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 six months ended June 30, 2009 was $2,584,000, or $0.40 per share, compared to net income of $3,704,000, or $0.66 per share for the six months ended June 30, 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, securities transactions and reimbursed collection expenses, which did not reoccur in 2009. The annualized returns on average shareholders' equity and average assets were approximately 5.66% and 0.70% for the six months ended June 30, 2009 compared to 9.81% and 1.19% for the same period in 2008. For the quarter ending June 30, 2009, annualized returns on average shareholders' equity and average assets were approximately 5.95% and 0.74% compared to 9.58% and 1.13% for the same quarter of 2008.

Net income for the three months ended June 30, 2009 was $1,355,000, or $0.21 per share, compared to net income of $1,930,000, or $0.32 per share for the three months ended June 30, 2008. Again, 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, such as the special FDIC assessment on all banks in the United States, as well as the existence of benefits to 2008 net income, such as securities transactions and income received for extending the Company's ATM processing contract, which did not reoccur in 2009.

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Net interest income for the six months ending June 30, 2009 totaled $13.22 million, up $1,177,000 or 9.7% from the $12.04 million of net interest income earned in the first six months of 2008, as the $1.848 million of additional net interest income of the combined Traders Bank more than offset the 5.6% 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 first four months of the comparative first half of 2008 results. Interest income in 2009 increased by $396,000 or 2.2%, as a result of the $2.65 million of interest income added by the operations of Traders Bank in the first four months of 2009. Excluding the operations of Traders Bank, interest income decreased by $2.25 million or 12.6% in 2009. Interest income on loans increased by $1.03 million, due to the $2.27 million of interest income on loans contributed by the operations of Traders Bank during the first four months of 2009. Otherwise, interest income on loans decreased by $1.24 million, due to lower loan yields even though on a higher average volume of loans outstanding. Interest earned on investments decreased $140,000, including the additional $377,000 of investment income added by the operations of Traders Bank during the first four months of 2009 due to lower average yields on a lower average volume of investments of the remaining bank operations. Interest earned on federal funds sold decreased by $485,000, largely due to 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%.

Interest expense in the first six months 2009 decreased by $781,000 or 13.4% despite the inclusion of the operations of Traders Bank. Excluding the $799,000 of interest expense from the first four months of Traders Bank operations in 2009, interest expense declined by $1.58 million or 27.2% in 2009 compared to the first six months of 2008, partially offsetting the $2.25 million decrease in interest income described above. Interest expense on deposits decreased by $750,000, including the $799,000 of interest expense on the deposits of Traders Bank during the first four months of 2009, largely due to lower rates paid on a slightly lower average balance of deposits outstanding of the remaining bank operations. Interest expense on repurchase agreements and federal funds purchased decreased $44,000 in 2009, largely due to lower rates paid on a slightly larger average balance. Interest expense on FHLB advances and other borrowings increased $13,000 in 2009 as interest savings from rate decreases on Premier's variable rate borrowings at the parent were more than offset by an increase in the average balance of borrowings from the new borrowing at the parent to fund the purchase of Traders.

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 six months of 2009 to 4.01% compared to 4.24% for the same period in 2008.

27.

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

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

                               Six Months Ended June 30, 2009                    Six Months Ended June 30, 2008
                          Balance           Interest      Yield/Rate        Balance           Interest      Yield/Rate
Assets
Interest Earning
Assets
Federal funds sold
and other               $     34,255       $       37            0.22 %   $     41,151       $      530            2.58 %
Securities available
for sale
Taxable                      160,785            3,223            4.01          149,683            3,388            4.53
Tax-exempt                     7,419              118            4.82            5,023               93            5.61
Total investment
securities                   168,204            3,341            4.04          154,706            3,481            4.56
Total loans                  464,410           14,878            6.46          375,350           13,849            7.40
Total
interest-earning
assets                       666,869           18,256            5.53 %        571,207           17,860            6.28 %
Allowance for loan
losses                        (8,545 )                                          (7,259 )
Cash and due from
banks                         24,875                                            16,163
Other assets                  47,784                                            34,982
Total assets            $    730,983                                      $    615,093

