Edgar Filing: PREMIER FINANCIAL BANCORP INC

pfbi10q09302007.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 September 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, – 5,237,899 shares outstanding at November 1, 2007

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2007

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management’s Discussion and Analysis	19
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	29
Item 4 – Controls and Procedures	29
Part II - Other Information	30
Item 1 – Legal Proceedings	30
Item 1A – Risk Factors	30
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3 – Defaults Upon Senior Securities	30
Item 4 – Submission of Matters to a Vote of Security Holders	30
Item 5 – Other Information	30
Item 6 – Exhibits	30
Signatures -	31

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 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

SEPTEMBER 30, 2007AND DECEMBER 31, 2006

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	(UNAUDITED)
	2007			2006
ASSETS
Cash and due from banks	$	15,152		$	16,974
Federal funds sold		35,238			27,583
Securities available for sale		123,347			121,367
Loans held for sale		4,251			1,978
Loans		346,502			343,797
Allowance for loan losses		(6,499	)		(6,661	)
Net loans		340,003			337,136
Federal Home Loan Bank and Federal Reserve Bank stock		3,316			3,265
Premises and equipment, net		6,259			6,533
Real estate and other property acquired through foreclosure		229			495
Interest receivable		3,179			2,821
Goodwill		15,816			15,816
Other assets		212			1,484
Total assets	$	547,002		$	535,452

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	76,735		$	72,784
Time deposits, $100,000 and over		54,074			53,477
Other interest bearing		320,151			312,689
Total deposits		450,960			438,950
Federal funds purchased		-			976
Securities sold under agreements to repurchase		13,034			12,555
Federal Home Loan Bank advances		4,910			7,285
Other borrowed funds		8,767			12,275
Interest payable		1,184			1,061
Other liabilities		2,675			1,348
Total liabilities		481,530			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		43,732			43,624
Retained earnings		21,232			17,420
Accumulated other comprehensive income (loss)		(600	)		(1,150	)
Total stockholders' equity		65,472			61,002
Total liabilities and stockholders' equity	$	547,002		$	535,452

See Accompanying Notes to Consolidated Financial Statements

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF NET INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007AND 2006

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Interest income
Loans, including fees	$	6,825		$	6,637		$	20,343		$	19,130
Securities available for sale
Taxable		1,424			1,300			4,093			3,855
Tax-exempt		39			24			118			69
Federal funds sold and other		450			287			1,508			884
Total interest income		8,738			8,248			26,062			23,938

Interest expense
Deposits		2,815			2,351			8,273			6,440
Repurchase agreements and other		83			60			248			175
FHLB advances and other borrowings		250			255			889			710
Debentures		-			205			-			672
Total interest expense		3,148			2,871			9,410			7,997

Net interest income		5,590			5,377			16,652			15,941
Provision for loan losses		25			(38	)		(103	)		(1,051	)
Net interest income after provision for loan losses		5,565			5,415			16,755			16,992

Non-interest income
Service charges on deposit accounts		691			775			2,031			2,088
Electronic banking income		156			129			446			366
Secondary market mortgage income		172			94			460			183
Life insurance benefit		-			-			212			-
Other		91			129			312			394
		1,110			1,127			3,461			3,031
Non-interest expenses
Salaries and employee benefits		2,159			2,314			6,647			6,846
Occupancy and equipment expenses		483			575			1,490			1,549
Outside data processing		537			525			1,575			1,512
Professional fees		110			108			301			363
Taxes, other than payroll, property and income		128			160			436			442
Write-downs, expenses, sales of other real estate owned, net of gains		(111	)		(7	)		(77	)		(29	)
Supplies		74			77			230			252
Other expenses		577			571			1,630			1,801
		3,957			4,323			12,232			12,736
Income before income taxes		2,718			2,219			7,984			7,287
Provision for income taxes		911			744			2,601			2,445

Net income	$	1,807		$	1,475		$	5,383		$	4,842

Weighted average shares outstanding:
Basic		5,237			5,237			5,237			5,236
Diluted		5,262			5,262			5,265			5,264

