Edgar Filing: PREMIER FINANCIAL BANCORP INC

pfbi10q06302007.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

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

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. Yesþ No o.

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. (Check one)

Large accelerated filer o.

Accelerated filer o.

Non-accelerated filer þ

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

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

Common stock, no par value, – 5,236,899 shares outstanding at July 31, 2007

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2007

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management’s Discussion and Analysis	18
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	27
Item 4 – Controls and Procedures	27
Part II - Other Information	28
Item 1 – Legal Proceedings	28
Item 1A – Risk Factors	28
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3 – Defaults Upon Senior Securities	28
Item 4 – Submission of Matters to a Vote of Security Holders	28
Item 5 – Other Information	28
Item 6 – Exhibits	29
Signatures -	30

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2007

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying information has not been audited by independent public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal and recurring nature. Premier Financial Bancorp, Inc.’s (“Premier’s”) accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America. Certain accounting principles used by Premier involve a significant amount of judgment about future events and require the use of estimates in their application. The following policies are particularly sensitive in terms of judgments and the extent to which estimates are used: allowance for loan losses, the identification and evaluation of impaired loans, the impairment of goodwill, the realization of deferred tax assets and stock based compensation disclosures. These estimates are based on assumptions that may involve significant uncertainty at the time of their use. However, the policies, the estimates and the estimation process as well as the resulting disclosures are periodically reviewed by the Audit Committee of the Board of Directors and material estimates are subject to review as part of the external audit by the independent public accountants.

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2006 for further information in this regard.

Index to consolidated financial statements:

Consolidated Balance Sheets	4
Consolidated Statements of Net Income	5
Consolidated Statements of Comprehensive Income	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2007AND DECEMBER 31, 2006

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	(UNAUDITED)
	2007			2006
ASSETS
Cash and due from banks	$	16,404		$	16,974
Federal funds sold		37,025			27,583
Securities available for sale		123,446			121,367
Loans held for sale		3,578			1,978
Loans		343,711			343,797
Allowance for loan losses		(6,640	)		(6,661	)
Net loans		337,071			337,136
Federal Home Loan Bank and Federal Reserve Bank stock		3,280			3,265
Premises and equipment, net		6,384			6,533
Real estate and other property acquired through foreclosure		501			495
Interest receivable		2,839			2,821
Goodwill		15,816			15,816
Other assets		915			1,484
Total assets	$	547,259		$	535,452

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	77,713		$	72,784
Time deposits, $100,000 and over		54,653			53,477
Other interest bearing		321,738			312,689
Total deposits		454,104			438,950
Federal funds purchased		-			976
Securities sold under agreements to repurchase		13,526			12,555
Federal Home Loan Bank advances		5,011			7,285
Other borrowed funds		9,107			12,275
Interest payable		1,146			1,061
Other liabilities		1,117			1,348
Total liabilities		484,011			474,450

Stockholders' equity
Preferred 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 shares issued and outstanding		1,108			1,108
Additional paid in capital		43,697			43,624
Retained earnings		19,948			17,420
Accumulated other comprehensive income (loss)		(1,505	)		(1,150	)
Total stockholders' equity		63,248			61,002
Total liabilities and stockholders' equity	$	547,259		$	535,452

See Accompanying Notes to Consolidated Financial Statements

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF NET INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2007AND 2006

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Interest income
Loans, including fees	$	6,754		$	6,404		$	13,518		$	12,493
Securities available for sale
Taxable		1,373			1,288			2,669			2,555
Tax-exempt		40			22			79			45
Federal funds sold and other		545			300			1,058			597
Total interest income		8,712			8,014			17,324			15,690

Interest expense
Deposits		2,788			2,140			5,458			4,089
Repurchase agreements and other		86			58			165			115
FHLB advances and other borrowings		287			251			639			455
Debentures		-			205			-			467
Total interest expense		3,161			2,654			6,262			5,126

Net interest income		5,551			5,360			11,062			10,564
Provision for loan losses		(164	)		(819	)		(128	)		(1,013	)
Net interest income after provision for loan losses		5,715			6,179			11,190			11,577

Non-interest income
Service charges on deposit accounts		707			713			1,340			1,313
Electronic banking income		153			126			290			237
Secondary market mortgage income		153			38			288			89
Life insurance benefit		-			-			212			-
Other		92			129			221			265
		1,105			1,006			2,351			1,904
Non-interest expenses
Salaries and employee benefits		2,154			2,270			4,488			4,532
Occupancy and equipment expenses		502			491			1,007			974
Outside data processing		512			517			1,038			987
Professional fees		113			121			191			255
Taxes, other than payroll, property and income		155			145			308			282
Write-downs, expenses, sales of other real estate owned, net		33			3			34			(22	)
Supplies		81			90			156			175
Other expenses		577			530			1,053			1,230
		4,127			4,167			8,275			8,413
Income before income taxes		2,693			3,018			5,266			5,068
Provision for income taxes		903			1,018			1,690			1,701

