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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the Quarterly Period Ended September 30, 2006

Or



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

For the transition period from  to

Commission file number: 001-33033



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PORTER
BANCORP, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Kentucky                                                       |  | 61-1142247                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2500 Eastpoint Parkway, Louisville, Kentucky                   |  | 40223                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(502) 499-4800

(Registrants telephone number, including area code)



---

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

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



|                         |  |                    |  |                         
|------------------------ |  | ------------------ |  | ------------------------
|Large accelerated filer ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer  x

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

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

7,620,497 shares of Common Stock, no par value, were outstanding at October 31, 2006.



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##### Table of Contents

INDEX





|          |  |                                                                                       |  |     
|--------- |  | ------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                       |  | Page
|          |  |                                                                                      
|PART I -  |  | FINANCIAL INFORMATION                                                                 |  |     
|          |  |                                                                                      
|ITEM 1.   |  | FINANCIAL STATEMENTS                                                                  |  | 1   
|          |  |                                                                                      
|ITEM 2.   |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 16  
|          |  |                                                                                      
|ITEM 3.   |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 30  
|          |  |                                                                                      
|ITEM 4.   |  | CONTROLS AND PROCEDURES                                                               |  | 31  
|          |  |                                                                                      
|PART II - |  | OTHER INFORMATION                                                                     |  |     
|          |  |                                                                                      
|ITEM 1.   |  | LEGAL PROCEEDINGS                                                                     |  | 32  
|          |  |                                                                                      
|ITEM 2.   |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 32  
|          |  |                                                                                      
|ITEM 3.   |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  | 33  
|          |  |                                                                                      
|ITEM 4.   |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 33  
|          |  |                                                                                      
|ITEM 5.   |  | OTHER INFORMATION                                                                     |  | 33  
|          |  |                                                                                      
|ITEM 6.   |  | EXHIBITS                                                                              |  | 33  



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##### Table of Contents

PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

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

Unaudited Condensed Consolidated Balance Sheets for September 30, 2006 and
December 31, 2005

Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2006
and 2005

Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity for the nine months ended September 30,
2006

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005

Notes to Unaudited Consolidated Condensed Financial Statements



1



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##### Table of Contents

PORTER BANCORP, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(dollars in thousands)



|                                                                                                                             |  |                   |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                             |  | September 30,2006 |         |   | December 31,2005 |  
|                                                                                                                             |  | (unaudited)       |         |   |                  |  
|Assets                                                                                                                       |  |                   |         |   |                  |   |         |  
|Cash and due from financial institutions                                                                                     |  | $                 | 17,038  |   |                  | $ | 18,808  |  
|Federal funds sold                                                                                                           |  |                   | 24,416  |   |                  |   | 33,473  |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                    |  |                   | 41,454  |   |                  |   | 52,281  |  
|Interest-bearing deposits in other financial institutions                                                                    |  |                   |        |   |                  |   | 200     |  
|Securities available for sale                                                                                                |  |                   | 95,722  |   |                  |   | 103,993 |  
|Loans, net of allowance of $12,655 and $12,197, respectively                                                                 |  |                   | 804,766 |   |                  |   | 779,754 |  
|Premises and equipment                                                                                                       |  |                   | 13,794  |   |                  |   | 14,341  |  
|Goodwill                                                                                                                     |  |                   | 12,881  |   |                  |   | 12,829  |  
|Accrued interest receivable and other assets                                                                                 |  |                   | 31,044  |   |                  |   | 28,083  |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                                 |  | $                 | 999,661 |   |                  | $ | 991,481 |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Liabilities and Stockholders Equity                                                                                         |  |                   |         |   |                  |   |         |  
|Deposits                                                                                                                     |  |                   |         |   |                  |   |         |  
|Non-interest bearing                                                                                                         |  | $                 | 67,534  |   |                  | $ | 62,379  |  
|Interest bearing                                                                                                             |  |                   | 734,884 |   |                  |   | 744,200 |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total deposits                                                                                                               |  |                   | 802,418 |   |                  |   | 806,579 |  
|                                                                                                                             |  |                  
|Federal funds purchased and repurchase agreements                                                                            |  |                   | 1,301   |   |                  |   | 4,576   |  
|Notes payable                                                                                                                |  |                   |        |   |                  |   | 9,600   |  
|Federal Home Loan Bank advances                                                                                              |  |                   | 56,964  |   |                  |   | 63,563  |  
|Accrued interest payable and other liabilities                                                                               |  |                   | 8,172   |   |                  |   | 10,287  |  
|Junior subordinated debentures                                                                                               |  |                   | 25,000  |   |                  |   | 25,000  |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                            |  |                   | 893,855 |   |                  |   | 919,605 |  
|                                                                                                                             |  |                  
|Stockholders equity                                                                                                         |  |                   |         |   |                  |   |         |  
|Preferred stock, no par, 1,000,000 shares authorized                                                                         |  |                   |         |   |                  |   |         |  
|Common stock, no par, 10,000,000 shares authorized, 7,620,497 and 5,000,000 shares issued and outstanding, respectively      |  |                   | 64,794  |   |                  |   | 25,638  |  
|Non-voting common stock, no par, 9,000,000 shares authorized, none and 1,332,447 shares issued and outstanding, respectively |  |                   |        |   |                  |   | 12,522  |  
|Additional paid-in capital                                                                                                   |  |                   | 10,985  |   |                  |   | 10,879  |  
|Retained earnings                                                                                                            |  |                   | 30,183  |   |                  |   | 23,356  |  
|Accumulated other comprehensive income (loss)                                                                                |  |                   | (156    | ) |                  |   | (519    | )
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                                   |  |                   | 105,806 |   |                  |   | 71,876  |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                   |  | $                 | 999,661 |   |                  | $ | 991,481 |  
|                                                                                                                             |  |                   |         |   |                  |   |         |  

See accompanying notes to unaudited condensed financial statements.



2



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##### Table of Contents

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Income

(dollars in thousands,
except per share data)



|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|------------------------------------------------------------ |  | ------------------------------- | --------- | ---- | ------------------------------ | --------- | ---- |  | ---- | --------- |  | - | --------- | -
|                                                             |  | Three Months EndedSeptember 30, |           |      | Nine Months EndedSeptember 30, |          
|                                                             |  | 2006                            |           | 2005 |                                |           | 2006 |  | 2005 |          
|Interest income                                              |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Loans, including fees                                        |  | $                               | 17,045    |      | $                              | 14,513    |      |  | $    | 49,101    |  | $ | 41,101    |  
|Taxable securities                                           |  |                                 | 918       |      |                                | 950       |      |  |      | 2,768     |  |   | 2,652     |  
|Tax exempt securities                                        |  |                                 | 179       |      |                                | 175       |      |  |      | 547       |  |   | 480       |  
|Fed funds sold and other                                     |  |                                 | 422       |      |                                | 265       |      |  |      | 1,082     |  |   | 684       |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|                                                             |  |                                 | 18,564    |      |                                | 15,903    |      |  |      | 53,498    |  |   | 44,917    |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Interest expense                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Deposits                                                     |  |                                 | 7,736     |      |                                | 5,602     |      |  |      | 21,563    |  |   | 15,525    |  
|Federal Home Loan Bank advances                              |  |                                 | 829       |      |                                | 512       |      |  |      | 2,057     |  |   | 1,387     |  
|Junior subordinated debentures                               |  |                                 | 543       |      |                                | 431       |      |  |      | 1,564     |  |   | 1,198     |  
|Notes payable                                                |  |                                 | 143       |      |                                | 1         |      |  |      | 431       |  |   | 4         |  
|Federal funds purchased and other                            |  |                                 | 34        |      |                                | 116       |      |  |      | 150       |  |   | 218       |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|                                                             |  |                                 | 9,285     |      |                                | 6,662     |      |  |      | 25,765    |  |   | 18,332    |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Net interest income                                          |  |                                 | 9,279     |      |                                | 9,241     |      |  |      | 27,733    |  |   | 26,585    |  
|Provision for loan losses                                    |  |                                 | 276       |      |                                | 715       |      |  |      | 1,029     |  |   | 1,768     |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Net interest income after provision for loan losses          |  |                                 | 9,003     |      |                                | 8,526     |      |  |      | 26,704    |  |   | 24,817    |  
|                                                             |  |                                 |           |     
|Non-interest income                                          |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Service charges on deposit accounts                          |  |                                 | 615       |      |                                | 750       |      |  |      | 1,963     |  |   | 2,116     |  
|Net gain on sales of government guaranteed loans             |  |                                 | 53        |      |                                | 84        |      |  |      | 152       |  |   | 628       |  
|Net gain on sales of loans originated for sale               |  |                                 | 44        |      |                                |          |      |  |      | 284       |  |   |          |  
|Net gain on sales of securities                              |  |                                 | 23        |      |                                | 1         |      |  |      | 50        |  |   | 57        |  
|Other                                                        |  |                                 | 582       |      |                                | 527       |      |  |      | 1,564     |  |   | 1,540     |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|                                                             |  |                                 | 1,317     |      |                                | 1,362     |      |  |      | 4,013     |  |   | 4,341     |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Non-interest expense                                         |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Salaries and employee benefits                               |  |                                 | 2,749     |      |                                | 2,930     |      |  |      | 8,634     |  |   | 8,563     |  
|Occupancy and equipment                                      |  |                                 | 612       |      |                                | 664       |      |  |      | 1,972     |  |   | 2,114     |  
|State franchise tax                                          |  |                                 | 267       |      |                                | 262       |      |  |      | 807       |  |   | 754       |  
|Advertising                                                  |  |                                 | 148       |      |                                | 51        |      |  |      | 467       |  |   | 205       |  
|Other                                                        |  |                                 | 877       |      |                                | 1,012     |      |  |      | 3,060     |  |   | 3,135     |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|                                                             |  |                                 | 4,653     |      |                                | 4,919     |      |  |      | 14,940    |  |   | 14,771    |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Income before minority interest                              |  |                                 | 5,667     |      |                                | 4,969     |      |  |      | 15,777    |  |   | 14,387    |  
|Minority interest in net income of consolidated subsidiaries |  |                                 |          |      |                                | 318       |      |  |      |          |  |   | 996       |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Income before income taxes                                   |  |                                 | 5,667     |      |                                | 4,651     |      |  |      | 15,777    |  |   | 13,391    |  
|Income tax expense                                           |  |                                 | 1,858     |      |                                | 947       |      |  |      | 5,135     |  |   | 2,827     |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Net income                                                   |  | $                               | 3,809     |      | $                              | 3,704     |      |  | $    | 10,642    |  | $ | 10,564    |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Basic and diluted earnings per share                         |  | $                               | 0.59      |      | $                              | 0.63      |      |  | $    | 1.67      |  | $ | 1.80      |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Pro forma data (1):                                          |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Net Income:                                                  |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|As reported                                                  |  | $                               | 3,809     |      | $                              | 3,704     |      |  | $    | 10,642    |  | $ | 10,564    |  
|Adjustments                                                  |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Add-back of minority interests (2)                           |  |                                 |          |      |                                | 318       |      |  |      |          |  |   | 996       |  
|Additional taxes (3)                                         |  |                                 |          |      |                                | (743      | )    |  |      |          |  |   | (2,065    | )
|Acquisition funding (4)                                      |  |                                 |          |      |                                | (147      | )    |  |      |          |  |   | (440      | )
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Adjusted net income                                          |  | $                               | 3,809     |      | $                              | 3,132     |      |  | $    | 10,642    |  | $ | 9,055     |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Weighted Average Shares Outstanding:                         |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|As reported and adjusted for stock split                     |  |                                 | 6,454,730 |      |                                | 5,868,224 |      |  |      | 6,373,656 |  |   | 5,868,224 |  
|Shares issued in the Ascencia transaction                    |  |                                 |          |      |                                | 464,223   |      |  |      |          |  |   | 464,223   |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Adjusted shares outstanding                                  |  |                                 | 6,454,730 |      |                                | 6,332,447 |      |  |      | 6,373,656 |  |   | 6,332,447 |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  
|Basic and diluted earnings per share                         |  | $                               | 0.59      |      | $                              | 0.49      |      |  | $    | 1.67      |  | $ | 1.43      |  
|                                                             |  |                                 |           |      |                                |           |      |  |      |           |  |   |           |  



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##### Table of Contents

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|(1) | The pro forma adjustments present the Companys 2005 results as if its acquisition of minority interests in subsidiary banks and the termination of its S corporation status
which were effective on December 31, 2005 were in effect for all of 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This adjustment reflects the minority interests in subsidiaries in a corporate reorganization on December 31, 2005.
|--- | -------------------------------------------------------------------------------------------------------------------

|(3) | This adjustment represents a tax rate of 34% applied to reported pre-tax income less reported tax expense to reflect the conversion from Subchapter S corporation to C corporation
status effective December 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Acquisition funding for the reorganization includes $9,500 in senior notes at an annual 6% interest rate and $5,313 in cash at an assumed annual 6% interest rate; net of tax at a
34% tax rate.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes to unaudited condensed financial statements.



