**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, 2005**





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:   **NONE**
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 Title
                  of each class
              
              Name
                  of exchange on which registered**Common
                  Stock without par value**
              
              **NASDAQ:NMS**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes o 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 Act Yes  o  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 .
      Yes þ No o .





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


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**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005











Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
                accelerated filero.
            Accelerated
                filero.
            Non-accelerated
                filerþ





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





As
      of
      June 30, 2005, the aggregate market value of the registrant’s common stock held
      by non-affiliates of the registrant was $56,532,143 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, 2006**Common
                  Stock without par value**
              
              **5,235,564**
 
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 Document
              
              Parts
                  Into Which IncorporatedProxy
                  Statement for the Annual Meeting of Shareholders to be held on
                  June 21,
                  2006.
              
              Part
                  III
  
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **FORM
          10-K**
 December
          31, 2005
 
 
 TABLE
                    OF CONTENTS**PART
                    I**Item
                    1.
                
                Description
                    of Business
                
                4Item
                    1A.
                
                Risk
                    Factors
                
                16Item
                    2.
                
                Properties
                
                21Item
                    3.
                
                Legal
                    Proceedings
                
                21Item
                    4.
                
                Submissions
                    of Matters to a Vote of Security
                    Holders
                
                21**PART
                    II**Item
                    5.
                
                Market
                    for Registrant’s Common Equity and Related
                    Stockholder Matters
                
                22Item
                    6.
                
                Selected
                    Financial Data
                
                24Item
                    7.
                
                Management’s
                    Discussion and Analysis of Financial Condition
                    and Results of Operations
                
                25Item
                    8.
                
                Financial
                    Statements and Supplementary
                    Data
                
                62Independent
                    Auditor’s Report
                
                64Consolidated
                    Statements of Financial
                    Condition
                
                65Consolidated
                    Statements of
                    Operations
                
                66Consolidated
                    Statements of Comprehensive
                    Income
                
                68Consolidated
                    Statements of Changes in
                    Stockholders’ Equity
                
                69Consolidated
                    Statements of Cash
                    Flows
                
                70Notes
                    to Consolidated Financial
                    Statements
                
                72**PART
                  III**Item
                    9.
                
                Changes
                    in and Disagreements with Accountants on Accounting
                    and Financial Disclosure
                
                103Item
                    9A.
                
                Controls
                    and Procedures
                
                103Item
                    10.
                
                Directors
                    and Executive Officers of
                    Registrant
                
                105Item
                    11.
                
                Executive
                    Compensation
                
                105Item
                    12.
                
                Security
                    Ownership of Certain Beneficial and Management and
                    Related Stockholder Matters
                
                105Item
                    13.
                
                Certain
                    Relationships and Related
                    Transactions
                
                105Item
                    14.
                
                Principal
                    Accountant Fees and Services
                
                105**PART
                    IV**Item
                    15.
                
                Exhibits
                    and Financial Statement
                    Schedules
                
                106Signatures
                
                109
 
   Table
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              Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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, 2006, operates ten banking offices in Kentucky,
      three banking offices in Ohio, and six banking offices in West Virginia. At
      December 31, 2005, Premier had total consolidated assets of $528.3 million,
      total consolidated deposits of $435.8 million and total consolidated
      shareholders' equity of $54.3 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; and Boone County Bank,
      Inc., Madison, West Virginia.




In
      2000
      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. 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. 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
      June 16,
      2003 Premier announced that as a result of an ongoing internal investigation,
      it
      had uncovered a systematic disregard for its loan approval and credit
      administration policies at its Farmers Deposit Bank subsidiary and had accepted
      the resignation of the bank's former president. On November 7, 2003 Premier
      disclosed that the Securities and Exchange Commission had requested information
      about Premier's internal investigation. As the internal investigation
      progressed, many loans were charged off and additional provisions for loan
      losses were recorded. Premier's management, with the assistance of outside
      independent professionals, conducted a further review of those loans for which
      significant charge offs or additional provisions were required in 2003. The
      purpose of the review was to determine if the facts or circumstances that gave
      rise to additional charge offs or provisions had been improperly withheld from
      senior management or improperly considered in applying management's estimates
      and judgments as to the adequacy of the allowance for loan losses in financial
      statement periods prior to 2003. The review did identify instances in which
      collateral securing loans had been released without proper support or notation
      in loan files, instances in which obligors on notes had been released from
      their
      repayment obligation without proper support or notation in loan files and
      instances in which delinquent loan reporting systems had been manipulated to
      prevent problem loans from being identified on a timely basis. Premier's


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**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








senior
      management determined that if these circumstances had been considered in
      evaluating the adequacy of the allowance for loan losses in prior periods then
      some of the loan charge offs and additional provisions for loan losses recorded
      in 2003 should have been reflected in prior periods. Therefore the financial
      statements for 2002 were restated, as reported in the 2003 Annual Report to
      Shareholders, to reflect the financial statement effect of the matters that
      occurred in those periods but which were improperly concealed by subsidiary
      management.




On
      December
      24, 2003, Premier announced that Farmers Deposit Bank had reached an agreement
      with the Federal Deposit Insurance Corporation ("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. The full text of the Order is available on
      the
      FDIC website at www.fdic.gov or by calling the FDIC Public Information Center
      at
      (877) 275-3342. Having found that Farmers Deposit had fully complied with the
      Order, the Supervisory Authorities rescinded the Order on December 13, 2005.




The
      Securities and Exchange Commission ("SEC") investigated the information
      disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the June 30,
      and
      September 30, 2003 Forms 10-Q regarding Farmers Deposit and requested
      information about Premier's internal investigation. Premier fully cooperated
      with the SEC. At the conclusion of its investigation, the SEC issued an
      administrative cease & desist order regarding Premier’s financial reporting
      and internal controls concerning Premier’s quarterly 2001 through 2003 and
      annual 2001 and 2002 public filings. According to the SEC Order, both the
      remedial acts promptly undertaken by Premier and Premier’s cooperation with the
      SEC Staff were taken into consideration in reaching the settlement.





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." See Note
      2 to
      the consolidated financial statements included later in this report for a more
      detailed discussion of discontinued operations.





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**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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 became inactive.





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 subsidiaries. See "REGULATORY MATTERS -- Dividend Restrictions"
      for
      discussion of the restrictions on the Affiliate Banks' ability to pay dividends
      to Premier.




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.


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**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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 their 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, Company senior management
      along with each Bank's management reviewed and standardized its offering of
      products and services, although pricing decisions will 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
      will be well positioned to take advantage of emerging technologies such as
      image
      exchange to clear items.


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          of Contents





**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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.
      Farmers Deposit Bank in Eminence, Kentucky, also offers limited trust services
      and acts as executor, administrator, trustee and in various other fiduciary
      capacities.





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. Consumer lending activities consist of
      traditional forms of financing for automobile and personal loans. 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. Farmers
      Deposit Bank has previously extended loans to professional athletes and their
      agents and advisors. This lending activity was curtailed in 2003.





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.





**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 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.





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          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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, interest rates charged on loans and other credit
      and service charges, 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 or PFBI Capital Trust preferred 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.





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.


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**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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 two 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 state banks and members of the
      Federal Reserve System are supervised and regulated by the Federal Reserve,
      and
      those state 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 subsidiaries 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.





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.


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**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








*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 2" capital, which 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 1 and Tier 2 capital) equal to at least 4% and 8% of total
      risk-weighted assets, respectively. At December 31, 2004, Premier met both
      requirements, with Tier I and total capital equal to 17.8% and 19.1% 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, 2004, Premier's leverage ratio was 10.6%.





On
      June 9, 1997, PFBI Capital Trust (Trust), a statutory business trust created
      under Delaware law, issued $28,750,000 of 9.750% Preferred Securities
      ("Preferred Securities" or "Trust Preferred Securities") with a stated value
      and
      liquidation preference of $25 per share. A portion of the Preferred Securities
      issued by the Trust qualifies as Tier 1 capital for the Company under the
      Federal Reserve Board's regulatory framework. The Federal Reserve Board recently
      re-evaluated whether trust preferred securities, in general, would continue
      to
      qualify as Tier 1 capital due to deconsolidation of the related trust preferred
      entity required by FASB Interpretation No. 46, . Its conclusion, issued in
      a
      report released on March 1 2005, was to continue to permit trust preferred
      securities to qualify as Tier I capital with certain restrictions phased in
      over
      five-years. Once completely phased-in, the dollar amount of trust preferred
      securities that will qualify as Tier I capital for bank holding companies of
      Premier's size will be limited to 25% of equity based Tier I capital net of
      goodwill. See Note 12 to the consolidated financial statements for additional
      details regarding the Company's Trust Preferred Securities.


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**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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.





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* - On
      September 29, 2000, the Company entered into an agreement with the Federal
      Reserve that prohibited the Company from paying dividends or incurring any
      additional debt without the prior written approval of the Federal Reserve.
      Additionally, the agreement required the Company to develop and monitor
      compliance with certain operational policies designed to strengthen Board of
      Director oversight including credit administration, liquidity, internal audit
      and loan review.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








On
      January 29, 2003, Premier entered into a written agreement with the Federal
      Reserve Bank of Cleveland in recognition of their common goal to restore the
      financial soundness of Premier. Among the provisions of the agreement was the
      continuation of the restriction on Premier's payment of dividends on its common
      stock (PFBI) without the express written consent of the Federal Reserve Bank
      of
      Cleveland and the continuation of the restriction on Premier's payment of
      quarterly distributions on its Trust Preferred Securities (PFBIP) without the
      express written consent of the Federal Reserve Bank of Cleveland. The written
      agreement supersedes and rescinds all previous agreements between Premier and
      the Federal Reserve Bank of Cleveland. Among other provisions, the agreement
      required(s) Premier to (i) retain an independent consultant to review its
      management, directorate and organizational structure, (ii) adopt a management
      plan responsive to such consultant's report, (iii) update its management
      succession plan in accordance with any recommendations in such consultant's
      report, (iv) monitor its subsidiary banks' compliance with bank policies and
      loan review programs, (v) conduct formal quarterly reviews of its subsidiary
      banks' allowances for loan losses, (vi) maintain sufficient capital, (vii)
      submit a plan to the Federal Reserve Bank of Cleveland for improving
      consolidated earnings over a three-year period, and (viii) submit to the Federal
      Reserve Bank of Cleveland annual projections of planned sources and uses of
      the
      parent company's cash, including a plan to service its outstanding debt and
      trust preferred securities. Premier's compliance with the written agreement
      is
      monitored by a committee consisting of at least three of its outside directors.
      The agreement, which requires periodic reporting, will remain in force until
      the
      FRB is satisfied that the Company and the banks have fully complied with the
      terms of the agreement.





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 the
      regulators.





On
      December 24, 2003, Premier announced that Farmers Deposit Bank had reached
      an
      agreement with the Federal Deposit Insurance Corporation ("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. The full text of the Order is available on
      the
      FDIC website at www.fdic.gov or by calling the FDIC Public Information Center
      at
      (877) 275-3342. Having found that Farmers Deposit had fully complied with the
      Order, the Supervisory Authorities rescinded the Order on December 13, 2005.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








The
      Securities and Exchange Commission ("SEC") investigated the information
      disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the June 30,
      and
      September 30, 2003 Forms 10-Q regarding Farmers Deposit and requested
      information about Premier's internal investigation. Premier fully cooperated
      with the SEC. At the conclusion of its investigation, the SEC issued an
      administrative cease & desist order regarding Premier’s financial reporting
      and internal controls concerning Premier’s quarterly 2001 through 2003 and
      annual 2001 and 2002 public filings. According to the SEC Order, both the
      remedial acts promptly undertaken by Premier and Premier’s cooperation with the
      SEC Staff were taken into consideration in reaching the settlement.





*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, 2005, approximately $2.5 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.





On
      January 29, 2003, Premier entered into a written agreement with the Federal
      Reserve Bank of Cleveland in recognition of their common goal to restore the
      financial soundness of Premier. Among the provisions of the agreement was the
      continuation of the restriction on Premier's payment of dividends on its common
      stock (PFBI) without the express written consent of the Federal Reserve Bank
      of
      Cleveland and the continuation of the restriction on Premier's payment of
      quarterly distributions on its Trust Preferred Securities (PFBIP) without the
      express written consent of the Federal Reserve Bank of Cleveland.





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.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








*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.





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 215 full-time
      equivalent employees as of December 31, 2005. Its executive offices are located
      at 2883 5th Avenue, Huntington, West Virginia 25702, telephone number (304)
      525-1600 (facsimile number (304) 525-9701).


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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 payment by the borrower rises
      to the extent permitted by the terms of the loan, and the increased 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


Table
            of Contents




**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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.





**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, Lewis, Lincoln, Logan, Kanawha and Upshur,
      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.





**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.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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.





**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.





**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.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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 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 is currently and certain
      of its Affiliate Banks have been in the past, subject to such corrective actions
      plans and therefore there 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” and Notes
      3 and 12 to consolidated financial statements included elsewhere in this
      report.





**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 ,
      distributions on its Trust Preferred Securities 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 regula-tions, 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 20
      to
      the consolidated financial statements. During 2006 the Banks could, without
      prior approval, declare dividends of approximately $2.5 million plus any 2006
      net profits retained to the date of the dividend declaration.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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 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 give 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.





**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





**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.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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 (formerly the
      Bank
      of Germantown). 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 and the two former locations of the Bank of Germantown, 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 two branches in Henry County,
      Kentucky. 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. 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.





**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.




The
      Securities and Exchange Commission ("SEC") investigated the information
      disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the June 30,
      and
      September 30, 2003 Forms 10-Q regarding Farmers Deposit and requested
      information about Premier's internal investigation. Premier fully cooperated
      with the SEC. At the conclusion of its investigation, the SEC issued an
      administrative cease & desist order regarding Premier’s financial reporting
      and internal controls concerning Premier’s quarterly 2001 through 2003 and
      annual 2001 and 2002 public filings. According to the SEC Order, both the
      remedial acts promptly undertaken by Premier and Premier’s cooperation with the
      SEC Staff were taken into consideration in reaching the settlement.





**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.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**PART
      II**





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




The
      Company's
      common stock is listed on the NASDAQ National Market System under the symbol
      PFBI. At December 31, 2005, the Company had approximately 674 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
            
            Sales
                PriceDividends
                Paid
            
            High
            
            Low2004First
                Quarter
            
            $
            -
            
            $
            9.49
            
            $
            8.31Second
                Quarter
            
            
            -
            
            
            10.20
            
            
            8.41Third
                Quarter
            
            
            -
            
            
            10.28
            
            
            8.50Fourth
                Quarter
            
            
            -
            
            
            13.35
            
            
            8.80-2005First
                Quarter
            
            $
            -
            
            $
            12.75
            
            $
            10.78Second
                Quarter
            
            
            -
            
            
            13.00
            
            
            10.00Third
                Quarter
            
            
            -
            
            
            14.93
            
            
            11.90Fourth
                Quarter
            
            
            -
            
            
            15.98
            
            
            12.66-2006First
                Quarter (through March 15, 2006)
            
            $
            -
            
            $
            16.44
            
            $
            14.01







The
      Board of
      Directors suspended the payment of dividends during the second quarter of 2000.
      In September 2000, as a result of an agreement entered into with the Federal
      Reserve, the Company agreed not to declare additional dividends without the
      prior approval of the Federal Reserve. The September 2000 agreement was
      superceded by a January 29, 2003 written agreement between Premier and the
      Federal Reserve which continued the restriction on dividends. The Board of
      Directors anticipates paying dividends at some future date when, in its
      discretion, financial prudence allows and the Federal Reserve concurs in the
      payment of such dividends. The January 29, 2003 agreement also restricts
      Premier's payments of dividends on its PFBI Capital Trust preferred securities.
      These dividends are cumulative and all deferred distributions must be paid
      before dividends may be paid to holders of common shares. Even if the Company
      is
      able to resume the payment of dividends, there can be no assurance that the
      amount of the dividends will be what the Company paid before the payment of
      dividends was suspended.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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, 2005
      approximately $2.5 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.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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
      Note
      2 to the consolidated financial statements.


(Dollars
                  in thousands, except per share amounts)
              
              At
                  or for the Year Ended December 312005
              
              2004
              
              2003
              
              2002
              
              2001EarningsNet
                  interest income
              
              $
              19,852
              
              $
              18,064
              
              $
              19,182
              
              $
              20,838
              
              $
              20,931Provision
                  for loan losses
              
              
              4
              
              
              1,026
              
              
              20,513
              
              
              9,453
              
              
              8,350Non-interest
                  income
              
              
              3,920
              
              
              3,606
              
              
              4,064
              
              
              2,717
              
              
              12,178Non-interest
                  expense
              
              
              17,305
              
              
              17,782
              
              
              17,632
              
              
              17,831
              
              
              20,200Income
                  taxes (benefit)
              
              
              2,029
              
              
              899
              
              
              (5,282
              )
              
              (1,522
              )
              
              2,985Income
                  (loss) fromcontinuing
                  operations
              
              
              4,434
              
              
              1,963
              
              
              (9,617
              )
              
              (2,207
              )
              
              1,574Income
                  (loss) fromdiscontinued
                  operations
              
              
              -
              
              
              4,734
              
              
              (80
              )
              
              (1,130
              )
              
              (380
              )Net
                  income (loss)
              
              $
              4,434
              
              $
              6,697
              
              $
              (9,697
              )
              $
              (3,337
              )
              $
              1,194Financial
                  PositionTotal
                  assets of continuingoperations
              
              $
              528,324
              
              $
              537,255
              
              $
              543,229
              
              $
              590,868
              
              $
              606,961Total
                  assets of discontinuedoperations
              
              
              -
              
              
              -
              
              
              79,163
              
              
              84,406
              
              
              104,653Loans,
                  net of unearned income
              
              
              328,717
              
              
              324,937
              
              
              331,794
              
              
              373,099
              
              
              384,940Allowance
                  for loan losses
              
              
              7,892
              
              
              9,384
              
              
              14,300
              
              
              9,698
              
              
              7,371Goodwill
                  and other intangibles
              
              
              15,816
              
              
              15,816
              
              
              15,816
              
              
              15,816
              
              
              15,816Securities
              
              
              137,419
              
              
              153,892
              
              
              147,646
              
              
              144,698
              
              
              143,516Deposits
              
              
              435,843
              
              
              437,798
              
              
              455,474
              
              
              477,724
              
              
              480,991Other
                  borrowings
              
              
              19,053
              
              
              20,536
              
              
              18,307
              
              
              32,600
              
              
              43,724Subordinated
                  debentures
              
              
              15,722
              
              
              20,876
              
              
              26,546
              
              
              29,639
              
              
              29,639Stockholders’
                  equity
              
              
              54,287
              
              
              51,029
              
              
              45,540
              
              
              56,124
              
              
              58,750Share
                  DataIncome
                  (loss) from continuingoperations
                  - basic
              
              $
              0.85
              
              $
              0.37
              
              $
              (1.84
              )
              $
              (0.42
              )
              $
              0.30Income
                  (loss) from continuingoperations
                  - diluted
              
              
              0.84
              
              
              0.37
              
              
              (1.84
              )
              
              (0.42
              )
              
              0.30Net
                  income - basic
              
              
              0.85
              
              
              1.28
              
              
              (1.85
              )
              
              (0.64
              )
              
              0.23Net
                  income - diluted
              
              
              0.84
              
              
              1.28
              
              
              (1.85
              )
              
              (0.64
              )
              
              0.23Book
                  value
              
              
              10.37
              
              
              9.75
              
              
              8.70
              
              
              10.73
              
              
              11.23Cash
                  dividends
              
              
              0.00
              
              
              0.00
              
              
              0.00
              
              
              0.00
              
              
              0.00RatiosReturn
                  on average assets (1), (2)
              
              
              0.82
              %
              
              0.36
              %
              
              (1.66
              )%
              
              (0.37
              )%
              
              0.24
              %Return
                  on average equity (2)
              
              
              8.42
              %
              
              4.06
              %
              
              (18.46
              )%
              
              (3.77
              )%
              
              2.76
              %Dividend
                  payout (2)
              
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %Stockholders’
                  equity to totalassets
                  at period-end (3)
              
              
              10.28
              %
              
              9.50
              %
              
              8.38
              %
              
              9.50
              %
              
              9.68
              %Average
                  stockholders’ equityto
                  average total assets (1)
              
              
              9.77
              %
              
              8.23
              %
              
              7.88
              %
              
              8.44
              %
              
              7.37
              %(1)
                  Computed based on average assets from continuing operations
                (2)
                  Computed based on income (loss) from continuing operations
                (3)
                  Shareholders’ equity at period-end divided by assets from continuing
                  operations




Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








**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 five community bank
      subsidiaries ranging in size from $80 million to $149 million, each with a
      local
      community name and orientation. On July 1, 2004, Premier sold one bank
      subsidiary, Citizens Bank (Kentucky), Inc. ("Citizens Bank"). As such, and
      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
      consolidated financial statements and this Management's Discussion and Analysis,
      and are presented separately as "discontinued operations." Premier realized
      a
      net profit on the sale of Citizens Bank of $4.7 million which is included in
      the
      income from discontinued operations. See Note 2 to the consolidated financial
      statements presented separately in this annual report for additional information
      concerning discontinued operations. The remaining banks operate in twenty
      communities within the states of West Virginia, Ohio and Kentucky and provide
      their customers with a full range of banking services. On January 3, 2005,
      Premier merged two of its banks, Citizen's Deposit Bank and Bank of Germantown.
      Premier is also the parent of a data processing subsidiary which is currently
      inactive. Prior to Premier’s conversion to an outsourced data services provider
      in the second quarter of 2005, the data processing subsidiary provided the
      data
      processing and management services for four of Premier's affiliate banks and
      one
      other non-affiliated bank. As of December 31, 2005, Premier had approximately
      $528 million in total assets, $329 million in total loans and $436 million
      in
      total deposits.




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 Chizek and Company LLC 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 audit
      committee of the Board of Directors engaged Arnett & Foster, CPA's in 2004,
      and 2003 to perform internal audits of the financial records of each of
      the


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








subsidiaries
      on a periodic basis. Their findings and recommendations were reported to
      Premier’s audit committee as well as the audit committees of the subsidiaries.
      In 2005, Premier reduced its reliance on third-party internal audit and loan
      review providers and expanded its internal audit staff at the holding company
      level. Likewise, their findings and recommendations are reported to Premier's
      audit committee as well as the audit committees of the subsidiaries. Also,
      on a
      regular periodic basis, the subsidiary banks are examined by Federal and State
      banking authorities for safety and soundness as well as compliance with
      applicable banking laws and regulations. The activities of both the internal
      and
      external audit functions are reviewed by the audit committee of the Board of
      Directors.








**FORWARD-LOOKING
      STATEMENTS**




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








**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.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








***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 are 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


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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.





***Impairment
      of Goodwill***




As
      required
      by applicable accounting guidance, 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.





