UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





þ
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the fiscal year ended December 31,
      2008





or





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





For
      the transition period from ___________ to
  ___________





Commission
file number 0-20908





PREMIER FINANCIAL BANCORP,
INC.


(Exact
name of registrant as specified in its charter)





Kentucky
            
            61-1206757(State
      or other jurisdiction of incorporation organization)
            
            (I.R.S.
      Employer Identification No.)2883
      Fifth Avenue
              Huntington,
      West Virginia
            
            25702(Address
      of principal executive offices)
            
            (Zip
      Code)Registrant’s
      telephone number    (304)
      525-1600








Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
            
            Name
      of exchange on which registeredCommon
      Stock without par value
            
            NASDAQ:GMS





Securities
registered pursuant to Section 12(g) of the
Act:                                                                                                                                                  NONE





Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.                     Yeso     No þ.





Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange ActYeso     No þ.





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to filing requirements for the past 90 days.  YesþNoo.





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this 10-K or any amendment to this Form 10-K.o





PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008











Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):


Large
      accelerated filer  o.
            Accelerated
      filer  o.
            Non-accelerated
      filer  o.
            Smaller
      reporting company  þ





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





As of
June 30, 2008, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $61,872,402 based on the closing sale
price as reported on the National Association of Securities Dealers Automated
Quotation System National Market System.





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





Title
      of each class
            
            Outstanding
      at March 15, 2009Common
      Stock without par value
            
            6,392,770








DOCUMENTS
INCORPORATED BY REFERENCE





Document
            
            Parts
      Into Which IncorporatedProxy
      Statement for the Annual Meeting of Shareholders to be held on June 17,
      2009.
            
            Part
      III














PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








TABLE OF CONTENTSPART IItem 1.
            
            Description of
      Business
            
            4Item 1A.
            
            Risk
      Factors
            
            14Item 1B.
            
            Unresolved Staff
      Comments
            
            22Item 2.
            
            Properties
            
            22Item 3.
            
            Legal
      Proceedings
            
            22Item 4.
            
            Submissions of Matters
      to a Vote of Security Holders
            
            22PART IIItem 5.
            
            Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchase of Equity Securities
            
            23Item 6.
            
            Selected
      Financial Data
            
            26Item 7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            28Item 7A.
            
            Quantitative and Qualitative
      Disclosures About Market Risk
            
            55Item 8.
            
            Financial
      Statements and Supplementary Data
            
            70Report of Independent
      Registered Public Accounting Firm
            
            72Consolidated Balance
      Sheets
            
            73Consolidated
      Statements of Income
            
            74Consolidated
      Statements of Comprehensive Income
            
            75Consolidated
      Statements of Changes in Stockholders’ Equity
            
            76Consolidated Statements of
      Cash Flows
            
            77Notes to Consolidated Financial
      Statements
            
            79Item 9.
            
            Changes in
      and Disagreements with Accountants on Accounting and Financial
      Disclosure
            
            119Item 9A(T).
            
            Controls and
      Procedures
            
            119Item 9B.
            
            Other
      Information
            
            120PART IIIItem
      10.
            
            Directors,
      Executive Officers and Corporate Governanceof
      Registrant
            
            121Item
      11.
            
            Executive
      Compensation
            
            121Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            121Item
      13.
            
            Certain
      Relationships and Related Transactions, and DirectorIndependence
            
            121Item
      14.
            
            Principal
      Accountant Fees and Services
            
            121PART IVItem 15.
            
            Exhibits and Financial
      Statement Schedules
            
            122Signatures
            
            125





3
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








PART
I





Item 1.  Description of
Business





THE
COMPANY




Premier Financial Bancorp, Inc. (the
"Company" or "Premier") is a multi-bank holding company that, as of March 15,
2009 operates nine banking offices in Kentucky, three banking offices in Ohio,
and thirteen banking offices in West Virginia. At December 31, 2008, Premier had
total consolidated assets of $724.5 million, total consolidated deposits of
$589.2 million and total consolidated shareholders' equity of $89.4 million. The
banking subsidiaries (the "Banks" or "Affiliate Banks") consist of Citizens
Deposit Bank & Trust, Vanceburg, Kentucky; Farmers Deposit Bank, Eminence,
Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc., Philippi,
West Virginia; Boone County Bank, Inc., Madison, West Virginia; and Traders
Bank, Inc., Ravenswood, West Virginia.




Premier was incorporated as a Kentucky
corporation in 1991 and has functioned as a bank holding company since its
formation. During 2002, Premier moved its principal executive offices from
Georgetown, Kentucky to its present location at 2883 5th Avenue, Huntington,
West Virginia, 25702. The purpose of the move was to be more centrally located
among Premier's Affiliate Banks and its directorship. Premier's telephone number
is (304) 525-1600.




Premier is a legal entity separate and
distinct from its Affiliate Banks and non-bank subsidiaries. Accordingly, the
right of Premier, and thus the right of Premier's creditors and shareholders, to
participate in any distribution of the assets or earnings of any of the
Affiliate Banks or non-bank subsidiaries is necessarily subject to the prior
claims of creditors of such subsidiaries, except to the extent that claims of
Premier, in its capacity as a creditor, may be recognized. The principal source
of Premier's revenue is dividends from its Affiliate Banks and non-bank
subsidiary.  See "REGULATORY MATTERS -- Dividend Restrictions" for
discussion of the restrictions on the Affiliate Banks' ability to pay dividends
to Premier.




In late 2007 Premier resumed a strategy
of franchise expansion by acquiring and owning community banks.  This
decision follows a five –year period whereby Premier suspended its acquisition
strategy in order to focus on improving operations, strengthening capital and
management oversight and improving the profitability of the banks previously
acquired. On October 24, 2007, the Company entered into a material definitive
agreement with Citizens First Bank, Inc. (Citizens First), a bank with $60
million of total assets located in Ravenswood, West Virginia.  Under
terms of the definitive agreement, Premier agreed to purchase Citizens First for
up to $11,700,000 in stock and cash.  Each share of Citizens First
common stock was entitled to merger consideration of cash and stock that
generally totaled $29.25, subject to certain limitations.  Premier
issued 480,000 shares of its common stock plus Premier paid $5.3 million in cash
to the shareholders of Citizens First.








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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








On November 27, 2007, the Company
entered into a material definitive agreement with Traders Bankshares, Inc.
(Traders), a single bank holding company with $105 million of total assets
located in Spencer, West Virginia.  Under terms of the definitive
agreement, Premier agreed to purchase Traders for approximately $18,140,000 in
stock and cash.  Each share of Traders common stock was entitled to
merger consideration of $50.00 cash and 3.75 shares of Premier common
stock.  Premier issued approximately 675,000 shares of its common
stock plus Premier paid $9.0 million in cash to the shareholders of
Traders.




On April 30, 2008, Premier closed the
acquisitions of Citizens First and Traders.  On October 25, 2008,
Premier merged these two new subsidiary banks together to form Traders Bank,
Inc. headquartered in Ravenswood, West Virginia.  The merger was
designed to consolidate management and operations of two subsidiaries in
overlapping or contiguous markets.  Similarly, effective January 3,
2005, Premier merged two of its subsidiary banks, Citizens Deposit Bank &
Trust in Vanceburg, Kentucky and Bank of Germantown, in Germantown, Kentucky.
Bank of Germantown was merged into Citizens Deposit Bank, with its facilities
continuing to operate as branches of Citizens Deposit Bank.




On December 31, 2008, the Company
entered into a material definitive agreement with Abigail Adams National
Bancorp, Inc. (Abigail Adams), a two bank holding company with $436 million of
total assets at December 31, 2008 with locations in and around Washington, DC
and Richmond, Virginia.  Under terms of the definitive agreement,
Premier agreed to purchase Abigail Adams for approximately $10.8 million in
stock.  Each share of Abigail Adams common stock will be entitled to
merger consideration of 0.4461 shares of Premier common
stock.  Premier will issue approximately 1,545,000 shares of its
common stock to the shareholders of Abigail Adams.  The transaction,
which is subject to certain conditions precedent, still requires approval by
Abigail Adams’ shareholders and bank regulatory authorities, and the issuance of
Premier common stock in the merger requires Premier shareholder
approval.  It is anticipated to close sometime in the second quarter
of 2009.




While Premier remains committed to its
core strategy of rural banking with community oriented and locally named
institutions, the Company may dispose of additional corporate assets that no
longer meet Premier's geographic or operational performance goals.  In
the fourth quarter of 2003, the Company adopted and began to implement a plan to
sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located in
Georgetown, Kentucky. On February 13, 2004, the Company announced that it had
signed a definitive agreement to sell Citizens Bank in a cash transaction valued
at approximately $14,500,000, and on July 1, 2004 the sale transaction closed.
In accordance with Financial Accounting Standard 144, "Accounting for the
Impairment or Disposal of Long-lived Assets", which became effective for the
Company on January 1, 2002, the financial position and results of operations of
Citizens Bank are removed from the detail line items in the Company's financial
statements and presented separately as "discontinued operations."








5
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Beginning in April 2005 and concluding
in July 2005, the Company converted each of its Affiliate Banks from an in-house
system administered by a wholly-owned subsidiary to an outsourced system
administered by FiServ for their data and item processing
functions.  Subsequent to the conversion, the operations of the
Company’s data processing subsidiary, Premier Data Services, Inc. were suspended
and the subsidiary was merged into the Company on June 27, 2006.








BUSINESS


General




Through the Banks the Company focuses
on providing quality, community banking services to individuals and
small-to-medium sized businesses primarily in non-urban areas. By seeking to
provide such banking services in non-urban areas, the Company believes that it
can minimize the competitive effect of larger financial institutions that
typically are focused on large metropolitan areas. Each Bank retains its local
management structure which offers customers direct access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service. This approach also enables each Bank to offer local and
timely decision-making, and flexible and reasonable operating procedures and
credit policies limited only by a framework of centralized risk controls
provided by the Company to promote prudent banking practices. See additional
discussion under "Regulatory Matters" below.




Each Bank maintains its community
orientation by, among other things, having selected members of its community as
members of its board of directors, who assist in the introduction of prospective
customers to the Bank and in the development or modification of products and
services to meet customer needs. As a result of the development of personal
banking relationships with its customers and the convenience and service offered
by the Banks, the Banks' lending and investing activities are funded primarily
by core deposits.




When appropriate and economically
advantageous, the Company centralizes certain of the Banks' back office, support
and investment functions in order to achieve consistency and cost efficiency in
the delivery of products and services. The Company centrally provides services
such as accounting, loan review, operations and network support, human
resources, compliance and internal auditing to the Banks to enhance their
ability to compete effectively. The Company also provides overall direction in
the areas of credit policy and administration, strategic planning, marketing,
investment portfolio management and other financial and administrative services.
Each Bank participates in product development by advising management of new
products and services needed by its customers and desirable changes to existing
products and services.




Prior to the conversions in mid 2005,
the Company's data processing subsidiary, Premier Data Services, Inc., provided
centralized data processing services to four of the Banks. Beginning in late
2004 and continuing through the middle of 2005, the Company converted its data
processing system to an external third-party provider. Through the conversion
process,


6
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Company
senior management along with each Bank's management reviewed and standardized
their offering of products and services, although pricing decisions remain at
the local Bank level. Furthermore, as a result of conversion, the Company
through the Banks is able offer more modern products, such as internet banking
and check imaging, and is able to take advantage of emerging technologies such
as image exchange to remit and clear items with its exchange
agents.




Each of the Banks provides a wide range
of retail and commercial banking services, including commercial, real estate,
agricultural and consumer lending; depository and funds transfer services;
collections; safe deposit boxes; cash management services; and other services
tailored for both individuals and businesses.




The Banks' residential mortgage lending
activities consist primarily of loans for purchasing personal residences or
loans for commercial or consumer purposes secured by residential
mortgages.  The Banks also originate residential mortgage loans that
are sold in the secondary mortgage market.  The Banks’ mortgage
originators are salaried employees who do not receive a commission or other
incentive compensation for the number or type of mortgages they
originate.  Consumer lending activities consist of traditional forms
of financing for automobile and personal loans including unsecured lines of
credit. Commercial lending activities include loans to small businesses located
primarily in the communities in which the Banks are located and surrounding
areas. Commercial loans are secured by business assets including real estate,
equipment, inventory, and accounts receivable. Some commercial loans are
unsecured.




The Banks' range of deposit services
includes checking accounts, NOW accounts, savings accounts, money market
accounts, club accounts, individual retirement accounts, certificates of deposit
and overdraft protection. Customers can access their accounts via traditional
bank branch locations as well as Automated Teller Machines (ATM’s) and the
internet.  The Banks also offer bill payment and telephone banking
services.  Deposits of the Banks are insured by the Bank Insurance
Fund administered by the FDIC to the maximum amounts offered by the
FDIC.





Competition




The Banks encounter strong competition
both in making loans and attracting deposits. The deregulation of the banking
industry and the widespread enactment of state laws that permit multi-bank
holding companies as well as the availability of nationwide interstate banking
have created a highly competitive environment for financial services providers.
In one or more aspects of its business, each Bank competes with other commercial
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking companies and other
financial intermediaries operating in its market and elsewhere, many of which
have substantially greater financial and managerial resources. While the Banks
are smaller financial institutions, each of the Banks' competitors include large
bank holding companies having substantially greater resources and
offering


7
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








certain
services that Premier Banks may not currently provide. Each Bank seeks to
minimize the competitive effect of larger financial institutions through a
community banking approach that emphasizes direct customer access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service.  Furthermore, via the Company’s credit
administration department, the Banks can also minimize the competitive effects
of larger institutions by tailoring their lending criteria to the individual
circumstances of the small-to-medium sized business owner.




Management believes that each Bank is
positioned to compete successfully in its respective primary market area,
although no assurances as to ongoing competitiveness can be given. Competition
among financial institutions is based upon interest rates offered on deposit
accounts, service charges on deposit accounts for various services related to
customer convenience, interest rates charged on loans and other credit, the
quality and scope of the services rendered, the convenience of the banking
facilities and, in the case of loans to commercial borrowers, relative lending
limits. Management believes that the commitment of its Banks to personal
service, innovation and involvement in their respective communities and primary
market areas, as well as their commitment to quality community banking service,
are factors that contribute to their competitiveness.





Regulatory
Matters




The following discussion sets forth
certain elements of the regulatory framework applicable to bank holding
companies and their subsidiaries and provides certain specific information
relevant to Premier. This regulatory framework is intended primarily for the
protection of depositors and the federal deposit insurance funds and not for the
protection of the holders of securities, including Premier common shares. To the
extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to those provisions. A
change in the statutes, regulations or regulatory policies applicable to Premier
or its subsidiaries may have a material effect on the business of
Premier.




General
- As a bank holding company, Premier is subject to regulation under the Bank
Holding Company Act ("BHC Act"), and to inspection, examination and supervision
by the Board of Governors of the Federal Reserve System ("Federal Reserve").
Under the BHC Act, bank holding companies generally may not acquire ownership or
control of more than 5% of the voting shares or substantially all the assets of
any company, including a bank, without the Federal Reserve's prior approval.
Similarly, bank holding companies generally may not acquire ownership or control
of a savings association without the prior approval of the Federal Reserve.
Further, branching by the Affiliate Banks is subject to the jurisdiction, and
requires the approval of each Affiliate Bank's primary federal banking regulator
and, if the Affiliate Bank is a state-chartered bank, the appropriate state
banking regulator.





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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Under the BHC Act, the Federal Reserve
has the authority to require a bank holding company to terminate any activity or
relinquish control of the nonbank subsidiary (other than a nonbank subsidiary of
a bank) upon the Federal Reserve's determination that such activity or control
constitutes a risk to the financial soundness and stability of any bank
subsidiary of the bank holding company. Premier and the Affiliate Banks are
subject to the Federal Reserve Act, which limits borrowings by Premier and its
nonbank subsidiaries from the Affiliate Banks and also limits various other
transactions between Premier and its nonbank subsidiaries with the Affiliate
Banks.




The two Affiliate Banks chartered in
Kentucky are supervised, regulated and examined by the Kentucky Department of
Financial Institutions, the Affiliate Bank chartered in Ohio is supervised,
regulated and examined by the Ohio Division of Financial Institutions, and the
three Affiliate Banks chartered in West Virginia are supervised, regulated and
examined by the West Virginia Division of Banking. In addition, those Affiliate
Banks that are members of the Federal Reserve System are supervised and
regulated by the Federal Reserve, and those banks that are not members of the
Federal Reserve System are supervised and regulated by the Federal Deposit
Insurance Corporation ("FDIC"). Each banking regulator has the authority to
issue cease-and-desist orders if it determines that the activities of a bank
regularly represent an unsafe and unsound banking practice or a violation of
law.




Both federal and state law extensively
regulates various aspects of the banking business, such as reserve and capital
requirements, truth-in-lending and truth-in-savings disclosure, equal credit
opportunity, fair credit reporting, trading in securities and other aspects of
banking operations. Premier, the Affiliate Banks and Premier's nonbank
subsidiary are also affected by the fiscal and monetary policies of the federal
government and the Federal Reserve and by various other governmental laws,
regulations and requirements. Further, the earnings of Premier and Affiliate
Banks are affected by general economic conditions and prevailing interest rates.
Legislation and administrative actions affecting the banking industry are
frequently considered by the United States Congress, state legislatures and
various regulatory agencies. It is not possible to predict with certainty
whether such legislation or administrative actions will be enacted or the extent
to which the banking industry, in general, or Premier and the Affiliate Banks,
in particular, would be affected.




Liability
for Bank Subsidiaries - The Federal Reserve has a policy to the effect
that a bank holding company is expected to act as a source of financial and
managerial strength to each of its subsidiary banks and to maintain resources
adequate to support each such subsidiary bank. This support may be required at
times when Premier may not have the resources to provide it. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of
payment.





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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Any depository institution insured by
the FDIC may be held liable for any loss incurred, or reasonably expected to be
incurred, by the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution in
danger of default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance. In the event that such a default
occurred with respect to a bank, any loans to the bank from its parent holding
company will be subordinate in right of payment of the bank's depositors and
certain of its other obligations.




Capital
Requirements - Premier is subject to capital ratios, requirements and
guidelines imposed by the Federal Reserve, which are substantially similar to
the ratios, requirements and guidelines imposed by the Federal Reserve and the
FDIC on the Banks within their respective jurisdictions. These capital
requirements establish higher capital standards for banks and bank holding
companies that assume greater credit risks. For this purpose, a bank's or
holding company's assets and certain specified off-balance sheet commitments are
assigned to four risk categories, each weighted differently based on the level
of credit risk that is ascribed to such assets or commitments. A bank's or
holding company's capital is divided into two tiers: "Tier I" capital and "Tier
II" capital. "Tier I" capital includes common shareholders' equity,
non-cumulative perpetual preferred stock, and related surplus (excluding auction
rate issues), minority interests in equity accounts of consolidated subsidiaries
and Trust Preferred Securities (subject to certain limitations.) Goodwill,
certain identifiable intangible assets and certain other assets are subtracted
from these sources of capital to calculate Tier I capital. "Tier II" capital
includes, among other items, perpetual preferred stock not meeting the Tier I
definition, mandatory convertible securities, subordinated debt and allowances
for loan and lease losses, subject to certain limitations, less certain required
deductions.




Bank holding companies currently are
required to maintain Tier I and total capital (the sum of Tier I and Tier II
capital) equal to at least 4% and 8% of total risk-weighted assets,
respectively. At December 31, 2008, Premier met both requirements, with Tier I
and total capital equal to 14.0% and 15.3% of its total risk-weighted assets,
respectively.




In addition to the risk-based capital
guidelines, the Federal Reserve requires bank holding companies to maintain a
minimum "leverage ratio" (Tier I capital to adjusted total assets) of 3%, if the
holding company has the highest regulatory ratings for risk-based capital
purposes. All other bank holding companies are required to maintain a leverage
ratio of 3% plus at least 100 to 200 basis points. At December 31, 2008,
Premier's leverage ratio was 8.7%.




The foregoing capital requirements are
minimum requirements. The Federal Reserve may set capital requirements higher
than the minimums described above for holding companies whose circumstances
warrant it. For example, holding companies experiencing or anticipating
significant growth may be expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.





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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Additionally, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things,
identifies five capital categories for insured depository institutions (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) and requires the respective
federal regulatory agencies to implement systems for "prompt corrective action"
for insured depository institutions that do not meet minimum capital
requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements.




An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee the bank's compliance with the plan. The
liability of the parent holding company under any such guarantee is limited to
the lesser of 5% of the Bank's assets at the time it became "undercapitalized"
or the amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take priority
over the parent's general unsecured creditors. In addition, FDICIA requires the
various regulatory agencies to prescribe certain non-capital standards for
safety and executive compensation and permits regulatory action against a
financial institution that does not meet such standards.




Regulatory
Agreements - As previously disclosed in earlier reports, the Company and
some of the subsidiary Banks have, in the past, been subject to regulatory
agreements.  On January 29, 2003, the Company entered into a written
agreement with the Federal Reserve Bank of Cleveland (FRB).  In, 2006,
the FRB determined that Premier had fully satisfied all of the provisions of the
written agreement and, accordingly, the FRB terminated the agreement effective
April 18, 2006.




Before they were merged together into
one entity, two of the Company's subsidiaries, Citizens Deposit Bank & Trust
and the Bank of Germantown, entered into similar agreements with their
respective primary regulators which, among other things, prohibited the payment
of dividends without prior written approval and required significant changes in
their credit administration policies. The banks fully complied with the terms of
the agreements in 2004 and the agreements were accordingly rescinded by their
regulators.




As a result of a 2003 investigation
into the conduct of the former president of Farmers Deposit Bank by Premier and
the FDIC, on December 24, 2003, Premier announced that Farmers Deposit Bank had
reached an agreement with the FDIC and the Kentucky Department of Financial
Institutions ("KDFI") [collectively referred to as "Supervisory Authorities"] to
consent to the issuance of a cease & desist order ("Order") from its
Supervisory Authorities.  The Order also outlined a number of steps to
be taken by Farmers Deposit which were designed to remedy and/or prevent the
reoccurrence of events that gave rise to the investigation during the latter
half of 2003.  Having found that Farmers Deposit had fully complied
with the Order, the Supervisory Authorities rescinded the Order on December 13,
2005.


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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Dividend
Restrictions - Premier is dependent on dividends from its Affiliate Banks
for its revenues. Various federal and state regulatory provisions limit the
amount of dividends the Affiliate Banks can pay to Premier without regulatory
approval. At December 31, 2008, approximately $2.4 million of the total
shareholders' equity of the Affiliate Banks was available for payment of
dividends to Premier without approval by the applicable regulatory
authority.




In addition, federal bank regulatory
authorities have authority to prohibit Premier's Affiliate Banks from engaging
in an unsafe or unsound practice in conducting their business. The payment of
dividends, depending upon the financial condition of the bank in question, could
be deemed to constitute such an unsafe or unsound practice. The ability of the
Affiliate Banks to pay dividends in the future is presently, and could be
further, influenced by bank regulatory policies and capital guidelines as well
as each Affiliate Bank's earnings and financial condition.  Additional
information regarding dividend limitations can be found in Note 20 of the accompanying audited consolidated financial
statements.




Interstate
Banking - Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration
limits, (i) bank holding companies, such as Premier, are permitted to acquire
banks and bank holding companies located in any state of the United States,
subject to certain restrictions, and (ii) banks are permitted to acquire branch
offices outside their home state by merging with out-of-state banks, purchasing
branches in other states or establishing de novo branch offices in other states;
provided that, in the case of any such purchase or opening of individual
branches, the host state has adopted legislation "opting in" to the relevant
provisions of the Riegle-Neal Act; and provided further, that, in the case of a
merger with a bank located in another state, the host state has not adopted
legislation "opting out" of the relevant provisions of the Riegle-Neal
Act.




Gramm-Leach-Bliley
Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") was
signed into law, eliminating many of the remaining barriers to full convergence
of the banking, securities, and insurance industries. The major provisions of
the Act took effect March 12, 2000.





The Act enables a broad-scale
consolidation among banks, securities firms, and insurance companies by creating
a new type of financial services company called a "financial holding company," a
bank holding company with dramatically expanded powers. Financial holding
companies can offer virtually any type of financial service, including banking,
securities underwriting, insurance (both agency and underwriting), and merchant
banking. In addition, the Act permits the Federal Reserve and the Treasury
Department to authorize additional activities for financial holding companies,
but only if they jointly determine that such activities are "financial in
nature" or "complementary to financial activities." Premier does not presently
qualify to elect financial holding company status.





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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








The Federal Reserve serves as the
primary "umbrella" regulator of financial holding companies, with jurisdiction
over the parent company and more limited oversight over its subsidiaries. The
primary regulator of each subsidiary of a financial holding company depends on
the activities conducted by the subsidiary. A financial holding company need not
obtain Federal Reserve approval prior to engaging, either de novo or through
acquisitions, in financial activities previously determined to be permissible by
the Federal Reserve. Instead, a financial holding company need only provide
notice to the Federal Reserve within 30 days after commencing the new activity
or consummating the acquisition.





Number
of Employees




The Company and its subsidiaries
collectively had approximately 270 full-time equivalent employees as of December
31, 2008 Its executive offices are located at 2883 5th Avenue, Huntington, West
Virginia 25702, telephone number (304) 525-1600 (facsimile number (304)
525-9701).





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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Item 1A.  Risk Factors




Like all financial companies, the
Company’s business and results of operations are subject to a number of risks,
many of which are outside of the Company’s control.  In addition to
the other information in this report, readers should carefully consider that the
following important factors, among others, could materially impact the Company’s
business and future results of operations.





Changes
in Interest Rates Could Negatively Impact the Company’s Results of
Operations




The earnings of the Company are
primarily dependent on net interest income, which is the difference between
interest earned on loans and investments, and interest paid on interest-bearing
liabilities such as deposits and borrowings. Interest rates are highly sensitive
to many factors, including government monetary and fiscal policies; domestic and
international economic and political conditions; and, in particular, changes in
the discount rate by the Board of Governors of the Federal Reserve System.
Conditions such as inflation, recession, unemployment, money supply, government
borrowing and other factors beyond management’s control may also affect interest
rates. If the Company’s interest-earning assets mature, reprice or prepay more
quickly than interest-bearing liabilities in a given period, a decrease in
market interest rates could adversely affect net interest income. Likewise, if
interest-bearing liabilities mature or reprice, or, in the case of deposits, are
withdrawn by the accountholder, more quickly than interest-earning assets in a
given period, an increase in market interest rates could adversely affect net
interest income. Given the Company’s current mix of assets and liabilities, a
declining interest rate environment would negatively impact the Company’s
results of operations.




Fixed rate loans increase the Company’s
exposure to interest rate risk in a rising rate environment because
interest-bearing liabilities would be subject to repricing before assets become
subject to repricing. Adjustable rate loans decrease the risks to a lender
associated with changes in interest rates but involve other risks. As interest
rates rise, the periodic payment by the borrower rises to the extent permitted
by the terms of the loan, and the increased periodic payment increases the
potential for default. At the same time, for secured loans, the marketability of
the underlying collateral may be adversely affected by higher interest rates. In
a declining interest rate environment, there is likely to be an increase in
prepayment activity on loans as the borrowers refinance their loans at lower
interest rates. Under these circumstances, the Company’s results of operations
could be negatively impacted.




Changes in interest rates also can
affect the value of loans, investments and other interest-rate sensitive assets
and the Company’s ability to realize gains on the sale or resolution of assets.
This type of income can vary significantly from quarter-to-quarter and
year-to-year based on a number of different factors, including the interest rate
environment. An increase in interest rates that adversely affects the ability of
borrowers to pay the principal or interest on loans may lead to an increase in
non-performing assets and increased loan loss reserve requirements that could
have a material adverse effect on the Company’s results of
operations.


14
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Regional
Economic Changes in the Company’s Markets Could Adversely Impact Results From
Operations




Like all banks, the Company is subject
to the effects of any economic downturn, and in particular a significant decline
in home values or reduced commercial development in the Company’s markets could
have a negative effect on results of operations. The Company’s success depends
primarily on the general economic conditions in the counties in which the
Company conducts business, and in the West Virginia, southern Ohio and northern
Kentucky areas in general. Unlike larger banks that are more geographically
diversified, the Company provides banking and financial services to customers
primarily in the West Virginia counties of Barbour, Boone, Harrison, Jackson,
Lewis, Lincoln, Logan, Kanawha, Roane, Upshur and Wood, as well as the southern
Ohio counties of Gallia, Lawrence and Scioto and the northern Kentucky counties
of Bracken, Fleming, Greenup, Lewis, Mason, and Robertson. The local economic
conditions in these market areas have a significant impact on the Company’s
ability to originate loans, the ability of the borrowers to repay these loans
and the value of the collateral securing these loans. A significant decline in
the general economic conditions caused by inflation, recession, unemployment or
other factors beyond the Company’s control would affect these local economic
conditions and could adversely affect the Company’s financial condition and
results of operations. Additionally, a significant decline in home values would
likely lead to increased delinquencies and defaults in both the consumer home
equity loan and residential real estate loan portfolios and result in increased
losses in these portfolios.





Extensive
Regulation and Supervision




The Company, primarily through its
Affiliate Banks, is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors’
funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect Premier’s lending practices, capital
structure, investment practices, dividend policy and growth, among other things.
The Company is also subject to a number of federal laws, which, among other
things, require it to lend to various sectors of the economy and population, and
establish and maintain comprehensive programs relating to anti-money laundering
and customer identification. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible changes.
Changes to statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could
affect Premier in substantial and unpredictable ways. Such changes could subject
the Company to additional costs, limit the types of financial services and
products it may offer, limit the ability of the Company and its Banks to
foreclose on collateral as a result of non-payment by the borrower and/or
increase the ability of non-banks to offer competing financial services and
products, among other things. Failure to comply with laws, regulations or
policies could result in sanctions by regulatory agencies, civil money penalties
and/or reputation damage, along with corrective action plans required by
regulatory agencies, any of which could have a material adverse effect on the
Company’s business, financial condition and results of
operations.  Premier and certain of its Affiliate Banks have in the
past been subject to such corrective action plans, and therefore
there


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FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








may
be some residual reputation damage within the regulatory
agencies.  While Premier has policies and procedures designed to
prevent any such violations, there can be no assurance that such violations will
not occur. See the “Regulatory Matters” section in Item 1,
“Business”.





Dividend
payments by subsidiaries to Premier and by Premier to its shareholders can be
restricted.




The
Company’s principal source of funds for dividend payments and its debt service
obligations is dividends received from the subsidiary Banks.  Banking
regulations limit the amount of dividends that may be paid without prior
approval of regulatory agencies.  Under these regulations, the amount
of dividends that may be paid in any calendar year is limited to the current
year’s net profits, as defined, combined with the retained net profits of the
preceding two years, subject to the capital requirements and additional
restrictions as discussed in Note 18 to the consolidated
financial statements.  During 2009 the Banks could, without prior
approval, declare dividends of approximately $2.4 million plus any 2009 net
profits retained to the date of the dividend declaration.





The
Extended Disruption of Vital Infrastructure Could Negatively Impact the
Company’s Results of Operations and Financial Condition




The Company’s operations depend upon,
among other things, its technological and physical infrastructure, including its
equipment and facilities.  While disaster recovery procedures are in
place, an extended disruption of its vital infrastructure by fire, power loss,
natural disaster, telecommunications failure, computer hacking and viruses,
terrorist activity or the domestic and foreign response to such activity, or
other events outside of the Company’s control, could have a material adverse
impact either on the financial services industry as a whole, or on the Company’s
business, results of operations, and financial condition.





New
or Revised Tax, Accounting and Other Laws, Regulations, Rules and Standards
Could Significantly Impact Strategic Initiatives, Results of Operations and
Financial Condition




The financial services industry is
highly regulated and laws and regulations may sometimes impose significant
limitations on operations. These limitations, and sources of potential liability
for the violation of such laws and regulations, are described in Item 1 of Part
I of this report under the heading “Business — Regulatory Matters.” These
regulations, along with the currently existing tax and accounting laws,
regulations, rules and standards, control the methods by which financial
institutions conduct business; implement strategic initiatives, as well as past,
present, and contemplated tax planning; and govern financial disclosures. These
laws, regulations, rules, and standards are constantly evolving and may change
significantly over time. The nature, extent, and timing of the adoption of
significant new laws, changes in existing laws, or repeal of existing laws may
have a material impact on the Company’s results of operations and financial
condition, the effects of which are impossible to predict at this
time.





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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Recent
Legislative and Regulatory Initiatives to Address Difficult Market and Economic
Conditions May Not Stabilize the United States Banking System and the Enactment
of These Initiatives May Significantly Impact Premier’s Financial Condition,
Results of Operations, Liquidity or Stock Price.




