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

Cautionary Note Regarding Forward-Looking Statements

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

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

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

Overview

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

The Company reported net income of $1.5 million for the three months ended March 31, 2012, compared with $799,000 for the same period of 2011. After deductions for dividends on preferred stock, accretion on preferred stock, and earnings allocated to participating securities, net income to common shareholders was $985,000 and $305,000 for the three months ended March 31, 2012 and 2011, respectively. Basic and diluted income per common share were $0.08 and $0.03 for the three months ended March 31, 2012 and 2011, respectively.

Significant developments during the quarter ended March 31, 2012 consist of the following:

? Net income increased to $1.5 million for the three months ended March 31, 2012, compared with $799,000 for the first quarter of 2011. Earnings per diluted common share were $0.08 compared with $0.03 in the first quarter of 2011.

? Net interest margin decreased 9 basis points to 3.45% in the first quarter of 2012 compared with 3.54% in the first quarter of 2011. The decrease in margin since last year was primarily due to elevated non-accrual loan levels and lower interest earning assets coupled with lower rates on those assets.

? We continue to execute on our strategy to reduce our commercial real estate and construction and development loans. Average loans decreased 13.3% to $1.1 billion in the first quarter of 2012 compared with $1.3 billion in the first quarter of 2011. Net loans decreased 16.0% to $1.05 billion in the first quarter of 2012, compared with $1.24 billion at March 31, 2011. Construction and development loans totaled $92.0 million, or 77% of total risk-based capital, at March 31, 2012 compared to $101.5 million, or 85% of total risk-based capital, at December 31, 2011. Non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group totaled $398.6 million, or 331% of total risk-based capital, at March 31, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.

? Loan proceeds received from the reduction of our commercial real estate and construction and development loans were used primarily to redeem maturing certificates of deposit during the quarter. Deposits decreased 15.4% to $1.25 billion compared with $1.48 billion at March 31, 2011. Certificates of deposit balances declined $72.8 million during the first quarter of 2012 to $951.5 million at March 31, 2012, from $1.02 billion at December 31, 2011. Demand deposits increased 2.9% during the first quarter of 2012 compared with the fourth quarter of 2011, and increased 7.1% compared with the first quarter of 2011.

? Total assets decreased $65.8 million to $1.39 billion compared with $1.46 billion at December 31, 2011, and $1.74 billion at March 31, 2011.

? Non-performing loans increased $4.6 million during the first quarter to $98.0 million at March 31, 2012, compared with $93.4 million at December 31, 2011. The increase was primarily in the commercial and residential real estate segments of our portfolio.

? Non-performing assets decreased $1.3 million during the first quarter to $133.5 million at March 31, 2012. The decrease was primarily due to sales of other real estate owned, offset by a higher level of non-performing loans described above.

? Loans past due 30-59 days increased from $17.3 million at December 31, 2011 to $20.6 million at March 31, 2012. Loans past due 60-89 days increased from $3.9 million at December 31, 2011 to $5.0 million at March 31, 2012. These increases were primarily in the commercial real estate segment of the portfolio.

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

Recent Developments and Future Plans

During the first quarter of 2012, we reported net income available to common shareholders of $985,000. This was an improvement from our 2011 results. During the year eneded December 31, 2011, we recorded a net loss to common shareholders of $105.2 million. This loss was primarily attributable to a $23.8 million goodwill impairment charge, the establishment of a $31.7 million valuation allowance on our deferred tax assets, OREO expense of $47.5 million related to valuation adjustments for our change in strategy related to certain properties, fair value write-downs related to new appraisals received for properties in the portfolio during 2001, net loss on the sale of OREO properties, and increase in carrying costs associated with carrying these higher levels of assets, as well as provision for loan losses expense of $62.6 million due to the continued decline in credit trends within our portfolio.

In June 2011, the Bank agreed to a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. As of March 31, 2012, these capital ratios were not met.

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

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

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

? Addressing construction and development lending.

o We recorded net construction and development loan charge-offs totaling $522,000 during the first quarter of 2012. This represented approximately 22% of our total net loan charge-offs for the first quarter of 2012. We recorded net construction and development loan charge-offs totaling $11.0 million and $11.4 million for the year eneded December 31, 2011 and 2010, respectively. This represented approximately 27% and 51% of our total net loan charge-offs in 2011 and 2010, respectively.

o In 2011, management determined, with the concurrence of the Board of Directors, that certain properties held in OREO were not likely to be successfully disposed of in an acceptable time-frame using routine marketing efforts. It became apparent due to weakness in the economy and softness in demand for housing that certain land development and residential condominium projects would require extended holding periods to sell the properties at recent appraised values. Accordingly, in June of 2011, the Company sold, in a single transaction, 54 finished condominium property units from condominium developments held in our OREO portfolio with a carrying value of approximately $11.0 million, for $5.2 million, resulting in a pre-tax loss of $5.8 million.

