PREMIER FINANCIAL BANCORP INC - FORM 10-Q

Attached files

file	filename
EX-32 - CEO AND CFO SECTION 906 CERTIFICATION - PREMIER FINANCIAL BANCORP INC	exhibit32.htm
EX-31.2 - CFO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INC	exhibit31-2.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INC	exhibit31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017

	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 000-20908

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. Yes  No .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§230.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No .

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

Large accelerated filer 		Accelerated filer 
Non-accelerated filer  (Do not check if smaller reporting company)	Smaller reporting company 	Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

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, – 10,658,799 shares outstanding at July 28, 2017

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2017

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management's Discussion and Analysis	40
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	53
Item 4 – Controls and Procedures	53
Part II - Other Information	54
Item 1 – Legal Proceedings	54
Item 1A – Risk Factors	54
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3 – Defaults Upon Senior Securities	54
Item 4 – Mine Safety Disclosures	54
Item 5 – Other Information	54
Item 6 – Exhibits	54
Signatures	55

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2017

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying information has not been audited by an independent registered public accounting firm; 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, 2016 for further information in this regard.

Index to consolidated financial statements:

Consolidated Balance Sheets	4
Consolidated Statements of Income	5
Consolidated Statements of Comprehensive Income	6
Consolidated Statement of Changes in Stockholders' Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2017 AND DECEMBER 31, 2016

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	(UNAUDITED)
	June 30,			December 31,
	2017			2016
ASSETS
Cash and due from banks	$	42,934		$	41,443
Interest bearing bank balances		37,538			55,720
Federal funds sold		2,396			7,555
Cash and cash equivalents		82,868			104,718
Time deposits with other banks		2,582			2,332
Securities available for sale		301,224			288,607
Loans		1,037,954			1,024,823
Allowance for loan losses		(11,695	)		(10,836	)
Net loans		1,026,259			1,013,987
Federal Home Loan Bank stock, at cost		3,185			3,200
Premises and equipment, net		23,579			24,224
Real estate and other property acquired through foreclosure		11,525			12,665
Interest receivable		3,637			3,862
Goodwill		35,371			35,371
Other intangible assets		3,833			4,349
Other assets		1,279			2,878
Total assets	$	1,495,342		$	1,496,193

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	319,060		$	319,618
Time deposits, $250,000 and over		63,528			66,378
Other interest bearing		894,620			893,390
Total deposits		1,277,208			1,279,386
Securities sold under agreements to repurchase		20,478			23,820
Other borrowed funds		7,000			8,859
Subordinated debt		5,360			5,343
Interest payable		352			364
Other liabilities		3,646			4,237
Total liabilities		1,314,044			1,322,009

Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 10,658,799 shares issued and outstanding at June 30, 2017, and 10,640,735 shares issued and outstanding at December 31, 2016		110,218			109,911
Retained earnings		70,581			66,195
Accumulated other comprehensive income (loss)		499			(1,922	)
Total stockholders' equity		181,298			174,184
Total liabilities and stockholders' equity	$	1,495,342		$	1,496,193

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Interest income
Loans, including fees	$	14,663	$	13,108	$	28,198	$	25,709
Securities available for sale
Taxable		1,464		1,362		2,809		2,790
Tax-exempt		64		88		136		172
Federal funds sold and other		182		108		339		205
Total interest income		16,373		14,666		31,482		28,876

Interest expense
Deposits		951		975		1,900		1,952
Repurchase agreements and other		7		11		14		18
FHLB advances		-		15		-		22
Other borrowings		79		107		166		220
Subordinated debt		74		67		144		118
Total interest expense		1,111		1,175		2,224		2,330

Net interest income		15,262		13,491		29,258		26,546
Provision for loan losses		776		812		1,142		1,124
Net interest income after provision for loan losses		14,486		12,679		28,116		25,422

Non-interest income
Service charges on deposit accounts		1,089		983		2,065		1,944
Electronic banking income		833		802		1,613		1,564
Secondary market mortgage income		39		59		106		99
Other		173		221		367		395
		2,134		2,065		4,151		4,002
Non-interest expenses
Salaries and employee benefits		4,973		5,217		9,943		10,208
Occupancy and equipment expenses		1,449		1,550		2,970		3,062
Outside data processing		1,355		1,314		2,675		2,635
Professional fees		277		183		525		333
Taxes, other than payroll, property and income		211		159		400		317
Write-downs, expenses, sales of other real estate owned, net		553		398		793		637
Amortization of intangibles		251		317		516		584
FDIC insurance		154		214		347		474
Other expenses		1,181		1,285		2,233		2,462
		10,404		10,637		20,402		20,712
Income before income taxes		6,216		4,107		11,865		8,712
Provision for income taxes		2,297		1,483		4,282		3,109

Net income	$	3,919	$	2,624	$	7,583	$	5,603

Net income per share:
Basic	$	0.37	$	0.25	$	0.71	$	0.54
Diluted		0.36		0.25		0.71		0.53

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net income	$	3,919		$	2,624		$	7,583		$	5,603

Other comprehensive income:
Unrealized gains arising during the period		1,451			1,862			3,725			4,494
Reclassification of realized amount		-			-			-			(4	)
Net change in unrealized gain on securities		1,451			1,862			3,725			4,490
Less tax impact		(508	)		(665	)		(1,304	)		(1,576	)
Other comprehensive income		943			1,197			2,421			2,914