Net income	$	1,790		$	2,000		$	3,576		$	3,367

Weighted average shares outstanding:
Basic		5,237			5,237			5,237			5,236
Diluted		5,268			5,264			5,266			5,268

Net income per share:
Basic	$	0.34		$	0.38		$	0.68		$	0.64
Diluted		0.34			0.38			0.68			0.64
Dividends per share		0.10			-			0.20			-

(continued)

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Net income	$	1,790		$	2,000		$	3,576		$	3,367

Other comprehensive income (loss):
Unrealized gains and (losses) arising during the period		(1,108	)		(897	)		(538	)		(1,539	)
Reclassification of realized amount		-			-			-			-
Net change in unrealized gain (loss) on securities		(1,108	)		(897	)		(538	)		(1,539	)
Less tax impact		(377	)		(305	)		(183	)		(523	)
Other comprehensive income (loss):		(731	)		(592	)		(355	)		(1,016	)

Comprehensive income	$	1,059		$	1,408		$	3,221		$	2,351

See Accompanying Notes to Consolidated Financial Statements

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	2007			2006
Cash flows from operating activities
Net income	$	3,576		$	3,367
Adjustments to reconcile net income to net cash from operating activities
Depreciation		387			408
Provision for loan losses		(128	)		(1,013	)
Amortization (accretion), net		(20	)		33
Stock compensation expense		74			68
FHLB stock dividends		-			(68	)
OREO writedowns (gains on sales), net		27			(15	)
Changes in :
Interest receivable		(18	)		65
Loans held for sale		(1,600	)		190
Other assets		750			279
Interest payable		85			124
Other liabilities		(231	)		(1,582	)
Net cash from operating activities		2,902			1,856

Cash flows from investing activities
Purchases of securities available for sale		(26,129	)		(11,012	)
Proceeds from maturities and calls of securities available for sale		23,507			15,788
Proceeds from sale of securities available for sale		25			-
Redemption of FHLB stock, (net of purchases)		(15	)		(53	)
Net change in federal funds sold		(9,442	)		(964	)
Net change in loans		6			(13,451	)
Purchases of premises and equipment, net		(238	)		(290	)
Proceeds from sale of other real estate acquired through foreclosure		154			1,881
Net cash from investing activities		(12,132	)		(8,101	)

Cash flows from financing activities
Net change in deposits		15,154			9,181
Cash dividends paid		(1,047	)		-
Repayment of Federal Home Loan Bank advances		(2,274	)		(410	)
Repayment of subordinated notes		-			(1,402	)
Proceeds from other borrowings		-			7,000
Repayment of other borrowed funds		(3,168	)		(255	)
Early redemption of Trust Preferred Securities		-			(7,000	)
Proceeds from stock option exercises		-			27
Net change in federal funds purchased		(976	)		-
Net change in agreements to repurchase securities		971			159
Net cash from financing activities		8,660			7,300

Net change in cash and cash equivalents		(570	)		1,055

Cash and cash equivalents at beginning of period		16,974			16,080

Cash and cash equivalents at end of period	$	16,404		$	17,135

See Accompanying Notes to Consolidated Financial Statements

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

SIX MONTHS ENDED JUNE 30, 2007AND 2006

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	2007		2006
Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	6,177	$	5,002

Loans transferred to real estate acquired through foreclosure		187		354

See Accompanying Notes to Consolidated Financial Statements

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 - BASIS OF PRESENTATION

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

						June 30, 2007
		Year	Total			Net Income
Subsidiary	Location	Acquired	Assets			Qtr			Six Mos
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	121,440		$	446		$	890
Farmers Deposit Bank	Eminence, Kentucky	1996		75,194			410			647
Ohio River Bank	Ironton, Ohio	1998		87,155			295			541
First Central Bank, Inc.	Philippi, West Virginia	1998		108,485			380			731
Boone County Bank, Inc.	Madison, West Virginia	1998		155,466			614			1,220
Mt. Vernon Financial Holdings, Inc.	Huntington, West Virginia	1999		617			(15	)		185
Parent and Intercompany Eliminations				(1,098	)		(340	)		(638	)
Consolidated Total				547,259			1,790			3,576

All significant intercompany transactions and balances have been eliminated.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of West Virginia. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense. The Company did not have any amounts accrued for interest and penalties at January 1, 2007. Under FIN 48, a tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company is no longer subject to examination by taxing authorities for years before 2002. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The adoption had no effect on the Company’s financial statements.