Liabilities and
Equity
Interest-bearing
liabilities
Interest-bearing
deposits                $    496,268            4,589            1.86     $    422,888            5,339            2.53
Short-term borrowings         14,129               62            0.88           13,183              106            1.61
FHLB advances                  5,125              143            5.63            4,791              147            6.15
Other borrowings              15,055              242            3.24            9,341              225            4.83
Total
interest-bearing
liabilities                  530,577            5,036            1.91 %        450,203            5,817            2.59 %
Non-interest bearing
deposits                     105,764                                            84,340
Other liabilities              3,858                                             5,838
Shareholders' equity          90,784                                            74,712
Total liabilities and
equity                  $    730,983                                      $    615,093

Net interest earnings                      $   13,220                                        $   12,043
Net interest spread                                              3.62 %                                            3.69 %
Net interest margin                                              4.01 %                                            4.24 %

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Additional information on Premier's net interest income for the second quarter of 2009 and second 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 June 30, 2009                   Three Months Ended June 30, 2008
                            Balance           Interest      Yield/Rate         Balance           Interest      Yield/Rate
Assets
Interest Earning
Assets
Federal funds sold and
other                    $      27,472       $       19            0.28 %   $      43,184       $      222            2.06 %
Securities available
for sale
Taxable                        169,897            1,587            3.74           166,881            1,858            4.45
Tax-exempt                       7,595               61            4.87             6,237               57            5.54
Total investment
securities                     177,492            1,648            3.78           173,118            1,915            4.49
Total loans                    464,118            7,453            6.44           412,090            7,296            7.10
Total interest-earning
assets                         669,082            9,120            5.48 %         628,392            9,433            6.04 %
Allowance for loan
losses                          (8,521 )                                           (7,958 )
Cash and due from
banks                           25,365                                             18,104
Other assets                    48,476                                             42,730
Total assets             $     734,402                                      $     681,268

Liabilities and Equity
Interest-bearing
liabilities
Interest-bearing
deposits                 $     499,210            2,236            1.80     $     468,328            2,751            2.36
Short-term borrowings           12,585               29            0.92            13,598               53            1.56
FHLB advances                    4,598               71            6.19             4,768               73            6.14
Other borrowings                14,813              122            3.30            10,474              107            4.10
Total interest-bearing
liabilities                    531,206            2,458            1.86 %         497,168            2,984            2.41 %
Non-interest bearing
deposits                       108,122                                             94,539
Other liabilities                3,953                                              8,941
Shareholders' equity            91,121                                             80,620
Total liabilities and
equity                   $     734,402                                      $     681,268

Net interest earnings                        $    6,662                                         $    6,449
Net interest spread                                                3.62 %                                             3.63 %
Net interest margin                                                4.01 %                                             4.13 %

Net interest income for the quarter ending June 30, 2009 totaled $6.66 million, up $213,000 or 3.3% from the $6.45 million of net interest income earned in the second quarter of 2008, largely due to the $500,000 of additional net interest income contributed by the operations of Traders Bank during April 2009. 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 first month of the comparative second quarter 2008 results. Interest income in the second quarter of 2009 decreased by $313,000 or 3.3% from income reported for the second quarter of 2008, as the $696,000 of interest income from the additional month of operations of Traders Bank in 2009 was more than offset by a $1.0 million decrease in interest income from the Company's other operations. Interest income on loans increased by $157,000 in 2009, due to the $597,000 of interest income on loans contributed by the April 2009 operations of Traders Bank. Otherwise, interest income on loans decreased by $440,000, due to lower loan

29.

yields even though on a higher average volume of loans outstanding. Interest earned on investments decreased $267,000 in the second quarter of 2009, including the additional $99,000 of investment income added by the April 2009 operations of Traders Bank due to lower average yields on a lower average volume of investments of the remaining bank operations. Interest earned on federal funds sold decreased by $200,000, largely due to 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%.

