**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, 2006**
 
 or
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the transition period from ___________ to ___________
 
 Commission
        file number **0-20908**
 
 **PREMIER
        FINANCIAL BANCORP, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 **Kentucky**
              
              **61-1206757**(State
                  or other jurisdiction of incorporation organization)
              
              (I.R.S.
                  Employer Identification No.)**2883
                  Fifth Avenue**
                **Huntington,
                  West Virginia**
              
              **25702**(Address
                  of principal executive offices)
              
              (Zip
                  Code**)**Registrant’s
                  telephone number**(304)
                  525-1600**
 
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 
 Title
                  of each class
              
              Name
                  of exchange on which registered**Common
                  Stock without par value**
              
              **NASDAQ:GMS**
 
 Securities
        registered pursuant to Section 12(g) of the Act:   **NONE**
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.   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
  **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 
 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, 2006, the aggregate market value of the registrant’s common stock held
        by non-affiliates of the registrant was $66,213,790 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, 2007**Common
                  Stock without par value**
              
              **5,236,899**
 
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 Document
              
              Parts
                  Into Which IncorporatedProxy
                  Statement for the Annual Meeting of Shareholders to be held on
                  June 20,
                  2007.
              
              Part
                  III
 
 
 
 
 2
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 TABLE
                  OF CONTENTS**PART
                  I**Item
                  1.
              
              Description
                  of Business
              
              4Item
                  1A.
              
              Risk
                  Factors
              
              14Item
                  1B.
              
              Unresolved
                  Staff Comments
              
              19Item
                  2.
              
              Properties
              
              19Item
                  3.
              
              Legal
                  Proceedings
              
              19Item
                  4.
              
              Submissions
                  of Matters to a Vote of Security
                  Holders
              
              19**PART
                  II**Item
                  5.
              
              Market
                  for Registrant’s Common Equity and
                  Related Stockholder Matters
              
              20Item
                  6.
              
              Selected
                  Financial Data
              
              23Item
                  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
                  Income
              
              66Consolidated
                  Statements of Comprehensive
                  Income
              
              68Consolidated
                  Statements of Changes in
                  Stockholders’ Equity
              
              69Consolidated
                  Statements of Cash
                  Flows
              
              70Notes
                  to Consolidated Financial
                  Statements
              
              72Item
                  9.
              
              Changes
                  in and Disagreements with
                  Accountants on Accounting and Financial Disclosure
              
              106Item
                  9A.
              
              Controls
                  and Procedures
              
              106Item
                  9B.
              
              Other
                  Information
              
              107**PART
                  III**Item
                  10.
              
              Directors
                  and Executive Officers of
                  Registrant
              
              107Item
                  11.
              
              Executive
                  Compensation
              
              107Item
                  12.
              
              Security
                  Ownership of Certain
                  Beneficial and Management and Related Stockholder
                  Matters
              
              107Item
                  13.
              
              Certain
                  Relationships and Related
                  Transactions
              
              107Item
                  14.
              
              Principal
                  Accountant Fees and
                  Services
              
              107**PART
                  IV**Item
                  15.
              
              Exhibits
                  and Financial Statement
                  Schedules
              
              108Signatures
              
              111
 
  3
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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, 2007, operates ten banking offices in Kentucky,
        three banking offices in Ohio, and six banking offices in West Virginia.
        At
        December 31, 2006, Premier had total consolidated assets of $535.5 million,
        total consolidated deposits of $439.0 million and total consolidated
        shareholders' equity of $61.0 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.
 
 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.
 
 
 
  4
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 Beginning
        in April 2005 and concluding in July 2005, the Company converted each of
        its
        Affiliate Banks from an in-house system administered by a wholly-owned
        subsidiary to an outsourced system administered by FiServ for their data
        and
        item processing functions. Subsequent to the conversion, the operations of
        the
        Company’s data processing subsidiary, Premier Data Services, Inc. were suspended
        and the subsidiary was merged into the Company on June 27, 2006.
 
 Premier
        is a legal entity separate and distinct from its Affiliate Banks and non-bank
        subsidiaries. Accordingly, the right of Premier, and thus the right of Premier's
        creditors and shareholders, to participate in any distribution of the assets
        or
        earnings of any of the Affiliate Banks or non-bank subsidiaries is necessarily
        subject to the prior claims of creditors of such subsidiaries, except to
        the
        extent that claims of Premier, in its capacity as a creditor, may be recognized.
        The principal source of Premier's revenue is dividends from its Affiliate
        Banks
        and non-bank subsidiary. See "REGULATORY MATTERS -- Dividend Restrictions"
        for
        discussion of the restrictions on the Affiliate Banks' ability to pay dividends
        to Premier.
  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.
  5
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **BUSINESS**
 **General**
  Through
        the
        Banks the Company focuses on providing quality, community banking services
        to
        individuals and small-to-medium sized businesses primarily in non-urban areas.
        By seeking to provide such banking services in non-urban areas, the Company
        believes that it can minimize the competitive effect of larger financial
        institutions that typically are focused on large metropolitan areas. Each
        Bank
        retains its local management structure which offers customers direct access
        to
        the Bank's president and other officers in an environment conducive to friendly,
        informed and courteous service. This approach also enables each Bank to offer
        local and timely decision-making, and flexible and reasonable operating
        procedures and credit policies limited only by a framework of centralized
        risk
        controls provided by the Company to promote prudent banking practices. See
        additional discussion under "Regulatory Matters" below.
 
 Each
        Bank maintains its community orientation by, among other things, having selected
        members of its community as members of its board of directors, who assist
        in the
        introduction of prospective customers to the Bank and in the development
        or
        modification of products and services to meet customer needs. As a result
        of the
        development of personal banking relationships with its customers and the
        convenience and service offered by the Banks, the Banks' lending and investing
        activities are funded primarily by core deposits.
 
 When
        appropriate and economically advantageous, the Company centralizes certain of
        the Banks' back office, support and investment functions in order to achieve
        consistency and cost efficiency in the delivery of products and services.
        The
        Company centrally provides services such as accounting, loan review, operations
        and network support, human resources, compliance and internal auditing to
        the
        Banks to enhance their ability to compete effectively. The Company also provides
        overall direction in the areas of credit policy and administration, strategic
        planning, marketing, investment portfolio management and other financial
        and
        administrative services. Each Bank participates in product development by
        advising management of new products and services needed by its customers
        and
        desirable changes to existing products and services.
 
 Prior
        to the conversions in mid 2005, the Company's data processing subsidiary,
        Premier Data Services, Inc., provided centralized data processing services
        to
        four of the Banks. Beginning in late 2004 and continuing through the middle
        of
        2005, the Company converted its data processing system to an external
        third-party provider. Through the conversion process, Company senior management
        along with each Bank's management reviewed and standardized their 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.
  6
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 Each
        of the Banks provides a wide range of retail and commercial banking services,
        including commercial, real estate, agricultural and consumer lending; depository
        and funds transfer services; collections; safe deposit boxes; cash management
        services; and other services tailored for both individuals and businesses.
 
 The
        Banks' residential mortgage lending activities consist primarily of loans
        for
        purchasing personal residences or loans for commercial or consumer purposes
        secured by residential mortgages. 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.
 
 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.
 
  7
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 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. 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.
  8
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 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 members of the Federal Reserve
        System are supervised and regulated by the Federal Reserve, and those banks
        that
        are not members of the Federal Reserve System are supervised and regulated
        by
        the Federal Deposit Insurance Corporation ("FDIC"). Each banking regulator
        has
        the authority to issue cease-and-desist orders if it determines that the
        activities of a bank regularly represent an unsafe and unsound banking practice
        or a violation of law.
 
 Both
        federal and state law extensively regulates various aspects of the banking
        business, such as reserve and capital requirements, truth-in-lending and
        truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
        trading in securities and other aspects of banking operations. Premier, the
        Affiliate Banks and Premier's nonbank subsidiary are also affected by the
        fiscal
        and monetary policies of the federal government and the Federal Reserve and
        by
        various other governmental laws, regulations and requirements. Further, the
        earnings of Premier and Affiliate Banks are affected by general economic
        conditions and prevailing interest rates. Legislation and administrative
        actions
        affecting the banking industry are frequently considered by the United States
        Congress, state legislatures and various regulatory agencies. It is not possible
        to predict with certainty whether such legislation or administrative actions
        will be enacted or the extent to which the banking industry, in general,
        or
        Premier and the Affiliate Banks, in particular, would be affected.
 
 *Liability
        for Bank Subsidiaries* -
        The Federal Reserve has a policy to the effect that a bank holding company
        is
        expected to act as a source of financial and managerial strength to each
        of its
        subsidiary banks and to maintain resources adequate to support each such
        subsidiary bank. This support may be required at times when Premier may not
        have
        the resources to provide it. In the event of a bank holding company's
        bankruptcy, any commitment by the bank holding company to a federal bank
        regulatory agency to maintain the capital of a subsidiary bank would be assumed
        by the bankruptcy trustee and entitled to priority of payment.
 
 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.
  9
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 *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 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, 2006, Premier met both
        requirements, with Tier I and total capital equal to 14.7% and 16.0% 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, 2006, Premier's leverage ratio was 8.9%.
 
 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. Prior to their redemption in November
        2006, a portion of the Preferred Securities issued by the Trust qualified
        as
        Tier 1 capital for the Company under the Federal Reserve Board's regulatory
        framework. See Note 12 to the consolidated financial
        statements for additional details regarding the Company's Trust Preferred
        Securities.
 
 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.
 
  10
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 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 Bank of Cleveland (FRB) that prohibited the Company from paying
        dividends or incurring any additional debt without the prior written approval
        of
        the FRB. 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.
  On January 29, 2003, the Company entered into a written agreement with the FRB
        which superseded and rescinded a previous agreement between the Company and
        the
        Federal Reserve Bank. In, 2006, the Federal Reserve Bank determined that
        Premier
        had fully satisfied all of the provisions of the Written Agreement and,
        accordingly, the FRB terminated the agreement effective April 18, 2006. Among
        other provisions, the agreement required 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 then outstanding trust
        preferred securities. The Company’s compliance with the written agreement was
        monitored by a committee consisting of three of its outside directors.
  11
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 As
        previously disclosed in earlier reports, some of the subsidary Banks have,
        in
        the past, been subject to regulatory agreements. Before they were merged
        together into one entity, two of the Company's subsidiaries, Citizens Deposit
        Bank & Trust and the Bank of Germantown, entered into similar agreements
        with their respective primary regulators which, among other things, prohibited
        the payment of dividends without prior written approval and required significant
        changes in their credit administration policies. The banks fully complied
        with
        the terms of the agreements in 2004 and the agreements were accordingly
        rescinded by their regulators.
 
 As
        a
        result of a 2003 investigation into the conduct of the former president of
        Farmers Deposit Bank by Premier and the FDIC, 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. On December 24, 2003, Premier announced that Farmers Deposit Bank
        had
        reached an agreement with the FDIC and the Kentucky Department of Financial
        Institutions ("KDFI") [collectively referred to as "Supervisory Authorities"]
        to
        consent to the issuance of a cease & desist order ("Order") from its
        Supervisory Authorities. The Order also outlined a number of steps to be
        taken
        by Farmers Deposit which were designed to remedy and/or prevent the reoccurrence
        of events that gave rise to the investigation during the latter half of 2003.
        Having found that Farmers Deposit had fully complied with the Order, the
        Supervisory Authorities rescinded the Order on December 13, 2005.
 
 *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, 2006, approximately $3.2 million of the total shareholders' equity of
        the
        Affiliate Banks was available for payment of dividends to Premier without
        approval by the applicable regulatory authority.
 
 In
        addition, federal bank regulatory authorities have authority to prohibit
        Premier's Affiliate Banks from engaging in an unsafe or unsound practice
        in
        conducting their business. The payment of dividends, depending upon the
        financial condition of the bank in question, could be deemed to constitute
        such
        an unsafe or unsound practice. The ability of the Affiliate Banks to pay
        dividends in the future is presently, and could be further, influenced by
        bank
        regulatory policies and capital guidelines as well as each Affiliate Bank's
        earnings and financial condition. Additional information regarding dividend
        limitations can be found in Note 21 of the
        accompanying audited consolidated financial statements.
 
  12
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 *Interstate
        Banking* -
        Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
        1994
        (the "Riegle-Neal Act"), subject to certain concentration limits, (i) bank
        holding companies, such as Premier, are permitted to acquire banks and bank
        holding companies located in any state of the United States, subject to certain
        restrictions, and (ii) banks are permitted to acquire branch offices outside
        their home state by merging with out-of-state banks, purchasing branches
        in
        other states or establishing de novo branch offices in other states; provided
        that, in the case of any such purchase or opening of individual branches,
        the
        host state has adopted legislation "opting in" to the relevant provisions
        of the
        Riegle-Neal Act; and provided further, that, in the case of a merger with
        a bank
        located in another state, the host state has not adopted legislation "opting
        out" of the relevant provisions of the Riegle-Neal Act.
 
 *Gramm-Leach-Bliley
        Act* - On
        November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") was signed into
        law,
        eliminating many of the remaining barriers to full convergence of the banking,
        securities, and insurance industries. The major provisions of the Act took
        effect March 12, 2000.
 
 The
        Act enables a broad-scale consolidation among banks, securities firms, and
        insurance companies by creating a new type of financial services company
        called
        a "financial holding company," a bank holding company with dramatically expanded
        powers. Financial holding companies can offer virtually any type of financial
        service, including banking, securities underwriting, insurance (both agency
        and
        underwriting), and merchant banking. In addition, the Act permits the Federal
        Reserve and the Treasury Department to authorize additional activities for
        financial holding companies, but only if they jointly determine that such
        activities are "financial in nature" or "complementary to financial activities."
        Premier does not presently qualify to elect financial holding company
        status.
 
 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 225 full-time
        equivalent employees as of December 31, 2006. Its executive offices are located
        at 2883 5th Avenue, Huntington, West Virginia 25702, telephone number (304)
        525-1600 (facsimile number (304) 525-9701).
 
  13
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **Item
        1A. Risk Factors**
 
 Like
        all financial companies, the Company’s business and results of operations are
        subject to a number of risks, many of which are outside of the Company’s
        control. In addition to the other information in this report, readers should
        carefully consider that the following important factors, among others, could
        materially impact the Company’s business and future results of operations.
 
 **Changes
        in Interest Rates Could Negatively Impact the Company’s Results of
        Operations**
 
 The
        earnings of the Company are primarily dependent on net interest income, which
        is
        the difference between interest earned on loans and investments, and interest
        paid on interest-bearing liabilities such as deposits and borrowings. Interest
        rates are highly sensitive to many factors, including government monetary
        and
        fiscal policies; domestic and international economic and political conditions;
        and, in particular, changes in the discount rate by the Board of Governors
        of
        the Federal Reserve System. Conditions such as inflation, recession,
        unemployment, money supply, government borrowing and other factors beyond
        management’s control may also affect interest rates. If the Company’s
        interest-earning assets mature, reprice or prepay more quickly than
        interest-bearing liabilities in a given period, a decrease in market interest
        rates could adversely affect net interest income. Likewise, if interest-bearing
        liabilities mature or reprice, or, in the case of deposits, are withdrawn
        by the
        accountholder, more quickly than interest-earning assets in a given period,
        an
        increase in market interest rates could adversely affect net interest income.
        Given the Company’s current mix of assets and liabilities, a declining interest
        rate environment would negatively impact the Company’s results of operations.
 
 Fixed
        rate loans increase the Company’s exposure to interest rate risk in a rising
        rate environment because interest-bearing liabilities would be subject to
        repricing before assets become subject to repricing. Adjustable rate loans
        decrease the risks to a lender associated with changes in interest rates
        but
        involve other risks. As interest rates rise, the periodic payment by the
        borrower rises to the extent permitted by the terms of the loan, and the
        increased periodic payment increases the potential for default. At the same
        time, for secured loans, the marketability of the underlying collateral may
        be
        adversely affected by higher interest rates. In a declining interest rate
        environment, there is likely to be an increase in prepayment activity on
        loans
        as the borrowers refinance their loans at lower interest rates. Under these
        circumstances, the Company’s results of operations could be negatively impacted.
 
 Changes
        in interest rates also can affect the value of loans, investments and other
        interest-rate sensitive assets and the Company’s ability to realize gains on the
        sale or resolution of assets. This type of income can vary significantly
        from
        quarter-to-quarter and year-to-year based on a number of different factors,
        including the interest rate environment. An increase in interest rates that
        adversely affects the ability of borrowers to pay the principal or interest
        on
  14
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 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.
 
  15
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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.
  16
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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 and certain of its
        Affiliate Banks have in the past been subject to such corrective action 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 Note 3 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 and its debt service
        obligations is dividends received from the subsidiary Banks. Banking regulations
        limit the amount of dividends that may be paid without prior approval of
        regulatory agencies. Under these regulations, the amount of 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 in Note 21 to the consolidated financial
        statements. During 2007 the Banks could, without prior approval, declare
        dividends of approximately $3.2 million plus any 2007 net profits retained
        to
        the date of the dividend declaration.
  17
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **Allowance
        for Loan Losses May Be Insufficient**
 
 Premier,
        through the Affiliate Banks, maintains an allowance for loan losses based
        on,
        among other things, national and regional economic conditions, historical
        loss
        experience, evaluations of potential losses on identified problem loans and
        delinquency trends. Premier believes that its allowance for loan losses is
        maintained at a level adequate to absorb any probable losses in its loan
        portfolio given the current information known to Management. These
        determinations are based upon estimates that are inherently subjective, and
        their accuracy depends on the outcome of future events. Therefore, Premier
        cannot predict loan losses with certainty and ultimate losses may differ
        from
        current estimates. Depending on changes in economic, operating and other
        conditions, including changes in interest rates, which are generally beyond
        its
        control, Premier’s actual losses could exceed its current allowance estimates.
        Premier can provide no assurance that its allowance is sufficient to cover
        all
        charge-offs in future periods. If charge-offs exceed Premier’s allowance, its
        earnings would decrease. In addition, regulatory agencies review Premier’s
        allowance for loan losses and may require additions to the allowance based
        upon
        their judgment about information available to them at the time of their
        examination. A required increase in Premier’s allowance for loan losses could
        reduce its earnings.
 
 **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.
  18
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **Item
        1B. Unresolved Staff Comments**
 
 None.
 
 **Item
        2. Properties**
 
 The
        Company leases its principal executive offices located in Huntington, West
        Virginia. The Company also owns property located at 104 Jefferson Street,
        Brooksville, Kentucky, which serves as a branch for Citizen's Deposit Bank.
        Except as noted, each of the Banks owns the real property and improvements
        on
        which their banking activities are conducted.
 
 Citizens
        Deposit Bank & Trust, in addition to its main office at 400 Second Street in
        Vanceburg, Kentucky, has four branch offices in Lewis County, Kentucky,
        (including one leased facility), one leased branch office in Mason County,
        Kentucky, one branch located on Highway 10 in Germantown, Kentucky, and one
        branch located in Bracken County, Kentucky. Farmers Deposit Bank, in addition
        to
        its main office at 5230 South Main Street in Eminence, Kentucky, has 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.
 
 
 **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.
  19
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **PART
        II**
 
 **Item
        5. Market for Registrant's Common Equity and Related Stockholder
        Matters**
 
 The
        Company's common stock is listed on the NASDAQ Global Market System under
        the
        symbol PFBI. At December 31, 2006, the Company had approximately 623 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
              
              Low2005First
                  Quarter
              
              $
              -
              
              $
              12.75
              
              $
              10.78Second
                  Quarter
              
              
              -
              
              
              13.00
              
              
              10.00Third
                  Quarter
              
              
              -
              
              
              14.93
              
              
              11.90Fourth
                  Quarter
              
              
              -
              
              
              15.98
              
              
              12.662006First
                  Quarter
              
              $
              -
              
              $
              16.44
              
              $
              14.01Second
                  Quarter
              
              
              -
              
              
              16.50
              
              
              13.25Third
                  Quarter
              
              
              0.05
              
              
              15.40
              
              
              13.90Fourth
                  Quarter
              
              
              0.05
              
              
              14.90
              
              
              13.400.102007First
                  Quarter (through March 15, 2007)
              
              $
              0.10
              
              $
              16.47
              
              $
              13.36
 
 
 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, 2006
        approximately $3.2 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.
   20
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **Stock
        Performance Graph**
 
 The
        following Stock Performance Graph and related information shall not be deemed
        “soliciting material” or to be “filed” with the Securities and Exchange
        Commission, nor shall such information be incorporated by reference into
        any
        future filing under the Securities Act of 1933 or Securities Exchange Act
        of
        1934, each as amended, except to the extent that Premier specifically
        incorporates it by reference into such filing.
 
 The
        following graph shows a comparison of cumulative total stockholder return
        on the
        Common Stock since December 31, 2001 with the cumulative total returns of
        both a
        broad equity market index and a published industry index. The broad equity
        market index chosen was the Russell 3000 and the published industry index
        chosen
        was the SNL ($500M-$1B) Bank Asset-Size Index. The graph reflects historical
        performance only, which is not indicative of possible future performance
        of the
        Common Stock.
 
 
  ***Period
                  Ending******Index***
              
              
              **12/31/01**
              
              
              **12/31/02**
              
              
              **12/31/03**
              
              
              **12/31/04**
              
              
              **12/31/05**
              
              
              **12/31/06**Premier
                  Financial Bancorp, Inc.
              
              
              100.00
              
              
              92.77
              
              
              102.29
              
              
              148.80
              
              
              192.53
              
              
              170.70Russell
                  3000
              
              
              100.00
              
              
              78.46
              
              
              102.83
              
              
              115.11
              
              
              122.16
              
              
              141.35SNL
                  $500M-$1B Bank Index
              
              
              100.00
              
              
              127.67
              
              
              184.09
              
              
              208.62
              
              
              217.57
              
              
              247.44**Source:
                  SNL Financial LC, Charlottesville, VA*
  21
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **Equity
        Compensation Plan Information**
 
 The
        following table gives information about the Company’s common stock that may be
        issued upon the exercise of options, warrants and rights under its two equity
        compensation plans, the 1996 Stock Option Plan and the 2002 Stock Option
        Plan,
        as of December 31, 2006.
 
 Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
                
                (a)
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
                
                (b)
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (Excluding securities reflected in column
                  (a))
                
                (c)Equity
                  compensation plans approved by shareholders1996
                  Stock Option Plan
              
              
              11,000
              
              $
              16.50
              
              
              02002
                  Stock Option
                  Plan
              
              
              109,248
              
              
              11.82
              
              
              386,083Equity
                  compensation plans not approved by shareholdersNoneTotal
              
              
              120,248
              
              $
              12.25
              
              
              386,083
 
  22
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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 312006
              
              2005
              
              2004
              
              2003(4)
              
              2002EarningsNet
                  interest income
              
              $
              21,395
              
              $
              19,852
              
              $
              18,064
              
              $
              19,182
              
              $
              20,838Provision
                  for loan losses
              
              
              (1,161
              )
              
              4
              
              
              1,026
              
              
              20,513
              
              
              9,453Non-interest
                  income
              
              
              4,165
              
              
              3,920
              
              
              3,606
              
              
              4,064
              
              
              2,717Non-interest
                  expense
              
              
              16,937
              
              
              17,305
              
              
              17,782
              
              
              17,632
              
              
              17,831Income
                  taxes (benefit)
              
              
              3,283
              
              
              2,029
              
              
              899
              
              
              (5,282
              )
              
              (1,522
              )Income
                  (loss) fromcontinuing
                  operations
              
              
              6,501
              
              
              4,434
              
              
              1,963
              
              
              (9,617
              )
              
              (2,207
              )Income
                  (loss) fromdiscontinued
                  operations
              
              
              -
              
              
              -
              
              
              4,734
              
              
              (80
              )
              
              (1,130
              )Net
                  income (loss)
              
              $
              6,501
              
              $
              4,434
              
              $
              6,697
              
              $
              (9,697
              )
              $
              (3,337
              )Financial
                  PositionTotal
                  assets of continuingoperations
              
              $
              535,452
              
              $
              528,324
              
              $
              537,255
              
              $
              543,229
              
              $
              590,868Total
                  assets of discontinuedoperations
              
              
              -
              
              
              -
              
              
              -
              
              
              79,163
              
              
              84,406Loans,
                  net of unearned income
              
              
              343,797
              
              
              328,717
              
              
              324,937
              
              
              331,794
              
              
              373,099Allowance
                  for loan losses
              
              
              6,661
              
              
              7,892
              
              
              9,384
              
              
              14,300
              
              
              9,698Goodwill
                  and other intangibles
              
              
              15,816
              
              
              15,816
              
              
              15,816
              
              
              15,816
              
              
              15,816Securities
              
              
              121,367
              
              
              137,419
              
              
              153,892
              
              
              147,646
              
              
              144,698Deposits
              
              
              438,950
              
              
              435,843
              
              
              437,798
              
              
              455,474
              
              
              477,724Other
                  borrowings
              
              
              33,091
              
              
              19,053
              
              
              20,536
              
              
              18,307
              
              
              32,600Subordinated
                  debentures
              
              
              -
              
              
              15,722
              
              
              20,876
              
              
              26,546
              
              
              29,639Stockholders’
                  equity
              
              
              61,002
              
              
              54,287
              
              
              51,029
              
              
              45,540
              
              
              56,124Share
                  DataIncome
                  (loss) from continuingoperations
                  - basic
              
              $
              1.24
              
              $
              0.85
              
              $
              0.37
              
              $
              (1.84
              )
              $
              (0.42
              )Income
                  (loss) from continuingoperations
                  - diluted
              
              
              1.24
              
              
              0.84
              
              
              0.37
              
              
              (1.84
              )
              
              (0.42
              )Net
                  income - basic
              
              
              1.24
              
              
              0.85
              
              
              1.28
              
              
              (1.85
              )
              
              (0.64
              )Net
                  income - diluted
              
              
              1.24
              
              
              0.84
              
              
              1.28
              
              
              (1.85
              )
              
              (0.64
              )Book
                  value
              
              
              11.65
              
              
              10.37
              
              
              9.75
              
              
              8.70
              
              
              10.73Cash
                  dividends
              
              
              0.10
              
              
              0.00
              
              
              0.00
              
              
              0.00
              
              
              0.00
  23
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **Item
        6. Selected Financial Data** (continued)
 
 (Dollars
                  in thousands, except per share amounts)
              
              At
                  or for the Year Ended December 312006
              
              2005
              
              2004
              
              2003(4)
              
              2002Return
                  on average assets (1), (2)
              
              
              1.21
              %
              
              0.82
              %
              
              0.36
              %
              
              (1.66
              )%
              
              (0.37
              )%Return
                  on average equity (2)
              
              
              11.31
              %
              
              8.42
              %
              
              4.06
              %
              
              (18.46
              )%
              
              (3.77
              )%Dividend
                  payout (2)
              
              
              8.06
              %
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %
              
              0.00
              %Stockholders’
                  equity to totalassets
                  at period-end (3)
              
              
              11.39
              %
              
              10.28
              %
              
              9.50
              %
              
              8.38
              %
              
              9.50
              %Average
                  stockholders’ equity
                to
                  average total assets (1)
              
              
              10.74
              %
              
              9.77
              %
              
              8.23
              %
              
              7.88
              %
              
              8.44
              %(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
                (4)
                  As previously disclosed in earlier reports, a 2003
                  investigation into the conduct of the former president of
                  Farmers Deposit Bank by Premier and the FDIC, resulted in the
                  charge-off of 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. See “Regulatory
                  Matters” in item 1 - Description of Business above and Premier’s earlier
                  SEC filings for additional details.
 
  24
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 **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 $77 million to $151 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", 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. On June 27, 2006, Premier merged its
        inactive data processing subsidiary into the parent company. 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, 2006, Premier had approximately $535 million in
        total
        assets, $344 million in total loans, $439 million in total deposits and $13
        million in customer repurchase agreements.
 
 The
        accompanying consolidated financial statements have been prepared by the
        management of Premier in conformity with accounting principles generally
        accepted in the United States of America. The audit committee of the Board
        of
        Directors engaged Crowe Chizek and Company LLC (Crowe) as independent auditors
        to audit the consolidated financial statements, and their report is included
        elsewhere herein. Financial information appearing throughout this annual
        report
        is consistent with that reported in the consolidated financial statements.
        The
        following discussion is designed to assist readers of the consolidated financial
        statements in understanding significant changes in Premier's financial condition
        and results of operations.
  Management's
        objective of a fair presentation of financial information is achieved through
        a
        system of internal accounting controls. The financial control system of Premier
        is designed to provide reasonable assurance that assets are safeguarded from
        loss and that transactions are properly authorized and recorded in the financial
        records. As an integral part of that financial control system, the audit
        committee of the Board of Directors engaged an audit
  25
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 firm
        other than Crowe to perform internal audits of the financial records of each
        of
        the subsidiaries on a periodic basis in 2004. 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. The words “may,”
“could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,”
“expect,” “intend,” “plan,” “project,” “predict,” “continue” and similar
        expressions are intended to identify forward-looking statements.
 
 
 **CRITICAL
        ACCOUNTING POLICIES**
 
 ***General***
  The
        financial
        condition and results of operations presented in the Consolidated Financial Statements, accompanying
Notes to the Consolidated
        Financial Statements and
        management's discussion and analysis are, to a large degree, dependent upon
        our
        accounting policies. The selection and application of these accounting policies
        involve judgments, estimates, and uncertainties that are susceptible to
        change.
 
 Presented
        below is a discussion of those accounting policies that management believes
        are
        the most important to the presentation and understanding of our financial
        condition and results of operations. These critical accounting policies require
        management's most difficult, subjective and complex judgments about matters
        that
        are inherently uncertain. In the event that
  26
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 different
        assumptions or conditions were to prevail, and depending upon the severity
        of
        such changes, the possibility of materially different financial condition
        or
        results of operations is a reasonable likelihood. See also Note 1 of the accompanying consolidated financial statements
        presented elsewhere in this annual report.
 
 ***Allowance
        for Loan Losses***
  The
        Company
        monitors and maintains an allowance for loan losses to absorb an estimate
        of
        probable incurred losses inherent in the loan portfolio. The Company maintains
        policies and procedures that address the systems of control over the following
        areas of maintenance of the allowance: the systematic methodology used to
        determine the appropriate level of the allowance to provide assurance that
        the
        allowance for loan losses is maintained in accordance with accounting principles
        generally accepted in the United States of America; the accounting policies
        for
        loan charge-offs and recoveries; the assessment and measurement of impairment
        in
        the loan portfolio; and the loan grading system.
 
 The
        Company evaluates various loans individually for impairment as required by
        Statement of Financial Accounting Standard (SFAS) No. 114, Accounting by
        Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors
        for Impairment of a Loan - Income Recognition and Disclosures. Loans evaluated
        individually for impairment include non-performing loans, such as loans on
        non-accrual, loans past due 90 days or more, restructured loans and other
        loans
        selected by management including loans graded as substandard or doubtful
        by the
        internal credit review process. The evaluations are based upon discounted
        expected cash flows or collateral valuations. If the evaluation shows that
        a
        loan is individually impaired, then a specific reserve is established for
        the
        amount of impairment. If a loan evaluated individually is not impaired, then
        the
        loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies
        (SFAS 5), with a group of loans that have similar characteristics.
 
 For
        loans without individual measures of impairment, the Company makes estimates
        of
        losses for groups of loans as required by SFAS 5. Loans are grouped by similar
        characteristics, including the type of loan, the assigned loan grade and
        the
        general collateral type. A loss rate reflecting the expected loss inherent
        in a
        group of loans is derived based upon estimates of default rates for a given
        loan
        grade, the predominant collateral type for the group and the terms of the
        loan.
        The resulting estimate of losses for groups of loans is adjusted for relevant
        environmental factors and other conditions of the portfolio of loans, including:
        borrower and industry concentrations; levels and trends in delinquencies,
        charge-offs and recoveries; changes in underwriting standards and risk
        selection; level of experience, ability and depth of lending management;
        and
        national and local economic conditions.
 
 The
        amount of estimated impairment for individually evaluated loans and groups
        of
        loans is added together for a total estimate of probable incurred loan losses.
        This estimate of
  27
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 losses
        is compared to the allowance for loan losses of the Company as of the evaluation
        date and, if the estimate of losses exceeds the allowance, an additional
        provision to the allowance would be made. If the estimate of losses is less
        than
        the allowance, the degree to which the allowance exceeds the estimate is
        evaluated to determine whether the allowance falls outside a range of estimates.
        If the estimate of losses were below the range of reasonable estimates, the
        allowance would be reduced by way of a credit to the provision for loan losses.
        The Company recognizes the inherent imprecision in estimates of losses due
        to
        various uncertainties and variability related to the factors used, and therefore
        a reasonable range around the estimate of losses is derived and used to
        ascertain whether the allowance is too high. If different assumptions or
        conditions were to prevail and it is determined that the allowance is not
        adequate to absorb the new estimate of probable incurred losses, an additional
        provision for loan losses would be made, which amount may be material to
        the
        Consolidated Financial Statements.
 
 ***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
        unrealized losses in the investment portfolio. 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. Changes in these assumptions
        could
        impact the carrying value of deferred tax assets and require a charge to
        tax
        expense.
  28
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 **SUMMARY
        FINANCIAL RESULTS**
 
 Premier
        had net income from continuing operations of $6.501 million in 2006 compared
        to
        a $4.434 million of net income from continuing operations reported for the
        year
        2005. Net income increased in 2006 as a result of an increase in interest
        income
        due to a greater volume of loans outstanding; higher yields on all earning
        assets; a negative provision for loan losses; and a reduction in the net
        operating costs of the company. Net income from continuing operations in
        2004
        was $1.963 million. The increase in 2005 over 2004 was the 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. Basic earnings per share from
        continuing operations were $1.24 in 2006 compared to $0.85 in 2005 and to
        $0.37
        in 2004.
 
 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 2006 resulted
        in an ROA of 1.21%, an increase over the 0.82% ROA in 2005 and the 0.36%
        ROA
        reported in 2004. As shown in the table, fully taxable equivalent net interest
        income (as a percent of average earning assets) again reached its highest
        level
        in five years in 2006 at 4.32%. The previous five year high was earned 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 a significantly reduced
        net credit income in 2002 and negative net credit income in 2003. In 2004,
        net
        credit income was once again positive and continued to increase in both 2005
        and
        again in 2006. In 2005, minimal provisions for loan losses were recorded
        and
        thus there was little reduction from net interest income. In 2006, negative
        provisions for loan losses were recorded which served to increase net credit
        income to 4.56%. 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 two years. As illustrated in the table, Premier's 2006 fully
        taxable net interest income as a percent of average earning assets was up
        to
        4.32% from the 4.00% recorded in 2005 as the yield on loans and investments
        increased in 2006 at a faster rate than the rates paid on interest bearing
        liabilities. The curtailment of interest expense growth was partially due
        to the
        early extinguishment of Premier’s junior subordinated debentures and other
        borrowed funds late in 2004 and throughout 2005 and 2006.
 
  29
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 
 **ANALYSIS
                  of RETURN ON ASSETS and EQUITY**from
                  continuing operations2006
              
              2005
              
              2004
              
              2003(1)
              
              2002As
                  a percent of average earning assetsFully
                  taxable-equivalent net interest income
              
              
              4.32
              %
              
              4.00
              %
              
              3.61
              %
              
              3.63
              %
              
              3.84
              %Provision
                  for loan losses
              
              
              0.23
              
              
              (0.00
              )
              
              (0.20
              )
              
              (3.81
              )
              
              (1.70
              )Net
                  credit income
              
              
              4.55
              
              
              4.00
              
              
              3.41
              
              
              (0.18
              )
              
              2.14Gains
                  on the sales of assets & subsidiaries
              
              
              0.00
              
              
              0.00
              
              
              0.02
              
              
              0.11
              
              
              (0.01
              )Non-interest
                  income
              
              
              0.84
              
              
              0.78
              
              
              0.69
              
              
              0.62
              
              
              0.50Non-interest
                  expense
              
              
              (3.40
              )
              
              (3.46
              )
              
              (3.52
              )
              
              (3.26
              )
              
              (3.21
              )Tax
                  equivalent adjustment
              
              
              (0.03
              )
              
              (0.03
              )
              
              (0.03
              )
              
              (0.07
              )
              
              (0.08
              )Applicable
                  income taxes
              
              
              (0.66
              )
              
              (0.41
              )
              
              (0.18
              )
              
              0.98
              
              
              0.27Return
                  on average earning assets
              
              
              1.30
              
              
              0.88
              
              
              0.39
              
              
              (1.79
              )
              
              (0.40
              )Multiplied
                  by average earning assets to
                average
                  total assets
              
              
              93.07
              
              
              92.84
              
              
              92.39
              
              
              92.86
              
              
              92.34**Return
                  on average assets**
              
              
              **1.21**
              **%**
              
              **0.82**
              **%**
              
              **0.36**
              **%**
              
              **(1.66**
              **)%**
              
              **(0.37**
              **)%**Multiplied
                  by average assets to
                average
                  equity
              
              
              9.31X
              
              
              10.23X
              
              
              11.33X
              
              
              11.13X
              
              
              10.26X**Return
                  on average equity**
              
              
              **11.31**
              **%**
              
              **8.42**
              **%**
              
              **4.06**
              **%**
              
              **(18.46**
              **)%**
              
              **(3.77**
              **)%**(1)
                  See footnote (4) of the Selected Financial Data
                  table in Item 6 above.
  The
        net
        overhead ratio (non-interest expense less non-interest income as a percent
        of
        average earning assets) decreased in 2006 to 2.56%, the lowest ratio reported
        in
        the last five years. This ratio compares to 2.68% in 2005, 2.83% in 2004
        and
        2.64% in 2003. The decrease in 2006 net overhead was the result of increases
        in
        Premier’s non-interest income related to service charges on deposit accounts,
        electronic banking income and secondary market mortgage commissions, plus
        decreases in non-interest expenses related to occupancy and equipment costs,
        net
        OREO expenses, recoveries of bad check losses, and conversion costs incurred
        in
        2005. The decrease in 2005 net overhead was similarly the result of increases
        in
        Premier’s non-interest income related to service charges on deposit accounts,
        electronic banking income and secondary market mortgage commissions plus
        a
        significant decrease in professional fee expense.
 
 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
        2006 ROE was 11.31% compared to 8.42% in 2005 and 4.06% realized in 2004.
        ROE
        increased primarily due to the increase in net income reported in 2006 versus
        2005 and 2004.
 
  30
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 A
        breakdown of Premier's financial results by quarter for the years ended December
        31, 2006 and 2005 is summarized below.
  **QUARTERLY
                  FINANCIAL INFORMATION**(Dollars
                  in thousands, except per share amounts)First
              
              Second
              
              Third
              
              Fourth
              
              Full
                  Year**2006**Interest
                  income
              
              $
              7,676
              
              $
              8,014
              
              $
              8,248
              
              $
              8,462
              
              $
              32,400Interest
                  expense
              
              
              2,472
              
              
              2,654
              
              
              2,871
              
              
              3,008
              
              
              11,005Net
                  interest income
              
              
              5,204
              
              
              5,360
              
              
              5,377
              
              
              5,454
              
              
              21,395Provision
                  for loan losses
              
              
              (194
              )
              
              (819
              )
              
              (38
              )
              
              (110
              )
              
              (1,161
              )Securities
                  gains
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Net
                  overhead
              
              
              3,348
              
              
              3,161
              
              
              3,196
              
              
              3,067
              
              
              12,772Income
                  before income taxes
              
              
              2,050
              
              
              3,018
              
              
              2,219
              
              
              2,497
              
              
              9,784Net
                  income
              
              
              1,367
              
              
              2,000
              
              
              1,475
              
              
              1,659
              
              
              6,501Basic
                  net income per share
              
              
              0.26
              
              
              0.38
              
              
              0.28
              
              
              0.32
              
              
              1.24Diluted
                  net income per share
              
              
              0.26
              
              
              0.38
              
              
              0.28
              
              
              0.32
              
              
              1.24Dividends
                  paid per share
              
              
              0.00
              
              
              0.00
              
              
              0.05
              
              
              0.05
              
              
              0.10**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
              
              
              6,463Net
                  income
              
              
              803
              
              
              727
              
              
              1,367
              
              
              1,537
              
              
              4,434Basic
                  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
 
 **SALE
        OF 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.
  31
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 **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, 2006, is provided in the
        table
        below.
 
 
  32
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 **AVERAGE
                  CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME
                  ANALYSIS**(Dollars
                  in thousands)2006
              
              2005
              
              2004Average
                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
              
              $
              95,705
              
              $
              3,398
              
              
              3.55
              %
              $
              107,177
              
              $
              3,278
              
              
              3.06
              %
              $
              112,260
              
              $
              3,117
              
              
              2.78
              %States
                  and municipalobligations
                  (1)
              
              
              2,342
              
              
              138
              
              
              5.89
              
              
              2,666
              
              
              153
              
              
              5.74
              
              
              4,941
              
              
              338
              
              
              6.84Mortgage
                  backed securities
              
              
              33,953
              
              
              1,564
              
              
              4.61
              
              
              37,050
              
              
              1,583
              
              
              4.27
              
              
              29,803
              
              
              1,183
              
              
              3.97Other
                  securities
              
              
              3,179
              
              
              182
              
              
              5.73
              
              
              3,089
              
              
              148
              
              
              4.79
              
              
              3,216
              
              
              138
              
              
              4.29Total
                  investment securities
              
              
              135,179
              
              
              5,282
              
              
              3.91
              
              
              149,982
              
              
              5,162
              
              
              3.44
              
              
              150,220
              
              
              4,776
              
              
              3.18Federal
                  funds sold
              
              
              24,365
              
              
              1,215
              
              
              4.99
              
              
              23,083
              
              
              745
              
              
              3.23
              
              
              29,369
              
              
              380
              
              
              1.29Interest-bearing
                  depositswith
                  banks
              
              
              486
              
              
              24
              
              
              4.94
              
              
              436
              
              
              12
              
              
              2.75
              
              
              256
              
              
              6
              
              
              2.57Loans,
                  net of unearnedincome
                  (4)(5)Commercial
              
              
              161,898
              
              
              12,424
              
              
              7.67
              
              
              147,398
              
              
              10,291
              
              
              6.98
              
              
              132,785
              
              
              8,913
              
              
              6.71Real
                  estate mortgage
              
              
              129,944
              
              
              9,271
              
              
              7.13
              
              
              132,527
              
              
              9,236
              
              
              6.97
              
              
              145,387
              
              
              10,182
              
              
              7.00Installment
              
              
              46,494
              
              
              4,334
              
              
              9.32
              
              
              46,690
              
              
              4,083
              
              
              8.74
              
              
              47,438
              
              
              4,029
              
              
              8.49Total
                  loans
              
              
              338,336
              
              
              26,029
              
              
              7.69
              
              
              326,615
              
              
              23,610
              
              
              7.23
              
              
              325,610
              
              
              23,124
              
              
              7.10Total
                  interest earning assets
              
              
              498,366
              
              
              32,550
              
              
              6.53
              
              
              500,116
              
              
              29,529
              
              
              5.90
              
              
              505,455
              
              
              28,286
              
              
              5.60Allowance
                  for loan losses
              
              
              (7,465
              )
              
              
              
              
              
              
              
              (8,998
              )
              
              
              
              
              
              
              
              (11,413
              )Cash
                  and due from banks
              
              
              13,824
              
              
              
              
              
              
              
              
              13,619
              
              
              
              
              
              
              
              
              13,837Premises
                  and equipment
              
              
              7,055
              
              
              
              
              
              
              
              
              7,256
              
              
              
              
              
              
              
              
              7,738Other
                  assets
              
              
              23,688
              
              
              
              
              
              
              
              
              26,697
              
              
              
              
              
              
              
              
              31,490Assets
                  of discontinuedoperations
              
              
              -
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              39,762Total
                  assets
              
              $
              535,468
              
              
              
              
              
              
              
              $
              538,690
              
              
              
              
              
              
              
              $
              586,869**Liabilities
                  and Equity:**Interest
                  bearing liabilitiesNOW
                  and money market
              
              $
              129,080
              
              
              1,766
              
              
              1.37
              %
              $
              142,501
              
              
              1,409
              
              
              0.99
              %
              $
              158,169
              
              
              1,290
              
              
              0.82
              %Savings
                  deposits
              
              
              52,295
              
              
              321
              
              
              0.61
              
              
              59,365
              
              
              412
              
              
              0.69
              
              
              62,518
              
              
              521
              
              
              0.83Certificates
                  of deposit andother
                  time deposits
              