The Emergency Economic Stabilization
Act (EESA), which established the Troubled Assets Relief Program (TARP), was
signed into law in October 2008. As part of TARP, the Treasury established the
Capital Purchase Program (CPP) to provide up to $700 billion of funding to
eligible financial institutions through the purchase of capital stock and other
financial instruments for the purpose of stabilizing and providing liquidity to
the U.S. financial markets. Then, on February 17, 2009, President Obama signed
the American Recovery and Reinvestment Act (ARRA), as a sweeping economic
recovery package intended to stimulate the economy and provide for broad
infrastructure, energy, health, and education needs. There can be no assurance
as to the actual impact that EESA or its programs, including the CPP, and ARRA
or its programs, will have on the national economy or financial markets. The
failure of these significant legislative measures to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect Premier’s business, financial
condition, results of operations, access to credit or the trading price of its
common shares.




There have been numerous actions
undertaken in connection with or following EESA and ARRA by the Federal Reserve
Board, Congress, the Treasury, the FDIC, the SEC and others in efforts to
address the current liquidity and credit crisis in the financial industry that
followed the sub-prime mortgage market meltdown which began in 2007. These
measures include homeowner relief that encourages loan restructuring and
modification; the establishment of significant liquidity and credit facilities
for financial institutions and investment banks; the lowering of the federal
funds rate; emergency action against short selling practices; a temporary
guaranty program for money market funds; the establishment of a commercial paper
funding facility to provide back-stop liquidity to commercial paper issuers; and
coordinated international efforts to address illiquidity and other weaknesses in
the banking sector. The purpose of these legislative and regulatory actions is
to help stabilize the U.S. banking system. EESA, ARRA and the other regulatory
initiatives described above may not have their desired effects. If the
volatility in the markets continues and economic conditions fail to improve or
worsen, Premier’s business, financial condition and results of operations could
be materially and adversely affected.





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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Defaults
by Another Larger Financial Institution Could Adversely Affect Financial Markets
Generally.




The commercial soundness of many
financial institutions may be closely interrelated as a result of relationships
between the institutions. As a result, concerns about, or a default or
threatened default by, one institution could lead to significant market-wide
liquidity and credit problems, losses or defaults by other institutions. This is
sometimes referred to as “systemic risk”.  The Company’s business
could be adversely affected directly by the default of another institution or if
the financial services industry experiences significant market-wide liquidity
and credit problems.





Current
Levels of Market Volatility are Unprecedented and May Adversely Affect Market
Price of Common Stock or Investment Security Values




The capital and credit markets have
been experiencing volatility and disruption for more than a year. In recent
months, the volatility and disruption has reached unprecedented levels. In some
cases, the markets have produced downward pressure on stock prices and credit
availability for certain issuers seemingly without regard to those issuers’
underlying financial strength. The current market volatility could contribute to
a further decline in the market value of certain security investments and other
assets of Premier.  If current levels of market disruption and
volatility continue or worsen, there can be no assurance that Premier will not
experience an adverse effect, which may be material, on results of operations,
capital or financial position.





Additional
Capital May Not Be Available When Needed or Required by Regulatory
Authorities.




Premier and its Affiliate Banks are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support its operations. In addition, the Company may elect to
raise additional capital to support its business or to finance acquisitions, if
any, or it may otherwise elect or be required to raise additional
capital.  Premier’s ability to raise additional capital, if needed,
will depend on conditions in the capital markets, economic conditions and a
number of other factors, many of which are outside the Company’s control and its
financial performance. Accordingly, there can be no assurance that Premier will
be able raise additional capital if needed or on acceptable terms. If Premier
cannot raise additional capital when needed, it may have a material adverse
effect on its financial condition, results of operations and
prospects.





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FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Allowance
for Loan Losses May Be Insufficient




Premier, through the Affiliate Banks,
maintains an allowance for loan losses based on, among other things, national
and regional economic conditions, historical loss experience, evaluations of
potential losses on identified problem loans and delinquency
trends.  Premier believes that its allowance for loan losses is
maintained at a level adequate to absorb any probable losses in its loan
portfolio given the current information known to Management.  These
determinations are based upon estimates that are inherently subjective, and
their accuracy depends on the outcome of future events.  Therefore,
Premier cannot predict loan losses with certainty and ultimate losses may differ
from current estimates.  Depending on changes in economic, operating
and other conditions, including changes in interest rates, which are generally
beyond its control, Premier’s actual losses could exceed its current allowance
estimates.  Premier can provide no assurance that its allowance is
sufficient to cover all charge-offs in future periods.  If charge-offs
exceed Premier’s allowance, its earnings would decrease.  In addition,
regulatory agencies review Premier’s allowance for loan losses and may require
additions to the allowance based upon their judgment about information available
to them at the time of their examination.  A required increase in
Premier’s allowance for loan losses could reduce its earnings.





Strong
Competition Within the Company’s Market Area May Limit
Profitability




The Company faces significant
competition both in attracting deposits and in the origination of loans, as
described under the heading “Business — Competition.” Mortgage bankers,
commercial banks, credit unions and other savings institutions, which have
offices in the Bank’s market area have historically provided most of the
Company’s competition for deposits; however, the Company also competes with
financial institutions that operate through Internet banking operations
throughout the continental United States. In addition, and particularly in times
of high interest rates, the Company faces additional and significant competition
for funds from money market and mutual funds, securities firms, commercial
banks, credit unions and other savings institutions located in the same
communities and those that operate through Internet banking operations
throughout the continental United States. Many competitors have substantially
greater financial and other resources than the Company. Moreover, credit unions
do not pay federal or state income taxes and are subject to fewer regulatory
constraints than community banks and as a result, they may enjoy a competitive
advantage over the Company. The Banks compete for loans principally on the basis
of the interest rates and loan fees they charge, the types of loans they
originate and the quality of services they provide to borrowers. This advantage
places significant competitive pressure on the prices of loans and
deposits.





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FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Loss
of Large Checking and Money Market Deposit Customers Could Increase Cost of
Funds and Have a Negative Effect on Results of Operations




The Company has a number of large
deposit customers that maintain balances in checking, money market and
repurchase agreement accounts at the Affiliate Banks. The ability to attract
these types of deposits has a positive effect on the Company’s net interest
margin as they provide a relatively low cost of funds to the Company compared to
certificates of deposits or advances. If these depositors were to withdraw these
funds and the Affiliate Banks were not able to replace them with similar types
of deposits, the cost of funds would increase and the Company’s results of
operation would be negatively impacted.





Claims
and Litigation Pertaining to Fiduciary Responsibility




From time to time, customers make
claims and take legal action pertaining to the Company’s and Affiliate Banks’
performance of their fiduciary responsibilities. If such claims and legal
actions are not resolved in a manner favorable to the Banks they may result in
financial liability and/or adversely affect the market perception of the Banks
and their products and services as well as impact customer demand for those
products and services. Any financial liability or reputation damage could have a
material adverse effect on the Company’s business, which, in turn, could have a
material adverse effect on its financial condition and results of
operations.





Unauthorized
Disclosure of Sensitive or Confidential Customer Information Could Severely Harm
Our Business.




In the normal course of business, the
Banks collects, processes and retains sensitive and confidential customer
information to both open deposit accounts and determine whether to approve a
customer’s request for a loan. Premier also relies upon a variety of computing
platforms and networks over the internet for the purposes of data processing,
communication and information exchange, including a variety of services provided
by third-party vendors.  Despite the security measures in place,
Premier’s facilities and systems, and those of the Company’s third-party service
providers, may be vulnerable to security breaches, acts of vandalism, computer
viruses, misplaced or lost data, programming and/or human errors or other
similar events. If information security is breached, information can be lost or
misappropriated, resulting in financial loss or costs to Premier or damages to
others. Any security breach involving the misappropriation, loss or other
unauthorized disclosure of confidential customer information, whether by Premier
or by its vendors, could severely damage the Company’s reputation, expose it to
the risks of litigation and liability or disrupt the business operations of the
Company which in turn, could have a material adverse effect on its financial
condition and results of operations.











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FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Inability
to Hire and Retain Qualified Employees




The Company’s performance is largely
dependent on the talents and efforts of highly skilled individuals and their
ability to attract and retain customer relationships in a community bank
environment. There is intense competition in the financial services industry for
qualified employees. In addition, the Company faces increasing competition with
businesses outside the financial services industry for the most highly skilled
individuals. The Company’s business could be adversely affected if it were
unable to retain and motivate its existing key employees and management
team.  Furthermore, the Company’s success may be impacted if it were
unable to recruit replacement management and key employees in a reasonable
amount of time.





Future
Issuances of Common Shares or Other Securities May Dilute the Value of
Outstanding Common Shares, Which May Also Adversely Affect their Market
Price




In many situations, Premier’s Board of
Directors has the authority, without any vote of its shareholders, to issue
shares of authorized but unissued securities, including Common Shares authorized
and unissued under the Company’s stock option plans and shares of the Company’s
preferred stock. In the future, Premier may issue additional securities, through
public or private offerings, in order to raise additional capital, complete
acquisitions, or compensate key employees. Any such issuance would dilute the
percentage of ownership interest of existing shareholders and may dilute the per
share value of the Common Shares.





Integration
of Recent and Pending Acquisitions May Be More Difficult Than
Anticipated




The success of the Company’s
acquisitions of Citizens First and Traders Bank and the planned acquisition of
Abigail Adams will depend on a number of factors, including (but not limited to)
Premier’s ability to:





•
            timely
      and successfully integrate the operations of Premier and each of the
      acquisitions;•
            maintain
      the existing relationships with the depositors of Citizens First and/or
      Traders and/or Abigail Adams to minimize the withdrawal of deposits
      subsequent to the merger(s);•
            maintain
      and enhance the existing relationships with the borrowers of Citizens
      First and/or Traders and/or Abigail Adams to limit potential losses from
      loans made by the them;•
            control
      the incremental non-interest expense of the integrated operations to
      maintain overall operating efficiencies;•
            retain
      and attract qualified personnel at Citizens First and/or Traders and/or
      Abigail Adams; and•
            compete
      effectively in the communities served by Citizens First, Traders and
      Abigail Adams and in nearby
communities.





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FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Item 1B.  Unresolved Staff
Comments





None.





Item 2.  Properties




The Company leases its principal
executive offices located in Huntington, West Virginia. The Company also owns
property located at 104 Jefferson Street, Brooksville, Kentucky, which serves as
a branch for Citizen's Deposit Bank. Except as noted, each of the Banks owns the
real property and improvements on which their banking activities are
conducted.




Citizens Deposit Bank & Trust, in
addition to its main office at 400 Second Street in Vanceburg, Kentucky, has
four branch offices in Lewis County, Kentucky, (including one leased facility),
one leased branch office in Mason County, Kentucky, one branch located on
Highway 10 in Germantown, Kentucky, and one branch located in Bracken County,
Kentucky. Farmers Deposit Bank, in addition to its main office at 5230 South
Main Street in Eminence, Kentucky, has one branches in Henry County, Kentucky
and closed a second branch in Henry County effective January 31, 2008. Ohio
River Bank, in addition to its main office at 221 Railroad Street in Ironton,
Ohio, has two branches, one leased facility in Lawrence County, Ohio and one in
Scioto County, Ohio. First Central Bank, in addition to its main office at 2
South Main Street in Philippi, West Virginia, has a branch located in
Buckhannon, West Virginia and a leased branch office located in Upshur County,
West Virginia. Boone County Bank, in addition to its main office at 300 State
Street, Madison, West Virginia, has one leased branch located in Lincoln County,
West Virginia and two other branches, one each located in Boone and Logan
Counties, West Virginia.  Traders Bank, Inc., in addition to its main
office at 601 Washington Street, Ravenswood, West Virginia, has two other branch
locations in Jackson County, two branch locations in Roane County, and one
location in Wood County, West Virginia.





Item 3.  Legal Proceedings




The Banks are respectively parties to
legal actions that are ordinary routine litigation incidental to a commercial
banking business. In management's opinion, the outcome of these matters,
individually or in the aggregate, will not have a material adverse impact on the
results of operations or financial position of the Company.








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




There were no matters submitted to a
vote of security holders, through solicitation of proxies or otherwise during
the fourth quarter of the fiscal year covered by this report.


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FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








PART
II





Item 5.  Market for Registrant's Common
Equity, Related Stockholder Matters and


Issuer
Purchase of Equity Securities




The Company's common stock is listed on
the NASDAQ Global Market System under the symbol PFBI. At December 31, 2008, the
Company had approximately 938 record holders of its common shares.




The following table sets forth on a
quarterly basis cash dividends paid and the range of high and low sales prices
on a per share basis during the quarters indicated.





Cash
      Dividends
            
            
            Sales
      PricePaid
            
            
            High
            
            
            Low2007First Quarter
            
            $
            0.10
            
            
            $
            16.49
            
            
            $
            13.36Second Quarter
            
            
            0.10
            
            
            
            16.50
            
            
            
            15.03Third Quarter
            
            
            0.10
            
            
            
            16.45
            
            
            
            13.23Fourth Quarter
            
            
            0.10
            
            
            
            14.77
            
            
            
            12.100.402008First Quarter
            
            $
            0.10
            
            
            $
            13.59
            
            
            $
            11.01Second Quarter
            
            
            0.11
            
            
            
            13.15
            
            
            
            10.05Third Quarter
            
            
            0.11
            
            
            
            11.63
            
            
            
            8.50Fourth Quarter
            
            
            0.11
            
            
            
            9.80
            
            
            
            5.980.432009First Quarter (through March 15,
      2009)
            
            $
            0.11
            
            
            $
            9.00
            
            
            $
            4.00







The payment of dividends by the Company
depends upon the ability of the Banks to declare and pay dividends to the
Company because the principal source of the Company's revenue will be dividends
paid by the Banks. At December 31, 2008 approximately $2.4 million was available
for payment as dividends from the Banks to the Company without the need for
regulatory approval. In considering the payment of dividends, the Board of
Directors will take into account the Company's financial condition, results of
operations, tax considerations, costs of expansion, industry standards, economic
conditions and need for funds, as well as governmental policies and regulations
applicable to the Company and the Banks. See "REGULATORY MATTERS - Capital
Requirements" for discussion on capital guidelines.





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FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Stock
Performance Graph




The following Stock Performance Graph
and related information shall not be deemed “soliciting material” or to be
“filed” with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933 or Securities Exchange Act of 1934, each as amended, except to the extent
that Premier specifically incorporates it by reference into such
filing.




The following graph shows a comparison
of cumulative total stockholder return on the Common Stock since December 31,
2003 with the cumulative total returns of both a broad equity market index and a
published industry index.  The broad equity market index chosen was
the Russell 3000 and the published industry index chosen was the SNL ($500M-$1B)
Bank Asset-Size Index.  The graph reflects historical performance
only, which is not indicative of possible future performance of the Common
Stock.





Premier
Financial Bancorp, Inc.











Period
      EndingIndex
            
            
            12/31/03
            
            
            12/31/04
            
            
            12/31/05
            
            
            12/31/06
            
            
            12/31/07
            
            
            12/31/08Premier
      Financial Bancorp, Inc.
            
            
            100.00
            
            
            145.47
            
            
            188.22
            
            
            166.88
            
            
            155.81
            
            
            89.62Russell
      3000
            
            
            100.00
            
            
            111.95
            
            
            118.80
            
            
            137.47
            
            
            144.54
            
            
            90.61SNL
      $500M-$1B Bank Index
            
            
            100.00
            
            
            113.32
            
            
            118.18
            
            
            134.41
            
            
            107.71
            
            
            69.02*Source:
      SNL Financial LC, Charlottesville, VA


24
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Equity
Compensation Plan Information




The following table gives information
about the Company’s common stock that may be issued upon the exercise of
options, warrants and rights under its equity compensation plan, the 2002 Stock
Option Plan, as of December 31, 2008.





Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              (a)
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
              (b)
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (Excluding securities reflected in column
      (a))
              (c)Equity
      compensation plans approved by shareholders2002 Stock Option
      Plan
            
            
            181,916
            
            
            
            12.47
            
            
            
            312,415Equity
      compensation plans not approved by
      shareholdersNoneTotal
            
            
            181,916
            
            
            $
            12.47
            
            
            
            312,415





25
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Item 6.  Selected Financial
Data




The following table presents
consolidated selected financial data for the Company. It does not purport to be
complete and is qualified in its entirety by more detailed financial information
and the audited consolidated financial statements contained elsewhere in this
annual report. The data presented below reflects separately the impact of
discontinued operations as more fully described in Item 1 – “The Company”.





(Dollars
      in thousands, except per share amounts)
            
            At
      or for the Year Ended December 312008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004EarningsNet interest
    income
            
            $
            26,035
            
            
            $
            22,296
            
            
            $
            21,395
            
            
            $
            19,852
            
            
            $
            18,064Provision for loan
      losses
            
            
            147
            
            
            
            (78
            )
            
            
            (1,161
            )
            
            
            4
            
            
            
            1,026Non-interest
    income
            
            
            5,291
            
            
            
            4,623
            
            
            
            4,165
            
            
            
            3,920
            
            
            
            3,606Non-interest
      expense
            
            
            19,894
            
            
            
            16,408
            
            
            
            16,937
            
            
            
            17,305
            
            
            
            17,782Income taxes
      (benefit)
            
            
            3,749
            
            
            
            3,470
            
            
            
            3,283
            
            
            
            2,029
            
            
            
            899Income (loss) fromcontinuing
      operations
            
            
            7,536
            
            
            
            7,119
            
            
            
            6,501
            
            
            
            4,434
            
            
            
            1,963Income (loss) fromdiscontinued
      operations (1)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,734Net income
    (loss)
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501
            
            
            $
            4,434
            
            
            $
            6,697Financial
      PositionTotal assets
            
            $
            724,465
            
            
            $
            549,255
            
            
            $
            535,452
            
            
            $
            528,324
            
            
            $
            537,255Loans, net of unearned
      income
            
            
            467,111
            
            
            
            346,570
            
            
            
            343,797
            
            
            
            328,717
            
            
            
            324,937Allowance for loan
      losses
            
            
            8,544
            
            
            
            6,497
            
            
            
            6,661
            
            
            
            7,892
            
            
            
            9,384Goodwill and other
      intangibles
            
            
            29,974
            
            
            
            15,816
            
            
            
            15,816
            
            
            
            15,816
            
            
            
            15,816Securities
            
            
            175,741
            
            
            
            124,242
            
            
            
            121,367
            
            
            
            137,419
            
            
            
            153,892Deposits
            
            
            589,182
            
            
            
            449,033
            
            
            
            438,950
            
            
            
            435,843
            
            
            
            437,798Other
borrowings
            
            
            41,518
            
            
            
            26,124
            
            
            
            33,091
            
            
            
            19,053
            
            
            
            20,536Subordinated
      debentures
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            15,722
            
            
            
            20,876Stockholders’
      equity
            
            
            89,422
            
            
            
            67,389
            
            
            
            61,002
            
            
            
            54,287
            
            
            
            51,029Share
      DataIncome (loss) from continuingoperations
      – basic
            
            $
            1.25
            
            
            $
            1.36
            
            
            $
            1.24
            
            
            $
            0.85
            
            
            $
            0.37Income (loss) from continuingoperations
      - diluted
            
            
            1.25
            
            
            
            1.35
            
            
            
            1.24
            
            
            
            0.84
            
            
            
            0.37Net income –
    basic
            
            
            1.25
            
            
            
            1.36
            
            
            
            1.24
            
            
            
            0.85
            
            
            
            1.28Net income -
      diluted
            
            
            1.25
            
            
            
            1.35
            
            
            
            1.24
            
            
            
            0.84
            
            
            
            1.28Book value
            
            
            13.99
            
            
            
            12.87
            
            
            
            11.65
            
            
            
            10.37
            
            
            
            9.75Tangible book
    value
            
            
            9.30
            
            
            
            9.85
            
            
            
            8.63
            
            
            
            7.35
            
            
            
            6.73Cash dividends
            
            
            0.43
            
            
            
            0.40
            
            
            
            0.10
            
            
            
            0.00
            
            
            
            0.00


26
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Item 6.  Selected Financial
Data(continued)





(Dollars
      in thousands, except per share amounts)
            
            At
      or for the Year Ended December 312008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Return on average assets (2),
      (3)
            
            
            1.12
            %
            
            
            1.31
            %
            
            
            1.21
            %
            
            
            0.82
            %
            
            
            0.36
            %Return on average equity (3)
            
            
            9.38
            %
            
            
            11.13
            %
            
            
            11.31
            %
            
            
            8.42
            %
            
            
            4.06
            %Dividend payout (3)
            
            
            34.40
            %
            
            
            29.41
            %
            
            
            8.06
            %
            
            
            0.00
            %
            
            
            0.00
            %Stockholders’ equity to totalassets
      at period-end
            
            
            12.34
            %
            
            
            12.27
            %
            
            
            11.39
            %
            
            
            10.28
            %
            
            
            9.50
            %Average stockholders’ equityto
      average total assets (2)
            
            
            11.94
            %
            
            
            11.74
            %
            
            
            10.74
            %
            
            
            9.77
            %
            
            
            8.23
            %(1) In
      the fourth quarter of 2003, the Company adopted and began to implement a
      plan to sell its subsidiary Citizens Bank (Kentucky), Inc. (“Citizens
      Bank”) located in Georgetown, Kentucky. The sale was completed on
      July 1, 2004. In accordance with Financial Accounting Standard 144,
      the financial position and results of operations of Citizens Bank are
      removed from the detail line items in the table and presented separately
      as “discontinued operations.”
              (2) Computed
      based on average assets from continuing operations
              (3) Computed
      based on income (loss) from continuing operations





27
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Item 7.  Management's Discussion and
Analysis of Financial Condition and Results


of
Operations.





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.


28
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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.


29
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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


30
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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.





31
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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,


32
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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 EQUITYfrom
      continuing operations2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004As
      a percent of average earning assetsFully 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
            
            
            
            3.41Gains on the sales of assets
      & subsidiaries
            
            
            0.01
            
            
            
            0.00
            
            
            
            0.00
            
            
            
            0.00
            
            
            
            0.02Non-interest
    income
            
            
            0.84
            
            
            
            0.91
            
            
            
            0.84
            
            
            
            0.78
            
            
            
            0.69Non-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
            
            
            
            0.39Multiplied by average earning
      assets to
              average total
    assets
            
            
            92.48
            
            
            
            93.34
            
            
            
            93.07
            
            
            
            92.84
            
            
            
            92.39Return
      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
            XReturn
      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.





33
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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
      Year2008Interest income
            
            $
            8,427
            
            
            $
            9,433
            
            
            $
            10,276
            
            
            $
            9,708
            
            
            $
            37,844Interest
expense
            
            
            2,833
            
            
            
            2,984
            
            
            
            3,099
            
            
            
            2,893
            
            
            
            11,809Net interest
    income
            
            
            5,594
            
            
            
            6,449
            
            
            
            7,177
            
            
            
            6,815
            
            
            
            26,035Provision for loan
      losses
            
            
            (135
            )
            
            
            91
            
            
            
            85
            
            
            
            106
            
            
            
            147Securities
gains
            
            
            0
            
            
            
            93
            
            
            
            0
            
            
            
            0
            
            
            
            93Net overhead
            
            
            3,056
            
            
            
            3,545
            
            
            
            4,197
            
            
            
            3,898
            
            
            
            14,696Income before income
      taxes
            
            
            2,673
            
            
            
            2,906
            
            
            
            2,895
            
            
            
            2,811
            
            
            
            11,285Net income
            
            
            1,774
            
            
            
            1,930
            
            
            
            1,930
            
            
            
            1,902
            
            
            
            7,536Basic net income per
      share
            
            
            0.34
            
            
            
            0.32
            
            
            
            0.30
            
            
            
            0.30
            
            
            
            1.25Diluted net income per
      share
            
            
            0.34
            
            
            
            0.32
            
            
            
            0.30
            
            
            
            0.30
            
            
            
            1.25Dividends paid per
      share
            
            
            0.10
            
            
            
            0.11
            
            
            
            0.11
            
            
            
            0.11
            
            
            
            0.432007Interest income
            
            $
            8,612
            
            
            $
            8,712
            
            
            $
            8,738
            
            
            $
            8,690
            
            
            $
            34,752Interest
expense
            
            
            3,101
            
            
            
            3,161
            
            
            
            3,148
            
            
            
            3,046
            
            
            
            12,456Net interest
    income
            
            
            5,511
            
            
            
            5,551
            
            
            
            5,590
            
            
            
            5,644
            
            
            
            22,296Provision for loan
      losses
            
            
            36
            
            
            
            (164
            )
            
            
            25
            
            
            
            25
            
            
            
            (78
            )Securities
gains
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Net overhead
            
            
            2,902
            
            
            
            3,022
            
            
            
            2,847
            
            
            
            3,014
            
            
            
            11,785Income before income
      taxes
            
            
            2,573
            
            
            
            2,693
            
            
            
            2,718
            
            
            
            2,605
            
            
            
            10,589Net income
            
            
            1,786
            
            
            
            1,790
            
            
            
            1,807
            
            
            
            1,736
            
            
            
            7,119Basic net income per
      share
            
            
            0.34
            
            
            
            0.34
            
            
            
            0.35
            
            
            
            0.33
            
            
            
            1.36Diluted net income per
      share
            
            
            0.34
            
            
            
            0.34
            
            
            
            0.34
            
            
            
            0.33
            
            
            
            1.35Dividends paid per
      share
            
            
            0.10
            
            
            
            0.10
            
            
            
            0.10
            
            
            
            0.10
            
            
            
            0.40





34
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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.








35
 Table of Contents


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
            
            
            2006Average
              Balance
            
            
            Interest
            
            
            Yield/
              Rate
      (2)
            
            
            Average
              Balance
            
            
            Interest
            
            
            Yield/
              Rate
      (2)
            
            
            Average
              Balance
            
            
            Interest
            
            
            Yield/
              Rate
      (2)Assets:Interest
      earning assetsU.S. Treasury and federalagency
      securities
            
            $
            102,758
            
            
            $
            4,457
            
            
            
            4.34
            %
            
            $
            82,177
            
            
            $
            3,496
            
            
            
            4.25
            %
            
            $
            95,705
            
            
            $
            3,398
            
            
            
            3.55
            %States and municipalobligations
      (1)
            
            
            6,098
            
            
            
            320
            
            
            
            5.25
            
            
            
            4,067
            
            
            
            241
            
            
            
            5.93
            
            
            
            2,342
            
            
            
            138
            
            
            
            5.89Mortgage backed
      securities
            
            
            53,069
            
            
            
            2,517
            
            
            
            4.74
            
            
            
            37,017
            
            
            
            1,799
            
            
            
            4.86
            
            
            
            33,953
            
            
            
            1,564
            
            
            
            4.61Other securities
            
            
            3,723
            
            
            
            180
            
            
            
            4.83
            
            
            
            3,307
            
            
            
            212
            
            
            
            6.41
            
            
            
            3,179
            
            
            
            182
            
            
            
            5.73Total investment
      securities
            
            
            165,648
            
            
            
            7,474
            
            
            
            4.51
            
            
            
            126,568
            
            
            
            5,748
            
            
            
            4.54
            
            
            
            135,179
            
            
            
            5,282
            
            
            
            3.91Federal funds
    sold
            
            
            37,885
            
            
            
            748
            
            
            
            1.97
            
            
            
            36,088
            
            
            
            1,829
            
            
            
            5.07
            
            
            
            24,365
            
            
            
            1,215
            
            
            
            4.99Interest-bearing depositswith
      banks
            
            
            1,614
            
            
            
            39
            
            
            
            2.42
            
            
            
            1,273
            
            
            
            56
            
            
            
            4.40
            
            
            
            486
            
            
            
            24
            
            
            
            4.94Loans, net of unearnedincome
      (3)(4)Commercial
            
            
            207,939
            
            
            
            14,044
            
            
            
            6.75
            
            
            
            169,217
            
            
            
            13,591
            
            
            
            8.03
            
            
            
            161,898
            
            
            
            12,424
            
            
            
            7.67Real estate
      mortgage
            
            
            155,324
            
            
            
            11,074
            
            
            
            7.13
            
            
            
            129,072
            
            
            
            9,474
            
            
            
            7.34
            
            
            
            129,944
            
            
            
            9,271
            
            
            
            7.13Installment
            
            
            53,802
            
            
            
            4,626
            
            
            
            8.60
            
            
            
            46,399
            
            
            
            4,244
            
            
            
            9.15
            
            
            
            46,494
            
            
            
            4,334
            
            
            
            9.32Total loans
            
            
            417,065
            
            
            
            29,744
            
            
            
            7.13
            
            
            
            344,688
            
            
            
            27,309
            
            
            
            7.92
            
            
            
            338,336
            
            
            
            26,029
            
            
            
            7.69Total interest earning
      assets
            
            
            622,212
            
            
            
            38,005
            
            
            
            6.11
            
            
            
            508,617
            
            
            
            34,942
            
            
            
            6.87
            
            
            
            498,366
            
            
            
            32,550
            
            
            
            6.53Allowance
      for loan losses
            
            
            (8,020
            )
            
            
            
            
            
            
            
            
            
            
            (6,615
            )
            
            
            
            
            
            
            
            
            
            
            (7,465
            )Cash
      and due from banks
            
            
            17,025
            
            
            
            
            
            
            
            
            
            
            
            13,853
            
            
            
            
            
            
            
            
            
            
            
            13,824Premises
      and equipment
            
            
            9,759
            
            
            
            
            
            
            
            
            
            
            
            6,378
            
            
            
            
            
            
            
            
            
            
            
            7,055Other
      assets
            
            
            31,802
            
            
            
            
            
            
            
            
            
            
            
            22,653
            
            
            
            
            
            
            
            
            
            
            
            23,688Total assets
            
            $
            672,778
            
            
            
            
            
            
            
            
            
            
            $
            544,886
            
            
            
            
            
            
            
            
            
            
            $
            535,468Liabilities
      and Equity:Interest
      bearing liabilitiesNOW 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
            
            
            
            0.61Certificates of deposit andother
      time deposits
            
            
            254,802
            
            
            
            9,159
            
            
            
            3.59
            
            
            
            202,183
            
            
            
            8,855
            
            
            
            4.38
            
            
            
            188,044
            
            
            
            6,896
            
            
            
            3.67Total interest bearingdeposits
            
            
            458,658
            
            
            
            10,676
            
            
            
            2.33
            
            
            
            375,032
            
            
            
            11,019
            
            
            
            2.94
            
            
            
            369,419
            
            
            
            8,983
            
            
            
            2.43Short-term
      borrowings
            
            
            17,325
            
            
            
            251
            
            
            
            1.45
            
            
            
            13,200
            
            
            
            321
            
            
            
            2.43
            
            
            
            9,591
            
            
            
            234
            
            
            
            2.44Other borrowings
            
            
            12,658
            
            
            
            590
            
            
            
            4.66
            
            
            
            10,047
            
            
            
            769
            
            
            
            7.65
            
            
            
            7,765
            
            
            
            574
            
            
            
            7.39FHLB advances
            
            
            4,723
            
            
            
            292
            
            
            
            6.18
            
            
            
            5,363
            
            
            
            347
            
            
            
            6.47
            
            
            
            7,815
            
            
            
            453
            
            
            
            5.80Debentures
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,887
            
            
            
            760
            
            
            
            9.64Total interest-bearingliabilities
            
            
            493,364
            
            
            
            11,809
            
            
            
            2.39
            %
            
            
            403,642
            
            
            
            12,456
            
            
            
            3.09
            %
            
            
            402,477
            
            
            
            11,004
            
            
            
            2.73
            %Non-interest
      bearing deposits
            
            
            94,155
            
            
            
            
            
            
            
            
            
            
            
            74,522
            
            
            
            
            
            
            
            
            
            
            
            72,781Other
      liabilities
            
            
            4,903
            
            
            
            
            
            
            
            
            
            
            
            2,743
            
            
            
            
            
            
            
            
            
            
            
            2,721Shareholders’
      equity
            
            
            80,356
            
            
            
            
            
            
            
            
            
            
            
            63,979
            
            
            
            
            
            
            
            
            
            
            
            57,489Total liabilities and
      equity
            
            $
            672,778
            
            
            
            
            
            
            
            
            
            
            $
            544,886
            
            
            
            
            
            
            
            
            
            
            $
            535,468Net interest earnings
      (1)
            
            
            
            
            
            $
            26,196
            
            
            
            
            
            
            
            
            
            
            $
            22,486
            
            
            
            
            
            
            
            
            
            
            $
            21,546Net interest spread
      (1)
            
            
            
            
            
            
            
            
            
            
            3.72
            %
            
            
            
            
            
            
            
            
            
            
            3.78
            %
            
            
            
            
            
            
            
            
            
            
            3.80
            %Net interest margin
      (1)
            
            
            
            
            
            
            
            
            
            
            4.21
            %
            
            
            
            
            
            
            
            
            
            
            4.42
            %
            
            
            
            
            
            
            
            
            
            
            4.32
            %(1) Taxable
      – equivalent yields are calculated assuming a 34% federal income tax
      rate
              (2) Yields
      are calculated on historical cost except for yields on marketable equity
      securities that are calculated used fair value
              (3) Includes
      loan fees, immaterial in amount, in both interest income and the
      calculation of yield on loans
              (4) Includes
      loans on non-accrual status


36
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








In 2008, average earning assets
increased by 22.3% or $113.6 million from 2007, following a 2.1% or $10.3
million increase in 2007 from 2006.  Average interest bearing
liabilities, the primary source of funds supporting the earning assets,
increased by 22.2% or $89.7 million in 2008 from 2007, which follows a 0.3% or
$1.2 million increase in 2007 over 2006.  The 2008 increase in average
earning assets was primarily the result of adding Traders and Citizens First to
the organization at the end of April, 2008.  The acquisition of these
two banks added $102.3 million in average earnings assets at $80.6 in average
interest bearing liabilities in 2008.  Excluding the acquisitions of
Traders and Citizens First, the remaining $11.3 million increase in average
earning assets in 2008 was primarily the result of a $7.5 million increase in
average total loans and an $11.1 million increase in average total investment
securities outstanding.  These increases more than offset the $6.9
million decrease in average federal funds sold, as surplus liquid funds were
used to fund loans and invest in higher yielding investment
securities.  Excluding the acquisitions of Traders and Citizens First,
average interest bearing liabilities increased by $9.1 million or 2.3% in 2008
from 2007.  This increase in average interest bearing liabilities in
2008 was the result of a $3.0 million increase in average interest bearing
deposits, a $4.1 million increase in average short-term borrowings, primarily
customer repurchase agreements, and a $2.0 million increase in other long-term
borrowings and Federal Home Loan Bank (FHLB) advances.  Furthermore,
the increase in average interest bearing deposits was complemented by a $19.6 or
26.3% increase in average non-interest bearing deposits, $17.3 million from the
acquisitions of Traders and Citizens First and $2.3 million from internal
growth.




