INTRODUCTION

Premier Financial Bancorp, Inc. ("Premier") is a multi-bank holding company headquartered in Huntington, West Virginia. It operates six community bank subsidiaries ranging in size from $66 million to $170 million, each with a local community name and orientation. The banks operate in twenty-four communities within the states of West Virginia, Ohio and Kentucky and provide their customers with a full range of banking services. At the close of business on April 30, 2008, Premier completed its acquisitions of Traders Bankshares, Inc. ("Traders"), a $108 million single bank holding company headquartered in Spencer, West Virginia, and Citizens First Bank, Inc. ("Citizens First"), a $62 million bank headquartered in Ravenswood, West Virginia. The results of operations of Citizens First and Traders are included in Premier's consolidated statements of income beginning only from the acquisition date. On October 25, 2008, Premier merged these two banks, named the resulting bank, Traders Bank, Inc. and moved its headquarters to Ravenswood, West Virginia. As of December 31, 2007, Premier had approximately $724 million in total assets, $467 million in total loans, $589 million in total deposits and $18 million in customer repurchase agreements.

The accompanying consolidated financial statements have been prepared by the management of Premier in conformity with accounting principles generally accepted in the United States of America. The audit committee of the Board of Directors engaged Crowe Horwath LLP (Crowe) as independent auditors to audit the consolidated financial statements, and their report is included elsewhere herein. Financial information appearing throughout this annual report is consistent with that reported in the consolidated financial statements. The following discussion is designed to assist readers of the consolidated financial statements in understanding significant changes in Premier's financial condition and results of operations.

Management's objective of a fair presentation of financial information is achieved through a system of internal accounting controls. The financial control system of Premier is designed to provide reasonable assurance that assets are safeguarded from loss and that transactions are properly authorized and recorded in the financial records. As an integral part of that financial control system, the holding company employs a staff of internal auditors to perform internal audits of the financial records of each of the subsidiaries on a periodic basis. The internal audit staff reports their findings and recommendations to Premier's audit committee as well as the audit committees of the subsidiaries. Also, on a regular periodic basis, the subsidiary banks are examined by Federal and State banking authorities for safety and soundness as well as compliance with applicable banking laws and regulations. The activities of both the internal and external audit functions are reviewed by the audit committee of the Board of Directors.

FORWARD-LOOKING STATEMENTS

Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, economic conditions (both generally and more specifically in the markets in which Premier operates), competition for Premier's customers from other providers of financial services, government legislation and regulation (which changes from time to time), changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth or lack thereof, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier. The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan," "project," "predict," "continue" and similar expressions are intended to identify forward-looking statements.

CRITICAL ACCOUNTING POLICIES

General

The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements and management's discussion and analysis are, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.

Presented below is a discussion of those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the accompanying consolidated financial statements presented elsewhere in this annual report.

Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable incurred losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of control over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance that the allowance for loan losses is maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

The Company evaluates various loans individually for impairment as required by Statement of Financial Accounting Standard (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due 90 days or more, restructured loans and other loans selected by management including loans graded as substandard or doubtful by the internal credit review process. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies (SFAS 5), with a group of loans that have similar characteristics.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of probable incurred loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses exceeds the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses were below the range of reasonable estimates, the

allowance would be reduced by way of a credit to the provision for loan losses. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable incurred losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.

Business Acquisitions and Impairment of Goodwill

For acquisitions, Premier is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.

Under Statement of Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible Assets, goodwill is evaluated at least annually to determine if the amount recorded on the Company's balance sheet is impaired. If goodwill is determined to be impaired, the recorded amount would be reduced to estimated fair value by a charge to expense in the period in which impairment is determined. Impairment is evaluated in the aggregate for all of the Company's banking operations. Operating characteristics of the aggregate banking operations are derived and compared to a database of peer group banks that have been sold. Pricing valuation factors that are considered in estimating the fair value of the Company's aggregate banking operations include price-to-total assets, price-to-total book value, price-to-deposits and price-to-earnings. Unusual events that have impacted the operating characteristics of the Company's aggregate banking operations are considered to assess the likelihood of recurrence and adjustments to historical performance may be made. Changes in assumptions regarding the likelihood of unusual historical events recurring or the use of different pricing valuation factors could have a material impact on management's impairment analysis.

SUMMARY FINANCIAL RESULTS

Premier had net income of $7.536 million in 2008 compared to $7.119 million of net income reported for the year 2007. Net income increased in 2008 as a result of higher interest income and non-interest income as well as lower interest expense all of which was partially offset by higher non-interest expense. The increases in each of these categories was primarily the result of the increase in operations from the acquisitions of Citizens First Bank ("Citizens First) and Traders Bankshares, Inc. ("Traders"), both of which occurred at the close of business on April 30, 2008. The operating results of Citizens First and Traders are included in the consolidated financial statements of Premier only from the date of acquisition. Net income in 2006 was $6.501 million. The increase in 2007 over 2006 was the result of an increase in interest income due to a greater average volume of loans outstanding; a greater volume of average federal funds sold outstanding; higher yields on all earning assets; an increase in secondary market mortgage income; and a reduction in the operating costs of the company. Net income in 2006 was the result of an increase in interest income due to a greater volume of loans outstanding; higher yields on all earning assets; a negative provision for loan losses; and a reduction in the net operating costs of the company. Basic earnings per share were $1.25 in 2008 compared to $1.36 in 2007 and to $1.24 in 2006. The decrease in earnings per share in 2008 resulted from the increase in the average shares outstanding related to the common stock issued as part of the merger consideration of Citizens First and Traders as more fully described in Note 23 to the consolidated financial statements.