Net income per share:
Basic	$	0.35		$	0.28		$	1.03		$	0.92
Diluted		0.34			0.28			1.02			0.92
Dividends per share		0.10			0.05			0.30			0.05

(continued)

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net income	$	1,807	$	1,475	$	5,383	$	4,842

Other comprehensive income:
Unrealized gains arising during the period		1,371		2,136		833		597
Reclassification of realized amount		-		-		-		-
Net change in unrealized gain (loss) on securities		1,371		2,136		833		597
Less tax impact		466		726		283		203
Other comprehensive income:		905		1,410		550		394

Comprehensive income	$	2,712	$	2,885	$	5,933	$	5,236

See Accompanying Notes to Consolidated Financial Statements

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

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

	2007			2006
Cash flows from operating activities
Net income	$	5,383		$	4,842
Adjustments to reconcile net income to net cash from operating activities
Depreciation		573			666
Provision for loan losses		(103	)		(1,051	)
Amortization (accretion), net		(31	)		37
Stock compensation expense		108			104
FHLB stock dividends		-			(103	)
OREO writedowns (gains on sales), net		(47	)		(34	)
Loans originated for sale		(22,835	)		(7,875	)
Secondary market loans sold		20,562			7,604
Changes in :
Interest receivable		(358	)		(199	)
Other assets		989			733
Interest payable		123			489
Other liabilities		(150	)		(1,618	)
Net cash from operating activities		4,214			3,595

Cash flows from investing activities
Purchases of securities available for sale		(28,114	)		(15,004	)
Proceeds from maturities and calls of securities available for sale		28,450			23,472
Proceeds from sale of securities available for sale		25			-
Redemption of FHLB stock, (net of purchases)		(51	)		(58	)
Net change in federal funds sold		(7,655	)		(3,258	)
Net change in loans		(2,966	)		(17,685	)
Purchases of premises and equipment, net		(299	)		(392	)
Proceeds from sale of other real estate acquired through foreclosure		515			2,133
Net cash from investing activities		(10,095	)		(10,792	)

Cash flows from financing activities
Net change in deposits		12,010			9,977
Cash dividends paid		(1,571	)		(261	)
Repayment of Federal Home Loan Bank advances		(2,375	)		(702	)
Repayment of subordinated notes		-			(1,402	)
Proceeds from other borrowings		-			7,000
Repayment of other borrowed funds		(3,508	)		(413	)
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		479			157
Net cash from financing activities		4,059			7,383

Net change in cash and cash equivalents		(1,822	)		186

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

Cash and cash equivalents at end of period	$	15,152		$	16,266

(continued)

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

NINE MONTHS ENDED SEPTEMBER 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	$	9,287	$	7,508

Loans transferred to real estate acquired through foreclosure		202		465

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:

						September 30, 2007
		Year	Total			Net Income
Subsidiary	Location	Acquired	Assets			Qtr			YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	123,238		$	446		$	1,336
Farmers Deposit Bank	Eminence, Kentucky	1996		71,934			327			974
Ohio River Bank	Ironton, Ohio	1998		85,795			297			838
First Central Bank, Inc.	Philippi, West Virginia	1998		110,314			366			1,097
Boone County Bank, Inc.	Madison, West Virginia	1998		156,596			652			1,872
Mt. Vernon Financial Holdings, Inc.	Huntington, West Virginia	1999		635			13			198
Parent and Intercompany Eliminations				(1,510	)		(294	)		(932	)
Consolidated Total				547,002			1,807			5,383

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 2004. 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 September 30, 2007 are summarized as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
U. S. Treasury securities	$	6,472	$	25	$	(4	)	$	6,493
U. S. agency securities		76,012		191		(294	)		75,909
Obligations of states and political subdivisions		4,080		6		(26	)		4,060
Mortgage-backed securities		37,692		32		(839	)		36,885
Total available for sale	$	124,256	$	254	$	(1,163	)	$	123,347