              
              188,044
              
              
              6,896
              
              
              3.67
              
              
              174,057
              
              
              4,904
              
              
              2.82
              
              
              164,932
              
              
              4,455
              
              
              2.70Total
                  interest bearing deposits
              
              
              369,419
              
              
              8,983
              
              
              2.43
              
              
              375,923
              
              
              6,725
              
              
              1.79
              
              
              385,619
              
              
              6,266
              
              
              1.62Short-term
                  borrowings
              
              
              9,591
              
              
              234
              
              
              2.44
              
              
              8,422
              
              
              180
              
              
              2.14
              
              
              6,539
              
              
              118
              
              
              1.80Other
                  borrowings
              
              
              7,765
              
              
              574
              
              
              7.39
              
              
              1,586
              
              
              14
              
              
              0.88
              
              
              5,306
              
              
              248
              
              
              4.67FHLB
                  advances
              
              
              7,815
              
              
              453
              
              
              5.80
              
              
              8,775
              
              
              499
              
              
              5.69
              
              
              9,955
              
              
              556
              
              
              5.59Debentures
              
              
              7,887
              
              
              760
              
              
              9.64
              
              
              20,480
              
              
              2,129
              
              
              10.40
              
              
              25,397
              
              
              2,869
              
              
              11.30Total
                  interest-bearing liabilities
              
              
              402,477
              
              
              11,004
              
              
              2.73
              %
              
              415,186
              
              
              9,547
              
              
              2.30
              %
              
              432,816
              
              
              10,057
              
              
              2.32
              %Non-interest
                  bearing deposits
              
              
              72,781
              
              
              
              
              
              
              
              
              66,848
              
              
              
              
              
              
              
              
              62,486Other
                  liabilities
              
              
              2,721
              
              
              
              
              
              
              
              
              4,007
              
              
              
              
              
              
              
              
              7,393Liabilities
                  of discontinuedoperations
              
              
              -
              
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              
              35,876Shareholders’
                  equity
              
              
              57,489
              
              
              
              
              
              
              
              
              52,649
              
              
              
              
              
              
              
              
              48,298Total
                  liabilities and equity
              
              $
              535,468
              
              
              
              
              
              
              
              $
              538,690
              
              
              
              
              
              
              
              $
              586,869**Net
                  interest earnings**(1)
              
              
              
              
              $
              21,546
              
              
              
              
              
              
              
              $
              19,982
              
              
              
              
              
              
              
              $
              18,229**Net
                  interest spread**(1)
              
              
              
              
              
              
              
              
              3.80
              %
              
              
              
              
              
              
              
              3.60
              %
              
              
              
              
              
              
              
              3.28
              %**Net
                  interest margin**(1)
              
              
              
              
              
              
              
              
              4.32
              %
              
              
              
              
              
              
              
              4.00
              %
              
              
              
              
              
              
              
              3.61
              %(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
 33
 **Table
              of
              Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 In
        2006, average earning assets declined by 0.3% or $1.8 million from 2005,
        following a 1.0% or $5.3 million decline in 2005 from 2004. Average interest
        bearing liabilities, the primary source of funds supporting the earning assets,
        decreased 3.1% or $12.8 million in 2006 from 2005, which follows a 4.1% or
        $17.6
        million decline in 2005 from 2004. The 2006 decline in average earning assets
        was primarily the result of a $14.8 million decline in average total investment
        securities as some maturing funds were used to fund loans or to continue
        the
        company’s debt reduction strategy. The decline in 2006 average interest bearing
        liabilities was due to a $6.5 million decrease in average interest bearing
        deposits and a $5.8 million decrease in average high cost debt and Federal
        Home
        Loan Bank (FHLB) advances. A portion of the decline in average interest bearing
        deposits was due to the $1.2 million increase in short-term borrowings,
        primarily customer repurchase agreements. Furthermore, nearly all of the
        decrease in average interest bearing deposits was offset by a $5.9 million
        increase in non-interest bearing deposits. The decline in 2005 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. 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 67.9% of average earning assets during 2006. After several
        declining years, average loans increased in 2005 by $1.0 million or 0.3%
        followed by a $11.7 million or 3.6% increase in 2006. The 2006 increase is
        largely attributable to loan growth in Premier’s West Virginia and Ohio markets.
        In 2006, Premier realized a $10.0 million or 6.5% increase in its West Virginia
        markets and a $2.1 million or 4.6% increase in average outstanding loans
        in its
        Ohio markets, while average loans in its Kentucky markets remained virtually
        unchanged. This follows an $11.2 million or 7.7% increase in average loans
        in
        its West Virginia markets in 2005, and a $2.1 million or 4.7% increase in
        loans
        in its Ohio markets in 2005. In 2005, the high level of charge-offs and loan
        collections at Farmers Deposit Bank in Kentucky 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. However, in 2006, average loans
        outstanding at Farmers Deposit decreased by only $571,000 or 1.3% as loan
        charge-offs and payoffs were nearly offset by new loans.
  34
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 Total
        loans at December 31, 2006 increased by $15.1 million or 4.6% from the total
        at
        December 31, 2005. This increase follows a $3.8 million or 1.2% increase
        in 2005
        from total loans at December 31, 2004. The increase in 2006 was the result
        of a
        significant increase in loan demand in Premier’s markets which more than offset
        the $1.4 million of loan charge-offs recorded during the year, (nearly half
        at
        Farmers Deposit). The increase in 2005 was the result of 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.
 
 Loans
        secured by real estate, which in total constituted approximately 73% of
        Premier's loan portfolio at December 31, 2006, 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.
 
  35
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 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 31,2006
              
              %
              
              2005
              
              %
              
              2004
              
              %
              
              2003(2)
              
              %
              
              2002
              
              %Summary
                  of Loans by TypeCommercial,
                  secured by real estate
              
              $
              101,786
              
              
              29.6
              %
              $
              85,989
              
              
              26.2
              %
              $
              101,567
              
              
              31.3
              %
              $
              101,325
              
              
              30.5
              %
              $
              109,571
              
              
              29.3
              %Commercial,
                  other
              
              
              43,981
              
              
              12.8
              
              
              49,362
              
              
              15.0
              
              
              40,923
              
              
              12.6
              
              
              38,063
              
              
              11.5
              
              
              51,347
              
              
              13.8Real
                  estate construction
              
              
              11,303
              
              
              3.3
              
              
              11,070
              
              
              3.4
              
              
              5,906
              
              
              1.8
              
              
              5,414
              
              
              1.6
              
              
              7,318
              
              
              2.0Real
                  estate mortgage
              
              
              138,795
              
              
              40.4
              
              
              134,570
              
              
              40.9
              
              
              128,243
              
              
              39.5
              
              
              126,134
              
              
              38.0
              
              
              134,271
              
              
              36.0Agricultural
              
              
              1,930
              
              
              0.5
              
              
              1,670
              
              
              0.5
              
              
              2,380
              
              
              0.7
              
              
              3,032
              
              
              0.9
              
              
              4,381
              
              
              1.2Consumer
              
              
              42,188
              
              
              12.3
              
              
              42,096
              
              
              12.8
              
              
              44,470
              
              
              13.7
              
              
              56,216
              
              
              17.0
              
              
              63,534
              
              
              17.0Other
              
              
              3,814
              
              
              1.1
              
              
              3,960
              
              
              1.2
              
              
              1,438
              
              
              0.4
              
              
              1,610
              
              
              0.5
              
              
              2,677
              
              
              0.7Total
                  loans
              
              $
              343,797
              
              
              100.0
              %
              $
              328,717
              
              
              100.0
              %
              $
              324,927
              
              
              100.0
              %
              $
              331,794
              
              
              100.0
              %
              $
              373,099
              
              
              100.0
              %Non-performing
                  AssetsNon-accrual
                  loans
              
              $
              4,698
              
              
              
              
              $
              3,751
              
              
              
              
              $
              6,847
              
              
              
              
              $
              11,958
              
              
              
              
              $
              8,197Accruing
                  loans which arecontractually
                  past
                due90days
                  or more
              
              
              992
              
              
              
              
              
              853
              
              
              
              
              
              739
              
              
              
              
              
              4,137
              
              
              
              
              
              1,238Restructured loans
              
              
              1,268
              
              
              
              
              
              1,540
              
              
              
              
              
              238
              
              
              
              
              
              104
              
              
              
              
              
              129Total
                  non-performing andrestructured
                  loans
              
              
              6,958
              
              
              
              
              
              6,144
              
              
              
              
              
              7,824
              
              
              
              
              
              16,199
              
              
              
              
              
              9,564Other
                  real estate acquiredthrough
                  foreclosures
              
              
              495
              
              
              
              
              
              2,049
              
              
              
              
              
              2,247
              
              
              
              
              
              3,187
              
              
              
              
              
              3,505Total
                  non-performing andrestructured
                loansandother
                  real estate
              
              $
              7,453
              
              
              
              
              $
              8,193
              
              
              
              
              $
              10,071
              
              
              
              
              $
              19,386
              
              
              
              
              $
              13,069Non-performing
                  andrestructuredloans
                asa
                  % oftotal
                  loans
              
              
              2.02%
              
              
              
              
              
              1.87%
              
              
              
              
              
              2.41%
              
              
              
              
              
              4.88%
              
              
              
              
              
              2.56%Non-performing
                  andrestructured
                  loans and
                otherreal
                  estate as a % of totalassets
                  (1)
              
              
              1.39%
              
              
              
              
              
              1.55%
              
              
              
              
              
              1.87%
              
              
              
              
              
              3.57%
              
              
              
              
              
              2.21%Allocation
                  of Allowance for Loan LossesCommercial, other
              
              $
              839
              
              
              14.4
              %
              $
              1,071
              
              
              16.7
              %
              $
              1,734
              
              
              13.7
              %
              $
              4,166
              
              
              12.9
              %
              $
              2,294
              
              
              15.7
              %Real estate, construction
              
              
              117
              
              
              3.3
              
              
              134
              
              
              3.4
              
              
              83
              
              
              1.8
              
              
              662
              
              
              1.6
              
              
              632
              
              
              2.0Real estate, other
              
              
              3,395
              
              
              70.0
              
              
              3,810
              
              
              67.1
              
              
              4,276
              
              
              70.8
              
              
              4,886
              
              
              68.5
              
              
              4,341
              
              
              65.3Consumer installment
              
              
              521
              
              
              12.3
              
              
              772
              
              
              12.8
              
              
              1,255
              
              
              13.7
              
              
              2,478
              
              
              17.0
              
              
              977
              
              
              17.0Unallocated
              
              
              1,789
              
              
              
              
              
              2,105
              
              
              
              
              
              2,036
              
              
              
              
              
              2,108
              
              
              
              
              
              1,454Total
              
              $
              6,661
              
              
              100.0
              %
              $
              7,892
              
              
              100.0
              %
              $
              9,384
              
              
              100.0
              %
              $
              14,300
              
              
              100.0
              %
              $
              9,698
              
              
              100.0
              %(1)
                  From continuing operations
                (2)
                  See footnote (4) of the Selected Financial Data
                  table in Item 6 above.
 
  36
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 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 19 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 $7.5
        million
        or 1.39% of total assets of continuing operations at year-end 2006. The amount
        continues to decline from the $8.2 million, or 1.55% of total assets of
        continuing operations at year-end 2005, and is down significantly from the
        $10.1
        million of non-performing assets (1.87% of total assets of continuing
        operations) at year-end 2004. The decrease in 2006 was largely due to the
        $1.6
        million reduction in OREO property, which was partially offset by an increase
        in
        non-accrual loans. As the collection or rehabilitation of previously delinquent
        loans and charge-offs of loans determined to be uncollectible continued in
        2006,
        these efforts were offset by other loans newly placed on non-accrual status.
        Management believes the estimated potential losses related to these newly
        delinquent loans to be adequately provided for in the allowance for loan
        losses.
        These losses were also included in the analyses that supported the recording
        of
        negative loan loss provisions during 2006. The decrease in non-performing
        assets
        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. 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
        2002 to the end of 2006, primarily related to the sale of OREO properties
        and
        the decline in non-accrual loans and loans 90+ days past due. Premier's efforts
        at its other affiliate banks in 2003 and 2004 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. At December
        31,
        2005, the non-performing assets at Farmers Deposit Bank had declined even
        further to $4.7 million. And by December 31, 2006, the non-performing assets
        at
        Farmers Deposit bank totaled $3.6 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.
  37
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 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, 2006. For real estate loans, upon
        repossession, the balance of the loan is transferred to "Other Real Estate
        Owned" (OREO) and carried at the lower of the outstanding loan balance or
        the
        fair value of the property based on current appraisals and other current
        market
        trends less estimated disposal costs. If a writedown of the OREO property
        is
        necessary at the time of foreclosure, the amount is charged against the
        allowance for loan losses. A periodic review of the recorded property value
        is
        performed in conjunction with normal loan reviews, and if market conditions
        indicate that the recorded value exceeds the fair market value less estimated
        disposal costs, additional writedowns of the property value are charged directly
        to operations.
 
 During
        2006 Premier recognized a $105,000 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. During 2004, Premier realized a $123,000
        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 2006, approximately $151,000
        of
        interest was recognized on non-accrual and restructured loans, while
        approximately $348,000 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.
 
  38
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 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 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. All of these events occurred in varying degrees during 2006 and resulted
        in $1,161,000 of negative provisions during the year.
  At
        December
        31, 2006, the allowance for loan losses was $6.7 million or 1.94% of total
        year-end loans. This ratio is a decrease from the prior year’s 2.40% and the
        2.89% at the end of 2004. The decrease in the allowance in 2006 was primarily
        the result of the $1.2 million of negative provisions for loan losses recorded
        during the year, as charge-offs in 2006 were nearly offset by recoveries.
        The
        decrease in 2005 was the result of the charge-off of $2.2 million of loans
        previously identified as impaired partially offset by $719,000 of recoveries.
        Only $4,000 of provision expense was recorded in 2005. 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. In 2006, negative provisions were recorded
        in
        each of the four quarters of the year as Premier realized collections of
        previously impaired loans whereby estimated losses were previously assigned
        to
        the loan as well as recoveries of previously charged-off
  39
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 loans.
        These positive events as well as the ongoing reduction in Premier’s historical
        loss ratios resulted in a lower estimate of the risk of loss in the loan
        portfolio and, thus, negative provisions were warranted. The negative provision
        for loan losses totaled $1.2 million in 2006.
 
 **SUMMARY
                  OF LOAN LOSS EXPERIENCE**(Dollars
                  in thousands)For
                  the Year Ended December 312006
              
              2005
              
              2004
              
              2003(1)
              
              2002Allowance
                  for loan lossesbeginning
                  of period
              
              $
              7,892
              
              $
              9,384
              
              $
              14,300
              
              $
              9,698
              
              $
              7,371Amounts
                  charged off:Commercial,
                  financial and agricultural loans
              
              
              154
              
              
              736
              
              
              1,520
              
              
              4,417
              
              
              4,080Real
                  estate construction loans
              
              
              0
              
              
              0
              
              
              5
              
              
              0
              
              
              833Real
                  estate loans - other
              
              
              863
              
              
              549
              
              
              2,413
              
              
              6,427
              
              
              1,072Consumer
                  installment loans
              
              
              393
              
              
              930
              
              
              3,054
              
              
              5,669
              
              
              1,904Total
                  charge-offs
              
              
              1,410
              
              
              2,215
              
              
              6,992
              
              
              16,513
              
              
              7,889Recoveries
                  on amounts previously charged-off:Commercial,
                  financial and agricultural loans
              
              
              266
              
              
              91
              
              
              264
              
              
              145
              
              
              138Real
                  estate construction loans
              
              
              8
              
              
              1
              
              
              1
              
              
              37
              
              
              16Real
                  estate loans - other
              
              
              340
              
              
              84
              
              
              87
              
              
              74
              
              
              163Consumer
                  installment loans
              
              
              726
              
              
              543
              
              
              698
              
              
              346
              
              
              446Total
                  recoveries
              
              
              1,340
              
              
              719
              
              
              1,050
              
              
              602
              
              
              763Net
                  charge-offs
              
              
              70
              
              
              1,496
              
              
              5,942
              
              
              15,911
              
              
              7,126Provision
                  for loan losses
              
              
              (1,161
              )
              
              4
              
              
              1,026
              
              
              20,513
              
              
              9,453Allowance
                  for loan losses, end of period
              
              $
              6,661
              
              $
              7,892
              
              $
              9,384
              
              $
              14,300
              
              $
              9,698Average
                  total loans
              
              $
              338,336
              
              $
              326,615
              
              $
              325,610
              
              $
              352,156
              
              $
              382,763Total
                  loans at year-end
              
              
              343,797
              
              
              328,717
              
              
              324,927
              
              
              331,794
              
              
              373,099As
                  a percent of average loansNet
                  charge-offs
              
              
              0.02
              %
              
              0.46
              %
              
              1.82
              %
              
              4.52
              %
              
              1.86
              %Provision
                  for loan losses
              
              
              (0.34
              )%
              
              0.00
              %
              
              0.32
              %
              
              5.83
              %
              
              2.47
              %Allowance
                  for loan losses
              
              
              1.97
              %
              
              2.42
              %
              
              2.88
              %
              
              4.06
              %
              
              2.53
              %As
                  a percent of total loans at year-endAllowance
                  for loan losses
              
              
              1.94
              %
              
              2.40
              %
              
              2.89
              %
              
              4.31
              %
              
              2.60
              %As
                  a multiple of net charge-offsAllowance
                  for loan losses
              
              
              95.16X
              
              
              5.28X
              
              
              1.58X
              
              
              0.90X
              
              
              1.36XIncome
                  before tax and provision for loan losses
              
              
              123.19X
              
              
              4.32X
              
              
              0.65X
              
              
              0.35X
              
              
              0.80X(1)
                  See footnote (4) of the Selected Financial Data
                  table in Item 6 above.
 40
 **Table
              of
              Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 Future
        provisions to the allowance for loan losses, positive or negative, will depend
        on future improvement or deterioration in estimated credit risk in the loan
        portfolio as well as whether additional payments are received on loans having
        significant credit risk. T he
        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. The provision for loan losses in 2004 was $1.0
        million and was the result of newly identified impaired loans and increases
        in
        the volume of loans outstanding at the banks located in West Virginia. Premier
        continually evaluates the adequacy of its allowance for loan losses, and
        changes
        in the provision are based on the estimated probable incurred losses in the
        loan
        portfolio.
 
 Net
        charge-offs in 2006 decreased to just $70,000 as a significant volume of
        recoveries nearly offset the level of charge-offs recorded during the year.
        In
        2005 net charge-offs 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 2006, Farmers Deposit Bank recorded
        $249,000 of net recoveries and provided nearly 70% of the Company’s total
        recoveries for 2006. While total charge-offs decreased in 2006, the level
        of
        loans secured by real estate that were charged-off increased by $314,000
        or
        57.2% as collection efforts on a few real estate secured borrowers came to
        their
        ultimate conclusion. All categories of loan charge-offs were down in 2005,
        while
        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, 2006 was 1.94% of total loans outstanding and 96% of
        non-performing loans.
  41
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 The
        following table presents the maturity distribution and interest sensitivity
        of
        selected loan categories at December 31, 2006. Maturities are based upon
        contractual terms.
 
 **LOAN
                  MATURITIES and INTEREST SENSITIVITY****December
                  31, 2006**(Dollars
                  in thousands)Projected
                  Maturities*One
                  Year or Less
              
              One
                  Through Five Years
              
              Over
                Five
                  Years
              
              TotalCommercial,
                  secured by real estate
              
              $
              38,310
              
              $
              51,758
              
              $
              11,718
              
              $
              101,786Commercial,
                  other
              
              
              21,357
              
              
              19,694
              
              
              2,930
              
              
              43,981Real
                  estate construction
              
              
              6,927
              
              
              3,114
              
              
              1,262
              
              
              11,303Agricultural
              
              
              592
              
              
              794
              
              
              544
              
              
              1,930Total
              
              $
              67,186
              
              $
              75,360
              
              $
              16,454
              
              $
              159,000Fixed
                  rate loans
              
              $
              15,065
              
              $
              36,113
              
              $
              4,558
              
              $
              55,736Floating
                  rate loans
              
              
              52,121
              
              
              39,247
              
              
              11,896
              
              
              103,264Total
              
              $
              67,186
              
              $
              75,360
              
              $
              16,454
              
              $
              159,000Fixed
                  rate loans projected to mature after one year
              
              
              
              
              
              
              
              
              
              
              $
              40,671Floating
                  rate loans projected to mature after one year
              
              
              
              
              
              
              
              
              
              
              
              51,143Total
              
              
              
              
              
              
              
              
              
              
              $
              91,814(*)
                  Based on scheduled or approximate repayments
 
  42
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 ***Investment
        Portfolio and***
 ***Other
        Earning Assets***
  Investment
        securities averaged $135.2 million in 2006, down $14.8 million or 9.9% from
        the
        $150.0 million averaged in 2005. This decrease follows two years of average
        investments around $150.0 million. As investments matured in 2006 and 2005
        not
        all funds were reinvested in the investment portfolio. Some funds were used
        to
        satisfy loan growth, deposit withdrawals and debt payments. Furthermore,
        during
        the latter part of 2006, bond reinvestment yields were not as attractive
        as the
        yield on highly liquid federal funds sold and funds from maturing investments
        were less likely to be reinvested in bonds. At December 31, 2006, the amount
        of
        investments totaled $121.4 million, down $16.1 million from December 31,
        2005.
        This follows a $16.5 million decrease in 2005 from the balance at December
        31,
        2004.
 
 The
        following table presents the carrying values of investment
        securities.
 
 **FAIR
                  VALUE OF SECURITIES AVAILABLE FOR SALE**(Dollars
                  in thousands)As
                  of December 312006
              
              2005
              
              2004U.S.
                  Treasury securities
              
              $
              6,401
              
              $
              3,941
              
              $
              250U.S.
                  Agency securities
              
              
              76,911
              
              
              95,300
              
              
              115,514States
                  and political subdivisions
              
              
              3,413
              
              
              2,514
              
              
              2,751Mortgage-backed
                  securities
              
              
              34,617
              
              
              35,639
              
              
              34,942Corporate
                  securities
              
              
              25
              
              
              25
              
              
              435Total
                  securities
              
              $
              121,367
              
              $
              137,419
              
              $
              153,892
 
 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, 2006 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, 2006 was 4 years
        7
        months, lengthened somewhat by the 11 year 3 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 69% of Premier's
        investment securities are U.S. Government agency or Treasury
  43
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 securities
        that have an average maturity of 1 year 8 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 5to the consolidated financial statements.
 