Comprehensive income	$	4,862		$	3,821		$	10,004		$	8,517

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2017

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

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income			Total
Balances, January 1, 2017	$	109,911	$	66,195		$	(1,922	)	$	174,184
Net income		-		7,583			-			7,583
Other comprehensive income		-		-			2,421			2,421
Cash dividends paid ($0.30 per share)		-		(3,197	)		-			(3,197	)
Stock options exercised		138		-			-			138
Stock based compensation expense		169		-			-			169
Balances, June 30, 2017	$	110,218	$	70,581		$	499		$	181,298

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(UNAUDITED, DOLLARS IN THOUSANDS)

	2017			2016
Cash flows from operating activities
Net income	$	7,583		$	5,603
Adjustments to reconcile net income to net cash from operating activities
Depreciation		879			976
Provision for loan losses		1,142			1,124
Amortization (accretion), net		616			1,189
OREO write-downs (gains on sales), net		349			(15	)
Stock compensation expense		169			142
Changes in :
Interest receivable		225			(50	)
Other assets		294			158
Interest payable		(12	)		(57	)
Other liabilities		(591	)		(2,798	)
Net cash from operating activities		10,654			6,272

Cash flows from investing activities
Net change in time deposits with other banks		(250	)		-
Purchases of securities available for sale		(43,190	)		(12,010	)
Proceeds from maturities and calls of securities available for sale		33,291			37,616
Redemption of FHLB stock		15			190
Net change in loans		(13,077	)		(45,301	)
Acquisition of subsidiary, net of cash received		-			16,385
Purchases of premises and equipment, net		(305	)		(184	)
Proceeds from sales of other real estate acquired through foreclosure		1,462			553
Net cash from (used in) investing activities		(22,054	)		(2,751	)

Cash flows from financing activities
Net change in deposits		(2,190	)		1,776
Net change in agreements to repurchase securities		(3,342	)		8,075
Repayment of other borrowed funds		(1,859	)		(1,217	)
Proceeds from stock option exercises		138			520
Advances from FHLB		-			5,000
Repayment of FHLB advances		-			(760	)
Common stock dividends paid		(3,197	)		(2,887	)
Net cash from (used in) financing activities		(10,450	)		10,507

Net change in cash and cash equivalents		(21,850	)		14,028

Cash and cash equivalents at beginning of period		104,718			72,539

Cash and cash equivalents at end of period	$	82,868		$	86,567

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(UNAUDITED, DOLLARS IN THOUSANDS)

	2017		2016
Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	2,236	$	2,387

Cash paid during period for income taxes		3,632		3,387

Loans transferred to real estate acquired through foreclosure		600		524

Stock issued to acquire subsidiary		-		22,041

Premises transferred to other real estate owned		71		-

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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 (the "Banks"):

					June 30, 2017
		Year	Total		Net Income
Subsidiary	Location	Acquired	Assets		Qtr				YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	419,236		$	1,103			$	2,300
Premier Bank, Inc.	Huntington, West Virginia	1998		1,069,784			3,188				6,273
Parent and Intercompany Eliminations				6,322			(372	)			(990	)
Consolidated Total			$	1,495,342		$	3,919			$	7,583

All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance was originally effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Companies have the option to apply ASU 2014-09 as of the original effective date. Early adoption is not permitted. The Company plans to adopt the guidance during the first quarter of 2018. Management continues to evaluate the impact ASU 2014-09 will have on the Company's consolidated financial statements as well as the most appropriate transition method of application. Based on this evaluation to date, management has determined that the majority of the revenues earned by the Company are not within the scope of ASU 2014-09 because they are already governed by other accounting standards. For those revenue streams management has determined to be within the scope of ASU 2014-09, namely elements of non-interest income such as service charges on deposit accounts that are governed by deposit account agreements with customers and the timing of revenue from the sale of real estate acquired through foreclosure, the guidance or any of its amendments is not anticipated to result in any material change the timing of when the revenue is recognized. Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on the consolidated financial statements as new interpretations and guidance are issued, such as the applicability of Topic 606 to interchange revenues included in the Company's electronic banking income, focusing on the new disclosures required by the adoption of ASU 2014-09.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 - BASIS OF PRESENTATION – continued

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale classification of equity investments, requiring equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income, and using an exit price notion when measuring the fair value of financial instruments for disclosure purposes. This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2017. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires organizations to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2018. The Company leases some of its branch locations. Upon adoption of this standard, an asset will be recorded to recognize the right of the Company to use the leased facilities and a liability will be recorded representing the obligation to make all future lease payments on those facilities. Management is currently evaluating the amounts to be recognized upon the adoption of this guidance in the Company's financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e., Additional Paid-in-Capital pools will be eliminated). The guidance in this ASU was adopted by the Company beginning January 1, 2017. The adoption of ASU No. 2016-09 did not have a material impact on the Company's financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the "current expected credit loss" or "CECL". The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts. The largest impact will be on the allowance for loan and lease losses. This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2019. Management has formed a steering committee that is evaluating the data gathering requirements, available economic forecasting and loss estimation models and potential software that would be employed by the Company to facilitate the adoption of this guidance and its required disclosures on the Company's financial statements. Upon adoption, management anticipates an initial one-time increase in the allowance for loan losses which will be offset by a corresponding decrease in capital as permitted by the standard.