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 September 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	$	-	$	-		$	986	$	(4	)	$	986	$	(4	)
U.S. agency securities		-		-			43,980		(294	)		43,980		(294	)
Obligations of states and political subdivisions		2,963		(24	)		208		(2	)		3,171		(26	)
Gov’t guaranteed mortgage-backed securities		1,312		(6	)		11,537		(384	)		12,849		(390	)
Mortgage-backed securities		5,290		(53	)		12,911		(396	)		18,201		(449	)

Total temporarily impaired	$	9,565	$	(83	)	$	69,622	$	(1,080	)	$	79,187	$	(1,163	)

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 September 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 September 30, 2007 and December 31, 2006 are summarized as follows:

	2007		2006
Commercial, secured by real estate	$	100,604	$	101,786
Commercial, other		41,164		43,981
Real estate construction		19,983		11,303
Residential real estate		136,516		138,795
Agricultural		2,033		1,930
Consumer and home equity		43,038		42,188
Other		3,164		3,814
	$	346,502	$	343,797

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 September 30, 2007 and December 31, 2006.

	2007		2006
Impaired loans at period end with an allowance	$	4,895	$	7,766
Impaired loan at period end with no allowance		-		-
Amount of allowance for loan losses allocated		1,528		1,774

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

	2007		2006
Non-accrual loans	$	3,432	$	4,698
Accruing loans which are contractually past due 90 days or more		1,048		992
Restructured loans		1,428		1,268
Total	$	5,908	$	6,958

NOTE 4 – ALLOWANCE FOR LOAN LOSSES

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Balance, beginning of period	$	6,640		$	7,198		$	6,661		$	7,892
Gross charge-offs		(312	)		(370	)		(636	)		(1,131	)
Recoveries		146			151			577			1,231
Provision for loan losses		25			(38	)		(103	)		(1,051	)
Balance, end of period	$	6,499		$	6,941		$	6,499		$	6,941

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 three to five years, with fixed interest rates ranging from 4.10% to 6.64%, averaging 6.04%. 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 September 30, 2007 are as follows:

2007 (remaining three months)	$	46
2008		190
2009		198
2010		4,207
2011		206
Thereafter		63
	$	4,910

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 $2,889,000 at September 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 $5,878,000 at September 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 September 30, 2007, there was no outstanding principal balance on the Promissory Note.

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 September 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:

	Sept 30, 2007	December 31, 2006	Regulatory Minimum Requirements	To Be Considered Well Capitalized
Tier I Capital (to Risk-Weighted Assets)	15.7%	14.7%	4.0%	6.0%
Total Capital (to Risk-Weighted Assets)	17.0%	16.0%	8.0%	10.0%
Tier I Capital (to Average Assets)	9.5%	8.9%	4.0%	5.0%

As of September 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.

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.

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 $108,000 was recorded for the first nine months of 2007 compared to $104,000 for the first nine months of 2006. For the three months ended Sept 30, $34,000 was recorded for 2007 while $36,000 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 $93,000 at September 30, 2007. This unrecognized expense is expected to be recognized over the next 27 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 nine months ended September 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		(4,831	)		14.44		(21,750	)		13.10
Outstanding at September 30,		152,417		$	12.66		122,248		$	12.26

Exercisable at September 30,		85,764					56,432
Weighted average remaining life of options outstanding		7.1					7.6
Weighted average fair value of options granted during the year	$	3.81				$	5.21

Additional information regarding stock options outstanding and exercisable at September 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	$	261		42,749		5.9	$	8.70	$	261
$10.01 to $12.50		32,500		11.62		103		21,172		7.3		11.62		67
$12.51 to $15.00		34,000		14.22		20		0		0.0		14.22		0
$15.01 to $17.50		43,168		16.13		0		21,843		6.6		16.25		0
Outstanding - September 30, 2007		152,417		12.66	$	384		85,764		7.1		11.34	$	328

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9 – PENDING ACQUISITION

On October 24, 2007, Premier Financial Bancorp, Inc. (Premier) entered into a material definitive agreement with Citizens First Bank, Inc. (Citizens First), a bank with $59 million of total assets located in Ravenswood, West Virginia. Under terms of the definitive agreement, Premier will purchase Citizens First for up to $11,700,000 in stock and cash. Each share of Citizens First common stock will be entitled to merger consideration of cash and stock that will generally total $29.25, subject to certain limitations. Premier will issue 480,000 shares of its common stock plus, depending upon Premier’s stock price nearer to transaction closing, Premier will pay in total up to $5.3 million in cash to the shareholders of Citizens First. The transaction, which still requires approval by regulatory agencies and Citizens First’s shareholders, is anticipated to close sometime in the first quarter of 2008.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 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 nine months ended September 30, 2007 was $5,383,000, or $1.03 per share, compared to net income of $4,842,000, or $0.92 per share for the nine months ended September 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 nine months of 2006 compared to the first nine months of 2007.

