Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations

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, 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.

A. Results of Operations

A financial institution's primary sources of revenue are generated by interest income on loans, investments and other 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.

Net income for the three months ended March 31, 2009 was $1,229,000, or $0.19 per share, compared to net income of $1,774,000, or $0.34 per share for the three months ended March 31, 2008. The decrease in income in 2009 is largely due to decreasing yields on earning assets, particularly federal funds sold, and increases in non-interest expenses as well as the existence of benefits to 2008 net income, such as negative provisions for loan losses and reimbursed collection expenses, which did not reoccur in 2009. The annualized returns on shareholders' equity and average assets were approximately 5.44% and 0.68% for the three months ended March 31, 2009 compared to 10.20% and 1.28% for the same period in 2008.

Net interest income for the three months ending March 31, 2009 totaled $6.56 million, up $964,000 or 17.2% from the $5.59 million of net interest income earned in the first three months of 2008, as the $1.349 million of additional net interest income of the combined Traders Bank more than offset the 6.9% decrease in net interest income of Premier's other five banks. The operations from the acquisitions of Citizens First Bank ("Citizens First) and Traders Bankshares, Inc. ("Traders"), (now merged together as Traders Bank), both of which occurred at the close of business on April 30, 2008 are included in the consolidated financial statements of Premier only from the date of acquisition and thus are not included in the comparison first quarter of 2008 results. Interest income in 2009 increased by $709,000 or 8.4%, as a result of the $1.95 million of interest income added by the operations of Traders Bank. Excluding the operations of Traders Bank, interest income decreased by $1.24 million or 14.7% in 2009. Interest income on loans decreased by $798,000, due to lower loan yields even though on a higher average volume of loans outstanding. Interest earned on investments decreased $151,000, due to lower average yields on a lower average volume of investments. Interest earned on federal funds sold decreased by $288,000, largely due lower yields earned resulting from the Federal Reserve Board of Governors' policy to stimulate the economy by maintaining the federal funds sold rate near 0.25%.

Partially offsetting the decrease in interest income, interest expense decreased in total by $255,000 or 9.0% in 2009 compared to 2008, which includes the $602,000 of increase in interest expense in 2009 from the Traders Bank operations. Excluding the Traders Bank operations, interest expense decreased by $857,000 or 30.3% in 2009 compared to the first quarter of 2008. Interest expense on deposits decreased by $837,000 or 32.3%, largely due to lower rates paid, although on a slightly higher average balance outstanding. Interest expense on repurchase agreements and other short-term borrowings decreased $20,000, largely due to lower rates paid even though on a larger average balance. Interest expense on FHLB advances and other borrowings remained unchanged as the increase in interest expense from higher average balance of these borrowings was offset by the lower rates paid on the variable rate portion of the other borrowings. The decreases in all sources of interest income and expense (excluding the operations of Traders Bank) in 2009 are largely the result of the decrease in market interest rates following the Federal Reserve Bank Board of Governors' monetary policy changes in 2008. The Board of Governors' policy to reduce the federal funds rate to nearly zero coupled with the U.S. Treasury actively buying investment securities has significantly reduced the yield on much of Premier's earning assets including investments, federal funds sold and variable rate loans. Premier has tried to offset some of the lower interest income by lowering the rates paid on its deposits and repurchase agreements with customers. The overall result has been a decrease in Premier's net interest margin in the first three months of 2009 to 4.01% compared to 4.38% for the same period in 2008.

Additional information on Premier's net interest income for the first quarter of 2009 and first quarter of 2008 is contained in the following table.

                                               PREMIER FINANCIAL BANCORP, INC.
                                             AVERAGE CONSOLIDATED BALANCE SHEETS
                                               AND NET INTEREST INCOME ANALYSIS

                                Three Months Ended March 31, 2009                    Three Months Ended March 31, 2008
                            Balance            Interest       Yield/Rate         Balance            Interest       Yield/Rate
Assets
Interest Earning
Assets
Federal funds sold and
other                    $       41,113       $        18            0.18 %   $       39,118       $       308            3.16 %
Securities available
for sale
Taxable                         151,572             1,636            4.32            132,485             1,530            4.62
Tax-exempt                        7,241                57            4.77              3,809                36            5.73
Total investment
securities                      158,813             1,693            4.34            136,294             1,566            4.65
Total loans                     464,705             7,425            6.48            338,610             6,553            7.76
Total interest-earning
assets                          664,631             9,136            5.58 %          514,022             8,427            6.59 %
Allowance for loan
losses                           (8,569 )                                             (6,560 )
Cash and due from
banks                            24,380                                               14,222
Other assets                     47,084                                               27,234
Total assets             $      727,526                                       $      548,918