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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, 2017 are summarized as follows:

2017	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	203,134	$	1,042	$	(652	)	$	203,524
U. S. sponsored agency CMO's - residential		61,844		649		(375	)		62,118
Total mortgage-backed securities of government sponsored agencies		264,978		1,691		(1,027	)		265,642
U. S. government sponsored agency securities		21,374		9		(68	)		21,315
Obligations of states and political subdivisions		14,105		174		(12	)		14,267
Total available for sale	$	300,457	$	1,874	$	(1,107	)	$	301,224

Amortized cost and fair value of investment securities, by category, at December 31, 2016 are summarized as follows:

2016	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	177,105	$	245	$	(3,173	)	$	174,177
U. S. sponsored agency CMO's - residential		73,163		761		(657	)		73,267
Total mortgage-backed securities of government sponsored agencies		250,268		1,006		(3,830	)		247,444
U. S. government sponsored agency securities		24,652		23		(174	)		24,501
Obligations of states and political subdivisions		16,645		111		(94	)		16,662
Total available for sale	$	291,565	$	1,140	$	(4,098	)	$	288,607

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2–SECURITIES - continued

The amortized cost and fair value of securities at June 30, 2017 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Available for sale
Due in one year or less	$	10,606	$	10,632
Due after one year through five years		18,929		18,929
Due after five years through ten years		5,386		5,463
Due after ten years		558		558
Mortgage-backed securities of government sponsored agencies		264,978		265,642
Total available for sale	$	300,457	$	301,224

Securities with unrealized losses at June 30, 2017 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 government sponsored agency securities	$	15,007	$	(68	)	$	-	$	-		$	15,007	$	(68	)
U.S government sponsored agency MBS – residential		75,722		(652	)		-		-			75,722		(652	)
U.S government sponsored agency CMO – residential		15,097		(183	)		7,860		(192	)		22,957		(375	)
Obligations of states and political subdivisions		2,028		(6	)		599		(6	)		2,627		(12	)
Total temporarily impaired	$	107,854	$	(909	)	$	8,459	$	(198	)	$	116,313	$	(1,107	)

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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, 2016 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 government sponsored agency securities	$	17,207	$	(174	)	$	-	$	-		$	17,207	$	(174	)
U.S government sponsored agency MBS – residential		157,022		(3,173	)		-		-			157,022		(3,173	)
U.S government sponsored agency CMO's – residential		18,374		(373	)		8,750		(284	)		27,124		(657	)
Obligations of states and political subdivisions		7,961		(94	)		-		-			7,961		(94	)
Total temporarily impaired	$	200,564	$	(3,814	)	$	8,750	$	(284	)	$	209,314	$	(4,098	)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities. The unrealized losses at June 30, 2017 and December 31, 2016 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities. Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery. 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, 2017 and December 31, 2016 are summarized as follows:

	2017		2016
Residential real estate	$	340,288	$	342,294
Multifamily real estate		78,352		74,165
Commercial real estate:
Owner occupied		133,846		129,370
Non owner occupied		227,700		220,836
Commercial and industrial		77,900		76,736
Consumer		29,747		30,916
All other		150,121		150,506
	$	1,037,954	$	1,024,823

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2017 was as follows:

Loan Class	Balance Dec 31, 2016		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2017

Residential real estate	$	2,948	$	193		$	(199	)	$	31	$	2,973
Multifamily real estate		785		552			-			-		1,337
Commercial real estate:
Owner occupied		1,543		(166	)		-			241		1,618
Non owner occupied		2,350		(12	)		(4	)		-		2,334
Commercial and industrial		1,140		9			(134	)		78		1,093
Consumer		347		138			(165	)		53		373
All other		1,723		428			(264	)		80		1,967
Total	$	10,836	$	1,142		$	(766	)	$	483	$	11,695

Activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2016 was as follows:

Loan Class	Balance Dec 31, 2015		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2016

Residential real estate	$	2,501	$	286		$	(56	)	$	16	$	2,747
Multifamily real estate		821		1			-			-		822
Commercial real estate:
Owner occupied		1,509		(68	)		-			1		1,442
Non owner occupied		2,070		638			-			-		2,708
Commercial and industrial		1,033		40			-			38		1,111
Consumer		307		33			(90	)		56		306
All other		1,406		194			(126	)		194		1,668
Total	$	9,647	$	1,124		$	(272	)	$	305	$	10,804

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2017 was as follows:

Loan Class	Balance March 31, 2017		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2017

Residential real estate	$	2,977	$	64		$	(94	)	$	26	$	2,973
Multifamily real estate		770		567			-			-		1,337
Commercial real estate:
Owner occupied		1,576		(198	)		-			240		1,618
Non owner occupied		2,422		(88	)		-			-		2,334
Commercial and industrial		1,129		43			(134	)		55		1,093
Consumer		370		22			(48	)		29		373
All other		1,650		366			(81	)		32		1,967
Total	$	10,894	$	776		$	(357	)	$	382	$	11,695

Activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2016 was as follows:

Loan Class	Balance March 31, 2016		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2016

Residential real estate	$	2,539	$	208		$	(7	)	$	7	$	2,747
Multifamily real estate		745		77			-			-		822
Commercial real estate:
Owner occupied		1,531		(89	)		-			-		1,442
Non owner occupied		2,337		371			-			-		2,708
Commercial and industrial		933		176			-			2		1,111
Consumer		288		44			(46	)		20		306
All other		1,542		25			(66	)		167		1,668
Total	$	9,915	$	812		$	(119	)	$	196	$	10,804

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at June 30, 2017 and December 31, 2016.