Interest expense in the second quarter of 2009 decreased by $526,000 or 17.6% despite the inclusion of the operations of Traders Bank. Excluding the $196,000 of interest expense from the April 2009 operations of Traders Bank, interest expense declined by $722,000 or 24.2% in 2009 compared to the second quarter of 2008, partially offsetting the $1.0 million decrease in interest income described above. Interest expense on deposits decreased by $515,000 in the second quarter of 2009, including the $196,000 of interest expense on the deposits of Traders Bank during April 2009, largely due to lower rates paid on a slightly lower average balance of deposits outstanding of the remaining bank operations. Interest expense on repurchase agreements and federal funds purchased decreased $24,000, or 45.3% in 2009, largely due to lower rates paid on a slightly lower average balance. Interest expense on FHLB advances and other borrowings increased $13,000 in 2009 as interest savings from rate decreases on Premier's variable rate borrowings at the parent were more than offset by an increase in the average balance of borrowings from the new borrowing at the parent to fund the purchase of Traders.

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 second quarter of 2009 to 4.01% compared to 4.13% for the same period in 2008.

Non-interest income decreased $122,000 to $2,496,000 for the first six months of 2009, largely due to $93,000 of gains on the sale of securities in 2008 and $150,000 of income received for extending the Company's ATM processing contract in 2008. Included in this decrease is $302,000 of non-interest income from the operations of Traders Bank during the first four months of 2009. Excluding their operations, service charges on deposit accounts decreased by $95,000 or 6.5%, secondary market mortgage income decreased by $88,000 or 29.3%, while electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $35,000 or 9.2%. The decrease in service charges on deposit accounts is largely due to lower total NSF fees as Premier believes that deposit customers seem to be keeping 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.

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For the quarter ending June 30, 2009, non-interest income decreased $226,000 to $1,326,000, again largely due to $93,000 of gains on the sale of securities in 2008 and $150,000 of income received for extending the Company's ATM processing contract in 2008. Excluding the non-recurring income and the $74,000 of non-interest income from the April 2009 operations of Traders Bank, non-interest income decreased by $57,000 or 4.4% in the second quarter of 2009 compared to the same quarter of 2008. Service charges on deposit accounts decreased by $37,000 or 4.5%, secondary market mortgage income decreased by $10,000, or 7.2%, while electronic banking income increased by $17,000 or 7.8%.

Non-interest expenses for the first six months of 2009 totaled $11,649,000 or 3.21% of average assets on an annualized basis compared to $9,126,000 or 2.98% of average assets for the same period of 2008. The $2.52 million increase in non-interest expenses in 2009 when compared to the first six months of 2008 is largely due to the $1.78 million of additional operating costs of Traders Bank during the first four months of 2009 and a $319,000 special assessment by the FDIC. Staff costs increased by $691,000 or 14.5% in 2009, largely due to $644,000 of staff costs included from the operations of Traders Bank during the first four months of 2009. The remaining $47,000 or 1.0% increase was largely due to normal salary and benefit increases partially offset by staff reductions and lower stock compensation expense. Occupancy and equipment expenses increased by $195,000 or 16.7% in 2009, largely due to $278,000 of occupancy and equipment expenses included from the operations of Traders Bank during the first four months of 2009. The remaining $83,000 decrease is largely the result of lower information technology equipment expenses. Outside data processing costs increased by $359,000 or 30.6% in 2009, largely due to $238,000 of outside data processing expenses included from the operations of Traders Bank during the first four months of 2009. The remaining $121,000 or 10.3% increase is largely due to the additional fees charged for Traders Bank since their conversion to Premier's third party data processing provider during the latter part of 2008 and new charges incurred for the outsourcing of deposit statement rendering. Professional fees increased by $181,000 or 45.1% in 2009 largely due to $67,000 of expenses related to audit and other professional services included from the operations of Traders Bank during the first four months of 2009. The remaining $114,000 or 28.4% increase is largely due to higher legal fees and costs associated with the pending acquisition of Abigail Adams National Bancorp, Inc. Taxes other than payroll, property and income increased by $35,000 or 11.0% in 2009, largely due to the $45,000 of expenses included from the operations of Traders Bank during the first four months of 2009. Write-downs, expenses and sales of other real estate owned (OREO) increased by $101,000 in the first six months of 2009, largely due to $109,000 of OREO expenses and writedowns at Traders Bank during the first four months of 2009. FDIC insurance increased by $475,000 or over 362% in 2009, largely due to the FDIC's special assessment on all banks in the United States during the second quarter of 2009. The special assessment, designed to shore-up the FDIC's Bank Insurance Fund, cost Premier approximately $319,000 during the second quarter of 2009. The additional $156,000 of FDIC insurance expense is due to the expiration of FDIC insurance credits that had previously been used to offset normal FDIC premiums in 2008. Other operating expenses increased by $458,000 or 47.5% in 2009, largely due to $344,000 of other operating expenses included from the operations of Traders Bank during the first four months of 2009. The remaining $114,000 increase consists primarily of $125,000 of collections expenses that were reimbursed to the Company in the first quarter 2008 reducing the amount of reported expenses in 2008.