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 February 2007, the FASB issued Statement No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company does not expect the adoption of SFAS No. 159 to have a material impact on the financial statements

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at June 30, 2007 are summarized as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
U. S. Treasury securities	$	6,466	$	-	$	(67	)	$	6,399
U. S. agency securities		77,518		11		(865	)		76,664
Obligations of states and political subdivisions		4,080		8		(90	)		3,998
Mortgage-backed securities		37,661		2		(1,278	)		36,385
Total available for sale	$	125,725	$	21	$	(2,300	)	$	123,446

Amortized cost and fair value of investment securities, by category, at December 31, 2006 are summarized as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
U. S. Treasury securities	$	6,454	$	-	$	(53	)	$	6,401
U. S. agency securities		77,885		43		(1,017	)		76,911
Obligations of states and political subdivisions		3,413		15		(15	)		3,413
Mortgage-backed securities		35,332		40		(755	)		34,617
Corporate securities		25		-		-			25
Total available for sale	$	123,109	$	98	$	(1,840	)	$	121,367

Securities with unrealized losses at June 30, 2007 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

U.S. treasury securities	$	1,472	$	(12	)	$	4,927	$	(55	)	$	6,399	$	(67	)
U.S. agency securities		20,656		(105	)		49,000		(760	)		69,656		(865	)
Obligations of states and political subdivisions		2,812		(86	)		206		(4	)		3,018		(90	)
Gov’t guaranteed mortgage-backed securities		1,321		(23	)		11,873		(574	)		13,194		(597	)
Mortgage-backed securities		9,626		(84	)		13,288		(597	)		22,914		(681	)

Total temporarily impaired	$	35,887	$	(310	)	$	79,294	$	(1,990	)	$	115,181	$	(2,300	)

10.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 2–SECURITIES - continued

Securities with unrealized losses at December 31, 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					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

U.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	)

The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored agencies. The unrealized losses at June 30, 2007 and December 31, 2006 are price changes resulting from changes in the interest rate environment and are not considered to be other than 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 3 – LOANS

Major classifications of loans at June 30, 2007 and December 31, 2006 are summarized as follows:

	2007		2006
Commercial, secured by real estate	$	96,274	$	101,786
Commercial, other		43,769		43,981
Real estate construction		19,710		11,303
Residential real estate		137,109		138,795
Agricultural		1,795		1,930
Consumer and home equity		42,166		42,188
Other		2,888		3,814
	$	343,711	$	343,797

11.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3 – LOANS - continued

The following table sets forth information with respect to the Company’s impaired loans at June 30, 2007 and December 31, 2006.

	2007		2006
Impaired loans at period end with an allowance	$	6,430	$	7,766
Impaired loan at period end with no allowance		-		-
Amount of allowance for loan losses allocated		1,739		1,774

The following table sets forth information with respect to the Company’s nonperforming loans at June 30, 2007 and December 31, 2006.

	2007		2006
Non-accrual loans	$	3,788	$	4,698
Accruing loans which are contractually past due 90 days or more		879		992
Restructured loans		1,354		1,268
Total	$	6,021	$	6,958

NOTE 4 – ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the three months ended June 30, 2007 and 2006 are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Balance, beginning of period	$	6,576		$	7,579		$	6,661		$	7,892
Gross charge-offs		(64	)		(334	)		(324	)		(761	)
Recoveries		292			772			431			1,080
Provision for loan losses		(164	)		(819	)		(128	)		(1,013	)
Balance, end of period	$	6,640		$	7,198		$	6,640		$	7,198

12.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 5 – 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.

In the first quarter of 2007, the Company prepaid $2,070,000 of advances with interest rates ranging from 5.30% to 5.60%. All remaining 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 5.99%. 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 calendar years subsequent to June 30, 2007 are as follows:

2007 (remaining six months)	$	96
2008		200
2009		209
2010		4,218
2011		218
Thereafter		70
	$	5,011

13.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 6 –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. The balance of this loan was approximately $3,040,000 at June 30, 2007.

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 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. The balance of this loan was approximately $6,067,000 at June 30, 2007.

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. At June 30, 2007, there was no outstanding principal balance on the Promissory Note.

14.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 7 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

The Company’s principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below. During 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 undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2007, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

Shown below is a summary of regulatory capital ratios for the Company:

	June 30, 2007		December 31, 2006		Regulatory Minimum Requirements		To Be Considered Well Capitalized
Tier I Capital (to Risk-Weighted Assets)		15.4%		14.7%		4.0%		6.0%
Total Capital (to Risk-Weighted Assets)		16.7%		16.0%		8.0%		10.0%
Tier I Capital (to Average Assets)		9.2%		8.9%		4.0%		5.0%

As of June 30, 2007, the most recent notification from the FRB 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 preceding table. There are no conditions or events since that notification that management believes have changed the Company’s category.

15.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 – STOCK COMPENSATION EXPENSE

From time to time the Company grants stock options to its employees. The Company accounts for these option grants using SFAS No. 123R, “Share-Based Payments,” which establishes accounting requirements for share-based compensation to employees. Under SFAS 123R, the Company estimates the fair value of the options at the time they are granted to employees and expenses that fair value over the vesting period of the option grant.