	2017		2016
Residential real estate	$	1,537	$	1,619
Commercial real estate
Owner occupied		1,645		2,013
Non owner occupied		-		5,396
Commercial and industrial		216		232
All other		1,860		2,061
Total carrying amount	$	5,258	$	11,321
Contractual principal balance	$	7,234	$	14,784

Carrying amount, net of allowance	$	5,208	$	11,311

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $50,000 for the six-months ended June 30, 2017, but did not increase the allowance for loan losses for purchased impaired loans during the six-months ended June 30, 2016.

For those purchased loans disclosed above, where the Company can reasonably estimate the cash flows expected to be collected on the loans, a portion of the purchase discount is allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion is being recognized as interest income over the remaining life of the loan.

Where the Company cannot reasonably estimate the cash flows expected to be collected on the loans, it has continued to account for those loans using the cost recovery method of income recognition. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method. If, in the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan. Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero. Any loan accounted for under the cost recovery method is also still included as a non-accrual loan in the amounts presented in the tables below.

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at June 30, 2017 and June 30, 2016.

	2017			2016
Balance at January 1	$	1,208		$	185
New loans purchased		-			1,115
Accretion of income		(403	)		(52	)
Reclassification to non-accretable		-			-
Disposals		-			-
Balance at June 30	$	805		$	1,248

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2017 and December 31, 2016. The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

June 30, 2017	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,767	$	3,190	$	693
Multifamily real estate		11,102		11,095		332
Commercial real estate
Owner occupied		2,156		2,078		-
Non owner occupied		311		212		-
Commercial and industrial		1,833		830		1,134
Consumer		276		252		-
All other		2,913		2,791		-
Total	$	22,358	$	20,448	$	2,159

December 31, 2016	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,467	$	2,794	$	606
Multifamily real estate		11,157		11,106		334
Commercial real estate
Owner occupied		1,769		1,704		15
Non owner occupied		294		196		36
Commercial and industrial		2,537		1,209		1,008
Consumer		366		347		-
All other		8,408		8,391		-
Total	$	27,998	$	25,747	$	1,999

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

- 18 -

Table of Contents

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 presents the aging of the recorded investment in past due loans as of June 30, 2017 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	340,288	$	4,920	$	2,061	$	6,981	$	333,307
Multifamily real estate		78,352		108		11,427		11,535		66,817
Commercial real estate:
Owner occupied		133,846		364		2,015		2,379		131,467
Non owner occupied		227,700		154		124		278		227,422
Commercial and industrial		77,900		50		1,900		1,950		75,950
Consumer		29,747		295		93		388		29,359
All other		150,121		875		2,789		3,664		146,457
Total	$	1,037,954	$	6,766	$	20,409	$	27,175	$	1,010,779

The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	342,294	$	6,113	$	1,596	$	7,709	$	334,585
Multifamily real estate		74,165		-		11,440		11,440		62,725
Commercial real estate:
Owner occupied		129,370		1,746		1,474		3,220		126,150
Non owner occupied		220,836		1,803		159		1,962		218,874
Commercial and industrial		76,736		330		2,120		2,450		74,286
Consumer		30,916		403		223		626		30,290
All other		150,506		577		8,187		8,764		141,742
Total	$	1,024,823	$	10,972	$	25,199	$	36,171	$	988,652

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Table of Contents

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 presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2017:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	-	$	2,973	$	-	$	2,973	$	326	$	338,425	$	1,537	$	340,288
Multifamily real estate		517		820		-		1,337		13,593		64,759		-		78,352
Commercial real estate:
Owner occupied		324		1,294		-		1,618		4,095		128,106		1,645		133,846
Non-owner occupied		-		2,334		-		2,334		1,914		225,786		-		227,700
Commercial and industrial		107		936		50		1,093		1,253		76,431		216		77,900
Consumer		-		373		-		373		-		29,747		-		29,747
All other		205		1,762		-		1,967		7,189		141,072		1,860		150,121
Total	$	1,153	$	10,492	$	50	$	11,695	$	28,370	$	1,004,326	$	5,258	$	1,037,954

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	-	$	2,948	$	-	$	2,948	$	379	$	340,296	$	1,619	$	342,294
Multifamily real estate		-		785		-		785		13,641		60,524		-		74,165
Commercial real estate:
Owner occupied		244		1,299		-		1,543		2,801		124,556		2,013		129,370
Non-owner occupied		-		2,350		-		2,350		2,373		213,067		5,396		220,836
Commercial and industrial		266		864		10		1,140		1,418		75,086		232		76,736
Consumer		-		347		-		347		-		30,916		-		30,916
All other		86		1,637		-		1,723		12,976		135,469		2,061		150,506
Total	$	596	$	10,230	$	10	$	10,836	$	33,588	$	979,914	$	11,321	$	1,024,823