***Realization
      of Deferred Tax Assets***




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. Deferred tax assets
      for the Company primarily relate to the allowance for loan losses and net
      operating loss carryforwards. In considering the need for a valuation allowance
      to reduce deferred tax assets to the amount expected to be realized, management
      considers the amount of previously paid taxes that may be recoverable and the
      likelihood of generating sufficient future taxable income to fully utilize
      expected future tax deductions. At December 31, 2005 management's consideration
      of the need for a valuation allowance focused on the generation of future
      taxable income as all available previously paid taxes were recovered from the
      operating loss reported in 2003. In determining the likelihood of generating
      future taxable income management considered unusual events that have impacted
      the Company's historical earnings and whether these events will recur, the
      Company's operating budget and likely operating results in the near term.
      Changes in these assumptions could impact the carrying value of deferred tax
      assets and require a charge to tax expense.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








**SIGNIFICANT
      EVENT ARISING IN 2003**




On
      June 16, 2003,
      Premier announced that as a result of an ongoing internal investigation it
      had
      uncovered a systematic disregard for its loan approval and credit administration
      policies at its wholly owned subsidiary Farmers Deposit Bank and had accepted
      the resignation of the bank's president. On June 4, 2003, senior management
      of
      Premier received from the bank's former president a request to charge-off over
      $2.0 million in loans. Concerned about the magnitude of the request and the
      impact on Premier's financial results, Premier management promptly notified
      the
      Federal Reserve Bank of Cleveland and the Federal Deposit Insurance Corporation
      ("FDIC") about the request. Premier's initial investigation indicated that
      the
      former president of Farmers Deposit had engaged in conduct which subverted
      the
      bank's internal controls and credit administration policies, conduct which
      appears to have been designed to avoid detection by management and those
      entities employed by Premier to perform independent reviews of its subsidiaries'
      accounting records, internal controls, and credit risk.




As
      a result
      of the investigation into the conduct of the former president of Farmers Deposit
      by Premier and the FDIC, Premier charged-off over $17.2 million of loans. The
      resulting depletion of the allowance for loan losses together with the analysis
      of additional risk in the loan portfolio warranted significant additional
      provisions for loan losses at the Bank. In addition to the provision for loan
      losses, interest income reversals and other non-interest expenses, including
      bad
      check write-offs and loan review expenses, were recorded.





Premier's
      management, with the assistance of outside independent professionals, conducted
      a further review of those loans for which significant charge offs or additional
      provisions were required in 2003. The purpose of the review was to determine
      if
      the facts or circumstances that gave rise to the additional charge offs or
      provisions had been improperly withheld from senior management or improperly
      considered in applying management's estimates and judgments as to the adequacy
      of the allowance for loan losses in prior financial statement periods. The
      review did identify instances in which collateral securing loans had been
      released without proper support or notation in loan files, instances in which
      obligors on notes had been released from their repayment obligation without
      proper support or notation in loan files and instances in which delinquent
      loan
      reporting systems had been manipulated to prevent problem loans from being
      identified on a timely basis. Premier's senior management determined that if
      these circumstances had been considered in evaluating the adequacy of the
      allowance for loan losses in prior periods then some of the loan charge offs
      and
      additional provisions for loan losses recorded in 2003 should have been
      reflected in prior periods. Therefore, in 2003, the financial statements for
      2002 and 2001 were restated to reflect the financial statement effect of the
      matters that occurred in those periods but which were improperly concealed
      by
      subsidiary management.








Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








On
      December 24, 2003, Premier announced that Farmers Deposit Bank had reached
      an
      agreement with the Federal Deposit Insurance Corporation ("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. The full text of the Order is available on
      the
      FDIC website at www.fdic.gov or by calling the FDIC Public Information Center
      at
      (877) 275-3342. Having found that Farmers Deposit had fully complied with the
      Order, the Supervisory Authorities rescinded the Order on December 13, 2005.





The
      Securities and Exchange Commission ("SEC") investigated the information
      disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the June 30,
      and
      September 30, 2003 Forms 10-Q regarding Farmers Deposit and requested
      information about Premier's internal investigation. Premier fully cooperated
      with the SEC. At the conclusion of its investigation, the SEC issued an
      administrative cease & desist order regarding Premier’s financial reporting
      and internal controls concerning Premier’s quarterly 2001 through 2003 and
      annual 2001 and 2002 public filings. According to the SEC Order, both the
      remedial acts promptly undertaken by Premier and Premier’s cooperation with the
      SEC Staff were taken into consideration in reaching the settlement.








**SUMMARY
      FINANCIAL RESULTS**




Premier
      had
      net income from continuing operations of $4.434 million in 2005 compared to
      a
      $1.963 million of net income from continuing operations reported for the year
      2004. Net income increased in 2005 as a result of an increase in interest income
      due to higher yields on earning assets; a decrease in interest expense due
      to
      the early retirement of Trust Preferred Securities; a significant decrease
      in
      the provision for loan losses; and a reduction in the net operating costs of
      the
      company. Net income in 2004 was primarily the result of the continued earnings
      of Premier's profitable banks partially offset by expenses associated with
      rehabilitating its subsidiary, Farmers Deposit Bank, conducting Premier's own
      investigation, cooperating with the SEC investigation, and reducing debt at
      the
      holding company. The income in 2004 follows a $9.6 million loss in 2003
      primarily due to large provisions for loan losses and bad check losses at
      Farmers Deposit Bank. Basic earnings per share from continuing operations were
      $0.85 in 2005 compared to $0.37 in 2004 and a loss of ($1.84) in
      2003.




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. Premier's net income in 2005 resulted
      in an ROA of 0.82%, an increase over the 0.36% ROA in 2004 and the (1.66)%
      net
      loss ROA reported in 2003. As shown in the table, fully taxable equivalent
      net
      interest income (as a percent of average earning assets)


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








reached
      its highest level in five years in 2005 at 4.00%. The net losses in 2003 and
      2002 were primarily the result of an increase in the provision for loan losses,
      resulting in negative net credit income for those years. In 2004, net credit
      income was once again positive and in 2005. In 2005, minimal provisions for
      loan
      losses were recorded and thus there was little reduction from net interest
      income. This increase in net credit income (as a percent of average earning
      assets) was complemented by the highest level of non-interest income (as a
      percent of average earning assets) over the past five years and a reduction
      in
      non-interest expenses (as a percent of average earning assets) when compared
      to
      the previous year. As illustrated in the table, Premier's 2005 fully taxable
      net
      interest income as a percent of average earning assets was up to 4.00% from
      the
      3.61% recorded in 2004 as the yield on loans and investments increased in 2005
      while interest expense savings were realized due to the early extinguishment
      of
      a portion of Premier’s junior subordinated debentures and other borrowed funds
      late in 2004.








**ANALYSIS
                of RETURN ON ASSETS and EQUITY**from
                continuing operations2005
            
            2004
            
            2003
            
            2002
            
            2001As
                a percent of average earning assetsFully
                taxable-equivalent net interest income
            
            
            4.00
            %
            
            3.61
            %
            
            3.63
            %
            
            3.84
            %
            
            3.50
            %Provision
                for loan losses
            
            
            (0.00
            )
            
            (0.20
            )
            
            (3.81
            )
            
            (1.70
            )
            
            (1.37
            )Net
                credit income
            
            
            4.00
            
            
            3.41
            
            
            (0.18
            )
            
            2.14
            
            
            2.13Gains
                on the sales of assets & subsidiaries
            
            
            0.00
            
            
            0.02
            
            
            0.11
            
            
            (0.01
            )
            
            1.48Non-interest
                income
            
            
            0.78
            
            
            0.69
            
            
            0.62
            
            
            0.50
            
            
            0.52Non-interest
                expense
            
            
            (3.46
            )
            
            (3.52
            )
            
            (3.26
            )
            
            (3.21
            )
            
            (3.30
            )Tax
                equivalent adjustment
            
            
            (0.03
            )
            
            (0.03
            )
            
            (0.07
            )
            
            (0.08
            )
            
            (0.08
            )Applicable
                income taxes
            
            
            (0.41
            )
            
            (0.18
            )
            
            0.98
            
            
            0.27
            
            
            (0.49
            )Return
                on average earning assets
            
            
            0.88
            
            
            0.39
            
            
            (1.79
            )
            
            (0.40
            )
            
            0.26Multiplied
                by average earning assets to
              average
                total assets
            
            
            92.84
            
            
            92.39
            
            
            92.86
            
            
            92.34
            
            
            91.98**Return
                on average assets**
            
            
            **0.82**
            **%**
            
            **0.36**
            **%**
            
            **(1.66**
            **)%**
            
            **(0.37**
            **)%**
            
            **0.24**
            **%**Multiplied
                by average assets to
              average
                equity
            
            
            10.23X
            
            
            11.33X
            
            
            11.13X
            
            
            10.26X
            
            
            11.68X**Return
                on average equity**
            
            
            **8.42**
            **%**
            
            **4.06**
            **%**
            
            **(18.46**
            **)%**
            
            **(3.77**
            **)%**
            
            **2.76**
            **%**




The
      net
      overhead ratio (non-interest expense less non-interest income as a percent
      of
      average earning assets) decreased in 2005 to 2.68% compared to 2.83% in 2004
      and
      2.64% in 2003, the lowest ratio reported in the five years presented in the
      table. The decrease in 2005 net overhead was the result of increases in
      Premier’s non-interest income related to service charges on deposit accounts and
      secondary market mortgage commissions plus a significant decrease in
      professional fee expense. The increase in 2004 net overhead was the result
      of
      increases in non-interest expense related to the investigation of Farmers
      Deposit Bank, the loss on the sale of facilities formerly leased to Citizens
      Bank (which was sold in 2004), and accelerated amortization costs related to
      the
      early redemption of Premier's Trust Preferred Securities.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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
      2005 ROE was 8.43%, compare to 4.06% realized in 2004 and (18.46%) reported
      in
      2003. ROE increased primarily due the increase in net income reported in 2005
      versus 2004 and the operating losses reported for 2003.





A
      breakdown of Premier's financial results by quarter for the years ended December
      31, 2005 and 2004 is summarized below.








**QUARTERLY
                FINANCIAL INFORMATION**(Dollars
                in thousands, except per share amounts)First
            
            Second
            
            Third
            
            Fourth
            
            Full
                Year**2005**Interest
                income
            
            $
            7,045
            
            $
            7,172
            
            $
            7,465
            
            $
            7,717
            
            $
            29,399Interest
                expense
            
            
            2,318
            
            
            2,279
            
            
            2,410
            
            
            2,540
            
            
            9,547Net
                interest income
            
            
            4,727
            
            
            4,893
            
            
            5,055
            
            
            5,177
            
            
            19,852Provision
                for loan losses
            
            
            243
            
            
            191
            
            
            (140
            )
            
            (290
            )
            
            4Securities
                gains
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Net
                overhead
            
            
            3,327
            
            
            3,660
            
            
            3,189
            
            
            3,209
            
            
            13,385Income
                before income taxes
            
            
            1,157
            
            
            1,042
            
            
            2,006
            
            
            2,258
            
            
            6,463Income
                from continuing operations
            
            
            803
            
            
            727
            
            
            1,367
            
            
            1,537
            
            
            4,434Income
                (loss) from discontinued operations
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Net
                income
            
            
            803
            
            
            727
            
            
            1,367
            
            
            1,537
            
            
            4,434Basic
                net income per share fromcontinuing
                operations
            
            
            0.15
            
            
            0.14
            
            
            0.26
            
            
            0.29
            
            
            0.85Diluted
                net income per sharefrom
                continuing operations
            
            
            0.15
            
            
            0.14
            
            
            0.26
            
            
            0.29
            
            
            0.84Basic
                net income per share
            
            
            0.15
            
            
            0.14
            
            
            0.26
            
            
            0.29
            
            
            0.85Diluted
                net income per share
            
            
            0.15
            
            
            0.14
            
            
            0.26
            
            
            0.29
            
            
            0.84Dividends
                paid per share
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00**2004**Interest
                income
            
            $
            7,055
            
            $
            6,926
            
            $
            6,951
            
            $
            7,189
            
            $
            28,121Interest
                expense
            
            
            2,609
            
            
            2,528
            
            
            2,533
            
            
            2,387
            
            
            10,057Net
                interest income
            
            
            4,446
            
            
            4,398
            
            
            4,418
            
            
            4,802
            
            
            18,064Provision
                for loan losses
            
            
            135
            
            
            374
            
            
            162
            
            
            355
            
            
            1,026Securities
                gains
            
            
            10
            
            
            0
            
            
            0
            
            
            90
            
            
            100Net
                overhead
            
            
            3,626
            
            
            3,337
            
            
            3,599
            
            
            3,714
            
            
            14,276Income
                before income taxes
            
            
            695
            
            
            687
            
            
            657
            
            
            823
            
            
            2,862Income
                from continuing operations
            
            
            485
            
            
            474
            
            
            448
            
            
            559
            
            
            1,963Income
                (loss) from discontinued operations
            
            
            29
            
            
            (25
            )
            
            4,730
            
            
            0
            
            
            4,734Net
                income
            
            
            514
            
            
            449
            
            
            5,178
            
            
            559
            
            
            6,697Basic
                and diluted net income per sharefrom
                continuing operations
            
            
            0.09
            
            
            0.09
            
            
            0.08
            
            
            0.11
            
            
            0.37Basic
                and diluted net income per share
            
            
            0.09
            
            
            0.09
            
            
            0.98
            
            
            0.11
            
            
            1.28Dividends
                paid per share
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








**SALE
      OF SUBSIDIARIES**





In
      2000
      Premier suspended its acquisition strategy in order to focus on improving its
      subsidiary bank operations by strengthening its management oversight. As part
      of
      this change in strategy, Premier elected to dispose of two of its subsidiary
      banks in 2001.




On
      January
      26, 2001, the company disposed of all the deposits (approximately $110 million),
      the majority of loans (approximately $92 million) and the premises and equipment
      (approximately $1.6 million) of the Bank of Mt. Vernon under the terms of a
      Purchase and Assumption Agreement. As a result of this transaction, the banking
      charter of the Bank of Mt. Vernon was relinquished and Premier agreed not to
      compete in the markets previously served by the Bank of Mt. Vernon.




Also,
      on
      December 10, 2001, the Company disposed of certain assets and liabilities of
      The
      Sabina Bank. The sale included all the loans (approximately $31 million) and
      all
      the deposits (approximately $41 million), as well as the premises and equipment
      (approximately $1.2 million). Certain assets of the bank were retained by
      Premier pending liquidation of the bank, which occurred in 2002. The operating
      results of both the Bank of Mount Vernon and The Sabina Bank were included
      in
      Premier's 2001 operating results through the respective dates of the sale.
      However, the operating results subsequent to 2001 do not include any of the
      operations of these two banks. Comparisons of average balances and income
      statement categories to 2001 are all affected by the disposition of these two
      subsidiaries.





In
      the fourth quarter of 2003, Premier 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, which was completed on July 1, 2004. The sale
      of
      this subsidiary helped to restore the financial position of Premier after the
      impact of the losses sustained at Farmers Deposit Bank during the second and
      third quarters of 2003. As a result of the sale, regulatory capital ratios
      of
      Premier were restored to the stronger levels management wishes to maintain;
      cash
      reserves of the holding company were replenished; a portion of the cash reserves
      were used to reduce outstanding debt by $9.4 million; and the profit from the
      sale allowed Premier to utilize a substantial portion of its Federal income
      tax
      net operating loss carryforward.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








**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, 2005, is provided in the table
      below.








Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








**AVERAGE
                CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME
                ANALYSIS**(Dollars
                in thousands)2005
            
            2004
            
            2003Average
              Balance
            
            Interest
                (2)
            
            Yield/
              Rate
                (3)
            
            Average
              Balance
            
            Interest
                (2)
            
            Yield/
              Rate
                (3)
            
            Average
              Balance
            
            Interest
                (2)
            
            Yield/
              Rate
                (3)**Assets:**Interest
                earning assetsU.S.
                Treasury and federalagency
                securities
            
            $
            107,177
            
            $
            3,278
            
            
            3.06
            %
            $
            112,260
            
            $
            3,117
            
            
            2.78
            %
            $
            102,856
            
            $
            3,924
            
            
            2.84
            %States
                and municipalobligations
                (1)
            
            
            2,666
            
            
            153
            
            
            5.74
            
            
            4,941
            
            
            338
            
            
            6.84
            
            
            15,589
            
            
            1,015
            
            
            6.51Mortgage
                backed securities
            
            
            37,050
            
            
            1,583
            
            
            4.27
            
            
            29,803
            
            
            1,183
            
            
            3.97
            
            
            16,757
            
            
            585
            
            
            3.49Other
                securities
            
            
            3,089
            
            
            148
            
            
            4.79
            
            
            3,216
            
            
            138
            
            
            4.29
            
            
            7,613
            
            
            342
            
            
            4.49Total
                investment securities
            
            
            149,982
            
            
            5,162
            
            
            3.44
            
            
            150,220
            
            
            4,776
            
            
            3.18
            
            
            142,815
            
            
            4,866
            
            
            3.41Federal
                funds sold
            
            
            23,083
            
            
            745
            
            
            3.23
            
            
            29,369
            
            
            380
            
            
            1.29
            
            
            42,844
            
            
            469
            
            
            1.09Interest-bearing
                depositswith
                banks
            
            
            436
            
            
            12
            
            
            2.66
            
            
            256
            
            
            6
            
            
            2.57
            
            
            568
            
            
            7
            
            
            1.23Loans,
                net of unearnedincome
                (4)(5)Commercial
            
            
            147,398
            
            
            10,291
            
            
            6.98
            
            
            132,785
            
            
            8,913
            
            
            6.71
            
            
            142,768
            
            
            9,944
            
            
            6.97Real
                estate mortgage
            
            
            132,527
            
            
            9,236
            
            
            6.97
            
            
            145,387
            
            
            10,182
            
            
            7.00
            
            
            151,210
            
            
            11,538
            
            
            7.63Installment
            
            
            46,690
            
            
            4,083
            
            
            8.74
            
            
            47,438
            
            
            4,029
            
            
            8.49
            
            
            58,178
            
            
            5,293
            
            
            9.10Total
                loans
            
            
            326,615
            
            
            23,610
            
            
            7.23
            
            
            325,610
            
            
            23,124
            
            
            7.10
            
            
            352,156
            
            
            26,775
            
            
            7.60Total
                interest earning assets
            
            
            500,116
            
            
            29,529
            
            
            5.90
            
            
            505,455
            
            
            28,286
            
            
            5.60
            
            
            538,383
            
            
            32,117
            
            
            5.97Allowance
                for loan losses
            
            
            (8,998
            )
            
            
            
            
            
            
            
            (11,413
            )
            
            
            
            
            
            
            
            (12,704
            )Cash
                and due from banks
            
            
            13,619
            
            
            
            
            
            
            
            
            13,837
            
            
            
            
            
            
            
            
            13,400Premises
                and equipment
            
            
            7,256
            
            
            
            
            
            
            
            
            7,738
            
            
            
            
            
            
            
            
            8,233Other
                assets
            
            
            26,697
            
            
            
            
            
            
            
            
            31,490
            
            
            
            
            
            
            
            
            32,474Assets
                of discontinuedoperations
            
            
            -
            
            
            
            
            
            
            
            
            39,762
            
            
            
            
            
            
            
            
            81,821Total
                assets
            
            $
            538,690
            
            
            
            
            
            
            
            $
            586,869
            
            
            
            
            
            
            
            $
            661,607**Liabilities
                and Equity:**Interest
                bearing liabilitiesNOW
                and money market
            
            $
            142,501
            
            
            1,409
            
            
            0.99
            %
            $
            158,169
            
            
            1,290
            
            
            0.82
            %
            $
            180,763
            
            
            2,045
            
            
            1.13
            %Savings
                deposits
            
            
            59,365
            
            
            412
            
            
            0.69
            
            
            62,518
            
            
            521
            
            
            0.83
            
            
            57,327
            
            
            781
            
            
            1.36Certificates
                of deposit andother
                time deposits
            
            
            174,057
            
            
            4,904
            
            
            2.82
            
            
            164,932
            
            
            4,455
            
            
            2.70
            
            
            182,542
            
            
            5,677
            
            
            3.11Total
                interest bearingdeposits
            
            
            375,923
            
            
            6,725
            
            
            1.79
            
            
            385,619
            
            
            6,266
            
            
            1.62
            
            
            420,632
            
            
            8,503
            
            
            2.02Short-term
                borrowings
            
            
            8,422
            
            
            180
            
            
            2.14
            
            
            6,539
            
            
            118
            
            
            1.80
            
            
            4,675
            
            
            51
            
            
            1.09Other
                borrowings
            
            
            1,586
            
            
            14
            
            
            0.88
            
            
            5,306
            
            
            248
            
            
            4.67
            
            
            8,350
            
            
            379
            
            
            4.54FHLB
                advances
            
            
            8,775
            
            
            499
            
            
            5.69
            
            
            9,955
            
            
            556
            
            
            5.59
            
            
            15,852
            
            
            826
            
            
            5.21Debentures
            
            
            20,480
            
            
            2,129
            
            
            10.40
            
            
            25,397
            
            
            2,869
            
            
            11.30
            
            
            27,253
            
            
            2,788
            
            
            10.23Total
                interest-bearingliabilities
            
            
            415,186
            
            
            9,547
            
            
            2.30
            %
            
            432,816
            
            
            10,057
            
            
            2.32
            %
            
            476,762
            
            
            12,547
            
            
            2.63
            %Non-interest
                bearing deposits
            
            
            66,848
            
            
            
            
            
            
            
            
            62,486
            
            
            
            
            
            
            
            
            53,824Other
                liabilities
            
            
            4,007
            
            
            
            
            
            
            
            
            7,393
            
            
            
            
            
            
            
            
            4,903Liabilities
                of discontinuedoperations
            
            
            -
            
            
            
            
            
            
            
            
            35,876
            
            
            
            
            
            
            
            
            74,021Shareholders’
                equity
            
            
            52,649
            
            
            
            
            
            
            
            
            48,298
            
            
            
            
            
            
            
            
            52,097Total
                liabilities and equity
            
            $
            538,690
            
            
            
            
            
            
            
            $
            586,869
            
            
            
            
            
            
            
            $
            661,607**Net
                interest earnings**(1)
            
            
            
            
            $
            19,982
            
            
            
            
            
            
            
            $
            18,229
            
            
            
            
            
            
            
            $
            19,570**Net
                interest spread**(1)
            
            
            
            
            
            
            
            
            3.60
            %
            
            
            
            
            
            
            
            3.27
            %
            
            
            
            
            
            
            
            3.33
            %**Net
                interest margin**(1)
            
            
            
            
            
            
            
            
            4.00
            %
            
            
            
            
            
            
            
            3.61
            %
            
            
            
            
            
            
            
            3.63
            %(1)
                Taxable - equivalent yields are calculated assuming a 34% federal
                income
                tax rate
              (2)
                Excludes the interest income and interest expense of discontinued
                operations
              (3)
                Yields are calculated on historical cost except for yields on marketable
                equity securities that are calculated used fair value
              (4)
                Includes loan fees, immaterial in amount, in both interest income
                and the
                calculation of yield on loans
              (5)
                Includes loans on non-accrual
                status





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








In
      2005, average earning assets declined by 1.0% or $5.3 million from 2004,
      following a 6.1% or $32.9 million decline in 2004 from 2003. Average interest
      bearing liabilities, the primary source of funds supporting the earning assets,
      decreased 4.1% or $17.6 million in 2005 from 2004, which follows a 9.1% or
      $43.1
      million decline in 2004 from 2003. The 2005 decline in average earning assets
      was primarily the result of a decline in federal funds sold as those funds
      were
      either used to fund loans or to continue the company’s debt reduction strategy.
      The decline in 2005 average interest bearing liabilities was due to a $9.7
      million decrease in average interest bearing deposits and a $6.1 million
      decrease in average high cost debt and FHLB advances. Nearly half of the
      decrease in average interest bearing deposit was offset by a $4.4 million
      increase in non-interest bearing deposits. The decline in 2004 average earning
      assets was the result of the residual effect of the $16.5 million of loan
      charge-offs in 2003, the $7.0 million of loan charge-offs in 2004 (primarily
      at
      Farmers Deposit in both years), coupled with loan maturities and principal
      pay
      downs that were not renewed and the redeployment of other available funds to
      reduce debt. The decline in interest bearing liabilities was largely due to
      debt
      reduction strategies, a continued shift in customer deposits from interest
      bearing to non-interest bearing, and the non-renewal of certain certificates
      of
      deposit at Farmers Deposit Bank in conjunction with Premier's capital
      restoration plan for that Bank. Additional information on each of the components
      of earning assets and interest bearing liabilities is contained in the following
      sections of this report.