 **SECURITIES
                  MATURITY AND YIELD ANALYSIS****December
                  31, 2006**(Dollars
                  in thousands)Market
                  Value
              
              Average
                  Maturity (yrs/mos)
              
              Taxable
                  Equivalent Yield*U.S.
                  Treasury securitiesWithin
                  one year
              
              $
              994
              
              
              
              
              
              4.44
              %After
                  one but within five years
              
              
              5,407
              
              
              
              
              
              4.36Total
                  U.S. Treasury Securities
              
              
              6,401
              
              
              2/5
              
              
              4.38U.S.
                  Government Agencies securitiesWithin
                  one year
              
              
              26,901
              
              
              
              
              
              3.16After
                  one but within five years
              
              
              50,010
              
              
              
              
              
              4.18Total
                  U.S. Government Agencies securities
              
              $
              76,911
              
              
              1/7
              
              
              3.82States
                  and political subdivisionsWithin
                  one year
              
              
              349
              
              
              
              
              
              4.26After
                  one but within five years
              
              
              964
              
              
              
              
              
              4.93After
                  five but within ten years
              
              
              544
              
              
              
              
              
              4.65Over
                  ten years
              
              
              1,556
              
              
              
              
              
              5.84Total
                  states and political subdivisions securities
              
              $
              3,413
              
              
              6/11
              
              
              5.23Mortgage-backed
                  securities**Within
                  one year
              
              
              3,681
              
              
              
              
              
              3.93After
                  one but within five years
              
              
              1,993
              
              
              
              
              
              5.36After
                  five but within ten years
              
              
              911
              
              
              
              
              
              3.85Over
                  ten years
              
              
              28,032
              
              
              
              
              
              4.68Total
                  mortgage-backed securities
              
              $
              34,617
              
              
              11/3
              
              
              4.62Corporate
                  securities
              
              $
              25Total
                  securities available-for-sale
              
              $
              121,367
              
              
              4/7
              
              
              4.12(*)
                  Fully tax-equivalent using the rate of 34%(**)
                  Maturities for mortgage-backed securities are based on final
                  maturity
  44
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 Premier's
        average investment in federal funds sold and other short-term investments
        increased by 5.6% in 2006. This follows a 21.4% decrease in 2005. Averaging
        $24.4 million in 2006, federal funds sold and other short-term investments
        increased $1.3 million from the $23.1 million averaged in 2005 but were lower
        than the $29.4 million averaged in 2004. The increase in average federal
        funds
        sold in 2006 was the result of retaining available funds to be used in the
        short-term to fund loans or satisfy deposit withdrawals. Furthermore, during
        the
        latter part of 2006, bond investment yields were not as attractive as the
        yield
        on highly liquid federal funds sold and funds from maturing investments were
        less likely to be reinvested in bonds. The decrease in average federal funds
        sold in 2005 from 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. Market rates continued
        to
        increase through 2006. As a result, the average rate paid on interest bearing
        liabilities increased to 2.73% in 2006, up from the 2.30% paid in 2005. The
        43
        basis point increase was primarily the result of an 85 basis point increase
        in
        the average rate paid on certificates of deposit and other time deposits,
        which
        made up 46.7% of the total average interest bearing liabilities in 2006.
        During
        2006, Premier was able to offset some of the increase in rates paid on deposits
        by reducing the interest cost on its long-term debt by refinancing the remaining
        $15.5 million of its 9.75% Trust Preferred Securities as discussed in more
        detail below. In 2005, Premier was able to offset the 17 basis point increase
        in
        the average rate paid on interest bearing deposits by reducing a portion
        of its
        high rate long-term borrowings. 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. 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, remained relatively unchanged in 2006, decreasing by
        $571,000 or 0.1% from 2005 average deposits. The 2006 decrease follows a
        1.2% or
        $5.3 million decrease in 2005 from the average in 2004. While average deposits
        in 2006 remained relatively unchanged in total, the composition of those
        deposits shifted toward non-interest bearing
  45
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 deposits.
        In addition, some public fund and tax-exempt organization deposits were
        reestablished as repurchase agreements in 2006. Average repurchase agreements
        increased by $1.3 million or 16.4% in 2006 when compared to 2005. 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 during
        2005, deposits, on average, increased by 2.2% or $8.0 million. In 2006, average
        deposits at Farmers Deposit Bank declined by $4.7 million, while in Premier’s
        other markets, deposits, on average, increased by $4.2 million or 1.1% during
        2006.
 
 In
        2006, average non-interest bearing deposits continued to increase, surpassing
        2005 average non-interest bearing deposits by $5.9 million or 8.9%. In 2005,
        non-interest bearing deposits increased 7.0% or $4.4 million on average when
        compared to 2004. Since no interest is paid on these deposits, an increase
        in
        non-interest bearing deposits helps to increase Premier's net interest margin
        and its profitability. Non-interest bearing deposits are more susceptible
        to
        withdrawal and therefore may provide challenges to maintaining adequate
        liquidity. (See the additional discussion on liquidity below.) However,
        Premier’s approach to community banking and friendly customer service has
        resulted in increases in average non-interest bearing deposits in each of
        the
        past four years.
 
 In
        2006, average interest bearing deposits decreased by $6.5 million or 1.7%.
        This
        decrease was largely due to the stiff competition for funds in 2006 and high
        rate certificate of deposits “specials” offered by some of Premier’s local
        competition. Some of these “special” rates exceeded the yields that Premier
        could earn by purchasing investments and therefore matching the competitions’
rates would have resulted in reducing Premier’s net interest income. Instead,
        Premier continued to focus on building its base of customer relationships
        by
        offering more convenient electronic banking products to its non-interest
        bearing
        deposit customers. Premier did realize a shift in its interest bearing deposits
        from lower cost savings and interest bearing transaction accounts to
        certificates of deposit as customers moved their funds to take advantage
        of the
        rising interest rates paid on these certificates. The result was a 64 basis
        point increase in the average rate paid on interest bearing deposits in 2006
        versus the 17 basis point increase realized in 2005. 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.
 
  46
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 The
        following table provides information on the maturities of time deposits of
        $100,000 or more at December 31, 2006.
 
 **MATURITY
                  OF TIME DEPOSITS $100,000 OR MORE****December
                  31, 2006**(Dollars
                  in thousands)Maturing
                  3 months or less
              
              $
              11,105Maturing
                  over 3 months
              
              
              11,263Maturing
                  over 6 months
              
              
              19,108Maturing
                  over 12 months
              
              
              12,001Total
              
              $
              53,477
  Other
        funding
        sources for Premier include short and long-term borrowings. Premier's short-term
        borrowings primarily consist of securities sold under agreements to repurchase
        with commercial, public entity and tax exempt organization customers. These
        are
        short-term non-FDIC insured deposit like products that are secured by the
        pledging of investment securities in Premier’s investment portfolio. Also
        included in short-term borrowings are federal funds purchased from other
        banks..
        These short-term borrowings fluctuate depending on near term funding needs
        and
        as part of Premier's management of its asset/liability mix. In 2006, short-term
        borrowings averaged $9.6 million, up $1.2 million or 13.9% from the average
        in
        2005 primarily due to the increase in repurchase agreements discussed above.
        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.
 
 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 10.9% or $960,000 in 2006, following an
        11.9%
        or $1.2 million decrease in 2005. 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 2006 and 2005, Premier made all of its scheduled principal payments and
        took
        advantage of penalty free prepayment opportunities as they became available.
        At
        December 31, 2006, FHLB advances totaled $7.3 million and had repayment
        schedules from four to six years with $4.0 million maturing in 2010.
 
 In
        2006, Premier refinanced the remaining $15.7 million of its 9.75% Junior
        Subordinated Deferrable Interest Debentures ("Subordinated Debentures") that
        were due in 2027. The refinancing was accomplished using two separate bank
        borrowings at the parent company and $2.2 million of cash held by the parent
        in
        its subsidiary banks. On January 31, 2006, Premier borrowed $7.0 million
        from
        First Guaranty Bank in Hammond, Louisiana under a promissory note bearing
        interest floating daily at the “Wall Street Journal” prime rate (currently
        8.25%) and
  47
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 requiring
        monthly principal payments of $50,000 until maturity on September 28, 2017.
        The
        note is secured by a pledge of Premier’s 100% interest in Boone County Bank. The
        proceeds of this note were used to redeem $7.0 million of the Subordinated
        Debentures as of January 31, 2006. On November 10, 2006, Premier borrowed
        $6.5
        million from The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky
        (“Bankers’ Bank”) under a term note bearing interest floating daily at the “Wall
        Street Journal” prime rate minus 1.00% (currently 7.25%) and requiring 83
        monthly principal and interest payments of $100,000 and a final payment of
        any
        balance due at maturity on November 9, 2013. The note is secured by a pledge
        of
        Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. and Premier’s
        100% interest in Farmers-Deposit Bank, Eminence, Kentucky. Also during 2006,
        Premier repaid two $701,000 subordinated notes with a 0% interest rate. For
        more
        information on other borrowings and the subordinated debentures, see Notes 11and 12 to the
        consolidated financial statements.
 
 **PAYMENTS
                  DUE ON CONTRACTUAL OBLIGATIONS****December
                  31, 2006**(Dollars
                  in thousands)Total
              
              Less
                  than one year
              
              1-3
                years
              
              3-5
                years
              
              More
                  than five yearsFederal
                  Home Loan Bank advances
              
              $
              7,285
              
              $
              637
              
              $
              1,375
              
              $
              5,203
              
              $
              70Other
                  borrowed funds
              
              
              12,275
              
              
              1,344
              
              
              2,860
              
              
              3,118
              
              
              4,953Operating
                  lease obligations
              
              
              206
              
              
              138
              
              
              62
              
              
              4
              
              
              2Data
                  and item processing contracts*
              
              
              5,280
              
              
              1,848
              
              
              2,772
              
              
              660
              
              
              0Total
              
              $
              25,046
              
              $
              3,967
              
              $
              7,069
              
              $
              8,985
              
              $
              5,025*
                  Data and item processing contractual obligations are estimated
                  using the
                  average billing for the last three months of
                  2006.
 
 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 2006, the estimated
        payments to Fiserv for these services will be approximately $1,316,000 per
        year
        beginning in 2007. Actual results may vary depending upon the number and
        type of
        accounts actually processed and future customer activity.
 
  48
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 ***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 1.4% 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 0.9% decrease in net interest income if
        interest rates fall by 100 basis points over the next year. Within the same
        time
        frame, but assuming a 200 basis point movement in interest rates, the simulation
        projects that net interest income would increase by 2.6% over the projected
        stable rate net interest income in a rising rate scenario and would decrease
        by
        2.2% in a falling rate scenario. Under both the 100 and 200 basis point
        simulations, the percentage changes in net interest income are within Premier's
        ALCO guidelines.
  The
        model
        simulation calculations of present value have certain acceptable shortcomings.
        The discount rates and prepayment assumptions utilized are based on estimated
        market interest rate levels for similar loans and securities nationwide.
        The
        unique characteristics of Premier's loans and securities may not necessarily
        parallel those assumed in the model simulations, and therefore, actual results
        could likely result in different discount rates, prepayment experiences and
        present values. The discount rates used for deposits and borrowings are based
        upon available alternative types and sources of funds which may not necessarily
        be indicative of the present value of Premier's deposits and borrowings.
        Premier's deposits have customer relationship advantages that are difficult
        to
        simulate. A higher or lower interest rate environment will most likely result
        in
        different investment and borrowing strategies by Premier which would be designed
        to further mitigate any negative effects on the value of, and the net interest
        earnings generated on Premier's net assets.
 
  49
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 The
        following table presents summary information about the simulation model's
        interest rate risk measures and results.
 
 Year-end
                2006
              Year-end
                2005
              ALCO
                  GuidelinesProjected
                  1-year net interest income-100
                  bp change vs. base rate
              -0.9%
              -0.6%
              5%+100
                  bp change vs. base rate
              1.4%
              0.5%
              5%Projected
                  1-year net interest income-200
                  bp change vs. base rate
              -2.2%
              -1.3%
              10%+200
                  bp change vs. base rate
              2.6%
              0.9%
              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 $5.4 million of cash from operations in 2006, which compares to
        $2.1
        million in 2005 and $11.5 million in 2004. The increase in 2006 was primarily
        the result of a return to normal cash generated from operations compared
        to
        2005. 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. The higher level of cash from operations
        in
        2004 was the result of deferring interest payments on the Trust Preferred
        Securities and income tax refunds generated from the carry back of net operating
        losses. 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 and $7.5 million in 2004. However in 2006, $5.9
        million of cash was used in investing activities primarily to fund loan growth.
        In addition to the $5.4 million of cash from operations, Premier generated
        $1.4
        million in additional cash from financing activities, primarily due to the
        increase in deposits and repurchase agreements. In 2005 and 2004, net cash
        used
        to satisfy deposit withdrawals and reduce debt totaled $8.4 million in 2005,
        $20.9 million in 2004. Details on the sources and uses of cash can be found
        in
        the Consolidated Statements of Cash Flows in the consolidated financial
        statements.
 
  50
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 At
        December 31, 2006, the parent company had over $3.6 million in cash held
        with
        its subsidiary banks. This balance along with cash dividends expected to
        be
        received from its subsidiaries is sufficient to cover the operating costs
        of the
        parent, service its existing other debt and pay dividends to common
        shareholders. During 2006, the parent company generated $5.1 million of cash
        from operations and used $4.9 million to redeem a portion of the Trust Preferred
        Securities outstanding, make principal payments on its outstanding other
        debt
        and pay dividends to shareholders. Also during 2006, the parent company borrowed
        $13.5 million which was used to redeem the remainder of the Trust Preferred
        Securities. 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. Additional
        information on parent company cash flows and financial statements is contained
        in Note 22 to the consolidated financial
        statements.
 
 ***Capital
        Resources***
  Premier's
        consolidated average equity-to-asset ratio increased to 10.74% during 2006,
        up
        from 9.77% in 2005 and from 8.23% in 2004. The ratios for all three years
        are
        considered adequate for a company of Premier's size. The increase in 2006
        was
        largely due to the increase in net income with the slight decline in average
        total assets. 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 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 2006, Premier’s risk adjusted capital-to-assets
        ratio was 16.0% compared to 19.1% at December 31, 2005. 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, 2006 was
        8.9%
        compared to 10.6% at December 31, 2005. Both of these ratios are above the
        recommended 4.0% to 5.0% recommended by the Federal Reserve. The decrease
        in the
        2006 ratios was primarily the result of redeeming the remainder of Premier’s
        Trust Preferred Securities which was includable as capital in Premier’s 2005
        capital ratios (see Selected Capital Information table below.) Premier's
        capital
        ratios are the direct result of management's desire to maintain a strong
        capital
        position. Additional information on Premier's capital ratios and the capital
        ratios of its banks may be found in Note 21 to the
        consolidated financial statements.
 
  51
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 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 21 to the consolidated financial
        statements. During 2007, Premier's banks could, without prior approval, declare
        and pay to Premier dividends of approximately $3.2 million plus any 2007
        net
        profits retained through the date of declaration by Ohio River Bank, Boone
        County Bank, First Central Bank and Farmers Deposit 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 beyond the December
        31, 2005 to pay any future dividends to the parent company out of its current
        earnings.
 
 Additional
        information on the capital position of Premier is included in the following
        table.
 
 **SELECTED
                  CAPITAL INFORMATION**(Dollars
                  in thousands)As
                  of December 312006
              
              2005
              
              ChangeStockholders’
                  Equity
              
              $
              61,002
              
              $
              54,287
              
              $
              6,715Qualifying
                  capital securities of subsidiary trust
              
              
              0
              
              
              15,250
              
              
              (15,250
              )Disallowed
                  amounts of goodwill and other intangibles
              
              
              (15,816
              )
              
              (15,816
              )
              
              0Disallowed
                  deferred tax assets
              
              
              0
              
              
              (628
              )
              
              628Unrealized
                  loss on securities available for sale
              
              
              1,150
              
              
              1,718
              
              
              (568
              )Tier
                  I capital
              
              $
              46,336
              
              $
              54,811
              
              $
              (8,475
              )Tier
                  II capital adjustmentsQualifying
                  capital securities of subsidiary trust
              
              
              0
              
              
              0Allowable
                  amount of the allowance for loan losses
              
              
              3,977
              
              
              3,899Total
                  capital
              
              $
              50,313
              
              $
              58,710Total
                  risk-weighted assets
              
              $
              315,485
              
              $
              307,951RatiosTier
                  I capital to risk-weighted assets
              
              
              14.69
              %
              
              17.80
              %Total
                  capital to risk-weighted assets
              
              
              15.95
              %
              
              19.06
              %Leverage
                  at year-end
              
              
              8.89
              %
              
              10.61
              %
 
  52
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 **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
        $21.5 million in 2006, up 7.8% from the 20.0 million earned in 2005 which
        follows a 9.6% increase in 2005 from 2004. 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 2006
        is largely due to an increase in interest income from loans and federal funds
        sold due to higher overall yields and a greater volume of loans outstanding.
        This increase in interest income more than offset the increase in interest
        expense in 2006 resulting from higher rates paid on deposits and a higher
        volume
        of certificates of deposit. 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 $2.4 million. This increase was complemented by an
        $867,000 increase in interest income due to an increase in loans outstanding
        which was partially offset by a $324,000 reduction in interest income due
        to a
        lower total of investment securities outstanding. Also shown in the table
        below,
        interest expense on deposits increased by $2.3 million, $2.0 million due
        to
        higher rates paid, primarily certificates of deposit, and $0.3 million due
        to a
        shifting of deposits from savings and transaction based accounts to certificates
        of deposit. This overall increase in interest expense was partially offset
        by
        net interest expense savings of $855,000 due to the refinancing and early
        redemption of outstanding debt and the reduction in FHLB borrowings. Some
        of
        this interest expense savings was offset by higher interest paid on other
        short-term borrowings. The combined effect was to increase net interest income
        by $1,564,000 for the year.
 
 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 in average certificates of deposit outstanding. The combined
        effect
        was to increase net interest income in 2005 by $1,752,000.
 
  53
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 **RATE
                  VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME**(Dollars
                  in thousands on a tax equivalent basis)2006
                  vs 2005
              
              2005
                  vs 2004Increase
                  (decrease) due to change in
              
              Increase
                  (decrease) due to change inVolume
              
              Rate
              
              NetChange
              
              Volume
              
              Rate
              
              NetChangeInterest
                  income*:Loans
              
              $
              867
              
              $
              1,552
              
              $
              2,419
              
              $
              72
              
              $
              414
              
              $
              486Investment
                  securities
              
              
              (324
              )
              
              444
              
              
              120
              
              
              (8
              )
              
              394
              
              
              386Federal
                  funds sold
              
              
              43
              
              
              427
              
              
              470
              
              
              (61
              )
              
              426
              
              
              365Deposits
                  with banks
              
              
              2
              
              
              10
              
              
              12
              
              
              5
              
              
              0
              
              
              5Total
                  interest income
              
              $
              588
              
              $
              2,433
              
              $
              3,021
              
              $
              8
              
              $
              1,234
              
              $
              1,242Interest
                  expense:DepositsNOW
                  and money market
              
              $
              (116
              )
              $
              473
              
              $
              357
              
              $
              (104
              )
              $
              223
              
              $
              119Savings
              
              
              (46
              )
              
              (45
              )
              
              (91
              )
              
              (25
              )
              
              (84
              )
              
              (109
              )Certificates
                  of deposit
              
              
              419
              
              
              1,573
              
              
              1,992
              
              
              252
              
              
              197
              
              
              449Short-term
                  borrowings
              
              
              27
              
              
              27
              
              
              54
              
              
              38
              
              
              24
              
              
              62Other
                  borrowings
              
              
              194
              
              
              366
              
              
              560
              
              
              (108
              )
              
              (126
              )
              
              (234
              )FHLB
                  borrowings
              
              
              (56
              )
              
              10
              
              
              (46
              )
              
              (67
              )
              
              10
              
              
              (57
              )Debt
              
              
              (1,224
              )
              
              (145
              )
              
              (1,369
              )
              
              (524
              )
              
              (216
              )
              
              (740
              )Total
                  interest expense
              
              $
              (802
              )
              $
              2,259
              
              $
              1,457
              
              $
              (538
              )
              $
              28
              
              $
              (510
              )Net
                  interest income*
              
              $
              1,390
              
              $
              174
              
              $
              1,564
              
              $
              546
              
              $
              1,206
              
              $
              1,752(*)
                  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 2006, Premier’s net interest margin also
        increased. In 2006, the yield earned on investment securities increased 47
        basis
        points to 3.91% while the average yield on the loan portfolio increased 46
        basis
        points to 7.69%. The yield on federal funds sold increased 176 basis points
        to
        4.99%. The net result on all earning assets was to increase the yield 63
        basis
        points to 6.53% in 2006, up from the 5.90% earned in 2005 and the 5.60% earned
        in 2004. Similarly, in 2006 Premier increased the average rate paid on its
        deposits by 64 basis points to keep competitive with local and national markets.
        The average rate paid on certificates of deposit increased the most at 85
        basis
        points, while interest bearing transaction accounts increased on average
        by only
        38 basis points in 2006. Premier also increased the rates paid on its short-term
        borrowings by 30 basis points. Rates also increased on other borrowings as
        Premier refinanced its subordinated debt with floating prime rate and sub
        prime
        rate loans. This refinancing resulted in a corresponding decrease in the
        overall
        rate paid on debt outstanding. The overall result of increasing rates paid
        on
        deposits and rate decreases resulting from debt refinancing was to increase
        the
        overall cost of funds by 43 basis points to 2.73%, up from the 2.30% in 2005
        and
        2.32% in 2004. As a result Premier's net interest spread increased by 20
        basis
        points and its net interest margin increased by 32 basis points to 4.32%
        in
        2006, up from 4.00% in 2005 and 3.61% in 2004.
  54
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 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. 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. 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. Further discussion of interest income is included in the section
        of this report entitled "Balance Sheet Analysis."
 
 ***Non-interest
        Income and Expense***
  Non-interest
        income has been and will continue to be an important factor for improving
        profitability. Recognizing this importance, management continues to evaluate
        areas where non-interest income can be enhanced. As shown in the table of
        Non-interest Income and Expense below, total fees and other income increased
        by
        $245,000 or 6.3% in 2006. The increase in 2006 was fairly evenly distributed
        between increases in the volume of service charges on deposit accounts,
        electronic banking income, and secondary market mortgage income. In 2006,
        service charges on deposit accounts increased $72,000 or 2.6% to $2,804,000,
        primarily due to increases in Premier’s non-interest bearing deposit customer
        base. Electronic banking income, which consists of debit and credit card
        transaction fees, ATM fees and internet banking fees, increased $95,000 or
        23.6%
        to $498,000 in 2006. Premier’s data processing conversion in 2005 modernized and
        increased the number of methods by which customers could electronically access
        their accounts and deposited funds. The increase in electronic banking income
        reflects the increased number of customers utilizing these methods. Secondary
        market mortgage income, which are commissions and fees earned for originating
        and selling mortgage loans to third parties in the secondary market, increased
        $86,000 or 39.6% to $303,000 in 2006. In 2005, Premier changed its approach
        to
        secondary market mortgage originations in an effort to expedite the loan
        approval process. The increased income in 2006 reflects a greater number
        customers taking advantage of this process. Other non-interest income was
        relatively unchanged totaling $560,000 in 2006 compared to $568,000 in 2005
        as
        the elimination of data processing fees earned in 2005 was offset by increases
        in the collection of loan extension and late payment fees in 2006.
 