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

In the tables below, total individually evaluated impaired loans include certain purchased loans that were acquired with deteriorated credit quality that are still individually evaluated for impairment.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2017. The table includes $199,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	367	$	326	$	-
Multifamily real estate		2,498		2,498		-
Commercial real estate
Owner occupied		3,129		3,079		-
Non owner occupied		2,006		1,914		-
Commercial and industrial		2,076		1,134		-
All other		3,191		3,071		-
		13,267		12,022		-
With an allowance recorded:
Multifamily real estate	$	11,102	$	11,095	$	517
Commercial real estate
Owner occupied		1,044		1,016		324
Commercial and industrial		469		318		157
All other		4,123		4,118		205
		16,738		16,547		1,203
Total	$	30,005	$	28,569	$	1,203

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Table of Contents

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 presents loans individually evaluated for impairment by class of loans as of December 31, 2016. The table includes $208,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	743	$	379	$	-
Multifamily real estate		13,692		13,641		-
Commercial real estate
Owner occupied		1,803		1,766		-
Non owner occupied		2,465		2,373		-
Commercial and industrial		2,429		1,338		-
All other		9,868		9,853		-
		31,000		29,350		-
With an allowance recorded:
Commercial real estate
Owner occupied	$	1,055	$	1,035	$	244
Commercial and industrial		431		288		276
All other		3,124		3,123		86
		4,610		4,446		606
Total	$	35,610	$	33,796	$	606

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Table of Contents

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 presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the six months ended June 30, 2017 and June 30, 2016. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Six months ended June 30, 2017						Six months ended June 30, 2016
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	345	$	1	$	1	$	638	$	11	$	9
Multifamily real estate		13,611		130		121		1,241		58		58
Commercial real estate:
Owner occupied		3,211		22		22		678		-		-
Non-owner occupied		2,079		61		61		5,706		100		97
Commercial and industrial		1,523		101		101		969		16		16
All other		9,129		289		286		802		7		6
Total	$	29,898	$	604	$	592	$	10,034	$	192	$	186

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended June 30, 2017 and June 30, 2016. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended June 30, 2017						Three months ended June 30, 2016
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	328	$	-	$	-	$	669	$	5	$	5
Multifamily real estate		13,596		65		59		1,824		45		45
Commercial real estate:
Owner occupied		3,417		16		16		795		-		-
Non-owner occupied		1,932		29		29		5,308		51		51
Commercial and industrial		1,471		27		27		1,141		13		12
All other		7,205		57		55		850		7		6
Total	$	27,949	$	194	$	186	$	10,587	$	121	$	119

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Troubled Debt Restructurings

A loan is classified as a troubled debt restructuring ("TDR") when loan terms are modified due to a borrower's financial difficulties and a concession is granted to a borrower that would not have otherwise been considered. Most of the Company's loan modifications involve a restructuring of loan terms prior to maturity to temporarily reduce the payment amount and/or to require only interest for a temporary period, usually up to six months. These modifications generally do not meet the definition of a TDR because the modifications are considered to be an insignificant delay in payment. The determination of an insignificant delay in payment is evaluated based on the facts and circumstances of the individual borrower(s).

The following table presents TDR's as of June 30, 2017 and December 31, 2016:

June 30, 2017	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	324	$	133	$	457
Multifamily real estate		-		2,166		2,166
Commercial real estate
Owner occupied		601		1,771		2,372
Commercial and industrial		59		520		579
All other		751		4,340		5,091
Total	$	1,735	$	8,930	$	10,665

December 31, 2016	TDR's on Non-accrual		Other TDR's		Total TDR's

Residential real estate	$	129	$	464	$	593
Multifamily real estate		-		2,201		2,201
Commercial real estate
Owner occupied		-		856		856
Commercial and industrial		62		352		414
All other		751		4,395		5,146
Total	$	942	$	8,268	$	9,210

At June 30, 2017, $40,000 in specific reserves was allocated to loans that had restructured terms. At December 31, 2016, $43,000 in specific reserves was allocated to loans that had restructured terms. As of June 30, 2017 and December 31, 2016, there were no commitments to lend additional amounts to these borrowers.

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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 presents TDR's that occurred during the three and six months ended June 30, 2017.

	Three months ended June 30, 2017						Six months ended June 30, 2017
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Commercial real estate
Owner occupied		2	$	1,525	$	1,525		2	$	1,525	$	1,525
Commercial & industrial		1		191		191		1		191		191
Total		3	$	1,716	$	1,716		3	$	1,716	$	1,716

The modifications reported above for the six months ended June 30, 2017 involve one borrowing relationship that did not include any permanent reduction of the recorded investment in the loans nor change in the interest rate on the loans. The Company has modified the terms of the loans granting interest only payments during a period of loan rehabilitation. These periods have exceeded normal interest only periods customarily offered by the Company. During the three and six month ended June 30, 2017, the Company did not increase the allowance for loan losses related to these loans.

The following table presents TDR's that occurred during the three and six months ended June 30, 2016.