***Loan
      Portfolio***




Premier's
      loan portfolio is its largest and highest yielding component of average earning
      assets, totaling 65.3% of average earning assets during 2005. After several
      declining years, average loans increased in 2005 by $1.0 million or 0.3%. The
      marginal increase is largely attributable to the high level of charge-offs
      and
      loan collections at Farmers Deposit which nearly offset the increase in loans
      in
      Premier’s other markets. The average loans outstanding at Farmers Deposit
      declined by $14.8 million in 2005. Of the remaining increase, Premier realized
      an $11.2 million or 7.7% increase in loans in its West Virginia markets, a
      $2.1
      million or 4.7% increase in loans in its Ohio markets, and a $2.5 million or
      3.3% increase in average loans in Premier's other Kentucky markets. In 2004,
      average loans declined by $26.5 million or 7.5%. The decline is again largely
      attributable to the high level of charge-offs and loan collections at Farmers
      Deposit. The average loans outstanding at Farmers Deposit declined by $30.5
      million in 2004, $4.0 million more than Premier's total decline of $26.5
      million. Of the remaining increase, Premier realized a 6.0% increase in loans
      in
      its West Virginia markets and an 11.1% increase in loans in its Ohio markets.
      These increases were partially offset by a 10.0% decline in average loans in
      Premier's other Kentucky markets. Due to the low interest rate environment
      in
      2003 and 2004, many borrowers sought to refinance their loans to reduce their
      interest costs. Due to the lackluster economy and the resulting lower demand
      for
      loans during much of that time, larger banks began competing more strongly
      by
      enticing borrowers with prime rate or below prime rate loans. Therefore,
      scheduled loan maturities were not necessarily renewed with Premier.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Total
      loans at December 31, 2005 increased by $3.8 million or 1.2% from the total
      at
      December 31, 2004. This increase follows a $6.9 million or 2.1% decrease in
      2004
      from total loans at December 31, 2003. The increase in 2005 was the result
      increased loan demand in Premier’s markets which offset $2.2 million of loan
      charge-offs recorded during the year, (half at Farmers Deposit) and $4.2 million
      of net loan collections at Farmers Deposit. The decline in 2004 period-end
      loans
      was the result of the $7.0 million of loan charge-offs recorded during the
      year,
      primarily at Farmers Deposit ($5.5 million).





Loans
      secured by real estate, which in total constituted approximately 71% of
      Premier's loan portfolio at December 31, 2005, 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. 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 participates in the solicitation of loans for
      the
      secondary market and recognizes the referral fees in non-interest income.
      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.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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 31,2005
            
            %
            
            2004
            
            %
            
            2003
            
            %
            
            2002
            
            %
            
            2001
            
            %Summary
                of Loans by TypeCommercial,
                secured by real estate
            
            $
            85,989
            
            
            26.2
            %
            $
            101,567
            
            
            31.3
            %
            $
            101,325
            
            
            30.5
            %
            $
            109,571
            
            
            29.3
            %
            $
            106,726
            
            
            27.7
            %Commercial,
                other
            
            
            49,362
            
            
            15.0
            
            
            40,923
            
            
            12.6
            
            
            38,063
            
            
            11.5
            
            
            51,347
            
            
            13.8
            
            
            59,364
            
            
            15.4Real
                estate construction
            
            
            11,070
            
            
            3.4
            
            
            5,906
            
            
            1.8
            
            
            5,414
            
            
            1.6
            
            
            7,318
            
            
            2.0
            
            
            8,245
            
            
            2.1Real
                estate mortgage
            
            
            134,570
            
            
            40.9
            
            
            128,243
            
            
            39.5
            
            
            126,134
            
            
            38.0
            
            
            134,271
            
            
            36.0
            
            
            135,937
            
            
            35.4Agricultural
            
            
            1,670
            
            
            0.5
            
            
            2,380
            
            
            0.7
            
            
            3,032
            
            
            0.9
            
            
            4,381
            
            
            1.2
            
            
            5,402
            
            
            1.4Consumer
            
            
            42,096
            
            
            12.8
            
            
            44,470
            
            
            13.7
            
            
            56,216
            
            
            17.0
            
            
            63,534
            
            
            17.0
            
            
            68,300
            
            
            17.7Other
            
            
            3,960
            
            
            1.2
            
            
            1,438
            
            
            0.4
            
            
            1,610
            
            
            0.5
            
            
            2,677
            
            
            0.7
            
            
            966
            
            
            0.3Total
                loans
            
            $
            328,717
            
            
            100.0
            %
            $
            324,927
            
            
            100.0
            %
            $
            331,794
            
            
            100.0
            %
            $
            373,099
            
            
            100.0
            %
            $
            385,019
            
            
            100.0
            %Non-performing
                AssetsNon-accrual
                loans
            
            $
            3,751
            
            
            
            
            $
            6,847
            
            
            
            
            $
            11,958
            
            
            
            
            $
            8,197
            
            
            
            
            $
            6,302Accruing
                loans which arecontractually
                past
              due
                90days
                or
                more
            
            
            853
            
            
            
            
            
            739
            
            
            
            
            
            4,137
            
            
            
            
            
            1,238
            
            
            
            
            
            5,612Restructured
                loans
            
            
            1,540
            
            
            
            
            
            238
            
            
            
            
            
            104
            
            
            
            
            
            129
            
            
            
            
            
            338Total
                non-performing andrestructured
                loans
            
            
            6,144
            
            
            
            
            
            7,824
            
            
            
            
            
            16,199
            
            
            
            
            
            9,564
            
            
            
            
            
            12,252Other real estate acquiredthrough
                foreclosures
            
            
            2,049
            
            
            
            
            
            2,247
            
            
            
            
            
            3,187
            
            
            
            
            
            3,505
            
            
            
            
            
            5,508Total
                non-performing andrestructured
              loans andother
                real estate
            
            $
            8,193
            
            
            
            
            $
            10,071
            
            
            
            
            $
            19,386
            
            
            
            
            $
            13,069
            
            
            
            
            $
            17,760Non-performing
                andrestructured
                loans
              as
                a %
                oftotal
                loans
            
            
            1.87
            %
            
            
            
            
            2.41
            %
            
            
            
            
            4.88
            %
            
            
            
            
            2.56
            %
            
            
            
            
            3.18
            %Non-performing
                andrestructured
                loans and other
              real
                estate as a % of totalassets
                (1)
            
            
            1.55
            %
            
            
            
            
            1.87
            %
            
            
            
            
            3.57
            %
            
            
            
            
            2.21
            %
            
            
            
            
            2.93
            %Allocation
                of Allowance for Loan LossesCommercial,
                other
            
            $
            1,071
            
            
            16.7
            %
            $
            1,734
            
            
            13.7
            %
            $
            4,166
            
            
            12.9
            %
            $
            2,294
            
            
            15.7
            %
            $
            1,379
            
            
            17.1
            %Real
                estate, construction
            
            
            134
            
            
            3.4
            
            
            83
            
            
            1.8
            
            
            662
            
            
            1.6
            
            
            632
            
            
            2.0
            
            
            488
            
            
            2.1Real
                estate, other
            
            
            3,810
            
            
            67.1
            
            
            4,276
            
            
            70.8
            
            
            4,886
            
            
            68.5
            
            
            4,341
            
            
            65.3
            
            
            3,235
            
            
            63.1Consumer
                installment
            
            
            772
            
            
            12.8
            
            
            1,255
            
            
            13.7
            
            
            2,478
            
            
            17.0
            
            
            977
            
            
            17.0
            
            
            1,178
            
            
            17.7Unallocated
            
            
            2,105
            
            
            
            
            
            2,036
            
            
            
            
            
            2,108
            
            
            
            
            
            1,454
            
            
            
            
            
            1,091Total
            
            $
            7,892
            
            
            100.0
            %
            $
            9,384
            
            
            100.0
            %
            $
            14,300
            
            
            100.0
            %
            $
            9,698
            
            
            100.0
            %
            $
            7,371
            
            
            100.0
            %(1)
                From continuing operations





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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 $8.2
      million, or 1.55% of total assets of continuing operations at year-end 2005.
      The
      amount is down significantly from the $10.1 million of non-performing assets
      (1.87% of total assets of continuing operations) at year-end 2004 and the $19.4
      million of non-performing assets (3.57% of total assets of continuing
      operations) at year-end 2003. The decrease in 2005 was due to the collection
      or
      rehabilitation of previously delinquent loans, the charge-offs of loans
      determined to be uncollectible and the sale of $1.7 million of OREO property.
      The decrease in 2004 was due to charge-offs of loans determined to be
      uncollectible, the sale of $4.5 million of OREO property, and the collection
      or
      rehabilitation of previously delinquent loans. As management's efforts to
      collect these loans upon maturity continue, 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. Premier is committed to
      continuing to reduce its high level of non-performing assets and implementing
      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 2001 to the end of 2002, primarily related to the sale
      of
      OREO properties and the decline in loans 90+ days past due. Premier's efforts
      at
      its other affiliate banks in 2003 and 2004 are 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,
      2005, the non-performing assets at Farmers Deposit Bank had declined even
      further to $4.7 million.




The
      Loan
      Summary table presents five years of comparative non-performing asset
      information. Other than these loans and the impaired loans discussed in Note
      6
      to the consolidated financial statements, Premier does not have a significant
      volume of loans whereby 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, 2005. For real


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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
      2003
      Premier recognized $466,000 of OREO writedowns. During 2004, Premier realized
      a
      $123,000 net profit on the disposition of OREO properties, net of writedowns,
      while in 2005 Premier realized $17,000 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 original contracted terms. During
      2005,
      approximately $93,000 of interest was recognized on non-accrual and restructured
      loans, while approximately $429,000 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.




A
      loan is
      categorized and reported as impaired when it is probable that the creditor
      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 condition 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


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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 6 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. 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 included 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.




At
      December
      31, 2005, the allowance for loan losses was $7.9 million or 2.40% of total
      year-end loans. This ratio is a decrease from the prior year’s 2.89% and the
      4.31% at the end of 2003. The decrease in the allowance in 2005 was the result
      of charge-offs of loans previously identified as impaired partially offset
      by
      $719,000 of recoveries. The decrease in the allowance in 2004 was the result
      of
      charge-offs of loans previously identified as impaired partially offset by
      $1.1
      million of recoveries and $1.0 million of additional provisions for loan losses
      during 2004. 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.




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. The provision for loan losses in 2005 was
      only
      $4,000. During the third and fourth quarters of 2005, negative provisions were
      recorded substantially offsetting the provisions recorded during the first
      half
      of the year. During the latter half of 2005, Premier realized collections of
      previously impaired loans whereby estimated losses were previously assigned
      to
      the loan as well as recoveries of 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. 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.  The
      provision for loan losses in 2004 was $1.0 million, down significantly from
      the
      $20.5 million provision in 2003. The provision in 2004 was the result of newly
      identified impaired loans and increases in the volume of loans outstanding
      at
      the banks located in West Virginia. The high level of provision in
      2003


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








was
      the result of the net charge-offs and increase in impaired loans at Farmers
      Deposit. Premier continually evaluates the adequacy of its allowance for loan
      losses, and changes in the provision are based on the estimated probable
      incurred loss of the loan portfolio.





**SUMMARY
                OF LOAN LOSS EXPERIENCE**(Dollars
                in thousands)For
                the Year Ended December 312005
            
            2004
            
            2003
            
            2002
            
            2001Allowance
                for loan losses,beginning
                of period
            
            $
            9,384
            
            $
            14,300
            
            $
            9,698
            
            $
            7,371
            
            $
            6,617Amounts
                charged off:Commercial,
                financial and agricultural loans
            
            
            736
            
            
            1,520
            
            
            4,417
            
            
            4,080
            
            
            2,585Real
                estate construction loans
            
            
            0
            
            
            5
            
            
            0
            
            
            833
            
            
            480Real
                estate loans - other
            
            
            549
            
            
            2,413
            
            
            6,427
            
            
            1,072
            
            
            3,013Consumer
                installment loans
            
            
            930
            
            
            3,054
            
            
            5,669
            
            
            1,904
            
            
            1,725Total
                charge-offs
            
            
            2,215
            
            
            6,992
            
            
            16,513
            
            
            7,889
            
            
            7,803Recoveries
                on amounts previously charged-off:Commercial,
                financial and agricultural loans
            
            
            91
            
            
            264
            
            
            145
            
            
            138
            
            
            163Real
                estate construction loans
            
            
            1
            
            
            1
            
            
            37
            
            
            16
            
            
            1Real
                estate loans - other
            
            
            84
            
            
            87
            
            
            74
            
            
            163
            
            
            10Consumer
                installment loans
            
            
            543
            
            
            698
            
            
            346
            
            
            446
            
            
            299Total
                recoveries
            
            
            719
            
            
            1,050
            
            
            602
            
            
            763
            
            
            473Net
                charge-offs
            
            
            1,496
            
            
            5,942
            
            
            15,911
            
            
            7,126
            
            
            7,330Provision
                for loan losses
            
            
            4
            
            
            1,026
            
            
            20,513
            
            
            9,453
            
            
            8,350Balance
                of disposed subsidiaries
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            (266
            )Allowance
                for loan losses, end of period
            
            $
            7,892
            
            $
            9,384
            
            $
            14,300
            
            $
            9,698
            
            $
            7,371Average
                total loans
            
            $
            326,615
            
            $
            325,610
            
            $
            352,156
            
            $
            382,763
            
            $
            424,903Total
                loans at year-end
            
            
            328,717
            
            
            324,927
            
            
            331,794
            
            
            373,099
            
            
            384,940As
                a percent of average loansNet
                charge-offs
            
            
            0.46
            %
            
            1.82
            %
            
            4.52
            %
            
            1.86
            %
            
            1.73
            %Provision
                for loan losses
            
            
            0.00
            %
            
            0.32
            %
            
            5.83
            %
            
            2.47
            %
            
            1.97
            %Allowance
                for loan losses
            
            
            2.42
            %
            
            2.88
            %
            
            4.06
            %
            
            2.53
            %
            
            1.73
            %As
                a percent of total loans at year-endAllowance
                for loan losses
            
            
            2.40
            %
            
            2.89
            %
            
            4.31
            %
            
            2.60
            %
            
            1.91
            %As
                a multiple of net charge-offsAllowance
                for loan losses
            
            
            5.28X
            
            
            1.58X
            
            
            0.90X
            
            
            1.36X
            
            
            1.01XIncome
                before tax and provision for loan losses
            
            
            4.32X
            
            
            0.65X
            
            
            0.35X
            
            
            0.80X
            
            
            1.76X





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Net
      charge-offs in 2005 decreased to $1.5 million, down $4.4 million or 75% from
      the
      $5.9 million of net charge-offs experienced in 2004. Approximately $641,000
      or
      43% of the 2005 net charge-offs and $4.8 million or 81% of the 2004 net
      charge-offs were at Farmers Deposit Bank. In 2003 net charge-offs totaled $15.9
      million with approximately $14.3 million or 90% of the 2003 net charge-offs
      at
      Farmers Deposit Bank. While all categories of loan charge-offs were down in
      2005, consumer loan charge-offs continued to exceed the other categories of
      loan
      charge-offs. 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 high level of non-performing loans
      and
      the resolution of collection efforts on those loans. These factors are
      considered in determining the adequacy of the allowance for loan losses, which
      at December 31, 2005 was 2.40% of total loans outstanding and 128% of
      non-performing loans.





The
      following table presents the maturity distribution and interest sensitivity
      of
      selected loan categories at December 31, 2005. Maturities are based upon
      contractual terms.





**LOAN
                MATURITIES and INTEREST SENSITIVITY****December
                31, 2005**(Dollars
                in thousands)Projected
                Maturities*One
                Year or Less
            
            One
                Through Five Years
            
            Over
              Five
                Years
            
            Total
                LoansCommercial,
                secured by real estate
            
            $
            30,208
            
            $
            45,447
            
            $
            10,334
            
            $
            85,989Commercial,
                other
            
            
            26,889
            
            
            19,011
            
            
            3,462
            
            
            49,362Real
                estate construction
            
            
            5,519
            
            
            4,111
            
            
            1,440
            
            
            11,070Agricultural
            
            
            803
            
            
            603
            
            
            264
            
            
            1,670Total
            
            $
            63,419
            
            $
            69,172
            
            $
            15,500
            
            $
            148,091Fixed
                rate loans
            
            $
            14,656
            
            $
            31,427
            
            $
            6,106
            
            $
            52,189Floating
                rate loans
            
            
            48,763
            
            
            37,745
            
            
            9,394
            
            
            95,902Total
            
            $
            63,419
            
            $
            69,172
            
            $
            15,500
            
            $
            148,091Fixed
                rate loans projected to mature after one year
            
            
            
            
            
            
            
            
            
            
            $
            37,533Floating
                rate loans projected to mature after on year
            
            
            
            
            
            
            
            
            
            
            
            47,139Total
            
            
            
            
            
            
            
            
            
            
            $
            84,672(*)
                Based on scheduled or approximate repayments





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








***Investment
      Portfolio and***


***Other
      Earning Assets***




Investment
      securities averaged $150.0 million in 2005, relatively unchanged from the $150.2
      million averaged in 2004. This increase follows a 5.2% increase from the $142.8
      million averaged in 2003. While average investments remained relatively
      unchanged in 2005, the amount of investments at December 31, 2005 was down
      $16.5
      million from the balance at December 31, 2004. As investments matured in 2005
      not all funds were reinvested in the investment portfolio. Some funds were
      used
      to satisfy loan growth, deposit withdrawals and debt payments. The increase
      in
      average investments in 2004 was the result of weak loan demand and funds from
      loan paydowns and payoffs at Farmers Deposit Bank. These funds were not used
      to
      fund new loans but were instead invested in high-quality debt and mortgage-
      backed securities.





The
      following table presents the carrying values of investment
      securities.





**FAIR
                VALUE OF SECURITIES AVAILABLE FOR SALE**(Dollars
                in thousands)As
                of December 312005
            
            2004
            
            2003U.S.
                Treasury securities
            
            $
            3,941
            
            $
            250
            
            $
            652U.S.
                Agency securities
            
            
            95,300
            
            
            115,514
            
            
            106,845States
                and political subdivisions
            
            
            2,514
            
            
            2,751
            
            
            6,868Mortgage-backed
                securities
            
            
            35,639
            
            
            34,942
            
            
            31,810Corporate
                securities
            
            
            25
            
            
            435
            
            
            1,471Total
                securities
            
            $
            137,419
            
            $
            153,892
            
            $
            147,646




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, 2005 all of Premier's
      investments were classified as available-for-sale and carried on the books
      at
      market value.




As
      shown in
      the following Securities Maturity and Yield Analysis table, the average maturity
      period of the securities available-for-sale at December 31, 2005 was 4 years
      2
      months, lengthened somewhat by the 10 year 11 month average final maturity
      of
      the mortgage-backed securities portfolio. The table uses a final maturity method
      to report the average maturity of mortgage-backed securities, which excludes
      the
      effect of monthly payments and prepayments. Approximately 72% of Premier's
      investment securities are U.S. Government agency or Treasury




Table
            of Contents




**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








securities
      that have an average maturity of 1 year 10 months. The average maturity of
      the
      investment portfolio is managed at a level to maintain a proper matching with
      interest rate risk guidelines. During 2004, Premier sold a portion of the
      securities classified as available-for-sale as part of its management of
      interest rate risk, as shown in the Statements of Cash Flows. 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
      5 to the consolidated financial statements.





**SECURITIES
                MATURITY AND YIELD ANALYSIS****December
                31, 2005**(Dollars
                in thousands)Market
                Value
            
            Average
                Maturity (yrs/mos)
            
            Taxable
                Equivalent Yield*U.S.
                Treasury securitiesAfter
                one but within five years
            
            $
            3,941
            
            
            
            
            
            4.31
            %Total
                U.S. Treasury Securities
            
            
            3,941
            
            
            2/8
            
            
            4.31U.S.
                Government Agencies securitiesWithin
                one year
            
            
            32,674
            
            
            
            
            
            2.47After
                one but within five years
            
            
            62,626
            
            
            
            
            
            3.51Total
                U.S. Government Agencies securities
            
            $
            95,300
            
            
            1/9
            
            
            3.15States
                and political subdivisionsWithin
                one year
            
            
            417
            
            
            
            
            
            4.75After
                one but within five years
            
            
            1,477
            
            
            
            
            
            4.66After
                five but within ten years
            
            
            241
            
            
            
            
            
            4.16Over
                ten years
            
            
            379
            
            
            
            
            
            5.51Total
                states and political subdivisions securities
            
            $
            2,514
            
            
            3/3
            
            
            4.75Mortgage-backed
                securities**Within
                one year
            
            
            2,754
            
            
            
            
            
            3.54After
                one but within five years
            
            
            2,071
            
            
            
            
            
            3.93After
                five but within ten years
            
            
            1,776
            
            
            
            
            
            4.08Over
                ten years
            
            
            29,038
            
            
            
            
            
            4.56Total
                mortgage-backed securities
            
            $
            35,639
            
            
            10/11
            
            
            4.42Corporate
                securities
            
            $
            25Total
                securities available-for-sale
            
            $
            137,419
            
            
            4/2
            
            
            3.54
            %(*)
                Fully tax-equivalent using the rate of 34%(**)
                Maturities for mortgage-backed securities are based on final
                maturity





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Premier's
      average investment in federal funds sold and other short-term investments
      decreased by 21.4% in 2005. This follows a 31.5% decrease in 2004. Averaging
      $23.1 million in 2005, federal funds sold and other short-term investments
      decreased $6.3 million from the $29.4 million averaged in 2004, and were lower
      than the $42.8 million averaged during 2003. The decrease in average federal
      funds sold in 2005 and 2004 was the result of investing more of Premier's
      available funds into higher yielding investments and using a portion of the
      funds to reduce outstanding debt and satisfy deposit withdrawals. 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
      2005,
      Premier began raising the rates paid on it interest bearing deposits in response
      to the increase in market interest rates. However, as Premier has been able
      to
      reduce a portion of its high rate long-term borrowings, the average rates paid
      on interest bearing liabilities remained relatively unchanged in 2005. The
      average rate paid on interest bearing liabilities decreased to 2.30% in 2005,
      down from the 2.32% paid in 2004. The decrease is largely due to the early
      redemption of $5.5 million of Premier’s 9.75% Trust Preferred Securities late in
      2004 and the payment of 10 quarters of deferred distributions on the Trust
      Preferred Securities in March 2005. The interest savings more than offset the
      increase in interest expense due to the rise in rates paid on NOW and money
      market transactional deposit accounts and on certificates of deposit. In 2004,
      Premier decreased the rates paid on its interest bearing deposits in response
      to
      the decline in market interest rates. The average rate paid on interest bearing
      liabilities decreased to 2.32% in 2004, down from the 2.63% paid in 2003. The
      decrease is largely due to declines in rates paid on time deposits as higher
      rate certificates of deposits were either not renewed at maturity or were
      redeposited at lower rates in conjunction with the decline in market interest
      rates. Similarly, rates paid on NOW and money market transactional deposit
      accounts also declined. 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.
      Premier's banks periodically offer special rate products to attract additional
      deposits.