On January 17, 2007, 37,000 incentive stock options were granted out of the 2002 Plan at an exercise price of $14.22. These options vest in three equal annual installments ending on January 17, 2010. On February 15, 2006, 35,250 incentive stock options were granted out of the 2002 Plan at an exercise price of $16.00. These options vest in three equal annual installments ending on February 15, 2009. 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 vested in three equal annual installments and were fully vested 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.

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

	2007			2006			2005
Risk-free interest rate		4.78	%		4.62	%		3.70	%
Expected option life (yrs)		5.00			5.00			5.00
Expected stock price volatility		0.25			0.26			0.25
Dividend yield		1.41	%		0.00	%		0.00	%
Weighted average fair value of options granted during the year	$	3.81		$	5.21		$	3.48

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.

16.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 – STOCK COMPENSATION EXPENSE - continued

Compensation expense of $74,000 was recorded for the first six months of 2007 compared to $68,000 for the first six months of 2006. For the three months ended June 30, $37,000 was recorded for 2007 while $38,000 was recorded 2006. 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 $148,000 at June 30, 2007. This unrecognized expense is expected to be recognized over the next 30 months based on the vesting periods of the options.

A summary of the Company’s stock option activity and related information is presented below for the six months ended June 30:

	- - - - - - 2007 - - - - - -					- - - - - - 2006 - - - - - -
				Weighted Average Exercise					Weighted Average Exercise
	Options			Price		Options			Price
Outstanding at beginning of year		120,248		$	12.25		111,750		$	11.05
Grants		37,000			14.22		35,250			16.00
Exercises		-			-		(3,002	)		9.02
Forfeitures or expired		(1,000	)		14.22		(21,000	)		13.00
Outstanding at June 30,		156,248		$	12.70		122,998		$	12.29

Exercisable at June 30,		85,764					56,432
Weighted average remaining life of options outstanding		7.4					7.8
Weighted average fair value of options granted during the year	$	3.81				$	5.21

Additional information regarding stock options outstanding and exercisable at June 30, 2007, 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	$	323		42,749		6.2	$	8.70	$	323
$10.01 to $12.50		32,999		11.62		153		21,172		7.6		11.62		98
$12.51 to $15.00		36,000		14.22		73		0		0.0		14.22		0
$15.01 to $17.50		44,500		16.12		8		21,843		6.9		16.25		3
Outstanding - June 30, 2007		156,248		12.70	$	557		85,764		7.4		11.34	$	424

17.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

A. Results of Operations

A financial institution’s primary sources of revenue are generated by interest income on loans, investments and other earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution’s optimal profitability while maintaining a minimum amount of interest rate risk and credit risk.

Net income for the six months ended June 30, 2007 was $3,576,000, or $0.68 per share, compared to net income of $3,367,000, or $0.64 per share for the six months ended June 30, 2006. The increase in income reported for 2007 was primarily the result of higher interest income (primarily on loans), higher non-interest income, life insurance benefits on the death of a former officer of a subsidiary, and expenses in 2006 related to the accelerated amortization of issuance costs related to the early redemption of $7.0 million of Premier’s Trust Preferred securities on January 31, 2006. These increases in profitability were only partially offset by higher interest expense and the income effect of higher negative loan loss provisions recorded in the first six months of 2006 compared to the first six months of 2007.

For the three months ended June 30, 2007, net income was $1,790,000, or $0.34 per share, compared to net income of $2,000,000 or $0.38 per share for the three months ended June 30, 2006. The decrease in income for 2007 was largely due to the benefits of $819,000 of negative provisions for loan losses recorded during the second quarter of 2006 versus only $164,000 of negative provisions for loan losses recording during the second quarter of 2007. Otherwise in the second quarter of 2007, interest income increased 8.7%, non-interest income increased 9.8% and non-interest expense decreased 1.0%.

18.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

Net interest income for the six months ended June 30, 2007 totaled $11.06 million, up 4.7% from the $10.56 million of net interest income earned during the first six months of 2006. Interest income in 2007 increased by $1.63 million or 10.4%, $1.03 million, or 8.2%, due to higher interest rates earned and increases in loans outstanding, and $448,000 due to higher yields and an increase in federal funds sold outstanding. Interest expense increased in total by $1.14 million in 2007 compared to 2006, partially offsetting the increase in interest income. Interest savings of $467,000 were realized due to the early redemption of $7.0 million of Premier’s Trust Preferred Securities on January 31, 2006 and the final $8.25 million on November 10, 2006. A portion of the savings was offset by the $184,000 increase in interest expense related to FHLB advances and other borrowings as Premier borrowed $7.0 million to complete the January 2006 redemption and another $6.5 million to complete the November 2006 redemption. (See Note 6 to the consolidated financial statements.) The net interest savings realized was more than offset by a $1.37 million, or 33.5% increase in interest expense on deposits. Due to the sustained increase in interest rates in 2007 when compared to 2006, Premier has increased the rates paid to its depositors to remain competitive in its markets. As a result of the increase in interest income, the net interest margin for the six months ending June 30, 2007 increased to 4.39% compared to 4.28% for the same period in 2006.