Liabilities and Equity
Interest-bearing
liabilities
Interest-bearing
deposits                 $      493,293             2,353            1.93     $      377,448             2,588            2.75
Short-term borrowings            15,690                33            0.85             12,768                53            1.66
FHLB advances                     5,658                72            5.16              4,814                74            6.17
Other borrowings                 15,300               120            3.18              8,208               118            5.77
Total interest-bearing
liabilities                     529,941             2,578            1.97 %          403,238             2,833            2.82 %
Non-interest bearing
deposits                        103,380                                               74,141
Other liabilities                 3,762                                                2,735
Shareholders' equity             90,443                                               68,804
Total liabilities and
equity                   $      727,526                                       $      548,918

Net interest earnings                         $     6,558                                          $     5,594
Net interest spread                                                  3.61 %                                               3.77 %
Net interest margin                                                  4.01 %                                               4.38 %

Non-interest income increased $104,000 to $1,170,000 for the first three months of 2009. Included in this increase is $228,000 of non-interest income from the operations of Traders Bank. Excluding their operations, service charges on deposit accounts decreased by $58,000 or 9.1%, secondary market mortgage income decreased by $78,000 or 48.4%, while electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $18,000 or 11.0%. The decrease in service charges on deposit accounts is largely due to lower total NSF fees as Premier believes that deposit customers seem to keep a closer watch on their available deposit balances as economic conditions tighten. Secondary market mortgage income decreased significantly as the number of mortgage buyers in the private sector has decreased substantially and government agency buyers have increased their requirements to approve the purchase of mortgage loans. Premier concentrates its efforts on selling high quality mortgage loans and routinely searches for new buyers for these loans; however, the volume of future sales may depend on factors beyond the control of the Company. Electronic banking income increased largely due to continued increases in Premier's deposit customer base and customers' greater propensity to use electronic means to conduct their banking business. Premier's conversion to a more modern banking software system in 2005 has allowed Premier to offer more electronic banking services and made it easier for customers to conduct their banking electronically.

Non-interest expenses for the first quarter of 2009 totaled $5,764,000 or 3.21% of average assets on an annualized basis compared to $4,122,000 or 3.01% of average assets for the same period of 2008. The $1,642,000 increase in non-interest expenses in 2009 when compared to the first quarter of 2008 is largely due to the $1,371,000 of additional non-interest expenses from the operations of Traders Bank. Excluding their operations, non-interest expense in the first quarter of 2009 increased by $271,000 or 6.6%. Excluding the operations of Traders Bank, staff costs increased by $70,000 or 3.1%, in 2009, professional fees increased by $109,000 or 60.9%, and other operating expenses increased by $129,000 or 33.2%. These increases were partially offset by a $39,000 decrease in write-downs, expenses and sales of other real estate owned (OREO) and a $10,000 decrease in taxes other than payroll, property and income. The increase in staff costs in 2009 was largely due to normal salary and benefit increases. Occupancy and equipment expenses increased by only $3,000, or 0.6% in the first quarter of 2009, while outside data processing costs remained unchanged from the first quarter of 2008. Professional fees increased largely due to legal expenses incurred in connection with the proposed acquisition of Abigail Adams National Bancorp and other legal fees incurred to settle outstanding lawsuits. Other operating expenses were higher in the first quarter of 2009 largely due to $125,000 of collections expenses that were reimbursed to the Company in the first quarter 2008 reducing the amount of reported expenses in 2008. Other operating expense also includes a $23,000 or 47.9% increase in FDIC insurance premiums in the first quarter of 2009 compared to the same quarter in 2008.

Income tax expense was $633,000 for the first three months of 2009 compared to $899,000 for the first three months of 2008. The effective tax rate for the three months ended March 31, 2009 increased slightly to 34.0% compared to the 33.6% effective tax rate for the same period in 2008. The decrease in income tax expense can be primarily attributed to the decrease in pre-tax income detailed above. The increase in the effective tax rate is largely due to certain expenses incurred in connection with the planned acquisition of Abigail Adams that are not deductible for income tax purposes.