In 2007, average earning assets
increased by 2.1% or $10.3 million from 2006, following a 0.3% or $1.8 million
decline in 2006 from 2005.  Average interest bearing liabilities, the
primary source of funds supporting the earning assets, increased by only 0.3% or
$1.2 million in 2007 from 2006, which follows a 3.1% or $12.8 million decline in
2006 from 2005.  The 2007 increase in average earnings assets was
primarily the result of a $6.4 million increase in average total loans and an
$11.7 million increase in average federal funds sold
outstanding.  These increases more than offset the $8.6 million
decline in average total investment securities, as investment funds were used to
fund loans and surplus investable proceeds were held in shorter-term but higher
yielding federal funds sold during the early part of 2007.  The slight
increase in 2007 average interest bearing liabilities was the result of a $5.6
million increase in average interest bearing deposits and a $3.6 million
increase in average short-term borrowings, primarily customer repurchase
agreements, nearly completely offset by an $8.1 million decrease in average high
cost debt and Federal Home Loan Bank (FHLB) advances.  Furthermore,
the increase in average interest bearing deposits was complemented by a $1.7
million increase in average non-interest bearing deposits.  Additional
information on each of the components of earning assets and interest bearing
liabilities is contained in the following sections of this report.





37
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Loan
Portfolio




Premier's loan portfolio is its largest
and highest yielding component of average earning assets, totaling 67.0% of
average earning assets during 2008.  Average loans increased in 2008
by $72.4 million or 21.0% over 2007 following a $6.4 million or 1.9% increase in
2007 over 2006.  The 2008 increase is largely attributable to the
acquisitions of Traders and Citizens First, which added $64.9 million in average
total loans during the year.  Excluding the acquisitions, average
total loans increased by $7.5 million or 2.2% in 2008 from 2007.  This
increase is the result of growth in Premier’s Ohio and West Virginia loan
markets.  In 2008, Premier realized a $1.9 million or 3.7% increase in
average outstanding loans in its Ohio markets, and a $5.8 million or 3.5%
increase in its West Virginia market (excluding Traders and Citizens
First).  These increases more than offset the slight $212,000 or 0.2%
decrease in average total loans in Premier’s Kentucky markets.  The
2008 increases follow a $2.6 million or 5.3% increase in average outstanding
loans in its Ohio markets, a $1.9 million or 1.5% increase in its Kentucky
markets and a $1.9 million or 1.1% increase in its West Virginia markets in
2007.




Total loans at December 31, 2008
increased by $120.5 million or 34.8% from the total at December 31,
2007.  This increase follows a $2.8 million or 0.8% increase in 2007
from total loans at December 31, 2006.  The significant increase in
2008 is primarily due to the $102.8 million of period end loans from the
acquisitions of Traders and Citizens First.  The remaining $17.8
million or 5.1% increase in 2008 was the result of significant increase in loan
demand in Premier’s markets.  The modest increase in 2007 is primarily
the result of sluggish loan demand coupled with a higher level of loan
payoffs.




Loans secured by real estate, which in
total constituted approximately 74% of Premier's loan portfolio at December 31,
2007, consist of a diverse portfolio of predominantly single family residential
loans and loans for commercial purposes where real estate is part of the
collateral, not the primary source of repayment. Residential real estate
mortgage loans generally do not exceed 80% of the value of the real property
securing the loan at the time of origination. The residential real estate
mortgage loan portfolio primarily consists of adjustable rate residential
mortgage loans. The origination of these mortgage loans can be more difficult in
a low interest rate environment where there is a significant demand for fixed
rate mortgages. Premier also originates mortgage loans to be sold in the
secondary market and recognizes non-interest income upon the sale of those
mortgages in the form of commissions and servicing release
fees.  Premier has not engaged in the solicitation of so-called
“sub-prime” or “interest only” mortgages.  Premier uses an experienced
staff underwriter to ensure the completeness of the borrowers’ loan application
and documentation and to ensure that the loans meet the standards required by
prospective loan purchasers.  Additional information regarding the
volume of mortgage loans originated and sold is contained in Premier’s
consolidated statements of cash flows presented elsewhere in this annual
report.





38
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Commercial loans are generally made to
small-to-medium size businesses located within a defined market area and
typically are secured by business assets and guarantees of the principal owners.
Additional risks of loss are associated with commercial lending, such as the
potential for adverse changes in economic conditions or the borrowers' ability
to successfully execute their business plan. Consumer loans generally are made
to individuals living in Premier's defined market area who are known to the
local bank's staff.  Consumer loans are generally made for terms of up
to seven years on a secured or unsecured basis; however longer terms may be
approved in certain circumstances and for revolving credit lines. While consumer
loans generally provide the Company with increased interest income, consumer
loans may involve a greater risk of default.








39
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








The following table presents a five
year comparison of loans by type. With the exception of those categories
included in the comparison, there are no loan concentrations which exceed 10% of
total loans. Additionally, Premier's loan portfolio contains no loans to foreign
borrowers nor does it have a material volume of highly leveraged transaction
lending.





LOAN
      SUMMARY(Dollars
      in thousands)As
      of December 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Summary
      of Loans by TypeCommercial, secured by real
      estate
            
            $
            133,742
            
            28.7
            %
            
            $
            100,278
            
            28.9
            %
            
            $
            101,786
            
            29.6
            %
            
            $
            85,989
            
            26.2
            %
            
            $
            101,567
            
            31.3
            %Commercial,
other
            
            
            61,655
            
            13.2
            
            
            
            40,438
            
            11.7
            
            
            
            43,981
            
            12.8
            
            
            
            49,362
            
            15.0
            
            
            
            40,923
            
            12.6Real estate
      construction
            
            
            26,182
            
            5.6
            
            
            
            24,035
            
            6.9
            
            
            
            11,303
            
            3.3
            
            
            
            11,070
            
            3.4
            
            
            
            5,906
            
            1.8Real estate
    mortgage
            
            
            185,536
            
            39.7
            
            
            
            133,776
            
            38.6
            
            
            
            138,795
            
            40.4
            
            
            
            134,570
            
            40.9
            
            
            
            128,243
            
            39.5Agricultural
            
            
            2,446
            
            0.5
            
            
            
            1,845
            
            0.5
            
            
            
            1,930
            
            0.5
            
            
            
            1,670
            
            0.5
            
            
            
            2,380
            
            0.7Consumer
            
            
            51,793
            
            11.1
            
            
            
            41,893
            
            12.1
            
            
            
            42,188
            
            12.3
            
            
            
            42,096
            
            12.8
            
            
            
            44,470
            
            13.7Other
            
            
            5,757
            
            1.2
            
            
            
            4,305
            
            1.3
            
            
            
            3,814
            
            1.1
            
            
            
            3,960
            
            1.2
            
            
            
            1,438
            
            0.4Total loans
            
            $
            467,111
            
            100.0
            %
            
            $
            346,570
            
            100.0
            %
            
            $
            343,797
            
            100.0
            %
            
            $
            328,717
            
            100.0
            %
            
            $
            324,927
            
            100.0
            %Non-performing
      AssetsNon-accrual
loans
            
            $
            6,943
            
            
            
            
            $
            3,157
            
            
            
            
            $
            4,698
            
            
            
            
            $
            3,751
            
            
            
            
            $
            6,847Accruing loans which are
      contractually past due 90 days or more
            
            
            625
            
            
            
            
            
            987
            
            
            
            
            
            992
            
            
            
            
            
            853
            
            
            
            
            
            739Restructured
    loans
            
            
            1,203
            
            
            
            
            
            1,489
            
            
            
            
            
            1,268
            
            
            
            
            
            1,540
            
            
            
            
            
            238Total non-performing and
      restructured loans
            
            
            8,771
            
            
            
            
            
            5,633
            
            
            
            
            
            6,958
            
            
            
            
            
            6,144
            
            
            
            
            
            7,824Other
      real estate acquired through foreclosures
            
            
            1,056
            
            
            
            
            
            174
            
            
            
            
            
            495
            
            
            
            
            
            2,049
            
            
            
            
            
            2,247Total non-performing and
      restructured loans and other real estate
            
            $
            9,827
            
            
            
            
            $
            5,807
            
            
            
            
            $
            7,453
            
            
            
            
            $
            8,193
            
            
            
            
            $
            10,071Non-performing
      and restructured loans as a % of total loans
            
            
            1.88
            %
            
            
            
            
            1.63
            %
            
            
            
            
            2.02
            %
            
            
            
            
            1.87
            %
            
            
            
            
            2.41
            %Non-performing
      and restructured loans and other real estate as a % of total
      assets
            
            
            1.36
            %
            
            
            
            
            1.06
            %
            
            
            
            
            1.39
            %
            
            
            
            
            1.55
            %
            
            
            
            
            1.87
            %Allocation
      of Allowance for Loan LossesCommercial,
other
            
            $
            1,197
            
            14.9
            %
            
            $
            689
            
            13.5
            %
            
            $
            839
            
            14.4
            %
            
            $
            1,071
            
            16.7
            %
            
            $
            1,734
            
            13.7
            %Real estate,
      construction
            
            
            283
            
            5.6
            
            
            
            237
            
            6.9
            
            
            
            117
            
            3.3
            
            
            
            134
            
            3.4
            
            
            
            83
            
            1.8Real estate,
    other
            
            
            4,564
            
            68.4
            
            
            
            3,092
            
            67.5
            
            
            
            3,395
            
            70.0
            
            
            
            3,810
            
            67.1
            
            
            
            4,276
            
            70.8Consumer
    installment
            
            
            345
            
            11.1
            
            
            
            259
            
            12.1
            
            
            
            521
            
            12.3
            
            
            
            772
            
            12.8
            
            
            
            1,255
            
            13.7Unallocated
            
            
            2,155
            
            
            
            
            
            2,220
            
            
            
            
            
            1,789
            
            
            
            
            
            2,105
            
            
            
            
            
            2,036Total
            
            $
            8,544
            
            100.0
            %
            
            $
            6,497
            
            100.0
            %
            
            $
            6,661
            
            100.0
            %
            
            $
            7,892
            
            100.0
            %
            
            $
            9,384
            
            100.0
            %





40
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








In addition to the loans presented in
the loan summary table, Premier also offers certain off-balance sheet products
such as letters of credit, revolving credit agreements, and other loan
commitments. These products are offered under the same credit standards as the
loan portfolio and are included in the risk-based capital ratios used by the
Federal Reserve to evaluate capital adequacy. Additional information on
off-balance sheet commitments is contained in Note 18 to
the consolidated financial statements.




Total non-performing assets, which
consist of past-due loans on which interest is not being accrued ("non accrual
loans"), foreclosed properties in the process of liquidation ("OREO"), loans
with restructured terms to enable a delinquent borrower to repay and accruing
loans past due 90 days or more, were $9.8 million or 1.36% of
total assets at year-end 2008.  These amounts compare to $5.8 million
of total non-performing assets or 1.06% of total assets at year-end 2007, the
lowest levels over the past five years.  The increase from end of 2007
is largely dueto
the $4.2 million
of non-performing assets at December 31, 2008 at the acquired Traders
Bank.  In addition to the non-accrual loans at TradersBank, in 2008 a $0.7 million increase in non-accrual loans was largely
offset by decreases in loans past due 90 days or more and restructured
loans.  While the ratio of non-performing assets to total assets at
the end of 2008 was higher than the end of 2007, it was still lower than any of
the previous three years presented in the table above.  The decrease
in total non-performing assets in 2007 was largely due a $1.5 million decrease
in non-accrual loansand a continued decrease in OREO
property.  These decreases offset the increase in restructured loans,
while loans past due 90 days or more and still accruing remained virtually
unchanged.  The decrease in 2006 was largely due to the $1.6 million
reduction in OREO property, which was partially offset by an increase in
non-accrual loans.  As the collection or rehabilitation of previously
delinquent loans and charge-offs of loans determined to be uncollectible
continued in 2006, these efforts were offset by other loans newly placed on
non-accrual status.  In 2007, the level of non-accrual loans declined
primarily as a result of loan payoffs as well as partial or complete loan
charge-offs.  Management believes the estimated potential losses
related to delinquent loans to be adequately provided for in the allowance for
loan losses.  These non-performing assets were included in the
analyses that supported the recording of provisions for loan loss during the
second, third and fourth quarters of 2008.  As management's efforts to
collect the non-performing assets at Traders Bank continue, matured loans are
only renewed using Premier's strengthened credit policies. Otherwise, loans may
be placed on non-accrual status and foreclosure proceedings begun to obtain and
liquidate any collateral securing the past due or matured loans. As previously
demonstrated by Premier’s history, management is committed to continuing to
reduce its level of non-performing assets and maintaining strong underwriting
standards to help maintain a lower level of non-performing assets in the future.
This effort is revealed in the decline in non-performing assets from the end of
2004 to the end of 2007, primarily related to the sale of OREO properties and
the decline in non-accrual loans and loans 90+ days past due. Premier's efforts
at its other affiliate banks in 2003 and 2004 were masked by the high level of
non-performing assets at Farmers Deposit Bank, which alone totaled $12.5 million
at December 31, 2003. At December 31, 2004, the non-performing assets at Farmers
Deposit Bank had declined to $6.8 million, leaving $3.3 million of total
non-performing assets at the other Affiliate Banks combined.  By
December 31, 2008, total non-performing assets at Farmers Deposit Bank had
declined to $1.1 million.


41
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








The Loan Summary table presents five
years of comparative non-performing asset information. Other than these loans
and the impaired loans discussed in Note 4 to the
consolidated financial statements, Premier does not have a significant volume of
loans where management has serious doubts about the borrowers’ ability to comply
with the present repayment terms of the loan.




It is Premier's policy to place loans
that are past due over 90 days on non-accrual status, unless the loans are
adequately secured and in the process of collection. Premier had no commitments
to provide additional funds on non-accrual loans at December 31, 2008. For real
estate loans, upon repossession, the balance of the loan is transferred to
"Other Real Estate Owned" (OREO) and carried at the lower of the outstanding
loan balance or the fair value of the property based on current appraisals and
other current market trends, less estimated disposal costs. If a writedown of
the OREO property is necessary at the time of foreclosure, the amount is charged
against the allowance for loan losses. A periodic review of the recorded
property value is performed in conjunction with normal loan reviews, and if
market conditions indicate that the recorded value exceeds the fair market value
less estimated disposal costs, additional writedowns of the property value are
charged directly to operations.




During 2008 Premier recorded $20,000 of
writedowns and losses on the disposition of OREO properties, net of gains, while
in 2007 Premier recognized a $20,000 net profit on the disposition of OREO
properties, net of writedowns.  During 2006 Premier realized $105,000
net profit on the disposition of OREO properties.  Although loans may
be classified as non-performing, some continue to pay interest irregularly or at
less than originally contracted terms. During 2008, approximately $56,000 of
interest was recognized on non-accrual and restructured loans, while
approximately $324,000 would have been recognized in accordance with their
original terms.




The allowance for loan losses is
maintained to absorb probable incurred losses associated with lending
activities. Actual losses are charged against the allowance ("charge-offs")
while collections on loans previously charged off ("recoveries") are added back
to the allowance. Since actual losses within a given loan portfolio are
difficult to predict, management uses a significant amount of estimation and
judgment to determine the adequacy of the allowance for loan losses. Factors
considered in determining the adequacy of the allowance include an individual
assessment of risk on certain loans and total creditor relationships, historical
charge-off experience, the type of loan, levels of non-performing and past due
loans, and an evaluation of current economic conditions. Loans are evaluated for
credit risk and assigned a risk grade. Premier's risk grading criteria are based
upon Federal Reserve guidelines and definitions. In evaluating the adequacy of
the allowance for loan losses, loans that are assigned passing grades are
grouped together and multiplied by historical charge-off percentages to
determine an estimated amount of potential losses and a corresponding amount of
allowance. Loans that are assigned marginally passing grades are grouped
together and allocated slightly higher percentages to determine the estimated
amount of potential losses due to the identification of increased risk(s). Loans
that are assigned a grade of "substandard" or "doubtful" are usually determined
to be impaired.


42
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








A loan is categorized and reported as
impaired when it is probable that the borrower will be unable to pay all of the
principal and interest amounts according to the contractual terms of the loan
agreement. In determining whether a loan is impaired, management considers such
factors as past payment history, recent economic events, current and projected
financial conditions and other relevant information that is available at the
time. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual basis for other loans. If a loan is deemed to be impaired, an
evaluation of the amount of estimated loss is performed assessing the present
value of estimated future cashflows using the loan's existing rate or assessing
the fair and realizable value of the loan collateral if repayment is expected
solely from the collateral. The estimation of loss is assigned to the impaired
loan and is used in determining the adequacy of the allowance for loan losses.
For impaired loans, this estimation of loss is reevaluated quarterly and, if
necessary, adjusted based upon the current known facts and circumstances related
to the loan and the borrower. Additional information on Premier's impaired loans
is contained in Note 4 to the consolidated financial
statements. The sum of the calculations and estimations of the risk of loss in a
given loan portfolio is compared to the recorded balance of the allowance for
loan losses. If the total allowance is deemed to be inadequate a charge to
earnings is recorded to increase the allowance. In 2008, Premier recorded
$147,000 of additional provisions for loan losses.  Conversely, should
an evaluation of the allowance result in a lower estimate of the risk of loss in
the loan portfolio and the allowance is deemed to be more than adequate, a
reversal of previous charges to earnings ("a negative provision") may be
warranted in the current period. Events that may lead to negative provisions
include greater than anticipated recoveries, a reduction in the historical loss
ratios, securing more collateral on an impaired loan during the collection
process, or receiving payment in full on an impaired loan.  All of
these events occurred in varying degrees during 2007 and 2006 and resulted in
$78,000 of negative provisions during 2007 and $1,161,000 of negative provisions
during 2006.




At December 31, 2008, the allowance for
loan losses was $8.5 million, or 1.83% of total year-end loans.  While
the total allowance increased by $2.0 million from the $6.5 million allowance at
the end of 2007, the ratio to total loans decreased slightly from the 1.87% of
total year-end loans at December 31, 2007.  The increase in the
allowance in 2008 is largely due to the $2.3 million allowance for loan losses
acquired via the purchase of Traders and Citizens First Banks.  The
slight decrease in the ratio to total year-end loans is largely the result of
lower estimates of required allocations of the allowance to impaired loans due
to a combination of collections of previously impaired loans and improved loan
to collateral values on existing impaired loans.  The allowance for
loan losses was also reduced by the $400,000 of net charge-offs in 2008 which
was only partially offset by the $147,000 of additional provisions for loan
losses during the year.  The decrease in the allowance in 2007
compared to 2006 was primarily the result of the $78,000 of negative provisions
for loan losses coupled with $86,000 of net charge-offs recorded during the
year.  The decrease in the allowance in 2006 was primarily the result
of the $1.2 million of negative provisions for loan losses recorded during the
year, as charge-offs in 2006 were nearly offset by recoveries.  In
management's opinion, the allowance for loan losses is adequate to absorb the
current estimated risk of loss in the existing loan portfolio. The summary of
the allowance for loan losses allocated by loan type is presented in the Loan
Summary Table above.


43
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








The following table provides a detailed
history of the allowance for loan losses, illustrating charge-offs and
recoveries by loan type, and the annual provision for loan losses over the past
five years. In 2008, due to the deterioration in the national economy and its
impact on the local economy in its markets, Premier experienced increases in
past due loans and non-performing assets.  As such, management’s
estimate of the current estimated risk of loss in the existing loan portfolio
began to increase in the second quarter of 2008 and provisions for
loan





SUMMARY
      OF LOAN LOSS EXPERIENCE(Dollars
      in thousands)For
      the Year Ended December 312008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Allowance
      for loan losses,beginning
      of period
            
            $
            6,497
            
            
            $
            6,661
            
            
            $
            7,892
            
            
            $
            9,384
            
            
            $
            14,300Amounts
      charged off:Commercial, financial and
      agricultural loans
            
            
            547
            
            
            
            83
            
            
            
            154
            
            
            
            736
            
            
            
            1,520Real estate construction
      loans
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            5Real estate loans –
      other
            
            
            369
            
            
            
            239
            
            
            
            863
            
            
            
            549
            
            
            
            2,413Consumer installment
      loans
            
            
            316
            
            
            
            436
            
            
            
            393
            
            
            
            930
            
            
            
            3,054Total charge-offs
            
            
            1,232
            
            
            
            758
            
            
            
            1,410
            
            
            
            2,215
            
            
            
            6,992Recoveries
      on amounts previously charged-off:Commercial, financial and
      agricultural loans
            
            
            113
            
            
            
            66
            
            
            
            266
            
            
            
            91
            
            
            
            264Real estate construction
      loans
            
            
            33
            
            
            
            14
            
            
            
            8
            
            
            
            1
            
            
            
            1Real estate loans –
      other
            
            
            459
            
            
            
            302
            
            
            
            340
            
            
            
            84
            
            
            
            87Consumer installment
      loans
            
            
            227
            
            
            
            290
            
            
            
            726
            
            
            
            543
            
            
            
            698Total recoveries
            
            
            832
            
            
            
            672
            
            
            
            1,340
            
            
            
            719
            
            
            
            1,050Net
      charge-offs
            
            
            400
            
            
            
            86
            
            
            
            70
            
            
            
            1,496
            
            
            
            5,942Balance
      of acquired subsidiaries
            
            
            2,300
            
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Provision
      for loan losses
            
            
            147
            
            
            
            (78
            )
            
            
            (1,161
            )
            
            
            4
            
            
            
            1,026Allowance
      for loan losses, end of period
            
            $
            8,544
            
            
            $
            6,497
            
            
            $
            6,661
            
            
            $
            7,892
            
            
            $
            9,384Average
      total loans
            
            $
            417,065
            
            
            $
            344,688
            
            
            $
            338,336
            
            
            $
            326,615
            
            
            $
            325,610Total
      loans at year-end
            
            
            467,111
            
            
            
            346,570
            
            
            
            343,797
            
            
            
            328,717
            
            
            
            324,927As
      a percent of average loansNet charge-offs
            
            
            0.10
            %
            
            
            0.02
            %
            
            
            0.02
            %
            
            
            0.46
            %
            
            
            1.82
            %Provision for loan
      losses
            
            
            0.04
            %
            
            
            (0.02
            )%
            
            
            (0.34
            )%
            
            
            0.00
            %
            
            
            0.32
            %Allowance for loan
      losses
            
            
            2.05
            %
            
            
            1.88
            %
            
            
            1.97
            %
            
            
            2.42
            %
            
            
            2.88
            %As
      a percent of total loans at year-endAllowance for loan
      losses
            
            
            1.83
            %
            
            
            1.87
            %
            
            
            1.94
            %
            
            
            2.40
            %
            
            
            2.89
            %As
      a multiple of net charge-offsAllowance for loan
      losses
            
            
            21.36
            X
            
            
            75.55
            X
            
            
            95.16
            X
            
            
            5.28
            X
            
            
            1.58
            XIncome before tax and provision
      for loan losses
            
            
            28.66
            X
            
            
            122.22
            X
            
            
            123.19
            X
            
            
            4.32
            X
            
            
            0.65
            X


44
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








losses
were charged to earnings in the second, third and fourth quarters which more
than offset a negative provision for losses in the first quarter.  In
2007, a negative provision was recorded during the second quarter which exceeded
the quarterly provisions recorded during the other three quarters of the
year.  In 2006, negative provisions were recorded in each of the four
quarters of the year.  The negative provisions were recorded primarily
as result of realized collections of previously impaired loans whereby estimated
losses were not realized as previously estimated and assigned to the
loan.  In addition, Premier has been successful in recovering some of
its previously charged-off loans.  These positive events as well as
the ongoing reduction in Premier’s historical loss ratios resulted in a lower
estimate of the risk of loss in the loan portfolio and, thus, negative
provisions were warranted.  The negative provisions for loan losses
totaled $78,000 in 2007 and $1,161,000 in 2006.  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.  Premier continually evaluates the adequacy of its
allowance for loan losses, and changes in the provision are based on the
estimated probable incurred losses in the loan portfolio.




Net charge-offs in 2008 totaled
$400,000, as $1,232,000 of loans charged–off were partially offset by $832,000
of recoveries of loans previously charged-off.  Net charge-offs in
2007 totaled $86,000, as $758,000 of loans charged-off were nearly offset by
$672,000 of recoveries of loans previously charged-off.  Net
charge-offs in 2006 decreased to just $70,000, as $1,340,000 of recoveries
nearly offset $1,410,000 of charge-offs recorded during the year.  In
2008, Farmers Deposit Bank recorded $42,000 of net recoveries and provided over
32% of the Company’s total recoveries for 2008.  In 2007, Farmers
Deposit Bank recorded $296,000 of net recoveries and provided over 70% of the
Company’s total recoveries for 2007.  In 2006, Farmers Deposit Bank
recorded $249,000 of net recoveries and provided nearly 70% of the Company’s
total recoveries for 2006.  These recoveries are primarily the result
of continued collection efforts of the significant number and amount of loans
charged-off at Farmers Deposit Bank in 2003 through
2005.  Approximately $641,000, or 43% of the 2005 net charge-offs and
$4.8 million, or 81% of the Premier’s 2004 net charge-offs were at Farmers
Deposit Bank.  The level of future recoveries is likely to decrease as
the level of past charge-offs has decreased.




In 2008, total charge-offs increased
for the first time in the previous four years, but still constituted a
relatively low 0.10% of average total loans.  In 2008, charge-offs on
commercial and real estate loans increased while consumer loan charge-offs
decreased to their lowest dollar volume in five years.  In 2007,
charge-offs on consumer installment loans increased by $43,000 or
10.9%.  However, the increase was more than offset by decreases in the
level of charge-offs of commercial loans and loans secured by real
estate.  While total charge-offs decreased in 2006, the level of loans
secured by real estate that were charged-off increased by $314,000 or 57.2% as
collection efforts on a few real estate secured borrowers came to their ultimate
conclusion.  Although management believes it has identified the
significant remaining credit risk in the loan portfolio, additional charge-offs
may be recorded in the coming months due to the level of non-performing loans
and the resolution of collection efforts on those loans. Premier continues to
make


45
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








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.  Premier continues to monitor and evaluate the impact that
national housing market price declines may have on its local markets and
collateral valuations as management evaluates the adequacy of the allowance for
loan losses.  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. These factors are considered in
determining the adequacy of the allowance for loan losses, which at December 31,
2008 was 1.83% of total loans outstanding and 97% of non-performing
loans.




The following table presents the
maturity distribution and interest sensitivity of selected loan categories at
December 31, 2008. Maturities are based upon contractual terms.





LOAN
      MATURITIES and INTEREST SENSITIVITYDecember
      31, 2008(Dollars
      in thousands)Projected
      Maturities*One
      Year or Less
            
            
            One
      Through Five Years
            
            
            Over
              Five
      Years
            
            
            TotalCommercial,
      secured by real estate
            
            $
            39,238
            
            
            $
            67,862
            
            
            $
            26,642
            
            
            $
            133,742Commercial,
      other
            
            
            35,927
            
            
            
            21,247
            
            
            
            4,481
            
            
            
            61,655Real
      estate construction
            
            
            16,925
            
            
            
            5,099
            
            
            
            4,158
            
            
            
            26,182Agricultural
            
            
            1,148
            
            
            
            1,237
            
            
            
            61
            
            
            
            2,446Total
            
            $
            93,238
            
            
            $
            95,445
            
            
            $
            35,342
            
            
            $
            224,025Fixed
      rate loans
            
            $
            21,362
            
            
            $
            28,371
            
            
            $
            7,392
            
            
            $
            57,125Floating
      rate loans
            
            
            71,876
            
            
            
            67,074
            
            
            
            27,950
            
            
            
            166,900Total
            
            $
            93,238
            
            
            $
            95,445
            
            
            $
            35,342
            
            
            $
            224,025Fixed
      rate loans projected to mature after one year
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            35,763Floating
      rate loans projected to mature after one year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            95,024Total
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            130,187(*)
      Based on scheduled or approximate repayments





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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Investment
Portfolio and


Other
Earning Assets




Investment securities averaged $165.6
million in 2008, up $39.1 million or 30.9% from the $126.6 million averaged in
2007.  This increase follows an $8.6 million or 6.4% decrease in 2007
from the $135.2 million averaged in 2006.  The significant increase in
2008 is largely due to the $27.9 million of average investment securities from
the acquisitions of Traders and Citizens First.  The remaining $11.1
million or 8.8% increase is largely due the declining interest rate environment
during the 2008 year.  As rates began falling, investable funds held
in federal funds sold were used to purchase high quality investment securities
to achieve a greater yield over a longer period of maturity.  Yields
on federal funds sold rise and fall in direct correlation with interest rate
changes made by the Federal Reserve Board in establishing national economic
policy.  Investment security yields are based on a number of pricing
factors including but not limited to coupon rate, time to maturity and issuer
credit quality.  Generally, in 2008 investment security yields were
higher than the yield that could be earned on federal funds
sold.  During 2007, as investments matured, not all funds were
reinvested in the investment portfolio.  Some funds were used to
satisfy loan growth, deposit withdrawals and debt
payments.  Furthermore, in contrast to 2008, during the first half of
2007, bond reinvestment yields were not as attractive as the yield on highly
liquid federal funds sold.  Consequently, funds from maturing
investments were less likely to be reinvested in bonds.  At December
31, 2008, the amount of investments totaled $175.7 million, up $51.5 million or
41.5% from December 31, 2007.  The significant increase in investments
is largely due to the $39.0 million of investments at December 31, 2008 from the
acquisitions of Traders and Citizens First, leaving $12.5 million of the
increase from internal growth.  This increase follows a $2.9 million
increase in 2007 from the balance at December 31, 2006.  As the
Federal Reserve Board began lowering the federal funds rate in the latter
portion of 2007 and continued to do so at various times throughout 2008, bond
yields have become more attractive than the yield on federal funds
sold.  Thus, to optimize interest income, Premier has begun increasing
the amount of funds it has invested in high-quality debt
securities.





The following table presents the
carrying values of investment securities.





FAIR
      VALUE OF SECURITIES AVAILABLE FOR SALE(Dollars
      in thousands)As
      of December 312008
            
            
            2007
            
            
            2006U.S.
      Treasury securities
            
            $
            1,544
            
            
            $
            5,574
            
            
            $
            6,401U.S.
      Agency securities
            
            
            97,105
            
            
            
            74,859
            
            
            
            76,911States
      and political subdivisions
            
            
            7,130
            
            
            
            3,816
            
            
            
            3,413Mortgage-backed
      securities from government sponsored entities
            
            
            69,962
            
            
            
            39,993
            
            
            
            34,617Corporate
      securities
            
            
            -
            
            
            
            -
            
            
            
            25Total securities
            
            $
            175,741
            
            
            $
            124,242
            
            
            $
            121,367





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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








As sources of funds (deposits, federal
funds purchased, and repurchase agreements with corporate customers) fluctuate,
excess funds are initially invested in federal funds sold and other short-term
investments. Based upon analyses of asset/liability repricing, interest rate
forecasts, and liquidity requirements, funds are periodically reinvested in
high-quality debt securities, which typically mature over a longer period of
time. At the time of purchase, management determines whether the securities will
be classified as trading, available-for-sale, or held-to-maturity. At December
31, 2008 all of Premier's investments were classified as available-for-sale and
carried on the books at fair value.