Additional information on Premier’s net interest income for the first six months of 2007 and 2006 is contained in the following table.

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

	Six Months Ended June 30, 2007								Six Months Ended June 30, 2006
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	40,452		$	1,058		5.27	%	$	25,532		$	597		4.72	%
Securities available for sale
Taxable		121,293			2,669		4.40			136,762			2,555		3.74
Tax-exempt		4,153			79		5.76			2,378			45		5.73
Total investment securities		125,446			2,748		4.45			139,140			2,600		3.77
Total loans		343,476			13,518		7.94			333,038			12,493		7.56
Total interest-earning assets		509,374			17,324		6.87	%		497,710			15,690		6.36	%
Allowance for loan losses		(6,669	)							(7,885	)
Cash and due from banks		13,874								13,814
Other assets		29,249								31,355
Total assets	$	545,828							$	534,994

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	376,586			5,458		2.92		$	369,268			4,089		2.23
Short-term borrowings		13,175			165		2.53			9,415			115		2.46
FHLB advances & other borrowings		17,212			639		7.49			15,217			455		6.03
Debentures		-			-		0.00			9,701			467		9.71
Total interest-bearing liabilities		406,973			6,262		3.10	%		403,601			5,126		2.56	%
Non-interest bearing deposits		73,999								73,282
Other liabilities		2,428								2,368
Shareholders’ equity		62,428								55,743
Total liabilities and equity	$	545,828							$	534,994

Net interest earnings				$	11,062							$	10,564
Net interest spread							3.77	%							3.80	%
Net interest margin							4.39	%							4.28	%

19.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

Additional information on Premier’s net interest income for the second quarter of 2007 and second quarter of 2006 is contained in the following table.

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

	Three Months Ended June 30, 2007								Three Months Ended June 30, 2006
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	41,897		$	545		5.22	%	$	24,752		$	300		4.86	%
Securities available for sale
Taxable		121,928			1,373		4.50			135,280			1,288		3.81
Tax-exempt		4,179			40		5.80			2,299			22		5.80
Total investment securities		126,107			1,413		4.55			137,579			1,310		3.84
Total loans		343,779			6,754		7.88			338,104			6,404		7.60
Total interest-earning assets		511,782			8,712		6.84	%		500,435			8,014		6.43	%
Allowance for loan losses		(6,648	)							(7,815	)
Cash and due from banks		13,485								13,722
Other assets		29,228								30,960
Total assets	$	547,848							$	537,303

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	378,653			2,788		2.95		$	369,144			2,140		2.33
Short-term borrowings		13,416			86		2.57			9,469			58		2.46
FHLB advances & other borrowings		15,711			287		7.33			16,153			251		6.23
Debentures		-			-		0.00			8,504			205		9.67
Total interest-bearing liabilities		407,780			3,161		3.11	%		403,271			2,654		2.64	%
Non-interest bearing deposits		74,427								75,137
Other liabilities		2,458								2,493
Shareholders’ equity		63,183								56,403
Total liabilities and equity	$	547,848							$	537,303

Net interest earnings				$	5,551							$	5,360
Net interest spread							3.73	%							3.79	%
Net interest margin							4.36	%							4.30	%

Net interest income for the quarter ending June 30, 2007 totaled $5.55 million, up $191,000 or 3.6% from the $5.36 million of net interest income earned in the second quarter of 2006. Interest income in 2007 increased by $698,000 or 8.7%, largely due to higher loan income and higher interest on federal funds sold. Interest income on loans increased by $350,000, or 5.5% as a higher volume of loans was complemented by overall higher yields. Interest earned on federal funds sold increased by $234,000, due to higher yields earned and a higher volume outstanding. Interest expense increased in total by $507,000 in the second quarter of 2007 compared to the same quarter of 2006, partially offsetting the increase in interest income. Interest savings of $205,000 were realized due to the retirement of Premier’s Trust Preferred Securities in 2006. A portion of the savings was offset by the $36,000 increase in interest expense related to FHLB advances and other borrowings as Premier borrowed $13.5 million to complete the 2006 redemptions. (See Note 6 to the consolidated financial statements). The net interest saving realized was more than offset by a $648,000, or 30.3% increase in interest expense on deposits and a $28,000 or 48.3% increase in interest expense on customer repurchase

20.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

agreements. Again, due to the higher interest rate environment in 2007 versus the same period 2006, Premier has increased the rates paid to its depositors to remain competitive in its markets. Furthermore, deposit balances and repurchase agreements outstanding have increased in the second quarter of 2007 compared to the same quarter of 2006. As a result of the $191,000 increase in net interest income, the net interest margin for the three months ending June 30, 2007 increased to 4.36% compared to 4.30% for the same period in 2006.