B. Financial Position

Total assets at March 31, 2009 increased $9.6 million to $734.1 million from the $724.5 million at December 31, 2008. Earning assets increased to $667.7 million at March 31, 2009 from the $664.1 million at December 31, 2008, an increase of $3.6 million, or 0.5%. The increase in earnings assets was largely due to an increase in federal funds sold and cash and due from banks, with a partially offsetting decrease in securities available-for-sale (see below).

Cash and due from banks at March 31, 2009 was $29.9 million, a $7.8 million increase from the $22.1 million at December 31, 2008. Federal funds sold increased $24.3 million from the $15.9 million reported at December 31, 2008. Changes in these two highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans and are part of Premier's management of its liquidity and interest rate risks. The increase in federal funds sold during the first three months of 2009 is in response to proceeds from increases in total deposits plus funds from the early redemption of investment securities by the issuers. Premier has been reluctant to reinvest these funds as investment yields on seasoned securities have been suppressed by the U.S. Treasury's program to purchase investment securities in the open market. Similarly, yields on newly issued high quality securities are also very low due to the low interest rate environment resulting from the U.S. Treasury's program and the Federal Reserve's policy on interest rates. The increase in cash and due from banks is a result of keeping additional funds on deposit with the Federal Reserve which is paying a higher rate of interest than most yields on Federal Funds Sold.

Securities available for sale totaled $155.6 million at March 31, 2009, a $20.2 million decrease from the $175.7 million at December 31, 2008. The decrease was largely due to $54.4 million of investment calls at maturities that occurred during the first three months of 2009 versus the $34.2 million of new investment purchases during the same period. The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored agencies. The unrealized gains at March 31, 2009 and December 31, 2008 are price changes resulting from changes in the interest rate environment. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

Total loans at March 31, 2009 were $466.9 million compared to $467.1 million at December 31, 2008, a decrease of approximately $237,000. The slight decrease in loans is largely due to new loan production which substantially offset loan payoffs and principal payments during the first quarter of 2009.

Deposits totaled $604.9 million as of March 31, 2009, a $15.7 million increase from the $589.2 million in deposits at December 31, 2008. The overall increase in deposits is due an across the board increase in deposit balances at Premier's subsidiary banks. Non-interest bearing deposits increased by $4.5 million or 4.4%, from December 31, 2008 to March 31, 2009. Likewise, other interest bearing deposits (CD's under $100,000, savings accounts and interest bearing transaction accounts) increased by $4.9 million or 1.2% during the same time frame. Time deposits $100,000 and over increased by $6.3 million or 8.9%, from December 31, 2008 to March 31, 2009. Contrary to the trend in total deposits, repurchase agreements with corporate and public entity customers decreased during the first quarter of 2009, declining by $5.0 million to $13.3 million as of March 31, 2009.

Long-term Federal Home Loan Bank (FHLB) advances declined by $44,000 in the first three months of 2009, and other borrowed funds decreased by $482,000 during that time due to regularly scheduled principal payments. FHLB advances also decreased by $1.0 million as the $3.0 million of overnight borrowings from the FHLB at December 31, 2008 was reduced to $2.0 million at March 31, 2009. See Note 5 to the consolidated financial statements for additional information on the Company's outstanding FHLB advances.

The following table sets forth information with respect to the Company's nonperforming assets at March 31, 2009 and December 31, 2008.

                                                                      (In Thousands)
                                                                    2009          2008
Non-accrual loans                                                 $   7,377     $   6,943
Accruing loans which are contractually past due 90 days or more         702           625
Restructured                                                          1,410         1,203
Total non-performing loans                                            9,489         8,771
Other real estate acquired through foreclosure (OREO)                   981         1,056
Total non-performing assets                                       $  10,470     $   9,827

Non-performing loans as a percentage of total loans                    2.03 %        1.88 %

Non-performing assets as a percentage of total assets                  1.43 %        1.36 %

Total non-performing loans have increased since year-end, due to increases on non-accrual loans, loans past due 90 days or more and loans restructured in an effort help borrowers meet their obligation to repay their loans. These increases were partially offset by a decrease in other real estate acquired through foreclosure. The increase in non-accrual loans was largely due to three commercial credits going past due at the newly acquired Traders Bank. Premier continues to make a significant effort to reduce its past due and non-performing loans by reviewing loan files, using the courts to bring borrowers current with the terms of their loan agreements and/or the foreclosure and sale of OREO properties. As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets. Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income. Also, as these plans are executed, other loans may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses.