Premier’s
      deposits, on average, decreased by 1.2% or $5.3 million in 2005. The 2005
      decrease follows at 5.6% or $26.4 million decrease in 2004 from the average
      in
      2003. In 2005, $13.3 million of the decline in deposits was at Farmers Deposit
      Bank, partially due to Premier's capital restoration plan as certain deposits
      were not renewed as part of the plan to reduce the size of the Bank. In
      Premier’s other markets, deposits, on average, increased by 2.2% or $8.0
      million. In 2004, $20.8 million of the decline in deposits was at Farmers
      Deposit Bank, again partially due to Premier's capital restoration plan to
      reduce the size of the Bank. The remaining $5.6 million decline in average
      deposits was largely due to the withdrawal of some public fund deposits which
      were reestablished as repurchase agreements. Average repurchase agreements


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








at
      Affiliate Banks other than Farmers Deposit increased by $5.8 million during
      2004
      offsetting the remaining decline in average deposits in 2004.




In
      2005,
      non-interest bearing deposits increased 7.0% or $4.4 million on average when
      compared to 2004. In 2004, non-interest bearing deposits increased by 16.1%
      or
      $8.7 million on average when compared to 2003. 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.) In 2005, interest bearing deposits decreased by 2.5% or $9.7 million
      on
      average when compared to 2004. The decrease was largely due to a $13.6 million
      decrease in average interest bearing deposits at Farmers Deposit Bank. The
      remaining increase was the result of internal growth in Premier’s other markets.
      In 2004, interest bearing deposits decreased by 8.3% or $35.0 million on average
      when compared to 2003. The decrease was primarily due to a $21.6 million
      decrease in average interest bearing deposits at Farmers Deposit Bank. The
      remaining decrease was the result of the non-renewal of certain high rate time
      deposits in 2003 that had a carryover effect on 2004 and a decrease in average
      interest bearing transaction deposits.





The
      following table provides information on the maturities of time deposits of
      $100,000 or more at December 31, 2005.





**MATURITY
                OF TIME DEPOSITS $100,000 OR MORE****December
                31, 2005**(Dollars
                in thousands)Maturing
                3 months or less
            
            $
            6,655Maturing
                over 3 months
            
            
            6,728Maturing
                over 6 months
            
            
            12,530Maturing
                over 12 months
            
            
            16,256Total
            
            $
            42,169




Other
      funding
      sources for Premier include short and long-term borrowings. Premier's short-term
      borrowings primarily consist of federal funds purchased from other banks, and
      securities sold under agreements to repurchase with commercial customers. These
      short-term borrowings fluctuate depending on near term funding needs and as
      part
      of Premier's management of its asset/liability mix. In 2005, short-term
      borrowings averaged $8.4 million, up $1.9 million from the average in 2004
      due
      to an increase in public fund repurchase agreements.  In 2004, short-term
      borrowings averaged $6.5 million, up $1.9 million again from the average in
      2003. Near the end of 2003, Farmers Deposit Bank reduced its short-term
      borrowings to zero as part of Premier's recapitalization plan. This event had
      the effect of reducing Premier's average short-term borrowings in 2004 by
      approximately $4.3 million. This decline in short-term borrowings was more
      than
      offset by the public fund repurchase agreements established at the Affiliate
      Banks in 2004 as discussed above.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Long-term
      borrowings consist of Federal Home Loan Bank (FHLB) borrowings by Premier's
      banks, other borrowings by the parent holding company and debt issued in the
      form of subordinated debentures to an unconsolidated trust subsidiary. FHLB
      advances, on average, declined by 11.9% or $1.2 million in 2005, following
      a
      37.2% or $5.9 million decrease in 2004. 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.
      In 2004, Premier elected not to renew most of its maturing FHLB advances and
      prepaid a limited number of other FHLB advances in order to reduce its
      outstanding debt. In 2005, Premier made all of its scheduled principal payments
      and took advantage of penalty free prepayment opportunities as they became
      available. At December 31, 2005, FHLB advances totaled $8.3 million and had
      repayment schedules from five to seven years with $4.0 million maturing in
      2010.
      Other borrowings, on average, declined by 70.1% or $3.7 million in 2005 and
      36.5% or $3.0 million in 2004 as the parent company began using available funds
      to aggressively pay down its outstanding debt in late 2001. At December 31,
      2005, other borrowings totaled $1.4 million which consisted of two $701,000
      subordinated notes with a 0% interest rate. These notes can only be repaid
      with
      the permission of the FRB. For more information on other borrowings, see Note
      11
      to the consolidated financial statements.





**PAYMENTS
                DUE ON CONTRACTUAL OBLIGATIONS****December
                31, 2005**(Dollars
                in thousands)For
                the Year Ended December 31Total
            
            Less
                than one year
            
            1-3
              years
            
            3-5
              years
            
            More
                than five yearsFederal
                Home Loan Bank advances
            
            $
            8,334
            
            $
            675
            
            $
            1,457
            
            $
            5,614
            
            $
            588Notes
                payable
            
            
            1,402
            
            
            1,402
            
            
            0
            
            
            0
            
            
            0Guaranteed
                subordinated debentures
            
            
            15,722
            
            
            0
            
            
            0
            
            
            0
            
            
            15,722Operating
                lease obligations
            
            
            332
            
            
            165
            
            
            148
            
            
            17
            
            
            2Data
                and item processing contracts*
            
            
            5,940
            
            
            1,320
            
            
            2,640
            
            
            1,980
            
            
            0Total
            
            $
            31,730
            
            $
            3,562
            
            $
            4,245
            
            $
            7,611
            
            $
            16,312*
                Data and item processing contractual obligations are estimated using
                the
                average billing for the last three months of
                2005.




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 Premier's subsidiary banks to
      Fiserv systems began on April 15, 2005 and were completed by July 31, 2005.
      Based upon the average billings of the last three months of 2005, the estimated
      payments to Fiserv for these services will be approximately $1,320,000 per
      year
      beginning in 2006. Actual results may vary depending upon the number and type
      of
      accounts actually processed and future customer activity.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Premier's
      Trust Preferred Securities represent beneficial interests in the assets of
      PFBI
      Capital Trust (NASDAQ/NMS-PFBIP). The trust holds $15.7 million of 9.75% Junior
      Subordinated Deferrable Interest Debentures ("Subordinated Debentures") due
      in
      2027. This total is down from the $20.9 million outstanding at December 31,
      2004
      due to $5.2 million of early redemptions during the fourth quarter of 2005.
      Quarterly cash distributions on the Preferred Securities are made to the extent
      interest on the debentures is received by the trust.




As
      previously
      disclosed, pursuant to an agreement entered into with the Federal Reserve Bank
      of Cleveland on September 29, 2000, as superseded by an agreement with the
      Federal Reserve Bank of Cleveland dated January 29, 2003, Premier is required
      to
      request approval for the payment of distributions due on the Trust Preferred
      Securities. During the quarter ended June 30, 2002, Premier was notified by
      the
      Federal Reserve Bank of Cleveland that due to the deterioration of core earnings
      of the Company, among other issues, the FRB would not allow the payment of
      the
      distribution due June 30, 2002 on Premier's Trust Preferred Securities. In
      response, Premier reached an agreement with the Federal Reserve Bank of
      Cleveland whereby Premier's Chairman of the Board, who is also its largest
      shareholder, agreed to loan the company the amount of the distribution,
      $701,000, so that Premier, with the Federal Reserve Bank's approval, could
      make
      the distribution. The loan is unsecured at a zero interest rate with no defined
      maturity date. The loan cannot be repaid without the prior approval of the
      Federal Reserve Bank. A similar agreement was reached for the payment of the
      distribution due September 30, 2002. Premier's President and Chief Executive
      Officer, who is also a director, agreed to loan the Company the amount of the
      September 30 distribution, $701,000. This loan is also unsecured at a zero
      interest rate with no defined maturity date. The loan also cannot be repaid
      without the prior approval of the Federal Reserve Bank of
      Cleveland.




In
      December
      2002, The Federal Reserve Bank of Cleveland ("FRB") denied Premier's request
      to
      make the fourth quarter distribution. Accordingly, Premier exercised its right
      to defer the payment of interest on the Subordinated Debentures related to
      the
      Trust Preferred Securities for an indefinite period (which can be no longer
      than
      20 consecutive quarterly periods). Premier continued to defer the payment of
      interest throughout 2003 and 2004. In the first quarter of 2005, Premier sought
      and received approval from the FRB to make the first quarter 2005 distribution
      and all nine previously deferred quarterly distributions. During the deferral
      period, the deferred distributions also accrued interest at an annual rate
      of
      9.75%. The payment was disbursed on March 31, 2005 to shareholders of record
      on
      March 15, 2005. The accrued interest on the deferred distributions was also
      paid
      when the deferred distributions were paid on March 31, 2005. The FRB has also
      approved the payment of current distributions due through March 31, 2006.
      Although the FRB has approved the payment of the deferred and current
      distributions through March 31, 2006, Premier is still bound by the Written
      Agreement and will be required to request the FRB’s approval to pay future
      distributions. No assurance can be given that the FRB will grant such
      approval.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








As
      part of a Debt Reduction and Profitability plan presented on January 6, 2003
      to
      the Federal Reserve Bank of Cleveland ("Federal Reserve"), Premier requested
      and
      received approval from the Federal Reserve to redeem $3,000,000 of the then
      outstanding $28,750,000 Trust Preferred Securities. The goal of the redemption
      was to use a portion of Premier's cash on hand to reduce its total interest
      cost
      and thus improve profitability. The redemption reduced Premier's interest cost
      by approximately $292,000 per year. However, this benefit was partially offset
      due to the interest accrued in 2003 on the deferred quarterly distributions.
      In
      2004, Premier requested and received approval from the Federal Reserve to redeem
      $4.5 million of Trust Preferred Securities on October 15, 2004 and another
      $1.0
      million on December 31, 2004. These two redemptions reduced Premier's interest
      cost by approximately $536,000 per year. In 2005, Premier requested and received
      approval from the Federal Reserve to redeem $5.0 million of Trust Preferred
      Securities on December 31, 2005. It is anticipated that this redemption will
      reduce Premier’s interest cost by approximately $487,000 per year. Future early
      redemptions, if any, will also require Federal Reserve approval, pursuant to
      a
      previously disclosed Written Agreement entered into with the Federal Reserve
      Bank of Cleveland on January 29, 2003.





***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 prepared 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. The most recent
      earnings simulation model projects net interest income would increase by
      approximately 0.5% 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 0.6% 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 0.9% over the projected
      stable rate net interest income in a rising rate scenario and would decrease
      by
      1.3% 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.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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.





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





Year-end
              2005
            Year-end
              2004
            ALCO
                GuidelinesProjected
                1-year net interest income-100
                bp change vs. base rate
            -0.6%
            -0.9%
            10%+100
                bp change vs. base rate
            0.5%
            0.4%
            10%Projected
                1-year net interest income-200
                bp change vs. base rate
            -1.3%
            -1.9%
            10%+200
                bp change vs. base rate
            0.9%
            0.8%
            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 $2.1 million of cash from operations in 2005, which compares to $11.5
      million in 2004 and $12.2 million in 2003. The decrease in 2005 was primarily
      the result of the payment of the deferred distributions of the Trust Preferred
      Securities in March 2005, which came out of cash from operations. Total cash
      from operations along with the 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.
      Net
      cash provided by liquidating investing activities totaled $7.9 million in 2005,
      $7.5 million in


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








2004
      and $29.5 million in 2003. Net cash used to satisfy deposit withdrawals and
      reduce debt totaled $8.4 million in 2005, $20.9 million in 2004, and $39.5
      million in 2003. 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, 2005, the parent company had over $3.2 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 to pay the deferred Trust Preferred
      distributions approved by the Federal Reserve in the first quarter of 2006.
      During 2005, the parent company generated $1.5 million of cash from operations
      and used $5.8 million to redeem a portion of the Trust Preferred Securities
      outstanding and payoff its outstanding other debt. During 2004, the parent
      company received $14.3 million from the sale of its subsidiary, Citizens Bank
      and generated $2.3 million from operations. Premier used a portion of these
      proceeds to complete the necessary capital injections into Farmers Deposit
      Bank
      to maintain the Bank's capital ratios required by the FDIC in accordance with
      the Order. Premier used a substantial portion of the proceeds to reduce its
      borrowed funds and redeem a portion of the Trust Preferred Securities
      outstanding. The remainder was held for future use. 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 9.77% during 2005,
      up
      from 8.23% in 2004 and from 7.87% during 2003. The ratios for all three years
      are considered adequate for a company of Premier's size. The increase in 2005
      was largely due to increase in net income in 2005 and the decline in average
      assets due to the sale of Citizen’s Bank Kentucky on July 1, 2004. The increase
      in 2004 was largely due to the decline in average total assets due to the sale
      of Citizen's Bank Kentucky. 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 2005, Premier's risk adjusted capital-to-assets
      ratio was 19.1% compared to 18.9% at December 31, 2004. 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. Premier's leverage ratio at December 31, 2005 was 10.6%
      compared to 9.7% at December 31, 2004. Both of these ratios are above the
      recommended 4.0% to 5.0% recommended by the Federal Reserve. The increase in
      the
      2005 ratios was the result of the increase in total capital due to the increase
      in net income and decline in total assets resulting from the sale of Citizens
      Bank, coupled with a decrease in disallowed deferred tax assets. In accordance
      with Federal Reserve guidelines for all banks and bank holding companies,
      deferred tax assets are subtracted from Premier's available total equity
      ("disallowed") if they generally cannot be realized through available tax
      refunds in


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








a
      next twelve month timeframe. 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 larger
      banks may be found in Note 20 to the consolidated financial
      statements.





While
      dividend payments to its shareholders are currently restricted by agreement
      with
      the FRB, 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
      2006, Premier's banks could, without prior approval, declare and pay to Premier
      dividends of approximately $2.5 million plus any 2006 net profits retained
      through the date of declaration by Ohio River Bank, Boone County Bank and First
      Central Bank. In 2005, Citizens Deposit Bank requested and received approval
      from the Federal Reserve to pay a $3.0 million dividend in March 2005. This
      amount was substantially higher than the bank’s prior two years of reported net
      income. As such, Citizens Deposit Bank must continue to request approval for
      up
      to two years to pay any future dividends to the parent company out of its
      current earnings. Likewise, Farmers Deposit Bank is under a similar restriction
      on the payment of dividends due to the net cumulative losses it has recorded
      over the past two years.





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





**SELECTED
                CAPITAL INFORMATION**(Dollars
                in thousands)As
                of December 312005
            
            2004
            
            ChangeStockholders’
                Equity
            
            $
            54,287
            
            $
            51,029
            
            $
            3,258Qualifying
                capital securities of subsidiary trust
            
            
            15,250
            
            
            17,185
            
            
            (1,935
            )Disallowed
                amounts of goodwill and other intangibles
            
            
            (15,816
            )
            
            (15,816
            )
            
            0Disallowed
                deferred tax assets
            
            
            (628
            )
            
            (1,743
            )
            
            1,115Unrealized
                loss on securities available for sale
            
            
            1,718
            
            
            527
            
            
            1,191Tier
                I capital
            
            $
            54,811
            
            $
            51,182
            
            $
            3,629Tier
                II capital adjustmentsQualifying
                capital securities of subsidiary trust
            
            
            0
            
            
            3,065Allowable
                amount of the allowance for loan losses
            
            
            3,899
            
            
            3,916Total
                capital
            
            $
            58,710
            
            $
            58,163Total
                risk-weighted assets
            
            $
            307,951
            
            $
            307,805RatiosTier
                I capital to risk-weighted assets
            
            
            17.80
            %
            
            16.63
            %Total
                capital to risk-weighted assets
            
            
            19.06
            %
            
            18.90
            %Leverage
                at year-end
            
            
            10.61
            %
            
            9.74
            %





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








**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
      $20.0 million in 2005, up 9.6% from the $18.2 million earned in 2004 which
      follows a 6.9% decrease in 2004 from 2003. 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
      2005
      is largely due to an increase in interest income from loans and investments
      due
      to higher yields and a decrease in interest expense due to a reduction in
      outstanding debt. As shown in the Rate Volume Analysis table below, increases
      in
      the yields on loans, investments and other earning assets increased Premier’s
      interest income by $1.2 million. This increase was complemented by interest
      expense savings of over $1.0 million due to the reduction of outstanding debt,
      FHLB borrowings and other borrowings. Some of this interest expense savings
      was
      offset by higher interest paid on deposits and other short-term borrowings
      due
      to overall higher rates paid on deposits and an increase average certificates
      of
      deposit outstanding. The combined effect was to increase net interest income
      by
      $1,752,000 for the year.





The
      decrease in net interest income in 2004 is largely due to a decrease in the
      volume of loans outstanding coupled with a decline in loan interest income
      resulting from the high level of non-accrual loans at Farmers Deposit. As shown
      in the Rate Volume Analysis table below, decreases in the volume of earning
      assets (primarily loans) in 2004 reduced Premier's interest income by $1.8
      million. This decrease was partially offset by the lower volume of interest
      bearing liabilities in 2004 resulting in a $1.3 million decline in interest
      expense. The net effect was to reduce net interest income by $571,000 for the
      year. Similarly, the lower interest rate environment in 2004, coupled with
      the
      decline in interest income for loans placed on non-accrual resulted in reduced
      interest income of $2.0 million. This decline was partially offset by reduced
      interest expense of $1.2 million which resulted primarily from the lower
      interest rate environment and the resulting lower rate paid on deposits. During
      the latter half of 2004, interest rates began to rise, which resulted in
      increases in the interest paid on Premier's long and short term borrowings.
      The
      overall effect of declining volumes and declining rates was a decrease in net
      interest income of $1.3 million in 2004 when compared to 2003.








Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








**RATE
                VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME**(Dollars
                in thousands on a tax equivalent basis)2005
                vs 2004
            
            2004
                vs 2003Increase
                (decrease) due to change in
            
            Increase
                (decrease) due to change inVolume
            
            Rate
            
            NetChange
            
            Volume
            
            Rate
            
            NetChangeInterest
                income*:Loans
            
            $
            72
            
            $
            414
            
            $
            486
            
            $
            (1,947
            )
            $
            (1,704
            )
            $
            (3,651
            )Investment
                securities
            
            
            (8
            )
            
            394
            
            
            386
            
            
            311
            
            
            (401
            )
            
            (90
            )Federal
                funds sold
            
            
            (61
            )
            
            426
            
            
            365
            
            
            (211
            )
            
            122
            
            
            (89
            )Deposits
                with banks
            
            
            5
            
            
            0
            
            
            5
            
            
            0
            
            
            (1
            )
            
            (1
            )Total
                interest income
            
            $
            8
            
            $
            1,234
            
            $
            1,242
            
            $
            (1,847
            )
            $
            (1,984
            )
            $
            (3,831
            )Interest
                expense:DepositsNOW
                and money market
            
            $
            (104
            )
            $
            223
            
            $
            119
            
            $
            (234
            )
            $
            (521
            )
            $
            (755
            )Savings
            
            
            (25
            )
            
            (84
            )
            
            (109
            )
            
            79
            
            
            (339
            )
            
            (260
            )Certificates
                of deposit
            
            
            252
            
            
            197
            
            
            449
            
            
            (517
            )
            
            (705
            )
            
            (1,222
            )Short-term
                borrowings
            
            
            38
            
            
            24
            
            
            62
            
            
            25
            
            
            42
            
            
            67Other
                borrowings
            
            
            (108
            )
            
            (126
            )
            
            (234
            )
            
            (143
            )
            
            12
            
            
            (131
            )FHLB
                borrowings
            
            
            (67
            )
            
            10
            
            
            (57
            )
            
            (335
            )
            
            65
            
            
            (270
            )Debt
            
            
            (524
            )
            
            (216
            )
            
            (740
            )
            
            (100
            )
            
            181
            
            
            81Total
                interest expense
            
            $
            (539
            )
            $
            29
            
            $
            (510
            )
            $
            (1,225
            )
            $
            (1,265
            )
            $
            (2,490
            )Net
                interest income*
            
            $
            547
            
            $
            1,205
            
            $
            1,752
            
            $
            (622
            )
            $
            (719
            )
            $
            (1,341
            )(*)
                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




As
      net
      interest income dollars increased in 2005, Premier’s net interest margin also
      increased. In 2005, the yield earned on investment securities increased 26
      basis
      points to 3.44% while the average yield on the loan portfolio increased 13
      basis
      points to 7.23%. The yield on federal funds sold increased 194 basis points
      to
      3.23%. The net result on all earning assets was to increase the yield 30 basis
      points to 5.90% in 2005, up from the 5.60% earned in 2004 but still down
      slightly from the 5.97% earned in 2003. Similarly, in 2005 Premier increased
      the
      average rate paid on its deposits by 17 basis points to keep competitive with
      national and local market rates. Premier also increased the rates paid on its
      short-term borrowings by 34 basis points. However, these rate increases were
      offset by reductions in other borrowings, FHLB advances and Premier’s
      subordinated debentures. Furthermore, due to the payment of the cumulative
      deferred Trust Preferred distributions in March, the effective rate on the
      outstanding principal balance of the debt decreased by 90 basis points to
      10.40%. The overall effect on all interest bearing liabilities was to actually
      reduce the cost of funds 2 basis points to 2.30% in 2005, down from 2.32% in
      2004 and2.63% in 2003. As a result Premier's net interest spread increased
      by 33
      basis points and its net interest margin increased by 39 basis points to 4.00%
      in 2005, up from 3.61% in 2004 and 3.63% in 2003. Further discussion of interest
      income is included in the section of this report entitled "Balance Sheet
      Analysis."


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








***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
      11.8% or $414,000 in 2005. The increase in 2005 is largely due to an increase
      in
      service charges of deposit accounts and secondary market mortgage commissions
      (reported in other income.) In 2004, total fees and other income increased
      by
      1.7% or $58,000 in 2004. The increase in 2004 is largely due to an increase
      in
      service charges on deposit accounts, substantially offset by declines in
      insurance commissions and other sources of non-interest income. Service charges
      on deposit accounts increased to $2,732,000 in 2005, an increase of 8.7% or
      $219,000. This increase follows a 16.0% or $346,000 increase in 2004 over 2003.
      The increases are the result of changes in the way Premier charges customers
      for
      over drawing their checking accounts and a general increase in customers and
      activity. Insurance commissions increased in 2005 by $15,000 following a $70,000
      decline in 2004. The increase in 2005 is largely due to an increase in new
      loan
      generations as loan demand increased in 2005. The decline in 2004 was largely
      due to lower new loan generations resulting from lower loan demand and stiffer
      competition from larger banks. Other income increased 19.2% or $180,000 in
      2005
      largely due to an increase in the commissions from originating secondary market
      mortgage loans, an increase in debit and ATM card transaction fees and an
      increase in revenue from other traditional banking services such as checkbook
      sales and safe box rental. These increases were partially offset by lower data
      processing revenue from non-affiliate banks as Premier’s data processing
      subsidiary ceased providing these services in late 2004 and early 2005. Other
      income decreased 18.8% or $218,000 in 2004 from the high amount of other income
      reported in 2003. This is primarily the result of a lower volume of commissions
      from originating secondary market mortgage loans, lower data processing revenue
      from non-affiliate banks, and a high level of 2003 collections of loans retained
      from the Bank of Mt. Vernon and Sabina Bank sales.