4



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##### Table of Contents

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity

For Nine Months Ended September 30, 2006

(dollars in thousands, except per share data)



|                                                              |  |           |  |                  |        |  |        |                          |                  |                  |         |   |                                   |   |        |       |   |        |   |  |   |      |   |  |   |         |  
|------------------------------------------------------------- |  | --------- |  | ---------------- | ------ |  | ------ | ------------------------ | ---------------- | ---------------- | ------- | - | --------------------------------- | - | ------ | ----- | - | ------ | - |  | - | ---- | - |  | - | ------- | -
|                                                              |  | Shares    |  |                  | Amount |  |        | AdditionalPaid-InCapital |                  | RetainedEarnings |         |   | AccumulatedOtherComprehensiveLoss |   |        | Total |  
|                                                              |  | Common    |  | Non-VotingCommon |        |  | Common |                          | Non-VotingCommon |                  |         |   |                                   |  
|Balances, January 1, 2006                                     |  | 5,000,000 |  | 1,332,447        |        |  | $      | 25,638                   |                  | $                | 12,522  |   |                                   | $ | 10,879 |       | $ | 23,356 |   |  | $ | (519 | ) |  | $ | 71,876  |  
|Issuance of stock in initial public offering, net             |  | 1,250,000 |  |                 |        |  |        | 26,634                   |                  |                  |        |   |                                   |   |       |       |   |       |   |  |   |     |   |  |   | 26,634  |  
|Issuance of unvested stock                                    |  |          |  | 39,600           |        |  |        |                         |                  |                  |        |   |                                   |   |       |       |   |       |   |  |   |     |   |  |   |        |  
|Forfeited unvested stock                                      |  |          |  | (1,550           | )      |  |        |                         |                  |                  |        |   |                                   |   |       |       |   |       |   |  |   |     |   |  |   |        |  
|Conversion of non-voting stock to voting                      |  | 1,370,497 |  | (1,370,497       | )      |  |        | 12,522                   |                  |                  | (12,522 | ) |                                   |   |       |       |   |       |   |  |   |     |   |  |   |        |  
|Stock-based compensation expense                              |  |          |  |                 |        |  |        |                         |                  |                  |        |   |                                   |   | 106    |       |   |       |   |  |   |     |   |  |   | 106     |  
|Comprehensive income:                                         |  |           |  |                  |        |  |        |                          |                  |                  |         |   |                                   |   |        |       |   |        |   |  |   |      |   |  |   |         |  
|Net income                                                    |  |          |  |                 |        |  |        |                         |                  |                  |        |   |                                   |   |       |       |   | 10,642 |   |  |   |     |   |  |   | 10,642  |  
|Changes in accumulated other comprehensive loss, net of taxes |  |          |  |                 |        |  |        |                         |                  |                  |        |   |                                   |   |       |       |   |       |   |  |   | 363  |   |  |   | 363     |  
|                                                              |  |           |  |                  |        |  |        |                          |                  |                  |         |   |                                   |   |        |       |   |        |   |  |   |      |   |  |   |         |  
|Total comprehensive income                                    |  |          |  |                 |        |  |        |                         |                  |                  |        |   |                                   |   |       |       |   |       |   |  |   |     |   |  |   | 11,005  |  
|                                                              |  |           |  |                  |        |  |        |                          |                  |                  |         |   |                                   |   |        |       |   |        |   |  |   |      |   |  |   |         |  
|Cash dividends ($0.40 per share)                              |  |          |  |                 |        |  |        |                         |                  |                  |        |   |                                   |   |       |       |   | (3,815 | ) |  |   |     |   |  |   | (3,815  | )
|                                                              |  |           |  |                  |        |  |        |                          |                  |                  |         |   |                                   |   |        |       |   |        |   |  |   |      |   |  |   |         |  
|Balances, September 30, 2006                                  |  | 7,620,497 |  |                 |        |  | $      | 64,794                   |                  | $                |        |   |                                   | $ | 10,985 |       | $ | 30,183 |   |  | $ | (156 | ) |  | $ | 105,806 |  
|                                                              |  |           |  |                  |        |  |        |                          |                  |                  |         |   |                                   |   |        |       |   |        |   |  |   |      |   |  |   |         |  

See accompanying notes to unaudited condensed financial statements.



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##### Table of Contents

PORTER BANCORP, INC. AND SUBSIDIARY

Unaudited Consolidated Condensed Statements of Cash Flows

For Nine Months
Ended September 30, 2006 and 2005

(dollars in thousands)



|                                                                          |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                          |  | 2006 |         |   | 2005 |  
|Cash flows from operating activities                                      |  |      |         |   |      |   |         |  
|Net income                                                                |  | $    | 10,642  |   |      | $ | 10,564  |  
|Adjustments to reconcile net income to net cash from operating activities |  |      |         |   |      |   |         |  
|Depreciation and amortization                                             |  |      | 1,569   |   |      |   | 1,734   |  
|Provision for loan losses                                                 |  |      | 1,029   |   |      |   | 1,768   |  
|Net amortization on securities                                            |  |      | 356     |   |      |   | 616     |  
|Stock-based compensation expense                                          |  |      | 106     |   |      |   |        |  
|Net gain on sales of loans                                                |  |      | (284    | ) |      |   |        |  
|Loans originated for sale                                                 |  |      | (8,825  | ) |      |   |        |  
|Proceeds from sales of loans held for sale                                |  |      | 9,109   |   |      |   |        |  
|Net (gain) loss on other real estate owned                                |  |      | (32     | ) |      |   | (1      | )
|Net realized gain on sales of securities                                  |  |      | (50     | ) |      |   | (57     | )
|Earnings on bank owned life insurance                                     |  |      | (190    | ) |      |   | (161    | )
|Federal Home Loan Bank stock dividends                                    |  |      | (369    | ) |      |   | (289    | )
|Net change in accrued interest receivable and other assets                |  |      | (982    | ) |      |   | (1,293  | )
|Net change in accrued interest payable and other liabilities              |  |      | (2,302  | ) |      |   | 1,961   |  
|                                                                          |  |      |         |   |      |   |         |  
|Net cash from operating activities                                        |  |      | 9,777   |   |      |   | 14,842  |  
|                                                                          |  |      |         |   |      |   |         |  
|Cash flows from investing activities                                      |  |      |         |   |      |   |         |  
|Net change in interest-bearing deposits with banks                        |  |      | 200     |   |      |   |        |  
|Purchases of available-for-sale securities                                |  |      | (11,037 | ) |      |   | (39,553 | )
|Sales and calls of available for sale securities                          |  |      | 4,416   |   |      |   | 2,847   |  
|Maturities and prepayments of available for sale securities               |  |      | 15,136  |   |      |   | 19,134  |  
|Maturities and prepayments of held to maturity securities                 |  |      |        |   |      |   | 100     |  
|Proceeds from sale of other real estate owned                             |  |      | 1,018   |   |      |   | 1,301   |  
|Improvements to other real estate owned                                   |  |      |        |   |      |   | (17     | )
|Loan originations and payments, net                                       |  |      | (27,923 | ) |      |   | (35,995 | )
|(Purchases) sales of premises and equipment, net                          |  |      | (248    | ) |      |   | 1,756   |  
|Investment in bank owned life insurance                                   |  |      | (1,100  | ) |      |   |        |  
|Acquisition of Associates Mortgage Group, net                             |  |      | (250    | ) |      |   |        |  
|Acquisition of Citizens Financial Bank, net                               |  |      |        |   |      |   | (1,079  | )
|                                                                          |  |      |         |   |      |   |         |  
|Net cash from investing activities                                        |  |      | (19,788 | ) |      |   | (51,506 | )
|                                                                          |  |      |         |   |      |   |         |  
|Cash flows from financing activities                                      |  |      |         |   |      |   |         |  
|Net change in deposits                                                    |  |      | (4,161  | ) |      |   | 39,539  |  
|Net change in federal funds purchased and repurchase agreements           |  |      | (3,275  | ) |      |   | (12,000 | )
|Repayment of notes payable                                                |  |      | (9,600  | ) |      |   |        |  
|Repayment of Federal Home Loan Bank advances                              |  |      | (32,819 | ) |      |   | (29,889 | )
|Advances from Federal Home Loan Bank                                      |  |      | 26,220  |   |      |   | 41,045  |  
|Minority interest in net income of subsidiaries                           |  |      |        |   |      |   | 996     |  
|Issuance of common stock for initial public offering, net                 |  |      | 26,634  |   |      |   |        |  
|Cash dividends paid                                                       |  |      | (3,815  | ) |      |   | (6,503  | )
|                                                                          |  |      |         |   |      |   |         |  
|Net cash from financing activities                                        |  |      | (816    | ) |      |   | 33,188  |  
|                                                                          |  |      |         |   |      |   |         |  
|Net change in cash and cash equivalents                                   |  |      | (10,827 | ) |      |   | (3,476  | )
|Beginning cash and cash equivalents                                       |  |      | 52,281  |   |      |   | 29,133  |  
|                                                                          |  |      |         |   |      |   |         |  
|Ending cash and cash equivalents                                          |  | $    | 41,454  |   |      | $ | 25,657  |  
|                                                                          |  |      |         |   |      |   |         |  
|Supplemental cash flow information:                                       |  |      |         |   |      |   |         |  
|Interest paid                                                             |  | $    | 25,037  |   |      | $ | 18,000  |  
|Income taxes paid                                                         |  |      | 5,495   |   |      |   | 2,681   |  
|Supplemental non-cash disclosure:                                         |  |      |         |   |      |   |         |  
|Transfer from loans to other real estate                                  |  | $    | 1,278   |   |      | $ | 1,233   |  

See accompanying notes to unaudited condensed financial statements.



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##### Table of Contents

PORTER BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Financial Statements

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

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected
for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2005 included in the Companys Form S-1 registration statement
(Reg. No. 333-133198) which are incorporated herein by reference.

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

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

New Accounting Standards

Accounting for Uncertainty in Income Taxes  In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN48), which prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective beginning in 2007. The Company is in the process of evaluating the impact, if any, the adoption of FIN 48 will have on its financial statements.

Accounting for Servicing of Financial Assets  In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156 Accounting for Servicing
of Financial Assets  an amendment of FASB Statement No. 140, that changes the accounting for all servicing rights which are recorded as the result of purchasing a servicing right or selling a loan with servicing retained. SFAS
No. 156 amends the current accounting guidance for servicing rights in that it allows companies to carry their servicing rights at fair value, where presently servicing rights are assessed for impairment based on their fair value at each
reporting date, using lower of cost or market value. This pronouncement is effective January 1, 2007, although earlier adoption is permitted during the first quarter of 2006. The Company plans to adopt this standard on January 1, 2007.
This standard will have no impact on the Companys financial statements to the extent the Company maintains its present practice of selling loans only with servicing rights released before January 1, 2007.



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##### Table of Contents

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 Topic 1N,
Financial Statements  Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires the dual approach to be used to compute the
amount of a financial statement misstatement. More specifically, the amount should be computed using both the rollover (current year income statement perspective) and iron curtain (year-end balance sheet perspective) methods.
A registrants financial statements require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. Registrants will not be required to restate
prior period financial statements when initially applying SAB 108 if management properly applied its previous approach (i.e. rollover or iron curtain) given that all relevant qualitative factors were considered. SAB 108 states that, upon initial
application, registrants may elect to (a) restate prior periods, or (b) record the cumulative effect of the initial application of SAB 108 in the carrying amounts of assets and liabilities, with the offsetting adjustment made to retained
earnings. To the extent that registrants elect to record the cumulative effect of initially applying SAB 108, they will disclose the nature and amount of each individual error being corrected in the cumulative adjustment. The disclosure will also
include when and how each error being corrected arose and the fact that the errors had previously been considered immaterial. SAB 108 is effective for us for the fiscal year ending December 31, 2006. We are in the process of evaluating the
impact, if any, the adoption of SAB 108 will have on our financial statements.