 In
        2005, total fees and other income increased 11.8% or $414,000 from the amount
        earned in 2004. The increase in 2005 is again largely due to an increase
        in
        service charges of deposit accounts, electronic banking income and secondary
        market mortgage. Service charges on
  55
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 deposit
        accounts increased to $2,732,000 in 2005, an increase of 8.7% or $219,000.
        The
        increase was the result of changes in the way Premier charges customers for
        overdrawing their checking accounts and a general increase in customers and
        activity. Electronic banking income increased $153,000 or 61.2% in 2005,
        largely
        due to the modernization of the ways Premier’s customers can access their
        deposit accounts. Secondary market mortgage income increased $146,000 or
        over
        200% as Premier changed its approach to secondary market mortgage originations
        and increased its volume of transactions. Other income decreased 15.5% or
        $104,000 in 2005 largely due to lower data processing revenue from non-affiliate
        banks as Premier’s data processing subsidiary ceased providing these services in
        late 2004 and early 2005.
  The
        following
        table is a summary of non-interest income and expense for each of the years
        in
        the three-year period ending December 31, 2006.
 
 **NON-INTEREST
                  INCOME AND EXPENSE**(Dollars
                  in thousands)Increase
                  (Decrease) Over Prior Year2006
              
              20052006
              
              2005
              
              2004
              
              Amount
              
              Percent
              
              Amount
              
              PercentNon-interest
                  income:Service
                  charges on depositaccounts
              
              $
              2,804
              
              $
              2,732
              
              $
              2,513
              
              $
              72
              
              
              2.64
              
              $
              219
              
              
              8.71Electronic
                  banking income
              
              
              498
              
              
              403
              
              
              250
              
              
              95
              
              
              23.57
              
              
              153
              
              
              61.20Secondary
                  market mortgage income
              
              
              303
              
              
              217
              
              
              71
              
              
              86
              
              
              39.63
              
              
              146
              
              
              205.63Other
              
              
              560
              
              
              568
              
              
              672
              
              
              (8
              )
              
              (1.41
              )
              
              (104
              )
              
              (15.48
              )Total
                  fees and other income
              
              $
              4,165
              
              $
              3,920
              
              $
              3,506
              
              
              245
              
              
              6.25
              
              
              414
              
              
              11.81Investment
                  securities gains
              
              
              0
              
              
              0
              
              
              100
              
              
              0
              
              
              
              
              
              (100
              )Total
                  non-interest income
              
              $
              4,165
              
              $
              3,920
              
              $
              3,606
              
              $
              245
              
              
              6.25
              
              $
              314
              
              
              8.71Non-interest
                  expense:Salaries
                  and wages
              
              $
              7,540
              
              $
              7,443
              
              $
              7,103
              
              $
              97
              
              
              1.30
              
              $
              340
              
              
              4.79Employee
                  benefits
              
              
              1,590
              
              
              1,642
              
              
              1,633
              
              
              (52
              )
              
              (3.17
              )
              
              9
              
              
              0.55Total
                  staff costs
              
              
              9,130
              
              
              9,085
              
              
              8,736
              
              
              45
              
              
              0.50
              
              
              349
              
              
              3.99Occupancy
                  and equipment
              
              
              1,907
              
              
              2,262
              
              
              2,141
              
              
              (355
              )
              
              (15.69
              )
              
              121
              
              
              5.65Outside
                  data processing
              
              
              2,036
              
              
              1,505
              
              
              1,023
              
              
              531
              
              
              35.28
              
              
              482
              
              
              47.12Professional
                  fees
              
              
              496
              
              
              554
              
              
              2,271
              
              
              (58
              )
              
              (10.47
              )
              
              (1,717
              )
              
              (75.61
              )Taxes,
                  other than payroll,property
                  and income
              
              
              598
              
              
              423
              
              
              589
              
              
              175
              
              
              41.37
              
              
              (166
              )
              
              (28.18
              )OREO
                  (gains) losses and expenses, net
              
              
              (91
              )
              
              52
              
              
              (45
              )
              
              (143
              )
              
              (275.00
              )
              
              97
              
              
              215.56Bad
                  check losses (recoveries)
              
              
              (79
              )
              
              36
              
              
              94
              
              
              (115
              )
              
              (319.44
              )
              
              (58
              )
              
              (61.70
              )Supplies
              
              
              333
              
              
              362
              
              
              365
              
              
              (29
              )
              
              (8.01
              )
              
              (3
              )
              
              (0.82
              )Accelerated
                  amortization ofsubordinated
                debt issuance
                  costs
              
              
              548
              
              
              184
              
              
              214
              
              
              364
              
              
              197.83
              
              
              (30
              )
              
              (14.02
              )Other
                  expenses
              
              
              2,059
              
              
              2,842
              
              
              2,394
              
              
              (783
              )
              
              (27.55
              )
              
              448
              
              
              18.71Total
                  non-interest expenses
              
              $
              16,937
              
              $
              17,305
              
              $
              17,782
              
              $
              (368
              )
              
              (2.13
              )
              $
              (477
              )
              
              (2.68
              )
 
  56
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 In
        2006 and 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.
  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 2006 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 2.56%, a decrease
        from
        the 2.68% realized in 2005 and the 2.82% ratio realized in 2004. The actual
        dollars of net overhead declined by 4.6% or $613,000 in 2006 which reduced
        the
        ratio by 12 basis points. In 2005, the ratio decreased by 15 basis points,
        as
        the actual dollars of net overhead expense decreased by 6.2% or $891,000.
        For
        the year 2006, net overhead was $12.8 million, down from the $13.4 million
        of
        2005 net overhead. The current year decrease follows a $891,000 decrease
        in 2005
        from the $14.3 million of net overhead in 2004.
 
 Total
        non-interest expense in 2006 decreased by $368,000, or 2.1% from 2005 as
        decreases in occupancy and equipment costs, professional fees, OREO losses,
        bad
        check losses and other expenses were only partially offset by higher data
        processing fees, accelerated trust preferred issuance cost amortization,
        and
        taxes not on income. 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.
 
 Staff
        costs increased by $45,000 or 0.5% in 2006 versus 2005. Normal salary and
        wage
        increases and $142,000 of stock compensation expense resulting from the adoption
        of FAS 123R in 2006 were substantially offset by reductions in staff count
        and
        correspondent benefit cost reductions resulting from the data processing
        conversion in 2005. 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 professionals which performed the function in 2004 and earlier.
 
 Occupancy
        and equipment expenses decreased by $355,000 or 15.7% in 2006 due to savings
        from the disposal of equipment and facilities related to Premier’s data
        processing subsidiary in 2005, lower property and casualty insurance costs,
        and
        the expensing of obsolete equipment as part of the data processing conversion
        in
        2005. 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.
  57
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 Outside
        data processing expense increased by $531,000 or 35.3% in 2006 as 2006
        represents the first full year of expense since Premier converted to an
        outsourced provider in early-to-mid 2005. 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 have been realized as a result of the conversion.
 
 Professional
        fees decreased by $58,000 or 10.5% in 2006 largely due to lower internal
        audit
        costs, tax preparation fees and consulting expenses. In 2005, Premier used
        an
        outside firm to continue to provide internal audits of Farmers Deposit Bank.
        For
        2006, these audits were performed by internal staff at the parent company.
        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 for all banks except Farmers Deposit.
 
 Taxes
        not on income increased by $175,000 or 41.4% in 2006 versus 2005. The increase
        in 2006 is largely due to an increase in taxable equity for equity based
        franchise taxes and an increase in local municipal taxes. 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.
 
 OREO
        gains, losses and expenses resulted in net gains of $91,000 in 2006 versus
        $52,000 of net expenses in 2005, a $143,000 reduction of non-interest expense.
        OREO expense represents the costs to operate, maintain and liquidate Other
        Real
        Estate acquired through foreclosure in satisfaction of unpaid loans. In 2006
        as
        Premier sold most its inventory of OREO properties, it realized $105,000
        of net
        gains on their disposition as well as a reduction in the expenses needed
        to
        maintain the properties. A majority of the gains on the disposition of OREO
        were
        on properties from which no previous writedowns had occurred. 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. In 2004, Premier realized $123,000
        of
        net profit from the disposition of OREO properties. This profit more than
        offset
        the costs of maintaining the remaining OREO property held in 2004.
 
 Net
        recoveries on bad checks totaled $79,000 in 2006 compared to $36,000 of net
        losses on bad checks in 2005. The $115,000 decrease was a largely the result
        of
        a $101,000 partial settlement on the recovery of bad check losses related
        to
        dishonored checks in 2003. In 2005 bad check losses declined for the second
        year
        in a row to $36,000 down from $94,000 in 2004.
 
 Accelerated
        Trust Preferred issuance costs were recognized in 2004, 2005 and 2006. At
        the
        time of issuance, the costs to originate the Trust Preferred Securities were
        capitalized. The costs were being amortized over the 30 year life of the
        securities which were scheduled to
  58
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 mature
        in 2027 and were recorded as an adjustment to interest expense. In March
        2003,
        Premier began redeeming its Trust Preferred Securities in accordance with
        the
        terms of the instrument. At time of redemption an amount of the remaining
        unamortized issuance costs proportional to the size of the redemption is
        expensed to non-interest expense. 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. In 2006, as a result of the $7.0
        million early redemption on January 31, 2006 and the final $8.25 million
        redeemed on November 10, 2006, Premier expensed the final $548,000 of the
        issuance costs. Additional information on the Trust Preferred Securities
        is
        contained in Note 12 to the consolidated financial
        statements.
 
 Other
        expenses totaled $2.1 million in 2006, a $783,000 or $27.6% decrease from
        the
        $2.8 million recorded in 2005. The decrease in 2006 is largely due to costs
        and
        fees incurred in 2005 related to Premier’s conversion to an outsource data and
        item processing provider. These costs included 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.
        Other reductions in 2006 expense include lower FDIC insurance costs; recoveries
        of previously expensed loan collection costs as well as lower costs incurred
        in
        2006; lower insurance costs and costs incurred in 2005 related the termination
        of trust services. Other expenses that increased in 2006 include advertising,
        employee training and development, and travel costs associated with the internal
        audit function. Other expenses totaled $2.8 million in 2005, an 18.7% or
        $448,000 increase from the $2.4 million recorded in 2004. Again, 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 included 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.
 
 An
        analysis of the allowance for loan losses and related provision for loan
        losses
        is included in the Loan Portfolio section of the Balance Sheet Analysis of
        this
        report.
 
 ***Applicable
        Income Taxes***
  Premier
        recognized $3.3 million of income tax expense related to continuing operations
        in 2006. This amount compares to $2.0 million of income tax expense recorded
        in
        2005 and $899,000 of income tax expense recorded in 2004. Premier's effective
        tax rate was 33.6% in 2006, up slightly from the 31.4% in 2005 and 2004.
        Premier's effective tax rate in 2006 was increased primarily due to stock
        compensation expense required by FAS 123R, most of which is a non-deductible
        expense for income tax purposes since it relates primarily to qualified
        incentive stock options. In addition, the tax saving benefits of holding
        tax-exempt investments and other tax saving instruments helped to reduce
        Premier's 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.
  59
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 ***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 2006**
 
 Income
        from continuing operations for the three months ended December 31, 2006 totaled
        $1,659,000, a $122,000 or 7.9% increase from the $1,537,000 of income from
        continuing operations reported for the fourth quarter of 2005. On a per share
        basis, Premier's income from continuing operations for the fourth quarter
        of
        2006 was 32 cents per share, compared to 29 cents per share for the same
        quarter
        last year.
 
 Net
        interest income totaled $5,454,000 for the fourth quarter of 2006, an increase
        of $277,000 or 5.4% from the net interest income earned in the same quarter
        of
        2005. The increase is the result of higher interest income on loans and
        investments due to higher yields and an increase in interest income on loans
        and
        federal funds sold due to an increase in their average balance. 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 and lower borrowing rates due the refinancing of the
        subordinated debt. During the fourth quarter of 2006, Premier reversed $110,000
        of previously recorded provisions for loan losses (negative provisions).
        This
        compares to $290,000 of negative provisions in the fourth quarter of 2005.
        The
        negative provisions 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
  60
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **MANAGEMENT’S
        DISCUSSION AND ANALYSIS**
 December
        31, 2006
 
 
 on
        loans having significant credit risk.  Non-interest
        income excluding securities transactions totaled $1,134,000 in the fourth
        quarter of 2006, an increase of $98,000 or 9.5% from the $1,036,000 in the
        fourth quarter of 2005. The increase was largely due to increases in secondary
        market mortgage income and electronic banking income. Non-interest expense
        totaled $4,201,000 in the fourth quarter of 2006, a $44,000 or 1.0% decrease
        from the $4,245,000 reported for the fourth quarter of 2005. A decrease in
        occupancy and equipment expense, data processing conversion expenses and
        loan
        collection costs as well as gains on the disposition of OREO were nearly
        offset
        by increases in staff costs, advertising and accelerated amortization of
        trust
        preferred issuance costs. 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***
 
 In
        September 2006, the FASB issued Statement No. 157, *Fair
        Value Measurements* .
        This Statement defines fair value, establishes a framework for measuring
        fair
        value and expands disclosures about fair value measurements. This Statement
        establishes a fair value hierarchy about the assumptions used to measure
        fair
        value and clarifies assumptions about risk and the effect of a restriction
        on
        the sale or use of an asset. The standard is effective for fiscal years
        beginning after November 15, 2007. The Company has not completed its evaluation
        of the impact of the adoption of this standard.
 
 In
        July 2006, the FASB issued FASB Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
        109* (FIN
        48), which prescribes a recognition threshold and measurement attribute for
        a
        tax position taken or expected to be taken in a tax return. FIN 48 also provides
        guidance on derecognition, classification, interest and penalties, accounting
        in
        interim periods, disclosure and transition. FIN 48 is effective for fiscal
        years
        beginning after December 15, 2006. The Company has determined that the adoption
        of FIN 48 will not have a material effect on the financial
        statements.
 
 New
        accounting standards have also been issued that the Company does not expect
        will
        have a material effect on the financial statements when adopted in future
        years
        or for which the Company has not yet completed its evaluation of the potential
        effect upon adoption. In general, these standards revise the accounting for
        derivatives embedded in other financial instruments for 2007, revise the
        recognition and accounting for servicing of financial assets for 2007, revise
        the accrual of post-retirement benefits associated with providing life insurance
        for 2008, and revise the accounting for cash surrender value for
        2007.
 
  61
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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, 2006 and
        2005
 Consolidated
        Statements of Income - Years Ended
        December 31, 2006, 2005, and 2004
 Consolidated
        Statements of Comprehensive Income -
        Years Ended December 31, 2006, 2005, and 2004
 Consolidated
        Statements of Changes in Stockholders'
        Equity - Years ended
 December
        31, 2006, 2005, and 2004
 Consolidated
        Statements of Cash Flows - Years ended December
        31, 2006, 2005, and 2004
 Notes
        to Consolidated Financial Statements
 
 
 
 
 
 
 
  62
 **Table
            of
            Contents**
  **PREMIER
          FINANCIAL BANCORP, INC.**
 
 
 **CONSOLIDATED
          FINANCIAL STATEMENTS**
 December
          31, 2006, 2005 and 2004
 
 
              
 
 63
 **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, 2006 and 2005, and the related consolidated
          statements of income, comprehensive income, changes in stockholders' equity,
          and
          cash flows for each of the three years in the period ended December 31,
          2006.
          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, 2006 and 2005, and the results of its
          operations and its cash flows for each of the three years in the period
          ended
          December 31, 2006, in conformity with U.S. generally accepted accounting
          principles.
 
 
 
 
 Crowe
          Chizek and Company LLC
 
 
 Columbus,
          Ohio
 March
          30, 2007
 
 
  64
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
          BALANCE SHEETS**
 December
          31, 2006 and 2005
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 2006
                
                2005**ASSETS**Cash
                    and due from banks
                
                $
                16,974
                
                $
                16,080Federal
                    funds sold
                
                
                27,583
                
                
                18,812Securities
                    available for sale
                
                
                121,367
                
                
                137,419Loans
                    held for sale
                
                
                1,978
                
                
                868Loans
                
                
                343,797
                
                
                328,717Allowance
                    for loan losses
                
                
                (6,661
                )
                
                (7,892
                )Net
                    loans
                
                
                337,136
                
                
                320,825Federal
                    Home Loan Bank and Federal Reserve Bank stock
                
                
                3,265
                
                
                3,060Premises
                    and equipment, net
                
                
                6,533
                
                
                7,126Real
                    estate and other property acquired through foreclosure
                
                
                495
                
                
                2,049Interest
                    receivable
                
                
                2,821
                
                
                2,661Goodwill
                
                
                15,816
                
                
                15,816Other
                    assets
                
                
                1,484
                
                
                3,608**Total
                    assets**
                
                $
                535,452
                
                $
                528,324**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**DepositsNon-interest
                    bearing
                
                $
                72,784
                
                $
                69,856Time
                    deposits, $100,000 and over
                
                
                53,477
                
                
                42,169Other
                    interest bearing
                
                
                312,689
                
                
                323,818Total
                    deposits
                
                
                438,950
                
                
                435,843Federal
                    funds purchased
                
                
                976
                
                
                -Securities
                    sold under agreements to repurchase
                
                
                12,555
                
                
                9,317Federal
                    Home Loan Bank advances
                
                
                7,285
                
                
                8,334Other
                    borrowed funds
                
                
                12,275
                
                
                -Notes
                    payable
                
                
                -
                
                
                1,402Guaranteed
                    junior subordinated interest debentures
                
                
                -
                
                
                15,722Interest
                    payable
                
                
                1,061
                
                
                724Other
                    liabilities
                
                
                1,348
                
                
                2,695Total
                    liabilities
                
                
                474,450
                
                
                474,037Commitments
                    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;5,236,899
                    in 2006 and 5,233,897 in 2005shares
                    issued and outstanding
                
                
                1,108
                
                
                1,105Additional
                    paid-in capital
                
                
                43,624
                
                
                43,458Retained
                    earnings
                
                
                17,420
                
                
                11,442Accumulated
                    other comprehensive income (loss)
                
                
                (1,150
                )
                
                (1,718
                )Total
                    stockholders' equity
                
                
                61,002
                
                
                54,287**Total
                    liabilities and stockholders' equity**
                
                $
                535,452
                
                $
                528,324
 See
                  accompanying notes
 65
 **Table
                of
                Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
          STATEMENTS OF INCOME**
 Years
          Ended December 31
 (In
          Thousands, Except Per Share Data)
 
 
 2006
                
                2005
                
                2004**Interest
                    income**Loans,
                    including fees
                
                $
                25,926
                
                $
                23,532
                
                $
                23,073Investment
                    securitiesTaxable
                
                
                5,148
                
                
                5,014
                
                
                4,444Tax-exempt
                
                
                88
                
                
                96
                
                
                217Federal
                    funds sold
                
                
                1,215
                
                
                745
                
                
                380Other
                    interest income
                
                
                23
                
                
                12
                
                
                7Total
                    interest income
                
                
                32,400
                
                
                29,399
                
                
                28,121**Interest
                    expense**Deposits
                
                
                8,984
                
                
                6,725
                
                
                6,267Repurchase
                    agreements and other
                
                
                234
                
                
                180
                
                
                115FHLB
                    advances and other borrowings
                
                
                1,027
                
                
                513
                
                
                807Debentures
                
                
                760
                
                
                2,129
                
                
                2,868Total
                    interest expense
                
                
                11,005
                
                
                9,547
                
                
                10,057**Net
                    interest income**
                
                
                21,395
                
                
                19,852
                
                
                18,064Provision
                    for loan losses
                
                
                (1,161
                )
                
                4
                
                
                1,026**Net
                    interest income after provision for loan losses**
                
                
                22,556
                
                
                19,848
                
                
                17,038**Non-interest
                    income**Service
                    charges
                
                
                2,804
                
                
                2,732
                
                
                2,513Electronic
                    banking income
                
                
                498
                
                
                403
                
                
                250Secondary
                    market mortgage income
                
                
                303
                
                
                217
                
                
                71Securities
                    gains
                
                
                -
                
                
                -
                
                
                100Other
                
                
                560
                
                
                568
                
                
                6724,165
                
                
                3,920
                
                
                3,606**Non-interest
                    expenses**Salaries
                    and employee benefits
                
                
                9,130
                
                
                9,085
                
                
                8,736Occupancy
                    and equipment expenses
                
                
                1,907
                
                
                2,262
                
                
                2,141Outside
                    data processing
                
                
                2,036
                
                
                1,505
                
                
                1,023Professional
                    fees
                
                
                496
                
                
                554
                
                
                2,271Taxes,
                    other than payroll, property and income
                
                
                598
                
                
                423
                
                
                589Write-downs,
                    expenses, sales of other
                  real
                    estate owned, net of gains
                
                
                (91
                )
                
                52
                
                
                (45
                )Supplies
                
                
                333
                
                
                362
                
                
                365Other
                    expenses
                
                
                2,528
                
                
                3,062
                
                
                2,70216,937
                
                
                17,305
                
                
                17,782Income
                    from continuing operationsbefore
                    income taxes
                
                
                9,784
                
                
                6,463
                
                
                2,862Provision
                    for income taxes
                
                
                3,283
                
                
                2,029
                
                
                899**Income
                    from continuing operations**
                
                
                **6,501**
                
                
                **4,434**
                
                
                **1,963**Discontinued
                    operationIncome
                    from operations of discontinued component
                
                
                -
                
                
                -
                
                
                4Gain
                    on sale of discontinued component
                
                
                -
                
                
                -
                
                
                6,664Provision
                    for income taxes
                
                
                -
                
                
                -
                
                
                1,934Income
                    from discontinued operation
                
                
                -
                
                
                -
                
                
                4,734**Net
                    income**
                
                **$**
                **6,501**
                
                **$**
                **4,434**
                
                **$**
                **6,697**
 
  (continued)
 66
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
          STATEMENTS OF INCOME** (Continued)
 Years
          Ended December 31
 (In
          Thousands, Except Per Share Data)
 