In
      2005,
      Premier did not execute any sales of investment securities. In 2004, Premier
      realized $100,000 in net gains on securities sales. These securities were sold
      as part of Premier's management of its asset/liability position and to liquidate
      certain tax exempt investments in order to generate future taxable income.
      In
      2003, Premier realized $616,000 in net gains on securities sales. Again, these
      securities were sold as part of Premier's management of its asset/liability
      position and to liquidate the tax-exempt investments at Farmers Deposit Bank
      in
      order to generate taxable income in the future.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








The
      following table is a summary of non-interest income and expense for each of
      the
      years the three-year period ending December 31, 2005.





**NON-INTEREST
                INCOME AND EXPENSE**(Dollars
                in thousands)Increase
                (Decrease) Over Prior Year2005
            
            20042005
            
            2004
            
            2003
            
            Amount
            
            Percent
            
            Amount
            
            PercentNon-interest
                income:Service
                charges on depositaccounts
            
            $
            2,732
            
            $
            2,513
            
            $
            2,167
            
            $
            219
            
            
            8.71
            
            $
            346
            
            
            15.97Insurance
                income
            
            
            69
            
            
            54
            
            
            124
            
            
            15
            
            
            27.78
            
            
            (70
            )
            
            (56.45
            )Other
            
            
            1,119
            
            
            939
            
            
            1,157
            
            
            180
            
            
            19.17
            
            
            (218
            )
            
            (18.84
            )Total
                fees and other income
            
            $
            3,920
            
            $
            3,506
            
            $
            3,448
            
            
            414
            
            
            11.81
            
            $
            58
            
            
            1.65Investment
                securities gains (losses)
            
            
            0
            
            
            100
            
            
            616
            
            
            (100
            )
            
            
            
            
            (516
            )Total
                non-interest income
            
            $
            3,920
            
            $
            3,606
            
            $
            4,064
            
            $
            314
            
            
            8.71
            
            $
            (458
            )
            
            (11.27
            )Non-interest
                expense:Salaries
                and wages
            
            $
            7,443
            
            $
            7,103
            
            $
            6,768
            
            $
            340
            
            
            4.79
            
            $
            335
            
            
            4.95Employee
                benefits
            
            
            1,642
            
            
            1,633
            
            
            1,955
            
            
            9
            
            
            0.55
            
            
            (322
            )
            
            (16.47
            )Total
                staff costs
            
            
            9,085
            
            
            8,736
            
            
            8,723
            
            
            349
            
            
            3.99
            
            
            13
            
            
            0.15Occupancy
                and equipment
            
            
            2,262
            
            
            2,141
            
            
            2,260
            
            
            121
            
            
            5.65
            
            
            (119
            )
            
            (5.27
            )Outside
                data processing
            
            
            1,505
            
            
            1,023
            
            
            1,062
            
            
            482
            
            
            47.12
            
            
            (39
            )
            
            (3.67
            )Professional
                fees
            
            
            554
            
            
            2,271
            
            
            1,338
            
            
            (1,717
            )
            
            (75.61
            )
            
            933
            
            
            69.73Taxes,
                other than payroll,property
                and income
            
            
            423
            
            
            589
            
            
            534
            
            
            (166
            )
            
            (28.18
            )
            
            55
            
            
            10.30OREO
                losses and expenses
            
            
            52
            
            
            (45
            )
            
            540
            
            
            97
            
            
            (215.56
            )
            
            (585
            )
            
            (108.33
            )Bad
                check losses
            
            
            36
            
            
            94
            
            
            461
            
            
            (58
            )
            
            (61.70
            )
            
            (367
            )
            
            (79.61
            )Supplies
            
            
            362
            
            
            365
            
            
            379
            
            
            (3
            )
            
            (0.82
            )
            
            (14
            )
            
            (3.69
            )Accelerated
                amortization ofTrust
                Preferred issuance costs
            
            
            184
            
            
            214
            
            
            124
            
            
            (30
            )
            
            (14.02
            )
            
            90
            
            
            72.58Other
                expenses
            
            
            2,842
            
            $
            2,394
            
            $
            2,211
            
            $
            448
            
            
            18.71
            
            $
            183
            
            
            8.28Total
                non-interest expenses
            
            $
            17,305
            
            $
            17,782
            
            $
            17,632
            
            $
            477
            
            
            (2.68
            )
            $
            150
            
            
            0.85




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 2005 net overhead ratio, or non-interest expense less
      non-interest income excluding securities transactions and other similar
      non-operating transactions to average earning assets was 2.67%, a decrease
      from
      the 2.82% realized in 2004 but still higher than the 2.62% ratio realized in
      2003. The actual dollars of net overhead declined by 6.2% or $891,000 in 2005
      which reduced the ratio by 15 basis points. In 2004, the ratio increased by
      20
      basis points, while the actual dollars of net overhead expense increased by
      only
      0.7% or $95,000. The primary reason for the increase in the net overhead ratio
      in 2004 was the 6.1% decrease in average earning assets without a corresponding
      decrease in operating costs. For the year 2005, net overhead was $13.4 million,
      down $891,000 from the $14.3 million of 2004 net overhead. The current year
      increase follows a $95,000 or 0.7% increase in 2004 from the $14.2 million
      of
      net overhead in 2003.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Total
      non-interest expense in 2005 decreased by $477,000, or 2.7% from 2004 as
      decreases in professional fees, taxes not on income, and bad check losses were
      only partially offset by higher data processing fees, staff costs, OREO
      expenses, occupancy and equipment expenses and other operating expenses. Total
      non-interest expense in 2004 increased by $150,000, or 0.9% from 2003 as
      decreases in OREO losses, bad check losses and occupancy and equipment expenses
      were essentially offset by increased professional fees, taxes not on income
      and
      other operating expenses.





Staff
      costs increased by $349,000 or 4.0% in 2005 versus 2004. Normal salary and
      wage
      increases in 2005 were increased by the addition of full time internal audit
      staff at the parent company. The use of employees to perform the internal audits
      of the company helped to reduce professional fees paid to outside which
      performed the function in 2004 and earlier. Staff costs increased by only
      $13,000 or 0.2% in 2004 versus 2003. Increases in salaries and wages were
      essentially offset by reductions in medical insurance and other benefit costs.
      In the second quarter of 2003, employees were required to contribute a
      percentage of the overall medical insurance premium as Premier changed its
      benefit structure to be more in-line with its competitors. The percentage of
      employee contribution was phased in over a two year period.





Occupancy
      and equipment expenses increased by $121,000 or 5.7% in 2005 due to the costs
      of
      operating an additional branch location opened in January 2005 plus an increase
      in equipment costs related to the write-off of old equipment and the purchase
      of
      new technology related to Premier’s conversion to an outside data processor in
      2005. Occupancy and equipment expenses decreased by $119,000 or 5.3% in 2004
      as
      lower equipment depreciation and maintenance costs were complemented by lower
      occupancy costs.





Outside
      data processing expense increased by $482,000 or 47.1% in 2005 as Premier
      transitioned its internal data and item processing functions to an outsourced
      provider. Savings in other expense areas such as staff costs, occupancy and
      equipment expense and other operating expenses will be realized as a result
      of
      the conversion. In 2004, outside data processing costs decreased by $39,000
      or
      3.7% versus 2003 as costs related to the data processing subsidiary were
      relatively unchanged from year to year.





Professional
      fees decreased by $1,717,000 or 75.6% in 2005 versus 2004 largely due to the
      increased audit costs as well as legal fees and other professional fees
      associated with Premier's investigation of Farmers Deposit Bank and the related
      SEC investigation in 2004 as disclosed in previous filings. Professional fees
      also declined in 2005 as a result of bringing the internal audit function
      in-house. Professional fees increased by $933,000 or 69.7% in 2004 versus 2003
      largely due to legal and audit costs related to the Farmers Deposit Bank
      investigation.








Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Taxes
      not on income decreased by $166,000 or 28.1% in 2005 versus 2004. The decrease
      in 2005 is largely due to a decrease in the taxable equity of the two Kentucky
      banks subject to the Kentucky Bank Franchise Tax. Taxes not on income increased
      by $55,000 or 10.3% in 2004 versus 2003. The increase in 2004 is due to an
      increase in franchise taxes imposed by the states in which the Banks
      operate.





OREO
      writedowns and expenses totaled $52,000 in 2005, a $97,000 increase over the
      net
      $45,000 benefit realized in 2004. The 2005 expense represents the costs to
      operate, maintain and liquidate Other Real Estate through foreclosure in
      satisfaction of unpaid loans. In 2004, Premier realized $123,000 of net profit
      from the disposition of OREO properties. A majority of the gains on the
      disposition of OREO were on properties from which no previous writedowns had
      occurred. This profit more than offset the costs of maintaining the remaining
      OREO property held in 2004. The net benefit in 2004 is a $585,000 decrease
      from
      the $540,000 of OREO writedowns and expenses recorded in 2003.





Bad
      check losses declined for the second year in a row to $36,000 in 2005. Bad
      check
      losses totaled $94,000 in 2004, a $367,000 decrease from the $461,000 recorded
      in 2003. The increase in 2003 was primarily the result of bad checks losses
      at
      Farmers Deposit Bank related to dishonored checks discovered during
      investigation. A partial collection of these checks was realized in the first
      quarter of 2006.





Accelerated
      Trust Preferred issuance costs were recognized in 2003, 2004 and 2005. At the
      time of issuance, the costs to originate the Trust Preferred Securities were
      capitalized. The costs are being amortized over the 30 year life of the
      securities which mature in 2027 and are recorded as an adjustment to interest
      expense. In March 2003, Premier redeemed $3.0 million of the Trust Preferred
      Securities in accordance with the terms of the instrument. At that time an
      amount of the remaining unamortized issuance costs proportional to the $3.0
      million of the then $28.8 million of Trust Preferred Securities outstanding
      was
      expensed to non-interest expense. This amount totaled $124,000 in 2003.
      Likewise, as a result of the $4.5 million early redemption on October 15, 2004
      and the additional $1.0 million redeemed on December 31, 2004, Premier expensed
      $214,000 of the issuance costs. In 2005, as a result of the $5.0 million early
      redemption on December 31, 2005, Premier expensed $184,000 of the issuance
      costs. Additional information on the Trust Preferred Securities is contained
      in
      Note 12 to the consolidated financial statements.





Other
      expenses totaled $2.8 million in 2005, an 18.7% or $448,000 increase from the
      $2.4 million recorded in 2004. The increase in 2005 is largely due to costs
      and
      fees related to Premier’s conversion to an outsource data and item processing
      provider. These costs include the travel and training of employees, fees and
      travel expense reimbursements paid to Fiserv to convert Premier’s data and costs
      associated with upgrading Premier’s computer networks. In 2004, other expenses
      increased $183,000 or 8.3% from the $2.2 million of other expenses recorded
      in
      2003. The increase in 2004 is largely due to a $165,000 writedown of the former
      headquarters of Premier located in Georgetown Kentucky prior to its
      sale.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








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 $2.0 million of income tax expense related to continuing operations
      in 2005. This amount compares to $899,000 of income tax expense recorded in
      2004
      and the $5.3 million income tax benefit recognized in 2003. The benefit in
      2003
      was due to the pretax losses realized by Premier. Premier's effective tax rate
      was 31.4% in 2005 and 2004, down from the negative (35.5%) in 2003. Premier's
      effective tax rate in 2003 was increased by the benefits of holding tax-exempt
      investments and other tax saving instruments. These tax saving benefits helped
      to reduce Premier's positive tax rate in 2005 and 2004 to 31.4% from the 34.0%
      statutory rate. Additional information regarding income taxes is contained
      in
      Note 13 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 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.








**SUMMARY
      RESULTS OF OPERATIONS**


**FOURTH
      QUARTER 2005**




Income
      from
      continuing operations for the three months ended December 31, 2005 totaled
      $1,537,000, a $978,000 or 175% increase from the $559,000 of income from
      continuing operations reported for the fourth quarter of 2004. On a per share
      basis, Premier's income from continuing operations for the fourth quarter of
      2005 was 29 cents per share, compared to 11 cents per share for the same quarter
      last year.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**MANAGEMENT’S
      DISCUSSION AND ANALYSIS**


December
      31, 2005








Net
      interest income totaled $5,177,000 for the fourth quarter of 2005, an increase
      of $375,000 or 7.8% from the net interest income earned in the same quarter
      of
      2004. The increase is the result of higher interest income on loans and
      investments largely due to higher yields. This increase in interest income
      was
      partially offset by an increase in interest expense. An increase in interest
      expense on deposits as a result of higher rates paid was partially reduced
      by a
      decrease in interest expense on borrowings due to lower outstanding balances.
      During the fourth quarter of 2005, Premier reversed $290,000 of previously
      recorded provisions for loan losses (negative provisions). This compares to
      $355,000 of positive provisions in the fourth quarter of 2004. The negative
      provisions in the fourth quarter of 2005 were the result of continued
      improvement in the estimated credit risk at banks formerly subject to regulatory
      agreements and payments on loans previously identified as having significant
      credit risk at Farmers Deposit Bank. 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.  Non-interest
      income excluding securities transactions totaled $1,036,000 in the fourth
      quarter of 2005, an increase of $166,000 or 19.1% from the $870,000 in the
      fourth quarter of 2004. The increase was largely due to an increase in service
      charge revenue on deposit accounts as well as increases in debit card and ATM
      transaction fees and secondary market mortgage commissions. Non-interest expense
      totaled $4,245,000 in the fourth quarter of 2005, a $339,000 or 7.4% decrease
      from the $4,584,000 reported for the fourth quarter of 2004. A decrease in
      professional fees was only partially offset by increases in outside data
      processing costs, OREO expenses and writedowns, and other operating expenses.
      Additional quarterly financial data is provided in Note 22 to the consolidated
      financial statements.








**ADOPTION
      OF NEW ACCOUNTING STANDARDS**




Recently
      Issued Accounting Standards Not Yet Adopted - FAS 123, Revised, requires all
      public companies to record compensation cost for stock options provided to
      employees in return for employee service. The cost of stock options is measured
      at the fair value of the options when granted. This cost will be required to
      be
      expensed over the employee service period, which is normally the vesting period
      of the options. This Standard will apply to stock option awards granted or
      modified beginning in 2006. Compensation cost will also be recorded for options
      already granted that have a vesting period beyond December 31, 2005. The effect
      on results of operations will depend on the level of future option grants and
      the calculation of the fair value of the options granted. The effect of existing
      options that will continue to vest after the adoption date is anticipated to
      be
      $27 in 2006 and $9 in 2007. The will also be no significant effect on the
      financial position of the Company as total equity will not change as a result
      of
      the required recording of compensation cost.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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, 2005 and
      2004


Consolidated
      Statements of Operations - Years Ended
      December 31, 2005, 2004, and 2003


Consolidated
      Statements of Comprehensive Income -
      Years Ended December 31, 2005, 2004, and 2003


Consolidated
      Statements of Changes in Stockholders'
      Equity - Years ended


December
      31, 2005, 2004, and 2003


Consolidated
      Statements of Cash Flows - Years ended December
      31, 2005, 2004, and 2003


Notes
      to Consolidated Financial
      Statements























.
 
 Table
          of Contents




**PREMIER
        FINANCIAL BANCORP, INC.**
 
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 December
        31, 2005, 2004 and 2003
 
     
 
 
 Table
              of Contents
   
 REPORT
        OF INDEPENDENT REGISTERED
 PUBLIC
        ACCOUNTING FIRM
 
 
 Board
        of Directors and Shareholders
 Premier
        Financial Bancorp, Inc.
 Huntington,
        West Virginia
 
 
 We
        have audited the accompanying consolidated balance sheets of Premier Financial
        Bancorp, Inc. as of December 31, 2005 and 2004, and the related consolidated
        statements of operations, comprehensive income, changes in stockholders'
        equity,
        and cash flows for each of the three years in the period ended December 31,
        2005. 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. 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, 2005 and 2004, and the results of its
        operations and its cash flows for each of the three years in the period ended
        December 31, 2005, in conformity with U.S. generally accepted accounting
        principles.
 
 
 
 
 Crowe
        Chizek and Company LLC
 
 
 Columbus,
        Ohio
 March
        17, 2006
 
  Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 December
        31, 2005 and 2004
 (In
        Thousands, Except Per Share Data)
 
 
 2005
              
              2004**ASSETS**Cash
                  and due from banks
              
              $
              16,080
              
              $
              14,474Federal
                  funds sold
              
              
              18,812
              
              
              17,342Securities
                  available for sale
              
              
              137,419
              
              
              153,892Loans
              
              
              328,717
              
              
              324,927Allowance
                  for loan losses
              
              
              (7,892
              )
              
              (9,384
              )Net
                  loans
              
              
              320,825
              
              
              315,543Federal
                  Home Loan Bank and Federal Reserve Bank stock
              
              
              3,060
              
              
              2,611Premises
                  and equipment, net
              
              
              7,126
              
              
              7,257Real
                  estate and other property acquired through foreclosure
              
              
              2,049
              
              
              2,247Interest
                  receivable
              
              
              2,661
              
              
              2,740Goodwill
              
              
              15,816
              
              
              15,816Other
                  assets
              
              
              4,476
              
              
              5,333**Total
                  assets**
              
              $
              528,324
              
              $
              537,255**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**DepositsNon-interest
                  bearing
              
              $
              69,856
              
              $
              68,380Time
                  deposits, $100,000 and over
              
              
              42,169
              
              
              40,213Other
                  interest bearing
              
              
              323,818
              
              
              329,205Total
                  deposits
              
              
              435,843
              
              
              437,798Federal
                  funds purchased
              
              
              -
              
              
              1,838Securities
                  sold under agreements to repurchase
              
              
              9,317
              
              
              7,208Federal
                  Home Loan Bank advances
              
              
              8,334
              
              
              9,288Other
                  borrowed funds
              
              
              -
              
              
              800Notes
                  payable
              
              
              1,402
              
              
              1,402Guaranteed
                  junior subordinated interest debentures
              
              
              15,722
              
              
              20,876Interest
                  payable
              
              
              724
              
              
              5,532Other
                  liabilities
              
              
              2,695
              
              
              1,484Total
                  liabilities
              
              
              474,037
              
              
              486,226Commitments
                  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;5,233,897
                  shares issued and outstanding
              
              
              1,105
              
              
              1,103Surplus
              
              
              43,458
              
              
              43,445Retained
                  earnings
              
              
              11,442
              
              
              7,008Accumulated
                  other comprehensive income (loss)
              
              
              (1,718
              )
              
              (527
              )Total
                  stockholders' equity
              
              
              54,287
              
              
              51,029**Total
                  liabilities and stockholders' equity**
              
              $
              528,324
              
              $
              537,255
 
 See
                  accompanying notes.
 
 Table
                  of
                  Contents
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 Years
        Ended December 31
 (In
        Thousands, Except Per Share Data)
 
 
 2005
              
              2004
              
              2003**Interest
                  income**Loans,
                  including fees
              
              $
              23,532
              
              $
              23,073
              
              $
              26,731Investment
                  securitiesTaxable
              
              
              5,014
              
              
              4,444
              
              
              3,871Tax-exempt
              
              
              96
              
              
              217
              
              
              651Federal
                  funds sold
              
              
              745
              
              
              380
              
              
              469Other
                  interest income
              
              
              12
              
              
              7
              
              
              7Total
                  interest income
              
              
              29,399
              
              
              28,121
              
              
              31,729**Interest
                  expense**Deposits
              
              
              6,725
              
              
              6,267
              
              
              8,503Repurchase
                  agreements and other
              
              
              180
              
              
              115
              
              
              51FHLB
                  advances and other borrowings
              
              
              513
              
              
              807
              
              
              1,205Debentures
              
              
              2,129
              
              
              2,868
              
              
              2,788Total
                  interest expense
              
              
              9,547
              
              
              10,057
              
              
              12,547**Net
                  interest income**
              
              
              19,852
              
              
              18,064
              
              
              19,182Provision
                  for loan losses
              
              
              4
              
              
              1,026
              
              
              20,513**Net
                  interest income after provision for loan losses**
              
              
              19,848
              
              
              17,038
              
              
              (1,331
              )**Non-interest
                  income**Service
                  charges
              
              
              2,732
              
              
              2,513
              
              
              2,167Insurance
                  commissions
              
              
              69
              
              
              54
              
              
              124Securities
                  gains
              
              
              -
              
              
              100
              
              
              616Other
              
              
              1,119
              
              
              939
              
              
              1,1573,920
              
              
              3,606
              
              
              4,064**Non-interest
                  expenses**Salaries
                  and employee benefits
              
              
              9,085
              
              
              8,736
              
              
              8,723Occupancy
                  and equipment expenses
              
              
              2,262
              
              
              2,141
              
              
              2,260Outside
                  data processing
              
              
              1,505
              
              
              1,023
              
              
              1,062Professional
                  fees
              
              
              554
              
              
              2,271
              
              
              1,338Taxes,
                  other than payroll, property and income
              
              
              423
              
              
              589
              
              
              534Write-downs,
                  expenses, sales of other real estate owned
              
              
              52
              
              
              (45
              )
              
              540Supplies
              
              
              362
              
              
              365
              
              
              379Bad
                  check losses
              
              
              36
              
              
              94
              
              
              461Other
                  expenses
              
              
              3,026
              
              
              2,608
              
              
              2,33517,305
              
              
              17,782
              
              
              17,632Income
                  (loss) from continuing operationsbefore
                  income taxes
              
              
              6,463
              
              
              2,862
              
              
              (14,899
              )Provision
                  (benefit) for income taxes
              
              
              2,029
              
              
              899
              
              
              (5,282
              )**Income
                  (loss) from continuing operations**
              
              
              **4,434**
              
              
              **1,963**
              
              
              **(9,617**
              **)**Discontinued
                  operationIncome
                  (loss) from operations of discontinued component
              
              
              -
              
              
              4
              
              
              (127
              )Gain
                  on sale of discontinued component
              
              
              -
              
              
              6,664
              
              
              -Provision
                  (benefit) for income taxes
              
              
              -
              
              
              1,934
              
              
              (47
              )Income
                  (loss) from discontinued operation
              
              
              -
              
              
              4,734
              
              
              (80
              )**Net
                  income (loss)**
              
              **$**
              **4,434**
              
              **$**
              **6,697**
              
              **$**
              **(9,697**
              **)**
 
  (continued)
 
 Table
            of Contents
   **PREMIER
        FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS** (Continued)
 Years
        Ended December 31
 (In
        Thousands, Except Per Share Data)
 
 
 2005
              
              2004
              
              2003Weighted
                  average shares outstanding:Basic
              
              
              5,233
              
              
              5,232
              
              
              5,232Diluted
              
              
              5,248
              
              
              5,237
              
              
              5,232Earnings
                  per share from continuing operations:Basic
              
              $
              0.85
              
              $
              0.37
              
              $
              (1.84
              )Diluted
              
              
              0.84
              
              
              0.37
              
              
              (1.84
              )Earnings
                  (loss) per share from discontinued operation:Basic
              
              $
              -
              
              $
              0.90
              
              $
              (0.01
              )Diluted
              
              
              -
              
              
              0.90
              
              
              (0.01
              )Net
                  earnings per share:Basic
              
              $
              0.85
              
              $
              1.28
              
              $
              (1.85
              )Diluted
              
              
              0.84
              
              
              1.28
              
              
              (1.85
              )
 
  See
            accompanying notes.
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME**
 Years
        Ended December 31
 (In
        Thousands, Except Per Share Data)
 
 
 2005
              
              2004
              
              2003**Net
                  income****(loss)**
              
              $
              4,434
              
              $
              6,697
              
              $
              (9,697
              )**Other
                  comprehensive income (loss)**:Unrealized
                  gains and (losses) arising during the period
              
              
              (1,805
              )
              
              (1,730
              )
              
              (726
              )Reclassification
                  of realized amount
              
              
              -
              
              
              (100
              )
              
              (618
              )Net
                  change in unrealized gain (loss) on securities
              
              
              (1,805
              )
              
              (1,830
              )
              
              (1,344
              )Less
                  tax impact
              
              
              (614
              )
              
              (622
              )
              
              (457
              )**Other
                  comprehensive income (loss)**:
              
              
              (1,191
              )
              
              (1,208
              )
              
              (887
              )**Comprehensive
                  income (loss)**
              
              $
              3,243
              
              $
              5,489
              
              $
              (10,584
              )
 
  See
            accompanying notes.
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
 Years
        Ended December 31, 2005, 2004 and 2003
 (In
        Thousands, Except Per Share Data)
 
 
 Common
                Stock
              
              Capital
                Surplus
              
              Retained
                Earnings
              
              Accumulated
                Other
                Comprehensive
                Income
              
              TotalBalances,
                  January 1, 2003
              
              $
              1,103
              
              $
              43,445
              
              $
              10,008
              
              $
              1,568
              
              $
              56,124Net
                  change in unrealized gains (losses)
                on
                  securities available for sale
              
              
              -
              
              
              -
              
              
              -
              
              
              (887
              )
              
              (887
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              (9,697
              )
              
              -
              
              
              (9,697
              )Balances,
                  December 31, 2003
              
              
              1,103
              
              
              43,445
              
              
              311
              
              
              681
              
              
              45,540Net
                  change in unrealized gains (losses)
                on
                  securities available for sale
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,208
              )
              
              (1,208
              )Net
                  income
              
              
              -
              
              
              -
              
              
              6,697
              
              
              -
              
              
              6,697Balances,
                  December 31, 2004
              
              
              1,103
              
              
              43,445
              
              
              7,008
              
              
              (527
              )
              
              51,029Net
                  change in unrealized gains (losses)
                on
                  securities available for sale
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,191
              )
              
              (1,191
              )Stock
                  options exercised, 1,667 shares
              
              
              2
              
              
              13
              
              
              -
              
              
              -
              
              
              15Net
                  income
              
              
              -
              
              
              -
              
              
              4,434
              
              
              -
              
              
              4,434**Balances,
                  December 31, 2005**
              
              **$**
              **1,105**
              
              **$**
              **43,458**
              
              **$**
              **11,442**
              
              **$**
              **(1,718**
              **)**
              **$**
              **54,287**
 
 
  See
              accompanying notes.
 