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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








As shown in the following Securities
Maturity and Yield Analysis table, the average maturity period of the securities
available-for-sale at December 31, 2008 was 4 years 10 months. The table uses a
weighted average life method to report the average maturity of mortgage-backed
securities, which includes the estimated effect of monthly payments and
prepayments. The average maturity of the investment portfolio is managed at a
level to maintain a proper matching with interest rate risk guidelines. Premier
does not have any securities classified as trading or held-to-maturity and it
has no plans to establish such classifications at the present time. Other
information regarding investment securities may be found in the following table
and in Note 3 to the consolidated financial
statements.





SECURITIES
      MATURITY AND YIELD ANALYSISDecember
      31, 2008(Dollars
      in thousands)Market
      Value
            
            
            Average
      Maturity (yrs/mos)
            
            
            Taxable
      Equivalent Yield*U.S.
      Treasury securitiesWithin one year
            
            $
            509
            
            
            
            
            
            
            4.68
            %After one but within five
      years
            
            
            1,035
            
            
            
            
            
            
            3.97Total U.S. Treasury
      Securities
            
            
            1,544
            
            
            
            0/11
            
            
            
            4.20U.S.
      Government Agencies securitiesWithin one year
            
            
            18,002
            
            
            
            
            
            
            
            4.13After one but within five
      years
            
            
            43,336
            
            
            
            
            
            
            
            4.21After five but within ten
      years
            
            
            35,767
            
            
            
            
            
            
            
            4.33Total U.S. Government Agencies
      securities
            
            $
            97,105
            
            
            
            4/3
            
            
            
            4.24States
      and political subdivisionsWithin one year
            
            
            146
            
            
            
            
            
            
            
            5.82After one but within five
      years
            
            
            2,325
            
            
            
            
            
            
            
            4.18After five but within ten
      years
            
            
            4,659
            
            
            
            
            
            
            
            5.26Total states and political
      subdivisions securities
            
            $
            7,130
            
            
            
            5/11
            
            
            
            4.92Mortgage-backed
      securities**Within one year
            
            
            269
            
            
            
            
            
            
            
            4.50After one but within five
      years
            
            
            55,519
            
            
            
            
            
            
            
            4.64After five but within ten
      years
            
            
            7,600
            
            
            
            
            
            
            
            5.15Over ten years
            
            
            6,574
            
            
            
            
            
            
            
            5.29Total mortgage-backed
      securities
            
            $
            69,962
            
            
            
            5/8
            
            
            
            4.76Total
      securities available-for-sale
            
            $
            175,741
            
            
            
            4/10
            
            
            
            4.47(*)  Fully
      tax-equivalent using the rate of 34%(**)  Maturities
      for mortgage-backed securities are based on weighted average
      life


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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Premier’s average investment in federal
funds sold and other short-term investments increased by 4.9% in
2008.  This follows a 48.1% increase in 2007.  Averaging
$37.9 million in 2008, federal funds sold and other short-term investments
increased $1.8 million from the $36.1 million averaged in 2007.  The
increase in average federal funds sold in 2008 was largely due to the
acquisitions of Traders and Citizens First which added $8.6 million in average
federal funds sold during the year.  This increase more than offset
the $6.9 million or 19.0% decrease in average federal funds sold of Premier’s
other affiliate banks.  This decrease was the result of using some of
the available federal funds sold to fund loans and purchase higher yielding
investment securities.  As shown in the Consolidated Average Balance
Sheets and Net Interest Income Analysis above, on average, the yield on federal
funds sold dropped to 1.97% in 2008, significantly less than the 4.51% average
yield on total investment securities in 2008.  In contrast, during the
latter part of 2006 and first part of 2007, bond yields were not as attractive
as the yield on highly liquid federal funds sold and funds from maturing
investments were less likely to be invested in bonds.  Thus, average
federal funds sold increased by $11.8 million or 48.1% in 2007 from the $24.4
million averaged in 2006.  As shown in the Consolidated Average
Balance Sheets and Net Interest Income Analysis above, on average, federal funds
sold yielded 5.07% in 2007 and 4.99% in 2006.  In each year, this
yield was higher than the yield earned on U.S. Treasury and Agency securities as
well as mortgage backed securities.  Fluctuations in federal funds
sold and other short-term investments reflect management's goal to maximize
asset yields while maintaining proper asset/liability structure, as discussed in
greater detail above and in other sections of this report.




Funding
Sources




In response to the Federal Reserve
policy to reduce market interest rates by lowering the target federal funds
rate, in 2008 Premier began cutting its rates paid on its interest bearing
deposits.  This change follows a three-year period during which
Premier was raising the rates paid on its interest bearing deposits in response
to the increase in market interest rates.  As a result, the average
rate paid on interest bearing liabilities decreased to 2.39% in 2007, down from
the 3.09% paid in 2007, and the 2.73% paid in 2006.  The 70 basis
point decrease in 2008 was primarily the result of a 79 basis point decrease in
the average rate paid on certificates of deposit and other time deposits, which
made up 51.6% of the total average interest bearing liabilities in
2008.  Other rate decreases on deposits in 2008 include a 66 basis
point decrease on NOW and money market accounts and a 15 basis point decrease in
savings deposits.  Likewise, in 2008 Premier decreased the rate paid
on its short-term borrowings, primarily repurchase agreements with deposit
customers, 98 basis points.  Also in response to the decrease in
market interest rates initiated by the Federal Reserve, the rate paid on
Premier’s long-term borrowings decreased as a result of the floating rate terms
of the borrowings.  In 2008, the average rate paid on other borrowings
decreased 299 basis points to 4.66%.  The Company’s FHLB advances are
fixed rate debt and thus decreased only as a result of payments and maturities
of higher rate advances.





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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








The 36 basis point increase in the
average rate paid on deposits in 2007 was primarily the result of a 71 basis
point increase in the average rate paid on certificates of deposit and other
time deposits, which made up 50.1% of the total average interest bearing
liabilities in 2007.  During 2007, Premier was able to offset some of
the increase in rates paid on deposits by long-term debt refinancing actions
taken in 2006 and prepaying approximately $2.1 million of amortizing FHLB
advances in the first quarter of 2007.  Also in 2006, Premier
refinanced the remaining $15.5 million of its 9.75% Trust Preferred Securities
with variable rate bank borrowings as discussed in more detail
below.  Due to alternative sources of investment and an ever
increasing sophistication of customers in funds management techniques to
maximize return on their money, competition for funds has become more
intense.  Other financial institutions that compete in local markets
with Premier that have a need to increase liquidity offer special above market
rate deposit products to attract additional funds.  Premier's banks
periodically offer special rate products to retain their deposit base or attract
additional deposits.




Premier’s deposits, on average,
increased by $103.3 million or 23.0% in 2008 following a $7.4 million or 1.7%
increase in 2007 from 2006 average deposits.  The increase in 2008
average deposits was largely due to the $97.9 million of average deposits from
the acquisitions of Traders and Citizens First.  The remaining $5.3
million or 1.2% increase in average deposits was largely due to a $2.3 million
or 3.1% increase in non-interest bearing deposits, a $1.5 million or 2.9%
increase in savings deposits and a $1.2 million increase in money market and
other interest bearing transaction oriented deposits.  The increase in
2007 average deposits was from a combination of a $14.1 million increase in
average certificates of deposit and other time deposits plus a $1.7 million
increase in non-interest bearing deposits.  These increases more than
offset a $9.2 million decrease in average NOW and money market
deposits.  During 2007, as rates paid on certificates of deposits
increased, particularly short-term certificates of deposit, customers
reallocated their funds from lower yielding transactional deposits such as NOW
and money market accounts to these short-term certificates of
deposit.





In addition,
some public fund and tax-exempt organization deposits were reestablished as
repurchase agreements in 2006 and again in 2008.  Average repurchase
agreements increased by $4.0
million or 30.5% in 2008 following a $3.6 million or 37.5% increase in 2007 over
2006 average repurchase agreements.  Also, in both 2007 and 2008, the
growth in deposits has been dampened by a decline in deposits at Farmers Deposit
Bank.  In 2007, average deposits at Farmers Deposit Bank declined by
$3.3 million, while in Premier’s other markets, deposits, on average, increased
by $10.8 million or 2.8%.  In 2008, average deposits at Farmers
Deposit Bank declined by $1.7 million, while in Premier other markets, deposits,
on average, increased by $7.0 million or 1.8% in 2008, excluding the
acquisitions of Traders and Citizens First. Farmers Deposit Bank faces stiff
competition for funds from local competitors who have paid higher than market
rates for the certificates of deposit.




In 2008, average non-interest bearing
deposits continued to increase, surpassing 2007 average non-interest bearing
deposits by $19.6 million or 26.3%.  The increase in 2008 includes the
$17.3 million of average non-interest bearing deposits from the acquisitions of
Traders and Citizens First.  Excluding these deposits, average
non-interest bearing deposits still increased by


51
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








$2.3
million or 3.1% in 2008.  This follows a $1.7 million or 2.4% increase
in average non-interest bearing deposits in 2007 when compared to
2006.  Since no interest is paid on these deposits, an increase in
non-interest bearing deposits helps to increase Premier's net interest margin
and its profitability. Non-interest bearing deposits are more susceptible to
withdrawal and therefore may provide challenges to maintaining adequate
liquidity. (See the additional discussion on liquidity
below.)  However, Premier’s approach to community banking and friendly
customer service has resulted in increases in average non-interest bearing
deposits in each of the past six years.




In 2008, average interest bearing
deposits increased by $83.6 million or 22.3%.  The increase was
largely due to the $80.6 million of average interest bearing deposits from the
acquisitions of Traders and Citizens First.  The remaining $3.0
million increase in average interest-bearing deposits in 2008 was primarily from
an increase in average savings deposits and average money market and other
transaction oriented deposits.  Due to the significant decrease in
rates paid on certificates of deposit during 2008, customers are taking a
“wait-and-see” approach and are not willing to commit their funds for a
longer-term low-yielding certificate of deposit.  Instead the trend
has been to keep their deposits readily accessible by placing the funds in
savings accounts and transaction oriented interest-bearing
accounts.  In 2007, average interest bearing deposits increased by
$5.6 million or 1.5%.  The increase was primarily from an increase in
average certificates of deposit and other time deposits as customers sought out
higher yielding short-term “special “rates.  While offering some
“special” certificate of deposit rates, in 2007 Premier continued to focus on
building its base of customer relationships by offering more convenient
electronic banking products to its non-interest bearing deposit
customers.  Premier did realize a shift in its interest bearing
deposits from lower cost interest bearing transaction accounts to certificates
of deposit as customers moved their funds to take advantage of the rising
interest rates paid on these certificates.  The result was a 51 basis
point increase in the average rate paid on interest bearing deposits in
2007.  However, Premier also realized an increase in its average
savings deposits in 2007.





The following table provides
information on the maturities of time deposits of $100,000 or more at December
31, 2008.





MATURITY
      OF TIME DEPOSITS $100,000 OR MOREDecember
      31, 2008(Dollars
      in thousands)Maturing
      3 months or less
            
            $
            12,493Maturing
      over 3 months
            
            
            13,109Maturing
      over 6 months
            
            
            21,739Maturing
      over 12 months
            
            
            23,804Total
            
            $
            71,145





52
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Other funding sources for Premier
include short and long-term borrowings. Premier's short-term borrowings
primarily consist of securities sold under agreements to repurchase with
commercial, public entity and tax exempt organization
customers.  These are short-term non-FDIC insured deposit-like
products that are secured by the pledging of investment securities in Premier’s
investment portfolio or by purchasing insurance through the Federal Home Loan
Bank (FHLB).  Also included in short-term borrowings are federal funds
purchased from other banks and overnight borrowings from the FHLB or the Federal
Reserve Bank (FRB) discount window. These short-term borrowings fluctuate
depending on near term funding needs and as part of Premier's management of its
asset/liability mix.  In 2008, short-term borrowings averaged $17.3
million, up $4.1 million or 31.3% from the average in 2007.  In 2007,
short-term borrowings averaged $13.2 million, up $3.6 million or 37.6% from the
average in 2006.  The increase in both years is largely due to an
increase in repurchase agreements which were newly offered by two of Premier’s
subsidiary banks late in 2006.




Long-term borrowings consist of FHLB
borrowings by Premier's banks, other borrowings by the parent holding company
and, prior to 2007, debt issued in the form of subordinated debentures to an
unconsolidated trust subsidiary.  FHLB advances, on average, declined
by 11.9% or $640,000 in 2008, following a 31.4% or $2.5 million decrease in
2007.  The decrease in 2008 is largely due to regularly scheduled
principal payments plus additional penalty free prepayments as permitted to be
made by the FHLB.  The decrease in 2007 was the result of a first
quarter 2007 prepayment of $2.1 million of amortizing FHLB advances in an effort
to reduce Premier’s cost of funds rate.  These advances had
contractual fixed rates between 5.30% and 5.60%, averaging 5.46%.  In
addition to the prepayment in the first quarter of 2007, Premier made all of its
scheduled principal payments in 2007 and took advantage of penalty free
prepayment opportunities as they became available. Premier uses fixed rate FHLB
advances from time-to-time to fund certain residential and commercial loans as
well to maximize investment opportunities as part of its interest rate risk
management.  At December 31, 2008, FHLB advances totaled $7.6 million
which included $3.0 million borrowed on an overnight basis.  The
remaining $4.6 million of amortizing FHLB advances had repayment schedules from
seventeen to forty-two months with $4.0 million maturing in 2010.




In 2006,
Premier refinanced the remaining $15.7 million of its 9.75% Junior Subordinated
Deferrable Interest Debentures ("Subordinated Debentures") that were due in
2027. The refinancing was accomplished using two separate bank borrowings at the
parent company and $2.2 million of cash held by the parent in its subsidiary
banks.  On January 31, 2006, Premier borrowed $7.0 million from First
Guaranty Bank in Hammond, Louisiana under a promissory note bearing interest
floating daily at the “Wall Street Journal” prime rate and requiring monthly
principal payments of $50,000 until maturity on September 28,
2017.  The note is secured by a pledge of Premier’s 100% interest in
Boone County Bank.  The proceeds of this note were used to redeem $7.0
million of the Subordinated Debentures as of January 31, 2006.  On
April 30, 2008, Premier refinanced the remaining $2.6 million of this note and
borrowed an additional $9.0 million which was used to fund the cash needed to
purchase Traders.  The $11.6 million note, dated April 30, 2008, bears
interest floating daily at the “Wall Street Journal” prime rate (the “Index”)
minus 1.00% and requiring 59 monthly principal payments of $50,000 and
one


53
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








final
payment of $8.6 million due at maturity on April 30, 2013.  If the
Index is between 5.00% and 6.00%, the interest on the note will be
5.00%.  If the Index falls below 5.00%, then the interest on the note
will float with the Index.  The note is secured by a pledge of
Premier’s 100% interest in Boone County Bank (a wholly owned subsidiary) under
Commercial Pledge Agreement dated April 30, 2008.





On November
10, 2006, Premier borrowed $6.5 million from The Bankers’ Bank of Kentucky, Inc.
of Frankfort, Kentucky (“Bankers’ Bank”) under a term note bearing interest
floating daily at the “Wall Street Journal” prime rate minus 1.00% and requiring
83 monthly principal and interest payments of $100,000 and a final payment of
any balance due at maturity on November 9, 2013. The note is secured by a pledge
of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. and
Premier’s 100% interest in Farmers-Deposit Bank, Eminence,
Kentucky.  On December 22, 2008, the Company executed and delivered to
Bankers’ Bank a modification agreement whereby the interest rate would not fall
below 3.00% or exceed 6.00% for the remaining term of the Note.  The
current interest rate on the Term Note is 3.00%.  In 2008 and 2007,
Premier made all scheduled principal and interest payments on both notes as well
as limited prepayments on the borrowing from First Guaranty Bank.  For
more information on other borrowings, see Note 10 to the
consolidated financial statements.





PAYMENTS
      DUE ON CONTRACTUAL OBLIGATIONSDecember
      31, 2008(Dollars
      in thousands)Total
            
            
            Less
      than one year
            
            
            1-3
              years
            
            
            3-5
              years
            
            
            More
      than five yearsFederal
      Home Loan Bank advances
            
            $
            7,607
            
            
            $
            3,178
            
            
            $
            4,372
            
            
            $
            57
            
            
            $
            0Other
      borrowed funds
            
            
            15,560
            
            
            
            1,674
            
            
            
            3,447
            
            
            
            10,439
            
            
            
            0Operating
      lease obligations
            
            
            608
            
            
            
            157
            
            
            
            252
            
            
            
            181
            
            
            
            18Data
      and item processing contracts*
            
            
            4,587
            
            
            
            2,527
            
            
            
            2,060
            
            
            
            0
            
            
            
            0Total
            
            $
            28,362
            
            
            $
            7,536
            
            
            $
            10,131
            
            
            $
            10,677
            
            
            $
            18*
      Data and item processing contractual obligations are estimated using the
      average billing for the last three months of 2008.




On December 20, 2004, Premier entered
into a sixty-three month contract with Fiserv Solutions, Inc. (Fiserv) whereby
Fiserv will provide data processing and item processing services to Premier.
Conversions by Traders and Citizens First bank to Fiserv systems began in early
August, 2008 and were completed by the end of October, 2008. Based upon the
average billings of the last three months of 2008 the estimated payments to
Fiserv for these services will be approximately $1,845,000 per year beginning in
2009. Actual results may vary depending upon the number and type of accounts
actually processed and future customer activity.





54
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Asset/Liability Management and Market Risk




Asset/liability management is a means
of maximizing net interest income while minimizing interest rate risk by
planning and controlling the mix and maturities of interest related assets and
liabilities. Premier has established an Asset/Liability Management Committee
(ALCO) for the purpose of monitoring and managing interest rate risk and to
evaluate investment portfolio strategies. Interest rate risk is the earnings
variation that could occur due to changes in market interest rates. The Board of
Directors has established policies to monitor and limit exposure to interest
rate risk. Premier monitors its interest rate risk through the use of an
earnings simulation model developed by an independent third party to analyze net
interest income sensitivity.




The earnings simulation model uses
assumptions, maturity patterns, and reinvestment rates provided by Premier and
forecasts the effect of instantaneous movements in interest rates of both 100
(1.00%) and 200 (2.00%) basis points, but never below zero.  The most
recent earnings simulation model projects that net interest income would
increase by approximately 1.3% over the projected stable rate net interest
income if interest rates rise by 100 basis points over the next year.
Conversely, the simulation projects an approximate 1.7% decrease in net interest
income if interest rates fall by 100 basis points over the next year. Within the
same time frame, but assuming a 200 basis point movement in interest rates, the
simulation projects that net interest income would increase by 2.5% over the
projected stable rate net interest income in a rising rate scenario and would
decrease by 3.8% in a falling rate scenario. Under both the 100 and 200 basis
point simulations, the percentage changes in net interest income are within
Premier's ALCO guidelines.




The model simulation calculations of
present value have certain acceptable shortcomings. The discount rates and
prepayment assumptions utilized are based on estimated market interest rate
levels for similar loans and securities nationwide. The unique characteristics
of Premier's loans and securities may not necessarily parallel those assumed in
the model simulations, and therefore, actual results could likely result in
different discount rates, prepayment experiences and present values. The
discount rates used for deposits and borrowings are based upon available
alternative types and sources of funds which may not necessarily be indicative
of the present value of Premier's deposits and borrowings. Premier's deposits
have customer relationship advantages that are difficult to simulate. A higher
or lower interest rate environment will most likely result in different
investment and borrowing strategies by Premier which would be designed to
further mitigate any negative effects on the value of, and the net interest
earnings generated on Premier's net assets.





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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








The following table presents summary
information about the simulation model's interest rate risk measures and
results.





Year-end
              2008
            
            
            Year-end
              2007
            
            
            ALCO
      GuidelinesProjected
      1-year net interest income-100 bp change vs. base
      rate
            
            
            -1.7
            %
            
            
            -2.6
            %
            
            
            5
            %+100 bp change vs. base
      rate
            
            
            1.3
            %
            
            
            2.5
            %
            
            
            5
            %Projected
      1-year net interest income-200 bp change vs. base
      rate
            
            
            -3.8
            %
            
            
            -2.7
            %
            
            
            10
            %+200 bp change vs. base
      rate
            
            
            2.5
            %
            
            
            4.7
            %
            
            
            10
            %








Liquidity




Liquidity is the ability to satisfy
demands for deposit withdrawals, lending commitments, and other corporate needs.
Premier's liquidity is based on the stable nature of consumer core deposits held
by the banking subsidiaries. Likewise, additional liquidity is available from
holdings of investment securities and short-term investments which can be
readily converted into cash. Furthermore, Premier's banks continue to have the
ability to attract short-term sources of funds such as federal funds and
repurchase agreements.




Premier generated $10.0 million of cash
from operations in 2008, which compares to $9.4 million in 2007 and $5.4 million
in 2006.  The increase in 2008 was primarily the result of an increase
in net income and a higher amount of cash received from the sale of mortgage
loans in the secondary market.  The increase in 2007 over 2006 was
primarily the result of an increase in net income over 2006, a decrease in
negative provisions for loan losses and cash received from the sale of mortgage
loans in the secondary market.  Total cash from operations along with
proceeds from the sale and maturity of securities and the repayment of loans
were used to purchase securities, satisfy deposit withdrawals, fund new loans
and reduce outstanding debt during those years. In 2006, $5.9 million of cash
was used in investing activities primarily to fund loan growth and in 2007 $5.0
million of cash was used in investing activities, again to fund loan growth but
to also increase federal funds sold.  In 2008, $15.0 million of cash
was used in investing activities funding loan growth, purchasing participation
loans from other banks, and purchasing the Traders and Citizens First
subsidiaries.  In addition to the $10.0 million of cash from
operations in 2008, Premier generated $4.7 million in additional cash from
financing activities, primarily due to new long-term borrowings and increases in
short-term borrowings and repurchase agreements with customers.  Some
of these funds were used to satisfy deposit withdrawals, pay dividends to
shareholders and make principal payments on borrowings.  In addition
to the $9.4 million of cash from operations in 2007, Premier generated $1.0
million in additional cash from financing activities, primarily due to the
increase in deposits.  The increase in cash from deposits was also
used to satisfy the repayment of FHLB advances and other borrowed funds as well
as pay dividends to shareholders.  In 2006, Premier generated $1.4
million in additional cash from financing activities, primarily due to increases
in deposits and


56
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








repurchase
agreements.  Details on the sources and uses of cash can be found in
the Consolidated Statements of Cash Flows in the consolidated financial
statements.




At December 31, 2008, the parent
company had nearly $4.7 million in cash held with its subsidiary
banks.  This balance along with cash dividends expected to be received
from its subsidiaries is sufficient to cover the operating costs of the parent,
service its existing other debt and pay dividends to common
shareholders.  During 2008, the parent company generated $6.3 million
of cash from operations and borrowed an additional $11.6 million.  The
proceeds were used fund the $14.3 million of cash paid to acquire Citizens First
Bank and Traders Bankshares, Inc., to make $4.1 million in principal payments on
its outstanding debt and pay $2.6 million in dividends to
shareholders.  During 2007, the parent company generated $10.3 million
of cash from operations and used $5.9 million to make principal payments on its
outstanding debt and pay dividends to shareholders.  During 2006, the
parent company generated $5.1 million of cash from operations and used $4.9
million to redeem a portion of the Trust Preferred Securities outstanding, make
principal payments on its outstanding other debt and pay dividends to
shareholders.  Also during 2006, the parent company borrowed $13.5
million which was used to redeem the remainder of the Trust Preferred
Securities.  Additional information on parent company cash flows and
financial statements is contained in Note 21 to the
consolidated financial statements.





Capital
Resources




Premier’s consolidated average
equity-to-asset ratio increased to 11.94% during 2008, up from 11.74% in 2007
and 10.74% in 2006.  The ratios for all three years are considered
adequate for a company of Premier’s size.  The increase in 2008 was
largely due to the increase in equity from net income plus a general rise in the
market value of investments from a $73,000 net unrealized gain at the end of
2007 to a $1.5 million net unrealized gain at the end of 2008.  Also
supporting the average equity-to-assets ratio were the combined acquisitions of
Traders and Citizens First.  The equity issued to acquire these two
banks amounted to 11.62% of the total assets acquired which approximates
Premier’s average equity-to-asset ratio over the past three
years.  The increase in 2007 was largely due to the increase in net
income, plus a general rise in the market value of investments from an overall
unrealized loss at the end of 2006 to an overall unrealized gain at the end of
2007.  The Federal Reserve's risk-based capital guidelines and
leverage ratio measure the capital adequacy of banking institutions. The
risk-based capital guidelines weight balance sheet assets and off-balance sheet
commitments by prescribed factors relative to credit risk, thus eliminating
disincentives for holding low risk assets and requiring more capital for holding
higher risk assets.  At year-end 2008, Premier’s risk adjusted
capital-to-assets ratio was 15.3% compared to 17.3% at December 31,
2007.  Both of these ratios are well above the minimum level of 8.0%
prescribed for bank holding companies of Premier’s size.  The leverage
ratio is a measure of total tangible equity to total tangible assets, net of any
related deferred taxes as permitted.  Premier’s leverage ratio at
December 31, 2008 was 8.7% compared to 9.8% at December 31,
2007.  Both of these ratios are above the 4.0% to 5.0% ratios
recommended by the Federal Reserve.  The decrease in the 2008 ratios
was primarily the result of the acquisitions of Traders and Citizens
First.  Their individual bank risk adjusted capital-to-asset ratios
and leverage


57
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








ratios
were lower than Premier’s prior to the acquisition date.  Furthermore,
the goodwill and core deposit intangible assets recorded as part of the
purchases, net of any related deferred taxes as permitted, are subtracted from
Premier’s total capital to calculate the leverage ratio.  The increase
in the 2007 ratios was primarily the result of the net income recorded in 2007,
partially offset by dividends paid to shareholders.  The net result
was an increase in shareholders’ equity.  Premier's capital ratios are
the direct result of management's desire to maintain a strong capital position.
Additional information on Premier's capital ratios and the capital ratios of its
banks may be found in Note 20 to the consolidated
financial statements.




The primary source of funds for
dividends paid by Premier is the dividends received from its subsidiary banks.
Banking regulations limit the amount of dividends that may be paid without prior
approval of the regulatory agencies. Under these regulations, the amount of
dividends that may be paid without prior approval in any calendar year is
limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to regulatory capital
requirements and additional restrictions more fully described in Note 20 to the consolidated financial statements. During
2009, Premier's banks could, without prior approval, declare and pay to Premier
dividends of approximately $2.4 million plus any 2009 net profits retained
through the date of declaration by Ohio River Bank, Boone County Bank, First
Central Bank, Traders Bank, Inc. and Citizens Deposit Bank.  In 2007,
Farmers Deposit Bank requested and received approval from its primary regulators
to pay a $2.5 million dividend in December 2007.  This amount was
substantially higher than the bank’s prior two years of reported net
income.  As such, Farmers Deposit Bank must continue to request
approval for up to two years beyond December 31, 2007 to pay any future
dividends to the parent company out of its current earnings.





Additional information on the capital
position of Premier is included in the following table.





SELECTED
      CAPITAL INFORMATION(Dollars
      in thousands)As
      of December 312008
            
            
            2007
            
            
            ChangeStockholders’
      Equity
            
            $
            89,422
            
            
            $
            67,389
            
            
            $
            22,033Disallowed amounts of goodwill
      and other intangibles
            
            
            (26,805
            )
            
            
            (15,816
            )
            
            
            (10,989
            )Other comprehensive loss
      related to pension plan
            
            
            87
            
            
            
            0
            
            
            
            87Unrealized (gain) loss on
      securities available for sale
            
            
            (1,634
            )
            
            
            (73
            )
            
            
            (1,561
            )Tier
      I capital
            
            $
            61,070
            
            
            $
            51,500
            
            
            $
            9,570Tier
      II capital adjustmentsAllowable amount of the
      allowance for loan losses
            
            
            5,486
            
            
            
            4,038Total
      capital
            
            $
            66,556
            
            
            $
            55,538Total
      risk-weighted assets
            
            $
            436,023
            
            
            $
            320,581RatiosTier I capital to risk-weighted
      assets
            
            
            14.01
            %
            
            
            16.06
            %Total capital to risk-weighted
      assets
            
            
            15.26
            %
            
            
            17.32
            %Leverage at
      year-end
            
            
            8.69
            %
            
            
            9.77
            %


58
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








INCOME
STATEMENT ANALYSIS


Net
Interest Income




Net interest income, the amount by
which interest generated from earning assets exceeds the expense associated with
funding those assets, is Premier's most significant component of
earnings.  Net interest income on a fully tax-equivalent basis was
$26.2 million in 2008, up 16.5% from the $22.5 million earned in 2007 which
follows a 4.4% increase in 2007 from 2006.  When net interest income
is presented on a fully tax-equivalent basis, interest income from tax-exempt
earning assets is increased by the amount equivalent to the federal income taxes
which would have been paid if this income were taxable at the statutory federal
tax rate of 34% for companies of Premier's size.  The increase in net
interest income in 2008 is largely due to the $4.2 million of fully
tax-equivalent net interest income from the acquisitions of Traders and Citizens
First.  The remaining Premier affiliate banks realized a $513,000 or
2.3% decrease in net interest income in 2008.  This decrease in net
interest income in 2008 is largely due to a decrease in interest income from
loans and federal funds sold partially offset by an increase in interest income
on investments.  The decrease in interest income was significantly
offset, however, by decreases in interest expense on deposits, short-term debt
and long-term debt.




As shown in the Rate Volume Analysis
table below, increases in the volume of earning assets such as loans,
investments and federal funds sold primarily due to the acquisitions of Traders
and Citizens First increased Premier’s interest income by $6.5
million.  This increase was offset by a $3.5 million decrease in
interest income on those earning assets largely due to the decline in yields
earned on the loan portfolio and federal fund sold.  Also shown in the
table below, interest expense on deposits increased by $1.3 million in 2008 due
to a higher volume of NOW and money market deposit accounts plus certificates of
deposit.  This increase in volume interest bearing deposits is largely
due to deposits from the acquisitions of Traders and Citizens
First.  Interest expense in 2008 increased further still due to higher
average volumes of short-term borrowings and other borrowings.  The
$1.8 million of additional interest expense in 2008 from the increase in the
volume of average interest bearing liabilities was more than offset by the $2.5
million decrease in interest expense due to decreases in the rates paid on
deposits, short-term borrowings and long-term borrowings.  The
combined effect was to increase net interest income by $3,710,000 for the
year.




The increase in net interest income in
2007 is largely due to an increase in interest income from loans, investments
and federal funds sold partially offset by an increase in interest expense on
deposits.  As shown in the Rate Volume Analysis table below, increases
in the yields on loans, investments, and other earnings assets increased
Premier’s interest income by $1.6 million in 2007.  This increase was
complemented by a $494,000 increase in interest income due to the higher volume
of average loans outstanding and a $594,000 increase in interest income due to
the higher volume of average federal funds sold outstanding in
2007.  Interest income was decreased by $301,000, however, due to a
lower volume of average investment securities outstanding.  Also shown
in the table below, interest expense on deposits increased by $2.0 million, $1.5
million due to higher rates paid, primarily on certificates of deposit, and
$0.5


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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








million
due to a higher volume of average certificates of deposit.  Also
increasing interest expense was the higher average volume of short-term and
other borrowings.  This interest expense increase was more than
offset, however, by the decrease in average FHLB borrowings and the repayment of
the trust preferred securities in late 2006.