Non-interest income increased to $2,351,000 for the first six months of 2007. This total includes $212,000 of life insurance benefits on the death of a former officer of a subsidiary. Excluding this benefit, non-interest income increased $235,000 in the first six months of 2007 when compared to the $1,904,000 of non-interest income for the first six months of 2006. Service charges on deposit accounts increased by $27,000 or 2.1% to $1,340,000 in 2007 largely due to increases in the volume of deposit customers. Electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased $53,000 or 22.4% to $290,000 in 2007 due to increases in Premier’s deposit customer base and their greater propensity to use electronic means to conduct their banking business. Premier’s conversion to a more modern banking software system in 2005 has allowed Premier to offer more electronic banking services and made it easier for customers to conduct their banking electronically. Secondary market mortgage income increased $199,000, or 224%, to $288,000 in 2007 as Premier has expanded its efforts to originate mortgage loans for brokers for a commission. Other non-interest income decreased $44,000, or 16.6%, to $221,000 in 2007 largely due to lower late payment fees on consumer loans and the termination of life insurance cash surrender value increases. For the quarter ending June 30, 2007, non-interest income increased $99,000 to $1,105,000 compared to $1,006,000 for the second quarter of 2006. The increase is primarily due to a $27,000 increase in electronic banking income and a $115,000 increase in secondary market mortgage income. Theses increases were partially offset by a $37,000 decrease in other non-interest income.

Non-interest expenses for the first six months of 2007 totaled $8,275,000 or 3.02% of average assets on an annualized basis compared to $8,413,000 or 3.13% of average assets for the same period of 2006. Staff costs decreased by $44,000, or 1.0%, to $4,488,000 in 2007 largely due to an increase in the deferral of loan origination costs. Occupancy and equipment expenses increased by $33,000 or 3.4% to $1,007,000 in 2007 largely due to higher occupancy costs related to net rent expense, snow removal, building repairs and other occupancy expenses. Outside data processing costs increased by $51,000 or 5.2% to $1,038,000 in 2007 largely due to fee increases for core processing and ATM processing, an increase in the number of items processed, and additional charges for new internet banking products offered by Premier. Taxes other than payroll, property and income increased by $26,000 or 9.2% to $308,000 in 2007 largely due to an increase in shareholders’ equity subject to taxes. Write-downs, expenses and sales of other real estate owned (OREO) increased by $56,000 from a $22,000 net gain in 2006 to $34,000 of expense in 2007 due to gains on the disposition of OREO recorded during the first six months of 2006 versus writedowns of existing OREO in 2007. Offsetting these expense increases in first six months of 2007 were the following expense reductions. Professional fees declined by $64,000 or 25.1% to $191,000 in 2007 largely due to lower legal fees, lower external and internal audit expense and lower consultant charges. Supplies expense declined by $19,000, or 10.9%, to $156,000 in 2007. Other expenses declined by $177,000 to $1,053,000 in 2007 largely due to $256,000 of accelerated issuance costs in 2006 related to the redemption of $7.0 million of Premier’s trust preferred securities on January 31, 2006 offset by increased FDIC insurance costs and accelerated amortization of origination costs on other borrowings.

21.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

Non-interest expenses for the second quarter of 2007 totaled $4,127,000 or 3.01% of average assets on an annualized basis compared to $4,167,000 or 3.10% of average assets for the same period of 2006. Staff costs decreased by $116,000, or 5.1%, largely due to an increase in the deferral of loan origination costs. Write-downs, expenses and sales of other real estate owned (OREO) increased by $30,000 in the second quarter of 2007 due to gains on the disposition of OREO recorded during the second quarter of 2006 versus writedowns of existing OREO in 2007. Other operating expenses increased by $47,000, or 8.9%, to $577,000 in the second quarter of 2007 largely due to an increase in FDIC insurance and the accelerated amortization of origination costs on other borrowings. Other categories of expenses such as occupancy and equipment, outside data processing, professional fees supplies expense and taxes other than payroll, property and income were relatively unchanged, as individual categories and collectively, in the second quarter of 2007 compared to the same quarter of 2006.

Income tax expense was $1,690,000 for the first six months of 2007 compared to $1,701,000 for the first six months of 2006. The effective tax rate for the six months ended June 30, 2007 was 32.1%, compared to the 33.6% effective tax rate for the same period in 2006. The decrease in the effective tax rate is largely due to the life insurance benefits realized in 2007 which are exempt from income tax. Income tax expense for the quarter ending June 30, 2007 was $903,000 (33.5% effective tax rate) compared to $1,018,000 (33.7% effective tax rate) for the same period of 2006. The slight decrease in the effective tax rate is largely due to the slight increase in tax-exempt investment and loan income.

The annualized returns on shareholders’ equity and average assets were approximately 11.39% and 1.30% for the six months ended June 30, 2007 compared to 12.05% and 1.25% for the same period in 2006. For the quarter ending June 30, 2007, annualized returns on shareholders’ equity and average assets were approximately 11.33% and 1.31% compared to 14.26% and 1.49% for the same quarter in 2006.