  2006
                
                2005
                
                2004Weighted
                    average shares outstanding:Basic
                
                
                5,236
                
                
                5,233
                
                
                5,232Diluted
                
                
                5,264
                
                
                5,248
                
                
                5,237Earnings
                    per share from continuing operations:Basic
                
                $
                1.24
                
                $
                0.85
                
                $
                0.37Diluted
                
                
                1.24
                
                
                0.84
                
                
                0.37Earnings
                    per share from discontinued operation:Basic
                
                $
                -
                
                $
                -
                
                $
                0.90Diluted
                
                
                -
                
                
                -
                
                
                0.90Net
                    earnings per share:Basic
                
                $
                1.24
                
                $
                0.85
                
                $
                1.28Diluted
                
                
                1.24
                
                
                0.84
                
                
                1.28
 
  See
              accompanying notes
 67
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
          STATEMENTS OF COMPREHENSIVE INCOME**
 Years
          Ended December 31
 (In
          Thousands, Except Per Share Data)
 
 
 2006
                
                2005
                
                2004**Net
                    income**
                
                $
                6,501
                
                $
                4,434
                
                $
                6,697**Other
                    comprehensive income (loss)**:Unrealized
                    gains and (losses) arising during the period
                
                
                861
                
                
                (1,805
                )
                
                (1,730
                )Reclassification
                    of realized amount
                
                
                -
                
                
                -
                
                
                (100
                )Net
                    change in unrealized gain (loss) on securities
                
                
                861
                
                
                (1,805
                )
                
                (1,830
                )Less
                    tax impact
                
                
                293
                
                
                (614
                )
                
                (622
                )**Other
                    comprehensive income (loss)**:
                
                
                568
                
                
                (1,191
                )
                
                (1,208
                )**Comprehensive
                    income**
                
                $
                7,069
                
                $
                3,243
                
                $
                5,489
 
  See
              accompanying notes
 68
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
 Years
          Ended December 31, 2006, 2005 and 2004
 (In
          Thousands, Except Per Share Data)
 
 
 Common
                  Stock
                
                Additional
                  Paid-in
                  Capital
                
                Retained
                  Earnings
                
                Accumulated
                  Other
                  Comprehensive
                  Income
                    (Loss)
                
                TotalBalances,
                    January 1, 2004
                
                $
                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
                
                
                -
                
                
                4,434Balances,
                    December 31, 2005
                
                
                1,105
                
                
                43,458
                
                
                11,442
                
                
                (1,718
                )
                
                54,287Net
                    change in unrealized gains (losses)
                  on
                    securities available for sale
                
                
                -
                
                
                -
                
                
                -
                
                
                568
                
                
                568Cash
                    dividends paid ($0.10 per share)
                
                
                -
                
                
                -
                
                
                (523
                )
                
                -
                
                
                (523
                )Stock
                    options exercised, 3,002 shares
                
                
                3
                
                
                24
                
                
                -
                
                
                -
                
                
                27Stock
                    based compensation expense
                
                
                -
                
                
                142
                
                
                -
                
                
                -
                
                
                142Net
                    income
                
                
                -
                
                
                -
                
                
                6,501
                
                
                -
                
                
                6,501**Balances,
                    December 31, 2006**
                
                **$**
                **1,108**
                
                **$**
                **43,624**
                
                **$**
                **17,420**
                
                **$**
                **(1,150**
                **)**
                **$**
                **61,002**
 
 
  See
                accompanying notes
 69
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 Years
          Ended December 31
 (In
          Thousands, Except Per Share Data)
 
 2006
                  
                  2005
                  
                  2004**Cash
                      flows from continuing operating activities**Net
                      income
                  
                  $
                  6,501
                  
                  $
                  4,434
                  
                  $
                  6,697Adjustments
                      to reconcile income to net cash from
                    continuing
                      operating activitiesIncome
                      from discontinued operation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (4,734
                  )Depreciation
                      and impairment of real estate
                  
                  
                  868
                  
                  
                  976
                  
                  
                  904Provision
                      for loan losses
                  
                  
                  (1,161
                  )
                  
                  4
                  
                  
                  1,026Amortization,
                      net
                  
                  
                  187
                  
                  
                  236
                  
                  
                  496FHLB
                      stock dividends
                  
                  
                  (145
                  )
                  
                  (113
                  )
                  
                  (90
                  )Gains
                      on other real estate owned, net
                  
                  
                  (105
                  )
                  
                  (17
                  )
                  
                  (123
                  )Stock
                      compensation expense
                  
                  
                  142
                  
                  
                  -
                  
                  
                  -Securities
                      gains
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (100
                  )Changes
                      in :Interest
                      receivable
                  
                  
                  (160
                  )
                  
                  79
                  
                  
                  708Deferred
                      income taxes
                  
                  
                  1,071
                  
                  
                  1,119
                  
                  
                  3,334Loans
                      held for sale
                  
                  
                  (1,110
                  )
                  
                  (868
                  )
                  
                  -Other
                      assets
                  
                  
                  288
                  
                  
                  1,069
                  
                  
                  1,774Interest
                      payable
                  
                  
                  337
                  
                  
                  (4,808
                  )
                  
                  1,630Other
                      liabilities
                  
                  
                  (1,347
                  )
                  
                  (18
                  )
                  
                  (20
                  )**Net
                      cash from continuing operating activities**
                  
                  
                  5,366
                  
                  
                  2,093
                  
                  
                  11,502**Cash
                      flows from continuing investing activities**Purchases
                      of securities available for sale
                  
                  
                  (23,248
                  )
                  
                  (18,486
                  )
                  
                  (76,861
                  )Proceeds
                      from sales of securities available for sale
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,911Proceeds
                      from maturities and calls of securities
                    available
                      for sale
                  
                  
                  39,974
                  
                  
                  34,143
                  
                  
                  66,675Purchase
                      of FHLB stock, net of redemptions
                  
                  
                  (60
                  )
                  
                  (336
                  )
                  
                  (31
                  )Proceeds
                      from sale of subsidiary
                  
                  
                  -
                  
                  
                  -
                  
                  
                  14,311Net
                      change in federal funds sold
                  
                  
                  (8,771
                  )
                  
                  (1,470
                  )
                  
                  (291
                  )Net
                      change in loans
                  
                  
                  (20,284
                  )
                  
                  (6,120
                  )
                  
                  311Purchases
                      of loan participations from other banks
                  
                  
                  (1,605
                  )
                  
                  (1,197
                  )
                  
                  (2,943
                  )Payments
                      on loan participations with other banks
                  
                  
                  6,067
                  
                  
                  589
                  
                  
                  10Purchases
                      of premises and equipment, net
                  
                  
                  (361
                  )
                  
                  (845
                  )
                  
                  (205
                  )Proceeds
                      from sale of other real estate acquired
                    through
                      foreclosure
                  
                  
                  2,417
                  
                  
                  1,658
                  
                  
                  4,610**Net
                      cash from continuing investing activities**
                  
                  
                  (5,871
                  )
                  
                  7,936
                  
                  
                  7,497
   (continued)
 70
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS** (Continued)
 Years
          Ended December 31
 (In
          Thousands, Except Per Share Data)
 
 2006
                  
                  2005
                  
                  2004**Cash
                      flows from continuing financing activities**Net
                      change in deposits
                  
                  
                  3,107
                  
                  
                  (1,955
                  )
                  
                  (17,676
                  )Cash
                      dividends paid
                  
                  
                  (523
                  )
                  
                  -
                  
                  
                  -Repayment
                      of Federal Home Loan Bank advances
                  
                  
                  (1,049
                  )
                  
                  (954
                  )
                  
                  (1,417
                  )Early
                      redemption of debentures, net
                  
                  
                  (15,250
                  )
                  
                  (5,000
                  )
                  
                  (5,500
                  )Repayment
                      of other borrowed funds
                  
                  
                  (2,627
                  )
                  
                  (800
                  )
                  
                  (5,400
                  )Proceeds
                      from other borrowings
                  
                  
                  13,500
                  
                  
                  -
                  
                  
                  -Proceeds
                      from stock option exercises
                  
                  
                  27
                  
                  
                  15
                  
                  
                  -Net
                      change in federal funds purchased
                  
                  
                  976
                  
                  
                  (1,838
                  )
                  
                  1,838Net
                      change in agreements to repurchase securities
                  
                  
                  3,238
                  
                  
                  2,109
                  
                  
                  7,208**Net
                      cash from continuing financing activities**
                  
                  
                  1,399
                  
                  
                  (8,423
                  )
                  
                  (20,947
                  )Net
                      change in cash and cash equivalents
                    from
                      continuing activities
                  
                  
                  894
                  
                  
                  1,606
                  
                  
                  (1,948
                  )Cash
                      and cash equivalents of discontinued operationsNet
                      cash from operating activities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  432Net
                      cash from investing activities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (2,636
                  )Net
                      cash from financing activities
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (3,102
                  )Cash
                      and cash equivalents at beginning of yearContinuing
                      operations
                  
                  
                  16,080
                  
                  
                  14,474
                  
                  
                  16,422Discontinued
                      operations
                  
                  
                  -
                  
                  
                  -
                  
                  
                  5,306**Cash
                      and cash equivalents at end of year**
                  
                  $
                  16,974
                  
                  $
                  16,080
                  
                  $
                  14,474Supplemental
                      disclosures of cash flow information:Cash
                      paid during year for -Interest
                  
                  $
                  10,667
                  
                  $
                  14,354
                  
                  $
                  8,428Income
                      taxes paid (refunded)
                  
                  
                  2,285
                  
                  
                  191
                  
                  
                  (3,946
                  )Loans
                      transferred to real estate acquired through foreclosure
                  
                  $
                  672
                  
                  $
                  1,443
                  
                  $
                  3,547Fixed
                      assets transferred to other real estate owned
                  
                  
                  141
                  
                  
                  -
                  
                  
                  -
  See
                accompanying notes
 71
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (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,
                          2006Subsidiary
                      
                      Location
                      
                      Year
                        Acquired
                      
                      Total
                        Assets
                      
                      Net
                        IncomeCitizens
                          Deposit Bank & Trust
                      
                      
                      Vanceburg,
                          Kentucky
                      
                      
                      1991
                      
                      $
                      121,176
                      
                      $
                      1,988Farmers
                          Deposit Bank
                      
                      
                      Eminence,
                          Kentucky
                      
                      
                      1996
                      
                      
                      77,073
                      
                      
                      1,320Ohio
                          River Bank
                      
                      
                      Ironton,
                          Ohio
                      
                      
                      1998
                      
                      
                      80,121
                      
                      
                      933First
                          Central Bank, Inc.
                      
                      
                      Philippi,
                          West Virginia
                      
                      
                      1998
                      
                      
                      105,446
                      
                      
                      1,855Boone
                          County Bank, Inc.
                      
                      
                      Madison,
                          West Virginia
                      
                      
                      1998
                      
                      
                      151,260
                      
                      
                      2,218Mt.
                          Vernon Financial Holdings, Inc.
                      
                      
                      Huntington,
                          West Virginia
                      
                      
                      1999
                      
                      
                      1,537
                      
                      
                      32
 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)
 72
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (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
          Held for Sale :
          Mortgage loans originated and intended for sale in the secondary market
          are
          carried at the lower of aggregate cost or market, as determined by outstanding
          commitments from investors. Net unrealized losses, if any, are recorded
          as a
          valuation allowance and charged to earnings.
 
 Loans :
          Net
          loans are stated at the amount of unpaid principal, reduced by unearned
          income
          and an allowance for loan losses. Interest income on loans is recognized
          on the
          accrual basis except for those loans in a non-accrual of income status.
          The
          accrual of interest on impaired loans is discontinued when management believes,
          after consideration of economic and business conditions and collection
          efforts,
          that the borrowers’ financial condition is such that collection of interest is
          doubtful.
 
 All
          interest accrued but not received for loans placed on non-accrual is reversed
          against interest income. Interest received on such loans is accounted for
          on the
          cash-basis or cost-recovery method, until qualifying for return to accrual.
          Loans are returned to accrual status when all the principal and interest
          amounts
          contractually due are brought current and future payments are reasonably
          assured.
 
  (continued)
 73
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 The
          allowance for loan losses is a valuation allowance for probable incurred
          credit
          losses increased by a provision for loan losses charged to expense. The
          allowance is an amount that management believes will be adequate to absorb
          probable incurred losses on existing loans based on evaluations of the
          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. Allocations of the allowance may be made for specific loans, but the entire
          allowance is available for any loan that, in management’s judgment, should be
          charged-off. Loans
          are charged against the allowance for loan losses when management believes
          that
          the collection of principal is unlikely. Subsequent recoveries, if any,
          are
          credited to the allowance.
 
 A
          loan is impaired when full payment under the loan terms is not expected.
          Impairment is evaluated in total for smaller-balance loans of similar nature
          such as residential mortgage, consumer, and credit card loans, and accordingly,
          they are not separately identified for impairment disclosures. All other
          loans
          are evaluated for impairment on an individual basis. If a loan is impaired,
          a
          portion of the allowance is allocated so that the loan is reported, net,
          at the
          present value of estimated future cash flows using the loan’s existing rate or
          at the fair value of collateral if repayment is expected solely from the
          collateral.
 
 Premises
          and Equipment :
          Land is carried at cost. Premises and equipment are stated at cost less
          accumulated depreciation. Depreciation is recorded principally by the
          straight-line method with useful lives ranging from 7 to 40 years for premises
          and from 3 to 15 years for equipment.
 
 Real
          Estate Acquired Through Foreclosure :
          Real estate acquired through foreclosure is carried at the lower of the
          recorded
          investment in the property or its fair value. Upon repossession, 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.
 
 Federal
          Home Loan Bank (FHLB) stock: The
          Banks are members of the FHLB system. Members are required to own a certain
          amount of stock based on the level of borrowings and other factors, and
          may
          invest in additional amounts. FHLB stock is carried at cost, classified
          as a
          restricted security, and periodically evaluated for impairment based on
          ultimate
          recovery of par value. Both cash and stock dividends are reported as income.
 
  (continued)
 74
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 Long-term
          Assets :
          Premises and equipment and other long-term assets are reviewed for impairment
          when events indicate that the carrying amount may not be recoverable from
          future
          undiscounted cash flows. If impaired, the assets are recorded at fair
          value.
 
 Repurchase
          Agreements :
          Substantially all repurchase agreement liabilities represent amounts advanced
          by
          various customers. Securities are pledged to cover these liabilities, which
          are
          not covered by federal deposit insurance.
 
 Goodwill :
          Goodwill results from business acquisitions and represents the excess of
          the
          purchase price over the fair value of acquired tangible assets and liabilities
          and identifiable intangible assets. Goodwill is assessed at least annually
          for
          impairment and any such impairment will be recognized in the period identified.
          Impairment is evaluated using the aggregate of all banking operations.
          To
          evaluate impairment, management uses pricing valuation factors such as
          price-to-total assets and price-to-total deposits from databases of actual
          peer
          group bank sales. These valuation factors are applied to the comparable
          factors
          of the Company’s aggregate banking operations to arrive at estimated fair value.
          The Company does not have any identifiable intangible assets such as core
          deposit intangibles.
 
 Stock
          Based Compensation :
          Effective January 1, 2006, the Company adopted Statement of Financial Accounting
          Standards (“SFAS”) No. 123(R), *Share-based
          Payment* ,
          using the modified prospective transition method. Accordingly, the Company
          has
          recorded stock-based employee compensation cost using the fair value method
          starting in 2006. For 2006, adopting this standard resulted in a reduction
          of
          income before income taxes of $142, a reduction in net income of $140,
          and a
          decrease in basic and diluted earnings per share of $0.03.
 
 Prior
          to January 1, 2006, employee compensation expense under stock options was
          reported using the intrinsic value method; therefore, no stock-based
          compensation cost is reflected in net income for the years ending December
          31,
          2005 and 2004, as all options granted had an exercise price equal to or
          greater
          than the market price of the underlying common stock at date of grant.
 
  (continued)
 75
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 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,* for
          the years ending December 31.
 
 2005
                
                2004Income
                    from continuing operations
                
                $
                4,434
                
                $
                1,963Deduct:
                    Stock based compensation expense determined under
                  fair
                    value based method
                
                
                (93
                )
                
                (63
                )Pro
                    forma income
                
                $
                4,341
                
                $
                1,900Basic
                    earnings per share from continuing operations
                
                $
                0.85
                
                $
                0.37Pro
                    forma basic earnings per share
                
                
                0.83
                
                
                0.36Diluted
                    earnings per share from continuing operations
                
                $
                0.84
                
                $
                0.37Pro
                    forma basic earnings per share
                
                
                0.82
                
                
                0.36
 
 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 commercial letters of credit, issued to meet
          customer financing needs. The face amount for these items represents the
          exposure to loss, before considering customer collateral or ability to
          repay.
          Such financial instruments are recorded when they are funded.
 
 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.
 
  (continued)
 76
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 Fair
          Value of Financial Instruments :
          Fair values of financial instruments are estimated using relevant market
          information and other assumptions, as more fully disclosed in a separate
          note.
          Fair value estimates involve uncertainties and matters of significant judgment
          regarding interest rates, credit risk, prepayments, and other factors,
          especially in the absence of broad markets for particular items. Changes
          in
          assumptions or in market conditions could significantly affect the
          estimates.
 
 Operating
          Segments :
          All
          of the Company’s operations are considered by management to be aggregated into
          one reportable operating segment. While the chief decision-makers monitor
          the
          revenue streams of the various products and services, the identifiable
          segments
          are not material. Operations are managed and financial performance is evaluated
          on a Company-wide basis.
 
 Reclassifications :
          Some items in the prior year financial statements were reclassified to
          conform
          to the current presentation.
 
 Adoption
          of New Accounting Standards :
          Effective January 1, 2006, the Company adopted Statement of Financial Accounting
          Standards (“SFAS”) No. 123(R), *Share-based
          Payment* .
          See
“Stock Compensation” above for further discussion of the effect of adopting this
          standard.
 
 In
          September 2006, the Securities and Exchange Commission (SEC) released Staff
          Accounting Bulletin No. 108, *Considering
          the Effects of Prior Year Misstatements when Quantifying Misstatements
          in
          Current Year Financial Statements (SAB 108),* which
          is effective for fiscal years ending on or after November 15, 2006. SAB
          108
          provides guidance on how the effects of prior-year uncorrected financial
          statement misstatements should be considered in quantifying a current year
          misstatement. SAB 108 requires public companies to quantify misstatements
          using
          both an income statement (rollover) and balance sheet (iron curtain) approach
          and evaluate whether either approach results in a misstatement that, when
          all
          relevant quantitative and qualitative factors are considered, is material.
          If
          prior year errors that had been previously considered immaterial now are
          considered material based on either approach, no restatement is required
          so long
          as management properly applied its previous approach and all relevant facts
          and
          circumstances were considered. Adjustments considered immaterial in prior
          years
          under the method previously used, but now considered material under the
          dual
          approach required by SAB 108, are to be recorded upon initial adoption
          of SAB
          108. The adoption of SAB 108 had no effect on the Company’s financial statements
          for the year ending December 31, 2006.
 
  (continued)
 77
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)
 
 Recently
          Issued Accounting Standards Not Yet Adopted : In
          September 2006, the FASB issued Statement No. 157, *Fair
          Value Measurements* .
          This Statement defines fair value, establishes a framework for measuring
          fair
          value and expands disclosures about fair value measurements. This Statement
          establishes a fair value hierarchy about the assumptions used to measure
          fair
          value and clarifies assumptions about risk and the effect of a restriction
          on
          the sale or use of an asset. The standard is effective for fiscal years
          beginning after November 15, 2007. The Company has not completed its evaluation
          of the impact of the adoption of this standard.
 
 In
          July 2006, the FASB issued FASB Interpretation No. 48, *Accounting
          for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
          109* (FIN
          48), which prescribes a recognition threshold and measurement attribute
          for a
          tax position taken or expected to be taken in a tax return. FIN 48 also
          provides
          guidance on derecognition, classification, interest and penalties, accounting
          in
          interim periods, disclosure and transition. FIN 48 is effective for fiscal
          years
          beginning after December 15, 2006. The Company has determined that the
          adoption
          of FIN 48 will not have a material effect on the financial
          statements.
 
 New
          accounting standards have also been issued that the Company does not expect
          will
          have a material effect on the financial statements when adopted in future
          years
          or for which the Company has not yet completed its evaluation of the potential
          effect upon adoption. In general, these standards revise the accounting
          for
          derivatives embedded in other financial instruments for 2007, revise the
          recognition and accounting for servicing of financial assets for 2007,
          revise
          the accrual of post-retirement benefits associated with providing life
          insurance
          for 2008, and revise the accounting for cash surrender value for
          2007.
  (continued)
 78
 **Table
              of
              Contents**
  **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (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, 2004Interest
                    income
                
                $
                2,021Interest
                    expense
                
                
                732Net
                    interest income
                
                
                1,289Provision
                    for loan losses
                
                
                -Non-interest
                    income
                
                
                434Non-interest
                    expense
                
                
                1,718Income
                    tax (benefit)
                
                
                (1
                )Net
                    income
                
                $
                4
  
 Activity
          in the allowance for loan losses for Citizens Bank follows (in
          thousands):
 
 2004Balance,
                    beginning of year
                
                $
                2,164Loans
                    charged-off
                
                
                (283
                )Recoveries
                
                
                124Provision
                    for loan losses
                
                
                -Sale
                    of subsidiary
                
                
                (2,005
                )Balance,
                    end of year
                
                $
                -
 
  (continued)
 79
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (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. In 2006, the Federal Reserve Bank determined that
          Premier fully satisfied all of the provisions of the Written Agreement
          and,
          accordingly, the FRB terminated the agreement effective April 18, 2006.
          Among
          other provisions, the agreement required 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 then outstanding trust
          preferred securities. The Company’s compliance with the written agreement was
          monitored by a committee consisting of three of its outside directors.
 
  (continued)
 80
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (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, 2006 and 2005 was
          approximately $3,300 and $3,100.
 