For the three months ended September 30, 2007, net income was $1,807,000, or $0.35 per share, compared to net income of $1,475,000 or $0.28 per share for the three months ended September 30, 2006. The increase in income for 2007 was primarily due to a 5.9% increase in interest income, an 83.0% increase in secondary market mortgage income and an 8.5% decrease in non-interest expense. These increases in profitability were only partially offset by a 4.0% increase in interest expense and the income effect of negative loan loss provisions recorded in the third quarter of 2006 compared to the provision expense in the third quarter of 2007.

Net interest income for the nine months ended September 30, 2007 totaled $16.65 million, up 4.5% from the $15.94 million of net interest income earned during the first nine months of 2006. Interest income in 2007 increased by $2.12 million or 8.9%, $1.21 million, or 6.3%, due to higher interest rates earned and increases in loans outstanding, $600,000 due to higher yields and an increase in federal funds sold outstanding, and $287,000 due to higher yields on securities available-for-sale although average investments outstanding decreased. Interest expense increased in total

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

by $1.41 million in 2007 compared to 2006, partially offsetting the increase in interest income. Interest savings of $672,000 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 $179,000 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 $1.83 million, or 28.5% 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 nine months ending September 30, 2007 increased to 4.39% compared to 4.29% for the same period in 2006.

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

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

	Nine Months Ended Sept 30, 2007								Nine Months Ended Sept 30, 2006
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	38,696		$	1,508		5.21	%	$	24,006		$	884		4.92	%
Securities available for sale
Taxable		122,247			4,093		4.46			134,974			3,853		3.81
Tax-exempt		4,104			118		5.81			2,288			70		6.18
Total investment securities		126,351			4,211		4.51			137,262			3,923		3.85
Total loans		343,759			20,343		7.91			336,327			19,130		7.60
Total interest-earning assets		508,806			26,062		6.86	%		497,595			23,937		6.44	%
Allowance for loan losses		(6,650	)							(7,663	)
Cash and due from banks		13,871								13,760
Other assets		29,547								31,035
Total assets	$	545,574							$	534,727

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	376,335			8,273		2.94		$	368,983			6,439		2.33
Short-term borrowings		13,195			248		2.51			9,464			175		2.47
FHLB advances & other borrowings		16,078			889		7.39			14,930			710		6.36
Debentures		-			-		0.00			9,298			672		9.66
Total interest-bearing liabilities		405,608			9,410		3.10	%		402,675			7,996		2.65	%
Non-interest bearing deposits		74,279								72,891
Other liabilities		2,578								2,594
Shareholders’ equity		63,109								56,567
Total liabilities and equity	$	545,574							$	534,727

Net interest earnings				$	16,652							$	15,941
Net interest spread							3.76	%							3.79	%
Net interest margin							4.39	%							4.29	%

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

Additional information on Premier’s net interest income for the third quarter of 2007 and third 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 Sept 30, 2007								Three Months Ended Sept 30, 2006
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	35,241		$	450		5.07	%	$	21,004		$	287		5.42	%
Securities available for sale
Taxable		124,124			1,425		4.59			131,456			1,299		3.95
Tax-exempt		4,008			38		5.75			2,111			24		6.89
Total investment securities		128,132			1,463		4.63			133,567			1,323		4.00
Total loans		344,316			6,826		7.87			342,798			6,637		7.68
Total interest-earning assets		507,689			8,738		6.85	%		497,369			8,247		6.60	%
Allowance for loan losses		(6,613	)							(7,226	)
Cash and due from banks		13,865								13,654
Other assets		30,133								30,405
Total assets	$	545,074							$	534,202