RATE
      VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME(Dollars
      in thousands on a tax equivalent basis)2008
      vs 2007
            
            
            2007
      vs 2006Increase
      (decrease) due to change in
            
            
            Increase
      (decrease) due to change inVolume
            
            
            Rate
            
            
            Net
      Change
            
            
            Volume
            
            
            Rate
            
            
            Net
      ChangeInterest
      income*:Loans
            
            $
            4,643
            
            
            $
            (2,208
            )
            
            $
            2,435
            
            
            $
            494
            
            
            $
            786
            
            
            $
            1,280Investment
      securities
            
            
            1,763
            
            
            
            (37
            )
            
            
            1,726
            
            
            
            (301
            )
            
            
            767
            
            
            
            466Federal funds
    sold
            
            
            96
            
            
            
            (1,177
            )
            
            
            (1,081
            )
            
            
            594
            
            
            
            20
            
            
            
            614Deposits with
    banks
            
            
            25
            
            
            
            (42
            )
            
            
            (17
            )
            
            
            34
            
            
            
            (2
            )
            
            
            32Total interest
    income
            
            $
            6,527
            
            
            $
            (3,464
            )
            
            $
            3,063
            
            
            $
            821
            
            
            $
            1,571
            
            
            $
            2,392Interest
      expense:DepositsNOW and money
    market
            
            $
            306
            
            
            $
            (950
            )
            
            $
            (644
            )
            
            $
            (71
            )
            
            $
            85
            
            
            $
            14Savings
            
            
            (16
            )
            
            
            13
            
            
            
            (3
            )
            
            
            4
            
            
            
            59
            
            
            
            63Certificates of
      deposit
            
            
            977
            
            
            
            (673
            )
            
            
            304
            
            
            
            547
            
            
            
            1,412
            
            
            
            1,959Short-term
      borrowings
            
            
            238
            
            
            
            (308
            )
            
            
            (70
            )
            
            
            88
            
            
            
            (1
            )
            
            
            87Other
borrowings
            
            
            355
            
            
            
            (534
            )
            
            
            (179
            )
            
            
            174
            
            
            
            21
            
            
            
            195FHLB borrowings
            
            
            (40
            )
            
            
            (15
            )
            
            
            (55
            )
            
            
            (168
            )
            
            
            62
            
            
            
            (106
            )Debt
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            (380
            )
            
            
            (380
            )
            
            
            (760
            )Total interest
      expense
            
            $
            1,820
            
            
            $
            (2,467
            )
            
            $
            (647
            )
            
            $
            193
            
            
            $
            1,259
            
            
            $
            1,452Net
      interest income*
            
            $
            4,707
            
            
            $
            (997
            )
            
            $
            3,710
            
            
            $
            628
            
            
            $
            312
            
            
            $
            940(*)
      Fully taxable equivalent using the rate of 34%
              Note
      – Changes to rate/volume are allocated to both rate and volume on a
      proportional dollar basis




Although net interest income dollars
increased in 2008, Premier’s net interest margin decreased as the yield on
earning assets decreased more than the decrease in rates paid on interest
bearing liabilities.  In 2008, the yield earned on Premier’s loan
portfolio decreased 79 basis points to 7.13% while the yield on federal funds
sold decreased 310 basis points to 1.97%.  In 2008, the yield earning
on the investment portfolio only decreased by 3 basis points to
4.51%.  The net result on all earnings assets was to decrease the
yield 76 basis points to 6.11% in 2008, down from the 6.87% earned in 2007 and
the 6.53% earned in 2006.  Similarly, in 2008 Premier decreased the
average rate paid on its deposits by 61 basis points as market deposit rates
fell during the year.  The average rate paid on certificates of
deposit decreased the most at 79 basis points, while interest bearing
transaction accounts decreased on average by 66 basis points and savings
accounts decreased by 15 basis points.  Just as deposit rates fell
during 2008, the rates Premier paid on its short- and long-term borrowings also
fell.  Premier was able to lower the rates paid on its short-term
borrowings, primarily customer based repurchase agreements, by


60
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








98
basis points to 1.45%.  Due to declines in the “prime” lending rate
during 2008, the rate Premier paid on its long-term borrowings from other banks
decreased 299 basis points to 4.66%.  The overall result of decreasing
rates paid on deposits and rate decreases on short- and long-term borrowings was
to decrease the overall cost of funds by 70 basis points to 2.39%, down from
3.09% in 2007, and 2.73% in 2006.  As a result, Premier’s net interest
spread decreased by 6 basis points.  However, due the larger volume of
Premier’s interest earning assets when compared to its volume of interest
bearing liabilities, the net interest margin decreased by 21 basis points to
4.21% in 2008, down from 4.42% in 2007, and 4.32% in 2006.




In contrast to 2008, as net interest
income dollars increased in 2007, Premier’s net interest margin also
increased.  In 2007, the yield earned on investment securities
increased 63 basis points to 4.54% while the average yield on the loan portfolio
increased 23 basis points to 7.92%.  The yield on federal funds sold
increased 8 basis points to 5.07%.  The net result on all earning
assets was to increase the yield 34 basis points to 6.87% in 2007, up from the
6.53% earned in 2006 and the 5.90% earned in 2005.  Similarly, in 2007
Premier increased the average rate paid on its deposits by 51 basis points to
remain competitive with local and national markets.  The average rate
paid on certificates of deposit increased the most at 71 basis points, while
interest bearing transaction accounts increased on average by only 12 basis
points in 2007 and savings accounts by increased 11 basis
points.  While the rates paid on Premier’s short-term borrowings
remained virtually unchanged at 2.43%, the rates paid on other borrowings
increased by 26 basis points to 7.65% and the rates paid on FHLB advances
increased by 67 basis points to 6.47%.  The rates paid on other
borrowings increased as Premier refinanced its subordinated debt with floating
prime rate and below prime rate loans in 2006 resulting in significant interest
expense savings.  The rates paid on FHLB advances increased as a
result of the prepayment of certain amortizing advances at one affiliate bank
while leaving higher rate fixed maturity advances at another
bank.  The overall result of increasing rates paid on deposits and
rate decreases resulting from debt refinancing was to increase the overall cost
of funds by 36 basis points to 3.09%, up from 2.73% in 2006 and 2.30% in
2005.  As a result, Premier’s net interest spread decreased by 2 basis
points, but the net interest margin increased by 10 basis points to 4.42% in
2007, up from 4.32% in 2006. Further discussion of interest income is included
in the section of this report entitled "Balance Sheet Analysis."





Non-interest
Income and Expense




Non-interest income has been and will
continue to be an important factor for improving profitability. Recognizing this
importance, management continues to evaluate areas where non-interest income can
be enhanced.  As shown in the table of Non-interest Income and Expense
below, total fees and other income increased by $575,000 or 12.4% in
2008.  The increase in 2008 was largely due to increases service
charges on deposit accounts, electronic banking income and other income
resulting from the acquisitions of Traders and Citizens First.  In
2008, service charges on deposit accounts increased by $511,000 or 18.7% to
$3,249,000.  Approximately $427,000 of this increase was the result of
adding the operations of Traders and Citizens First.  The remaining
$84,000 or 3.1% increase was largely due to incremental increase in fee rates
and growth in the number of deposit customers.  Electronic banking
income, which consists of debit


61
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








and
credit card transaction fees, ATM fees and internet banking fees, increased
$216,000 or 35.5% to $824,000 in 2008.  Approximately $99,000 of this
increase was the result of adding the operations of Traders and Citizens
First.  The remaining $117,000 or 19.2% increase was largely due to
Premier’s conversion to a more modern banking software system in
2005.  This banking software system has allowed Premier to offer more
electronic banking services and made it easier for customers to conduct their
banking electronically.  In 2008, secondary market mortgage income
(commissions and fees earned from originating and selling mortgage loans to
third parties in the secondary market) decreased by $192,000 or 29.5% to
$458,000.  Traders and Citizens First had virtually no revenue of this
type in 2008.  The decrease in secondary market mortgage income in
2008 is primarily due to a significant decrease in the appetite of secondary
market mortgage loan purchasers as brokers have either tightened their credit
standards or have ceased buying new mortgages in an effort to avoid further
exposure to sub-prime lending.  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.  Other non-interest income increased by
$40,000, or 6.4%, in 2008.  Included in this increase is $142,000 of
other non-interest income from the operations of Traders and Citizens
First.  The remaining $102,000 decrease is largely due to $212,000 of
life insurance benefits on the death of a former officer of a subsidiary that
was recognized in the prior year.  Excluding this benefit, other
non-interest income increased $110,000 in 2008, which includes $150,000 of
income received for extending Premier’s ATM processing contract.





In 2007,
total fees and other income increased by $458,000 or 11.0%.  The
increase in 2007 was largely due to increases in secondary market mortgage
income and electronic banking income.  In 2007, secondary market
mortgage income (commissions and fees earned for originating and selling
mortgage loans to third parties in the secondary market) increased by $347,000
or 114.5% to $650,000.  In 2005, Premier changed its approach to
secondary market mortgage originations in an effort to expedite the loan
approval process.  The increased income in 2007 reflects an expansion
of the program to all of Premier’s affiliate banks which generated a greater
number of customers taking advantage of this process.  Electronic
banking income, increased $110,000 or 22.1% to $608,000 in 2007, largely due to
the modernization of the ways Premier’s customers can access their deposit
accounts.  Service charges on deposit accounts decreased in 2007 by
$66,000 or 2.4% to $2,738,000.  A new required disclosure of
year-to-date NSF charges on customers’ deposit account statements is believed to
be resulting in lower overdraft activity by customers.  Other
non-interest income increased by $67,000, or 12.0%, in 2007.  In 2007,
other non-interest income includes $212,000 of life insurance benefits on the
death of a former officer of a subsidiary.  Excluding this benefit,
other non-interest income decreased $145,000 in 2007 as Premier discontinued
offering trust services in 2006, realized fewer loan extension and late fees in
2007, ceased recording an increase in the cash surrender value of the officer’s
life insurance policy in 2007 and recorded lower other miscellaneous income in
2007.





In 2008, Premier realized $93,000 in
gains on the sale of investment securities.  In 2007 and 2006, Premier
did not execute any sales of investment securities.





62
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








The following table is a summary of
non-interest income and expense for each of the years in the three-year period
ending December 31, 2008.





NON-INTEREST
      INCOME AND EXPENSE(Dollars
      in thousands)Increase
      (Decrease) Over Prior Year2008
            
            
            20072008
            
            
            2007
            
            
            2006
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentNon-interest
      income:Service charges on depositaccounts
            
            $
            3,249
            
            
            $
            2,738
            
            
            $
            2,804
            
            
            $
            511
            
            
            
            18.66
            
            
            $
            (66
            )
            
            
            (2.35
            )Electronic banking
      income
            
            
            824
            
            
            
            608
            
            
            
            498
            
            
            
            216
            
            
            
            35.53
            
            
            
            110
            
            
            
            22.09Secondary market mortgage
      income
            
            
            458
            
            
            
            650
            
            
            
            303
            
            
            
            (192
            )
            
            
            (29.54
            )
            
            
            347
            
            
            
            114.52Other
            
            
            667
            
            
            
            627
            
            
            
            560
            
            
            
            40
            
            
            
            6.38
            
            
            
            67
            
            
            
            11.96Total fees and other
      income
            
            $
            5,198
            
            
            $
            4,623
            
            
            $
            4,165
            
            
            
            575
            
            
            
            12.44
            
            
            
            458
            
            
            
            11.00Investment securities
      gains
            
            
            93
            
            
            
            0
            
            
            
            0
            
            
            
            93
            
            
            
            
            
            
            
            0Total non-interest
      income
            
            $
            5,291
            
            
            $
            4,623
            
            
            $
            4,165
            
            
            $
            668
            
            
            
            14.45
            
            
            $
            458
            
            
            
            11.00Non-interest
      expense:Salaries and
    wages
            
            $
            8,389
            
            
            $
            7,211
            
            
            $
            7,540
            
            
            $
            1,178
            
            
            
            16.34
            
            
            $
            (329
            )
            
            
            (4.36
            )Employee
benefits
            
            
            1,840
            
            
            
            1,560
            
            
            
            1,590
            
            
            
            280
            
            
            
            17.95
            
            
            
            (30
            )
            
            
            (1.89
            )Total staff
    costs
            
            
            10,229
            
            
            
            8,771
            
            
            
            9,130
            
            
            
            1,458
            
            
            
            16.62
            
            
            
            (359
            )
            
            
            (3.93
            )Occupancy and
      equipment
            
            
            2,546
            
            
            
            1,947
            
            
            
            1,907
            
            
            
            599
            
            
            
            30.77
            
            
            
            40
            
            
            
            2.10Outside data
      processing
            
            
            2,587
            
            
            
            2,132
            
            
            
            2,036
            
            
            
            455
            
            
            
            21.34
            
            
            
            96
            
            
            
            4.72Professional
fees
            
            
            840
            
            
            
            461
            
            
            
            496
            
            
            
            379
            
            
            
            82.21
            
            
            
            (35
            )
            
            
            (7.06
            )Taxes, other than payroll,property
      and income
            
            
            603
            
            
            
            580
            
            
            
            598
            
            
            
            23
            
            
            
            3.97
            
            
            
            (18
            )
            
            
            (3.01
            )Amortization of
      intangibles
            
            
            204
            
            
            
            0
            
            
            
            0
            
            
            
            204
            
            
            
            100.00
            
            
            
            41
            
            
            
            45.05OREO (gains) losses and
      expenses, net
            
            
            59
            
            
            
            (50
            )
            
            
            (91
            )
            
            
            109
            
            
            
            (218.00
            )
            
            
            41
            
            
            
            45.05Supplies
            
            
            406
            
            
            
            315
            
            
            
            333
            
            
            
            91
            
            
            
            28.89
            
            
            
            (18
            )
            
            
            (5.41
            )Accelerated amortization ofsubordinated
              debt  issuance
      costs
            
            
            0
            
            
            
            0
            
            
            
            548
            
            
            
            0
            
            
            
            0.00
            
            
            
            (548
            )
            
            
            (100.00
            )Other expenses
            
            
            2,420
            
            
            
            2,252
            
            
            
            1,980
            
            
            
            168
            
            
            
            7.46
            
            
            
            156
            
            
            
            7.58Total non-interest
      expenses
            
            $
            19,894
            
            
            $
            16,408
            
            
            $
            16,937
            
            
            $
            3,486
            
            
            
            21.25
            
            
            $
            (529
            )
            
            
            (3.12
            )





63
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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Just as management continues to
evaluate areas where non-interest income can be enhanced, it strives to find
ways to improve the efficiency of its operations and utilize the economies of
scale of the consolidated entity to reduce its operating
costs.  Premier’s 2008 net overhead ratio, or non-interest expense
less non-interest income excluding securities transactions and other similar
non-operating transactions to average earnings assets was 2.39%, only a slight
increase from the 2.36% realized in 2007 and a decrease from the 2.56% ratio
realized in 2006.  The actual dollars of net overhead increased by
23.7% or $2,849,000 in 2008, however, average earning assets increased by a
similar 22.3% in 2008.  Both of these increases were largely the
result of the acquisitions of Traders and Citizens First.  In fact,
the net overhead of Traders and Citizens First comprise all but $57,000 or 0.5%
of Premier’s increase in net overhead expense in 2008.  The 2008 net
overhead ratio and actual dollars of net overhead expense excludes the $93,000
of gains on the sales of securities and the $150,000 of income received for
extending Premier’s ATM processing contract.  The 2007 net overhead
ratio and actual dollars of net overhead expense excludes the $212,000 of life
insurance benefits as a non-operating income transaction.  For the
year 2008, net overhead was $14.8 million, an increase from the $12.0 million of
net overhead in 2007.  In 2007, the net overhead ratio, decreased by
20 basis points as the actual dollars of net overhead expense decreased by 6.1%
or $775,000 from the $12.8 million of net overhead in 2006.




Total non-interest expense in 2008
increased by $3,486,000, or 21.2% from 2007 largely due to the increase in all
categories of costs from adding the operations of Traders and Citizens
First.  The 2008 operations of Traders and Citizens First added
$3,463,000 of total non-interest expenses leaving only a $23,000 or 0.1%
increase resulting from Premier’s other operations.  Total
non-interest expense in 2007 decreased by $529,000, or 3.1% from 2006 as
decreases in staff costs, professional fees, and accelerated trust preferred
issuance cost amortization were only partially offset by higher occupancy and
equipment costs, data processing fees, and other expenses plus the absence of
bad check loss recoveries and lower net gains on the disposition of
OREO.




Staff costs increased by $1,458,000 or
16.6% in 2008 versus 2007 as $1,407,000 of the increase was due to the
operations of Traders and Citizens First.  The remaining $51,000 or
0.6% increase was largely the result of increased employer payroll taxes and
normal salary and wage increases partially offset by decreases related to staff
turnover and greater deferred loan originations costs related to FAS
91.  Staff costs decreased by $359,000 or 3.9% in 2007 versus 2006 as
normal salary and wage increases were more than offset by an increase in
deferred loan origination costs related to FAS 91.




Occupancy and equipment expenses
increased by $529,000 or 26.2% in 2008.  The operations of Traders and
Citizens First added approximately $629,000 of occupancy and equipment expenses
in 2008 leaving a $100,000 or 5.0% decrease in these expenses from Premier’s
other operations.  The $100,000 decrease in 2008 is largely due to the
$70,000 2007 writedown of branch property that was scheduled to be closed at the
end of January 2008.  The decision to close the branch was made in
2007, and in accordance with FAS 144, the branch property was written down to
its estimated realizable value.  Furthermore, occupancy
and


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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








equipment
expenses were less in 2008 due to lower real estate taxes, building repairs,
equipment maintenance and equipment depreciation partially offset by increase in
utility costs, and other building cleaning and maintenance costs.  In
2007, occupancy and equipment expenses increased by $40,000 or 2.1%, largely due
to the $70,000 writedown of branch property.  Excluding this
writedown, occupancy and equipment expenses decreased by $30,000 in 2007,
largely due to decreases in equipment depreciation.




Outside data processing expense
increased by $455,000 or 21.3% in 2008.  The operations of Traders and
Citizens First added approximately $294,000 of outside data processing expenses
in 2008 leaving a $161,000 or 7.6% increase in these expenses from Premier’s
other operations.  The $161,000 increase in 2008 is largely due to
increases in item processing charges due to Premier’s conversion to exchange
electronic images instead of processing paper checks to settle customer deposit
account activity plus higher communication costs and contractual inflationary
fee adjustments for data processing and internet banking expenses.  In
2007, outside data processing expense increased by $96,000 or 4.7%, largely due
to increases in ATM processing costs, internet banking charges and contractual
inflationary fee adjustments, partially offset by a decrease in customer
overdraft privilege program costs. Outside data processing expense increased by
$531,000 or 35.3% in 2006, as 2006 represents the first full year of expense
since Premier converted to an outsourced provider in early-to-mid
2005.




Professional fees increased by $379,000
or 82.2% in 2008. The operations of Traders and Citizens First added
approximately $81,000 of professional fees in 2008 leaving a $298,000 or 64.6%
increase in these expenses from Premier’s other operations.  The
$298,000 increase in 2008 is largely due to additional legal and other
professional fees incurred during the early part of the year to help in the
completion of the acquisitions Traders and Citizens First and also due to fees
associated with hiring outside internal auditors in the fourth quarter to help
complete the Company’s internal audit schedule.  In 2007, professional
fees decreased by $35,000 or 7.1%, largely due to lower internal and external
audit costs and lower consulting fees.  Professional fees decreased by
$58,000 or 10.5% in 2006 largely due to lower internal audit costs, tax
preparation fees and consulting expenses.




Taxes not on income increased by
$23,000, or 4.0% in 2008.  The operations of Traders and Citizens
First added approximately $83,000 of taxes not on income in 2008 leaving a
$60,000 or 10.3% decrease in these expenses from Premier’s other
operations.  The $60,000 decrease in 2008 is largely due to decreases
in the tax rate on equity based franchised taxes.  In 2007, taxes not
on income decreased by $18,000, or 3.0%.  The decrease in 2007 is
largely due to a decrease in the amount of expense related to equity based
franchise taxes.




OREO gains, losses and expenses
resulted in net expenses of $59,000 in 2008 versus $50,000 of net gains in 2007,
a $109,000 increase in non-interest expense.  OREO expense represents
the costs to operate, maintain and liquidate Other Real Estate acquired through
foreclosure in satisfaction of unpaid loans.  The operations of
Traders and Citizens First added approximately $13,000 of OREO expenses in 2008
leaving a $96,000 increase in these expenses


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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








from
Premier’s other operations.  The $96,000 increase in 2008 is largely
due to $20,000 of net gains realized on the disposition or OREO in 2007 compared
to $21,000 of net losses in 2008 as well as $30,000 of expense recoveries in
2007 that were not repeated in 2008.  In 2007, as Premier sold most of
its remaining inventory of OREO properties, it realized $20,000 of net gains on
their disposition as well as $30,000 of expense recoveries.  OREO
gains, losses and expenses resulted in net gains of $91,000 in 2006. In 2006,
Premier sold a substantial portion of its inventory of OREO properties,
realizing $105,000 of net gains on their disposition as well as a reduction in
the expenses needed to maintain the properties.  A majority of the
gains on the disposition of OREO in 2007 and 2006 were on properties from which
no previous writedowns had occurred.




Accelerated Trust Preferred issuance
costs were recognized in 2006.  At the time of issuance, the costs to
originate the Trust Preferred Securities were capitalized. The costs were being
amortized over the 30 year life of the securities which were scheduled to mature
in 2027 and were recorded as an adjustment to interest expense. In March 2003,
Premier began redeeming its Trust Preferred Securities in accordance with the
terms of the instrument. At time of redemption an amount of the remaining
unamortized issuance costs proportional to the size of the redemption was
expensed to non-interest expense. In 2006, as a result of the $7.0 million early
redemption on January 31, 2006 and the final $8.25 million redeemed on November
10, 2006, Premier expensed the final $548,000 of the issuance
costs.




Other expenses totaled $2.4 million in
2008, a $168,000, or 7.5% increase from the $2.2 million recorded in
2007.  The operations of Traders and Citizens First added
approximately $661,000 of other expenses in 2008 leaving a $493,000, or 21.9%
decrease in these expenses from Premier’s other operations.  The
$493,000 decrease in 2008 is primarily the result of a $439,000 reduction in
collection expenses due to a $285,000 restitution payment made to Farmers
Deposit Bank by the bank’s former president who plead guilty to bank fraud and
to $32,000 of net reimbursements from settlements with customers compared to
$120,000 of collection expenses in 2007.  Other expense savings
include a $74,000 reduction in courier costs in 2008 due to Premier’s conversion
to exchange electronic images instead of transporting and processing paper
checks to settle customer deposit account activity, as well as reductions in
advertising expenditures, postage, correspondent bank charges and insurance
costs.  These expense reductions were partially offset by increases in
regulatory expenses such as FDIC insurance and state examination costs,
shareholder expenses such as NASDAQ expenses and stock transfer fees, losses due
to forged checks and fictitious electronic payment transactions, as well as
increases in bank director fees and employee travel
costs.   Other expenses totaled $2.2 million in 2007, a $156,000,
or 7.6% increase from the $2.1 million recorded in 2006.  The increase
in 2007 is largely due to significantly higher regulatory expenses, such as FDIC
insurance and state examination costs, higher postage costs, travel expenses,
employee development and secondary market mortgage underwriting
expenses.  These increases were partially offset by lower stationery
and supplies costs, advertising expenditures, correspondent bank charges and
insurance expense.





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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








Because the FDIC’s deposit insurance
fund fell below prescribed levels in 2008, the FDIC has announced increased
premiums for all insured depository institutions, including Premier’s subsidiary
banks, in order to begin recapitalizing the fund.  In addition, the
FDIC has proposed an additional 20 basis point emergency assessment on insured
depository institutions to be paid on September 30, 2009, which could be
decreased by the FDIC in certain events occur prior to the assessment
date.  These changes (and proposed changed if enacted) will result in
potentially significant increases in deposit insurance expense for Premier in
2009.





Amortization of intangibles began in
2008 as a result of the core deposit intangible asset from the acquisitions of
Traders and Citizens First.





An analysis of the allowance for loan
losses and related provision for loan losses is included in the Loan Portfolio
section of the Balance Sheet Analysis of this report.








Applicable
Income Taxes




Premier recognized $3.7 million of
income tax expense in 2008.  This amount compares to $3.5 million of
income tax expense recorded in 2007 and $3.3 million of income tax expense
recorded in 2006.  Premier’s effective tax rate was 33.2% in 2008, up
slightly from the 32.8% in 2007 but down from the 33.6% in
2006.  Premier’s effective tax rate in 2007 decreased primarily as a
results of death benefits received from a former officer’s life insurance policy
which were not subject to income tax.  Premier realizes the tax saving
benefits of holding tax-exempt investments and other tax savings instruments as
well as making tax-exempt loans.  These activities help to reduce
Premier’s tax rate from the 34.0% statutory rate.  Additional
information regarding income taxes is contained in Note 11
to the consolidated financial statements.








Effects
of Changing Prices




The results of operations and financial
condition presented in this report are based on historical cost, unadjusted for
the effects of inflation. Inflation affects Premier in two ways. One effect is
that inflation can result in increased operating costs which must be absorbed or
recovered through increased prices for services. The second effect is on the
purchasing power of the corporation. Virtually all of a bank's assets and
liabilities are monetary in nature. Regardless of changes in prices, most assets
and liabilities of the banking subsidiaries will be converted into a fixed
number of dollars. Non-earning assets, such as premises and equipment, do not
comprise a major portion of Premier's assets; therefore, most assets are subject
to repricing on a more frequent basis than in other industries.




Premier's ability to offset the effects
of inflation and potential reductions in future purchasing power depends
primarily on its ability to maintain capital levels by adjusting prices for its
services and to improve net interest income by maintaining an effective
asset/liability mix.  Management's efforts to meet these goals are
described in other sections of this report.


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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








SUMMARY
RESULTS OF OPERATIONS


FOURTH
QUARTER 2008




Net income for the three months ended
December 31, 2008 totaled $1,902,000, a $166,000 or 9.6% increase from the
$1,736,000 of net income reported for the fourth quarter of 2007.  On
a per share basis, Premier’s net income for the fourth quarter of 2008 was 30
cents per share, compared to 33 cents per share for the same quarter last
year.  The decrease in earnings per share is due to the additional
shares of common stock issued to acquire Traders and Citizens
First.




Net interest income totaled $6,815,000
for the fourth quarter of 2008, an increase of $1,171,000 or 20.7% from the net
interest income earned in the same quarter of 2007.  Approximately
$1,497,000 of net interest income was earned by Traders and Citizens First in
the fourth quarter of 2008.  The remaining $326,000 decrease in net
interest income when compared to the same quarter of 2007 is the result of lower
interest on loans and federal funds sold primarily due to lower yields earned on
those assets and a lower outstanding balance of federal funds
sold.  This $1,109,000 decrease in interest income was partially
offset by a $783,000 decrease in interest expense primarily due to lower rates
paid on deposits and short-term borrowings. During the fourth quarter of 2008,
Premier recorded a $106,000 provision for loan losses compared to a $25,000
provision for loan losses in the fourth quarter of 2007.  The increase
in provision expense was the result of a higher estimation of the credit risk in
the loan portfolio.




Non-interest income, excluding
securities transactions, totaled $1,289,000 in the fourth quarter of 2008, an
increase of $127,000 or 10.9% from the $1,162,000 reported in the fourth quarter
of 2008.  Approximately $232,000 of non-interest income was generated
by the operations of Traders and Citizens First in the fourth quarter of
2008.  The remaining $105,000 decrease in non-interest income when
compared to the same quarter of 2007 is the primarily the result of lower
secondary market mortgage income partially offset by higher electronic banking
income.  Non-interest expense totaled $5,187,000 in the fourth quarter
of 2008, a $1,011,000 or 24.2% increase from the $4,176,000 reported for the
fourth quarter of 2007.  The operations of Traders and Citizens First
generated approximately $1,280,000 of non-interest expenses in the fourth
quarter of 2008.  The remaining $269,000 decrease in non-interest
expense when compared to the same quarter of 2007 is primarily due to the
$285,000 restitution payment made to Farmers Deposit Bank by the bank’s former
president who plead guilty to bank fraud.  Other decreases in
non-interest expenses include lower taxes not on income, supplies, postage,
courier costs, travel expenditure, correspondent bank fees, collection costs and
OREO expenses.  These savings were offset by increases in staff costs,
professional fees, director fees, and shareholder
expenses.  Additional quarterly financial data is provided in Note 22 to the consolidated financial
statements.





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PREMIER
FINANCIAL BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


December
31, 2008








ADOPTION
OF NEW ACCOUNTING STANDARDS





Recently
Issued Accounting Standards Not Yet Adopted




In December 2007, the FASB issued FAS
No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination.  FAS No.
141(R) is effective for fiscal years beginning on or after December 15,
2008.  Earlier adoption is prohibited.  There was no impact
to the Company upon adoption of this standard, but the accounting for future
business combinations will be different from prior practice.  See Note 24 to the consolidated financial
statements.




In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51”  (“SFAS No. 160”), which will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity within the
consolidated balance sheets. FAS No. 160 is effective as of the beginning of the
first fiscal year beginning on or after December 15, 2008.  Earlier
adoption is prohibited and the Corporation does not expect the adoption of FAS
No. 160 to have a significant impact on its results of operations or financial
position.




In March 2008, the FASB issued SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133”. FAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133 for derivative instruments and hedging activities.
FAS No. 161 requires qualitative disclosure about objectives and strategies for
using derivative and hedging instruments, quantitative disclosures about fair
value amounts of the instruments and gains and losses on such instruments, as
well as disclosures about credit-risk features in derivative agreements. FAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged.  The adoption of this standard is not expected to have a
material effect on the Corporation’s results of operations or financial
position


69
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








Item 8.  Financial Statements and
Supplementary Data




The Company's Financial Statements and
related Independent Auditors' Report are presented in the following pages. The
financial statements filed in this Item 8 are as follows:





Report of
Independent Registered Public Accounting Firm





Financial Statements:


Consolidated Balance Sheets - December 31, 2008 and
      2007


Consolidated Statements of Income - Years Ended
      December 31, 2008, 2007, and
2006


Consolidated Statements of Comprehensive
      Income - Years Ended December 31, 2008, 2007, and
  2006


Consolidated Statements of Changes in
      Stockholders' Equity – Years ended December
      31, 2008, 2007, and 2006




Consolidated Statements of Cash Flows - Years ended
      December 31, 2008, 2007, and
2006


Notes to Consolidated Financial
    Statements























70
 Table of Contents















































PREMIER
FINANCIAL BANCORP, INC.








CONSOLIDATED
FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006























































71
 Table of Contents




















REPORT OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM








Board
of Directors and Stockholders


Premier
Financial Bancorp, Inc.


Huntington,
West Virginia








We
have audited the accompanying consolidated balance sheets of Premier Financial
Bancorp, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
2008.  These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.





In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premier Financial
Bancorp, Inc. as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.