During the first quarter of 2009, the Company recorded $102,000 of additional provisions for loan losses. This compares to the reversal $135,000 of previously recorded provisions for loan losses, commonly referred to as "negative provisions", during the first quarter of 2008. Any increases or decreases in the provision for loan losses are made in accordance with Premier's policies regarding management's estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America. The additional provisions recorded during the first quarter of 2009 were in response to Premier's estimation of increased credit risk in the loan portfolio due to uncertainties related to the ability of borrowers' to repay loans in a declining economy, the Company's increase in non-accrual and loans past due more than 90 days and the level of charge-offs recorded during the first three months of 2009. The negative provisions in the first quarter of 2008 were the combined result of continued improvement in the estimated credit risk at banks formerly

subject to regulatory agreements, payments on loans previously identified as having significant credit risk, net recoveries recorded during the quarter and the $10.6 million decline in loans outstanding. In the coming months, as management evaluates the adequacy of the allowance for loan losses, Premier will continue to monitor the impact that national housing market price declines may have on its local markets and local collateral valuations and also the impact that the downturn in the national economy will have on local businesses and individual borrowers, potentially affecting their repayment patterns. While some price deterioration is expected, it is not currently anticipated that Premier's markets will be impacted as severely as other areas of the country due to the historically modest increases in real estate values in the Company's markets. Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.

Gross charge-offs totaled $165,000 during the first three months of 2009. Any collections on these loans would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first three months of 2009 totaled $106,000, resulting in net charge-offs for the first quarter of 2009 of $59,000. This compares to $45,000 of net recoveries recorded in the first quarter of 2008. The allowance for loan losses at March 31, 2009 was 1.84% of total loans as compared to 1.83% at December 31, 2008. The slightly increasing percentage of allowance for loan losses to total loans is largely due to $102,000 of additional provisions for loan losses exceeding the $59,000 of net charge-offs recorded in the first quarter of 2009 as there was very little change in total loans outstanding during that time.

C. Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America. These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2008 . Some of these accounting policies, as discussed below, are considered to be critical accounting policies. Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified two accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance for loan losses and the impairment of goodwill. A detailed description of these accounting policies is contained in the Company's annual report on Form 10-K for the year ended December 31, 2008 . There have been no significant changes in the application of these accounting policies since December 31, 2008.

Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time.

D. Liquidity

Liquidity objectives for the Company can be expressed in terms of maintaining sufficient cash flows to meet both existing and unplanned obligations in a cost effective manner. Adequate liquidity allows the Company to meet the demands of both the borrower and the depositor on a timely basis, as well as pursuing other business opportunities as they arise. Thus, liquidity management embodies both an asset and liability aspect while attempting to maximize profitability. In order to provide for funds on a current and long-term basis, the Company's subsidiary banks rely primarily on the following sources:

1. Core deposits consisting of both consumer and commercial deposits and certificates of deposit of $100,000 or more. Management believes that the majority of its $100,000 or more certificates of deposit are no more volatile than its other deposits. This is due to the nature of the markets in which the subsidiaries operate.

2. Cash flow generated by repayment of loans and interest.

3. Arrangements with correspondent banks for purchase of unsecured federal funds.

4. The sale of securities under repurchase agreements and borrowing from the Federal Home Loan Bank.

5. Maintenance of an adequate available-for-sale security portfolio. The Company owns $155.6 million of securities at fair value as of March 31, 2009.

The cash flow statements for the periods presented in the financial statements provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity.

E. Capital

At March 31, 2009, total shareholders' equity of $90.0 million was 12.3% of total assets. This compares to total shareholders' equity of $89.4 million or 12.3% of total assets on December 31, 2008.

Tier I capital totaled $61.1 million at March 31, 2009, which represents a Tier I leverage ratio of 8.7%. This ratio is unchanged from the 8.7% at December 31, . . .