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



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##### Table of Contents

Note 2  Stock Plans and Stock Based Compensation

At September 30, 2006, the Company has a stock option plan and a stock incentive plan. On December 31, 2005, the Company assumed the 2000 Stock Option Plan of
Ascencia Bank, Inc. when the Company acquired the minority interest of Ascencia Bancorp, Inc. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006 Stock Incentive Plan. With regard to the 2000 Option Plan, no additional
grants were made subsequent to year-end and none are expected to be made in the future. The 2006 Plan permits the issuance of up to 400,000 shares of the Companys common stock upon the exercise of stock options or upon the grant of stock
awards. As of September 30, 2006, the Company had granted outstanding options to purchase 222,820 shares and had awarded 38,050 unvested shares net of forfeitures. The Company has 333,134 shares available for issue under the 2006 Plan. All
shares issued under the above mentioned plans came from authorized and unissued shares.

On May 15, 2006, the board of directors approved the Porter
Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, which was approved by holders of the Companys voting common stock on June 8, 2006. Under the terms of the plan, 100,000 shares are reserved for issuance to
non-employee directors upon the exercise of stock options granted under the plan. Options granted are granted automatically under the plan at fair market value on the date of grant, vest over a three-year period and have a five year term. On
September 22, 2006, the Company granted options to purchase 24,000 shares to non-employee directors in connection with the completion of the initial public offering. At September 30, 2006, 76,000 shares remain available for issue under
this plan.

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

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

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

The following table summarizes stock option activity:



|                       |  |                                     |   |                                      |                              |       |         |         |                              |   |      
|---------------------- |  | ----------------------------------- | - | ------------------------------------ | ---------------------------- | ----- | ------- | ------- | ---------------------------- | - | -----
|                       |  | Nine Months EndedSeptember 30, 2006 |   | Twelve Months EndedDecember 31, 2005
|                       |  | Options                             |   |                                      | WeightedAverageExercisePrice |       | Options |         | WeightedAverageExercisePrice
|Outstanding, beginning |  | 194,004                             |   |                                      | $                            | 25.50 |         | 194,004 |                              | $ | 25.50
|Issued                 |  | 53,816                              |   |                                      |                              | 24.83 |         |        |                              |   |     
|Cancelled/forfeited    |  | (1,000                              | ) |                                      |                              | 25.50 |         |        |                              |   |     
|                       |  |                                     |   |                                      |                              |       |         |         |                              |   |      
|Outstanding, ending    |  | 246,820                             |   |                                      | $                            | 25.35 |         | 194,004 |                              | $ | 25.50
|                       |  |                                     |   |                                      |                              |       |         |         |                              |   |      



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##### Table of Contents

The following table details stock options outstanding:



|                                                |  |                   |        
|----------------------------------------------- |  | ----------------- | -------
|                                                |  | September 30,2006
|Stock options vested and currently exercisable: |  |                   | 189,102
|Weighted average exercise price                 |  | $                 | 25.50  
|Aggregate intrinsic value                       |  | $                 | 0      
|Weighted average remaining life (in years)      |  |                   | 3.6    
|Total Options Outstanding:                      |  |                   | 246,820
|Aggregate intrinsic value                       |  | $                 | 0      
|Weighted average remaining life (in years)      |  |                   | 3.9    

The intrinsic value of stock options is calculated based on the exercise price of the underlying awards and the
market price of our common stock as of the reporting date. There were no options exercised during the first nine months of 2006 or 2005. The Company recorded $55,000 of stock option compensation during the nine months ended September 30, 2006
to salaries and employee benefits. Since the stock options are non-qualified stock options, a tax benefit of $19,000 was recognized. No options were modified during either period. As of September 30, 2006, no stock options issued by the Company
have been exercised.

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

The weighted-average assumptions used are summarized as follows:



|                                |  |   |           |  
|------------------------------- |  | - | --------- | -
|Risk-free interest rate         |  |   | 4.88      | %
|Expected option life            |  |   | 3.5 years |  
|Expected stock price volatility |  |   | 22.0      | %
|Expected dividend yield         |  |   | 3.7       | %
|Fair value                      |  | $ | 3.83      |  

On March 23, 2006, the Company awarded 39,600 unvested shares to employees. As of September 30, 2006,
1,550 of these shares have been forfeited due to employee cessation of service, and 38,050 unvested shares remain issued and outstanding. The shares vest at a rate of 10% on each one-year anniversary date of the grant date provided the employee is
still employed by the Company at that date. The fair value on the date of grant was $25.50 per share. The Company recorded $51,000 of stock-based compensation during the nine months ended September 30, 2006 to salaries and employee benefits. A
tax benefit of $17,000 was recognized related to this expense.

Unrecognized stock based compensation expense related to stock options and unvested shares
for the remainder of 2006 and beyond is estimated as follows (in thousands):



|                             |  |   |    
|---------------------------- |  | - | ---
|October 2006  December 2006 |  | $ | 49 
|2007                         |  |   | 195
|2008                         |  |   | 164
|2009                         |  |   | 124
|2010 & thereafter            |  |   | 604



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##### Table of Contents

The following table illustrates the effect on net income and earnings per share if expense was measured using the fair
value recognition provisions of SFAS 123R for the nine months ended September 30, 2005:



|                                                                                                  |  |                                              |        |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------ | -
|                                                                                                  |  | Nine Months EndedSeptember 30, 2005          |       
|                                                                                                  |  | (dollars in thousands,except per share data) |       
|Net income as reported                                                                            |  | $                                            | 10,564 |  
|Less: Stock-based compensation expense determined under the fair value based method, net of taxes |  |                                              | (15    | )
|                                                                                                  |  |                                              |        |  
|Pro forma net income                                                                              |  | $                                            | 10,549 |  
|                                                                                                  |  |                                              |        |  
|Basic and diluted earnings per share as reported                                                  |  | $                                            | 1.80   |  
|                                                                                                  |  |                                              |        |  
|Pro forma basic and diluted earning per share                                                     |  | $                                            | 1.80   |  
|                                                                                                  |  |                                              |        |  



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##### Table of Contents

Note 3 - Securities

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



|                                   |  |                        |         |                      |   |                       |  |   |        |  
|---------------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | - | ------ | -
|                                   |  | Fair Value             |         | GrossUnrealizedGains |   | GrossUnrealizedLosses | 
|                                   |  | (dollars in thousands) |        
|September 30, 2006                 |  |                        |         |                      |   |                       |  |   |        |  
|U.S. Government and federal agency |  | $                      | 17,203  |                      | $ | 1                     |  | $ | (432   | )
|State and municipal                |  |                        | 17,532  |                      |   | 243                   |  |   | (101   | )
|Mortgage-backed                    |  |                        | 54,611  |                      |   | 165                   |  |   | (741   | )
|Corporate bonds                    |  |                        | 2,452   |                      |   | 82                    |  |   |       |  
|                                   |  |                        |         |                      |   |                       |  |   |        |  
|Total debt securities              |  |                        | 91,798  |                      |   | 491                   |  |   | (1,274 | )
|Equity                             |  |                        | 3,924   |                      |   | 725                   |  |   | (178   | )
|                                   |  |                        |         |                      |   |                       |  |   |        |  
|Total                              |  | $                      | 95,722  |                      | $ | 1,216                 |  | $ | (1,452 | )
|                                   |  |                        |         |                      |   |                       |  |   |        |  
|December 31, 2005                  |  |                        |         |                      |   |                       |  |   |        |  
|U.S. Government and federal agency |  | $                      | 21,407  |                      | $ | 4                     |  | $ | (507   | )
|State and municipal                |  |                        | 17,315  |                      |   | 217                   |  |   | (225   | )
|Mortgage-backed                    |  |                        | 58,936  |                      |   | 201                   |  |   | (895   | )
|Corporate bonds                    |  |                        | 2,509   |                      |   | 128                   |  |   |       |  
|                                   |  |                        |         |                      |   |                       |  |   |        |  
|Total debt securities              |  |                        | 100,167 |                      |   | 550                   |  |   | (1,627 | )
|Equity                             |  |                        | 3,826   |                      |   | 547                   |  |   | (256   | )
|                                   |  |                        |         |                      |   |                       |  |   |        |  
|Total                              |  | $                      | 103,993 |                      | $ | 1,097                 |  | $ | (1,883 | )
|                                   |  |                        |         |                      |   |                       |  |   |        |  

Securities pledged at September 30, 2006 and December 31, 2005 had carrying values of approximately
$27,765,000 and $12,269,000, respectively, and were pledged to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances.

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

As of September 30, 2006, the Company has 58 equity securities. Of these securities, one had an
unrealized loss of $300 and had been in an unrealized loss position for less than twelve months and fifteen had an unrealized loss of $178,000 and had been in an unrealized loss position for more than twelve months. Management monitors the credit
quality and current market pricing for these equity securities monthly. Management has made a practice of selling equity securities where recovery does not seem likely but does not have the present intent to sell securities with unrealized losses.
As of September 30, 2006, there are no securities management would classify as other than temporarily impaired.



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##### Table of Contents

Note 4  Loans

Loans were as follows:



|                                |  |                        |         |   |                  |   |         |  
|------------------------------- |  | ---------------------- | ------- | - | ---------------- | - | ------- | -
|                                |  | September 30,2006      |         |   | December 31,2005 |  
|                                |  | (dollars in thousands) |        
|Commercial                      |  | $                      | 57,017  |   |                  | $ | 50,626  |  
|Real estate                     |  |                        | 715,861 |   |                  |   | 695,569 |  
|Agriculture                     |  |                        | 13,936  |   |                  |   | 13,625  |  
|Consumer                        |  |                        | 29,582  |   |                  |   | 30,808  |  
|Other                           |  |                        | 1,025   |   |                  |   | 1,323   |  
|                                |  |                        |         |   |                  |   |         |  
|Subtotal                        |  |                        | 817,421 |   |                  |   | 791,951 |  
|Less: Allowance for loan losses |  |                        | (12,655 | ) |                  |   | (12,197 | )
|                                |  |                        |         |   |                  |   |         |  
|Loans, net                      |  | $                      | 804,766 |   |                  | $ | 779,754 |  
|                                |  |                        |         |   |                  |   |         |  

Activity in the allowance for loan losses was as follows:



|                             |  |                        |        |   |                   |   |        |  
|---------------------------- |  | ---------------------- | ------ | - | ----------------- | - | ------ | -
|                             |  | September 30,2006      |        |   | September 30,2005 |  
|                             |  | (dollars in thousands) |       
|Beginning balance            |  | $                      | 12,197 |   |                   | $ | 10,261 |  
|Acquired in bank acquisition |  |                        |       |   |                   |   | 807    |  
|Provision for loan losses    |  |                        | 1,029  |   |                   |   | 1,768  |  
|Loans charged-off            |  |                        | (774   | ) |                   |   | (880   | )
|Loan recoveries              |  |                        | 203    |   |                   |   | 478    |  
|                             |  |                        |        |   |                   |   |        |  
|Ending balance               |  | $                      | 12,655 |   |                   | $ | 12,434 |  
|                             |  |                        |        |   |                   |   |        |  

Impaired loans were as follows:



|                                                  |  |                        |       |                  |   |      
|------------------------------------------------- |  | ---------------------- | ----- | ---------------- | - | -----
|                                                  |  | September 30,2006      |       | December 31,2005
|                                                  |  | (dollars in thousands)
|Loans with no allocated allowance for loan losses |  | $                      | 2,371 |                  | $ | 1,632
|Loans with allocated allowance for loan losses    |  |                        | 3,050 |                  |   | 484  
|                                                  |  |                        |       |                  |   |      
|Total                                             |  | $                      | 5,421 |                  | $ | 2,116
|                                                  |  |                        |       |                  |   |      
|Amount of the allowance for loan losses allocated |  | $                      | 871   |                  | $ | 118  

Nonperforming loans were as follows:



|                                                |  |                        |       |                  |   |      
|----------------------------------------------- |  | ---------------------- | ----- | ---------------- | - | -----
|                                                |  | September 30,2006      |       | December 31,2005
|                                                |  | (dollars in thousands)
|Loans past due 90 days or more still on accrual |  | $                      | 2,356 |                  | $ | 1,969
|Non-accrual loans                               |  |                        | 7,616 |                  |   | 5,045

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



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##### Table of Contents

Note 5  Advance from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:



|                                                                                                               |  |                        |        |                  |   |       
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ------
|                                                                                                               |  | September 30,2006      |        | December 31,2005
|                                                                                                               |  | (dollars in thousands)
|Single maturity advances with fixed rates from 4.48% to 5.64% maturing from 2006 through 2012                  |  | $                      | 6,822  |                  | $ | 7,720 
|                                                                                                               |  |                       
|Single maturity advances with variable rates from 5.38% to 5.59% maturing from 2007 through 2008               |  |                        | 33,000 |                  |   | 36,500
|                                                                                                               |  |                       
|Monthly amortizing advances with fixed rates from 0.00% to 9.10% and maturities ranging from 2007 through 2035 |  |                        | 17,142 |                  |   | 19,343
|                                                                                                               |  |                        |        |                  |   |       
|Total                                                                                                          |  | $                      | 56,964 |                  | $ | 63,563
|                                                                                                               |  |                        |        |                  |   |       

Each advance is payable per terms on agreement, with a prepayment penalty. The advances were collateralized by
first mortgage loans, under a blanket lien arrangement.