The following table comparatively illustrates the components of ROA and ROE over the previous five years. Return on average assets (ROA) measures how effectively Premier utilizes its assets to produce net income. It also facilitates the analysis of earnings performance of different sized organizations. In 2008, Premier increased the size its balance sheet from $549.3 million in total assets at the end of 2007 to $724.5 million at the end of 2008, largely due to the acquisitions of Traders and Citizens First. The increase in asset size will generally result in higher dollars of income earned and expenses incurred. A detailed review of the components of ROA will help analyze Premier's performance without regard to changes in its size.

Premier's net income in 2008 resulting in an ROA of 1.12%, a decrease from the 1.31% ROA in 2007 and the 1.21% ROA in 2006. As shown in the table, fully taxable equivalent net interest income (as a percent of average earning assets) reached its highest level in five years in 2007 at 4.42%. In 2008, this percentage decreased to 4.21% as the increase in average earning assets from Traders and Citizens First did not result in a similar percentage increase in net interest income. In 2004, net credit income was 3.41% of average earning assets and continued to increase in both 2005 and again in 2006. In 2005, minimal provisions for loan losses were recorded and thus there was little reduction from the increase in net interest income. In 2006, negative provisions for loan losses were recorded which served to help increase net credit income to 4.55%. This increase in net credit income (as a percent of average earning assets) was complemented by an increase in non-interest income (as a percent of average earning assets) and a reduction in non-interest expenses (as a percent of average earning assets) when compared to the previous two years. In 2007, while net interest income continued to increase,

net credit income was lower than 2006 as a result of minimal negative provisions for loan losses recorded in 2007. However, in 2007, non-interest income (as a percent of average earning assets) reached its highest level in the past five years while non-interest expense (as a percent of average earning assets) continued to decline. In 2008, minimal provisions for loan losses reduced an already lower net interest income (as a percent of average earning assets), resulting in net credit income of 4.19% of average earning assets. In 2008, non-interest income (as a percent of average earning assets) declined somewhat, returning to the level achieved in 2006. However, non-interest income (as a percent of average earning assets) continued to decline in 2008 resulting in the lowest ratio over the past five years. As illustrated in the table, the overall result was to decrease Premier's 2008 return on average earning assets to 1.21% and decrease its return on average total assets (ROA) to 1.12%.

                              ANALYSIS of RETURN ON ASSETS and EQUITY
                                    from continuing operations

                                    2008          2007          2006          2005          2004
As a percent of average earning
assets
Fully taxable-equivalent net
interest income                        4.21 %        4.42 %        4.32 %        4.00 %        3.61 %
Provision for loan losses             (0.02 )        0.02          0.23         (0.00 )       (0.20 )
Net credit income                      4.19          4.44          4.55          4.00          3.41
Gains on the sales of assets &
subsidiaries                           0.01          0.00          0.00          0.00          0.02
Non-interest income                    0.84          0.91          0.84          0.78          0.69
Non-interest expense                  (3.20 )       (3.23 )       (3.40 )       (3.46 )       (3.52 )
Tax equivalent adjustment             (0.03 )       (0.04 )       (0.03 )       (0.03 )       (0.03 )
Applicable income taxes               (0.60 )       (0.68 )       (0.66 )       (0.41 )       (0.18 )
Return on average earning
assets                                 1.21          1.40          1.30          0.88          0.39
Multiplied by average earning
assets to
average total assets                  92.48         93.34         93.07         92.84         92.39
Return on average assets               1.12 %        1.31 %        1.21 %        0.82 %        0.36 %
Multiplied by average assets to
average equity                         8.37 X        8.52 X        9.31 X       10.23 X       11.33 X
Return on average equity               9.38 %       11.13 %       11.31 %        8.42 %        4.06 %

The net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) increased slightly in 2008 to 2.36%. This ratio compares to 2.32% in 2007, the lowest ratio reported in the last five years, 2.56% in 2006, 2.68% in 2005, and 2.83% in 2004. The increase in 2008 net overhead was largely the result of a lower ratio of non-interest income to average earning assets due to lower secondary market mortgage commissions overall and the 0.66% non-interest income ratio of the acquired banks. The decrease in 2007 net overhead was the result of increases in Premier's non-interest income related to electronic banking income and secondary market mortgage commissions, plus decreases in non-interest expenses related to staff costs and the accelerated amortization of trust preferred issuance costs recorded in 2006 but not 2007.