	Three months ended June 30, 2016						Six months ended June 30, 2016
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Residential real estate		-	$	-	$	-		2	$	299	$	299
Commercial real estate
Owner occupied		-		-		-		2		610		610
Non-owner occupied		-		-		-		1		100		100
Commercial & industrial		-		-		-		1		20		20
Total		-	$	-	$	-		6	$	1,029	$	1,029

The modifications reported above for the six months ended June 30, 2016 involve one borrowing relationship that did not include any permanent reduction of the recorded investment in the loans nor change in the interest rate on the loans. The Company has modified the terms of the loans by extending payment terms and requiring interest only payments during a period of loan rehabilitation. These periods have exceeded normal extension and interest only periods customarily offered by the Company. During the six month ended June 30, 2016, the Company increased the allowance for loan losses by $145,000 related to these loans.

- 25 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

During the three and six months ended June 30, 2017 and the three and six months ended June 30, 2016, there were no TDR's for which there was a payment default within twelve months following the modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis. For consumer loans, including consumer loans secured by residential real estate, the analysis involves monitoring the performing status of the loan. At the time such loans become past due by 30 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

As of June 30, 2017 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	327,595	$	3,114	$	9,578	$	1	$	340,288
Multifamily real estate		63,630		75		12,035		2,612		78,352
Commercial real estate:
Owner occupied		121,638		6,826		5,382		-		133,846
Non-owner occupied		219,011		6,408		2,281		-		227,700
Commercial and industrial		72,032		3,779		2,089		-		77,900
Consumer		29,343		155		249		-		29,747
All other		140,829		1,728		7,564		-		150,121
Total	$	974,078	$	22,085	$	39,178	$	2,613	$	1,037,954

As of December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	328,905	$	4,880	$	8,507	$	2	$	342,294
Multifamily real estate		59,375		78		14,712		-		74,165
Commercial real estate:
Owner occupied		118,134		6,720		4,516		-		129,370
Non-owner occupied		213,641		4,391		2,804		-		220,836
Commercial and industrial		72,094		2,337		2,275		30		76,736
Consumer		30,369		242		305		-		30,916
All other		134,945		1,958		13,603		-		150,506
Total	$	957,463	$	20,606	$	46,722	$	32	$	1,024,823

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - 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 2017 the Banks could, without prior approval, declare dividends to the Company of approximately $4.1 million plus any 2017 net profits retained to the date of the dividend declaration.

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

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following tables). The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes, as of June 30, 2017, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS - continued

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

	June 30, 2017			December 31, 2016			Regulatory Minimum Requirements			To Be Considered Well Capitalized
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		13.9	%		13.4	%		4.5	%		6.5	%
Tier 1 Capital (to Risk-Weighted Assets)		14.4	%		13.9	%		6.0	%		8.0	%
Total Capital (to Risk-Weighted Assets)		15.5	%		15.0	%		8.0	%		10.0	%
Tier 1 Capital (to Average Assets)		10.4	%		10.1	%		4.0	%		5.0	%

Beginning on January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action. The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over a four year period from 2016 thru 2019, resulting in a required capital conservation buffer of 0.625% in 2016 and 1.25% in 2017. When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company. The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%. The Company's capital conservation buffer was 7.53% at June 30, 2017 and 6.95% at December 31, 2016, well in excess of the fully phased-in 2.50% required by December 31, 2019.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 – STOCK COMPENSATION EXPENSE

From time to time the Company grants stock options to its employees. 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 March 15, 2017, 55,500 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $19.01, the closing market price of Premier's common stock on the grant date. These options vest in three equal annual installments ending on March 15, 2020. On March 16, 2016, 55,990 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $13.55, the closing market price of Premier's common stock on the grant date. These options vest in three equal annual installments ending on March 16, 2019.

On April 19, 2017, 6,000 shares of Premier's common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan. The fair value of the stock at the time of the grant was $20.70 per share based upon the closing price of Premier's stock on the date of grant and $124,000 of stock-based compensation was recorded as a result. On March 16, 2016, 7,700 shares of Premier's common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan. The fair value of the stock at the time of the grant was $13.55 per share based upon the closing price of Premier's stock on the date of grant and $104,000 of stock-based compensation was recorded as a result.

Compensation expense of $169,000 was recorded for the first six months of 2017 while $142,000 was recorded for the first six months of 2016, including the compensation expense related to the stock grants to Mr. Walker. Stock-based compensation expense related to incentive stock option grants is recognized ratably over the requisite vesting period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $124,000 at June 30, 2017. This unrecognized expense is expected to be recognized over the next 32 months based on the vesting periods of the options.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and six months ended June 30, 2017 and 2016 is presented below:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Basic earnings per share
Income available to common stockholders	$	3,9193,918	$	2,624	$	7,583	$	5,603
Weighted average common shares outstanding		10,656,350		10,587,223		10,649,750		10,449,476
Earnings per share	$	0.37	$	0.25	$	0.71	$	0.54

Diluted earnings per share
Income available to common stockholders	$	3,9193,918	$	2,624	$	7,583	$	5,603
Weighted average common shares outstanding		10,656,350		10,587,223		10,649,750		10,449,476
Add dilutive effects of potential additional common stock		88,984		59,127		83,140		59,605
Weighted average common and dilutive potential common shares outstanding		10,745,334		10,646,350		10,732,890		10,509,081
Earnings per share assuming dilution	$	0.36	$	0.25	$	0.71	$	0.53

Stock options for 22,000 shares of common stock were not considered in computing diluted earnings per share for the six months ended June 30, 2016 because they were antidilutive. There were no stock options considered antidilutive for the six months ended June 30, 2017. There were no stock options considered antidilutive for the three months ended June 30, 2017 and 2016.