Crowe Horwath LLP








Columbus,
Ohio


March
25, 2009





72
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


CONSOLIDATED BALANCE SHEETS


December
31, 2008 and 2007


(Dollars
in Thousands, Except Per Share Data)








2008
            
            
            2007ASSETSCash
      and due from banks
            
            $
            22,148
            
            
            $
            22,365Federal
      funds sold
            
            
            15,899
            
            
            
            32,035Securities
      available for sale
            
            
            175,741
            
            
            
            124,242Loans
      held for sale
            
            
            1,193
            
            
            
            1,891Loans
            
            
            467,111
            
            
            
            346,570Allowance for loan
      losses
            
            
            (8,544
            )
            
            
            (6,497
            )Net loans
            
            
            458,567
            
            
            
            340,073Federal
      Home Loan Bank and Federal Reserve Bank stock
            
            
            3,931
            
            
            
            3,314Premises
      and equipment, net
            
            
            11,367
            
            
            
            6,200Real
      estate and other property acquired through foreclosure
            
            
            1,056
            
            
            
            174Interest
      receivable
            
            
            3,720
            
            
            
            2,768Goodwill
            
            
            28,543
            
            
            
            15,816Other
      intangible assets
            
            
            1,431
            
            
            
            -Other
      assets
            
            
            869
            
            
            
            377Total assets
            
            $
            724,465
            
            
            $
            549,255LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNon-interest
    bearing
            
            $
            101,588
            
            
            $
            75,271Time deposits, $100,000 and
      over
            
            
            71,145
            
            
            
            55,345Other interest
    bearing
            
            
            416,449
            
            
            
            318,417Total deposits
            
            
            589,182
            
            
            
            449,033Federal
      funds purchased
            
            
            -
            
            
            
            392Securities
      sold under agreements to repurchase
            
            
            18,351
            
            
            
            12,477Federal
      Home Loan Bank advances
            
            
            7,607
            
            
            
            4,843Other
      borrowed funds
            
            
            15,560
            
            
            
            8,412Interest
      payable
            
            
            1,054
            
            
            
            1,064Other
      liabilities
            
            
            3,289
            
            
            
            5,645Total liabilities
            
            
            635,043
            
            
            
            481,866Commitments
      and contingent liabilities
            
            
            -
            
            
            
            -Stockholders'
      equityPreferred stock, no par value;
      1,000,000 shares authorized;none issued or
      outstanding
            
            
            -
            
            
            
            -Common stock, no par value;
      10,000,000 shares authorized;6,392,772 in 2008 and 5,237,899
      in 2007shares
      issued and outstanding
            
            
            2,264
            
            
            
            1,109Additional paid-in
      capital
            
            
            58,265
            
            
            
            43,763Retained earnings
            
            
            27,346
            
            
            
            22,444Accumulated other comprehensive
      income
            
            
            1,547
            
            
            
            73Total stockholders'
      equity
            
            
            89,422
            
            
            
            67,389Total liabilities and
      stockholders' equity
            
            $
            724,465
            
            
            $
            549,255


See accompanying notes.
 73
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF INCOME


Years
Ended December 31


(In
Thousands, Except Per Share Data)








2008
            
            
            2007
            
            
            2006Interest
      incomeLoans, including
    fees
            
            $
            29,692
            
            
            $
            27,201
            
            
            $
            25,926Investment
    securitiesTaxable
            
            
            7,148
            
            
            
            5,509
            
            
            
            5,148Tax-exempt
            
            
            211
            
            
            
            157
            
            
            
            88Federal funds sold
            
            
            748
            
            
            
            1,829
            
            
            
            1,215Other interest
    income
            
            
            45
            
            
            
            56
            
            
            
            23Total interest
    income
            
            
            37,844
            
            
            
            34,752
            
            
            
            32,400Interest
      expenseDeposits
            
            
            10,676
            
            
            
            11,019
            
            
            
            8,984Repurchase agreements and
      other
            
            
            251
            
            
            
            321
            
            
            
            234FHLB advances and other
      borrowings
            
            
            882
            
            
            
            1,116
            
            
            
            1,027Debentures
            
            
            -
            
            
            
            -
            
            
            
            760Total interest
      expense
            
            
            11,809
            
            
            
            12,456
            
            
            
            11,005Net
      interest income
            
            
            26,035
            
            
            
            22,296
            
            
            
            21,395Provision
      for loan losses
            
            
            147
            
            
            
            (78
            )
            
            
            (1,161
            )Net interest income after
      provision for loan losses
            
            
            25,888
            
            
            
            22,374
            
            
            
            22,556Non-interest
      incomeService charges
            
            
            3,249
            
            
            
            2,738
            
            
            
            2,804Electronic banking
      income
            
            
            824
            
            
            
            608
            
            
            
            498Secondary market mortgage
      income
            
            
            458
            
            
            
            650
            
            
            
            303Securities gains
            
            
            93
            
            
            
            -
            
            
            
            -Other
            
            
            667
            
            
            
            627
            
            
            
            5605,291
            
            
            
            4,623
            
            
            
            4,165Non-interest
      expensesSalaries and employee
      benefits
            
            
            10,229
            
            
            
            8,771
            
            
            
            9,130Occupancy and equipment
      expenses
            
            
            2,546
            
            
            
            2,017
            
            
            
            1,907Outside data
      processing
            
            
            2,587
            
            
            
            2,132
            
            
            
            2,036Professional fees
            
            
            840
            
            
            
            461
            
            
            
            496Taxes, other than payroll,
      property and income
            
            
            603
            
            
            
            580
            
            
            
            598Write-downs, expenses, sales of
      otherreal
      estate owned, net of gains
            
            
            59
            
            
            
            (50
            )
            
            
            (91
            )Supplies
            
            
            406
            
            
            
            315
            
            
            
            333Other expenses
            
            
            2,624
            
            
            
            2,182
            
            
            
            2,52819,894
            
            
            
            16,408
            
            
            
            16,937Income
      before income taxes
            
            
            11,285
            
            
            
            10,589
            
            
            
            9,784Provision
      for income taxes
            
            
            3,749
            
            
            
            3,470
            
            
            
            3,283Net
      income
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501Weighted
      average shares outstanding:Basic
            
            
            6,011
            
            
            
            5,237
            
            
            
            5,236Diluted
            
            
            6,019
            
            
            
            5,263
            
            
            
            5,264Earnings
      per share:Basic
            
            $
            1.25
            
            
            $
            1.36
            
            
            $
            1.24Diluted
            
            
            1.25
            
            
            
            1.35
            
            
            
            1.24


See accompanying notes.
 74
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


Years
Ended December 31


(In
Thousands, Except Per Share Data)








2008
            
            
            2007
            
            
            2006Net
      income
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501Other comprehensive
      income:Unrealized gains on securities
      arising during the period
            
            
            2,457
            
            
            
            1,853
            
            
            
            861Reclassification of realized
      amount
            
            
            (93
            )
            
            
            -
            
            
            
            -Net change in unrealized gain on
      securities
            
            
            2,364
            
            
            
            1,853
            
            
            
            861Change in funded status of pension
      plan
            
            
            (132
            )
            
            
            -
            
            
            
            -Less tax impact
            
            
            758
            
            
            
            630
            
            
            
            293Other comprehensive
      income:
            
            
            1,474
            
            
            
            1,223
            
            
            
            568Comprehensive
      income
            
            $
            9,010
            
            
            $
            8,342
            
            
            $
            7,069





See accompanying notes.
 75
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY


Years
Ended December 31, 2008, 2007 and 2006


(In
Thousands, Except Per Share Data)








Common
              Stock
            
            
            Additional
              Paid-in
              Capital
            
            
            Retained
              Earnings
            
            
            Accumulated
              Other
              Comprehensive
              Income (Loss)
            
            
            TotalBalances,
      January 1, 2006
            
            $
            1,105
            
            
            $
            43,458
            
            
            $
            11,442
            
            
            $
            (1,718
            )
            
            $
            54,287Net
      income
            
            
            -
            
            
            
            -
            
            
            
            6,501
            
            
            
            -
            
            
            
            6,501Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            568
            
            
            
            568Cash
      dividends paid ($0.10 per share)
            
            
            -
            
            
            
            -
            
            
            
            (523
            )
            
            
            -
            
            
            
            (523
            )Stock
      options exercised, 3,002 shares
            
            
            3
            
            
            
            24
            
            
            
            -
            
            
            
            -
            
            
            
            27Stock
      based compensation expense
            
            
            -
            
            
            
            142
            
            
            
            -
            
            
            
            -
            
            
            
            142Balances,
      December 31, 2006
            
            
            1,108
            
            
            
            43,624
            
            
            
            17,420
            
            
            
            (1,150
            )
            
            
            61,002Net
      income
            
            
            -
            
            
            
            -
            
            
            
            7,119
            
            
            
            -
            
            
            
            7,119Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,223
            
            
            
            1,223Cash
      dividends paid ($0.40 per share)
            
            
            -
            
            
            
            -
            
            
            
            (2,095
            )
            
            
            -
            
            
            
            (2,095
            )Stock
      options exercised, 1,000 shares
            
            
            1
            
            
            
            9
            
            
            
            -
            
            
            
            -
            
            
            
            10Stock
      based compensation expense
            
            
            -
            
            
            
            130
            
            
            
            -
            
            
            
            -
            
            
            
            130Balances,
      December 31, 2007
            
            
            1,109
            
            
            
            43,763
            
            
            
            22,444
            
            
            
            73
            
            
            
            67,389Net
      income
            
            
            -
            
            
            
            -
            
            
            
            7,536
            
            
            
            -
            
            
            
            7,536Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,474
            
            
            
            1,474Cash
      dividends paid ($0.43 per share)
            
            
            -
            
            
            
            -
            
            
            
            (2,634
            )
            
            
            -
            
            
            
            (2,634
            )Stock
      issued to acquire subsidiaries
            
            
            1,155
            
            
            
            14,382
            
            
            
            -
            
            
            
            -
            
            
            
            15,537Stock
      based compensation expense
            
            
            -
            
            
            
            120
            
            
            
            -
            
            
            
            -
            
            
            
            120Balances,
      December 31, 2008
            
            $
            2,264
            
            
            $
            58,265
            
            
            $
            27,346
            
            
            $
            1,547
            
            
            $
            89,422





See accompanying notes.
 76
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


Years
Ended December 31


(In
Thousands, Except Per Share Data)








2008
            
            
            2007
            
            
            2006Cash
      flows from operating activitiesNet income
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501Adjustments to reconcile net
      income  to net cashfrom
      operating activitiesDepreciation and impairment of
      real estate
            
            
            1,001
            
            
            
            833
            
            
            
            868Provision for loan
      losses
            
            
            147
            
            
            
            (78
            )
            
            
            (1,161
            )Amortization (accretion),
      net
            
            
            290
            
            
            
            (40
            )
            
            
            187FHLB stock
    dividends
            
            
            (102
            )
            
            
            -
            
            
            
            (145
            )Writedowns (gains) on other real
      estate owned, net
            
            
            21
            
            
            
            (20
            )
            
            
            (105
            )Stock compensation
      expense
            
            
            120
            
            
            
            130
            
            
            
            142Loans originated for
      sale
            
            
            (23,066
            )
            
            
            (27,461
            )
            
            
            (14,616
            )Secondary market loans
      sold
            
            
            24,222
            
            
            
            28,198
            
            
            
            13,809Secondary market
      income
            
            
            (458
            )
            
            
            (650
            )
            
            
            (303
            )Gain on the sale of securities
      available for sale
            
            
            (93
            )
            
            
            -
            
            
            
            -Changes in :Interest
    receivable
            
            
            6
            
            
            
            53
            
            
            
            (160
            )Deferred income
    taxes
            
            
            1,002
            
            
            
            648
            
            
            
            1,071Other assets
            
            
            (142
            )
            
            
            558
            
            
            
            288Interest payable
            
            
            (395
            )
            
            
            3
            
            
            
            337Other liabilities
            
            
            (69
            )
            
            
            68
            
            
            
            (1,347
            )Net cash from operating
      activities
            
            
            10,020
            
            
            
            9,361
            
            
            
            5,366Cash
      flows from investing activitiesPurchases of securities available
      for sale
            
            
            (90,616
            )
            
            
            (41,078
            )
            
            
            (23,248
            )Proceeds from sales of securities
      available for sale
            
            
            2,088
            
            
            
            25
            
            
            
            -Proceeds from maturities and calls
      of securitiesavailable
      for sale
            
            
            80,314
            
            
            
            43,571
            
            
            
            39,974Purchase of FHLB  stock,
      net of redemptions
            
            
            (130
            )
            
            
            (49
            )
            
            
            (60
            )Purchases of subsidiaries, net of
      cash received
            
            
            (8,717
            )
            
            
            -
            
            
            
            -Net change in federal funds
      sold
            
            
            26,978
            
            
            
            (4,452
            )
            
            
            (8,771
            )Net change in
loans
            
            
            (12,002
            )
            
            
            (4,361
            )
            
            
            (20,284
            )Purchases of loan participations
      from other banks
            
            
            (15,595
            )
            
            
            (4,825
            )
            
            
            (1,605
            )Payments on loan participations
      with other banks
            
            
            3,601
            
            
            
            6,045
            
            
            
            6,067Purchases of premises and
      equipment, net
            
            
            (1,221
            )
            
            
            (500
            )
            
            
            (361
            )Proceeds from sale of other real
      estate acquiredthrough
      foreclosure
            
            
            326
            
            
            
            623
            
            
            
            2,417Net cash from investing
      activities
            
            
            (14,974
            )
            
            
            (5,001
            )
            
            
            (5,871
            )








(continued)
 77
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)


Years
Ended December 31


(In
Thousands, Except Per Share Data)





2008
                
                
                2007
                
                
                2006Cash
      flows from financing activitiesNet change in
    deposits
                
                
                (8,351
                )
                
                
                10,083
                
                
                
                3,107Net change in short-term Federal
      Home Loan Bank advances
                
                
                3,000
                
                
                
                -
                
                
                
                -Net change in federal funds
      purchased
                
                
                (392
                )
                
                
                (584
                )
                
                
                976Net change in agreements to
      repurchase securities
                
                
                5,874
                
                
                
                (78
                )
                
                
                3,238Repayment of Federal Home Loan
      Bank advances
                
                
                (236
                )
                
                
                (2,442
                )
                
                
                (1,049
                )Early redemption of debentures,
      net
                
                
                -
                
                
                
                -
                
                
                
                (15,250
                )Repayment of other borrowed
      funds
                
                
                (4,074
                )
                
                
                (3,863
                )
                
                
                (2,627
                )Proceeds from other
      borrowings
                
                
                11,550
                
                
                
                -
                
                
                
                13,500Cash dividends
paid
                
                
                (2,634
                )
                
                
                (2,095
                )
                
                
                (523
                )Proceeds from stock option
      exercises
                
                
                -
                
                
                
                10
                
                
                
                27Net cash from financing
      activities
                
                
                4,737
                
                
                
                1,031
                
                
                
                1,399Net
      change in cash and cash equivalents
                
                
                (217
                )
                
                
                5,391
                
                
                
                894Cash
      and cash equivalents at beginning of year
                
                
                22,365
                
                
                
                16,974
                
                
                
                16,080Cash
      and cash equivalents at end of year
                
                $
                22,148
                
                
                $
                22,365
                
                
                $
                16,974Supplemental
      disclosures of cash flow information:Cash paid during year for
      -Interest
                
                $
                12,204
                
                
                $
                12,453
                
                
                $
                10,667Income taxes paid
                
                
                3,082
                
                
                
                3,066
                
                
                
                2,285Non-cash
    transactionsLoans transferred to real estate
      acquiredthrough
      foreclosure
                
                $
                679
                
                
                $
                282
                
                
                $
                672Purchases of securities available
      for sale not yet settled
                
                
                -
                
                
                
                3,500
                
                
                
                -Fixed assets transferred to other
      real estate owned
                
                
                -
                
                
                
                -
                
                
                
                141Subsidiaries
      acquired:Fair value of assets acquired
      from Citizens First Bank, Inc.
                
                $
                68,048Common stock issued to acquire
      Citizens First Bank, Inc.
                
                
                6,400Cash paid for capital stock of
      Citizens First Bank, Inc.
                
                
                5,300Liabilities assumed of Citizens
      First Bank, Inc.
                
                $
                56,348Fair value of assets acquired
      from Traders Bankshares, Inc.
                
                $
                112,488Common stock issued to acquire
      Traders Bankshares, Inc.
                
                
                9,138Cash paid for capital stock of
      Traders Bankshares, Inc.
                
                
                9,002Liabilities assumed of Traders
      Bankshares, Inc.
                
                $
                94,348
 See accompanying notes.
 78
 Table of
Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The
consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly-owned subsidiaries:





UnauditedDecember
      31, 2008Subsidiary
            Location
            Year
              Acquired
            
            Total
              Assets
            
            
            Net
              IncomeCitizens
      Deposit Bank & Trust
            Vanceburg,
      Kentucky
            1991
            
            $
            125,236
            
            
            $
            1,968Farmers
      Deposit Bank
            Eminence,
      Kentucky
            1996
            
            
            66,225
            
            
            
            1,173Ohio
      River Bank
            Ironton,
      Ohio
            1998
            
            
            91,186
            
            
            
            1,218First
      Central Bank, Inc.
            Philippi,
      West Virginia
            1998
            
            
            114,524
            
            
            
            1,244Boone
      County Bank, Inc.
            Madison,
      West Virginia
            1998
            
            
            158,123
            
            
            
            2,201Traders
      Bank, Inc.
            Ravenswood,
      West Virginia
            2008
            
            
            170,209
            
            
            
            891Mt.
      Vernon Financial Holdings, Inc.
            Huntington,
      West Virginia
            1999
            
            
            378
            
            
            
            193Parent
      and Intercompany Eliminations
            
            
            
            
            (1,416
            )
            
            
            (1,352
            )Consolidated
      total
            
            
            
            $
            724,465
            
            
            $
            7,536





All
material intercompany transactions and balances have been
eliminated.





Nature of
Operations:  The subsidiary banks (Banks) operate under state
bank charters and provide traditional banking services to customers primarily
located in the counties and adjoining counties in Kentucky, Ohio, and West
Virginia in which the Banks operate.  Chartered as state banks, the
Banks are subject to regulation by their respective state banking regulators and
the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve Bank for
member banks. The Company is also subject to regulation by the Federal Reserve
Bank.





Estimates in the Financial
Statements:  The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from those estimates.  The allowance for loan losses, the
identification and evaluation of impaired loans, impairment of goodwill, and
fair values of financial instruments are particularly subject to
change.





Cash
Flows:  For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and interest-earning
balances with banks with an original maturity less than ninety
days.  Net cash flows are reported for loans, federal funds sold,
deposits, and other borrowing transactions.





(continued)
 79
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)





Securities:  The
Company classifies its securities portfolio as either securities available for
sale or securities held to maturity.  Securities held to maturity are
carried at amortized cost.





Securities
available for sale might be sold before maturity and are carried at fair
value.  Adjustments from amortized cost to fair value are recorded in
other comprehensive income, net of related income tax. Other securities such as
Federal Home Loan Bank stock are carried at cost.





Interest
income includes amortization of purchase premium or discount computed using the
level yield method.  Gains or losses on dispositions are based on the
net proceeds and adjusted carrying amount of the securities sold using the
specific identification method.  Securities are written down to fair
value when a decline in fair value is not temporary.





Declines
in the fair value of securities below their cost that are other than temporary
are reflected as realized losses.  In estimating other-than-temporary
losses, management considers: (1) the length of time and extent that fair value
has been less than cost, (2) the financial condition and near term prospects of
the issuer, and (3) the Company’s ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair
value.





Loans Held for
Sale:  Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or market, as
determined by outstanding commitments from investors.  Net unrealized
losses, if any, are recorded as a valuation allowance and charged to
earnings.  Loans are generally sold with servicing
released.





Loans:  Net
loans are stated at the amount of unpaid principal, reduced by unearned income
and an allowance for loan losses.  Interest income on loans is
recognized on the accrual basis except for those loans in a non-accrual of
income status.  The accrual of interest on impaired loans is
discontinued when management believes, after consideration of economic and
business conditions and collection efforts, that the borrowers’ financial
condition is such that collection of interest is doubtful.





All
interest accrued but not received for loans placed on non-accrual is reversed
against interest income.  Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual.  Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.





(continued)
 80
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)





The
allowance for loan losses is a valuation allowance for probable incurred credit
losses increased by a provision for loan losses charged to
expense.  The allowance is an amount that management believes will be
adequate to absorb probable incurred losses on existing loans based on
evaluations of the collectability of loans and prior loan loss
experience.  The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrowers’ ability to pay.  Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management’s judgment, should be
charged-off.  Loans are charged against the allowance for loan losses
when management believes that the collection of principal is
unlikely.  Subsequent recoveries, if any, are credited to the
allowance.





A
loan is impaired when full payment under the loan terms is not
expected.  Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit card loans,
and accordingly, they are not separately identified for impairment
disclosures.  All other loans are evaluated for impairment on an
individual basis.  If a loan is impaired, a portion of the allowance
is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral.





Premises and
Equipment:  Land is carried at cost.  Premises and
equipment are stated at cost less accumulated
depreciation.  Depreciation is recorded principally by the
straight-line method with useful lives ranging from 7 to 40 years for premises
and from 3 to 15 years for equipment.





Real Estate Acquired Through
Foreclosure:  Real estate acquired through foreclosure is
carried at the lower of the recorded investment in the property or its fair
value less estimated costs to sell.  Upon repossession, the value of
the underlying loan is written down to the fair value of the real estate less
estimated costs to sell by a charge to the allowance for loan losses, if
necessary.  Any subsequent write-downs are charged to operating
expenses. Parcels of real estate maybe leased to third parties to offset holding
period costs. Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other
expenses.





Federal Home Loan Bank
(FHLB) stock:  The Banks are members of the FHLB
system.  Members are required to own a certain amount of stock based
on the level of borrowings and other factors, and may invest in additional
amounts.  FHLB stock is carried at cost, classified as a restricted
security, and periodically evaluated for impairment based on ultimate recovery
of par value.  Both cash and stock dividends are reported as
income.





(continued)
 81
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)





Long-term Assets:
Premises and equipment and other long-term assets are reviewed for impairment
when events indicate that the carrying amount may not be recoverable from future
undiscounted cash flows.  If impaired, the assets are recorded at fair
value.





Repurchase
Agreements:  Substantially all repurchase agreement liabilities
represent amounts advanced by various customers.  Securities are
pledged to cover these liabilities, which are not covered by federal deposit
insurance.





Goodwill and Other
Intangible Assets:  Goodwill results from business acquisitions
and represents the excess of the purchase price over the fair value of acquired
tangible assets and liabilities and identifiable intangible
assets.   Goodwill is assessed at least annually for impairment
and any such impairment will be recognized in the period
identified.  Impairment is evaluated using the aggregate of all
banking operations.  To evaluate impairment, management uses pricing
valuation factors such as price-to-total assets and price-to-total deposits from
databases of actual peer group bank sales.  These valuation factors
are applied to the comparable factors of the Company’s aggregate banking
operations to arrive at estimated fair value.





Other
intangible assets consist of core deposit intangible assets arising from the
whole bank acquisitions.  They are initially measured at fair value
and then are amortized on an accelerated method over their estimated useful
lives of approximately 8 years.





Stock Based
Compensation:  Compensation cost is recognized for stock
options granted to employees based on the fair value of these awards at the date
of grant. A Black-Scholes model is utilized to estimate the fair value of stock
options.  Compensation cost is recognized on a straight-line basis
over the required service period, generally defined as the vesting
period.


(continued)
 82
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)





Income
Taxes:  Income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities.  Deferred tax assets and liabilities are the expected
future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax
rates.  A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.





The
Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"), as of January 1, 2007. A tax position is recognized as a
benefit only if it is more likely than not that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had no
effect on the Company's financial statements.





The
Company recognizes interest related to income tax matters as other interest
expense and penalties related to income tax matters as other noninterest
expense.





Off Balance Sheet Financial
Instruments:  Financial instruments include off-balance sheet
credit instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs.  The face amount for
these items represents the exposure to loss, before considering customer
collateral or ability to repay.  Such financial instruments are
recorded when they are funded.





(continued)
 83
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)





Earnings Per Common
Share:  Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the
period.  Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable under stock
options.  Earnings and dividends per share are restated for all stock
splits and dividends through the date of issuance of the financial
statements.





Comprehensive
Income:  Comprehensive income consists of net income and other
comprehensive income.  Other comprehensive income includes unrealized
gains and losses on securities available for sale which are also recognized as a
separate component of equity.





Loss
Contingencies:  Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated.  Management does not believe there now are such
matters that will have a material effect on the financial
statements.





Fair Value of Financial
Instruments:  Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note.  Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items.  Changes in assumptions or in market
conditions could significantly affect the estimates.





Operating
Segments:  All of the Company’s operations are considered by
management to be aggregated into one reportable operating
segment.  While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not
material.  Operations are managed and financial performance is
evaluated on a Company-wide basis.





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








(continued)
 84
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)





Adoption of New Accounting
Standards:  In September 2006, the FASB issued Statement No.
157, Fair Value
Measurements.  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset.  The
standard was effective for fiscal years beginning after November 15,
2007.  In February 2008, the FASB issued Staff Position (FSP) 157-2,
Effective Date of FASB Statement No. 157.  This FSP delayed the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years.  In October 2008,
the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a
Financial Asset when the Market for That Asset Is Not Active.  This
FSP clarifies the application of FAS 157 in a market that is not
active.  The impact of adoption was not material.





In
February 2007, the FASB issued Statement No. 159 – The Fair Value Option for Financial
Assets and Financial Liabilities.  The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.  The new
standard was effective for the Company on January 1, 2008.  The
Company did not elect the fair value option for any financial assets or
financial liabilities as of January 1, 2008.





On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB
105, Application of Accounting Principles to Loan Commitments, stated that in
measuring the fair value of a derivative loan commitment, a company should not
incorporate the expected net future cash flows related to the associated
servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the
expected net future cash flows related to the associated servicing of the loan
should be included in measuring fair value for all written loan commitments that
are accounted for at fair value through earnings.  SAB 105 also
indicated that internally-developed intangible assets should not be recorded as
part of the fair value of a derivative loan commitment, and SAB 109 retains that
view.  SAB 109 was effective for derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007.  The
impact of adoption was not material.





(continued)
 85
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES(Continued)





In
December 2007, the SEC issued Staff Accounting Bulleting (SAB) No. 110, which
expresses the views of the SEC regarding the use of a “simplified” method, as
discussed in SAB No. 107, in developing an estimate of expected term of “plain
vanilla” share options in accordance with SFAS No. 123(R), Share-Based
Payment.  The SEC concluded that a company could, under certain
circumstances, continue to use the simplified method for share option grants
after December 31, 2007.  The Company does not use the simplified
method for share options and therefore SAB No. 110 has no impact on the
Company’s consolidated financial statements.





Recently Issued Accounting
Standards Not Yet Adopted:  In December 2007, the FASB issued
FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in an acquiree, including
the recognition and measurement of goodwill acquired in a business
combination.  FAS No. 141(R) is effective for fiscal years beginning
on or after December 15, 2008.  Earlier adoption is
prohibited.  There was no impact to the Company upon adoption of this
standard, but the accounting for future business combinations will be different
from prior practice.  See Note 24
below.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51”  (“SFAS
No. 160”), which will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity within the consolidated balance sheets. FAS
No. 160 is effective as of the beginning of the first fiscal year beginning on
or after December 15, 2008.  Earlier adoption is prohibited and the
Corporation does not expect the adoption of FAS No. 160 to have a significant
impact on its results of operations or financial position.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133”. FAS No. 161
amends and expands the disclosure requirements of SFAS No. 133 for derivative
instruments and hedging activities. FAS No. 161 requires qualitative disclosure
about objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged.  The adoption of this
standard is not expected to have a material effect on the Corporation’s results
of operations or financial position.


(continued)
 86
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  2 - RESTRICTIONS ON CASH AND DUE FROM
BANKS





Included
in cash and due from banks are certain non-interest bearing deposits that are
held at the Federal Reserve or maintained in vault cash in accordance with
average balance requirements specified by the Federal Reserve Board of
Governors. The balance requirement at December 31, 2008 and 2007 was
approximately $5,548 and $3,426.





NOTE  3 –SECURITIES





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





2008
            
            Amortized
      Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair
      ValueAvailable
      for saleU. S. Treasury
      securities
            
            $
            1,494
            
            
            $
            50
            
            
            $
            -
            
            
            $
            1,544U. S. agency
      securities
            
            
            96,154
            
            
            
            1,018
            
            
            
            (67
            )
            
            
            97,105Obligations of states and
      politicalsubdivisions
            
            
            7,065
            
            
            
            75
            
            
            
            (10
            )
            
            
            7,130Mortgage-backed securities ofgovernment
      sponsored agencies
            
            
            68,553
            
            
            
            1,479
            
            
            
            (70
            )
            
            
            69,962Total available for
      sale
            
            $
            173,266
            
            
            $
            2,622
            
            
            $
            (147
            )
            
            $
            175,741








2007
            
            Amortized
      Cost
            
            
            Unrealized
      Gains
            
            
            Unrealized
      Losses
            
            
            Fair
      ValueAvailable
      for saleU. S. Treasury
      securities
            
            $
            5,477
            
            
            $
            97
            
            
            $
            -
            
            
            $
            5,574U. S. agency
      securities
            
            
            74,515
            
            
            
            427
            
            
            
            (83
            )
            
            
            74,859Obligations of states and
      politicalsubdivisions
            
            
            3,789
            
            
            
            31
            
            
            
            (4
            )
            
            
            3,816Mortgage-backed securities ofgovernment
      sponsored agencies
            
            
            40,350
            
            
            
            131
            
            
            
            (488
            )
            
            
            39,993Total available for
      sale
            
            $
            124,131
            
            
            $
            686
            
            
            $
            (575
            )
            
            $
            124,242





(continued)
 87
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  3 –SECURITIES
(Continued)





The
amortized cost and fair value of securities at December 31, 2008 by contractual
maturity are shown below.  Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.





Amortized
              Cost
            
            
            Fair
              ValueAvailable
      for saleDue in one year or
      less
            
            $
            18,397
            
            
            $
            18,657Due after one year through five
      years
            
            
            46,078
            
            
            
            46,696Due after five years through ten
      years
            
            
            40,238
            
            
            
            40,426Mortgage-backed securities of
      government sponsored agencies
            
            
            68,553
            
            
            
            69,962Total available for
      sale
            
            $
            173,266
            
            
            $
            175,741





Proceeds
from sale of securities during 2008 and 2007 were $1,995 and $25.  A
$93 gain was recognized from sales of securities in 2008 while no gain or loss
was realized on the sale in 2007.  There were no sales of securities
in 2006.





Securities
with an approximate carrying value of $90,324 and $84,116 at December 31, 2008
and 2007 were pledged to secure public deposits, trust funds, securities sold
under agreements to repurchase and for other purposes as required or permitted
by law.





Securities
with unrealized losses at year-end 2008 aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position are as follows:





Less
      than 12 Months
            
            
            12
      Months or More
            
            
            TotalDescription
      of Securities
            
            Fair
      Value
            
            
            Unrealized
      Loss
            
            
            Fair
      Value
            
            
            Unrealized
      Loss
            
            
            Fair
      Value
            
            
            Unrealized
      LossU.S.
      agency securities
            
            $
            12,475
            
            
            $
            (67
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            12,475
            
            
            $
            (67
            )Obligations
      of states and
              political
      subdivisions
            
            
            871
            
            
            
            (10
            )
            
            
            -
            
            
            
            -
            
            
            
            871
            
            
            
            (10
            )Mortgage-backed
      securitiesof
              government
      sponsoredagencies
            
            
            5,714
            
            
            
            (70
            )
            
            
            -
            
            
            
            -
            
            
            
            5,714
            
            
            
            (70
            )Total
      temporarily impaired
            
            $
            19,060
            
            
            $
            (147
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            19,060
            
            
            $
            (147
            )





(continued)
 88
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  3 –SECURITIES
(Continued)





Securities
with unrealized losses at year-end 2007 aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position, are as follows:





Less
      than 12 Months
            
            
            12
      Months or More
            
            
            TotalDescription
      of Securities
            
            Fair
      Value
            
            
            Unrealized
      Loss
            
            
            Fair
      Value
            
            
            Unrealized
      Loss
            
            
            Fair
      Value
            
            
            Unrealized
      LossU.S.
      agency securities
            
            $
            1,997
            
            
            $
            (3
            )
            
            $
            24,712
            
            
            $
            (80
            )
            
            $
            26,709
            
            
            $
            (83
            )Obligations
      of states and
              political
      subdivisions
            
            
            245
            
            
            
            (3
            )
            
            
            210
            
            
            
            (1
            )
            
            
            455
            
            
            
            (4
            )Mortgage-backed
      securitiesof
              government
      sponsoredagencies
            
            
            4,404
            
            
            
            (49
            )
            
            
            21,198
            
            
            
            (439
            )
            
            
            25,602
            
            
            
            (488
            )Total
      temporarily impaired
            
            $
            6,646
            
            
            $
            (55
            )
            
            $
            46,120
            
            
            $
            (520
            )
            
            $
            52,766
            
            
            $
            (575
            )





The
investment portfolio is predominately high quality interest-bearing bonds with
defined maturity dates backed by the U.S. Government or Government sponsored
entities.The
unrealized losses at December
31, 2008 and December 31, 2007 are price changes resulting from changes
in the interest rate environmentand are considered to be temporary declines in the value of the
securities.Their
fair value is expected to recover as the bonds approach their maturity date
and/or market conditions improve.








NOTE  4 - LOANS





Loans
at year-end were as follows:





2008
            
            
            2007Commercial,
      secured by real estate
            
            $
            133,742
            
            
            $
            100,278Commercial,
      other
            
            
            61,655
            
            
            
            40,438Real
      estate construction
            
            
            26,182
            
            
            
            24,035Residential
      real estate
            
            
            185,536
            
            
            
            133,776Agricultural
            
            
            2,446
            
            
            
            1,845Consumer
      and home equity
            
            
            51,793
            
            
            
            41,893Other
            
            
            5,757
            
            
            
            4,305$
            467,111
            
            
            $
            346,570





(continued)
 89
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  4 – LOANS
(Continued)





Certain
directors and executive officers of the Banks and companies in which they have
beneficial ownership, were loan customers of the Banks during 2008 and
2007.   Such related party loans are governed by federal banking
regulations which require such loans to be made in the ordinary course of
business.