Note 6  Earnings per Share

The factors used in the earnings per share computation follow:



|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|------------------------------------------------------------------------------- |  | ------------------------------------------------------- | --------- | ------------------------------ | - | --------- |  | ---- | --------- |  | - | ---------
|                                                                                |  | Three Months EndedSeptember 30,                         |           | Nine Months EndedSeptember 30,
|                                                                                |  | 2006                                                    |           | 2005                           |   | 2006      |  | 2005
|                                                                                |  | (dollars in thousands, except share and per share data)
|Basic                                                                           |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Net income                                                                      |  | $                                                       | 3,809     |                                | $ | 3,704     |  | $    | 10,642    |  | $ | 10,564   
|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Weighted average voting and non-voting common shares outstanding                |  |                                                         | 6,454,730 |                                |   | 5,868,224 |  |      | 6,373,656 |  |   | 5,868,224
|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Basic earnings per common share                                                 |  | $                                                       | 0.59      |                                | $ | 0.63      |  | $    | 1.67      |  | $ | 1.80     
|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Diluted                                                                         |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Net income                                                                      |  | $                                                       | 3,809     |                                | $ | 3,704     |  | $    | 10,642    |  | $ | 10,564   
|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Weighted average voting and non-voting common shares outstanding                |  |                                                         | 6,454,730 |                                |   | 5,868,224 |  |      | 6,373,656 |  |   | 5,868,224
|Add: dilutive effects of assumed exercises of stock options and unvested shares |  |                                                         |          |                                |   |          |  |      |          |  |   |         
|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Average shares and potential common shares                                      |  |                                                         | 6,454,730 |                                |   | 5,868,224 |  |      | 6,373,656 |  |   | 5,868,224
|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          
|Diluted earnings per common share                                               |  | $                                                       | 0.59      |                                | $ | 0.63      |  | $    | 1.67      |  | $ | 1.80     
|                                                                                |  |                                                         |           |                                |   |           |  |      |           |  |   |          



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##### Table of Contents

Stock options of 246,820 and 194,004 in the first nine months of 2006 and 2005, and 38,050 of unvested shares in the
first nine months of 2006 were excluded from diluted earnings per share as their impact was anti-dilutive.

Note 7  Total Comprehensive Income

Total comprehensive income was as follows:



|                                                                                                       |  |                                 |       |      |                                |       |      |  |      |        |  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ----- | ---- | ------------------------------ | ----- | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                                                       |  | Three Months EndedSeptember 30, |       |      | Nine Months EndedSeptember 30, |      
|                                                                                                       |  | 2006                            |       | 2005 |                                |       | 2006 |  | 2005 |       
|                                                                                                       |  | (dollars in thousands)          |      
|Net income                                                                                             |  | $                               | 3,809 |      | $                              | 3,704 |      |  | $    | 10,642 |  | $ | 10,564 |  
|Change in unrealized gain (loss) on securities held for sale, net of reclassifications and tax effects |  |                                 | 1,058 |      |                                | (222  | )    |  |      | 363    |  |   | (785   | )
|                                                                                                       |  |                                 |       |      |                                |       |      |  |      |        |  |   |        |  
|Total comprehensive income                                                                             |  | $                               | 4,867 |      | $                              | 3,482 |      |  | $    | 11,005 |  | $ | 9,779  |  
|                                                                                                       |  |                                 |       |      |                                |       |      |  |      |        |  |   |        |  

Note 8  Business Combinations

On January 6, 2006, the Company completed the acquisition of the assets in an arms length transaction of Associates Mortgage Group, an unrelated third-party mortgage banking operation and related title
services company located in Louisville, Kentucky for $250,000 in cash, plus potential future cash payments as discussed below. The purchase price was allocated $100,000 to fixed assets, $100,000 to a non-compete covenant, and $50,000 to goodwill.
Under the terms of the Asset Purchase Agreement, the Company has agreed to pay additional consideration in future periods, based upon the attainment by the acquired entity of defined operating objectives. In accordance with Statement of Financial
Accounting Standard No. 141, Business Combinations, the Company will not accrue contingent consideration obligations prior to attainment of the objectives. Maximum potential future consideration pursuant to such arrangement, to be
resolved over the following two years, is $350,000. Any such payments would result in an increase in goodwill.



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##### Table of Contents

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

and Results of Operations

This item analyzes the major elements of Porter Bancorp Inc.s consolidated balance sheets and statements of income for the nine months ended
September 30, 2006, and compares them to the same periods of the previous year. This section should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes presented in Part I, Item 1 of
this report.

Cautionary Note Regarding Forward-Looking Statements

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

Forward-looking statements involve risks and uncertainties that may cause our actual
results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of our control. Factors that could contribute to
differences in our results include, but are not limited to:



| |  |  | our ability to expand 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the interest rate environment, which may reduce our margins or impact the value of securities, loans, deposits and other financial instruments;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic or business conditions, either nationally, regionally or locally in the communities we serve, may be less favorable than expected, resulting in, among other things,
a deterioration in credit quality or a reduced demand for credit;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------

In addition to the factors listed above, we refer you to the more detailed risks identified, and the cautionary statements included, in our Form S-1 registration statement (Reg. No. 333-133198) under the heading Risk
Factors, which are incorporated by reference into this report.

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



16



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##### Table of Contents

assumptions or bases and actual results can be material. The forward-looking statements included in this report speak only as of the date of the report. We
have no duty, and do not intend to, update these statements unless applicable laws require us to do so.

Overview

Porter Bancorp, Inc. (NASDAQ: PBIB) is a Louisville, Kentucky-based bank holding company which operates 13 full-service banking offices in nine 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
from banking offices in Cumberland, Butler, Green, Hart, Edmonson and Barren Counties. Our markets have experienced annual positive deposit growth rates in recent years with the trend expected to continue for the next few years.

In our last two full fiscal years we have acquired two banks in Glasgow. In our July 30, 2004 acquisition of United Community Bank, we acquired $37.9 million in
assets and $31.0 million in deposits and recorded $165,000 in goodwill and $431,000 in core deposit intangibles. In our January 31, 2005 acquisition of Citizens Financial Bank, we acquired $37.9 million in assets and $31.1 million in deposits
and recorded $974,000 in goodwill and $189,000 in core deposit intangibles. These acquisitions established our presence in the Bowling Green market in south central Kentucky.

In 2005, we completed a reorganization in which we acquired the minority interests of our three partially owned bank holding companies and consolidated our five subsidiary banks under the common control of our
founders into a single bank. In the reorganization, we terminated the elections by our company and our banking subsidiary to be subchapter S corporations for federal income tax purposes. As a subchapter S corporation with two shareholders, we
historically paid a substantial portion of our net income as dividends to fund the tax liability our shareholders owed on our income and to provide a return on their investment. Dividends paid in 2005, our last year as a subchapter S corporation,
represented 69.4% of our net income. As a C corporation, we now pay federal and state income taxes directly, but our shareholders no longer have to pay taxes on their share of our income, and we have adjusted our dividend policy accordingly. Subject
to our future earnings, capital requirements, financial condition, future prospects and other factors our board of directors deems relevant, we plan to pay a substantially smaller dividend that will provide a return on investment to our
shareholders.

We focus on commercial and commercial real estate lending, both in markets where we have banking offices and other growing markets in our
region. Commercial, commercial real estate and real estate construction loans accounted for 69.4% of our total loan portfolio as of September 30, 2006, and 68.9% as of December 31, 2005, and contributed significantly to our earnings.
Commercial lending generally produces higher yields than residential lending, but requires more rigorous underwriting standards and credit quality monitoring.

We have improved our return on average equity, return on average assets and efficiency ratio during each of the last three years. In 2005, our return on average equity was 21.21%, our return on average assets was 1.55% and our efficiency
ratio was 47.96%. When adjusted to reflect our reorganization, had it occurred on January 1, 2005, including the additional income tax expense we would have incurred as a result of the termination of our subchapter S corporation status, our
return on average equity would have been 20.02% and our return on average assets would have been 1.21%. Our efficiency ratio was not affected by the reorganization. During the first nine months of 2006, our return on average equity was 18.74%, our
return on average assets was 1.44% and our efficiency ratio was 47.14%. While we will continue to emphasize operating efficiency and eliminate duplicative functions, we anticipate that future improvements in our operating results, if any, will
likely result from our growth initiatives.

For more information about the Company, we refer you to our Form S-1 registration statement (Reg.
No. 333-133198) under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations.



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##### Table of Contents

For the three months and nine months ended September 30, 2006, respectively, the Company reported net income of $3.8
million and $10.6 million. This compares to net income of $3.7 million and $10.6 million for the same periods in 2005. Additionally, on an adjusted pro forma basis, this compares to net income of $3.1 million and $9.1 million for the same periods in
2005. Basic and diluted earnings per share were $0.59 and $ 1.67 for the three months and nine months ended September 30, 2006, respectively, compared to $0.63 and $1.80 for the same periods in 2005 and on an adjusted pro forma basis $0.49 and
$1.43 for the same periods in 2005. The pro forma adjustments, as presented in our unaudited condensed consolidated statements of income, present the Companys 2005 results as if its acquisition of minority interests in subsidiary banks and the
termination of its S corporation status, which were effective on December 31, 2005, were in effect for all of 2005.

Highlights for the quarter and
nine months ended September 30, 2006 consist of the following:



| |  |  | On September 22, 2006, the Company successfully completed its initial public offering, issuing 1,250,000 new shares at a price to the public of $24.00 per share;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Return on average assets and return on average equity increased to 1.44 % and 18.74 %, respectively, for the nine months ended September 30, 2006, compared to
1.30 % and 17.30 % for the same period in 2005 on a pro forma basis;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net interest income increased $1,148,000 or 4.3% during the first nine months of 2006 and $38,000 or 0.4% for the quarter as compared to comparable periods in 2005. The increases in
net interest income was attributable to an increase in overall loan volume offset by an reduction in net interest margin reflecting the effect of a flattening yield curve;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net loans increased $ 25.0 million or 3.2% during the first nine months of 2006; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | The Company repaid $9.5 million in debt incurred to acquire minority interests in 2005.
| | - |  | ---------------------------------------------------------------------------------------

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

Application of Critical Accounting Policies

Our accounting and reporting policies comply with GAAP and conform to general practices within
the banking industry. We believe that of our significant accounting policies, the following may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or
underlying circumstances were to change.

Allowance for Loan Losses  We maintain an allowance for loan losses sufficient to absorb
probable incurred credit losses existing in the loan portfolio, and our senior loan committee evaluates the adequacy of the allowance for loan losses on a quarterly basis. We estimate 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 estimate the
allowance for loan losses, in part, based on historical losses within each loan category, estimates for losses within the commercial real estate portfolio are more dependent upon credit analysis and recent payment performance. Allocation of the
allowance may be made 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. The general



18



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##### Table of Contents

component covers non-classified loans and is based on historical loss experience adjusted for current factors. The methodology for allocating the allowance
for loan losses takes into account our increase in commercial and consumer lending. We adjust the amount of the allowance allocated to commercial loans and consumer loans in response to changes in the commercial and consumer loan portfolios and
managements recognition of the higher risks and loan losses in these lending areas. Allowance estimates are developed based on actual loss experience adjusted for current economic conditions. Allowance estimates are considered a prudent
measurement of the risk in the loan portfolio and are applied 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,
the allowance for loan losses and provision for loan losses on the income statement could be materially affected.

Goodwill and Intangible
Assets  Goodwill and intangible assets that have indefinite useful lives are subject to an impairment test at least annually and more frequently if circumstances indicate their value may not be recoverable. Goodwill is tested for
impairment by comparing the fair value of the reporting unit to the book value of the reporting unit. If the fair value, net of goodwill, exceeds book value, then goodwill is not considered to be impaired. Intangible assets that are not amortized
will be 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. These amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value to carrying value. Based on the
annual goodwill impairment test as of December 31, 2005, we do not believe any of our goodwill is impaired as of that date. While we believe no impairment existed at December 31, 2005 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 our impairment evaluation and financial condition or future results of
operations.