 Table
            of Contents
   **PREMIER
        FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 Years
        Ended December 31
 (In
        Thousands, Except Per Share Data)
 
 
 2005
              
              2004
              
              2003**Cash
                  flows from continuing****operating
                  activities**Income
                  (loss) from continuing operations
              
              $
              4,434
              
              $
              1,963
              
              $
              (9,617
              )Adjustments
                  to reconcile income (loss) to net cash from
                continuing
                  operating activitiesDepreciation
                  and impairment of real estate
              
              
              976
              
              
              904
              
              
              989Provision
                  for loan losses
              
              
              4
              
              
              1,026
              
              
              20,513Amortization,
                  net
              
              
              236
              
              
              496
              
              
              567FHLB
                  stock dividends
              
              
              (113
              )
              
              (90
              )
              
              (139
              )Writedowns
                  (gains) on other real estate owned
              
              
              (17
              )
              
              (123
              )
              
              466Securities
                  gains
              
              
              -
              
              
              (100
              )
              
              (616
              )Changes
                  in :Interest
                  receivable
              
              
              79
              
              
              708
              
              
              1,806Deferred
                  income taxes
              
              
              1,119
              
              
              3,334
              
              
              (1,693
              )Other
                  assets
              
              
              201
              
              
              1,774
              
              
              (2,862
              )Interest
                  payable
              
              
              (4,808
              )
              
              1,630
              
              
              2,347Other
                  liabilities
              
              
              (18
              )
              
              (20
              )
              
              398**Net
                  cash from continuing operating activities**
              
              
              2,093
              
              
              11,502
              
              
              12,159**Cash
                  flows from continuing investing activities**Purchases
                  of securities available for sale
              
              
              (18,486
              )
              
              (76,861
              )
              
              (141,891
              )Proceeds
                  from sales of securities available for sale
              
              
              -
              
              
              1,911
              
              
              21,926Proceeds
                  from maturities and calls of securities
                available
                  for sale
              
              
              34,143
              
              
              66,675
              
              
              115,770Purchase
                  of FHLB stock, net of redemptions
              
              
              (336
              )
              
              (31
              )
              
              1,466Proceeds
                  from sale of subsidiary
              
              
              -
              
              
              14,311
              
              
              -Net
                  change in federal funds sold
              
              
              (1,470
              )
              
              (291
              )
              
              7,696Net
                  change in loans
              
              
              (6,120
              )
              
              311
              
              
              22,788Purchases
                  of loan participations from other banks
              
              
              (1,197
              )
              
              (2,943
              )
              
              -Payments
                  on loan participations with other banks
              
              
              589
              
              
              10
              
              
              -Purchases
                  of premises and equipment, net
              
              
              (845
              )
              
              (205
              )
              
              (473
              )Proceeds
                  from sale of other real estate acquired
                through
                  foreclosure
              
              
              1,658
              
              
              4,610
              
              
              2,190**Net
                  cash from continuing investing activities**
              
              
              7,936
              
              
              7,497
              
              
              29,472
 
 
 
  (continued)
 
 Table
            of Contents
   **PREMIER
        FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS** (Continued)
 Years
        Ended December 31
 (In
        Thousands, Except Per Share Data)
 
 
 2005
              
              2004
              
              2003**Cash
                  flows from continuing financing activities**Net
                  change in deposits
              
              
              (1,955
              )
              
              (17,676
              )
              
              (22,250
              )Advances
                  from Federal Home Loan Bank
              
              
              -
              
              
              -
              
              
              2,750Repayment
                  of Federal Home Loan Bank advances
              
              
              (954
              )
              
              (1,417
              )
              
              (10,288
              )Early
                  redemption of debentures, net
              
              
              (5,000
              )
              
              (5,500
              )
              
              (3,000
              )Repayment
                  of other borrowed funds
              
              
              (800
              )
              
              (5,400
              )
              
              (1,500
              )Proceeds
                  from stock option exercises
              
              
              15
              
              
              -
              
              
              -Net
                  change in federal funds purchased
              
              
              (1,838
              )
              
              1,838
              
              
              -Net
                  change in agreements to repurchase securities
              
              
              2,109
              
              
              7,208
              
              
              (5,255
              )**Net
                  cash from continuing financing activities**
              
              
              (8,423
              )
              
              (20,947
              )
              
              (39,543
              )Net
                  change in cash and cash equivalentsfrom
                  continuing activities
              
              
              1,606
              
              
              1,948
              
              
              2,088
              )Cash
                  and cash equivalents of continuing operationsat
                  beginning of year
              
              
              14,474
              
              
              16,422
              
              
              14,334**Cash
                  and cash equivalents of continuing operations****at
                  end of year**
              
              $
              16,080
              
              $
              14,474
              
              $
              16,422Supplemental
                  disclosures of cash flow information:Cash
                  paid during year for -Interest
              
              $
              14,354
              
              $
              8,428
              
              $
              10,201Income
                  taxes paid (refunded)
              
              
              191
              
              
              (3,946
              )
              
              (549
              )Loans
                  transferred to real estate acquired through foreclosure
              
              $
              1,443
              
              $
              3,547
              
              $
              2,338
 Cash
                    and cash equivalents of discontinued operationsBeginning
                    of year
                
                $
                -
                
                $
                5,306
                
                $
                3,710Net
                    cash from operating activities
                
                
                -
                
                
                432
                
                
                829Net
                    cash from investing activities
                
                
                -
                
                
                (2,636
                )
                
                5,815Net
                    cash from financing activities
                
                
                -
                
                
                (3,102
                )
                
                (5,048
                )End
                    of year
                
                $
                -
                
                $
                -
                
                $
                5,306
 
  See
              accompanying notes.
 
 Table
            of Contents
   **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (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:
  UnauditedDecember31,
                      2005Subsidiary
                  
                  Location
                  
                  Year
                    Acquired
                  
                  Total
                    Assets
                  
                  Net
                    IncomeCitizens
                      Deposit Bank & Trust
                  
                  
                  Vanceburg,
                      Kentucky
                  
                  
                  1991
                  
                  $
                  118,211
                  
                  $
                  1,826Farmers
                      Deposit Bank
                  
                  
                  Eminence,
                      Kentucky
                  
                  
                  1996
                  
                  
                  80,839
                  
                  
                  129Ohio
                      River Bank
                  
                  
                  Ironton,
                      Ohio
                  
                  
                  1998
                  
                  
                  80,116
                  
                  
                  843First
                      Central Bank, Inc.
                  
                  
                  Philippi,
                      West Virginia
                  
                  
                  1998
                  
                  
                  98,779
                  
                  
                  1,490Boone
                      County Bank, Inc.
                  
                  
                  Madison,
                      West Virginia
                  
                  
                  1998
                  
                  
                  148,791
                  
                  
                  2,388Mt.
                      Vernon Financial Holdings, Inc.
                  
                  
                  Huntington,
                      West Virginia
                  
                  
                  1999
                  
                  
                  1,864
                  
                  
                  (22
                  )
 
 The
        Company also owns an inactive data processing subsidiary, Premier Data Services,
        Inc. 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, including trust 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, realizability of deferred tax assets, 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)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (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 are carried at fair value. Adjustments from amortized
        cost to
        fair value are recorded in stockholders’ equity, net of related income tax,
        under accumulated other comprehensive income on securities available for
        sale.
        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 :
        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.
 
 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
        collectibility 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. Loans
        are charged against the allowance for loan losses when
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 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 on an
        individual loan basis for other loans. 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. The value of the underlying
        loan
        is written down to the fair value of the real estate to be acquired by a
        charge
        to the allowance for loan losses, if necessary. Any subsequent write-downs
        are
        charged to operating expenses. Certain parcels of real estate are being 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.
 
 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 :
        Goodwill results from prior 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. The Company does not have any identifiable intangible
        assets such as core deposit intangibles.
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 Stock
        Compensation :
        Employee compensation expense under stock options is reported using the
        intrinsic value method. No stock-based compensation cost is reflected in
        net
        income, as all options granted had an exercise price equal to or greater
        than
        the market price of the underlying common stock at the date of grant. The
        following table illustrates the effect on net income and earnings per share
        if
        expense was measured using the fair value recognition provisions of FASB
        Statement No. 123, *Accounting
        for Stock-Based Compensation.*
 
 2005
              
              2004
              
              2003Income
                  (loss) from continuing operations
              
              $
              4,434
              
              $
              1,963
              
              $
              (9,617
              )Deduct:
                  Stock based compensation expense determined underfair
                  value based method
              
              
              (61
              )
              
              (33
              )
              
              (18
              )Pro
                  forma income (loss)
              
              $
              4,373
              
              $
              1,930
              
              $
              (9,635
              )Basic
                  earnings (loss) per share from continuing operations
              
              $
              0.85
              
              $
              0.37
              
              $
              (1.84
              )Pro
                  forma basic earnings (loss) per share
              
              
              0.84
              
              
              0.37
              
              
              (1.84
              )Diluted
                  earnings (loss) per share from continuing operations
              
              $
              0.84
              
              $
              0.37
              
              $
              (1.84
              )Pro
                  forma basic earnings (loss) per share
              
              
              0.83
              
              
              0.37
              
              
              (1.84
              )
 
 On
        January 19, 2005, 35,000 incentive stock options were granted out of the
        2002
        Plan at an exercise price of $11.62. These options vest in three equal annual
        installments ending on January 19, 2008. On February 18, 2004, 28,200 incentive
        stock options were granted out of the 2002 Stock Option Plan at an exercise
        price of $9.30. These options vest in three equal annual installments ending
        on
        February 18, 2007. On January 15, 2003, 28,650 incentive stock options were
        granted out of the 2002 Stock Option Plan at an exercise price of $7.96.
        These
        options vested in three equal annual installments and were fully vested on
        January 15, 2006. Proforma stock-compensation expense is being amortized
        over
        the three-year vesting period for each of these grants.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 The
        pro forma effects are computed using option pricing models, using the following
        weighted-average assumptions as of grant date.
 
 2005
              
              2004
              
              2003Risk-free
                  interest rate
              
              
              3.70
              %
              
              3.15
              %
              
              3.10
              %Expected
                  option life (yrs)
              
              
              5.00
              
              
              5.00
              
              
              5.00Expected
                  stock price volatility
              
              
              0.25
              
              
              0.25
              
              
              0.42Dividend
                  yield
              
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %Weighted
                  average fair value of options granted during the year
              
              $
              3.48
              
              $
              2.64
              
              $
              3.30
 
 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.
 
 Off
        Balance Sheet Financial Instruments :
        Financial instruments include off-balance sheet credit instruments, such
        as
        commitments to make loans and standby 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.
 
 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.
 
 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.
   (continued)
 
 Table
              of Contents
 
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 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.
 
 Recently
        Issued Accounting Standards Not Yet Adopted :
        FAS
        123, Revised, requires all public companies to record compensation cost for
        stock options provided to employees in return for employee service. The cost
        of
        stock options is measured at the fair value of the options when granted.
        This
        cost will be required to be expensed over the employee service period, which
        is
        normally the vesting period of the options. This Standard will apply to stock
        option awards granted or modified beginning in 2006. Compensation cost will
        also
        be recorded for options already granted that have a vesting period beyond
        December 31, 2005. The effect on results of operations will depend on the
        level
        of future option grants and the calculation of the fair value of the options
        granted. The effect of existing options that will continue to vest after
        the
        adoption date is anticipated to be $27 in 2006 and $9 in 2007. There will
        also
        be no significant effect on the financial position of the Company as total
        equity will not change as a result of the required recording of compensation
        cost.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        2 - DISCONTINUED OPERATIONS**
 
 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. The sale was completed on July 1, 2004. 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.”
 
 A
        condensed statement of operations for Citizens Bank follows:
 
 For
                  the six months
                ended
                  June 30, 2004
              
              For
                  the year ended
                December
                  31, 2003Interest
                  income
              
              $
              2,021
              
              $
              4,643Interest
                  expense
              
              
              732
              
              
              1,873Net
                  interest income
              
              
              1,289
              
              
              2,770Provision
                  for loan losses
              
              
              -
              
              
              240Non-interest
                  income
              
              
              434
              
              
              938Non-interest
                  expense
              
              
              1,718
              
              
              3,595Income
                  tax (benefit)
              
              
              (1
              )
              
              (47
              )Net
                  (loss)
              
              $
              4
              
              $
              (80
              )
 
 Activity
        in the allowance for loan losses for Citizens Bank follows (in
        thousands):
 
 2004
              
              2003Balance,
                  beginning of year
              
              $
              2,164
              
              $
              2,685Loans
                  charged-off
              
              
              (283
              )
              
              (1,012
              )Recoveries
              
              
              124
              
              
              251Provision
                  for loan losses
              
              
              -
              
              
              240Sale
                  of subsidiary
              
              
              (2,005
              )
              
              -Balance,
                  end of year
              
              $
              -
              
              $
              2,164
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        3 - REGULATORY MATTERS**
 
 On January 29, 2003, the Company entered into a written agreement with the Federal
        Reserve Bank (FRB) which superseded and rescinded a previous agreement between
        the Company and the FRB. Among the provisions of the agreement was the
        continuation of the restriction on the Company’s payment of dividends on its
        common stock without the express written consent of the FRB and the continuation
        of the restriction on the Company’s payment of quarterly distributions on its
        Trust Preferred Securities without the express written consent of the FRB.
        Among
        other provisions, the agreement required(s) the Company to retain an independent
        consultant to review its management, directorate and organizational structure,
        adopt a management plan responsive to such consultant's report, update its
        management succession plan in accordance with any recommendations in such
        consultant's report, monitor its subsidiary banks' compliance with bank policies
        and loan review programs, conduct formal quarterly reviews of its subsidiary
        Banks' allowances for loan losses, maintain sufficient capital, submit a
        plan to
        the FRB for improving consolidated earnings over a three-year period, and
        submit
        to the FRB annual projections of planned sources and uses of the Company's
        cash,
        including a plan to service its outstanding debt and trust preferred securities.
        The Company’s compliance with the written agreement is monitored by a committee
        consisting of three of its outside directors. As of December 31, 2005 management
        believes the Company is operating in compliance with the provisions of the
        written agreement.
 
 On
        December 22, 2003, the Company’s subsidiary Farmers Deposit Bank - Eminence,
        Kentucky (the Bank), was issued a Cease and Desist order (Order) by the Federal
        Deposit Insurance Corporation (FDIC) and the Kentucky Department of Financial
        Institutions (KDFI) [collectively
        referred to as “Supervisory Authorities”] r elated
        to activities of the bank’s former president. Farmers Deposit Bank has fully
        complied with the Order and, accordingly, the Order was rescinded by the Supervisory Authorities on December 13,
        2005.
 
 The
        Securities and Exchange Commission ("SEC") investigated the information
        disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the June 30,
        and
        September 30, 2003 Forms 10-Q regarding Farmers Deposit and requested
        information about Premier's internal investigation. Premier fully cooperated
        with the SEC. At the conclusion of its investigation, the SEC issued an
        administrative cease & desist order regarding Premier’s financial reporting
        and internal controls concerning Premier’s quarterly 2001 through 2003 and
        annual 2001 and 2002 public filings. According to the SEC Order, both the
        remedial acts promptly undertaken by Premier and Premier’s cooperation with the
        SEC Staff were taken into consideration in reaching the settlement.
 
  (continued)
 79
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        4 - 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, 2005 and 2004 was $3,100
        and
        $3,000.
 
 **NOTE
        5 -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:
 
 **2005**
              
              Amortized
                  Cost
              
              Unrealized
                  Gains
              
              Unrealized
                  Losses
              
              Fair
                  ValueAvailable
                  for saleU.
                  S. Treasury securities
              
              $
              3,952
              
              $
              3
              
              $
              (14
              )
              $
              3,941U.
                  S. agency securities
              
              
              97,209
              
              
              -
              
              
              (1,909
              )
              
              95,300Obligations
                  of states and political
                subdivisions
              
              
              2,487
              
              
              31
              
              
              (4
              )
              
              2,514Mortgage-backed
                  securities
              
              
              36,349
              
              
              2
              
              
              (712
              )
              
              35,639Corporate
                  securities
              
              
              25
              
              
              -
              
              
              -
              
              
              25Total
                  available for sale
              
              $
              140,022
              
              $
              36
              
              $
              (2,639
              )
              $
              137,419
 
 
 **2004**
              
              Amortized
                  Cost
              
              Unrealized
                  Gains
              
              Unrealized
                  Losses
              
              Fair
                  ValueAvailable
                  for saleU.
                  S. Treasury securities
              
              $
              250
              
              $
              -
              
              $
              -
              
              $
              250U.
                  S. agency securities
              
              
              116,427
              
              
              127
              
              
              (1,040
              )
              
              115,514Obligations
                  of states and political
                subdivisions
              
              
              2,661
              
              
              90
              
              
              -
              
              
              2,751Mortgage-backed
                  securities
              
              
              34,921
              
              
              171
              
              
              (150
              )
              
              34,942Corporate
                  securities
              
              
              428
              
              
              7
              
              
              -
              
              
              435Total
                  available for sale
              
              $
              154,687
              
              $
              395
              
              $
              (1,190
              )
              $
              153,892
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        5 -SECURITIES** (Continued)
 
 The
        amortized cost and fair value of securities at December 31, 2005 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
              
              $
              33,519
              
              $
              33,091Due
                  after one year through five years
              
              
              69,485
              
              
              68,012Due
                  after five years through ten years
              
              
              266
              
              
              273Due
                  after ten years
              
              
              403
              
              
              404Mortgage-backed
                  securities
              
              
              36,349
              
              
              35,639Total
                  available for sale
              
              $
              140,022
              
              $
              137,419
 
 There
        were no sales of securities in 2005. Proceeds
        from sales of securities during 2004 and 2003 were $1,911 and $21,926. Gross
        gains of $101 **** and
        $653, and gross losses of $1 and $37 were realized on those sales.
 
 Securities
        with an approximate carrying value of $75,396 and $78,339 at December 31,
        2005
        and 2004 were pledged to secure public deposits, trust funds, securities
        sold
        under agreements to repur-chase and for other purposes as required or permitted
        by law.
 