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	375,841			2,814		2.97		$	368,423			2,350		2.53
Short-term borrowings		13,234			83		2.49			9,560			60		2.49
FHLB advances & other borrowings		13,847			251		7.19			14,365			255		7.04
Debentures		-			-		0.00			8,505			205		9.64
Total interest-bearing liabilities		402,922			3,148		3.10	%		400,853			2,870		2.84	%
Non-interest bearing deposits		74,830								72,122
Other liabilities		2,873								3,039
Shareholders’ equity		64,449								58,188
Total liabilities and equity	$	545,074							$	534,202

Net interest earnings				$	5,590							$	5,377
Net interest spread							3.75	%							3.76	%
Net interest margin							4.39	%							4.31	%

Net interest income for the quarter ending September 30, 2007 totaled $5.59 million, up $213,000 or 4.0% from the $5.38 million of net interest income earned in the third quarter of 2006. Interest income in 2007 increased by $490,000 or 5.9%. Interest income on loans increased by $188,000, or 2.8% as a higher volume of loans was complemented by overall higher yields. Interest earned on federal funds sold increased by $152,000 in 2007, due to a higher volume outstanding although yields declined somewhat. In contrast, interest earned on securities available-for-sale increased by $139,000 in 2007, due to an increase in overall yields although average investments outstanding decreased. Premier monitors investment opportunities and maintains its liquidity position in an effort to optimize interest income. Interest expense increased in total by $277,000 in the third 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 $30,000 increase in interest expense related to other borrowings as Premier borrowed $13.5 million to complete the 2006 redemptions. (See Note 6 to the consolidated financial statements). This increase in interest on other borrowings was

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

offset by $35,000 of interest savings on FHLB advances due to principal payments and a $2.1 million prepayment in the first quarter of 2007. (See Note 5 to the consolidated financial statements.) The combined net interest savings realized on the Trust Preferred refinancing was more than offset by a $464,000, or 19.7% increase in interest expense on deposits and a $23,000 or 38.3% increase in interest expense on customer repurchase 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 third quarter of 2007 compared to the same quarter of 2006. As a result of the $213,000 increase in net interest income in 2007, the net interest margin for the three months ending September 30, 2007 increased to 4.39% compared to 4.31% for the same period in 2006.

Non-interest income increased to $3,461,000 for the first nine 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 $218,000 in the first nine months of 2007 when compared to the $3,031,000 of non-interest income earned during the first nine months of 2006. Service charges on deposit accounts have decreased by $57,000 or 2.7% to $2,031,000 in 2007 largely due to deposit customers’ lower propensity to overdraft their deposit accounts. A new required disclosure of year-to-date NSF charges on customers’ deposit account statements is believed to be resulting in lower overdraft activity by customers. Offsetting this decrease, however, electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased $80,000 or 21.9% to $446,000 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 $277,000, or 151%, to $460,000 in 2007 as Premier has expanded its efforts to originate mortgage loans for brokers for a commission. Other non-interest income decreased $82,000, or 20.8%, to $312,000 in 2007 largely due to lower late payment fees on consumer loans, lower checkbook fee income and the termination of life insurance cash surrender value increases. For the quarter ending September 30, 2007, non-interest income decreased $17,000 to $1,110,000 compared to $1,127,000 for the third quarter of 2006. The decrease is primarily due to an $84,000 decrease in service charges and fees on deposit accounts and a $38,000 decrease in other non-interest income. These decreases were partially offset by a $27,000, or 20.9% increase in electronic banking income and a $78,000, or 83.0% increase in secondary market mortgage income.