o Although we were carrying our OREO at fair market value less estimated cost to sell, we subsequently adjusted our valuations for land development and residential development properties held in OREO similar to the properties we sold earlier in 2011. Our 2011 fair value adjustments totaled approximately $25.6 million to reflect our intent to market these properties more aggressively to retail and bulk buyers. Additionally, we recorded approximately $9.3 million of fair value adjustments related to new appraisals received for properties in the portfolio during 2011.

o In summary, for the year eneded December 31, 2011 and 2010 respectively, we recorded net construction and development OREO fair value adjustments and loss on sale of OREO totaling $38.7 million and $10.4 million. This represents approximately 89% and 71% of our total OREO fair value adjustments and loss on sale in 2011 and 2010, respectively.

o For the first quarter of 2012, we recorded net construction and development OREO fair value adjustments and loss on sale of construction and development OREO of $ 222,000. This represents approximately 25% of our total OREO fair value adjustments and loss on sale of OREO in the first quarter of 2012.

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

o Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. These loans totaled $92.0 million, or 77% of total risk-based capital, at March 31, 2012 and $101.5 million, or 85% of total risk-based capital, at December 31, 2011.

o Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group, to not more than 250% of total risk based capital. These loans totaled $398.6 million, or 331% of total risk-based capital, at March 31, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.

o We are working to reduce these loans by curtailing new construction and development lending and new non-owner occupied commercial real estate lending. We are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale. While we have not yet reduced our balances in these categories to the required percentages, we have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $92.0 million at March 31, 2012. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $246.1 million at March 31, 2012.

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

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

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

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

Results of Operations

The following table summarizes components of income and expense and the change
in those components for the three months ended March 31, 2012, compared with the
same period of 2011:

                              For the Three Months             Change from
                                 Ended March 31,              Prior Period
                               2012            2011        Amount      Percent
                                          (dollars in thousands)

Gross interest income       $    15,755      $ 19,616     $ (3,861 )      (19.7 )%
Gross interest expense            4,301         5,848       (1,547 )      (26.5 )
Net interest income              11,454        13,768       (2,314 )      (16.8 )
Provision for loan losses         3,750         5,100       (1,350 )      (26.5 )
Non-interest income               3,445         1,787        1,658         92.8
Non-interest expense              9,647         9,395          252          2.7
Net income before taxes           1,502         1,060          442         41.7
Income tax expense                    -           261         (261 )     (100.0 )
Net income                        1,502           799          703         88.0

Net income for the first quarter of 2012 increased $703,000 to $1.5 million compared with $799,000 for the first quarter of 2011. The increase was primarily attributable to gains on sales of investment securities in the first quarter of 2012 totaling $2.1 million compared with $83,000 in the first quarter of 2011, and a decrease in our provision for loan losses in the first quarter of 2012 totaling $3.75 million compared with $5.85 million in the first quarter of 2011. We also did not record income tax expense for the first quarter of 2012 compared with income tax expense of $261,000 in the first quarter of 2011. The income tax effect on pre-tax income for the first quarter of 2012 decreased our deferred tax assets and related valuation allowance by $419,000.

Those improvements were partially offset by lower net interest income in the first quarter of 2012 compared with the first quarter of 2011.

Net Interest Income - Our net interest income was $11.5 million for the three months ended March 31, 2012, a decrease of $2.3 million, or 16.8%, compared with $13.8 million for the same period in 2011. Net interest spread and margin were 3.30% and 3.45%, respectively, for the first quarter of 2012, compared with 3.38% and 3.54%, respectively, for the first quarter of 2011. Average non-accrual loans were $92.0 million and $61.8 million in the first quarter of 2012 and 2011, respectively.

Average loans receivable declined approximately $171.7 million for the quarter ended March 31, 2012 compared with the first quarter of 2011. This resulted in a decline in interest revenue of approximately $2.3 million for the quarter ended March 31, 2012 compared with the prior year period. This decline in loan volume is attributable to soft loan demand in our markets as well as our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio.

Net interest margin decreased 9 basis points from our margin of 3.54% in the prior year first quarter due primarily to lower average earning assets relative to average interest bearing liabilities and an 8 basis point decline in net interest spread. The yield on earning assets declined 30 basis points from the first quarter of 2011, compared with a 22 basis point decline in rates paid on interest-bearing liabilities.

Net interest margin for the three months ended March 31 2012, increased 25 basis points from our margin of 3.20% in the fourth quarter of 2011 due primarily to lower yielding fed funds and deposits with financial institutions being used to fund maturing time deposits. In addition, our average rate on interest-bearing liabilities declined 7 basis points to 1.43% for the first quarter of 2012, from 1.50% for the fourth quarter of 2011. Interest-earning fed funds and deposits with financial institutions, with an average yield of 0.23%, declined from an average balance of $114.5 million in the fourth quarter of 2011 to an average balance of $67.8 million in the first quarter of 2012. These funds were used to redeem maturing certificates of deposit with an average cost of 1.55%. This was partially offset by an increase in interest foregone on non-accrual loans. Interest foregone on non-accrual loans totaled $790,000 in the first quarter of 2012, compared with $640,000 in the fourth quarter of 2011.