Stock-based Compensation  We adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 123R Share-Based Payment (Revised 2004), on January 1, 2006. Among other things, SFAS No. 123R eliminates the ability to account for stock-based compensation using the intrinsic value based method of accounting and
requires that such transactions be recognized as compensation expense in the income statement based on their fair values on the date of the grant. SFAS No. 123R requires that management make assumptions including stock price volatility and
employee turnover that are utilized to measure compensation expense. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, such as
volatility, risk-free interest rates and dividend pay-out rates.

Treatment of Deferred Tax Asset  We have approximately $3.4 million
in deferred tax assets as of September 30, 2006. A majority of the deferred tax assets were created in connection with the conversion of our company and our surviving bank subsidiary from Subchapter S corporations to Subchapter C corporations
for federal income tax purposes. We will evaluate the deferred tax asset quarterly and will realize this asset to the extent we are profitable or carry back tax losses to periods in which we paid income taxes. Our determination of the realization of
the deferred tax asset will be based upon our judgment of various future events and uncertainties, including the timing and amount of future income we will earn and the implementation of various tax plans to maximize realization of the deferred tax
assets. We believe that we will generate sufficient operating earnings to realize the deferred tax benefits. Examinations of our income tax returns or changes in tax law may impact our tax liabilities and resulting provisions for income
taxes.



19



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##### Table of Contents

Results of Operations

The following table summarizes components of income and expense and the change in those components for the three months ended September 30, 2006 compared with the same period of 2005:



|                            |  |                                         |        |                          |   |        |  |   |         |   |  |         |  
|--------------------------- |  | --------------------------------------- | ------ | ------------------------ | - | ------ |  | - | ------- | - |  | ------- | -
|                            |  | For the Three Months EndedSeptember 30, |        | Change from Prior Period |  
|                            |  | 2006                                    |        | 2005                     |   | Amount |  |   | Percent |  
|                            |  | (dollars in thousands)                  |       
|Gross interest income       |  | $                                       | 18,564 |                          | $ | 15,903 |  | $ | 2,661   |   |  | 16.73   |  
|Gross interest expense      |  |                                         | 9,285  |                          |   | 6,662  |  |   | 2,623   |   |  | 39.37   |  
|Net interest income         |  |                                         | 9,279  |                          |   | 9,241  |  |   | 38      |   |  | 0.41    |  
|Provision for credit losses |  |                                         | 276    |                          |   | 715    |  |   | (439    | ) |  | (61.40  | )
|Non-interest income         |  |                                         | 1,294  |                          |   | 1,361  |  |   | (67     | ) |  | (4.92   | )
|Gain on sale of securities  |  |                                         | 23     |                          |   | 1      |  |   | 22      |   |  | 2200.00 |  
|Non-interest expense        |  |                                         | 4,653  |                          |   | 4,919  |  |   | (266    | ) |  | (5.41   | )
|Net income before taxes     |  |                                         | 5,667  |                          |   | 4,969  |  |   | 698     |   |  | 14.05   |  
|Minority interest (1)       |  |                                         |       |                          |   | 318    |  |   | (318    | ) |  | (100.00 | )
|Income tax expense          |  |                                         | 1,858  |                          |   | 947    |  |   | 911     |   |  | 96.20   |  
|Net income                  |  |                                         | 3,809  |                          |   | 3,704  |  |   | 105     |   |  | 2.83    |  

---

|(1) | The Company bought out the minority interests in its subsidiary bank holding company in the December 31, 2005 Reorganization.
|--- | -----------------------------------------------------------------------------------------------------------------------------

Net income of $3,809,000 for the three months ended September 30, 2006 increased $105,000, or 2.8%, from $3,704,000 for the comparable period of 2005. This increase
in earnings was primarily attributable to a lower provision for loan losses expense and decreased non-interest expense, which was partially offset by increased income tax expense. Provision for loan losses expense decreased $439,000, or 61.4%, in
comparison to the third quarter of 2005 as a result of our current assessment of borrowers ability to repay and our collateral positions related to impaired and non-performing loans. Non-interest expense decreased $266,000, or 5.4%, in
comparison to the third quarter of 2005 as a result of an increase in the deferral of direct loan origination costs and reduced employee benefit costs resulting from a change in our group health benefits plan that went into effect July 1, 2006.
These decreases in non-interest expense were partially offset by increased advertising costs associated with our current advertising campaign. Income tax expense increased $911,000, or 96.2%, for the three months ended September 30, 2006 in
comparison with the same period of 2005 resulting from our change to C corporation status effective December 31, 2005.

The following table summarizes
components of income and expense and the change in those components for the nine months ended September 30, 2006 compared with the same period of 2005:



|                            |  |                                        |        |                          |   |        |  |   |         |   |  |         |  
|--------------------------- |  | -------------------------------------- | ------ | ------------------------ | - | ------ |  | - | ------- | - |  | ------- | -
|                            |  | For the Nine Months EndedSeptember 30, |        | Change from Prior Period |  
|                            |  | 2006                                   |        | 2005                     |   | Amount |  |   | Percent |  
|                            |  | (dollars in thousands)                 |       
|Gross interest income       |  | $                                      | 53,498 |                          | $ | 44,917 |  | $ | 8,581   |   |  | 19.10   | %
|Gross interest expense      |  |                                        | 25,765 |                          |   | 18,332 |  |   | 7,433   |   |  | 40.55   |  
|Net interest income         |  |                                        | 27,733 |                          |   | 26,585 |  |   | 1,148   |   |  | 4.32    |  
|Provision for credit losses |  |                                        | 1,029  |                          |   | 1,768  |  |   | (739    | ) |  | (41.80  | )
|Non-interest income         |  |                                        | 3,963  |                          |   | 4,284  |  |   | (321    | ) |  | (7.49   | )
|Gain on sale of securities  |  |                                        | 50     |                          |   | 57     |  |   | (7      | ) |  | (12.28  | )
|Non-interest expense        |  |                                        | 14,940 |                          |   | 14,771 |  |   | 169     |   |  | 1.14    |  
|Net income before taxes     |  |                                        | 15,777 |                          |   | 14,387 |  |   | 1,390   |   |  | 9.66    |  
|Minority interest (1)       |  |                                        |       |                          |   | 996    |  |   | (996    | ) |  | (100.00 | )
|Income tax expense          |  |                                        | 5,135  |                          |   | 2,827  |  |   | 2,308   |   |  | 81.64   |  
|Net income                  |  |                                        | 10,642 |                          |   | 10,564 |  |   | 78      |   |  | 0.74    |  

---

|(1) | The Company bought out the minority interests in its subsidiary bank holding company in the December 31, 2005 Reorganization.
|--- | -----------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Net income of $10,642,000 for the nine months ended September 30, 2006 increased $78,000, or 0.74%, from $10,564,000
for the comparable period of 2005. This increase in earnings was primarily attributable to increased net interest income and a lower provision for loan losses expense, which was partially offset by lower non-interest income and increased income tax
expense. Net interest income increased $1.1 million, or 4.3%, over the same period of 2005 as a result of growth in the loan portfolio, but was offset by a reduction in net interest margin. Provision for loan losses expense decreased $739,000, or
41.8%, from the comparable period of 2005 as a result of our current assessment of borrowers ability to repay and our collateral positions related to impaired and non-performing loans. Non-interest income decreased $321,000, or 7.5%, in
comparison to the same period of 2005 due to decreased income from service charges on deposit accounts and gains on sales of government guaranteed loans, reflecting the cyclical nature of originations and sales of this type of loan. Decreased
service charges on deposit accounts resulted from changes in product fee structures. Income tax expense increased $2.3 million, or 81.6%, over the comparable period of 2005 as a result of our change to C corporation status effective
December 31, 2005.

Net Interest Income  Our net interest income was $9,279,000 for the three months ended September 30,
2006, an increase of $38,000, or 0.4%, compared with $9,241,000 for the same period in 2005. Net interest spread and margin were 3.43% and 3.95%, respectively, for the third quarter of 2006, compared with 3.59% and 4.04%, respectively, for the third
quarter of 2005. Net interest income was $27,733,000 for the nine months ended September 30, 2006, an increase of $1,148,000, or 4.3%, compared with $26,585,000 for the same period in 2005. Net interest spread and margin were 3.52% and 4.00%,
respectively, for the first nine months of 2006, compared with 3.59% and 4.01%, respectively, for the first nine months of 2005. 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 the flattening yield curve between periods. The increase of $40.3 million in average loans for the nine month period ended September 30, 2006, compared to the same period in 2005, was due to growth in our
loan portfolio.

Our average interest-earning assets were $936.8 million for the nine months ended September 30, 2006, compared with $894.9 million
for the nine months ended September 30, 2005, a 4.7% increase primarily attributable to loan growth. Average loans were $807.1 million for the nine months ended September 30, 2006, compared with $766.8 million for the nine months ended
September 30, 2005, a 5.3% increase. Our total interest income increased by 19.1% to $53.5 million for the nine months ended September 30, 2006, compared with $44.9 million for the same period in 2005. The change was due to a combination
of higher interest rates and higher loan volume.

Our average interest-bearing liabilities also increased by 6.5% to $836.9 million for the nine months
ended September 30, 2006, compared with $786.1 million for the nine months ended September 30, 2005. Our total interest expense increased by 41.0% to $25.8 million for the nine months ended September 30, 2006, compared with $18.3
million during the same period in 2005, due primarily to an increase in the volume of, and higher interest rates paid on, certificates of deposit. Our average volume of certificates of deposit increased by 12.7% to $631.4 million for the nine months
ended September 30, 2006, compared with $560.3 million for the nine months ended September 30, 2005. The average interest rate paid on certificates of deposits increased to 4.54% and 4.25% for the three months and nine months ended
September 30, 2006, respectively, compared with 3.45% and 3.30% for the three months and nine months ended September 30, 2005, respectively. The increase in cost of funds was the result of the continued repricing of certificates of deposit
at maturity at higher interest rates. Certificate of deposit volume increase also reflected increased interest rates. Going forward, management expects cost of funds to continue to increase as the general market deposit rates have become
increasingly competitive with the recent upward trend in interest rates.



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##### Table of Contents

Average Balance Sheets

The following table presents the average balance sheets for the three month periods ending September 30, 2006 and 2005, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest
spread for the related periods.