 Securities
        with unrealized losses at year-end 2005 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.
                  treasury securities
              
              $
              968
              
              $
              (14
              )
              $
              -
              
              $
              -
              
              $
              968
              
              $
              (14
              )U.S.
                  agency securities
              
              
              22,096
              
              
              (332
              )
              
              73,204
              
              
              (1,577
              )
              
              95,300
              
              
              (1,909
              )Obligations
                  of states and
                political
                  subdivisions
              
              
              397
              
              
              (4
              )
              
              -
              
              
              -
              
              
              397
              
              
              (4
              )Mortgage-backed
                  securities
              
              
              22,328
              
              
              (341
              )
              
              11,968
              
              
              (371
              )
              
              34,297
              
              
              (712
              )Total
                  temporarily impaired
              
              $
              45,789
              
              $
              (691
              )
              $
              85,172
              
              $
              (1,948
              )
              $
              130,962
              
              $
              (2,639
              )
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        5 -SECURITIES** (Continued)
 
 Securities
        with unrealized losses at year-end 2004 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
              
              $
              93,557
              
              $
              (959
              )
              $
              3,928
              
              $
              (81
              )
              $
              97,485
              
              $
              (1,040
              )Mortgage-backed
                  securities
              
              
              13,099
              
              
              (54
              )
              
              5,284
              
              
              (96
              )
              
              18,383
              
              
              (150
              )Total
                  temporarily impaired
              
              $
              106,656
              
              $
              (1,013
              )
              $
              9,212
              
              $
              (177
              )
              $
              115,868
              
              $
              (1,190
              )
 
 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 ,
        2005 and December 31, 2004 are price changes resulting from changes in the
        interest rate environment and
        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
        6 - LOANS**
 
 Loans
        at year-end were as follows:
 
 2005
              
              2004Commercial,
                  secured by real estate
              
              $
              85,989
              
              $
              101,567Commercial,
                  other
              
              
              49,362
              
              
              40,923Real
                  estate construction
              
              
              11,070
              
              
              5,906Residential
                  real estate
              
              
              134,570
              
              
              128,243Agricultural
              
              
              1,670
              
              
              2,380Consumer
                  and home equity
              
              
              42,092
              
              
              44,470Other
              
              
              3,964
              
              
              1,438$
              328,717
              
              $
              324,927
 
 Certain
        directors and executive officers of the Banks and companies in which they
        have
        beneficial ownership, were loan customers of the Banks during 2005 and 2004.
        Such related party loans are governed by federal banking regulations which
        require such loans  to be made in the ordinary course of business at
        the Banks’ normal credit terms and interest rates.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        6 - LOANS** (Continued)
 
 An
        analysis of the 2005 activity with respect to all director and executive
        officer
        loans is as follows (in thousands):
 
 Balance,
                  December 31, 2004
              
              $
              15,114Additions,
                  including loans now meeting disclosure requirements
              
              
              8,650Amounts
                  collected, including loans no longer meeting disclosure
                  requirements
              
              
              (9,096
              )Balance,
                  December 31, 2005
              
              $
              14,668
 
 Activity
        in the allowance for loan losses was as follows:
 2005
                
                2004
                
                2003Balance,
                    beginning of year
                
                $
                9,384
                
                $
                14,300
                
                $
                9,698Loans
                    charged off
                
                
                (2,215
                )
                
                (6,992
                )
                
                (16,513
                )Recoveries
                
                
                719
                
                
                1,050
                
                
                602Provision
                    for loan losses
                
                
                4
                
                
                1,026
                
                
                20,513Balance,
                    end of year
                
                $
                7,892
                
                $
                9,384
                
                $
                14,300
 Impaired
        loans were as follows:
 2005
              
              2004
              
              2003Impaired
                  loans at year-end with an allowance
              
              $
              7,926
              
              $
              12,918
              
              $
              17,071Impaired
                  loans at year-end with no allowance
              
              
              291
              
              
              263
              
              
              3,849Amount
                  of the allowance for loan losses allocated
              
              
              1,921
              
              
              2,915
              
              
              8,418Average
                  of impaired loans during the year
              
              
              10,819
              
              
              16,069
              
              
              12,756Interest
                  income recognized during impairment
              
              
              583
              
              
              640
              
              
              444Cash-basis
                  interest income recognized
              
              
              499
              
              
              620
              
              
              515
 
 Nonperforming
        loans at year end were as follows:
 2005
              
              2004
              
              2003Loans
                  past due over 90 days still on accrual
              
              $
              853
              
              $
              739
              
              $
              4,137Non-accrual
                  loans
              
              
              3,751
              
              
              6,847
              
              
              11,958Restructured
                  loans
              
              
              1,540
              
              
              238
              
              
              104
 
 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.
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        7 - PREMISES AND EQUIPMENT**
 
 Year-end
        premises and equipment were as follows:
 2005
              
              2004Land
                  and improvements
              
              $
              1,618
              
              $
              1,583Buildings
                  and leasehold improvements
              
              
              6,218
              
              
              6,077Furniture
                  and equipment
              
              
              7,039
              
              
              7,40214,875
              
              
              15,062Less:
                  accumulated depreciation
              
              
              (7,749
              )
              
              (7,805
              )$
              7,126
              
              $
              7,257
 
 
 **NOTE
        8 - DEPOSITS**
 
 At
        December 31, 2005  the
        scheduled maturities of time deposits are as follows:
 2006
                
                $
                114,2632007
                
                
                42,5052008
                
                
                10,9252009
                
                
                6,2712010
                    and thereafter
                
                
                4,583$
                178,547
 Certain
          directors and executive officers of the Banks and companies in which they
          have
          benef icial
          ownership were deposit customers of the Banks during 2005 and 2004. The
          balance
          of such deposits at December 31, 2005 and 2004 were approximately $8,090
          and
          $9,189.
 
 
 **NOTE
        9 - 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 repu rchase
        is summarized as follows:
 
 2005
              
              2004Year-end
                  balance
              
              $
              9,317
              
              $
              7,208Average
                  balance during the year
              
              $
              8,201
              
              $
              6,186Average
                  interest rate during the year
              
              
              2.10
              %
              
              1.82
              %Maximum
                  month-end balance during the year
              
              $
              9,378
              
              $
              7,334Weighted
                  average interest rate at year-end
              
              
              2.39
              %
              
              2.66
              %
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        10 - FEDERAL HOME LOAN BANK ADVANCES**
 
 The
        Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio.
        This
        stock allows the Banks to borrow advances from the FHLB.
 
 All
        advances are paid either on a monthly basis or at maturity, over remaining
        terms
        of five to seven years, with interest rates ranging from 4.10% to 6.64%.
        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, 2005 are as follows:
  2006
                
                $
                6752007
                
                
                7102008
                
                
                7472009
                
                
                7862010
                
                
                4,828Thereafter
                
                
                588$
                8,334
 **NOTE
        11 - NOTES PAYABLE AND OTHER BORROWED FUNDS**
 
 The
        Company had a promissory note with a commercial bank which is secured by
        Boone
        County Bank common stock. The interest rate was prime plus 2.00%. The balance
        payable on this note was $800 at December 31, 2004. The note was fully repaid
        in
        March 2005.
 
 In
        2002, the Company also entered into notes payable with the Company’s Chairman of
        the Board and President. Due to the restriction on the Company to pay its
        Trust
        Preferred distributions as discussed in Note 12, the Company reached an
        agreement with the FRB whereby the Company's Chairman of the Board, who is
        also
        the Company's largest shareholder, agreed to loan the Company the amount
        of the
        distribution, $701, so that the Company, with the FRB's approval, could make
        its
        second quarter 2002 distribution. A similar agreement was reached with the
        FRB
        for the payment of the distribution due for the third quarter 2002. The
        Company's President, who is also a director, agreed to loan the Company the
        amount of the distribution, $701. Thus, the balance of notes payable at December
        31, 2005, was $1,402. Both loans are unsecured at a zero percent interest
        rate
        with no defined maturity date. The loans cannot be repaid without the prior
        approval of the FRB.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        12 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES**
 
 On
        June 9, 1997, PFBI Capital Trust (Trust), a statutory business trust created
        under Delaware law, issued $28,750 of 9.750% Preferred Securities ** (“Preferred
        Securities” or “Trust Preferred Securities”) with a stated value and liquidation
        preference of $25 per share. The Trust’s obligations under the Preferred
        Securities issued are fully and unconditionally guaranteed by the Company.
        The
        proceeds from the sale of the Preferred Securities of the Trust, as well
        as the
        proceeds from the issuance of common securities to the Company, were utilized
        by
        the Trust to invest in $29,639 of 9.750% Junior Subordinated Deferrable Interest
        Debentures (the “Debentures”) of the Company. The Debentures, which mature on
        June 30, 2027 are unsecured obligations and rank subordinate and junior to
        the
        right of payment to all senior indebtedness, liabilities and obligations
        of the
        Company. The Debentures represent the sole assets of the Trust. Distributions
        on
        the Preferred Securities are payable at an annual rate of 9.750% of the stated
        liquidation amount of $25 per Preferred Security, payable quarterly. Cash
        distributions on the Preferred Securities are made to the extent interest
        on the
        Debentures is received by the Trust. In the event of certain changes or
        amendments to regulatory requirements or federal tax rules, the Debentures
        are
        redeemable in whole. Otherwise, the Debentures are generally redeemable by
        the
        Company in whole or in part on or after June 30, 2002 at 100% of the liquidation
        amount. Proceeds from any redemption of the Debentures would cause a mandatory
        redemption of the Preferred Securities and the common securities having an
        aggregate liquidation amount equal to the principal amount of the Debentures
        redeemed. Debt issuance costs of $1,478 have been capitalized by the Trust
        and
        are being amortized over the life of the debenture.
  The
          Company determined that the Trust meets the definition of a variable interest
          entity and that the Company is not the primary beneficiary of the Trust’s
          activities. Accordingly, the
          Trust is not consolidated with the Company and the Company does not report
          the
          Preferred Securities issued by the Trust as liabilities. Instead the Company
          reports as liabilities the Debentures issued by the Company and held by
          the
          Trust, as these are no longer eliminated in consolidation. The amounts
          are
          reported as “ Guaranteed
          junior subordinated interest debentures ”
and
          continue to be presented in liabilities on the balance sheet.
 
 (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        12** **-** **GUARANTEED
        JUNIOR SUBORDINATED INTEREST**
 **DEBENTURES** (Continued)
 
 A
        portion of the Preferred Securities issued by the Trust qualify as Tier 1
        capital for the Company under the Federal Reserve Board’s regulatory framework.
        The Federal Reserve Board recently re-evaluated whether trust preferred
        securities would continue to qualify as Tier 1 capital due to deconsolidation
        of
        the related trust preferred entity. Its conclusion, issued in a press release
        on
        March 1, 2005, was to continue to permit trust preferred securities to qualify
        as Tier I capital with certain restrictions phased in over five-years. Once
        completely phased-in, the dollar amount of trust preferred securities that
        will
        qualify as Tier I capital will be limited to 25% of equity based Tier I capital
        net of goodwill. As of December 31, 2005, $15,250 of the Preferred Securities
        were included in the Company’s Tier I capital. Had the Federal Reserve Board’s
        new limitations been completely phased in at December 31, 2005, the amount
        of
        Preferred Securities includable in the Company’s Tier I capital would have been
        limited to $10,047.
 
 As
        previously disclosed, pursuant to an agreement entered into with the Federal
        Reserve Bank (FRB) described in Note 3 the Company is required to request
        approval for the payment of distributions due on the Debentures and Trust
        Preferred Securities. As part of a Debt Reduction and Profitability plan
        presented on January 6, 2003, the Company requested and received approval
        from
        the FRB to redeem $3,000 of the $28,750 outstanding Debentures and Trust
        Preferred Securities. Thus, on February 24, 2003, the Company announced its
        plans to redeem $3,000 (120,000 shares) of the 9.75% Trust Preferred Securities
        as of March 31, 2003. The FRB denied the Company’s requests to make further
        distributions on the remaining Debentures and Trust Preferred Securities.
        During
        2004, the Company requested and received approval from the FRB to redeem,
        and
        redeemed $4,500 (180,000 shares) on October 15, 2004 and an additional $1,000
        (40,000 shares) on December 31, 2004. During 2005, the Company requested
        and
        received approval from the FRB to redeem, and redeemed $5,000 (200,000 shares)
        on December 31, 2005.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        12** **-** **GUARANTEED
        JUNIOR SUBORDINATED INTEREST**
 **DEBENTURES** (Continued)
 
 On
        January 31, 2006, the Company redeemed $7,000 (280,000 shares) of the 9.75%
        Trust Preferred Securities with funds obtained from a long-term bank borrowing.
        The bank borrowing bears an interest rate floating with the Prime Rate,
        currently 7.50%, and requires monthly principal payments of $50.
 
 Premier
        exercised its right to defer the payment of interest on the 9.75% Trust
        Preferred Securities for the quarter ending December 31, 2002 and all subsequent
        quarters through December 31, 2004, and for an indefinite period, which can
        be
        no longer than 20 consecutive quarterly periods. These deferred distributions
        accrued interest at an annual rate of 9.750%. In March 2005, Premier received
        approval from the FRB to pay the first quarter 2005 current distribution
        and all
        prior deferred distributions. The payment was disbursed on March 31, 2005
        to
        shareholders of record on March 15, 2005. The accrued interest on the deferred
        distributions was also paid when the deferred distributions were paid on
        March
        31, 2005. The FRB has also approved the payment of current distributions
        due
        through December 31, 2005. Although the FRB has approved the payment of the
        deferred and current distributions through December 31, 2005, Premier is
        still
        bound by the Written Agreement and will be required to request the FRB’s
        approval to pay future distributions. No assurance can be given that the
        FRB
        will grant such approval.
 
 
 **NOTE
        13 - INCOME TAXES**
 
 The
        components of the provision (benefit) for income taxes are as
        follows:
 
 2005
              
              2004
              
              2003Current
              
              $
              910
              
              $
              (2,435
              )
              $
              (3,589
              )Deferred
              
              
              1,119
              
              
              3,334
              
              
              (1,693
              )Provision
                  (benefit) for income taxes
              
              $
              2,029
              
              $
              899
              
              $
              (5,282
              )
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        13 - INCOME TAXES** (Continued)
 
 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.
 
 2005
              
              2004Deferred
                  tax assetsAllowance
                  for loan losses
              
              $
              2,683
              
              $
              3,191Net
                  operating loss carryforward
              
              
              0
              
              
              239AMT
                  and other credit carryforwards
              
              
              359
              
              
              460Write-downs
                  of other real estate owned
              
              
              9
              
              
              19Unrealized
                  loss on investment securities
              
              
              885
              
              
              272Other
              
              
              113
              
              
              129Total
                  deferred tax assets
              
              
              4,049
              
              
              4,310Deferred
                  tax liabilitiesAmortization
                  of intangibles
              
              $
              1,660
              
              $
              1,320Depreciation
              
              
              101
              
              
              236Federal
                  Home Loan Bank dividends
              
              
              270
              
              
              206Other
              
              
              105
              
              
              129Total
                  deferred tax liabilities
              
              
              2,136
              
              
              1,891Net
                  deferred tax assets, included in other assets
              
              $
              1,913
              
              $
              2,419
 
 An
        analysis of the differences between the effective tax rates and the statutory
        U.S. federal income tax rate is as follows:
  2005
                
                2004
                
                2003U.S.
                    federal income tax rate
                
                $
                2,197
                
                
                34.0
                %
                $
                973
                
                
                34.0
                %
                $
                (5,066
                )
                
                (34.0
                )%Changes
                    from the statutory rateTax-exempt
                    interest income
                
                
                (81
                )
                
                (1.3
                )
                
                (131
                )
                
                (4.6
                )
                
                (221
                )
                
                (1.5
                )Non-deductible
                    interest expense
                  related
                    to carrying tax-exempt
                  interest
                    earning assets
                
                
                5
                
                
                0.1
                
                
                5
                
                
                0.2
                
                
                11
                
                
                0.1Tax
                    credits
                
                
                (10
                )
                
                (0.2
                )
                
                -
                
                
                0.0
                
                
                (71
                )
                
                (0.5
                )Other
                
                
                (82
                )
                
                (1.2
                )
                
                52
                
                
                1.8
                
                
                65
                
                
                0.4$
                2,029
                
                
                31.4
                %
                $
                899
                
                
                31.4
                %
                $
                (5,282
                )
                
                (35.5)%
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollasrs
        in Thousands, Except Per Share Data)
 
 
 **NOTE** **14
        - EMPLOYEE BENEFIT PLANS**
 
 The
        Company has qualified profit sharing plans that cover substan-tially all
        employees. Contrib utions
        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 $229,
        $197 and $197` in 2005, 2004 and 2003.
 
 The
        Company also maintains Employee Stock Ownership incentive Plans (the Plans)
        whereby certain employees of the Company are eligible to receive
        ince ntive
        stock options. The Plans are accounted for in accordance with Accounting
        Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to
        Employees”, and related interpretations. Pursuant to the Plans, a maximum of
        600,000 shares of the Company’s common stock may be issued through the exercise
        of these incentive stock options. The option price is the fair market value
        of
        the Company’s shares at the date of the grant. The options are exercisable ten
        years from the date of grant.
 
 A
        summary of the Company’s stock option activity is as follows:
 
 ----------2005----------
              
              ----------2004----------
              
              ----------2003----------Weighted
                Average
                Exercise
              
              
              
              Weighted
                Average
                Exercise
              
              
              
              Weighted
                Average
                ExerciseOptions
              
              Price
              
              Options
              
              Price
              
              Options
              
              PriceOutstanding
                  at beginning of year
              
              
              83,650
              
              $
              10.65
              
              
              55,450
              
              $
              11.33
              
              
              35,000
              
              $
              14.03Grants
              
              
              35,000
              
              
              11.62
              
              
              28,200
              
              
              9.30
              
              
              28,650
              
              
              7.96Exercises
              
              
              (1,667
              )
              
              8.50Forfeitures
              
              
              (5,233
              )
              
              9.31
              
              
              -
              
              
              0.00
              
              
              (8,200
              )
              
              11.08Outstanding
                  at year-end
              
              
              111,750
              
              $
              11.05
              
              
              83,650
              
              $
              10.65
              
              
              55,450
              
              $
              11.33Exercisable
                  at year-end
              
              
              54,180
              
              $
              11.61
              
              
              39,821
              
              $
              12.65
              
              
              32,000
              
              $
              13.80Weighted
                  average remaining life
              
              
              6.2
              
              
              
              
              
              6.2
              
              
              
              
              
              5.7Weighted
                  average fair value of
                options
                  granted during the year
              
              $
              3.48
              
              
              
              
              $
              2.64
              
              
              
              
              $
              3.30
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE** **14
        - EMPLOYEE BENEFIT PLANS** (Continued)
 
 Options
        outstanding at year-end 2005 were as follows:
 
 Outstanding
              
              ExercisableRange
                  of Exercise Prices
              
              Number
              
              Weighted
                  Average Remaining Contractual Life
              
              Weighed
                  Average Exercise Price
              
              Number
              
              Weighed
                  Average Exercise Price$7.50
                  to $10.00
              
              
              45,750
              
              
              7.6
              
              $
              8.69
              
              
              22,180
              
              $
              8.46$10.01
                  to $12.50
              
              
              55,000
              
              
              5.7
              
              
              11.91
              
              
              21,000
              
              
              12.38$15.01
                  to $17.50
              
              
              11,000
              
              
              3.0
              
              
              16.50
              
              
              11,000
              
              
              16.50Outstanding
                  at year-end
              
              
              111,750
              
              
              6.2
              
              
              11.05
              
              
              54,180
              
              
              11.61
 
 
 **NOTE
        15 - RELATED PARTY TRANSACTIONS**
 
 During
        2005, 2004, and 2003, the Company paid approximately $191, $358, and $272
        for
        printing, supplies, furniture, and equipment to a company affiliated by common
        ow nership.
        The Company also paid another affiliate approximately $499, $489, and $892
        in
        2005, 2004, and 2003 to permit the Company’s employees to participate in that
        entity’s employee medical benefit plan.
 
 During
        2005, 2004 and 2003, the Company paid approximately $52, $52, and $51 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.
 
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        16- EARNINGS PER SHARE**
 
 A
        reconciliation of the numerators and denominators of the earnings per common
        share and ear nings
        per common share assuming dilution computations for 2004, 2003 and 2002 is
        presented below:
 
 2005
              
              2004
              
              2003Basic
                  earnings per share from continuing operationsIncome
                  (loss) available to common stockholders
              
              $
              4,434
              
              $
              1,963
              
              $
              (9,617
              )Weighted
                  average common shares outstanding
              
              
              5,233
              
              
              5,232
              
              
              5,232Earnings
                  (loss) per share
              
              $
              0.85
              
              $
              0.37
              
              $
              (1.84
              )Diluted
                  earnings per share from continuing operationsIncome
                  (loss) available to common stockholders
              
              $
              4,434
              
              $
              1,963
              
              $
              (9,617
              )Weighted
                  average common shares outstanding
              
              
              5,233
              
              
              5,232
              
              
              5,232Add
                  dilutive effects of assumed exercise of stock options
              
              
              15
              
              
              5
              
              
              -Weighted
                  average common and dilutive potential
                Common
                  shares outstanding
              
              
              5,248
              
              
              5,237
              
              
              5,232Earnings
                  (loss) per share assuming dilution
              
              $
              0.84
              
              $
              0.37
              
              $
              (1.84
              )Basic
                  earnings per shareIncome
                  (loss) available to common stockholders
              
              $
              4,434
              
              $
              6,697
              
              $
              (9,697
              )Weighted
                  average common shares outstanding
              
              
              5,233
              
              
              5,232
              
              
              5,232Earnings
                  (loss) per share
              
              $
              0.85
              
              $
              1.28
              
              $
              (1.85
              )Diluted
                  earnings per shareIncome
                  (loss) available to common stockholders
              
              $
              4,434
              
              $
              6,697
              
              $
              (9,697
              )Weighted
                  average common shares outstanding
              
              
              5,233
              
              
              5,232
              
              
              5,232Add
                  dilutive effects of assumed exercise of stock options
              
              
              15
              
              
              5
              
              
              -Weighted
                  average common and dilutive potential
                Common
                  shares outstanding
              
              
              5,248
              
              
              5,237
              
              
              5,232Earnings
                  (loss) per share assuming dilution
              
              $
              0.84
              
              $
              1.28
              
              $
              (1.85
              )
 
 
 Stock
        options for 55,450 shares of common stock for 2003 were not included in the
        co mputation
        of earnings per share assuming dilution because their impact was
        anti-dilutive.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 The
        fair values of the Company’s financial instruments at year-end are as
        fo llows:
 
 2005
              
              2004Carrying
                Amount
              
              Fair
                Value
              
              Carrying
                Amount
              
              Fair
                ValueFinancial
                  assetsCash
                  and due from banks
              
              $
              16,080
              
              $
              16,080
              
              $
              14,474
              
              $
              14,474Federal
                  funds sold
              
              
              18,812
              
              
              18,812
              
              
              17,342
              
              
              17,342Securities
                  available for sale
              
              
              137,419
              
              
              137,419
              
              
              153,892
              
              
              153,892Loans,
                  net
              
              
              320,825
              
              
              304,589
              
              
              315,543
              
              
              312,496Federal
                  Home Loan Bank and
                Federal
                  Reserve Bank stock
              
              
              3,060
              
              
              3,060
              
              
              2,611
              
              
              2,611Interest
                  receivable
              
              
              2,661
              
              
              2,661
              
              
              2,740
              
              
              2,740Financial
                  liabilitiesDeposits
              
              $
              (435,843
              )
              $
              (434,459
              )
              $
              (437,798
              )
              $
              (438,440
              )Federal
                  funds purchased
              
              
              -
              
              
              -
              
              
              (1,838
              )
              
              (1,838
              )Securities
                  sold under agreementsto
                  repurchase
              
              
              (9,317
              )
              
              (9,317
              )
              
              (7,208
              )
              
              (7,208
              )Federal
                  Home Loan Bank advances
              
              
              (8,334
              )
              
              (7,355
              )
              
              (9,288
              )
              
              (8,636
              )Other
                  borrowed funds
              
              
              -
              
              
              -
              
              
              (800
              )
              
              (803
              )Notes
                  payable
              
              
              (1,402
              )
              
              (1,319
              )
              
              (1,402
              )
              
              (1,332
              )Guaranteed
                  junior subordinatedInterest
                  debentures
              
              
              (15,722
              )
              
              (14,997
              )
              
              (20,876
              )
              
              (21,655
              )Interest
                  payable
              
              
              (724
              )
              
              (724
              )
              
              (5,532
              )
              
              (5,532
              )
 
 Carrying
        amount is the estimated fair value for cash and cash equivalents, Federal
        funds
        sold, Federal Home Loan Bank and Federal Reserve Bank stock, accrued interest
        receivable and pa yable,
        demand deposits, short-term debt, and variable rate loans or deposits that
        reprice frequently and fully. Security fair values are based on market prices
        or
        dealer quotes, and if no such information is available, on the rate and term
        of
        the security and information about the issuer. 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
        considered material.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (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 obliga-tions 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 $4,927 at
        December 31, 2005.
 
 At
        December 31, 2005 and 2004, the Banks had the following financial instruments
        whose approximate contract amounts represent credit risk:
 
 2005
              
              2004Standby
                  letters of credit
              
              $
              949
              
              $
              896Commitments
                  to extend creditFixed
              
              $
              8,303
              
              $
              5,694Variable
              
              
              24,158
              
              
              17,118
 
 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 5.0% to 18.0%. 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)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (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, 2005 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
        regula-tions, the amount of div idends
        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 2006 the Banks could, without prior approval, declare
        dividends of approximately $2.5 million plus any 2006 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 u ndertaken,
        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 t able)
        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, 2005, the Company and the
        Banks meet all quantitative capital adequacy requirements to which they are
        subject.
 