22.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

B. Financial Position

Total assets at June 30, 2007 increased $11.8 million to $547.3 million from the $535.5 million at December 31, 2006. Earning assets increased to $508.9 million at June 30, 2007 from the $496.7 million at December 31, 2006, an increase of $12.2 million, or 2.5%. The increase was due to an increase federal funds sold and the securities portfolio with a partially offsetting decrease in total cash and due from banks.

Cash and due from banks at June 30, 2007 was $16.4 million, a $570,000 decrease from the $17.0 million at December 31, 2006. Federal funds sold increased $9.4 million from the $27.6 million reported at December 31, 2006. Changes in these two highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans and are part of Premier’s management of its liquidity and interest rate risks. The increase in federal funds sold during the first six months of 2007 is in response to proceeds from increases in total deposits that were not invested in high quality securities. These funds were held in federal funds sold due to the inverted yield curve earlier in 2007. During a period of an inverted yield curve, shorter-term investments, such as federal funds sold, yield higher interest income than longer-term investments such as investment grade bonds. (A normal yield curve rewards longer-term investing with higher interest yields.) As a result, Premier has been keeping its funds from the growth in deposits in higher yielding federal funds sold and investing in investment grade bonds when yields were comparable.

Securities available for sale totaled $123.4 million at June 30, 2007, a $2.1 million increase from the $121.4 million at December 31, 2006. The modest increase in comparison to the increase in federal funds sold was largely due to the inverted yield curve earlier in 2007. The inverted yield curve resulted in lower returns for longer-term investments and thus no additional interest reward for the interest rate risk being assumed with a longer-term investment. The yield curve became more traditional during the second quarter of 2007, and accordingly, Premier began to resume its normal investment security purchase activity. Additionally, the investment portfolio decreased $538,000 due to declines in the market value of the total portfolio. The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored agencies. The unrealized losses at June 30, 2007 and December 31, 2006 are price changes resulting from changes in the interest rate environment and are not considered to be other than 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. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

Total loans at June 30, 2007 were $343.7 million compared to $343.8 million at December 31, 2006, virtually unchanged. Premier has been able to offset continued loan collections at Farmers Deposit Bank, pay-offs on impaired loans and net payments on other loans, plus the charge-off of $324,000 of uncollectible loans across the company with new loans to customers.

Deposits totaled $454.1 million as of June 30, 2007, a $15.1 million increase from the $439.0 million in deposits at December 31, 2006. The increase is largely due to a $9.0 million increase in other interest bearing deposits coupled with a $1.2 million increase in time deposits $100,000 and over. Non-interest bearing deposits increased by an additional $4.9 million which helped to fund interest bearing assets without negatively impacting the net interest margin. Repurchase agreements with corporate and public entity customers increased by $0.9 million to $13.5 million as of June 30, 2007.

23.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

Federal Home Loan Bank (FHLB) advances declined by $2.3 million in the first six months of 2007 due to regularly scheduled principal payments and $2.1 million of debt prepayments. Other borrowed funds decreased by $3.2 million since December 31, 2006, due to regularly scheduled principal payments and $2,500,000 of debt prepayments. See Notes 5 and 6 to the consolidated financial statements for additional information on the Company’s outstanding bank debt and FHLB advances.

The following table sets forth information with respect to the Company’s nonperforming assets at June 30, 2007 and December 31, 2006.

	(In Thousands)
	2007			2006
Non-accrual loans	$	3,788		$	4,698
Accruing loans which are contractually past due 90 days or more		879			992
Restructured		1,354			1,268
Total non-performing loans		6,021			6,958
Other real estate acquired through foreclosure		501			495
Total non-performing assets	$	6,522		$	7,453

Non-performing loans as a percentage of total loans		1.75	%		2.02	%

Non-performing assets as a percentage of total assets		1.19	%		1.39	%

Total non-performing loans and non-performing assets have decreased since year-end largely due to loan pay-offs received on non-accrual loans during the first half of 2007, partially offset by additional loans placed on non-accrual during the second quarter of 2007. Accruing loans past due 90 days or more also declined in the first six months of 2007 due to collection efforts by the Company. Premier continues to make a significant effort to reduce its past due and non-performing loans by reviewing loan files, using the courts to bring borrowers current with the terms of their loan agreements and/or the foreclosure and sale of OREO properties. As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets. Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income. Also, as these plans are executed, other loans may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses.