|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------- | - | ----------------- |  | ---- | -------------- |  | - | ------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                                  |  | Three Months Ended September 30, |        
|                                                  |  | 2006                             |         |   | 2005                |  
|                                                  |  | AverageBalance                   |         |   | InterestEarned/Paid |   | AverageYield/Cost |  |      | AverageBalance |  |   | InterestEarned/Paid |   | AverageYield/Cost |  
|                                                  |  | (dollars in thousands)           |        
|ASSETS                                            |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Interest-earning assets:                          |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Loan receivables (1)(2)                           |  | $                                | 811,838 |   |                     | $ | 17,045            |  | 8.33 | %              |  | $ | 779,418             |   |                   | $ | 14,513 |  | 7.39 | %
|Securities                                        |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Taxable                                           |  |                                  | 77,240  |   |                     |   | 882               |  | 4.53 |                |  |   | 88,218              |   |                   |   | 911    |  | 4.10 |  
|Tax-exempt (3)                                    |  |                                  | 17,148  |   |                     |   | 179               |  | 6.27 |                |  |   | 16,600              |   |                   |   | 175    |  | 6.34 |  
|FHLB stock                                        |  |                                  | 8,720   |   |                     |   | 127               |  | 5.78 |                |  |   | 8,255               |   |                   |   | 101    |  | 4.85 |  
|Other equity securities                           |  |                                  | 3,389   |   |                     |   | 36                |  | 4.21 |                |  |   | 3,714               |   |                   |   | 39     |  | 4.17 |  
|Federal funds sold and other                      |  |                                  | 22,496  |   |                     |   | 295               |  | 5.20 |                |  |   | 20,488              |   |                   |   | 164    |  | 3.18 |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total interest-earning assets                     |  |                                  | 940,831 |   |                     |   | 18,564            |  | 7.83 | %              |  |   | 916,693             |   |                   |   | 15,903 |  | 6.88 | %
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Less: Allowance for loan losses                   |  |                                  | (12,791 | ) |                     |   |                   |  |      |                |  |   | (12,384             | ) |                   |   |        |  |      |  
|Non-interest earning assets                       |  |                                  | 60,225  |   |                     |   |                   |  |      |                |  |   | 51,407              |   |                   |   |        |  |      |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total assets                                      |  | $                                | 988,265 |   |                     |   |                   |  |      |                |  | $ | 955,716             |   |                   |   |        |  |      |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY              |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                     |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Certificates of deposit and other time deposits   |  | $                                | 632,689 |   |                     | $ | 7,246             |  | 4.54 | %              |  | $ | 566,892             |   |                   | $ | 4,932  |  | 3.45 | %
|NOW and money market deposits                     |  |                                  | 75,791  |   |                     |   | 425               |  | 2.22 |                |  |   | 120,973             |   |                   |   | 633    |  | 2.08 |  
|Savings accounts                                  |  |                                  | 24,202  |   |                     |   | 65                |  | 1.07 |                |  |   | 26,072              |   |                   |   | 37     |  | 0.56 |  
|Federal funds purchased and repurchase agreements |  |                                  | 3,222   |   |                     |   | 34                |  | 4.19 |                |  |   | 12,255              |   |                   |   | 116    |  | 3.76 |  
|FHLB advances                                     |  |                                  | 67,063  |   |                     |   | 829               |  | 4.90 |                |  |   | 52,331              |   |                   |   | 512    |  | 3.88 |  
|Junior subordinated debentures                    |  |                                  | 25,000  |   |                     |   | 543               |  | 8.62 |                |  |   | 25,000              |   |                   |   | 431    |  | 6.84 |  
|Other borrowing                                   |  |                                  | 9,414   |   |                     |   | 143               |  | 6.03 |                |  |   | 100                 |   |                   |   | 1      |  | 3.97 |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing liabilities                |  |                                  | 837,381 |   |                     |   | 9,285             |  | 4.40 | %              |  |   | 803,623             |   |                   |   | 6,662  |  | 3.29 | %
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Non-interest-bearing liabilities:                 |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Non-interest-bearing deposits                     |  |                                  | 65,226  |   |                     |   |                   |  |      |                |  |   | 65,439              |   |                   |   |        |  |      |  
|Minority interest in unconsolidated subsidiaries  |  |                                  |        |   |                     |   |                   |  |      |                |  |   | 8,900               |   |                   |   |        |  |      |  
|Other liabilities                                 |  |                                  | 7,248   |   |                     |   |                   |  |      |                |  |   | 8,358               |   |                   |   |        |  |      |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities                                 |  |                                  | 909,855 |   |                     |   |                   |  |      |                |  |   | 886,320             |   |                   |   |        |  |      |  
|Stockholders equity                              |  |                                  | 78,410  |   |                     |   |                   |  |      |                |  |   | 69,396              |   |                   |   |        |  |      |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities and stockholdersequity         |  | $                                | 988,265 |   |                     |   |                   |  |      |                |  | $ | 955,716             |   |                   |   |        |  |      |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Net interest income                               |  |                                  |         |   |                     | $ | 9,279             |  |      |                |  |   |                     |   |                   | $ | 9,241  |  |      |  
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Net interest spread                               |  |                                  |         |   |                     |   |                   |  | 3.43 | %              |  |   |                     |   |                   |   |        |  | 3.59 | %
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Net interest margin                               |  |                                  |         |   |                     |   |                   |  | 3.95 | %              |  |   |                     |   |                   |   |        |  | 4.04 | %
|                                                  |  |                                  |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  

---

|(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 34% federal income tax rate.
|--- | --------------------------------------------------------------------------------



22



---

##### Table of Contents

Average Balance Sheets

The following table presents the average balance sheets for the nine month periods ending September 30, 2006 and 2005, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest
spread for the related periods.



|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------- | - | ----------------- |  | ---- | -------------- |  | - | ------------------- | - | ----------------- | - | ------ |  | ---- | -
|                                                  |  | Nine Months Ended September 30, |        
|                                                  |  | 2006                            |         |   | 2005                |  
|                                                  |  | AverageBalance                  |         |   | InterestEarned/Paid |   | AverageYield/Cost |  |      | AverageBalance |  |   | InterestEarned/Paid |   | AverageYield/Cost |  
|                                                  |  | (dollars in thousands)          |        
|ASSETS                                            |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Interest-earning assets:                          |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Loan receivables (1)(2)                           |  | $                               | 807,104 |   |                     | $ | 49,101            |  | 8.13 | %              |  | $ | 766,842             |   |                   | $ | 41,101 |  | 7.17 | %
|Securities                                        |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Taxable                                           |  |                                 | 79,835  |   |                     |   | 2,650             |  | 4.44 |                |  |   | 82,532              |   |                   |   | 2,540  |  | 4.11 |  
|Tax-exempt (3)                                    |  |                                 | 17,378  |   |                     |   | 547               |  | 6.38 |                |  |   | 14,884              |   |                   |   | 480    |  | 6.53 |  
|FHLB stock                                        |  |                                 | 8,598   |   |                     |   | 370               |  | 5.75 |                |  |   | 8,147               |   |                   |   | 290    |  | 4.76 |  
|Other equity securities                           |  |                                 | 3,456   |   |                     |   | 118               |  | 4.56 |                |  |   | 3,726               |   |                   |   | 112    |  | 4.02 |  
|Federal funds sold and other                      |  |                                 | 20,450  |   |                     |   | 712               |  | 4.65 |                |  |   | 18,816              |   |                   |   | 394    |  | 2.80 |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total interest-earning assets                     |  |                                 | 936,821 |   |                     |   | 53,498            |  | 7.64 | %              |  |   | 894,947             |   |                   |   | 44,917 |  | 6.71 | %
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Less: Allowance for loan losses                   |  |                                 | (12,647 | ) |                     |   |                   |  |      |                |  |   | (11,752             | ) |                   |   |        |  |      |  
|Non-interest earning assets                       |  |                                 | 60,900  |   |                     |   |                   |  |      |                |  |   | 49,324              |   |                   |   |        |  |      |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total assets                                      |  | $                               | 985,074 |   |                     |   |                   |  |      |                |  | $ | 932,519             |   |                   |   |        |  |      |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY              |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                     |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Certificates of deposit and other time deposits   |  | $                               | 631,396 |   |                     | $ | 20,086            |  | 4.25 | %              |  | $ | 560,319             |   |                   | $ | 13,822 |  | 3.30 | %
|NOW and money market deposits                     |  |                                 | 83,613  |   |                     |   | 1,335             |  | 2.13 |                |  |   | 114,014             |   |                   |   | 1,594  |  | 1.87 |  
|Savings accounts                                  |  |                                 | 23,387  |   |                     |   | 142               |  | 0.81 |                |  |   | 26,770              |   |                   |   | 109    |  | 0.54 |  
|Federal funds purchased and repurchase agreements |  |                                 | 4,694   |   |                     |   | 150               |  | 4.27 |                |  |   | 8,840               |   |                   |   | 218    |  | 3.30 |  
|FHLB advances                                     |  |                                 | 59,241  |   |                     |   | 2,057             |  | 4.64 |                |  |   | 51,082              |   |                   |   | 1,387  |  | 3.63 |  
|Junior subordinated debentures                    |  |                                 | 25,000  |   |                     |   | 1,564             |  | 8.36 |                |  |   | 25,000              |   |                   |   | 1,198  |  | 6.41 |  
|Other borrowing                                   |  |                                 | 9,528   |   |                     |   | 431               |  | 6.05 |                |  |   | 100                 |   |                   |   | 4      |  | 5.35 |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total interest-bearing liabilities                |  |                                 | 836,859 |   |                     |   | 25,765            |  | 4.12 | %              |  |   | 786,125             |   |                   |   | 18,332 |  | 3.12 | %
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Non-interest-bearing liabilities:                 |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Non-interest-bearing deposits                     |  |                                 | 65,173  |   |                     |   |                   |  |      |                |  |   | 64,436              |   |                   |   |        |  |      |  
|Minority interest in unconsolidated subsidiaries  |  |                                 |        |   |                     |   |                   |  |      |                |  |   | 8,552               |   |                   |   |        |  |      |  
|Other liabilities                                 |  |                                 | 7,097   |   |                     |   |                   |  |      |                |  |   | 4,919               |   |                   |   |        |  |      |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities                                 |  |                                 | 909,129 |   |                     |   |                   |  |      |                |  |   | 864,032             |   |                   |   |        |  |      |  
|Stockholders equity                              |  |                                 | 75,945  |   |                     |   |                   |  |      |                |  |   | 68,487              |   |                   |   |        |  |      |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Total liabilities and stockholdersequity         |  | $                               | 985,074 |   |                     |   |                   |  |      |                |  | $ | 932,519             |   |                   |   |        |  |      |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Net interest income                               |  |                                 |         |   |                     | $ | 27,733            |  |      |                |  |   |                     |   |                   | $ | 26,585 |  |      |  
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Net interest spread                               |  |                                 |         |   |                     |   |                   |  | 3.52 | %              |  |   |                     |   |                   |   |        |  | 3.59 | %
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  
|Net interest margin                               |  |                                 |         |   |                     |   |                   |  | 4.00 | %              |  |   |                     |   |                   |   |        |  | 4.01 | %
|                                                  |  |                                 |         |   |                     |   |                   |  |      |                |  |   |                     |   |                   |   |        |  |      |  

---

|(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 34% federal income tax rate.
|--- | --------------------------------------------------------------------------------



23



---

##### Table of Contents

Rate/Volume Analysis

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



|                                                  |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  
|------------------------------------------------- |  | ---------------------------------------------- | ----- | ------ | --------------------------------------------- | ---- | - | ----------------------------------- | - | ------ | --------- |  | - | ----- |  | - | ----- | - |  | - | ----- | -
|                                                  |  | Three Months Ended September 30, 2006 vs. 2005 |       |        | Nine Months Ended September 30, 2006 vs. 2005 |     
|                                                  |  | Increase (decrease)due to change in            |       |        | NetChange                                     |      |   | Increase (decrease)due to change in |   |        | NetChange | 
|                                                  |  | Rate                                           |       | Volume |                                               |      |   | Rate                                |   | Volume |           | 
|                                                  |  | (dollars in thousands)                         |      
|Interest-earning assets:                          |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  
|Loan receivables                                  |  | $                                              | 1,909 |        | $                                             | 623  |   |                                     | $ | 2,532  |           |  | $ | 5,761 |  | $ | 2,239 |   |  | $ | 8,000 |  
|Securities                                        |  |                                                | 144   |        |                                               | (169 | ) |                                     |   | (25    | )         |  |   | 183   |  |   | (6    | ) |  |   | 177   |  
|FHLB stock                                        |  |                                                | 20    |        |                                               | 6    |   |                                     |   | 26     |           |  |   | 63    |  |   | 17    |   |  |   | 80    |  
|Other equity securities                           |  |                                                | 0     |        |                                               | (3   | ) |                                     |   | (3     | )         |  |   | 13    |  |   | (7    | ) |  |   | 6     |  
|Federal funds sold and other                      |  |                                                | 114   |        |                                               | 17   |   |                                     |   | 131    |           |  |   | 281   |  |   | 37    |   |  |   | 318   |  
|                                                  |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  
|Total increase (decrease) in interest income      |  |                                                | 2,187 |        |                                               | 474  |   |                                     |   | 2,661  |           |  |   | 6,301 |  |   | 2,280 |   |  |   | 8,581 |  
|                                                  |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  
|Interest-bearing liabilities:                     |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  
|Certificates of deposit and other time deposits   |  |                                                | 1,693 |        |                                               | 621  |   |                                     |   | 2,314  |           |  |   | 4,356 |  |   | 1,908 |   |  |   | 6,264 |  
|NOW and money market accounts                     |  |                                                | 49    |        |                                               | (257 | ) |                                     |   | (208   | )         |  |   | 294   |  |   | (553  | ) |  |   | (259  | )
|Savings accounts                                  |  |                                                | 31    |        |                                               | (3   | ) |                                     |   | 28     |           |  |   | 45    |  |   | (12   | ) |  |   | 33    |  
|Federal funds purchased and repurchase agreements |  |                                                | 15    |        |                                               | (97  | ) |                                     |   | (82    | )         |  |   | 115   |  |   | (183  | ) |  |   | (68   | )
|FHLB advances                                     |  |                                                | 153   |        |                                               | 164  |   |                                     |   | 317    |           |  |   | 426   |  |   | 244   |   |  |   | 670   |  
|Junior subordinated debentures                    |  |                                                | 112   |        |                                               | 0    |   |                                     |   | 112    |           |  |   | 366   |  |   | 0     |   |  |   | 366   |  
|Other borrowings                                  |  |                                                | 2     |        |                                               | 140  |   |                                     |   | 142    |           |  |   | 1     |  |   | 426   |   |  |   | 427   |  
|                                                  |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  
|Total increase (decrease) in interest expense     |  |                                                | 2,055 |        |                                               | 568  |   |                                     |   | 2,623  |           |  |   | 5,603 |  |   | 1,830 |   |  |   | 7,433 |  
|                                                  |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  
|Increase in net interest income                   |  | $                                              | 132   |        | $                                             | (94  | ) |                                     | $ | 38     |           |  | $ | 698   |  | $ | 450   |   |  | $ | 1,148 |  
|                                                  |  |                                                |       |        |                                               |      |   |                                     |   |        |           |  |   |       |  |   |       |   |  |   |       |  