An
analysis of the 2008 activity with respect to all director and executive officer
loans is as follows (in thousands):





Balance,
      December 31, 2007
            
            $
            15,262Additions,
      including loans now meeting disclosure requirements
            
            
            18,904Amounts
      collected and loans no longer meeting disclosure
    requirements
            
            
            (11,685
            )Balance,
      December 31, 2008
            
            $
            22,481





Activity
in the allowance for loan losses was as follows:





2008
            
            
            2007
            
            
            2006Balance,
      beginning of year
            
            $
            6,497
            
            
            $
            6,661
            
            
            $
            7,892Balance
      of acquired subsidiaries
            
            
            2,300
            
            
            
            -
            
            
            
            -Loans
      charged off
            
            
            (1,232
            )
            
            
            (758
            )
            
            
            (1,410
            )Recoveries
            
            
            832
            
            
            
            672
            
            
            
            1,340Provision
      for loan losses
            
            
            147
            
            
            
            (78
            )
            
            
            (1,161
            )Balance,
      end of year
            
            $
            8,544
            
            
            $
            6,497
            
            
            $
            6,661





Impaired
loans were as follows:





2008
            
            
            2007
            
            
            2006Impaired
      loans at year-end with an allowance
            
            $
            11,610
            
            
            $
            4,761
            
            
            $
            7,766Impaired
      loans at year-end with no allowance
            
            
            0
            
            
            
            0
            
            
            
            0Amount
      of the allowance for loan losses allocated
            
            
            2,208
            
            
            
            1,482
            
            
            
            1,774Average
      of impaired loans during the year
            
            
            8,506
            
            
            
            5,926
            
            
            
            8,258Interest
      income recognized during impairment
            
            
            795
            
            
            
            495
            
            
            
            480Cash-basis
      interest income recognized
            
            
            793
            
            
            
            495
            
            
            
            480





(continued)
 90
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  4 – LOANS
(Continued)





Nonperforming
loans at year end were as follows:





2008
            
            
            2007
            
            
            2006Loans
      past due over 90 days still on accrual
            
            $
            625
            
            
            $
            987
            
            
            $
            992Non-accrual
      loans
            
            
            6,943
            
            
            
            3,157
            
            
            
            4,698Restructured
      loans
            
            
            1,203
            
            
            
            1,489
            
            
            
            1,268





Nonperforming
loans include some impaired loans and smaller balance homogeneous loans, such as
residential mortgage and consumer loans, that are collectively evaluated for
impairment.  Loan impairment is reported when full payment under the
loan terms is not anticipated, which can include loans that are current or less
than 90 days past due.








NOTE 5 – PREMISES AND EQUIPMENT





Year-end
premises and equipment were as follows:





2008
            
            
            2007Land
      and improvements
            
            $
            2,497
            
            
            $
            1,522Buildings
      and leasehold improvements
            
            
            9,536
            
            
            
            5,673Construction
      in progress
            
            
            77
            
            
            
            193Furniture
      and equipment
            
            
            8,705
            
            
            
            7,35720,815
            
            
            
            14,745Less:
      accumulated depreciation
            
            
            (9,448
            )
            
            
            (8,545
            )$
            11,367
            
            
            $
            6,200





Operating Leases: The
Company leases certain branch and other properties as well as some equipment
under operating leases.  Rent expense, net of rental income, was $230,
$213, and $204 for 2008, 2007, and 2006.  Rent commitments, before
considering renewal options that generally are present, were as
follows:





2009
            
            $
            1572010
            
            
            1262011
            
            
            1262012
            
            
            1092013
      and thereafter
            
            
            90$
            608





(continued)
 91
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  6 – GOODWILL AND OTHER INTANGIBLE
ASSETS





The
change in the balance for goodwill during the year is as follows:





2008
            
            
            2007
            
            
            2006Beginning
      of year
            
            $
            15,816
            
            
            $
            15,816
            
            
            $
            15,816Acquired
      goodwill
            
            
            12,727
            
            
            
            -
            
            
            
            -Impairment
            
            
            -
            
            
            
            -
            
            
            
            -End
      of year
            
            $
            28,543
            
            
            $
            15,816
            
            
            $
            15,816





Acquired
intangible assets at December 31, 2008 were as follows.  There were no
such intangibles at December 31, 2007.





Gross
      Carrying Amount
            
            
            Accumulated
      AmortizationCore
      deposit intangible
            
            $
            1,635
            
            
            $
            (204
            )





Aggregate
intangible amortization expense was $204 for 2008 while none was recorded for
the years 2007 and 2006.





Estimated
amortization expense for each of the next five years:





2009
            
            $
            2682010
            
            
            2182011
            
            
            1842012
            
            
            1752013
      and thereafter
            
            
            586$
            1,431





(continued)
 92
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  7 – DEPOSITS





At
December 31, 2008 the scheduled maturities of time deposits are as
follows:





2009
            
            $
            186,5982010
            
            
            55,9242011
            
            
            12,4402012
            
            
            9,1462013
      and thereafter
            
            
            7,091$
            271,199





Certain
directors and executive officers of the Banks and companies in which they have
beneficial ownership were deposit customers of the Banks during 2008 and
2007.  The balance of such deposits at December 31, 2008 and 2007 were
approximately $18,013 and $10,011.








NOTE 8 – SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE





Securities
sold under agreements to repurchase generally mature within one to ninety days
from the transaction date.  Information concerning securities sold
under agreements to repurchase is summarized as follows:





2008
            
            
            2007Year-end
      balance
            
            $
            18,351
            
            
            $
            12,477Average
      balance during the year
            
            $
            17,133
            
            
            $
            13,124Average
      interest rate during the year
            
            
            1.44
            %
            
            
            2.41
            %Maximum
      month-end balance during the year
            
            $
            23,805
            
            
            $
            13,672Weighted
      average interest rate at year-end
            
            
            0.83
            %
            
            
            1.96
            %


(continued)
 93
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 9 – FEDERAL HOME LOAN BANK ADVANCES





The
Banks own stock of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB-Cin) or
the Federal Home Loan Bank of Pittsburgh, Pennsylvania (FHLB-Pitt). This stock
allows the Banks to borrow advances from the FHLB.





At
year-end, advances from the FHLB-Cin were as follows:





2008
            
            
            2007Payments
      due at maturity in May 2010, fixed rate  at rates from 6.25% to
      6.64%, averaging 6.45%
            
            $
            4,000
            
            
            $
            4,000Payments
      due monthly with maturities from November 2011 to July 2012, fixed rates
      from 4.10% to 4.40%, averaging 4.26%
            
            
            607
            
            
            
            843Overnight
      borrowed funds
            
            
            3,000
            
            
            
            -$
            7,607
            
            
            $
            4,843





Advances
are secured by the FHLB stock, certain pledged investment securities and
substantially all single family first mortgage loans of the participating
Banks.  Scheduled principal payments due on advances during the five
years subsequent to December 31, 2008 are as follows:





2009
            
            $
            3,1782010
            
            
            4,1862011
            
            
            1862012
            
            
            572013
            
            
            -Thereafter
            
            
            -$
            7,607





(continued)
 94
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 10 – NOTES PAYABLE AND OTHER BORROWED FUNDS





On
April 30, 2008, the Company executed and delivered to First Guaranty Bank of
Hammond, Louisiana a Promissory Note and Business Loan Agreement dated April 30,
2008 for the principal amount of $11,550, bearing interest floating daily at the
“Wall Street Journal” prime rate (the “Index”) minus 1.00% and requiring 59
monthly principal payments of $50 and one final payment of $8.6 million due at
maturity on April 30, 2013.  If the Index is between 5.00% and 6.00%,
the interest on the note will be 5.00%.  If the Index falls below
5.00%, then the interest on the note will float with the Index.  The
note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a
wholly owned subsidiary) under Commercial Pledge Agreement dated April 30,
2008.  The proceeds of this note were used to fund the $9,000 of cash
needed to purchase Traders Bankshares, Inc. and to refinance the remaining
$2,550 balance of Premier’s outstanding note with First Guaranty Bank dated
January 31, 2006. Premier’s chairman owns approximately 27.6% of the voting
stock of First Guaranty Bank and is the chairman of its board of
directors.  Premier’s board of directors reviewed the loan and
authorized the Company to enter into the loan transaction.





On
November 10, 2006, the Company executed and delivered to The Bankers’ Bank of
Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) a Term Note and Business
Loan Agreement dated November 10, 2006 in the principal amount of $6,500,
bearing interest floating daily at the “JP Morgan Chase” prime rate minus 1.00%
and requiring 83 monthly principal and interest payments of $100 and a final
payment of any balance due at maturity on November 9, 2013. The note is secured
by a pledge of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc.
(a wholly owned subsidiary) and Premier’s 100% interest in Farmers-Deposit Bank,
Eminence, Kentucky (a wholly owned subsidiary) under a Stock Pledge and Security
Agreement dated November 10, 2006.  On December 22, 2008, the Company
executed and delivered to Bankers’ Bank a modification agreement whereby the
interest rate would not fall below 3.00% or exceed 6.00% for the remaining term
of the Note.  The current interest rate on the Term Note is
3.00%.





Scheduled
principal payments due on the two bank borrowings subsequent to December 31,
2008 are as follows:





2009
            
            $
            1,6742010
            
            
            1,7072011
            
            
            1,7402012
            
            
            1,7752013
            
            
            8,664Thereafter
            
            
            -$
            15,560





(continued)
 95
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 10 – NOTES PAYABLE AND OTHER
BORROWED FUNDS(Continued)





In
addition to the $6,500 Term Note, Premier executed and delivered to the Bankers’
Bank a Promissory Note whereby Premier may request and receive monies from
Bankers’ Bank from time to time, but the aggregate outstanding principal balance
under the Promissory Note at any time shall not exceed $3,000, and the right to
request and receive monies from Bankers’ Bank expires on November 9, 2009. The
outstanding principal balance under this Promissory Note shall bear annual
interest floating daily at the “JP Morgan Chase” prime rate minus
1.00%.  The Promissory Note is subject to the same 3.00% minimum and
6.00% maximum interest rate as the $6,500 Term Note (currently 3.00%). Interest
on this Promissory Note shall be due and payable on the 5th day of each,
January, April, July and October during the term of this Promissory Note, and at
the maturity date hereof. Any outstanding principal amount loaned to Premier
under this Promissory Note, and not previously repaid, shall be due on November
9, 2009.  The Promissory Note is secured by the same collateral as the
$6,500 Term Note. At December 31, 2008, there was no outstanding principal
balance on the Promissory Note.








(continued)
 96
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 11–INCOME
TAXES





The
components of the provision (benefit) for income taxes are as
follows:





2008
            
            
            2007
            
            
            2006Current
            
            $
            2,747
            
            
            $
            2,822
            
            
            $
            2,212Deferred
            
            
            1,002
            
            
            
            648
            
            
            
            1,071Provision for income
      taxes
            
            $
            3,749
            
            
            $
            3,470
            
            
            $
            3,283





The
Company’s deferred tax assets and liabilities at December 31 are shown
below.  No valuation allowance for the realization of deferred tax
assets is considered necessary.





2008
            
            
            2007Deferred
      tax assetsAllowance for loan
      losses
            
            $
            2,569
            
            
            $
            2,209Net operating loss
      carryforward
            
            
            1,584
            
            
            
            -Write-downs of other real estate
      owned
            
            
            21
            
            
            
            15Taxable income on non-accrual
      loans
            
            
            59
            
            
            
            103Defined benefit pension
      plan
            
            
            398
            
            
            
            -Other
            
            
            1
            
            
            
            2Total deferred tax
      assets
            
            
            4,632
            
            
            
            2,329Deferred
      tax liabilitiesAmortization of
      intangibles
            
            $
            2,682
            
            
            $
            2,342Depreciation
            
            
            375
            
            
            
            34Federal Home Loan Bank
      dividends
            
            
            354
            
            
            
            319Deferred loan
fees
            
            
            236
            
            
            
            170Purchase accounting
      adjustments
            
            
            145
            
            
            
            -Unrealized gain on investment
      securities
            
            
            842
            
            
            
            38Other
            
            
            185
            
            
            
            155Total deferred tax
      liabilities
            
            
            4,819
            
            
            
            3,058Net
      deferred taxes
            
            $
            (187
            )
            
            $
            (729
            )





At
December 31, 2008 the Company had net operating loss carryforwards of
approximately $4,659 which expire at various dates from 2025 to
2028.  The deductibility of these net operating losses are limited
under IRC Sec 382.  No valuation allowance is considered necessary
based on management's estimate that the net operating losses will be utilized
prior to the time that they expire.


(continued)
 97
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 11–INCOME TAXES
(Continued)





An
analysis of the differences between the effective tax rates and the statutory
U.S. federal income tax rate is as follows:





2008
            
            
            2007
            
            
            2006U.S.
      federal income tax rate
            
            $
            3,837
            
            
            
            34.0
            %
            
            $
            3,600
            
            
            
            34.0
            %
            
            $
            3,327
            
            
            
            34.0
            %Changes
      from the statutory rateTax-exempt interest
      income
            
            
            (120
            )
            
            
            (1.1
            )
            
            
            (124
            )
            
            
            (1.2
            )
            
            
            (97
            )
            
            
            (1.0
            )Non-deductible interest expenserelated
      to carrying tax-exempt
              interest earning
      assets
            
            
            11
            
            
            
            0.1
            
            
            
            11
            
            
            
            0.1
            
            
            
            8
            
            
            
            0.1Non-deductible stock compensationexpense
            
            
            41
            
            
            
            0.4
            
            
            
            44
            
            
            
            0.4
            
            
            
            46
            
            
            
            0.5Tax credits, net
            
            
            (49
            )
            
            
            (0.4
            )
            
            
            (2
            )
            
            
            (0.0
            )
            
            
            (10
            )
            
            
            (0.1
            )Officer’s life insurance death
      benefit
            
            
            -
            
            
            
            -
            
            
            
            (73
            )
            
            
            (0.6
            )
            
            
            -
            
            
            
            -Other
            
            
            29
            
            
            
            0.2
            
            
            
            14
            
            
            
            0.1
            
            
            
            9
            
            
            
            0.1$
            3,749
            
            
            
            33.2
            %
            
            $
            3,470
            
            
            
            32.8
            %
            
            $
            3,283
            
            
            
            33.6
            %





Unrecognized Tax
Benefits: The Company does not have any beginning or ending unrecognized
tax benefits. The Company does not expect the total amount of unrecognized tax
benefits to significantly increase in the next twelve months.  There
were no interest and penalties recorded in the income statement or accrued for
the year ended December 31, 2008 related to unrecognized tax
benefits.





The
Company and its subsidiaries file a consolidated U.S. Corporation income tax
return and a combined return in the state of West Virginia. The Company files a
corporate income tax return in the state of Kentucky. The Company is no longer
subject to examination by taxing authorities for years before 2005.  A
federal examination of the tax years 2001 - 2003 was completed in 2005 with no
material adjustments.








NOTE
12 – EMPLOYEE BENEFIT PLANS





The
Company has qualified profit sharing plans that cover substantially all
employees. Contributions to the plans consist of a Company match and additional
amounts at the discretion of the Company’s Board of Directors.  Total
contributions to the plans were $266, $245 and $236 in 2008, 2007 and
2006.





(continued)
 98
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE
13 – STOCK COMPENSATION EXPENSE





In
2002, the Company registered 200,000 shares of its common stock to be reserved
stock based incentive programs (“the 2002 Plan”).  From time to time
the Company grants stock options to its employees.  The Company
accounts for these option grants using SFAS No. 123R, “Share-Based Payments,”
which establishes accounting requirements for share-based compensation to
employees.  Under SFAS 123R, the Company estimates the fair value of
the options at the time they are granted to employees and expenses that fair
value over the vesting period of the option grant.





On
February 20, 2008, 45,300 incentive stock options were granted out of the 2002
Plan at an exercise price of $12.92, the closing market price of Premier on the
grant date.  These options vest in three equal annual installments
ending on February 20, 2011.  On January 17, 2007, 37,000 incentive
stock options were granted out of the 2002 Plan at an exercise price of
$14.22.  These options vest in three equal annual installments ending
on January 17, 2010.  On February 15, 2006, 35,250 incentive stock
options were granted out of the 2002 Plan at an exercise price of
$16.00.  These options vest in three equal annual installments ending
on February 15, 2009.





The
fair value of the Company's employee stock options granted is estimated at the
date of grant using the Black-Scholes option-pricing model. This model requires
the input of highly subjective assumptions, changes to which can materially
affect the fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee stock options
granted but are not considered by the model. The assumptions used in the
Black-Scholes option-pricing model are as follows:





2008
            
            
            2007
            
            
            2006Risk-free
      interest rate
            
            
            3.50
            %
            
            
            4.78
            %
            
            
            4.62
            %Expected
      option life (yrs)
            
            
            7.00
            
            
            
            5.00
            
            
            
            5.00Expected
      stock price volatility
            
            
            23.00
            %
            
            
            25.00
            %
            
            
            26.00
            %Dividend
      yield
            
            
            3.10
            %
            
            
            1.41
            %
            
            
            0.00
            %Weighted
      average fair value ofoptions
      granted during the year
            
            $
            2.55
            
            
            $
            3.81
            
            
            $
            5.21





The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield in effect at the time of the grant.  The expected
option life was estimated since there has been little option exercise
history.  The expected stock price volatility is based on historical
volatilities of the Company’s common stock.  The dividend yield is
estimated at the time of the option grant based upon Premier’s dividend rate and
stock price at that time.





(continued)
 99
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 13 – STOCK COMPENSATION EXPENSE(Continued)





Compensation
expense of $120, $130 and $142 was recorded for the years ended December 31,
2008, 2007 and 2006, respectively.





Stock-based
compensation expense is recognized ratably over the requisite service period for
all awards. Unrecognized stock-based compensation expense related to stock
options totaled $67 at December 31, 2008. This unrecognized expense is expected
to be recognized over the next 25 months based on the vesting periods of the
options.





Information
related to the stock option plan during each year follows:





2008
            
            
            2007
            
            
            2006Intrinsic
      value of options exercised
            
            $
            -
            
            
            $
            3
            
            
            $
            9Cash
      received from option exercises
            
            
            -
            
            
            
            10
            
            
            
            27Tax
      benefit realized from option exercises
            
            
            -
            
            
            
            1
            
            
            
            2


(continued)
 100
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 13 – STOCK COMPENSATION EXPENSE(Continued)





A
summary of the Company’s stock option activity is as follows:





2008
            
            
            2007
            
            
            2006Weighted
              Average
              Exercise
            
            
            
            
            
            Weighted
              Average
              Exercise
            
            
            
            
            
            Weighted
              Average
              ExerciseOptions
            
            
            Price
            
            
            Options
            
            
            Price
            
            
            Options
            
            
            PriceOutstanding
      at beginning of year
            
            
            150,249
            
            
            $
            12.65
            
            
            
            120,248
            
            
            $
            12.25
            
            
            
            111,750
            
            
            $
            11.05Grants
            
            
            45,300
            
            
            
            12.92
            
            
            
            37,000
            
            
            
            14.22
            
            
            
            35,250
            
            
            
            16.00Exercises
            
            
            -
            
            
            
            -
            
            
            
            (1,000
            )
            
            
            10.85
            
            
            
            (3,002
            )
            
            
            9.02Forfeitures
      or expired
            
            
            (13,633
            )
            
            
            15.89
            
            
            
            (5,999
            )
            
            
            14.60
            
            
            
            (23,750
            )
            
            
            13.11Outstanding
      at year-end
            
            
            181,916
            
            
            $
            12.47
            
            
            
            150,249
            
            
            $
            12.65
            
            
            
            120,248
            
            
            $
            12.25Exercisable
      at year-end
            
            
            106,433
            
            
            $
            11.59
            
            
            
            84,096
            
            
            $
            11.31
            
            
            
            55,931
            
            
            $
            10.68Weighted
      average remaining life
            
            
            7.0
            
            
            
            
            
            
            
            6.9
            
            
            
            
            
            
            
            7.3Weighted
      average fair value of
              options granted during the
      year
            
            $
            2.55
            
            
            
            
            
            
            $
            3.81
            
            
            
            
            
            
            $
            5.21





Options
outstanding at year-end are expected to fully vest.





Additional
information regarding stock options outstanding and exercisable at December 31,
2008 is provided in the following table:





- - - - - - - - Outstanding - - - - - - -
      -
            
            
            - - - - - - - - Currently Exercisable - - - - - -
      - -Range
      of Exercise Prices
            
            
            Number
            
            
            Weighted
      Average Exercise Price
            
            
            Aggregate
      Intrinsic Value
            
            
            Number
            
            
            Weighted
      Average Remaining Contractual Life
            
            
            Weighted
      Average Exercise Price
            
            
            Aggregate
      Intrinsic Value$
      7.50
      to $10.00
            
            
            
            42,416
            
            
            $
            8.69
            
            
            $
            -
            
            
            
            42,416
            
            
            
            4.6
            
            
            $
            8.69
            
            
            $
            -$
      10.01
      to $12.50
            
            
            
            31,833
            
            
            
            11.62
            
            
            
            -
            
            
            
            31,833
            
            
            
            6.1
            
            
            
            11.62
            
            
            
            -$
      12.51
      to $15.00
            
            
            
            76,167
            
            
            
            13.48
            
            
            
            -
            
            
            
            11,175
            
            
            
            8.1
            
            
            
            14.22
            
            
            
            -$
      15.01
      to $17.50
            
            
            
            31,500
            
            
            
            16.00
            
            
            
            -
            
            
            
            21,009
            
            
            
            7.1
            
            
            
            16.00
            
            
            
            -Outstanding
      at Dec 31, 2008
            
            
            
            181,916
            
            
            
            12.47
            
            
            $
            -
            
            
            
            106,433
            
            
            
            5.9
            
            
            
            11.59
            
            
            $
            -











(continued)
 101
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE
14 – ACQUIRED PENSION PLAN IN PROCESS OF LIQUIDATION





As
part of the acquisition of Traders Bankshares, Inc. on April 30, 2008, Premier
assumed the assets and liabilities of the Traders employee defined benefit
pension plan.  The plan provides defined benefits based on years of
service and final average salary.  Prior to the acquisition by
Premier, the plan benefits were frozen and a plan of termination had been
submitted to the Internal Revenue Service (IRS).  Also, all the plan
assets were reinvested into a money market account to preserve the principal
balance for distribution upon termination.  As of December 31, 2008
the pension plan is still waiting for final approval for termination from the
IRS.





The
following table sets forth changes in obligations and plan assets of the defined
benefit pension plan from the April 30, 2008 acquisition date through December
31, 2008:





Change
      in Benefit ObligationBenefit Obligation acquired on
      April 30, 2008
            
            $
            (3,723
            )Interest cost
            
            
            (119
            )Amendments
            
            
            (6
            )Actuarial loss
            
            
            (132
            )Actual
    distributions
            
            
            69Settlement
            
            
            498Benefit Obligation at December
      31, 2008
            
            $
            (3,413
            )Change
      in Plan AssetsPlan Assets at fair value
      acquired on April 30, 2008
            
            $
            2,685Actual return on Plan
      Assets
            
            
            37Settlement
            
            
            (498
            )Actual
    distributions
            
            
            (69
            )Plan Assets at fair value at
      December 31, 2008
            
            $
            2,155Funded
      status at December 31, 2008
            
            $
            (1,258
            )





The
$87 loss recognized in accumulated other comprehensive income at December 31,
2008 consists of the net actuarial loss from May 1, 2008 through December 31,
2008.  It is estimated that this loss will be recognized into net
periodic pension benefit expense during the next fiscal year when the pension
benefit plan is approved for termination and the pension plan assets are
distributed to the participants.





The
accumulated benefit obligation (ABO) was $3,413 at year-end 2008.





The
assumptions used to determine the pension benefit obligation at April 30, 2008
and December 31, 2008 follow:





Dec. 31, 2008
            
            
            April 30, 2008Discount
      rate
            
            
            4.27
            %
            
            
            4.27
            %Rate
      of compensation increase
            
            
            3.00
            %
            
            
            3.00
            %


(continued)
 102
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE
15 – RELATED PARTY TRANSACTIONS





During
2008, 2007 and 2006, the Company paid approximately $218, $231, and $228 for
printing, supplies, furniture, and equipment to a company affiliated by common
ownership.  The Company also paid another affiliate approximately
$533, $459, and $468 in 2008, 2007 and 2006 to permit the Company’s employees to
participate in that entity’s employee medical benefit plan.





During
2008, 2007 and 2006, the Company paid approximately $52, $52, and $52 to lease
its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia from
River City Properties, LLC, an entity 12.5% owned by the Company’s Chairman of
the Board.








NOTE
16 – EARNINGS PER SHARE





A
reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for 2008,
2007 and 2006 is presented below:





2008
            
            
            2007
            
            
            2006Basic
      earnings per shareIncome available to common
      stockholders
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501Weighted average common shares
      outstanding
            
            
            6,011
            
            
            
            5,237
            
            
            
            5,236Earnings per share
            
            $
            1.25
            
            
            $
            1.36
            
            
            $
            1.24Diluted
      earnings per shareIncome available to common
      stockholders
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501Weighted average common shares
      outstanding
            
            
            6,011
            
            
            
            5,237
            
            
            
            5,236Add dilutive effects of assumed
      exercise of stock options
            
            
            8
            
            
            
            26
            
            
            
            28Weighted average common and
      dilutive potential
              Common shares
      outstanding
            
            
            6,019
            
            
            
            5,263
            
            
            
            5,264Earnings per share assuming
      dilution
            
            $
            1.25
            
            
            $
            1.35
            
            
            $
            1.24





Stock
options for 153,133, 42,500 and 46,250 shares of common stock were not
considered in computing diluted earnings per share for 2008, 2007 and 2006
because they were antidilutive.





(continued)
 103
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  17
– FAIR VALUE





Financial
Accounting Standards Board (FASB) Statement 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Statement 157 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:





Level
1: Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement
date.





Level
2: Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.





Level
3: Significant unobservable inputs that reflect a company’s own assumptions
about the assumptions that market participants would use in pricing an asset or
liability.





When
possible, the Company looks to active and observable markets to price identical
assets or liabilities. When identical assets and liabilities are not traded in
active markets, the Company looks to observable market data for similar assets
and liabilities. However, certain assets and liabilities are not traded in
observable markets and the Company must use other valuation methods to develop a
fair value.





Premier’s
reported fair values of securities available for sale are determined by matrix
pricing, which is a mathematical technique widely used in the industry to value
debt securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities’ relationship to other
benchmark quoted securities (Level 2 inputs).  The fair value of
impaired loans is based on the fair value of the underlying collateral, which is
estimated through third party appraisals or internal estimates of collateral
values (Level 3 inputs).





(continued)
 104
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  17 – FAIR VALUE(Continued)





Assets and Liabilities
Measured on a Recurring Basis





Assets
and liabilities measured at fair value on a recurring basis are summarized
below:





Fair
      Value Measurements at December 31, 2008 UsingDec.
      31, 2008
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)Assets:Available
      for sale securities
            
            $
            175,741
            
            
            $
            -
            
            
            $
            175,741
            
            
            $
            -





Assets and Liabilities
Measured on a Non-Recurring Basis





Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:





Fair
      Value Measurements at December 31, 2008 UsingDec.
      31, 2008
            
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs (Level 2)
            
            
            Significant
      Unobservable Inputs
              (Level
      3)Assets:Impaired
      Loans
            
            $
            9,402
            
            
            $
            -
            
            
            $
            -
            
            
            $
            9,402





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $11,610 with a
valuation allowance of $2,208.  Approximately $5,418 of the carrying
amount and $384 of the valuation allowance were added as a result of the
acquisitions of Citizens First and Traders.  The remaining change
since year-end 2007 resulted in a provision for loan losses of $342 for the
twelve month period.




(continued)
 105
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE  17 – FAIR VALUE(Continued)





The
carrying amount and estimated fair values of financial instruments at year end
were as follows:





2008
            
            
            2007Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              ValueFinancial
      assetsCash and due from
      banks
            
            $
            22,148
            
            
            $
            22,148
            
            
            $
            22,365
            
            
            $
            22,365Federal funds sold
            
            
            15,899
            
            
            
            15,899
            
            
            
            32,035
            
            
            
            32,035Securities available for
      sale
            
            
            175,741
            
            
            
            175,741
            
            
            
            124,242
            
            
            
            124,242Loans held for
sale
            
            
            1,193
            
            
            
            1,193
            
            
            
            1,891
            
            
            
            1,891Loans, net
            
            
            458,567
            
            
            
            465,488
            
            
            
            340,073
            
            
            
            344,158Federal Home Loan Bank andFederal
      Reserve Bank stock
            
            
            3,931
            
            
            
            n/a
            
            
            
            3,314
            
            
            
            n/aInterest
receivable
            
            
            3,720
            
            
            
            3,720
            
            
            
            2,768
            
            
            
            2,768Financial
      liabilitiesDeposits
            
            $
            (589,182
            )
            
            $
            (592,658
            )
            
            $
            (449,033
            )
            
            $
            (448,648
            )Federal funds
      purchased
            
            
            -
            
            
            
            -
            
            
            
            (392
            )
            
            
            (392
            )Securities sold under agreementsto
      repurchase
            
            
            (18,351
            )
            
            
            (18,351
            )
            
            
            (12,477
            )
            
            
            (12,477
            )Federal Home Loan Bank
      advances
            
            
            (7,607
            )
            
            
            (7,860
            )
            
            
            (4,843
            )
            
            
            (5,051
            )Other borrowed
    funds
            
            
            (15,560
            )
            
            
            (15,660
            )
            
            
            (8,412
            )
            
            
            (8,367
            )Interest payable
            
            
            (1,054
            )
            
            
            (1,054
            )
            
            
            (1,064
            )
            
            
            (1,064
            )





Carrying
amount is the estimated fair value for cash and due from banks, Federal funds
sold, accrued interest receivable and payable, demand deposits, short-term debt,
and variable rate loans or deposits that reprice frequently and
fully.  It was not practicable to determine the fair value of Federal
Home Loan Bank and Federal Reserve Bank stock due to the restrictions placed on
its transferability.  For fixed rate loans or deposits and for
variable rate loans or deposits with infrequent repricing or repricing limits,
fair value is based on discounted cash flows using current market rates applied
to the estimated life and credit risk.  Fair values for impaired loans
are estimated using discounted cash flow analysis or underlying collateral
values.  Fair value of debt is based on current rates for similar
financing. The fair value of commitments to extend credit and standby letters of
credit is not material.





(continued)
 106
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK





The
Banks are parties to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of their
customers.  These financial instruments include standby letters of
credit and commitments to extend credit in the form of unused lines of credit.
The Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance sheet instruments.  In addition,
the Banks offer a service whereby deposit customers for a fee are permitted to
overdraw their accounts up to a certain deminimus amount, also known as “bounce
protection” or “overdraft protection”.  The aggregate unused portion
of “bounce protection” was $7,742 and $5,003 at December 31, 2008 and
2007.





At
December 31, 2008 and 2007, the Banks had the following financial instruments
whose approximate contract amounts represent credit risk:





2008
            
            
            2007Standby
      letters of credit
            
            $
            1,411
            
            
            $
            977Commitments
      to extend creditFixed
            
            $
            12,674
            
            
            $
            6,100Variable
            
            
            41,167
            
            
            
            33,112





Standby
letters of credit represent conditional commitments issued by the Banks to
guarantee the performance of a third party.  The credit risk involved
in issuing these letters of credit is essentially the same as the risk involved
in extending loans to customers.  Collateral held varies but primarily
includes real estate and certificates of deposit.  Some letters of
credit are unsecured.





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Outstanding commitments
are at current market rates.  Fixed rate loan commitments have
interest rates ranging from 4.00% to 18.00%. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The Banks evaluate each customer’s creditworthiness on a case-by-case basis.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income producing properties.





(continued)
 107
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE
19 - LEGAL PROCEEDINGS





Legal
proceedings involving the Company and its subsidiaries periodically arise in the
ordinary course of business, including claims by debtors and their related
interests against the Company’s subsidiaries following initial collection
proceedings. These legal proceedings sometimes can involve claims for
substantial damages.  At December 31, 2008 management is unaware of
any legal proceedings for which the expected outcome would have a material
adverse effect upon the consolidated financial statements of the
Company.








NOTE 20 - STOCKHOLDERS’ EQUITY





The
Company’s principal source of funds for dividend payments is dividends received
from the subsidiary Banks.  Banking regulations limit the amount of
dividends that may be paid without prior approval of regulatory
agencies.  Under these regulations, the amount of dividends that may
be paid in any calendar year is limited to the current year’s net profits, as
defined, combined with the retained net profits of the preceding two years,
subject to the capital requirements and additional restrictions as discussed
below.  During 2009 the Banks could, without prior approval, declare
dividends to Premier of approximately $2.4 million plus any 2009 net profits
retained to the date of the dividend declaration.





The
Company and the subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies.  Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices.





These
quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined).  Management believes, as of
December 31, 2008 the Company and the Banks meet all quantitative capital
adequacy requirements to which they are subject.








(continued)
 108
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 20 - STOCKHOLDERS’ EQUITY
(Continued)





The
Company’s and the subsidiary Banks’ capital amounts and ratios as of December
31, 2008 are presented in the table below.  As of December 31, 2008,
the most recent notification from each of the Banks’ primary Federal regulators
categorized the subsidiary Banks as well capitalized under the regulatory
framework for prompt corrective action.  To be categorized as well
capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the following table.  There
are no conditions or events since that notification that management believes
have changed the Banks’ categories.