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Non-interest expenses for the second quarter of 2009 totaled $5,885,000 or 3.21% of average assets on an annualized basis compared to $5,004,000 or 2.94% of average assets for the same period of 2008. The $881,000 increase in non-interest expenses in the second quarter of 2009 when compared to the second quarter of 2008 is largely due to the $413,000 of additional operating costs of Traders Bank during April 2009 and the $319,000 special assessment by the FDIC. Excluding the $145,000 of staff costs from the operations Traders Bank in April 2009, staff costs decreased by $23,000 or 0.9% in 2009 as normal salary and benefit increases have been substantially offset by staff reductions and lower stock compensation expense. Excluding the $69,000 of occupancy and equipment costs from the operations Traders Bank in April 2009, occupancy and equipment expenses decreased by $86,000 or 12.8% in 2009 largely due to lower information technology equipment expenses. Excluding the $67,000 of outside data processing costs from the operations Traders Bank in April 2009, outside data processing costs increased by $121,000 or 20.5% in 2009 largely due to the additional fees charged for Traders Bank since their conversion to Premier's third party data processing provider and new charges incurred for the outsourcing of deposit statement rendering. Professional fees increased by $19,000 in the second quarter of 2009, largely due to the inclusion of the April 2009 operations of Traders Bank. Taxes other than payroll, property and income increased by $11,000 in the second quarter of 2009, largely due to the inclusion of the April 2009 operations of Traders Bank. Write-downs, expenses and sales of other real estate owned (OREO) increased by $34,000 in the second quarter of 2009 largely due to losses on the liquidation of OREO properties. FDIC insurance increased by $432,000 or over 520% in the second quarter of 2009 due to the $319,000 special FDIC assessment and the expiration of FDIC insurance credits that had previously been used to offset normal FDIC premiums in 2008. Other operating expenses increased by $90,000 in the second quarter of 2009, largely due to the inclusion of the April 2009 operations of Traders Bank.

Income tax expense was $1,271,000 for the first six months of 2009 compared to $1,875,000 for the first six months of 2008. The effective tax rate for the six months ended June 30, 2009 was 33.0% 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 decrease in the effective tax rate is primarily due to an increase in tax-exempt investments acquired via the purchase of Citizens First in April 2008 and the purchase of other income tax exempt financial instruments in 2008. Income tax expense for the quarter ending June 30, 2009 was $638,000 (32.0% effective tax rate) compared to $976,000 (33.6% effective tax rate) for the same period of 2008. The decrease in income tax expense is directly related to the decrease in pre-tax income detailed above. The decrease in the effective tax rate is again largely . . .