Non-Interest Income  The following table presents the major categories of non-interest income
for the third quarter and nine months ended September 30, 2006 and 2005:



|                                                   |  |                                 |       |      |                                |       |      |  |      |       |  |   |      
|-------------------------------------------------- |  | ------------------------------- | ----- | ---- | ------------------------------ | ----- | ---- |  | ---- | ----- |  | - | -----
|                                                   |  | Three Months EndedSeptember 30, |       |      | Nine Months EndedSeptember 30,
|                                                   |  | 2006                            |       | 2005 |                                |       | 2006 |  | 2005
|                                                   |  | (dollars in thousands)         
|Service charges on deposit accounts                |  | $                               | 615   |      | $                              | 750   |      |  | $    | 1,963 |  | $ | 2,116
|Gains on sales of government guaranteed loans, net |  |                                 | 53    |      |                                | 84    |      |  |      | 152   |  |   | 628  
|Gains on sales of loans originated for sale        |  |                                 | 44    |      |                                |      |      |  |      | 284   |  |   |     
|Gains on sales of other assets, net                |  |                                 | 14    |      |                                | (18   | )    |  |      | 32    |  |   | 45   
|Gains on sales of investment securities, net       |  |                                 | 23    |      |                                | 1     |      |  |      | 50    |  |   | 57   
|Other                                              |  |                                 | 568   |      |                                | 545   |      |  |      | 1,532 |  |   | 1,495
|                                                   |  |                                 |       |      |                                |       |      |  |      |       |  |   |      
|Total non-interest income                          |  | $                               | 1,317 |      | $                              | 1,362 |      |  | $    | 4,013 |  | $ | 4,341
|                                                   |  |                                 |       |      |                                |       |      |  |      |       |  |   |      



24



---

##### Table of Contents

Non-interest income for the third quarter ended September 30, 2006 decreased $45,000, or 3.3%, in comparison with
the third quarter of 2005. For the nine months ended September 30, 2006, non-interest income decreased by $328,000 to $4.0 million, compared with $4.3 million for same period during 2005. The decrease in non-interest income for both the third
quarter and nine months ended September 30, 2006 was primarily due to decreased gains on sales of government guaranteed loans, reflecting the cyclical nature of originations and sales of this type of loan. Decreased income from sales of
government guaranteed loans was partially offset by increased income from gains on sales of residential real estate loans originated by the new PBI Mortgage division, which we acquired in January 2006.

Beginning in 2004, we placed more emphasis on lending under the Business and Industrial Loan Guarantee Program administered by the Rural Business-Cooperative Service of
the United States Department of Agriculture (USDA). The program makes an annual allocation of available credits to guarantee loans to promote rural economic development, giving priority to loans in rural communities with populations of
25,000 or less. Participating lenders submit proposals for individual projects meeting specific criteria in a competitive process, and there is ordinarily several months between the time a conditional commitment is awarded for a project and the loan
closing. Accordingly, we expect the amount of income we earn from the sale of USDA guaranteed loans will fluctuate from period to period.

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the third quarter and nine months ended September 30, 2006 and 2005:



|                                 |  |                                 |       |                                |   |       |  |      |        |  |   |       
|-------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                 |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                 |  | 2006                            |       | 2005                           |   | 2006  |  | 2005
|                                 |  | (dollars in thousands)         
|Salary and employee benefits (1) |  | $                               | 2,749 |                                | $ | 2,930 |  | $    | 8,634  |  | $ | 8,563 
|Occupancy and equipment          |  |                                 | 612   |                                |   | 664   |  |      | 1,972  |  |   | 2,114 
|Professional fees                |  |                                 | 164   |                                |   | 299   |  |      | 643    |  |   | 778   
|State franchise tax              |  |                                 | 267   |                                |   | 262   |  |      | 807    |  |   | 754   
|Communications                   |  |                                 | 121   |                                |   | 127   |  |      | 404    |  |   | 406   
|Postage and delivery             |  |                                 | 119   |                                |   | 118   |  |      | 383    |  |   | 370   
|Office supplies                  |  |                                 | 113   |                                |   | 85    |  |      | 366    |  |   | 302   
|Advertising                      |  |                                 | 148   |                                |   | 51    |  |      | 467    |  |   | 205   
|Other real estate owned expense  |  |                                 | 49    |                                |   | 2     |  |      | 172    |  |   | 112   
|Other                            |  |                                 | 311   |                                |   | 381   |  |      | 1,092  |  |   | 1,167 
|                                 |  |                                 |       |                                |   |       |  |      |        |  |   |       
|Total non-interest expense       |  | $                               | 4,653 |                                | $ | 4,919 |  | $    | 14,940 |  | $ | 14,771
|                                 |  |                                 |       |                                |   |       |  |      |        |  |   |       

---

|(1) | During the third quarter and nine months ended September 30, 2006 the Company recognized $41,000 and $106,000, respectively, of expense upon the issuance of stock options and
restricted stock to employees.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Non-interest expense for the third quarter ended September 30, 2006 decreased $266,000, or 5.4%, to $4.7
million, compared to $4.9 million for the third quarter of 2005. The decrease in non-interest expense during the quarter was primarily due to reduced employee benefit costs resulting from a change in the Companys group health benefit plan that
went into effect on July 1, 2006 and an increase in the deferral of direct loan origination costs. This decrease was partially offset by the increased cost of advertising in connection with branding the new name, PBI Bank. For the nine months
ended September 30, 2006, non-interest expense increased $169,000, or 1.1%, to $14.9 million compared with $14.8 million for the first nine months of 2005. The increase in non-interest expense for the nine month period ended September 30,
2006 was additional employee compensation expenses relating to planned growth in our lending staff and the increased advertising cost, but was partially offset by the decreased group benefit plan costs. In addition, the Company implemented Statement
of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R) during the first quarter of 2006 resulting in the recognition of $41,000 and $106,000 in non-cash compensation expense in the third quarter and
first nine months of 2006, respectively. No such expense was recorded in the comparative periods of 2005.



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##### Table of Contents

Income Tax ExpenseIncome tax expense was $1.9 million and $5.1 million for the third quarter
and nine months ended September 30, 2006, respectively, compared with $947,000 and $2.8 million for the same periods in 2005. During 2005, the Company and certain of its former subsidiaries were subchapter S corporations. As such, the Company
and its former S corporation subsidiaries were not historically subject to federal corporate income tax at the corporate level, while certain other of its subsidiaries were subject to federal income tax. After 2005, all of the Companys income
and all of the income of its wholly owned subsidiary PBI Bank will be subject to federal income tax. On December 31, 2005, when the Subchapter S elections were voluntarily terminated, certain deferred tax assets and liabilities were reinstated.
Income tax expense would have increased approximately $743,000 and $2.1 million for the third quarter and nine months ended September 30, 2005, respectively, had the Company and its subsidiaries that were subchapter S corporations been subject
to federal income tax during that period.

Analysis of Financial Condition

Total assets at September 30, 2006 were $1.0 billion compared with $991.5 million at December 31, 2005, an increase of $8.5 million or 0.9%. This increase was primarily attributable to an increase of $25.0
million in net loans from loan growth. The increase was partially offset by a $9.1 million decrease in federal funds sold and a $8.3 million decrease in securities available for sale.

Loans ReceivableLoans receivable increased $25.5 million or 3.2% during the nine months ended September 30, 2006 to $817.4 million. Our commercial, commercial real estate, and real
estate construction portfolios increased by an aggregate of $21.1 million or 3.9% during the nine months and comprised 69.4% of the total loan portfolio at September 30, 2006.

Loan Portfolio CompositionLoans The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in our
portfolio and other than the categories noted; there is no concentration of loans in any industry exceeding 10% of total loans.



|              |  |                         |         |         |        |   |                        |   |         |  |        |  
|------------- |  | ----------------------- | ------- | ------- | ------ | - | ---------------------- | - | ------- |  | ------ | -
|              |  | As of September 30,2006 |         |         |        |   | As of December 31,2005 |   |         | 
|              |  | Amount                  |         | Percent |        |   | Amount                 |   | Percent | 
|              |  | (dollars in thousands)  |        
|Type of Loan: |  |                         |         |         |        |   |                        |   |         |  |        |  
|Real estate:  |  |                         |         |         |        |   |                        |   |         |  |        |  
|Commercial    |  | $                       | 303,543 |         | 37.13  | % |                        |   | 305,099 |  | 38.52  | %
|Construction  |  |                         | 206,298 |         | 25.24  | % |                        |   | 190,080 |  | 24.00  | %
|Residential   |  |                         | 180,033 |         | 22.02  | % |                        |   | 177,683 |  | 22.44  | %
|Home equity   |  |                         | 25,987  |         | 3.18   | % |                        |   | 22,707  |  | 2.87   | %
|Commercial    |  |                         | 57,017  |         | 6.98   | % |                        |   | 50,626  |  | 6.39   | %
|Consumer      |  |                         | 29,582  |         | 3.62   | % |                        |   | 30,808  |  | 3.89   | %
|Agriculture   |  |                         | 13,936  |         | 1.70   | % |                        |   | 13,625  |  | 1.72   | %
|Other         |  |                         | 1,025   |         | 0.13   | % |                        |   | 1,323   |  | 0.17   | %
|              |  |                         |         |         |        |   |                        |   |         |  |        |  
|Total loans   |  | $                       | 817,421 |         | 100.00 | % |                        | $ | 791,951 |  | 100.00 | %
|              |  |                         |         |         |        |   |                        |   |         |  |        |  



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##### Table of Contents

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

The following table sets forth information with respect to non-performing assets as of September 30, 2006 and December 31, 2005.



|                                                |  |                        |        |   |                  |   |       |  
|----------------------------------------------- |  | ---------------------- | ------ | - | ---------------- | - | ----- | -
|                                                |  | September 30,2006      |        |   | December 31,2005 |  
|                                                |  | (dollars in thousands) |       
|Loans past due 90 days or more still on accrual |  | $                      | 2,356  |   |                  | $ | 1,969 |  
|Non-accrual loans                               |  |                        | 7,616  |   |                  |   | 5,045 |  
|                                                |  |                        |        |   |                  |   |       |  
|Total non-performing loans                      |  |                        | 9,972  |   |                  |   | 7,014 |  
|Real estate acquired through foreclosure        |  |                        | 2,093  |   |                  |   | 1,781 |  
|Other repossessed assets                        |  |                        | 9      |   |                  |   | 1     |  
|                                                |  |                        |        |   |                  |   |       |  
|Total non-performing assets                     |  | $                      | 12,074 |   |                  | $ | 8,796 |  
|                                                |  |                        |        |   |                  |   |       |  
|Non-performing loans to total loans             |  |                        | 1.22   | % |                  |   | 0.89  | %
|                                                |  |                        |        |   |                  |   |       |  
|Non-performing assets to total loans            |  |                        | 1.48   | % |                  |   | 1.11  | %
|                                                |  |                        |        |   |                  |   |       |  

Past due loans increased $387,000 from December 31, 2005 to September 30, 2006. Non-accrual loans
increased $2.6 million from December 31, 2005 to September 30, 2006. This increase was primarily attributable to three residential construction loans and five related commercial loans. Management believes these loans are well secured and
has begun the appropriate collection actions to resolve them.

Allowance for Loan LossesThe allowance for loan losses is based
on managements continuing review and risk evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in managements judgment, require
current recognition in estimating loan losses.

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

The provision for loan losses was $276,000 for the three months ended September 30, 2006, compared with $715,000 for the
same period in 2005. The provision for loan losses was $1.0 million for the nine months ended September 30, 2006, compared with $1.8 million for the same nine months of 2005. The total allowance for loan losses was $12.7 million or 1.55% of
total loans at September 30, 2006, compared with $12.4 million or 1.56% of total loans at September 30, 2005. The increased allowance is primarily due to increases in the loan portfolio between periods. Net charge-offs were $232,000 for
the three months ended September 30, 2006 compared with $304,000 for the same period in 2005. Net charge-offs were $571,000 for the nine months ended September 30, 2006, compared with $402,000 for the same nine months of 2005.