On December 9, 2016, Premier paid a 10% stock dividend (1 share for every 10 shares owned on record date) to shareholders of record on December 2, 2016. Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a result of the stock dividend to aid in the comparison to current period results.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

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

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

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

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

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

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a recurring basis:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at June 30, 2017 were as follows:

				Fair Value Measurements at June 30, 2017 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	80,472		$	80,472		$	-		$	-	$	80,472
Federal funds sold		2,396			2,396			-			-		2,396
Time deposits with other banks		2,582			-			2,592			-		2,592
Securities available for sale		301,224			-			301,224			-		301,224
Loans, net		1,026,259			-			-			1,012,953		1,012,953
Federal Home Loan Bank stock		3,185			n/a			n/a			n/a		n/a
Interest receivable		3,637			-			762			2,875		3,637

Financial liabilities
Deposits	$	(1,277,208	)	$	(931,962	)	$	(341,484	)	$	-	$	(1,273,446	)
Securities sold under agreements to repurchase		(20,478	)		-			(20,478	)		-		(20,478	)
Other borrowed funds		(7,000	)		-			(6,957	)		-		(6,957	)
Subordinated Debt		(5,360	)		-			(5,387	)		-		(5,387	)
Interest payable		(352	)		(8	)		(344	)		-		(352	)

The carrying amounts and estimated fair values of financial instruments at December 31, 2016 were as follows:

				Fair Value Measurements at December 31, 2016 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	97,163		$	97,163		$	-		$	-	$	97,163
Federal funds sold		7,555			7,555			-			-		7,555
Time deposits with other banks		2,332			-			2,352			-		2,352
Securities available for sale		288,607			-			288,607			-		288,607
Loans, net		1,013,987			-			-			1,004,388		1,004,388
Federal Home Loan Bank stock		3,200			n/a			n/a			n/a		n/a
Interest receivable		3,862			-			771			3,091		3,862

Financial liabilities
Deposits	$	(1,279,386	)	$	(920,745	)	$	(354,885	)	$	-	$	(1,275,630	)
Securities sold under agreements to repurchase		(23,820	)		-			(23,820	)		-		(23,820	)
Other borrowed funds		(8,859	)		-			(8,906	)		-		(8,906	)
Subordinated debt		(5,343	)		-			(5,341	)		-		(5,341	)
Interest payable		(364	)		(7	)		(357	)		-		(364	)

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at June 30, 2017 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	203,524	$	-	$	203,524	$	-
U. S. agency CMO's - residential		62,118		-		62,118		-
Total mortgage-backed securities of government sponsored agencies		265,642		-		265,642		-
U. S. government sponsored agency securities		21,315		-		21,315		-
Obligations of states and political subdivisions		14,267		-		14,267		-
Total securities available for sale	$	301,224	$	-	$	301,224	$	-

			Fair Value Measurements at December 31, 2016 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	174,177	$	-	$	174,177	$	-
U. S. agency CMO's		73,267		-		73,267		-
Total mortgage-backed securities of government sponsored agencies		247,444		-		247,444		-
U. S. government sponsored agency securities		24,501		-		24,501		-
Obligations of states and political subdivisions		16,662		-		16,662		-
Total securities available for sale	$	288,607	$	-	$	288,607	$	-

There were no transfers between Level 1 and Level 2 during 2017 or 2016.

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE - continued

Assets and Liabilities Measured on a Non-Recurring Basis

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a non-recurring basis:

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent collateral appraisals. Real estate appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and unique to each property and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports. Management periodically evaluates the appraised collateral values and will discount the collateral's appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, management's expertise and knowledge of the client and client's business, or other factors unique to the collateral. To the extent an adjusted collateral value is lower than the carrying value of an impaired loan, a specific allocation of the allowance for loan losses is assigned to the loan.

Other real estate owned (OREO): The fair value of OREO is based on appraisals less cost to sell at the date of foreclosure. Management may obtain additional updated appraisals depending on the length of time since foreclosure. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Management periodically evaluates the appraised values and will discount a property's appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property. To the extent an adjusted appraised value is lower than the carrying value of an OREO property, a direct charge to earnings is recorded as an OREO write-down.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2017 are summarized below:

			Fair Value Measurements at June 30, 2017 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	10,578	$	-	$	-	$	10,578
Commercial real estate:
Owner occupied		692		-		-		692
Commercial and industrial		161		-		-		161
All other		3,913		-		-		3,913
Total impaired loans	$	15,344	$	-	$	-	$	15,344

Other real estate owned:
Residential real estate	$	509	$	-	$	-	$	509
Commercial real estate:
Owner occupied		175		-		-		175
Non-owner occupied		1,953		-		-		1,953
All other		2,855		-		-		2,855
Total OREO	$	5,492	$	-	$	-	$	5,492