Non-interest expenses for the first nine months of 2007 totaled $12,232,000 or 3.00% of average assets on an annualized basis compared to $12,736,000 or 3.18% of average assets for the same period of 2006. Staff costs decreased by $199,000, or 2.9%, to $6,647,000 in 2007 largely due to staff reductions and an increase in the deferral of loan origination costs. Occupancy and equipment expenses decreased by $59,000 or 3.8% to $1,490,000 in 2007 largely due to a $55,000 real estate impairment writedown in 2006. Otherwise, higher occupancy costs related to net rent expense, utilities, snow removal, and other occupancy costs and higher equipment costs related to software subscriptions and equipment maintenance were offset by lower insurance costs and equipment depreciation. Outside data processing costs increased by $63,000 or 4.2% to $1,575,000 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

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

internet banking products offered by Premier. Offsetting these expense increases in first nine months of 2007 were the following expense reductions. Professional fees declined by $62,000 or 17.1% to $301,000 in 2007 largely due to lower legal fees, lower external and internal audit expense and lower consultant charges. Taxes other than payroll, property and income decreased by $6,000 or 1.4% to $436,000 in 2007. Write-downs, expenses and sales of other real estate owned (OREO) decreased by $48,000 from a $29,000 net gain in 2006 to $77,000 net gain in 2007 largely due to gains on the disposition of OREO recorded during the third quarter of 2007. Supplies expense declined by $22,000, or 8.7%, to $230,000 in 2007. Other expenses declined by $171,000 to $1,630,000 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.

Non-interest expenses for the third quarter of 2007 totaled $3,957,000 or 2.90% of average assets on an annualized basis compared to $4,323,000 or 3.24% of average assets for the same period of 2006. Staff costs decreased by $155,000, or 6.7%, largely due to staff reductions and an increase in the deferral of loan origination costs. Occupancy and equipment costs declined by $92,000 or 16.0% in the third quarter of 2007 largely due to a $55,000 real estate impairment writedown in 2006 and lower equipment depreciation expense in 2007. Write-downs, expenses and sales of other real estate owned (OREO) decreased by $104,000 in the third quarter of 2007 due to gains on the disposition of OREO in 2007. Taxes other than payroll, property and income decreased by $32,000 as a result of lower than anticipated equity based taxes. Other operating expenses increased by $6,000, or 1.0%, to $577,000 in the third quarter of 2007 as an increase in FDIC insurance was primarily offset by lower insurance costs, lower loan processing costs, lower correspondent bank charges and lower travel costs. Other categories of expenses such as outside data processing, professional fees and supplies expense were relatively unchanged, as individual categories and collectively, in the third quarter of 2007 compared to the same quarter of 2006.

Income tax expense was $2,601,000 for the first nine months of 2007 compared to $2,445,000 for the first nine months of 2006. The effective tax rate for the nine months ended September 30, 2007 was 32.6%, 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 September 30, 2007 was $911,000 (33.5% effective tax rate) compared to $744,000 (33.5% effective tax rate) for the same period of 2006.

The annualized returns on shareholders’ equity and average assets were approximately 11.25% and 1.30% for the nine months ended September 30, 2007 compared to 11.31% and 1.19% for the same period in 2006. For the quarter ending September 30, 2007, annualized returns on shareholders’ equity and average assets were approximately 11.22% and 1.33% compared to 10.14% and 1.10% for the same quarter in 2006.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

B. Financial Position

Total assets at September 30, 2007 increased $11.6 million to $547.0 million from the $535.5 million at December 31, 2006. Earning assets increased to $509.8 million at September 30, 2007 from the $496.7 million at December 31, 2006, an increase of $13.1million, or 2.6%. The increase was due to an increase in federal funds sold, loans and the securities portfolio with a partially offsetting decrease in total cash and due from banks.

Cash and due from banks at September 30, 2007 was $15.2 million, a $1.8 million decrease from the $17.0 million at December 31, 2006. Federal funds sold increased $7.7 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 nine 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 September 30, 2007, a $2.0 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 increased $833,000 due to increases 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 September 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. In the third quarter of 2007 alone, the market value of the securities portfolio improved by $1.4 million reducing the net unrealized loss to approximately $909,000 at September 30, 2007. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows and Note 2 to the consolidated financial statements

Total loans at September 30, 2007 were $346.5 million compared to $343.8 million at December 31, 2006, a $2.7 million increase. 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 $636,000 of uncollectible loans across the company with new loans to customers.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

Deposits totaled $451.0 million as of September 30, 2007, a $12.0 million increase from the $439.0 million in deposits at December 31, 2006. The increase is largely due to a $7.5 million increase in other interest bearing deposits coupled with a $0.6 million increase in time deposits $100,000 and over. Non-interest bearing deposits increased by an additional $4.0 million which helped to fund interest bearing assets without negatively impacting the net interest margin. Repurchase agreements with corporate and public entity customers decreased by $0.5 million to $13.0 million as of September 30, 2007.