27



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##### Table of Contents

An analysis of changes in allowance for loan losses and selected ratios for the three and nine month periods ended
September 30, 2006 and 2005 follows:



|                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                  |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                  |  | 2006                            |        |   | 2005                           |   |        | 2006 |  |   | 2005   |  
|                                                  |  | (dollars in thousands)          |       
|Balance at beginning of period                    |  | $                               | 12,611 |   |                                | $ | 12,023 |      |  | $ | 12,197 |   |  | $ | 10,261 |  
|Provision for loan losses                         |  |                                 | 276    |   |                                |   | 715    |      |  |   | 1,029  |   |  |   | 1,768  |  
|Recoveries                                        |  |                                 | 49     |   |                                |   | 183    |      |  |   | 203    |   |  |   | 478    |  
|Charge-offs                                       |  |                                 | (281   | ) |                                |   | (487   | )    |  |   | (774   | ) |  |   | (880   | )
|Balance acquired in bank acquisition              |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 807    |  
|                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Balance at end of period                          |  | $                               | 12,655 |   |                                | $ | 12,434 |      |  | $ | 12,655 |   |  | $ | 12,434 |  
|                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses to period-end loans     |  |                                 | 1.55   | % |                                |   | 1.56   | %    |  |   | 1.55   | % |  |   | 1.56   | %
|                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net charge-offs to average loans                  |  |                                 | 0.03   | % |                                |   | 0.04   | %    |  |   | 0.07   | % |  |   | 0.05   | %
|                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses to non-performing loans |  |                                 | 126.91 | % |                                |   | 140.21 | %    |  |   | 126.91 | % |  |   | 140.21 | %
|                                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  

LiabilitiesTotal liabilities at September 30, 2006 were $893.9 million compared
to $919.6 million at December 31, 2005, a decrease of $25.7 million, or 2.8%. The decrease was primarily attributable to a decrease of $4.2 million in deposits, a decrease of $9.6 million in notes payable and a decrease of $6.6 million in
Federal Home Loan Bank advances. These decreases were due to planned non-renewal of national market certificates of deposit and reductions in borrowings.

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



|                        |  |                                              |         |             |                                     |   |                |   |             |  |      |  
|----------------------- |  | -------------------------------------------- | ------- | ----------- | ----------------------------------- | - | -------------- | - | ----------- |  | ---- | -
|                        |  | For the Nine Months Ended
September 30, 2006 |         |             | For the Year EndedDecember 31, 2005 |  
|                        |  | AverageBalance                               |         | AverageRate |                                     |   | AverageBalance |   | AverageRate | 
|                        |  | (dollars in thousands)                       |        
|Demand                  |  | $                                            | 65,173  |             |                                    |   |                | $ | 64,395      |  |     |  
|Interest checking       |  |                                              | 51,735  |             | 1.56                                | % |                |   | 60,551      |  | 1.32 | %
|Money market            |  |                                              | 31,878  |             | 3.06                                | % |                |   | 52,168      |  | 2.61 | %
|Savings                 |  |                                              | 23,387  |             | 0.81                                | % |                |   | 26,210      |  | 0.57 | %
|Certificates of deposit |  |                                              | 631,396 |             | 4.25                                | % |                |   | 568,353     |  | 3.40 | %
|                        |  |                                              |         |             |                                     |   |                |   |             |  |      |  
|Total Deposits          |  | $                                            | 803,569 |             | 3.59                                | % |                | $ | 771,677     |  | 2.80 | %
|                        |  |                                              |         |             |                                     |   |                |   |             |  |      |  



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##### Table of Contents

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



|                   |  |                                             |         |             |                                     |   |                |   |             |  |      |  
|------------------ |  | ------------------------------------------- | ------- | ----------- | ----------------------------------- | - | -------------- | - | ----------- |  | ---- | -
|                   |  | For the Nine Months EndedSeptember 30, 2006 |         |             | For the Year EndedDecember 31, 2005 |  
|                   |  | AverageBalance                              |         | AverageRate |                                     |   | AverageBalance |   | AverageRate | 
|                   |  | (dollars in thousands)                      |        
|Less than $100,000 |  | $                                           | 472,901 |             | 4.21                                | % |                | $ | 437,351     |  | 3.37 | %
|$100,000 or more   |  |                                             | 158,495 |             | 4.39                                | % |                |   | 131,002     |  | 3.51 | %
|                   |  |                                             |         |             |                                     |   |                |   |             |  |      |  
|Total              |  | $                                           | 631,396 |             | 4.25                                | % |                | $ | 568,353     |  | 3.40 | %
|                   |  |                                             |         |             |                                     |   |                |   |             |  |      |  

The following table shows at September 30, 2006 and December 31, 2005 the amount of our time deposits of
$100,000 or more by time remaining until maturity:



|                                 |                        |                        |         |                       |   |        
|-------------------------------- | ---------------------- | ---------------------- | ------- | --------------------- | - | -------
|Maturity Period                  |                        | As ofSeptember 30,2006 |         | As ofDecember 31,2005
|                                 | (dollars in thousands)
|Three months or less             |                        | $                      | 32,217  |                       | $ | 27,183 
|Three months through six months  |                        |                        | 48,391  |                       |   | 21,871 
|Six months through twelve months |                        |                        | 46,768  |                       |   | 51,542 
|Over twelve months               |                        |                        | 37,430  |                       |   | 49,997 
|                                 |                        |                        |         |                       |   |        
|Total                            |                        | $                      | 164,806 |                       | $ | 150,593
|                                 |                        |                        |         |                       |   |        

Liquidity

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

Funds are available from a number
of sources, including the sale of securities in the available-for-sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities, brokered deposits and other wholesale funding. During 2005 and the first nine
months of 2006, PBI Bank utilized brokered and wholesale deposits to supplement its funding strategy. At September 30, 2006, these deposits totaled $2.6 million. PBI Bank also secured federal funds borrowing lines from major correspondent banks
totaling $21.7 million on an unsecured basis and an additional $17.7 million on a secured basis.

Traditionally, PBI Bank has utilized borrowings from the
FHLB to supplement our funding requirements. At September 30, 2006, the Bank had an unused borrowing capacity with the FHLB of $81.3 million. Management believes our sources of liquidity are adequate to meet expected cash needs for the
foreseeable future.



29



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##### Table of Contents

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

Capital

Stockholders equity increased $33.9 million to $105.8 million at September 30, 2006 compared with
$71.9 million at December 31, 2005. The increase was due to the completion of our initial public offering and net income earned during 2006 reduced by dividends declared. The Company and the Bank qualified as well capitalized under regulatory
guidelines at September 30, 2006.

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

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



|                         |  |                    |               |  |                          |         |  |                    |               |  |                   |         |  |       |   |  |       |  
|------------------------ |  | ------------------ | ------------- |  | ------------------------ | ------- |  | ------------------ | ------------- |  | ----------------- | ------- |  | ----- | - |  | ----- | -
|                         |  | RegulatoryMinimums |               |  | Well-CapitalizedMinimums |         |  | September 30, 2006 |               |  | December 31, 2005 |        
|                         |  |                    | PorterBancorp |  |                          | PBIBank |  |                    | PorterBancorp |  |                   | PBIBank | 
|Tier I capital           |  | 4.0                | %             |  | 6.0                      | %       |  | 14.73              | %             |  | 11.84             | %       |  | 10.88 | % |  | 11.39 | %
|Total risk-based capital |  | 8.0                |               |  | 10.0                     |         |  | 15.99              |               |  | 13.10             |         |  | 12.13 |   |  | 12.65 |  
|Tier I leverage ratio    |  | 4.0                |               |  | 5.0                      |         |  | 12.06              |               |  | 9.67              |         |  | 8.82  |   |  | 9.23  |  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Companys interest sensitivity profile was
asset sensitive at September 30, 2006, and December 31, 2005. Given an instantaneous 100 basis point decrease in rates that was sustained for 12 months, base net interest income would decrease by an estimated 6.9% at September 30,
2006 compared with a decrease of 9.0% at December 31, 2005. Given a 100 basis point increase in interest rates, base net interest income would increase by an estimated 6.1% at September 30, 2006, compared with an increase of 8.3% at
December 31, 2005.

The following table indicates the estimate impact on net interest income under various interest rate scenarios for the twelve
months following September 30, 2006, as calculated using the static shock model approach:



30



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##### Table of Contents

|                   |  |                                      |        |   |                   |        |  
|------------------ |  | ------------------------------------ | ------ | - | ----------------- | ------ | -
|                   |  | Change in Future Net Interest Income |       
|                   |  | Dollar Change                        |        |   | Percentage Change |       
|                   |  | (dollars in thousands)               |       
|+ 200 basis points |  | $                                    | 4,128  |   |                   | 12.04  | %
|+ 100 basis points |  |                                      | 2,102  |   |                   | 6.13   |  
|- 100 basis points |  |                                      | (2,358 | ) |                   | (6.88  | )
|- 200 basis points |  |                                      | (5,325 | ) |                   | (15.53 | )

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of
the end of the fiscal quarter covered by this report, these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required disclosure.



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##### Table of Contents

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Information regarding risk
factors appears in the Companys Form S-1 under the sections titled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations  Cautionary Note Regarding Forward-Looking
Statements in this report. There have been no material changes from the risk factors previously discussed in our Form S-1.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Securities and Exchange Commission declared our
registration statement, filed on Form S-1 (File No. 333-133198) under the Securities Act of 1933 in connection with the initial public offering of 1,550,000 shares of our common stock effective on September 21, 2006. Sandler
ONeill & Partners, L.P. acted as Lead Manager and Sole Bookrunner for the transaction and Keefe, Bruyette & Woods, Inc. acted as co-manager.

Our initial public offering commenced on September 21, 2006, and did not terminate until after the sale of all of the securities registered by the Registration Statement. Of the 1,550,000 shares of common stock
registered under the Registration Statement, 300,000 shares were sold by selling shareholders, for which we received no proceeds.

All 1,550,000 shares of
our common stock registered in the offering were sold at the initial public offering price per share of $24.00. The aggregate purchase price of the offering was $37.2 million. The Company sold 1,250,000 newly issued shares of common stock for an
aggregate purchase price of $30.0 million, and selling shareholders sold 300,000 shares of common stock for an aggregate purchase price of $7.2 million, for their own accounts.

The net proceeds to us were $26.6 million after deducting total expenses of $3.4 million, which consists of $2.1 million in underwriters discounts and commissions and $1.3 million of other expenses. No payments
for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

We closed our initial public offering on September 27, 2006. On September 29, 2006, Registrant used $9.5 million to pay in full two promissory notes
issued to William G. Porter, a director of PBI Bank and the brother of J. Chester Porter, Chairman of the Board of the Company, in connection with its acquisition of minority interests in two subsidiary banks as part of the Companys
reorganization that took effect on December 31, 2005. The remainder has been retained by the Company and invested in accordance with its investment policy. There has been no material change in the planned use of proceeds from the initial public
offering as described in the Companys final prospectus filed with the SEC.



32



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##### Table of Contents

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Securities Holders

On September 1, 2006, the holders the voting common
stock of Porter Bancorp, Inc., by unanimous written consent, approved an amendment to the Porter Bancorp, Inc. 2006 Non-employee Directors Stock Ownership Incentive Plan to change the definition of change of control to be the same as is
used in the Porter Bancorp, Inc. 2006 Stock Incentive Plan for the Companys employees.

Item 5. Other Information

Not applicable.

Item 6. Exhibits



|(a) | Exhibits
|--- | --------

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



|               |  |                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                
|31.1           |  | Certification of Principal Executive Officer, pursuant to Rule 13a-14(a)                                                                              
|31.2           |  | Certification of Principal Financial Officer, pursuant to Rule 13a-14(a)                                                                              
|32.1           |  | Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|               | 
|32.2           |  | Certification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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



|                  |  |                      |  |                                    
|----------------- |  | -------------------- |  | -----------------------------------
|                  |  | PORTER BANCORP, INC.
|                  |  | (Registrant)        
|                  |  |                     
|November 13, 2006 |  | By:                  |  | /s/ Maria L. Bouvette              
|                  |  |                      |  | Maria L. Bouvette                  
|                  |  |                      |  | President & Chief Executive Officer
|                  |  |                     
|November 13, 2006 |  | By:                  |  | /s/ David B. Pierce                
|                  |  |                      |  | David B. Pierce                    
|                  |  |                      |  | Chief Financial Officer and Chief  
|                  |  |                      |  | Accounting Officer                 



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