To
      Be Well CapitalizedFor
      Capital
            
            
            Under
      Prompt CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      Provisions2008
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioTotal
      Capital (to Risk-Weighted Assets):Consolidated (1)
            
            $
            66,556
            
            
            
            15.3
            %
            
            $
            34,882
            
            
            
            8
            %
            
            $
            43,602
            
            
            
            10
            %Boone County Bank
            
            
            18,546
            
            
            
            22.3
            
            
            
            6,647
            
            
            
            8
            
            
            
            8,309
            
            
            
            10Citizens Deposit
    Bank
            
            
            13,487
            
            
            
            17.5
            
            
            
            6,157
            
            
            
            8
            
            
            
            7,697
            
            
            
            10Farmers Deposit
    Bank
            
            
            8,441
            
            
            
            18.6
            
            
            
            3,627
            
            
            
            8
            
            
            
            4,534
            
            
            
            10Ohio River Bank
            
            
            7,943
            
            
            
            15.5
            
            
            
            4,111
            
            
            
            8
            
            
            
            5,139
            
            
            
            10First Central Bank
            
            
            10,663
            
            
            
            13.0
            
            
            
            6,544
            
            
            
            8
            
            
            
            8,180
            
            
            
            10Traders Bank
            
            
            15,584
            
            
            
            16.1
            
            
            
            7,763
            
            
            
            8
            
            
            
            9,704
            
            
            
            10Tier
      I Capital (to Risk-Weighted Assets):Consolidated (1)
            
            $
            61,070
            
            
            
            14.0
            %
            
            $
            17,441
            
            
            
            4
            %
            
            $
            26,161
            
            
            
            6
            %Boone County Bank
            
            
            17,503
            
            
            
            21.1
            
            
            
            3,323
            
            
            
            4
            
            
            
            4,985
            
            
            
            6Citizens Deposit
    Bank
            
            
            12,526
            
            
            
            16.3
            
            
            
            3,079
            
            
            
            4
            
            
            
            4,618
            
            
            
            6Farmers Deposit
    Bank
            
            
            7,856
            
            
            
            17.3
            
            
            
            1,813
            
            
            
            4
            
            
            
            2,720
            
            
            
            6Ohio River Bank
            
            
            7,419
            
            
            
            14.4
            
            
            
            2,056
            
            
            
            4
            
            
            
            3,083
            
            
            
            6First Central Bank
            
            
            9,773
            
            
            
            12.0
            
            
            
            3,272
            
            
            
            4
            
            
            
            4,908
            
            
            
            6Traders Bank
            
            
            14,357
            
            
            
            14.8
            
            
            
            3,882
            
            
            
            4
            
            
            
            5,822
            
            
            
            6Tier
      I Capital (to Average Assets):Consolidated (1)
            
            $
            61,070
            
            
            
            8.7
            %
            
            $
            28,114
            
            
            
            4
            %
            
            $
            35,143
            
            
            
            5
            %Boone County Bank
            
            
            17,503
            
            
            
            11.4
            
            
            
            6,163
            
            
            
            4
            
            
            
            7,703
            
            
            
            5Citizens Deposit
    Bank
            
            
            12,526
            
            
            
            10.1
            
            
            
            4,983
            
            
            
            4
            
            
            
            6,229
            
            
            
            5Farmers Deposit
    Bank
            
            
            7,856
            
            
            
            12.6
            
            
            
            2,496
            
            
            
            4
            
            
            
            3,120
            
            
            
            5Ohio River Bank
            
            
            7,419
            
            
            
            8.1
            
            
            
            3,687
            
            
            
            4
            
            
            
            4,609
            
            
            
            5First Central Bank
            
            
            9,773
            
            
            
            8.8
            
            
            
            4,432
            
            
            
            4
            
            
            
            5,540
            
            
            
            5Traders Bank
            
            
            14,357
            
            
            
            9.1
            
            
            
            6,318
            
            
            
            4
            
            
            
            7,897
            
            
            
            5(1)
      Consolidated company is not subject to Prompt Corrective Action
      Provisions





(continued)
 109
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 20 - STOCKHOLDERS’ EQUITY
(Continued)





The
Company’s and the subsidiary Banks’ capital amounts and ratios as of December
31, 2007 are presented in the table below:





To
      Be Well CapitalizedFor
      Capital
            
            
            Under
      Prompt CorrectiveActual
            
            
            Adequacy
      Purposes
            
            
            Action
      Provisions2007
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioTotal
      Capital (to Risk-Weighted Assets):Consolidated (1)
            
            $
            55,538
            
            
            
            17.3
            %
            
            $
            25,646
            
            
            
            8
            %
            
            $
            32,058
            
            
            
            10
            %Boone County Bank
            
            
            16,492
            
            
            
            20.9
            
            
            
            6,319
            
            
            
            8
            
            
            
            7,898
            
            
            
            10Citizens Deposit
    Bank
            
            
            13,253
            
            
            
            18.3
            
            
            
            5,805
            
            
            
            8
            
            
            
            7,256
            
            
            
            10Farmers Deposit
    Bank
            
            
            8,179
            
            
            
            18.4
            
            
            
            3,555
            
            
            
            8
            
            
            
            4,443
            
            
            
            10Ohio River Bank
            
            
            7,537
            
            
            
            16.5
            
            
            
            3,653
            
            
            
            8
            
            
            
            4,566
            
            
            
            10First Central Bank
            
            
            9,509
            
            
            
            11.8
            
            
            
            6,434
            
            
            
            8
            
            
            
            8,043
            
            
            
            10Tier
      I Capital (to Risk-Weighted Assets):Consolidated (1)
            
            $
            51,500
            
            
            
            16.1
            %
            
            $
            12,823
            
            
            
            4
            %
            
            $
            19,235
            
            
            
            6
            %Boone County Bank
            
            
            15,500
            
            
            
            19.6
            
            
            
            3,159
            
            
            
            4
            
            
            
            4,739
            
            
            
            6Citizens Deposit
    Bank
            
            
            12,342
            
            
            
            17.0
            
            
            
            2,902
            
            
            
            4
            
            
            
            4,354
            
            
            
            6Farmers Deposit
    Bank
            
            
            7,603
            
            
            
            17.1
            
            
            
            1,777
            
            
            
            4
            
            
            
            2,666
            
            
            
            6Ohio River Bank
            
            
            7,016
            
            
            
            15.4
            
            
            
            1,826
            
            
            
            4
            
            
            
            2,740
            
            
            
            6First Central Bank
            
            
            8,594
            
            
            
            10.7
            
            
            
            3,217
            
            
            
            4
            
            
            
            4,826
            
            
            
            6Tier
      I Capital (to Average Assets):Consolidated (1)
            
            $
            51,500
            
            
            
            9.8
            %
            
            $
            21,081
            
            
            
            4
            %
            
            $
            26,351
            
            
            
            5
            %Boone County Bank
            
            
            15,500
            
            
            
            10.6
            
            
            
            5,864
            
            
            
            4
            
            
            
            7,330
            
            
            
            5Citizens Deposit
    Bank
            
            
            12,342
            
            
            
            10.0
            
            
            
            4,927
            
            
            
            4
            
            
            
            6,159
            
            
            
            5Farmers Deposit
    Bank
            
            
            7,603
            
            
            
            11.2
            
            
            
            2,728
            
            
            
            4
            
            
            
            3,410
            
            
            
            5Ohio River Bank
            
            
            7,016
            
            
            
            8.4
            
            
            
            3,324
            
            
            
            4
            
            
            
            4,155
            
            
            
            5First Central Bank
            
            
            8,594
            
            
            
            8.1
            
            
            
            4,269
            
            
            
            4
            
            
            
            5,336
            
            
            
            5(1)
      Consolidated company is not subject to Prompt Corrective Action
      Provisions


(continued)
 110
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS





CONDENSED
      BALANCE SHEETSDecember
      312008
            
            
            2007ASSETSCash
            
            $
            4,659
            
            
            $
            7,858Investment
      in subsidiaries
            
            
            100,494
            
            
            
            67,688Premises
      and equipment
            
            
            437
            
            
            
            501Other
      assets
            
            
            231
            
            
            
            51Total
      assets
            
            $
            105,821
            
            
            $
            76,098LIABILITIES
      AND STOCKHOLDERS’ EQUITYOther
      liabilities
            
            $
            839
            
            
            $
            297Other
      borrowed funds
            
            
            15,560
            
            
            
            8,412Total liabilities
            
            
            16,399
            
            
            
            8,709Stockholders’
      equityPreferred stock
            
            
            -
            
            
            
            -Common stock
            
            
            2,264
            
            
            
            1,109Additional paid-in
      capital
            
            
            58,265
            
            
            
            43,763Retained earnings
            
            
            27,346
            
            
            
            22,444Accumulated other comprehensive
      income
            
            
            1,547
            
            
            
            73Total stockholders’
      equity
            
            
            89,422
            
            
            
            67,389Total
      liabilities and stockholders’ equity
            
            $
            105,821
            
            
            $
            76,098











(continued)
 111
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 21 - PARENT COMPANY FINANCIAL
STATEMENTS(Continued)





Condensed
      Statement of OperationsYears
      Ended December 312008
            
            
            2007
            
            
            2006IncomeDividends from
      subsidiaries
            
            $
            7,395
            
            
            $
            11,085
            
            
            $
            6,440Interest and dividend
      income
            
            
            62
            
            
            
            41
            
            
            
            37Other income
            
            
            648
            
            
            
            648
            
            
            
            615Total income
            
            
            8,105
            
            
            
            11,774
            
            
            
            7,092ExpensesInterest expense
            
            
            590
            
            
            
            769
            
            
            
            1,334Salaries and employee
      benefits
            
            
            1,448
            
            
            
            1,337
            
            
            
            1,199Professional fees
            
            
            362
            
            
            
            136
            
            
            
            165Accelerated subordinated debenture
      issuance costs
            
            
            -
            
            
            
            -
            
            
            
            548Other expenses
            
            
            569
            
            
            
            497
            
            
            
            420Total expenses
            
            
            2,969
            
            
            
            2,739
            
            
            
            3,666Income
      before income taxes
              and equity in undistributed income
      of subsidiaries
            
            
            5,136
            
            
            
            9,035
            
            
            
            3,426Income
      tax (benefit)
            
            
            (907
            )
            
            
            (837
            )
            
            
            (1,160
            )Income
      before equity in undistributed income of subsidiaries
            
            
            6,043
            
            
            
            9,872
            
            
            
            4,586Equity
      in undistributed income (excess distributions)
              of subsidiaries
            
            
            1,493
            
            
            
            (2,753
            )
            
            
            1,915Net
      income
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501








(continued)
 112
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 21 - PARENT COMPANY FINANCIAL
STATEMENTS(Continued)





Condensed
      Statement of Cash FlowsYears
      Ended December 312008
            
            
            2007
            
            
            2006Cash
      flows from operating activitiesNet income
            
            $
            7,536
            
            
            $
            7,119
            
            
            $
            6,501Adjustments to reconcile net
      income to
              net cash from operating
      activitiesDepreciation
            
            
            95
            
            
            
            97
            
            
            
            101Stock compensation
      expense
            
            
            120
            
            
            
            130
            
            
            
            142(Gain) loss from sales of
      assets
            
            
            -
            
            
            
            (5
            )
            
            
            (4
            )Dividends in excess of net income
      of subsidiaries
            
            
            -
            
            
            
            2,753
            
            
            
            -Equity in undistributed earnings
      of subsidiaries
            
            
            (1,493
            )
            
            
            -
            
            
            
            (1,915
            )Change in other
      assets
            
            
            (52
            )
            
            
            324
            
            
            
            258Change in other
      liabilities
            
            
            85
            
            
            
            (141
            )
            
            
            17Net cash from operating
      activities
            
            
            6,291
            
            
            
            10,277
            
            
            
            5,100Cash
      flows from investing activitiesProceeds from liquidation of
      subsidiary
            
            
            -
            
            
            
            -
            
            
            
            203Purchases of
      subsidiaries
            
            
            (14,300
            )
            
            
            -
            
            
            
            -Proceeds from sales of assets, net
      of purchases
            
            
            (31
            )
            
            
            (33
            )
            
            
            (116
            )Net cash from investing
      activities
            
            
            (14,331
            )
            
            
            (33
            )
            
            
            87Cash
      flows from financing activitiesEarly redemption of subordinated
      note
            
            
            -
            
            
            
            -
            
            
            
            (15,250
            )Cash dividends paid to
      shareholders
            
            
            (2,634
            )
            
            
            (2,095
            )
            
            
            (523
            )Issuance of common
      stock
            
            
            -
            
            
            
            10
            
            
            
            27Proceeds from
      borrowings
            
            
            11,550
            
            
            
            -
            
            
            
            13,500Payments on other borrowed
      funds
            
            
            (4,075
            )
            
            
            (3,863
            )
            
            
            (2,627
            )Net cash from financing
      activities
            
            
            4,841
            
            
            
            (5,948
            )
            
            
            (4,873
            )Net
      change in cash and cash equivalents
            
            
            (3,199
            )
            
            
            4,296
            
            
            
            314Cash
      and cash equivalents at beginning of year
            
            
            7,858
            
            
            
            3,562
            
            
            
            3,248Cash
      and cash equivalents at end of year
            
            $
            4,659
            
            
            $
            7,858
            
            
            $
            3,562





(continued)
 113
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)





Earnings
      Per ShareInterest
      Income
            
            
            Net
      Interest Income
            
            
            Net
      Income
            
            
            Basic
            
            
            Diluted2008First
      Quarter
            
            $
            8,427
            
            
            $
            5,594
            
            
            $
            1,774
            
            
            $
            0.34
            
            
            $
            0.34Second
      Quarter
            
            
            9,433
            
            
            
            6,449
            
            
            
            1,930
            
            
            
            0.32
            
            
            
            0.32Third
      Quarter
            
            
            10,276
            
            
            
            7,177
            
            
            
            1,930
            
            
            
            0.30
            
            
            
            0.30Fourth
      Quarter
            
            
            9,708
            
            
            
            6,815
            
            
            
            1,902
            
            
            
            0.30
            
            
            
            0.302007First
      Quarter
            
            $
            8,612
            
            
            $
            5,511
            
            
            $
            1,786
            
            
            $
            0.34
            
            
            $
            0.34Second
      Quarter
            
            
            8,712
            
            
            
            5,551
            
            
            
            1,790
            
            
            
            0.34
            
            
            
            0.34Third
      Quarter
            
            
            8,738
            
            
            
            5,590
            
            
            
            1,807
            
            
            
            0.35
            
            
            
            0.34Fourth
      Quarter
            
            
            8,690
            
            
            
            5,644
            
            
            
            1,736
            
            
            
            0.33
            
            
            
            0.33





In
2008, interest income increased significantly in the second quarter and further
still in the third quarter largely due to the additional earning assets acquired
via the purchases of Citizens First and Traders on April 30,
2008.  The increase in interest income was tempered somewhat in the
fourth quarter due to declining yields on loans and federal funds
sold.  The increases in interest income resulted in increases in net
interest income and net income in 2008.  In contrast to the increases
in net income, earnings per share decreased in the second and third quarters of
2008 due to the additional shares issued to acquire Citizens First and Traders
on April 30, 2008.





In
2007, interest income improved in each of the first three quarters as yields on
investments securities increased and the outstanding balance of federal funds
sold increased.  In the fourth quarter, as the Federal Reserve began
reducing its targeted federal funds rate, the Company’s interest income also
began to decline.  The improvement in interest income resulted in the
improvement in net interest income, but was tempered by a rising trend in the
rates paid on deposits.  During the first two quarters of 2007, the
Company aggressively reduced its FHLB and bank borrowings as funds became
available.  This debt reduction also served to improve net interest
income.  Fourth quarter net interest income also benefitted from the
decline in the floating interest rate on bank borrowings.











(continued)
 114
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 23- ACQUISITIONS





At
the close of business on April 30, 2008, the Company completed its acquisition
of Traders Bankshares, Inc. (“Traders”), a $108 million bank holding company
headquartered in Spencer, West Virginia.  Under terms of the
definitive agreement of merger dated November 27, 2007, each share of Traders
common stock was entitled to merger consideration of $50.00 cash and 3.75 shares
of Premier common stock.  Premier issued approximately 675,000 shares
of its common stock and paid in total $9.0 million in cash to the shareholders
of Traders.  The cash portion of the merger consideration was funded
by proceeds from a borrowing from First Guaranty Bank more fully described in Note 10.  The value of the transaction is estimated
at $18.1 million.  The acquisition of Traders afforded Premier the
opportunity to expand its presence in Jackson County, West Virginia and enter
new adjoining markets in Roane and Wood Counties, West Virginia.  The
purchase price resulted in approximately $7.3 million in goodwill and $1.5
million in core deposit intangible, none of which is deductible for tax
purposes.  The purchase price resulted in goodwill as the Company
believes there are cost saving synergies to be obtained and long-term expansion
opportunities in the acquired markets beyond the existing customer
base.  The core deposit intangible will be amortized using an
accelerated method.  Purchase accounting adjustments are subject to
refinement as management finalizes the calculations.





Also
at the close of business on April 30, 2008, the Company completed its
acquisition of Citizens First Bank, Inc. (“Citizens First”) a $62 million bank
headquartered in Ravenswood, West Virginia.  Under terms of the
definitive agreement of merger dated October 24, 2007, each share of Citizens
First common stock was entitled to merger consideration of $13.25 cash and 1.20
shares of Premier common stock.  Premier issued approximately 480,000
shares of its common stock and paid in total $5.3 million in cash to the
shareholders of Citizens First.  The cash portion of the merger
consideration was funded from cash on hand of Premier.  The value of
the transaction is estimated at $11.7 million.  The acquisition of
Citizens First afforded Premier the opportunity to enter new markets in Jackson
County, West Virginia.  The purchase price resulted in approximately
$5.4 million in goodwill and $169,000 in core deposit intangible, none of which
is deductible for tax purposes.  The purchase price resulted in
goodwill as the Company believes there are long-term expansion opportunities in
the acquired markets beyond the existing customer base.  The core
deposit intangible will be amortized using an accelerated
method.  Purchase accounting adjustments are subject to refinement as
management finalizes the calculations.  On October 24, 2008, Citizens
First Bank was merged into Traders Bank, Inc.


(continued)
 115
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 23- ACQUISITIONS(Continued)





Net
assets acquired via each transaction are shown in the table below:





Citizens
      First
            
            
            TradersCash
      and due from banks
            
            $
            2,300
            
            
            $
            3,285Federal
      funds sold
            
            
            8,394
            
            
            
            2,448Securities
      available for sale
            
            
            4,097
            
            
            
            40,643Loans,
      net
            
            
            44,773
            
            
            
            50,551Goodwill
      and other intangible assets
            
            
            5,580
            
            
            
            8,752Other
      assets
            
            
            2,904
            
            
            
            6,809Total assets
    acquired
            
            
            68,048
            
            
            
            112,488Deposits
            
            
            (56,020
            )
            
            
            (92,807
            )Other
      liabilities
            
            
            (328
            )
            
            
            (1,541
            )Total liabilities
      assumed
            
            
            (56,348
            )
            
            
            (94,348
            )Net assets
    acquired
            
            $
            11,700
            
            
            $
            18,140





The
results of operations of Citizens First and Traders are included in Premier’s
consolidated statements of income beginning as of the acquisition
date.  The following table presents pro forma condensed income
statements as if the mergers had occurred at the beginning of each period
presented:





(Unaudited)2008
            
            
            2007Interest
      income
            
            $
            41,266
            
            
            $
            45,625Interest
      expense
            
            
            13,118
            
            
            
            16,555Net interest
income
            
            
            28,148
            
            
            
            29,070Provision
      for loan losses
            
            
            147
            
            
            
            (76
            )Net interest income after
      provision
            
            
            28,001
            
            
            
            29,146Non-interest
      income
            
            
            5,564
            
            
            
            5,488Non-interest
      expense
            
            
            24,112
            
            
            
            22,714Income before income
      taxes
            
            
            9,453
            
            
            
            11,920Income
      tax expense
            
            
            3,088
            
            
            
            3,938Net income
            
            $
            6,365
            
            
            $
            7,982Basic
      earnings per share
            
            $
            1.00
            
            
            $
            1.25Diluted
      earnings per share
            
            
            0.99
            
            
            
            1.24








(continued)
 116
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 24 - PENDING ACQUISITION





On
December 31, 2008, the Company entered into a material definitive agreement with
Abigail Adams National Bancorp, Inc. (Abigail Adams), a two bank holding company
with $436 million of total assets at December 31, 2008 with locations in and
around Washington, DC and Richmond, Virginia.  Under terms of the
definitive agreement, Premier agreed to purchase Abigail Adams for approximately
$10.8 million in stock.  Each share of Abigail Adams common stock will
be entitled to merger consideration of 0.4461 shares of Premier common
stock.  Premier will issue approximately 1,545,000 shares of its
common stock to the stockholders of Abigail Adams.  The transaction,
which is subject to certain conditions precedent, still requires approval by
Abigail Adams’ stockholders and bank regulatory authorities, and the issuance of
Premier common stock in the merger requires Premier stockholder
approval.  It is anticipated to close sometime in the second quarter
of 2009.  Premier is also guarantor of a $6.0 million line of credit
that Abigail Adams has from the Bankers’ Bank of which $4.2 million was
outstanding at December 31, 2008.





NOTE 25 – CAPITAL PURCHASE PROGRAM





It is
a condition to the completion of the merger with Abigail Adams that Premier
complete the sale of $24.0 million of Premier preferred stock to the U.S.
Treasury under the Troubled Asset Relief Program (“TARP”) Capital Purchase
Program (“CPP”).  Premier has applied for approval to participate in
the CPP but has yet to receive any approval from the U.S.
Treasury.  Premier’s participation in the CPP program will affect the
stockholders of Premier common stock in the following ways.  Upon
Premier’s participation in the U.S. Treasury’s CPP, the U.S. Treasury would
purchase from Premier cumulative perpetual preferred shares, with a liquidation
preference of at least one thousand dollars per share (the “Senior Preferred
Shares”).  Based upon an investment of $24.0 million, Premier would
issue 24,000 Senior Preferred Shares, each with a liquidation preference of one
thousand dollars per share.  The Senior Preferred Shares would
constitute Tier 1 capital and would rank senior to Premier’s common
shares.  The Senior Preferred Shares would pay cumulative dividends at
a rate of 5% per annum for the first five years and would reset to a rate of 9%
per annum after year five.  Dividends would be payable quarterly in
arrears.








(continued)
 117
 Table of Contents


PREMIER
FINANCIAL BANCORP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2008, 2007, and 2006


(Dollars
in Thousands, Except Per Share Data)








NOTE 25- CAPITAL PURCHASE PROGRAM(Continued)





The
Senior Preferred Shares would be non-voting shares, but would have class voting
rights on (i) any authorization or issuance of shares ranking senior to the
Senior Preferred Shares; (ii) any amendment to the rights of the Senior
Preferred Shares; or (iii) any merger, consolidation, share exchange,
reclassification or similar transaction which would adversely affect the rights
of the Senior Preferred Shares.  In the event that the cumulative
dividends described above were not paid in full for an aggregate of six dividend
periods or more, whether or not consecutive, the authorized number of directors
of Premier would automatically be increased by two and the holders of the Senior
Preferred Shares would have the right to elect two directors.  The
right to elect directors would end when dividends have been paid in full for
four consecutive dividend periods.





Each
financial institution participating in the CPP must also issue a warrant (the
“Warrant”) to the U.S. Treasury to purchase a number of common shares having a
market price equal to 15% of the aggregate amount of the Senior Preferred Shares
purchased by the U.S. Treasury.  The market price for determining the
number of common shares subject to the Warrant will be calculated based on the
average of the closing prices of Premier’s common shares on the 20 trading days
prior to preliminary approval to participate in the CPP by the U.S. Treasury.
The Warrant will have a 10 year term.  Issuance and exercise of the
Warrant would dilute the interests of existing Premier common
shareholders.





To
participate in the CPP, Premier would also be required to adopt the U.S.
Treasury’s standards for executive compensation and corporate governance, as
amended from time-to-time, for the period during which the U.S. Treasury holds
equity issued under the CPP.





118
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008





Item 9.  Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure




There have been no changes in or
disagreements with accountants on accounting or financial disclosure
matters.





Item 9A(T).  Controls and
Procedures





A.
            Disclosure
      Controls & Procedures





Premier management, including the Chief
Executive Officer and Chief Financial Officer, has conducted an evaluation of
the effectiveness of disclosure controls and procedures pursuant to the
Securities and Exchange Act of 1934 Rule 13a-15c as of the end of the period
covered by this annual report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this annual report has been made known to them in a timely
fashion.





B.
            Management’s
      Report on Internal Control Over Financial
  Reporting





Management of the Company is
responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) under the Securities Exchange
Act of 1934. The Company’s internal control over financial reporting is designed
to provide reasonable assurance to the Company’s management and board of
directors regarding the preparation and fair presentation of published financial
statements.





Management assessed the effectiveness
of the Company’s internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control — Integrated Framework. Based on our
assessment, we believe that, as of December 31, 2008, the Company’s internal
control over financial reporting is effective based on those
criteria.





This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting.  Management’s report was
not subject to attestation by the Company’s registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.





119
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








/s/
      Robert W. Walker
            
            /s/
      Brien M. ChaseRobert
      W. Walker, President and
            
            Brien
      M. Chase, Senior Vice PresidentChief
      Executive Officer
            
            and
      Chief Financial OfficerDate:  March
      27, 2009
            
            Date:  March
      27, 2009





C.         Changes
in Internal Controls over Financial Reporting





There were no changes in internal
controls over financial reporting during the fourth fiscal quarter that have
materially affected or are reasonably likely to materially affect Premier's
internal controls over financial reporting.





D.         Inherent
Limitations on Internal Control





"Internal controls" are procedures,
which are designed with the objective of providing reasonable assurance that (1)
transactions are properly authorized; (2) assets are safeguarded against
unauthorized or improper use; and (3) transactions are properly recorded and
reported, all so as to permit the preparation of reports and financial
statements in conformity with generally accepted accounting principles. However,
a control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their cost. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. The design of any system of controls is also based, in part,
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, a control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. Finally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control.





Item 9B.  Other Information





None





120
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








PART
III




Item 10, 11, 12, 13 and 14.  Directors, Executive
Officers and Corporate Governance; Executive Compensation; Security Ownership
of Certain
Beneficial Owners and Management and Related Stockholder Matters; Certain
Relationships and Related Transactions, and
Director Independence; and Principal Accountant Fees and
Services




The
information required by these Items is omitted because the Company is filing a
definitive proxy statement pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report which includes the
required information. The required information contained in the Company's proxy
statement is incorporated herein by reference.








121
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PREMIER
FINANCIAL BANCORP, INC.


FORM
10-K


December
31, 2008








PART
IV





Item 15.  Exhibits and Financial Statement
Schedules





(a)          The
following documents are filed as part of this report:





1.      Financial Statements:





2.      Financial Statement
Schedules:





No
financial statement schedules have been included as part of this report because
they are either not required or the information  is otherwise
included.





3.      List of Exhibits:





The following is a list of
exhibits required by Item 601 of Regulation S-K and by paragraph (c) of this
Item 14.


Exhibit
                Number
              Description
      of Document2.1
              Definitive
      Merger Agreement between Premier Financial Bancorp, Inc. and Citizens
      First Bank, Inc. dated October 24, 2007, filed as Exhibit 10.1 to form 8-K
      filed on October 25, 2007 is incorporated herein by
      reference.2.2
              Definitive
      Merger Agreement between Premier Financial Bancorp, Inc. and Traders
      Bankshares, Inc. dated November 27, 2007, filed as Exhibit 10.1 to form
      8-K filed on November 28, 2007 is incorporated herein by
      reference.2.3
              Definitive
      Merger Agreement between Premier Financial Bancorp, Inc. and Abigail Adams
      National Bancorp, Inc. dated December 30, 2008, filed as Exhibit 2.1 to
      form 8-K filed on January 2, 2009 is incorporated herein by
      reference.3.1
              Form
      of Articles of Incorporation of registrant (included as Exhibit 3.1 to
      registrant's Registration Statement on Form S-1, Registration
      No.  333-1702, filed on February 28, 1996 with the Commission
      and incorporated herein by reference).3.2
              Form
      of Articles of Amendment to Articles of Incorporation effective March 15,
      1996 re: amendment to Article IV (included as Exhibit 3.2 to registrant's
      Amendment No. 1 to Registration Statement on Form S-1, Registration
      No.  333-1702, filed on March 25, 1996 with the Commission and
      incorporated herein by reference).3.3
              By-Laws
      of Premier Financial Bancorp, Inc., as amended, filed as Exhibit 3.1 to
      Form 10-Q filed on November 13, 2007 is incorporated herein by
      reference.***
      10.1
              Premier
      Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan
      (included as Exhibit 10.6 to registrant's Registration Statement on Form
      S-1, Registration No.  333-1702, filed on February 28, 1996 with
      the Commission and incorporated herein by
  reference).


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Exhibit
              Number
            Description
      of Document***
      10.2
            Premier
      Financial Bancorp, Inc.'s 2002 Employee Stock Ownership Incentive Plan,
      filed as Annex A to definitive proxy statement dated May 17, 2002, filed
      on April 30, 2002 with the Commission, is incorporated herein by
      reference.***
      10.3
            Form
      of Stock Option Agreement pursuant to 2002 Employee Stock Ownership
      Incentive Plan, filed as Exhibit 10.1 to form 8-K filed January 24, 2005,
      is incorporated herein by reference.10.4
            Premier
      Financial Bancorp, Inc. written agreement with the Federal Reserve Bank of
      Cleveland dated January 29, 2003, filed as Exhibit 10.4 to form 10-K filed
      on March 27, 2003, is incorporated herein by
  reference.10.5
            Premier
      Financial Bancorp, Inc. contract with Fiserv Solutions, Inc. dated
      December 20, 2004, filed as Exhibit 10 to form 8-K filed December 23,
      2004, is incorporated herein by reference.10.6
            Loan
      Agreement between Premier Financial Bancorp, Inc. and The Kentucky
      Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed on November
      10, 2006, is incorporated herein by reference.10.7
            Term
      Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.2 to form 8-K
      filed on November 10, 2006, is incorporated herein by
      reference.10.8
            Promissory
      Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.3 to
      form 8-K filed on November 10, 2006, is incorporated herein by
      reference.10.9
            Stock
      Pledge and Security Agreement between Premier Financial Bancorp, Inc. and
      The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.4 to form 8-K filed
      on November 10, 2006, is incorporated herein by
    reference.10.10
            Loan
      Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank,
      Hammond, Louisiana, filed as Exhibit 10.1 to form 8-K filed May 1, 2008,
      is incorporated herein by reference.10.11
            Promissory
      Note to First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.2 to
      form 8-K filed May 1, 2008, is incorporated herein by
      reference.10.12
            Collateral
      Agreement with First Guaranty Bank, Hammond Louisiana, filed as Exhibit
      10.8 to form 10-K filed March 30, 2006, is incorporated herein by
      reference.10.13
            Loan
      Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc.
      filed as Exhibit 10.1 to form 8-K filed November 10, 2008, is incorporated
      herein by reference.10.14
            Loan
      Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc.
      filed as Exhibit 10.1 to form 8-K filed December 23, 2008, is incorporated
      herein by reference.14.1
            Premier
      Financial Bancorp, Inc. Code of Ethics for the Chief Executive Officer,
      Chief Financial Officer and Chief Accounting Officer, filed as Exhibit
      14.1 to form 10-K filed on April 14, 2004, is incorporated herein by
      reference.14.2
            Premier
      Financial Bancorp, Inc. Code of Business Conduct and Ethics, filed as
      Exhibit 14.2 to form 10-K filed on April 14, 2004, is incorporated herein
      by reference.


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December
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Exhibit
              Number
            Description
      of Document21
            Subsidiaries of
  registrant23
            Consent of Independent Registered Public
      Accounting Firm31.1
            Principal Executive Officer Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Robert W.
      Walker31.2
            Principal Executive Officer Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Brien M.
      Chase32
            Robert W. Walker and Brien M. Chase
      Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act 2002.***
      Denotes executive compensation plans and
  arrangements.





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SIGNATURES





Pursuant to the requirements of the
Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.





PREMIER
      FINANCIAL BANCORP, INC.By:  /s/
      Robert W. Walker, PresidentRobert
      W. Walker, PresidentDate:  March
      27, 2009





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Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.





/s/ Robert W. Walker
            Principal Executive and
      Director
            March 27, 2009Robert W. Walker/s/ Brien M. Chase
            Principal Financial and
      Accounting
            March 27, 2009Brien M. Chase
            Officer/s/ Toney K. Adkins
            Director
            March 18, 2009Toney K. Adkins/s/ Hosmer A. Brown, III
            Director
            March 18, 2009Hosmer A. Brown, III/s/ Edsel Burns
            Director
            March 20, 2009Edsel Burns/s/ E. V. Holder, Jr.
            Director
            March 18, 2009E. V. Holder, Jr./s/ Keith F. Molihan
            Director
            March 18, 2009Keith F. Molihan/s/ Marshall T. Reynolds
            Chairman of the Board
            March 18, 2009Marshall T. Reynolds/s/ Neal Scaggs
            Director
            March 18, 2009Neal Scaggs/s/ Thomas W. Wright
            Director
            March 18, 2009Thomas W. Wright








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