Federal Home Loan Bank (FHLB) advances declined by $2.4 million in the first nine months of 2007 due to regularly scheduled principal payments and $2.1 million of debt prepayments. Other borrowed funds decreased by $3.5 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 September 30, 2007 and December 31, 2006.

	(In Thousands)
	2007			2006
Non-accrual loans	$	3,432		$	4,698
Accruing loans which are contractually past due 90 days or more		1,048			992
Restructured		1,428			1,268
Total non-performing loans		5,908			6,958
Other real estate acquired through foreclosure		229			495
Total non-performing assets	$	6,137		$	7,453

Non-performing loans as a percentage of total loans		1.71	%		2.02	%

Non-performing assets as a percentage of total assets		1.12	%		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 nine months of 2007 plus charge-offs of non-performing loans during the same time frame. These declines were partially offset by additional loans placed on non-accrual during the first nine months 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 but increased slightly in the third quarter of 2007. 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.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

During the third quarter of 2007, the Company recorded $25,000 of provisions for loan losses as recoveries of previously charged-off loans and collections on impaired loans that had an allowance for loan losses allocation were more than offset by increases in credit risk identified in the loan portfolio. This provision expense compares to $38,000 of negative provisions (the reversal of previously recorded provisions) recorded during the third quarter of 2006. 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 third 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.

For the first nine months of 2007, the provision expense in the first and third quarters of 2007 was more than offset by $164,000 of negative provisions recorded in the second quarter of 2007. The net $103,000 in negative provisions in the first nine months of 2007 compare to $1,051,000 of negative provisions recorded during the first nine months of 2006. The significant level of negative provisions in the first nine months of 2006 were the result of continued improvement in the estimated credit risk at banks formerly subject to regulatory agreements, payments on loans previously identified as having significant credit risk at Farmers Deposit Bank and at First Central Bank, and $1,231,000 of recoveries of previously charged-off loans collected in 2006. Nearly two-thirds of the high level of recoveries occurred in the second quarter of 2006 ($772,000) and was attributable to recoveries from a few customers which had significant charged-off loan balances. Future recoveries, if any, are not anticipated to continue to be that sizable. 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 $636,000 during the first nine 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 nine months of 2007 totaled $577,000, resulting in net charge-offs for the first nine months of 2007 of $59,000. This compares to $100,000 of net recoveries recorded in the first nine months of 2006. The allowance for loan losses at September 30, 2007 was 1.88% 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 $59,000 of net charge-offs recorded in the first nine months of 2007 plus the $103,000 of negative provisions and the increase in total loans outstanding since year-end.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2007

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.

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 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 September 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 September 30, 2007, total stockholders’ equity of $65.5 million was 12.0% of total assets. This compares to total stockholders’ equity of $61.0 million or 11.4% of total assets on December 31, 2006.

Tier I capital totaled $50.3 million at September 30, 2007, which represents a Tier I leverage ratio of 9.5%. 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 $12.50 at September 30, 2007, and $11.65 at December 31, 2006. The increase in book value per share was the result of the $1.03 per share earned during the first nine months less $0.30 per share in common dividends. Also increasing the book value per share was $550,000 of other comprehensive income for the first nine months of 2007 related to the after tax decrease in the market value of investment securities available for sale.

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 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 third fiscal quarter that have materially affected or are reasonably likely to materially affect Premier's internal controls over financial reporting.

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 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 None

Item 5. Other Information None

Item 6. Exhibits

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

3.1 Bylaws of registrant as amended on August 15, 2007.

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

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 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: November 13, 2007 /s/ Robert W. Walker

Robert W. Walker

President & Chief Executive Officer

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

Brien M. Chase

Vice President & Chief Financial Officer