Average Balance Sheets
The following table presents the average balance sheets for the three month
periods ended March 31, 2012 and 2011, along with the related calculations of
tax-equivalent net interest income, net interest margin and net interest spread
for the related periods.

                                                                    Three Months Ended March 31,
                                                       2012                                              2011
                                     Average         Interest          Average         Average         Interest          Average
                                     Balance        Earned/Paid      Yield/Cost        Balance        Earned/Paid      Yield/Cost
                                                                       (dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)            $ 1,119,181     $      14,512            5.22 %   $ 1,290,851     $      18,110            5.69 %
Securities
Taxable                                125,502               826            2.65         111,893             1,029            3.73
Tax-exempt (3)                          27,103               250            5.71          27,020               260            6.00
FHLB stock                              10,072               114            4.55          10,072               114            4.59
Other equity securities                  1,359                15            4.44           1,400                13            3.77
Federal funds sold and other            67,661                38            0.23         150,325                90            0.24

Total interest-earning assets        1,350,878            15,755            4.73 %     1,591,561            19,616            5.03 %

Less: Allowance for loan losses        (52,894 )                                         (34,233 )
Non-interest earning assets            114,622                                           180,925

Total assets                       $ 1,412,606                                       $ 1,738,253

LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Certificates of deposit and
other time deposits                $   976,448     $       3,772            1.55 %   $ 1,166,832     $       4,875            1.69 %
NOW and money market deposits          153,098               186            0.49         172,077               424            1.00
Savings accounts                        37,085                42            0.46          36,188                61            0.68
Repurchase agreements                    1,673                 2            0.48          11,346               118            4.22
FHLB advances                            6,906                57            3.32          14,725               142            3.91
Junior subordinated debentures          32,645               242            2.98          33,550               228            2.76

Total interest-bearing
liabilities                          1,207,855             4,301            1.43 %     1,434,718             5,848            1.65 %

Non-interest-bearing
liabilities:
Non-interest-bearing deposits          112,656                                           106,095
Other liabilities                        7,436                                             6,855

Total liabilities                    1,327,947                                         1,547,668
Stockholders' equity                    84,659                                           190,585

Total liabilities and
stockholders' equity               $ 1,412,606                                       $ 1,738,253

Net interest income                                $      11,454                                     $      13,768

Net interest spread                                                         3.30 %                                            3.38 %

Net interest margin                                                         3.45 %                                            3.54 %

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

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

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

                                                      Three Months Ended March 31,
                                                              2012 vs. 2011
                                                    Increase (decrease)
                                                      due to change in           Net
                                                     Rate          Volume       Change

Interest-earning assets:
Loan receivables                                  $   (1,306 )    $ (2,292 )   $ (3,598 )
Securities                                              (331 )         118         (213 )
Other equity securities                                    2             -            2
Federal funds sold and other                              (6 )         (46 )        (52 )

Total decrease in interest income                     (1,641 )      (2,220 )     (3,861 )

Interest-bearing liabilities:
Certificates of deposit and other time deposits         (349 )        (754 )     (1,103 )
NOW and money market accounts                           (195 )         (43 )       (238 )
Savings accounts                                         (21 )           2          (19 )
Repurchased agreements                                   (59 )         (57 )       (116 )
FHLB advances                                            (18 )         (67 )        (85 )
Junior subordinated debentures                            20            (6 )         14

Total decrease in interest expense                      (622 )        (925 )     (1,547 )

Increase (decrease) in net interest income        $   (1,019 )    $ (1,295 )   $ (2,314 )

Non-Interest Income - The following table presents the major categories of non-interest income for the first quarter ended March 31, 2012 and 2011:

                                                 Three Months Ended
                                                      March 31,
                                                  2012          2011
                                                   (in thousands)
Service charges on deposit accounts            $      554      $   630
Income from fiduciary activities                      251          255
Secondary market brokerage fees                        17           76
Title insurance commissions                            22           31
Gains on sales of loans originated for sale            45          221
Gains on sales of investment securities, net        2,019           83
Other                                                 537          491
Total non-interest income                      $    3,445      $ 1,787

Non-interest income for the first quarter ended March 31, 2012 increased $1.7 million, or 92.8%, compared with the first quarter of 2011. This increase in non-interest income was primarily due to increased gains on sales of securities of $1.9 million, partially offset by lower service charges on deposit accounts of $76,000 due to lower transaction volume, and gains on sales of loans originated for sale of $176,000 due to fewer loans originated for sale.

Non-interest Expense - The following table presents the major categories of non-interest expense for the first quarter ended March 31, 2012 and 2011:

                                    Three Months Ended
                                         March 31,
                                     2012          2011
                                      (in thousands)
Salary and employee benefits      $    4,312      $ 4,124
Occupancy and equipment                  886          972
Other real estate owned expense        1,257        1,367
FDIC insurance                           873          855
State franchise tax                      592          582
Loan collection fees                     360          262
Professional fees                        356          280
Communications                           180          168
. . .