 **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:
 
 2006
                
                Amortized
                    Cost
                
                Unrealized
                    Gains
                
                Unrealized
                    Losses
                
                Fair
                    ValueAvailable
                    for saleU.
                    S. Treasury securities
                
                $
                6,454
                
                $
                -
                
                $
                (53
                )
                $
                6,401U.
                    S. agency securities
                
                
                77,885
                
                
                43
                
                
                (1,017
                )
                
                76,911Obligations
                    of states and political
                  subdivisions
                
                
                3,413
                
                
                15
                
                
                (15
                )
                
                3,413Mortgage-backed
                    securities
                
                
                35,332
                
                
                40
                
                
                (755
                )
                
                34,617Corporate
                    securities
                
                
                25
                
                
                -
                
                
                -
                
                
                25Total
                    available for sale
                
                $
                123,109
                
                $
                98
                
                $
                (1,840
                )
                $
                121,367
 
 
 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
 
  (continued)
 81
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          5 -SECURITIES** (Continued)
 
 The
          amortized cost and fair value of securities at December 31, 2006 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
                
                $
                28,491
                
                $
                28,244Due
                    after one year through five years
                
                
                57,154
                
                
                56,382Due
                    after five years through ten years
                
                
                539
                
                
                544Due
                    after ten years
                
                
                1,593
                
                
                1,580Mortgage-backed
                    securities
                
                
                35,332
                
                
                34,617Total
                    available for sale
                
                $
                123,109
                
                $
                121,367
 
 There
          were no sales of securities in 2006 or 2005. Proceeds from sales of securities
          during 2004 were $1,911. Gross gains of $101 **** and
          gross losses of $1 were realized on those sales.
 
 Securities
          with an approximate carrying value of $76,845 and $75,396 at December 31,
          2006
          and 2005 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 2006 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
                
                $
                5,435
                
                $
                (32
                )
                $
                966
                
                $
                (21
                )
                $
                6,401
                
                $
                (53
                )U.S.
                    agency securities
                
                
                3,735
                
                
                (12
                )
                
                63,145
                
                
                (1,005
                )
                
                66,880
                
                
                (1,017
                )Obligations
                    of states and
                  political
                    subdivisions
                
                
                1,581
                
                
                (12
                )
                
                322
                
                
                (3
                )
                
                1,903
                
                
                (15
                )Gov’t
                    guaranteed mortgage-
                  backed
                    securities
                
                
                -
                
                
                -
                
                
                13,121
                
                
                (381
                )
                
                13,121
                
                
                (381
                )Mortgage-backed
                    securities
                
                
                943
                
                
                (3
                )
                
                14,720
                
                
                (371
                )
                
                15,663
                
                
                (374
                )Total
                    temporarily impaired
                
                $
                11,694
                
                $
                (59
                )
                $
                92,274
                
                $
                (1,781
                )
                $
                103,968
                
                $
                (1,840
                )
 
  (continued)
 82
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          5 -SECURITIES** (Continued)
 
 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
                )
 
 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 ,
          2006 and December 31, 2005 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:
 
 2006
                
                2005Commercial,
                    secured by real estate
                
                $
                101,786
                
                $
                85,989Commercial,
                    other
                
                
                43,981
                
                
                49,362Real
                    estate construction
                
                
                11,303
                
                
                11,070Residential
                    real estate
                
                
                138,795
                
                
                134,570Agricultural
                
                
                1,930
                
                
                1,670Consumer
                    and home equity
                
                
                42,188
                
                
                42,092Other
                
                
                3,814
                
                
                3,964$
                343,797
                
                $
                328,717
 
  (continued)
 83
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          6 - LOANS** (Continued)
 
 Certain
          directors and executive officers of the Banks and companies in which they
          have
          beneficial ownership, were loan customers of the Banks during 2006 and
          2005. 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.
 
 An
          analysis of the 2006 activity with respect to all director and executive
          officer
          loans is as follows (in thousands):
 
 Balance,
                    December 31, 2005
                
                $
                14,668Additions,
                    including loans now meeting disclosure requirements
                
                
                8,198Amounts
                    collected and loans no longer meeting disclosure
                    requirements
                
                
                (8,535
                )Balance,
                    December 31, 2006
                
                $
                14,331
 
 Activity in
          the allowance for loan losses was as follows:
 
 2006
                
                2005
                
                2004Balance,
                    beginning of year
                
                $
                7,892
                
                $
                9,384
                
                $
                14,300Loans
                    charged off
                
                
                (1,410
                )
                
                (2,215
                )
                
                (6,992
                )Recoveries
                
                
                1,340
                
                
                719
                
                
                1,050Provision
                    for loan losses
                
                
                (1,161
                )
                
                4
                
                
                1,026Balance,
                    end of year
                
                $
                6,661
                
                $
                7,892
                
                $
                9,384
 
 Impaired
          loans were as follows:
 2006
                
                2005
                
                2004Impaired
                    loans at year-end with an allowance
                
                $
                7,766
                
                $
                7,926
                
                $
                12,918Impaired
                    loans at year-end with no allowance
                
                
                0
                
                
                291
                
                
                263Amount
                    of the allowance for loan losses allocated
                
                
                1,774
                
                
                1,921
                
                
                2,915Average
                    of impaired loans during the year
                
                
                8,258
                
                
                10,819
                
                
                16,069Interest
                    income recognized during impairment
                
                
                480
                
                
                583
                
                
                640Cash-basis
                    interest income recognized
                
                
                480
                
                
                499
                
                
                620
 
  (continued)
 84
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          6 - LOANS** (Continued)
 
 Nonperforming
          loans at year end were as follows:
 
 2006
                
                2005
                
                2004Loans
                    past due over 90 days still on accrual
                
                $
                992
                
                $
                853
                
                $
                739Non-accrual
                    loans
                
                
                4,698
                
                
                3,751
                
                
                6,847Restructured
                    loans
                
                
                1,268
                
                
                1,540
                
                
                238
 
 Nonperforming
          loans include some impaired loans and smaller balance homogeneous loans,
          such as
          residential mortgage and consumer loans, that are collectively evaluated
          for
          impairment. Loan impairment is reported when full payment under the loan
          terms
          is not anticipated, which can include loans that are current or less than
          90
          days past due.
 
 
 **NOTE
          7 - PREMISES AND EQUIPMENT**
 
 Year-end
          premises and equipment were as follows:
 
 2006
                
                2005Land
                    and improvements
                
                $
                1,522
                
                $
                1,618Buildings
                    and leasehold improvements
                
                
                5,659
                
                
                6,218Furniture
                    and equipment
                
                
                7,431
                
                
                7,03914,612
                
                
                14,875Less:
                    accumulated depreciation
                
                
                (8,079
                )
                
                (7,749
                )$
                6,533
                
                $
                7,126
 
 Operating
          Leases :
          The
          Company leases certain branch and other properties as well as some equipment
          under operating leases. Rent expense, net of rental income, was $204, $188,
          and
          $234 for 2006, 2005, and 2004. Rent commitments, before considering renewal
          options that generally are present, were as follows:
 
 2007
                
                $
                1382008
                
                
                472009
                
                
                152010
                
                
                22011
                    and thereafter
                
                
                4$
                206
 
  (continued)
 85
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          8 - DEPOSITS**
 
 At
          December 31, 2006  the
          scheduled maturities of time deposits are as follows:
 
 2007
                
                $
                154,1552008
                
                
                26,8532009
                
                
                7,7392010
                
                
                7,2482011
                    and thereafter
                
                
                3,037$
                199,032
 
 Certain
          directors and executive officers of the Banks and companies in which they
          have
          benef icial
          ownership were deposit customers of the Banks during 2006 and 2005. The
          balance
          of such deposits at December 31, 2006 and 2005 were approximately $11,295
          and
          $8,090.
 
 
 **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:
 
 2006
                
                2005Year-end
                    balance
                
                $
                12,555
                
                $
                9,317Average
                    balance during the year
                
                $
                9,542
                
                $
                8,201Average
                    interest rate during the year
                
                
                2.43
                %
                
                2.10
                %Maximum
                    month-end balance during the year
                
                $
                12,555
                
                $
                9,378Weighted
                    average interest rate at year-end
                
                
                2.34
                %
                
                2.39
                %
  (continued)
 86
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (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 four to six years, with fixed interest rates ranging from 4.10% to 6.64%,
          averaging 5.82%. 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, 2006 are as follows:
 
 2007
                
                $
                6372008
                
                
                6702009
                
                
                7052010
                
                
                4,7422011
                
                
                461Thereafter
                
                
                70$
                7,285
 
 
 **NOTE
          11 - NOTES PAYABLE AND OTHER BORROWED FUNDS**
 
 On
          January 31, 2006, the Company executed and delivered to First Guaranty
          Bank of
          Hammond, Louisiana a Promissory Note and Business Loan Agreement dated
          January
          31, 2006 for the principal amount of $7,000,000, bearing interest floating
          daily
          at the “Wall Street Journal” prime rate (currently 8.25%) and requiring monthly
          principal payments of $50,000 until maturity on September 28, 2017. The
          note is
          secured by a pledge of Premier’s 100% interest in Boone County Bank (a wholly
          owned subsidiary) under Commercial Pledge Agreement dated January 31, 2006.
          The
          proceeds of this note were used to redeem $7,000,000 (280,000 shares) of
          Premier’s 9.75% Trust Preferred Securities as of January 31, 2006. Premier’s
          chairman owns approximately 27.6% of the voting stock of First Guaranty
          Bank.
Premier’s
          board of directors reviewed the loan and authorized the Company to enter
          into
          the loan transaction .
  On
          November
          10, 2006, Premier Financial Bancorp, Inc. (“Premier”) executed and delivered to
          The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) a
          Term Note and Business Loan Agreement dated November 10, 2006 in the principal
          amount of $6,500,000, bearing interest floating daily at the “Wall Street
          Journal” prime rate minus 1.00% (initially 7.25%) and requiring 83 monthly
          principal and interest payments of $100,000 and a final
  (continued)
 87
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          11 - NOTES PAYABLE AND OTHER BORROWED FUNDS** (Continued)
 
 payment
          of
          any balance due at maturity on November 9, 2013. The note is secured by
          a pledge
          of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. (a wholly
          owned subsidiary) and Premier’s 100% interest in Farmers-Deposit Bank, Eminence,
          Kentucky (a wholly owned subsidiary) under a Stock Pledge and Security
          Agreement
          dated November 10, 2006. The proceeds of this note were used in conjunction
          with
          $1,750,000 of the Company’s own cash to redeem the final $8,250,000 (330,000
          shares) of Premier’s 9.75% Trust Preferred Securities on November 10,
          2006.
 
 Scheduled
          principal payments due on the two bank borrowings subsequent to December
          31,
          2006 are as follows:
 
 2007
                
                $
                1,3442008
                
                
                1,4002009
                
                
                1,4602010
                
                
                1,5242011
                
                
                1,594Thereafter
                
                
                4,953$
                12,275
 
 In
          addition to the $6,500,000 Term Note, Premier executed and delivered to
          the
          Bankers’ Bank a Promissory Note whereby Premier may request and receive monies
          from Bankers’ Bank from time to time, but the aggregate outstanding principal
          balance under the Promissory Note at any time shall not exceed $3,500,000,
          and
          the right to request and receive monies from Bankers’ Bank hereunder shall cease
          and terminate on November 9, 2007. The outstanding principal balance under
          this
          Promissory Note shall bear annual interest floating daily at the “Wall Street
          Journal” prime rate minus 1.00% (initially 7.25%). Interest on this Promissory
          Note shall be due and payable on the 5th day of each, January, April, July
          and
          October during the term of this Promissory Note, and at the maturity date
          hereof. Any outstanding principal amount loaned to Premier under this Promissory
          Note, and not previously repaid, shall be due on November 9, 2007.  The
          Promissory Note is secured by the same collateral as the $6,500,000 Term
          Note.
 
 In
          June 2006, the Company fully repaid the non-interest bearing $701,000 note
          payable to Mr. Reynolds, Chairman of the Board, and the non-interest bearing
          $701,000 note payable to Mr. Walker, President and CEO of the Company.
          In an
          agreement reached with the Federal Reserve Bank of Cleveland, Mr. Reynolds
          loaned the Company the proceeds to make the June 2002 distribution on the
          Trust
          Preferred Securities. Similarly, Mr. Walker loaned the Company the proceeds
          to
          make the September 2002 distribution of the Trust Preferred
          Securities.
 
  (continued)
 88
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (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 were 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 were
          scheduled to mature on June 30, 2027, were unsecured obligations and ranked
          subordinate and junior to the right of payment to all senior indebtedness,
          liabilities and obligations of the Company. The Debentures represented
          the sole
          assets of the Trust. Distributions on the Preferred Securities were 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
          were
          made to the extent interest on the Debentures was received by the Trust.
          Debt
          issuance costs of $1,478 were capitalized by the Trust and were amortized
          over
          the life of the debenture.
 
 The
          Company determined that the Trust met the definition of a variable interest
          entity and that the Company was not the primary beneficiary of the Trust’s
          activities. Accordingly, the Trust was not consolidated with the Company
          and the
          Company did
          not report the Preferred Securities issued by the Trust as liabilities.
          Instead
          the Company reported as liabilities the Debentures issued by the Company
          and
          held by the Trust, as these were no longer eliminated in consolidation.
          The
          amounts were reported as “ Guaranteed
          junior subordinated interest debentures ”
and
          continued to be presented in liabilities on the balance sheet.
 
 The
          Debentures were 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 caused 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. Beginning in
          March
          2003 and ending with a final redemption on November 10, 2006, the Company
          has
          redeemed all of the $28,750 of the outstanding Trust Preferred Securities.
          The
          following table details the redemptions by date and amount.
 
 March
                    31, 2003
                
                $
                3,000October
                    15, 2004
                
                
                4,500December
                    31, 2004
                
                
                1,000December
                    31, 2005
                
                
                5,000January
                    31, 2006
                
                
                7,000November
                    10, 2006
                
                
                8,250$
                28,750
  (continued)
 89
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          13 - INCOME TAXES**
 
 The
          components of the provision (benefit) for income taxes are as
          follows:
 
 2006
                
                2005
                
                2004Current
                
                $
                2,212
                
                $
                910
                
                $
                (2,435
                )Deferred
                
                
                1,071
                
                
                1,119
                
                
                3,334Provision
                    for income taxes
                
                $
                3,283
                
                $
                2,029
                
                $
                899
 
 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.
 
 2006
                
                2005Deferred
                    tax assetsAllowance
                    for loan losses
                
                $
                2,265
                
                $
                2,683AMT
                    and other credit carryforwards
                
                
                0
                
                
                359Write-downs
                    of other real estate owned
                
                
                80
                
                
                9Taxable
                    income on non-accrual loans
                
                
                153
                
                
                54Unrealized
                    loss on investment securities
                
                
                592
                
                
                885Other
                
                
                40
                
                
                59Total
                    deferred tax assets
                
                
                3,130
                
                
                4,049Deferred
                    tax liabilitiesAmortization
                    of intangibles
                
                $
                2,001
                
                $
                1,660Depreciation
                
                
                105
                
                
                101Federal
                    Home Loan Bank dividends
                
                
                318
                
                
                270Other
                
                
                157
                
                
                105Total
                    deferred tax liabilities
                
                
                2,581
                
                
                2,136Net
                    deferred tax assets, included in other assets
                
                $
                549
                
                $
                1,913
 
  (continued)
 90
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          13 - INCOME TAXES** (Continued)
 
 An
          analysis of the differences between the effective tax rates and the statutory
          U.S. federal income tax rate is as follows:
 
 2006
                
                2005
                
                2004U.S.
                    federal income tax rate
                
                $
                3,327
                
                
                34.0
                %
                $
                2,197
                
                
                34.0
                %
                $
                973
                
                
                34.0
                %Changes
                    from the statutory rateTax-exempt
                    interest income
                
                
                (97
                )
                
                (1.0
                )
                
                (81
                )
                
                (1.3
                )
                
                (131
                )
                
                (4.6
                )Non-deductible
                    interest expense
                  related
                    to carrying tax-exempt
                  interest
                    earning assets
                
                
                8
                
                
                0.1
                
                
                5
                
                
                0.1
                
                
                5
                
                
                0.2Non-deductible
                    stock compensation
                  expense
                
                
                46
                
                
                0.5
                
                
                -
                
                
                0.0
                
                
                -
                
                
                0.0Tax
                    credits
                
                
                (10
                )
                
                (0.1
                )
                
                (10
                )
                
                (0.2
                )
                
                -
                
                
                0.0Other
                
                
                9
                
                
                0.1
                
                
                (82
                )
                
                (1.2
                )
                
                52
                
                
                1.8$
                3,283
                
                
                33.6
                %
                $
                2,029
                
                
                31.4
                %
                $
                899
                
                
                31.4
                %
 
 
 **NOTE
          14 - EMPLOYEE BENEFIT PLANS**
 
 The
          Company has qualified profit sharing plans that cover substantially 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 $236,
          $229 and $197 in 2006, 2005 and 2004.
 
 
  (continued)
 91
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          15- STOCK COMPENSATION EXPENSE**
 
 On
          January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment,” which
          is a revision of SFAS No. 123, “Accounting for Stock Issued for Employees.” SFAS
          No. 123R establishes accounting requirements for share-based compensation
          to
          employees and carries forward prior guidance on accounting for awards to
          non-employees. Prior to the adoption of SFAS No. 123R, the Company reported
          employee compensation expense under stock option plans only if options
          were
          granted below market prices at grant date in accordance with the intrinsic
          value
          method of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for
          Stock Issued to Employees,” and related interpretations. In accordance with APB
          No. 25, the Company reported no compensation expense on options granted
          as the
          exercise price of the options granted always equaled the market price of
          the
          underlying stock on the date of grant. SFAS No. 123R eliminates the ability
          to
          account for stock-based compensation using APB No. 25 and requires that
          such
          transactions be recognized as compensation cost in the income statement
          based on
          their fair values on the measurement date, which is generally the date
          of the
          grant.
 
  The
          Company transitioned to SFAS No. 123R using the modified prospective application
          method ("modified prospective application"). As permitted under modified
          prospective application, as it is applicable to the Company, SFAS No. 123R
          applies to new awards and to awards modified, repurchased, or cancelled
          after
          January 1, 2006. Additionally, compensation cost for non-vested awards
          that were
          outstanding as of January 1, 2006 will be recognized as the remaining requisite
          service is rendered during the period of and/or the periods after the adoption
          of SFAS No. 123R, adjusted for forfeitures. The recognition of compensation
          cost
          for those earlier awards is based on the same method and on the same grant-date
          fair values previously determined for the pro forma disclosures reported
          by the
          Company for periods prior to January 1, 2006.
 
 On
          February 15, 2006, 35,250 incentive stock options were granted out of the
          2002
          Plan at an exercise price of $16.00. These options vest in three equal
          annual
          installments ending on February 15, 2009. 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 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 Plan at an exercise
          price
          of $7.96. These options vested in three equal annual installments and were
          fully
          vested on January 15, 2006.
 
  (continued)
 92
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          15- STOCK COMPENSATION EXPENSE** **(Continued)**
 
 The
          fair value of the Company's employee stock options granted is estimated
          at the
          date of grant using the Black-Scholes option-pricing model. This model
          requires
          the input of highly subjective assumptions, changes to which can materially
          affect the fair value estimate. Additionally, there may be other factors
          that
          would otherwise have a significant effect on the value of employee stock
          options
          granted but are not considered by the model. The assumptions used in the
          Black-Scholes option-pricing model are as follows:
 
 2006
                
                2005
                
                2004Risk-free
                    interest rate
                
                
                4.62
                %
                
                3.70
                %
                
                3.15
                %Expected
                    option life (yrs)
                
                
                5.00
                
                
                5.00
                
                
                5.00Expected
                    stock price volatility
                
                
                0.26
                
                
                0.25
                
                
                0.25Dividend
                    yield
                
                
                0.00
                %
                
                0.00
                %
                
                0.00
                %Weighted
                    average fair value of
                  options
                    granted during the year
                
                $
                5.21
                
                $
                3.48
                
                $
                2.64
 The
          risk-free interest rate for the expected term of the option is based on
          the U.S.
          Treasury yield in effect at the time of the grant. The expected option
          life was
          estimated at half the total option term since there has been little option
          exercise history. The expected stock price volatility is based on historical
          volatilities of the Company’s common stock. The estimated dividend yield is the
          dividend yield at the time of the option grant.
 
 
 Stock-based
          compensation expense is recognized ratably over the requisite service period
          for
          all awards. Unrecognized stock-based compensation expense related to stock
          options totaled $85 at December 31, 2006. This unrecognized expense is
          expected
          to be recognized over the next 27 months based on the vesting periods of
          the
          options.
 
 Information
          related to the stock option plan during each year follows:
 
 2006
                
                2005
                
                2004Intrinsic
                    value of options exercised
                
                $
                9
                
                $
                5
                
                $
                -Cash
                    received from option exercises
                
                
                27
                
                
                15
                
                
                -Tax
                    benefit realized from option exercises
                
                
                2
                
                
                -
                
                
                -
   (continued)
 93
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          15 STOCK COMPENSATION EXPENSE - continued**
 
 A
          summary of the Company’s stock option activity is as follows:
 
 ----------2006----------
                
                ----------2005----------
                
                ----------2004----------Weighted
                  Average
                  Exercise
                
                
                
                Weighted
                  Average
                  Exercise
                
                
                
                Weighted
                  Average
                  ExerciseOptions
                
                Price
                
                Options
                
                Price
                
                Options
                
                PriceOutstanding
                    at beginning of year
                
                
                111,750
                
                $
                11.05
                
                
                83,650
                
                $
                10.65
                
                
                55,450
                
                $
                11.33Grants
                
                
                35,250
                
                
                16.00
                
                
                35,000
                
                
                11.62
                
                
                28,200
                
                
                9.30Exercises
                
                
                (3,002
                )
                
                9.02
                
                
                (1,667
                )
                
                8.50Forfeitures
                    or expired
                
                
                (23,750
                )
                
                13.11
                
                
                (5,233
                )
                
                9.31
                
                
                -
                
                
                0.00Outstanding
                    at year-end
                
                
                120,248
                
                $
                12.25
                
                
                111,750
                
                $
                11.05
                
                
                83,650
                
                $
                10.65Exercisable
                    at year-end
                
                
                55,931
                
                $
                10.68
                
                
                54,180
                
                $
                11.61
                
                
                39,821
                
                $
                12.65Weighted
                    average remaining life
                
                
                7.3
                
                
                
                
                
                6.2
                
                
                
                
                
                6.2Weighted
                    average fair value of
                  options
                    granted during the year
                
                $
                5.21
                
                
                
                
                $
                3.48
                
                
                
                
                $
                2.64
 
 
 Additional
          information regarding stock options outstanding and exercisable at December
          31,
          2006, is provided in the following table:
  -
                      - - - - - - - Outstanding - - - - - - - -
                  
                  -
                      - - - - - - - Currently Exercisable - - - - - - - -Range
                      of Exercise Prices
                  
                  Number
                  
                  Weighted
                      Average Exercise Price
                  
                  Aggregate
                      Intrinsic Value
                  
                  Number
                  
                  Weighted
                      Average Remaining Contractual Life
                  
                  Weighted
                      Average Exercise Price
                  
                  Aggregate
                      Intrinsic Value$7.50
                      to $10.00
                  
                  
                  42,749
                  
                  $
                  8.70
                  
                  $
                  230
                  
                  
                  34,590
                  
                  
                  6.5
                  
                  $
                  8.55
                  
                  $
                  191$10.01
                      to $12.50
                  
                  
                  32,999
                  
                  
                  11.62
                  
                  
                  81
                  
                  
                  10,341
                  
                  
                  8.0
                  
                  
                  11.62
                  
                  
                  25$15.01
                      to $17.50
                  
                  
                  44,500
                  
                  
                  16.12
                  
                  
                  0
                  
                  
                  11,000
                  
                  
                  2.0
                  
                  
                  16.50
                  
                  
                  0Outstanding
                      at Dec 31, 2006
                  
                  
                  120,248
                  
                  
                  12.25
                  
                  $
                  311
                  
                  
                  55,931
                  
                  
                  5.9
                  
                  
                  10.68
                  
                  $
                  216
 
  (continued)
 94
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          16 - RELATED PARTY TRANSACTIONS**
 
 During
          2006, 2005, and 2004, the Company paid approximately $228, $191, and $358
          for
          printing, supplies, furniture, and equipment to a company affiliated by
          common
          ow nership.
          The Company also paid another affiliate approximately $468, $499, and $489
          in
          2006, 2005, and 2004 to permit the Company’s employees to participate in that
          entity’s employee medical benefit plan.
 