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        20 - STOCKHOLDERS’ EQUITY** (Continued)
 
 The
        capital amounts and classifications are also subject to qualitative judgments
        by
        the regul ators.
        As a result of these qualitative judgments, the Company has entered into
        an
        agreement with the applicable regulatory authorities which provide for
        additional restrictions on their respective capital levels and the payment
        of
        dividends. The Company entered into an agreement with the Federal Reserve
        Bank
        (FRB), as discussed in Note 3, restricting the Company from declaring or
        paying
        dividends without prior approval from the FRB. An additional provision of
        this
        agreement requires prior approval from the FRB before the Company increases
        its
        borrowings or incurs any debt. This agreement is in effect until terminated
        by
        the FRB.
 
 Effective
        January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a C&D
        order by the FDIC and KDFI restricting Farmers Deposit from declaring or
        paying
        dividends, without prior approval, if its Tier I cap ital
        to average assets falls below 8.00%. The order also required Farmers Deposit
        to
        maintain a minimum 5.0% Tier I capital to average assets ratio and submit
        a
        written capital restoration plan to increase the ratio to 8.0% by December
        31,
        2004. Having determined that Farmers had fully complied with all of the
        provisions of the order, the KDFI and FDIC rescinded the order on December
        13,
        2005. Farmers Deposit’s Tier I capital to average assets was 11.4% at December
        31, 2005.
 
 As
        of
        December 31, 2005, the most recent notification from the Federal Reserve
        Bank
        categorized the Company and its subsidiary banks as well capitalized under
        the
        regulatory framework for prompt corrective action. To be categorized as well
        capitalized, the Company 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 Company’s category.
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (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, 2005 are presented in the table below:
 
 To
                  Be Well CapitalizedFor
                  Capital
              
              Under
                  Prompt CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  Provisions**2005**
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioTotal
                  Capital (to Risk-Weighted Assets):Consolidated
                  (1)
              
              $
              58,710
              
              
              19.1
              %
              $
              24,636
              
              
              8
              %
              $
              30,795
              
              
              10
              %Boone
                  County Bank
              
              
              15,778
              
              
              20.8
              
              
              6,073
              
              
              8
              
              
              7,591
              
              
              10Citizens
                  Deposit Bank
              
              
              12,318
              
              
              17.0
              
              
              5,801
              
              
              8
              
              
              7,251
              
              
              10Farmers
                  Deposit Bank
              
              
              9,398
              
              
              12.7
              
              
              3,470
              
              
              8
              
              
              4,337
              
              
              10Ohio
                  River Bank
              
              
              6,978
              
              
              16.3
              
              
              3,434
              
              
              8
              
              
              4,292
              
              
              10First
                  Central Bank
              
              
              8,584
              
              
              12.1
              
              
              5,658
              
              
              8
              
              
              7,073
              
              
              10Tier
                  I Capital (to Risk-Weighted Assets):Consolidated
                  (1)
              
              $
              54,811
              
              
              17.8
              %
              $
              12,318
              
              
              4
              %
              $
              18,477
              
              
              6
              %Boone
                  County Bank
              
              
              14,927
              
              
              19.7
              
              
              3,036
              
              
              4
              
              
              4,555
              
              
              6Citizens
                  Deposit Bank
              
              
              11,396
              
              
              15.7
              
              
              2,900
              
              
              4
              
              
              4,351
              
              
              6Farmers
                  Deposit Bank
              
              
              8,823
              
              
              20.3
              
              
              1,735
              
              
              4
              
              
              2,602
              
              
              6Ohio
                  River Bank
              
              
              6,482
              
              
              15.1
              
              
              1,717
              
              
              4
              
              
              2,575
              
              
              6First
                  Central Bank
              
              
              7,690
              
              
              10.9
              
              
              2,829
              
              
              4
              
              
              4,244
              
              
              6Tier
                  I Capital (to Average Assets):Consolidated
                  (1)
              
              $
              54,811
              
              
              10.6
              %
              $
              20,660
              
              
              4
              %
              $
              25,826
              
              
              5
              %Boone
                  County Bank
              
              
              14,927
              
              
              10.3
              
              
              5,772
              
              
              4
              
              
              7,216
              
              
              5Citizens
                  Deposit Bank
              
              
              11,396
              
              
              9.7
              
              
              4,699
              
              
              4
              
              
              5,873
              
              
              5Farmers
                  Deposit Bank
              
              
              8,823
              
              
              11.4
              
              
              3,096
              
              
              4
              
              
              3,870
              
              
              5Ohio
                  River Bank
              
              
              11,303
              
              
              12.5
              
              
              3,606
              
              
              4
              
              
              4,507
              
              
              5First
                  Central Bank
              
              
              7,690
              
              
              8.2
              
              
              3,771
              
              
              4
              
              
              4,713
              
              
              5(1)
                Consolidate company is not subject to Prompt Corrective Actoin
                Provisions
 
 
 (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (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, 2004 are presented in the table below:
 
 To
                  Be Well CapitalizedFor
                  Capital
              
              Under
                  Prompt CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  Provisions**2004**
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              RatioTotal
                  Capital (to Risk-Weighted Assets):Consolidated
                  (1)
              
              $
              58,163
              
              
              18.9
              %
              $
              24,624
              
              
              8
              %
              $
              30,781
              
              
              10
              %Boone
                  County Bank
              
              
              15,270
              
              
              19.7
              
              
              6,208
              
              
              8
              
              
              7,761
              
              
              10Citizens
                  Deposit Bank
              
              
              12,016
              
              
              21.6
              
              
              4,442
              
              
              8
              
              
              5,553
              
              
              10Farmers
                  Deposit Bank
              
              
              9,056
              
              
              18.6
              
              
              3,906
              
              
              8
              
              
              4,882
              
              
              10Ohio
                  River Bank
              
              
              6,730
              
              
              15.4
              
              
              3,504
              
              
              8
              
              
              4,380
              
              
              10First
                  Central Bank
              
              
              8,007
              
              
              12.6
              
              
              5,099
              
              
              8
              
              
              6,374
              
              
              10Tier
                  I Capital (to Risk-Weighted Assets):Consolidated
                  (1)
              
              $
              51,182
              
              
              16.6
              %
              $
              12,312
              
              
              4
              %
              $
              18,468
              
              
              6
              %Boone
                  County Bank
              
              
              14,299
              
              
              18.4
              
              
              3,104
              
              
              4
              
              
              4,656
              
              
              6Citizens
                  Deposit Bank
              
              
              11,303
              
              
              20.4
              
              
              2,221
              
              
              4
              
              
              3,332
              
              
              6Farmers
                  Deposit Bank
              
              
              8,406
              
              
              17.2
              
              
              1,953
              
              
              4
              
              
              2,929
              
              
              6Ohio
                  River Bank
              
              
              6,254
              
              
              14.3
              
              
              1,752
              
              
              4
              
              
              2,628
              
              
              6First
                  Central Bank
              
              
              7,271
              
              
              11.4
              
              
              2,549
              
              
              4
              
              
              3,824
              
              
              6Tier
                  I Capital (to Average Assets):Consolidated
                  (1)
              
              $
              51,182
              
              
              9.7
              %
              $
              21,009
              
              
              4
              %
              $
              26,261
              
              
              5
              %Boone
                  County Bank
              
              
              14,299
              
              
              9.2
              
              
              6,212
              
              
              4
              
              
              7,765
              
              
              5Citizens
                  Deposit Bank
              
              
              11,303
              
              
              12.5
              
              
              3,606
              
              
              4
              
              
              4,507
              
              
              5Farmers
                  Deposit Bank
              
              
              8,406
              
              
              9.5
              
              
              3,560
              
              
              4
              
              
              4,450
              
              
              5Ohio
                  River Bank
              
              
              6,254
              
              
              7.7
              
              
              3,236
              
              
              4
              
              
              4,046
              
              
              5First
                  Central Bank
              
              
              7,271
              
              
              8.6
              
              
              3,366
              
              
              4
              
              
              4,208
              
              
              5
 (1)
                  Consolidate company is not subject to Prompt Corrective Actoin
                  Provisions
  (continued)
 
 Table
            of Contents
   **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        21 - PARENT COMPANY FINANCIAL STATEMENTS**
 
 CONDENSED
                  BALANCE SHEETSDecember
                  312005
              
              2004**ASSETS**Cash
              
              $
              3,248
              
              $
              7,666Investment
                  in subsidiaries
              
              
              66,936
              
              
              70,683Premises
                  and equipment
              
              
              541
              
              
              514Other
                  assets
              
              
              1,106
              
              
              599**Total
                  assets**
              
              $
              71,831
              
              $
              79,462**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Other
                  liabilities
              
              $
              420
              
              
              5,355Notes
                  payable
              
              
              1,402
              
              
              1,402Subordinated
                  debentures issued to trust
              
              
              15,722
              
              
              20,876Other
                  borrowed funds
              
              
              -
              
              
              800Total
                  liabilities
              
              
              17,544
              
              
              28,433Stockholders’
                  equityPreferred
                  stock
              
              
              -
              
              
              -Common
                  stock
              
              
              1,105
              
              
              1,103Surplus
              
              
              43,458
              
              
              43,445Retained
                  earnings
              
              
              11,442
              
              
              7,008Accumulated
                  other comprehensive income
              
              
              (1,718
              )
              
              (527
              )Total
                  stockholders’ equity
              
              
              54,287
              
              
              51,029**Total
                  liabilities and stockholders’ equity**
              
              $
              71,831
              
              $
              79,462
 
 
 
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        21 - PARENT COMPANY FINANCIAL STATEMENTS** (Continued)
 
 Condensed
                  Statement of OperationsYears
                  Ended December 312005
              
              2004
              
              2003IncomeDividends
                  from continuing subsidiaries
              
              $
              8,405
              
              $
              5,800
              
              $
              7,853Interest
                  and dividend income
              
              
              45
              
              
              46
              
              
              14Other
                  income
              
              
              450
              
              
              367
              
              
              472Total
                  income
              
              
              8,900
              
              
              6,213
              
              
              8,339ExpensesInterest
                  expense
              
              
              2,142
              
              
              3,117
              
              
              3,121Salaries
                  and employee benefits
              
              
              1,180
              
              
              726
              
              
              597Professional
                  fees
              
              
              17
              
              
              1,607
              
              
              550Accelerated
                  trust preferred issuance costs
              
              
              184
              
              
              214
              
              
              124Other
                  expenses
              
              
              327
              
              
              514
              
              
              295Total
                  expenses
              
              
              3,850
              
              
              6,178
              
              
              4,687Income
                  from continuing operations before
                income
                  taxes and equity in undistributed
                income
                  of subsidiaries
              
              
              5,050
              
              
              35
              
              
              3,652Income
                  tax (benefit)
              
              
              (1,314
              )
              
              (2,071
              )
              
              (1,631
              )Income
                  from continuing operations before
                equity
                  in undistributed income of subsidiaries
              
              
              6,364
              
              
              2,106
              
              
              5,283Equity
                  in undistributed income of subsidiaries
                continuing
                  in operation
              
              
              (1,930
              )
              
              (143
              )
              
              (14,900
              )Net
                  income (loss) from continuing operations
              
              
              4,434
              
              
              1,963
              
              
              (9,617
              )Net
                  income (loss) from discontinued operations
              
              
              -
              
              
              4,734
              
              
              (80
              )Net
                  income (loss)
              
              $
              4,434
              
              $
              6,697
              
              $
              (9,697
              )
  
  (continued)
 
 Table
            of Contents
  **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        21 - PARENT COMPANY FINANCIAL STATEMENTS** (Continued)
 
 Condensed
                  Statement of Cash FlowsYears
                  Ended December 312005
              
              2004
              
              2003Cash
                  flows from operating activitiesNet
                  income (loss) from continuing operations
              
              $
              4,434
              
              $
              1,963
              
              $
              (9,617
              )Adjustments
                  to reconcile net income (loss) to
                Net
                  cash from operating activitiesDepreciation
              
              
              83
              
              
              91
              
              
              71(Gain)
                  loss from sales of assets
              
              
              (3
              )
              
              159
              
              
              21Dividends
                  in excess of net income of
                Subsidiaries
                  continuing in operation
              
              
              1,930
              
              
              143
              
              
              14,900Change
                  in other assets
              
              
              (35
              )
              
              (1,436
              )
              
              144Change
                  in other liabilities
              
              
              (4,934
              )
              
              1,406
              
              
              2,470Net
                  cash from operating activities
              
              
              1,475
              
              
              2,326
              
              
              7,989Cash
                  flows from investing activitiesCapital
                  contributed to subsidiaries continuing in operation
              
              
              -
              
              
              (1,831
              )
              
              (8,108
              )Proceeds
                  from liquidation of subsidiary
              
              
              -
              
              
              14,311
              
              
              -Proceeds
                  from sales of assets, net of purchases
              
              
              (108
              )
              
              192
              
              
              216Net
                  cash from investing activities
              
              
              (108
              )
              
              12,672
              
              
              (7,882
              )Cash
                  flows from financing activitiesEarly
                  redemption of subordinated note
              
              
              (5,000
              )
              
              (5,500
              )
              
              (3,000
              )Issuance
                  of common stock
              
              
              15
              
              
              -
              
              
              -Payments
                  on other borrowed funds
              
              
              (800
              )
              
              (5,400
              )
              
              (1,500
              )Net
                  cash from financing activities
              
              
              (5,785
              )
              
              (10,900
              )
              
              (4,500
              )Net
                  change in cash and cash equivalents
              
              
              (4,418
              )
              
              4,098
              
              
              (4,393
              )Cash
                  and cash equivalents at beginning of year
              
              
              7,666
              
              
              3,568
              
              
              7,961Cash
                  and cash equivalents at end of year
              
              $
              3,248
              
              $
              7,666
              
              $
              3,568
 
 
 
 
  (continued)
 
 Table
            of Contents
   **PREMIER
        FINANCIAL BANCORP, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
        31, 2005, 2004, and 2003
 (Dollars
        in Thousands, Except Per Share Data)
 
 
 **NOTE
        22 - QUARTERLY FINANCIAL DATA (UNAUDITED)**
  FromContinuingOperations
                
                Earnings
                    per Share
                  on
                    Continuing OperationsInterest
                  Income
                
                Net
                    Interest Income
                
                Net
                  Income
                
                Basic
                
                Fully
                  Diluted2005First
                    Quarter
                
                $
                7,045
                
                $
                4,727
                
                $
                803
                
                $
                0.15
                
                $
                0.15Second
                    Quarter
                
                
                7,172
                
                
                4,893
                
                
                727
                
                
                0.14
                
                
                0.14Third
                    Quarter
                
                
                7,465
                
                
                5,055
                
                
                1,367
                
                
                0.26
                
                
                0.26Fourth
                    Quarter
                
                
                7,717
                
                
                5,177
                
                
                1,537
                
                
                0.29
                
                
                0.292004First
                    Quarter
                
                $
                7,055
                
                $
                4,446
                
                $
                482
                
                $
                0.09
                
                $
                0.09Second
                    Quarter
                
                
                6,926
                
                
                4,398
                
                
                474
                
                
                0.09
                
                
                0.09Third
                    Quarter
                
                
                6,951
                
                
                4,418
                
                
                448
                
                
                0.08
                
                
                0.08Fourth
                    Quarter
                
                
                7,189
                
                
                4,802
                
                
                559
                
                
                0.11
                
                
                0.11
 In
        2005, interest income improved each quarter as yields on investments and
        federal
        funds sold rose and loan balances outstanding increased. The improvement
        in
        interest income drove the improvement in net interest income. Net income
        was
        also impacted positively in the third and fourth quarters by the recording
        of
        reversals of the provision for loan losses due to improvements in the Company’s
        historical loan loss ratios and the collection of impaired loans with previous
        allocations of the allowance for loan losses that were no longer needed.
 
 In
        2004, interest income continued to be negatively impacted by the level of
        non-accrual loans at Farmers Deposit Bank. However, due to interest expense
        savings, net interest income began a gradual resurgence beginning with the
        second quarter. Net income was impacted positively in the fourth quarter
        by the
        improvement in the net interest margin and gains on the disposition of other
        real estate owned.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**PART
      III**








**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. Controls and 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 Exchange Act 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.




"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. Premier management uses the financial reports of its subsidiaries
      to
      make decisions about the allocation of the Company's resources, to implement
      strategies to improve the Company's performance, and to prepare the consolidated
      financial statements of the Company for its shareholders and regulatory
      authorities. 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.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








It
      is
      this "management override of controls" that led to the significant charge-offs
      and provisions for loan losses at Farmers Deposit in 2003 and the financial
      statement restatement for years 2002 and 2001. Premier's policies and procedures
      related to the evaluation of a borrower's creditworthiness prior to making
      or
      renewing a loan, the reporting of new loan activity and delinquent loans to
      the
      bank's board of directors, and the guidelines for assessing the credit risk
      of
      existing loans were overridden by local management. The systematic disregard
      for
      these controls was sophisticated enough to avoid detection during routine
      reviews of that bank's records as directed by the Company and the regulatory
      authorities of the banking industry.




During
      late
      2003 and throughout 2004, Premier management implemented corrective actions
      to
      remedy the deficiencies identified at Farmers Deposit. In addition to the steps
      identified in the cease and desist order of the FDIC and KDFI,
      Premier





•  hired
      a new President and CEO of Farmers Deposit in 2003 who has experience restoring
      troubled banks to safe and sound banking practices,


•  hired
      a Chief Financial Officer for the bank in 2003, a new position, to segregate
      the
      lending and accounting functions of the bank,


•  formed
      a collections department to pursue delinquent borrowers and, when possible,
      to
      collect on loans previously charged-off, and


•  begun
      using system generated reports to the bank's board of directors rather than
      manually generated reports whenever possible.




Premier
      management also implemented additional processes and procedures throughout
      its
      network of banking subsidiaries in an effort to minimize the likelihood that
      improper management overrides go undetected. These included:





•  hiring
      a credit analyst at the holding company level to review all loan requests over
      $400,000,


•  forming
      loan approval committees made up of the bank presidents and the President of
      Premier to review all loan requests over $750,000,


•  incorporating
      "whistleblower" provisions into the employee code of ethics and
      conduct,


•  dispatching
      members of the Audit Committee of the Company's board of directors, at their
      request, to conduct employee meetings emphasizing the importance of each
      employee's responsibilities in maintaining the financial integrity of the
      Company's books and records, that overriding of internal controls will not
      be
      tolerated, and the employees' obligation to report improprieties to senior
      management or the Audit Committee in accordance with the employee code of
      ethics,


•  hiring
      an internal audit department at the holding company level to, among other duties
      assigned, conduct various tests for data integrity and compliance with internal
      control procedures, and


•  evaluating
      the internal audit program to incorporate tests designed to specifically detect
      the abuses uncovered during the Farmers Deposit investigation.


Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








In
      2005, Premier reduced its reliance on third-party internal audit and loan review
      providers and expanded its internal audit staff at the holding company level.
      Management believes a full-time internal audit and loan review staff will be
      able to provide more specific and more thorough testing of the books and records
      of the company and the effectiveness of its internal controls. Management also
      believes that having internal auditors on staff will provide more immediate
      reporting of findings to management, a source of on-location training of best
      practices for employees at the Affiliate Banks during the conduct of an audit
      and a rapid response team to address issues raised by employees under the
      "whistleblower" provisions of the employee code of ethics and
      conduct.




Beginning
      in
      April 2005 and concluding in July 2005, Premier's affiliate banks converted
      to a
      third-party data processing and item processing provider. As part of the
      conversion process, system processes, workflows and procedures were reviewed
      and
      potentially revised in an effort to standardize the way the Banks conduct
      business and record transactions in the various modules of the software. While
      no significant changes to Premier's key controls were made as a result of these
      reviews, holding company staff now has direct on-line access to the financial
      books and records of the Banks.





In
      late 2005 and continuing in early 2006, Premier’s internal audit staff and
      senior management began a review of all outstanding policies of the Affiliate
      Banks. The policies were standardized across the company as much as practicable,
      with minor variances permitted to accommodate the different markets in which
      the
      Banks operate. New policies and procedures were also developed to govern the
      new
      outsourced data and item processing functions, the integrated data network,
      and
      the addition of internet banking products.




Other
      than
      the steps identified above, which are in various stages of implementation,
      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.








**Item
      10, 11, 12, 13 and 14. Directors and Executive Officers of the
      Registrant; Executive Compensation; Security Ownership of Certain Beneficial
      and
      Management and Related Stockholder Matters; Certain Relationships and Related
      Transactions; 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.








Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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
            Stock
                Purchase Agreement dated February 13, 2004 among Citizens Bank (Kentucky),
                Inc., Premier Financial Bancorp, Inc. and Farmers Capital Bank Corporation
                is incorporated herein by reference to Form 8-K filed by Registrant
                on
                February 19, 2004.3.1
            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
            Bylaws
                of registrant (included as Exhibit 3.2 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).





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








Exhibit
              Number
            Description
                of Document4.1
            Form
                of Junior Subordinated Indenture dated as of June 6, 1997 between
                Registrant and Bankers Trust Company, as Trustee, with respect to
                9.75%
                Junior Subordinated Deferrable Interest Debentures due June 30, 2027
                (incorporated by reference to Exhibit 4.1 to the Registration Statement
                on
                Form S-1 of Registrant filed May 28, 1997 with the Commission
                (Registration No. 333-27943)).4.2
            Form
                of 9.75% Junior Subordinated Deferrable Interest Debenture Certificate
                (incorporated by reference to Exhibit 4.2 to the Registration Statement
                on
                Form S-1 of Registrant filed May 28, 1997 with the Commission
                (Registration No. 333-27943)).4.3
            Form
                of Amended and Restated Trust Agreement dated as of June 6, 1997
                among
                registrant, as Depositor, Bankers Trust Company, as Property Trustee,
                and
                Bankers Trust (Delaware), as Delaware Trustee (incorporated by reference
                to Exhibit 4.4 to the Registration Statement on Form S-1 of Registrant
                filed May 28, 1997 with the Commission (Registration No.
                333-27943)).4.4
            Form
                of Guarantee Agreement dated as of June 6, 1997 between Registrant
                and
                Bankers Trust Company (incorporated by reference to Exhibit 4.6 to
                the
                Registration Statement on Form S-1 of Registrant filed May 28, 1997
                with
                the Commission (Registration No. 333-27943)).***
                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).***
                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 First Guaranty
                Bank,
                Hammond, Louisana10.7
            Promissory
                Note to First Guaranty Bank, Hammond, Louisana10.8
            Collateral
                Agreement with First Guaranty Bank, Hammond
                Louisana





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








Exhibit
              Number
            Description
                of Document14.1
            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.21
            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.





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








**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 30, 2006





Table
          of Contents


**PREMIER
      FINANCIAL BANCORP, INC.**


**FORM
      10-K**


December
      31, 2005








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
                30, 2006Robert
                W. Walker/s/
                Brien M. Chase
            Principal
                Financial and Accounting
            March
                30, 2006Brien
                M. Chase
            Officer/s/
                Toney K. Adkins
            Director
            March
                15, 2006Toney
                K. Adkins/s/
                Hosmer A. Brown, III
            Director
            March
                15, 2006Hosmer
                A. Brown, III/s/
                Edsel Burns
            Director
            March
                15, 2006Edsel
                Burns/s/
                E. V. Holder, Jr.
            Director
            March
                15, 2006E.
                V. Holder, Jr./s/
                Keith F. Molihan
            Director
            March
                15, 2006Keith
                F. Molihan/s/
                Marshall T. Reynolds
            Chairman
                of the Board
            March
                15, 2006Marshall
                T. Reynolds/s/
              Neal Scaggs
            Director
            March
                29, 2006Neal
                Scaggs/s/
                Thomas W. Wright
            Director
            March
                15, 2006Thomas
                W. Wright