Return on average equity (ROE), another measure of earnings performance, indicates the amount of net income earned in relation to the total equity invested. Premier's 2008 ROE was 9.38% compared to 11.13% in 2007 and 11.31% realized in 2006. ROE decreased in 2008 due to an increase in average equity as a result of the common stock issued to acquire Traders and Citizens First. ROE decreased slightly in 2007 as average equity increased at a faster pace than average assets resulting in a decrease in the multiplier of average assets to average equity.

A breakdown of Premier's financial results by quarter for the years ended December 31, 2008 and 2007 is summarized below.

                              QUARTERLY FINANCIAL INFORMATION
                     (Dollars in thousands, except per share amounts)
                                First      Second       Third       Fourth       Full Year
2008
Interest income                $ 8,427     $ 9,433     $ 10,276     $ 9,708     $    37,844
Interest expense                 2,833       2,984        3,099       2,893          11,809
Net interest income              5,594       6,449        7,177       6,815          26,035
Provision for loan losses         (135 )        91           85         106             147
Securities gains                     0          93            0           0              93
Net overhead                     3,056       3,545        4,197       3,898          14,696
Income before income taxes       2,673       2,906        2,895       2,811          11,285
Net income                       1,774       1,930        1,930       1,902           7,536
Basic net income per share        0.34        0.32         0.30        0.30            1.25
Diluted net income per share      0.34        0.32         0.30        0.30            1.25
Dividends paid per share          0.10        0.11         0.11        0.11            0.43

2007
Interest income                $ 8,612     $ 8,712     $  8,738     $ 8,690     $    34,752
Interest expense                 3,101       3,161        3,148       3,046          12,456
Net interest income              5,511       5,551        5,590       5,644          22,296
Provision for loan losses           36        (164 )         25          25             (78 )
Securities gains                     0           0            0           0               0
Net overhead                     2,902       3,022        2,847       3,014          11,785
Income before income taxes       2,573       2,693        2,718       2,605          10,589
Net income                       1,786       1,790        1,807       1,736           7,119
Basic net income per share        0.34        0.34         0.35        0.33            1.36
Diluted net income per share      0.34        0.34         0.34        0.33            1.35
Dividends paid per share          0.10        0.10         0.10        0.10            0.40

BALANCE SHEET ANALYSIS

Summary

A financial institution's primary sources of revenue are generated by its earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk. Information on rate-related sources and uses of funds for each of the three years in the period ended December 31, 2008, is provided in the table below.

                        PREMIER FINANCIAL BANCORP, INC.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                               December 31, 2008


                                          AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
                                                                 (Dollars in thousands)
                                             2008                                       2007                                       2006
                             Average                      Yield/        Average                      Yield/        Average                      Yield/
                             Balance      Interest       Rate (2)       Balance      Interest       Rate (2)       Balance      Interest       Rate (2)
Assets:
Interest earning assets
U.S. Treasury and federal
agency securities           $ 102,758     $   4,457           4.34 %   $  82,177     $   3,496           4.25 %   $  95,705     $   3,398           3.55 %
States and municipal
obligations (1)                 6,098           320           5.25         4,067           241           5.93         2,342           138           5.89
Mortgage backed
securities                     53,069         2,517           4.74        37,017         1,799           4.86        33,953         1,564           4.61
Other securities                3,723           180           4.83         3,307           212           6.41         3,179           182           5.73
Total investment
securities                    165,648         7,474           4.51       126,568         5,748           4.54       135,179         5,282           3.91
Federal funds sold             37,885           748           1.97        36,088         1,829           5.07        24,365         1,215           4.99
Interest-bearing deposits
with banks                      1,614            39           2.42         1,273            56           4.40           486            24           4.94
Loans, net of unearned
income (3)(4)
Commercial                    207,939        14,044           6.75       169,217        13,591           8.03       161,898        12,424           7.67
Real estate mortgage          155,324        11,074           7.13       129,072         9,474           7.34       129,944         9,271           7.13
Installment                    53,802         4,626           8.60        46,399         4,244           9.15        46,494         4,334           9.32
Total loans                   417,065        29,744           7.13       344,688        27,309           7.92       338,336        26,029           7.69
Total interest earning
assets                        622,212        38,005           6.11       508,617        34,942           6.87       498,366        32,550           6.53
Allowance for loan losses      (8,020 )                                   (6,615 )                                   (7,465 )
Cash and due from banks        17,025                                     13,853                                     13,824
Premises and equipment          9,759                                      6,378                                      7,055
Other assets                   31,802                                     22,653                                     23,688
Total assets                $ 672,778                                  $ 544,886                                  $ 535,468

Liabilities and Equity:
Interest bearing
liabilities
NOW and money market        $ 136,878         1,136           0.83 %   $ 119,849         1,780           1.49 %   $ 129,080         1,766           1.37 %
Savings deposits               66,978           381           0.57        53,000           384           0.72        52,295           321           0.61
. . .