 During
          2006, 2005 and 2004, the Company paid approximately $52, $52, and $52 to
          lease
          its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia
          from
          River City Properties, LLC, an entity 12.5% owned by the Company’s Chairman of
          the Board.
 
 
  (continued)
 95
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          17- 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 2006, 2005 and 2004
          is
          presented below:
 
 2006
                
                2005
                
                2004Basic
                    earnings per share from continuing operationsIncome
                    available to common stockholders
                
                $
                6,501
                
                $
                4,434
                
                $
                1,963Weighted
                    average common shares outstanding
                
                
                5,236
                
                
                5,233
                
                
                5,232Earnings
                    per share
                
                $
                1.24
                
                $
                0.85
                
                $
                0.37Diluted
                    earnings per share from continuing operationsIncome
                    available to common stockholders
                
                $
                6,501
                
                $
                4,434
                
                $
                1,963Weighted
                    average common shares outstanding
                
                
                5,236
                
                
                5,233
                
                
                5,232Add
                    dilutive effects of assumed exercise of stock options
                
                
                28
                
                
                15
                
                
                5Weighted
                    average common and dilutive potential
                  common
                    shares outstanding
                
                
                5,264
                
                
                5,248
                
                
                5,237Earnings
                    per share assuming dilution
                
                $
                1.24
                
                $
                0.84
                
                $
                0.37Basic
                    earnings per shareIncome
                    available to common stockholders
                
                $
                6,501
                
                $
                4,434
                
                $
                6,697Weighted
                    average common shares outstanding
                
                
                5,236
                
                
                5,233
                
                
                5,232Earnings
                    per share
                
                $
                1.24
                
                $
                0.85
                
                $
                1.28Diluted
                    earnings per shareIncome
                    available to common stockholders
                
                $
                6,501
                
                $
                4,434
                
                $
                6,697Weighted
                    average common shares outstanding
                
                
                5,236
                
                
                5,233
                
                
                5,232Add
                    dilutive effects of assumed exercise of stock options
                
                
                28
                
                
                15
                
                
                5Weighted
                    average common and dilutive potential
                  common
                    shares outstanding
                
                
                5,264
                
                
                5,248
                
                
                5,237Earnings
                    per share assuming dilution
                
                $
                1.24
                
                $
                0.84
                
                $
                1.28
  
 Stock
          options for 46,250, 32,000 and 32,000 shares of common stock were not considered
          in computing diluted earnings per share for 2006, 2005 and 2004 because
          they
          were antidilutive.
  (continued)
 96
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 The
          fair values of the Company’s financial instruments at year-end are as
          fo llows:
 
 2006
                
                2005Carrying
                  Amount
                
                Fair
                  Value
                
                Carrying
                  Amount
                
                Fair
                  ValueFinancial
                    assetsCash
                    and due from banks
                
                $
                16,974
                
                $
                16,974
                
                $
                16,080
                
                $
                16,080Federal
                    funds sold
                
                
                27,583
                
                
                27,583
                
                
                18,812
                
                
                18,812Securities
                    available for sale
                
                
                121,367
                
                
                121,367
                
                
                137,419
                
                
                137,419Loans
                    held for sale
                
                
                1,978
                
                
                1,978
                
                
                868
                
                
                868Loans,
                    net
                
                
                337,136
                
                
                337,730
                
                
                320,825
                
                
                304,589Federal
                    Home Loan Bank and
                  Federal
                    Reserve Bank stock
                
                
                3,265
                
                
                3,265
                
                
                3,060
                
                
                3,060Interest
                    receivable
                
                
                2,821
                
                
                2,821
                
                
                2,661
                
                
                2,661Financial
                    liabilitiesDeposits
                
                $
                (438,950
                )
                $
                (437,280
                )
                $
                (435,843
                )
                $
                (434,459
                )Federal
                    funds purchased
                
                
                (976
                )
                
                (976
                )
                
                -
                
                
                -Securities
                    sold under agreements
                  to
                    repurchase
                
                
                (12,555
                )
                
                (12,555
                )
                
                (9,317
                )
                
                (9,317
                )Federal
                    Home Loan Bank advances
                
                
                (7,285
                )
                
                (7,506
                )
                
                (8,334
                )
                
                (7,355
                )Other
                    borrowed funds
                
                
                (12,275
                )
                
                (12,303
                )
                
                -
                
                
                -Notes
                    payable
                
                
                -
                
                
                -
                
                
                (1,402
                )
                
                (1,319
                )Guaranteed
                    junior subordinated
                  interest
                    debentures
                
                
                -
                
                
                -
                
                
                (15,722
                )
                
                (14,997
                )Interest
                    payable
                
                
                (1,061
                )
                
                (1,061
                )
                
                (724
                )
                
                (724
                )
 
 Carrying
          amount is the estimated fair value for cash and due from bank s,
          Federal funds sold, Federal Home Loan Bank and Federal Reserve Bank stock,
          accrued interest receivable and payable, 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)
 97
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          19 - 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 $5,226 at
          December 31, 2006.
 
 At
          December 31, 2006 and 2005, the Banks had the following financial instruments
          whose approximate contract amounts represent credit risk:
 
 2006
                
                2005Standby
                    letters of credit
                
                $
                678
                
                $
                949Commitments
                    to extend creditFixed
                
                $
                5,498
                
                $
                8,303Variable
                
                
                32,988
                
                
                24,158
 
 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)
 98
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          20 - 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, 2006 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
          21 - STOCKHOLDERS’ EQUITY**
 
 The
          Company’s principal source of funds for dividend payments is dividends received
          from the subsidiary Banks. Banking regulations limit the amount of dividends
          that may be paid without prior approval of regulatory agencies. Under these
          regulations, the amount of 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 2007 the Banks could, without prior approval, declare
          dividends of approximately $3.2 million plus any 2007 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, 2006 the Company and
          the Banks
          meet all quantitative capital adequacy requirements to which they are
          subject.
 
 
  (continued)
 99
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          21 - STOCKHOLDERS’ EQUITY** (Continued)
 
 The
          Company’s and the subsidiary Banks’ capital amounts and ratios as of December
          31, 2006 are presented in the table below. As of December 31, 2006, 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.
 
 
 To
                    Be Well CapitalizedFor
                    Capital
                
                Under
                    Prompt CorrectiveActual
                
                Adequacy
                    Purposes
                
                Action
                    Provisions**2006**
                
                Amount
                
                Ratio
                
                Amount
                
                Ratio
                
                Amount
                
                RatioTotal
                    Capital (to Risk-Weighted Assets):Consolidated(1)
                
                $
                50,313
                
                
                16.0
                %
                $
                25,239
                
                
                8
                %
                $
                31,549
                
                
                10
                %Boone
                    County Bank
                
                
                16,488
                
                
                20.7
                
                
                6,372
                
                
                8
                
                
                7,965
                
                
                10Citizens
                    Deposit Bank
                
                
                12,819
                
                
                17.4
                
                
                5,893
                
                
                8
                
                
                7,366
                
                
                10Farmers
                    Deposit Bank
                
                
                10,441
                
                
                23.2
                
                
                3,606
                
                
                8
                
                
                4,507
                
                
                10Ohio
                    River Bank
                
                
                7,233
                
                
                16.3
                
                
                3,557
                
                
                8
                
                
                4,447
                
                
                10First
                    Central Bank
                
                
                9,291
                
                
                12.6
                
                
                5,904
                
                
                8
                
                
                7,380
                
                
                10Tier
                    I Capital (to Risk-Weighted Assets):Consolidated(1)
                
                $
                46,336
                
                
                14.7
                %
                $
                12,619
                
                
                4
                %
                $
                18,929
                
                
                6
                %Boone
                    County Bank
                
                
                15,490
                
                
                19.5
                
                
                3,186
                
                
                4
                
                
                4,779
                
                
                6Citizens
                    Deposit Bank
                
                
                11,893
                
                
                16.2
                
                
                2,946
                
                
                4
                
                
                4,419
                
                
                6Farmers
                    Deposit Bank
                
                
                9,854
                
                
                21.9
                
                
                1,803
                
                
                4
                
                
                2,704
                
                
                6Ohio
                    River Bank
                
                
                6,721
                
                
                15.1
                
                
                1,779
                
                
                4
                
                
                2,668
                
                
                6First
                    Central Bank
                
                
                8,475
                
                
                11.5
                
                
                2,952
                
                
                4
                
                
                4,428
                
                
                6Tier
                    I Capital (to Average Assets):Consolidated(1)
                
                $
                46,336
                
                
                8.9
                %
                $
                20,855
                
                
                4
                %
                $
                26,068
                
                
                5
                %Boone
                    County Bank
                
                
                15,490
                
                
                10.6
                
                
                5,824
                
                
                4
                
                
                7,280
                
                
                5Citizens
                    Deposit Bank
                
                
                11,893
                
                
                10.0
                
                
                4,779
                
                
                4
                
                
                5,974
                
                
                5Farmers
                    Deposit Bank
                
                
                9,854
                
                
                13.4
                
                
                2,949
                
                
                4
                
                
                3,686
                
                
                5Ohio
                    River Bank
                
                
                6,721
                
                
                8.4
                
                
                3,211
                
                
                4
                
                
                4,013
                
                
                5First
                    Central Bank
                
                
                8,475
                
                
                8.5
                
                
                3,981
                
                
                4
                
                
                4,976
                
                
                5(1)
                    Consolidated company is not subject to Prompt Corrective Action
                    Provisions
 
  (continued)
 100
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          21 - 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)
                    Consolidated company is not subject to Prompt Corrective Action
                    Provisions
 
  (continued)
 101
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          22 - PARENT COMPANY FINANCIAL STATEMENTS**
 
 CONDENSED
                    BALANCE SHEETSDecember
                    312006
                
                2005**ASSETS**Cash
                
                $
                3,562
                
                $
                3,248Investment
                    in subsidiaries
                
                
                69,218
                
                
                66,936Premises
                    and equipment
                
                
                560
                
                
                541Other
                    assets
                
                
                375
                
                
                1,106**Total
                    assets**
                
                $
                73,715
                
                $
                71,831**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Other
                    liabilities
                
                $
                438
                
                $
                420Notes
                    payable
                
                
                -
                
                
                1,402Subordinated
                    debentures issued to trust
                
                
                -
                
                
                15,722Other
                    borrowed funds
                
                
                12,275
                
                
                -Total
                    liabilities
                
                
                12,713
                
                
                17,544Stockholders’
                    equityPreferred
                    stock
                
                
                -
                
                
                -Common
                    stock
                
                
                1,108
                
                
                1,105Additional
                    paid-in capital
                
                
                43,624
                
                
                43,458Retained
                    earnings
                
                
                17,420
                
                
                11,442Accumulated
                    other comprehensive income
                
                
                (1,150
                )
                
                (1,718
                )Total
                    stockholders’ equity
                
                
                61,002
                
                
                54,287**Total
                    liabilities and stockholders’ equity**
                
                $
                73,715
                
                $
                71,831
 
 
 
  (continued)
 102
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          22 - PARENT COMPANY FINANCIAL STATEMENTS** (Continued)
 
 Condensed
                    Statement of OperationsYears
                    Ended December 312006
                
                2005
                
                2004IncomeDividends
                    from continuing subsidiaries
                
                $
                6,440
                
                $
                8,405
                
                $
                5,800Interest
                    and dividend income
                
                
                37
                
                
                45
                
                
                46Other
                    income
                
                
                615
                
                
                484
                
                
                367Total
                    income
                
                
                7,092
                
                
                8,934
                
                
                6,213ExpensesInterest
                    expense
                
                
                1,334
                
                
                2,142
                
                
                3,117Salaries
                    and employee benefits
                
                
                1,199
                
                
                1,180
                
                
                726Professional
                    fees
                
                
                165
                
                
                37
                
                
                1,607Accelerated
                    subordinated debenture issuance costs
                
                
                548
                
                
                184
                
                
                214Other
                    expenses
                
                
                420
                
                
                341
                
                
                514Total
                    expenses
                
                
                3,666
                
                
                3,884
                
                
                6,178Income
                    from continuing operations beforeincome
                    taxes and
                  equity
                    in undistributedincome
                    of subsidiaries
                
                
                3,426
                
                
                5,050
                
                
                35Income
                    tax (benefit)
                
                
                (1,160
                )
                
                (1,314
                )
                
                (2,071
                )Income
                    from continuing operations before
                  equity
                    in undistributed income of subsidiaries
                
                
                4,586
                
                
                6,364
                
                
                2,106Equity
                    in undistributed income (excess distributions) of
                  subsidiaries
                    continuing in operation
                
                
                1,915
                
                
                (1,930
                )
                
                (143
                )Net
                    income from continuing operations
                
                
                6,501
                
                
                4,434
                
                
                1,963Net
                    income from discontinued operations
                
                
                -
                
                
                -
                
                
                4,734Net
                    income
                
                $
                6,501
                
                $
                4,434
                
                $
                6,697
  
  (continued)
 103
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          22 - PARENT COMPANY FINANCIAL STATEMENTS** (Continued)
 Condensed
                      Statement of Cash FlowsYears
                      Ended December 312006
                  
                  2005
                  
                  2004Cash
                      flows from operating activitiesNet
                      income
                  
                  $
                  6,501
                  
                  $
                  4,434
                  
                  $
                  6,697Adjustments
                      to reconcile net income to
                    net
                      cash from operating activitiesIncome
                      from discontinued operation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (4,734
                  )Depreciation
                  
                  
                  101
                  
                  
                  83
                  
                  
                  91Stock
                      compensation expense
                  
                  
                  142
                  
                  
                  -
                  
                  
                  -(Gain)
                      loss from sales of assets
                  
                  
                  (4
                  )
                  
                  (3
                  )
                  
                  159Dividends
                      in excess of net income of
                    subsidiaries
                      continuing in operation
                  
                  
                  -
                  
                  
                  1,930
                  
                  
                  143Equity
                      in undistributed earnings of subsidiaries
                  
                  
                  (1,915
                  )
                  
                  -
                  
                  
                  -Change
                      in other assets
                  
                  
                  258
                  
                  
                  (35
                  )
                  
                  (1,436
                  )Change
                      in other liabilities
                  
                  
                  17
                  
                  
                  (4,934
                  )
                  
                  1,406Net
                      cash from operating activities
                  
                  
                  5,100
                  
                  
                  1,475
                  
                  
                  2,326Cash
                      flows from investing activitiesCapital
                      contributed to subsidiaries continuing in operation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,831
                  )Proceeds
                      from liquidation of subsidiary
                  
                  
                  203
                  
                  
                  -
                  
                  
                  14,311Proceeds
                      from sales of assets, net of purchases
                  
                  
                  (116
                  )
                  
                  (108
                  )
                  
                  192Net
                      cash from investing activities
                  
                  
                  87
                  
                  
                  (108
                  )
                  
                  12,672Cash
                      flows from financing activitiesEarly
                      redemption of subordinated note
                  
                  
                  (15,250
                  )
                  
                  (5,000
                  )
                  
                  (5,500
                  )Cash
                      dividends paid to shareholders
                  
                  
                  (523
                  )
                  
                  -
                  
                  
                  -Issuance
                      of common stock
                  
                  
                  27
                  
                  
                  15
                  
                  
                  -Proceeds
                      from borrowings
                  
                  
                  13,500
                  
                  
                  -
                  
                  
                  -Payments
                      on other borrowed funds
                  
                  
                  (2,627
                  )
                  
                  (800
                  )
                  
                  (5,400
                  )Net
                      cash from financing activities
                  
                  
                  (4,873
                  )
                  
                  (5,785
                  )
                  
                  (10,900
                  )Net
                      change in cash and cash equivalents
                  
                  
                  314
                  
                  
                  (4,418
                  )
                  
                  4,098Cash
                      and cash equivalents at beginning of year
                  
                  
                  3,248
                  
                  
                  7,666
                  
                  
                  3,568Cash
                      and cash equivalents at end of year
                  
                  $
                  3,562
                  
                  $
                  3,248
                  
                  $
                  7,666
 
  (continued)
 104
 **Table
              of Contents**
 **PREMIER
          FINANCIAL BANCORP, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 December
          31, 2006, 2005, and 2004
 (Dollars
          in Thousands, Except Per Share Data)
 
 
 **NOTE
          23 - QUARTERLY FINANCIAL DATA (UNAUDITED)**
  Earnings
                      per ShareInterest
                    Income
                  
                  Net
                      Interest Income
                  
                  Net
                    Income
                  
                  Basic
                  
                  Fully
                    Diluted2006First
                      Quarter
                  
                  $
                  7,676
                  
                  $
                  5,204
                  
                  $
                  1,367
                  
                  $
                  0.26
                  
                  $
                  0.26Second
                      Quarter
                  
                  
                  8,014
                  
                  
                  5,360
                  
                  
                  2,000
                  
                  
                  0.38
                  
                  
                  0.38Third
                      Quarter
                  
                  
                  8,248
                  
                  
                  5,377
                  
                  
                  1,475
                  
                  
                  0.28
                  
                  
                  0.28Fourth
                      Quarter
                  
                  
                  8,462
                  
                  
                  5,454
                  
                  
                  1,659
                  
                  
                  0.32
                  
                  
                  0.322005First
                      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
                  
                  
                  0.29
 In
          2006, interest income improved each quarter as yields on earning assets
          rose and
          loan balances outstanding increased. The improvement in interest income
          drove
          the improvement in net interest income, but was tempered by rising interest
          costs on deposits. Net income was also impacted positively in each of the
          four
          quarters by reversals of the provision for loan losses (negative provisions)
          especially the second quarter when $819,000 of negative provisions were
          recorded. The negative provisions were due to improvements in the Company’s
          historical loan loss ratios, recoveries of previously charged-off loans
          and the
          collection of impaired loans with previous allocations of the allowance
          for loan
          losses that were no longer needed.
 
 Similarly
          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.
  105
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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**
 
 A.
            Disclosure
                Controls & Procedures 
 Premier
        management, including the Chief Executive Officer and Chief Financial Officer,
        has conducted an evaluation of the effectiveness of disclosure controls and
        procedures pursuant to 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.
  106
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 B.
              Changes
                  in Internal Controls over Financial
                  Reporting 
  There
        were no changes in internal controls over financial reporting during the
        fourth
        fiscal quarter that have materially affected or are reasonably likely to
        materially affect Premier's internal controls over financial
        reporting.
 
 
 **Item
        9B. Other Information**
 
 None
 
 
 **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.
 
 
  107
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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).
 
  108
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 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
 
  109
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 Exhibit
                Number
              Description
                  of Document10.9
              Loan
                  Agreement between Premier Financial Bancorp, Inc. and The Kentucky
                  Bankers’ Bank, Inc.10.10
              Term
                  Note to The Kentucky Bankers’ Bank, Inc.10.11
              Promissory
                  Note to The Kentucky Bankers’ Bank, Inc.10.12
              Stock
                  Pledge and Security Agreement between Premier Financial Bancorp,
                  Inc. and
                  The Kentucky Bankers’ Bank, Inc.14.1
              Premier
                  Financial Bancorp, Inc. Code of Ethics for the Chief Executive
                  Officer,
                  Chief Financial Officer and Chief Accounting Officer, filed as
                  Exhibit
                  14.1 to form 10-K filed on April 14, 2004, is incorporated herein
                  by
                  reference.14.2
              Premier
                  Financial Bancorp, Inc. Code of Business Conduct and Ethics, filed
                  as
                  Exhibit 14.2 to form 10-K filed on April 14, 2004, is incorporated
                  herein
                  by reference.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.
 
  110
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 **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, 2007
 
  111
 **Table
            of Contents**
 **PREMIER
        FINANCIAL BANCORP, INC.**
 **FORM
        10-K**
 December
        31, 2006
 
 
 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, 2007Robert
                  W. Walker/s/
                  Brien M. Chase
              Principal
                  Financial and Accounting
              March
                  30, 2007Brien
                  M. Chase
              Officer/s/
                  Toney K. Adkins
              Director
              March
                  21, 2007Toney
                  K. Adkins/s/
                  Hosmer A. Brown, III
              Director
              March
                  21, 2007Hosmer
                  A. Brown, III/s/
                  Edsel Burns
              Director
              March
                  21, 2007Edsel
                  Burns/s/
                  E. V. Holder, Jr.
              Director
              March
                  21, 2007E.
                  V. Holder, Jr./s/
                  Keith F. Molihan
              Director
              March
                  21, 2007Keith
                  F. Molihan/s/
                  Marshall T. Reynolds
              Chairman
                  of the Board
              March
                  21, 2007Marshall
                  T. Reynolds/s/
                  Neal Scaggs
              Director
              March
                  21, 2007Neal
                  Scaggs/s/
                  Thomas W. Wright
              Director
              March
                  21, 2007Thomas
                  W. Wright
 
 112