24.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

During the second quarter of 2007, the Company reversed $164,000 of previously recorded provisions for loan losses (negative provisions) due to $292,000 of recoveries of previously charged-off loans and collections on impaired loans that had an allowance for loan losses allocation. This negative provision compares to the second quarter of 2006 when Premier reversed $819,000 of previously recorded provisions for loan losses (negative provisions). The negative provisions were made in accordance with Premier’s policies regarding management’s estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America. The negative provisions in the second quarter of 2006 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 and at First Central Bank, and $772,000 of recoveries of previously charged-off loans. For the first six months of 2007, the negative provisions in the second quarter of 2007 more than offset the $36,000 of additional provisions recorded to provide for the increased credit risk in the loan portfolio in the first quarter of 2007. The net $128,000 in negative provisions in the first six months of 2007 compare to $1,103,000 of negative provisions recorded during the first six months of 2006. Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk. Premier continues to monitor and evaluate the impact that national housing market price declines may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses. While some price deterioration is expected, it is not currently anticipated that Premier’s markets will be impacted as severely as other areas of the country due to the historically modest increases in real estate values in the Company’s markets.

Gross charge-offs totaled $324,000 during the first six months of 2007. Any collections on these loans would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first six months of 2007 totaled $431,000, resulting in net recoveries for the first six months of 2007 of $107,000. This compares to $319,000 of net recoveries recorded in the first six months of 2006. The allowance for loan losses at June 30, 2007 was 1.93% of total loans as compared to 1.94% at December 31, 2006. The slightly declining percentage of allowance for loan losses to total loans is largely due to the net recoveries recorded in the first half of 2007 being offset by the $128,000 of negative provisions and virtually no change in total loans outstanding since year-end.

C. Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America. These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2006. Some of these accounting policies, as discussed below, are considered to be critical accounting policies. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified two accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance for loan losses and the impairment of goodwill. A detailed description of these accounting policies is contained in the Company’s annual report on Form 10-K for the year ended December 31, 2006. There have been no significant changes in the application of these accounting policies since December 31, 2006.

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

25.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2007

D. Liquidity

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

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

Cash flow generated by repayment of loans and interest.

Arrangements with correspondent banks for purchase of unsecured federal funds.

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

Maintenance of an adequate available-for-sale security portfolio. The Company owns $123.4 million of securities at market value as of June 30, 2007.

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

E. Capital

At June 30, 2007, total shareholders’ equity of $63.2 million was 11.6% of total assets. This compares to total shareholders’ equity of $61.0 million or 11.4% of total assets on December 31, 2006.

Tier I capital totaled $48.9 million at June 30, 2007, which represents a Tier I leverage ratio of 9.2%. This ratio is up from the 8.9% at December 31, 2006 due to Premier’s continued profitability in relation to the growth in total assets.

Book value per share was $12.08 at June 30, 2007, and $11.65 at December 31, 2006. The increase in book value per share was the result of the $0.68 per share earned during the first six months less the $0.20 per share common dividend. Also decreasing the book value per share was $355,000 of other comprehensive loss for the first six months of 2007 related to the after tax decrease in the market value of investment securities available for sale.

26.

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2007

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company currently does not engage in any derivative or hedging activity. Refer to the Company’s 2006 10-K for analysis of the interest rate sensitivity. The Company believes there have been no significant changes in the interest rate sensitivity since previously reported on the Company’s 2006 10-K.

Item 4. 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 quarterly 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 quarterly 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.

B. Changes in Internal Controls over Financial Reporting

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

27.

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2007

PART II - OTHER INFORMATION

Item 1. Legal Proceedings None

Item 1A. Risk Factors

Please refer to Premier’s Annual Report on Form 10-K for the year ended December 31, 2006 for disclosures with respect to Premier’s risk factors at December 31, 2006. There have been no material changes since year-end 2006 in the specified risk factors disclosed in the Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None

Item 3. Defaults Upon Senior Securities None

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

(a)	Annual meeting of the Shareholders was held June 20, 2007.

(b)	All director nominees were elected.

(c)	Certain matters voted upon at the meeting and the votes cast with respect to such matters are as follows:

(i) The following were elected as directors of the Company for a term of one year.

Director	Votes Received	Votes Withheld
1. Toney K. Adkins	4,812,247	16,472
2. Hosmer A. Brown, III	4,812,299	16,420
3. Edsel R. Burns	4,812,609	16,110
4. E. V. Holder, Jr.	4,812,562	16,157
5. Keith F. Molihan	4,812,711	16,008
6. Marshall T. Reynolds	4,805,384	23,335
7. Neal Scaggs	4,812,562	16,157
8. Robert W. Walker	4,811,858	16,861
9. Thomas W. Wright	4,813,297	15,422

(ii) Ratification of Crowe Chizek and Company LLC as independent auditors of the Corporation for 2007. Votes for 4,814,085; votes against 12,722; votes abstaining 1,912.

Item 5. Other Information None

28.

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2007

Item 6. Exhibits

(a) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K.

31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification Pursuant to 18 U.S.C §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

29.

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2007

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PREMIER FINANCIAL BANCORP, INC.

Date: August 13, 2007 /s/ Robert W. Walker

Robert W. Walker

President & Chief Executive Officer

Date: August 13, 2007 /s/ Brien M. Chase

Brien M. Chase

Vice President & Chief Financial Officer

30.