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $16,547,000 at June 30, 2017 with a valuation allowance of $1,203,000 and a carrying amount of $4,446,000 at December 31, 2016 with a valuation allowance of $606,000. The change resulted in a provision for loan losses of $763,000 for the six months ended June 30, 2017, compared to an $191,000 provision for loan losses for the six months ended June 30, 2016 and a $678,000 provision for loan losses for the three months ended June 30, 2017, compared to a $139,000 provision for loan losses for the three months ended June 30, 2016. The detail of impaired loans by loan class is contained in Note 3 above.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $5,492,000 which is made up of the outstanding balance of $8,803,000 net of a valuation allowance of $3,311,000 at June 30, 2017. There were $363,000 of write downs during the six months ended June 30, 2017 compared to no additional write downs during the six months ended June 30, 2016. For the three months ended June 30, 2017 there were $324,000 of additional write downs compared to no additional write downs during the three months ended June 30, 2016. At December 31, 2016, other real estate owned had a net carrying amount of $6,624,000, made up of the outstanding balance of $9,900,000, net of a valuation allowance of $3,276,000.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at June 30, 2017 are summarized below:

	June 30, 2017		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	10,578	sales comparison	adjustment for differences between the comparable sales	4.0%-4.0% (4.0%)
Commercial real estate:
Owner occupied		692	sales comparison	adjustment for limited salability of specialized property	23.1%-76.4% (29.5%)
Commercial and industrial		161	sales comparison	adjustment for differences between the comparable sales	8.0%-56.5% (52.8%)
All other		3,913	sales comparison	adjustment for differences between the comparable sales	8.0%-14.9% (14.7%)
Total impaired loans	$	15,344

Other real estate owned:
Residential real estate	$	509	sales comparison	adjustment for differences between the comparable sales	0.1%-50.2% (14.7%)
Commercial real estate:
Owner occupied		175	sales comparison	adjustment for differences between the comparable sales	21.8%-21.8% (21.8%)
Non-owner occupied		1,953	sales comparison	adjustment for differences between the comparable sales	27.6%-58.9% (30.8%)
All other		2,855	sales comparison	adjustment for estimated realizable value	15.1%-69.0% (18.8%)
Total OREO	$	5,492

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2016 are summarized below:

			Fair Value Measurements at December 31, 2016 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate:
Owner occupied	$	793	$	-	$	-	$	793
Commercial and Industrial		12		-		-		12
All Other		3,036		-		-		3,036
Total impaired loans	$	3,841	$	-	$	-	$	3,841

Other real estate owned:
Residential real estate:	$	613	$	-	$	-	$	613
Commercial real estate:
Owner occupied		175		-		-		175
Non-owner occupied		2,153		-		-		2,153
All other		3,683		-		-		3,683
Total OREO	$	6,624	$	-	$	-	$	6,624

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2016 are summarized below:

	December 31, 2016		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Commercial real estate:
Owner occupied	$	793	sales comparison	adjustment for limited salability of specialized property	9.3%-76.4% (19.3%)
Commercial and Industrial		12	sales comparison	adjustment for limited salability of specialized property	8.0%-8.0% (8.0%)
All Other		3,036	sales comparison	adjustment for differences between the comparable sales	5.7%-9.0% (8.0%)
Total impaired loans	$	3,841

Other real estate owned:
Residential real estate	$	613	sales comparison	adjustment for differences between the comparable sales	0.7%-86.8% (25.2%)
Commercial real estate:
Owner occupied		175	sales comparison	adjustment for differences between the comparable sales	21.8%-21.8% (21.8%)
Non-owner occupied		2,153	sales comparison	adjustment for differences between the comparable sales	17.2%-27.6% (25.7%)
All Other		3,683	sales comparison	adjustment for estimated realizable value	15.1%-45.4% (21.8%)
Total OREO	$	6,624

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

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, 2017 was $7,583,000, or $0.71 per diluted share, compared to net income of $5,603,000, or $0.53 per diluted share, for the six months ended June 30, 2016. The increase in income in 2017 is largely due to increases in interest income and non-interest income as well as decreases in interest expense and non-interest expense. The annualized returns on average common shareholders' equity and average assets were approximately 8.44% and 1.01% for the six months ended June 30, 2017 compared to 6.51% and 0.76%% for the same period in 2016.

Net income for the three months ended June 30, 2017 was $3,919,000, or $0.36 per diluted share, compared to net income of $2,624,000, or $0.25 per diluted share for the three months ended June 30, 2016. The increase in income for the three months ended June 30, 2017 is likewise largely due to an increase in interest income and non-interest income as well as a decrease in interest expense and non-interest expense. The annualized returns on average common shareholders' equity and average assets were approximately 8.63% and 1.04% for the three months ended June 30, 2017 compared to 5.98% and 0.70% for the same period in 2016.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

Net interest income for the six months ended June 30, 2017 totaled $29.258 million, up $2.7 million, or 10.2%, from the $26.546 million of net interest income earned in the first six months of 2016. Interest income in 2017 increased by $2.606 million, or 9.0%, largely due to a $2.489 million increase in interest income on loans. Interest income on loans in the first six months of 2017 included approximately $1,607,000 of deferred interest and discounts recognized on loans that paid off during the first six months of 2017 compared to $70,000 of loan interest income of this kind recognized during the first six months of 2016. The loan payoffs in 2017 included both non-accrual loans and performing loans that were once on non-accrual status. Otherwise, interest income on loans increased by $952,000, or 3.7%, largely due to a higher average balance of loans outstanding during the period although with a slightly lower average yield. Interest income on investment securities in the first six months of 2017 decreased by $17,000, or 0.6%, largely due to a lower average balance of investments outstanding as surplus funds and maturing investments have been used to fund the higher yielding loan portfolio. Interest income from interest-bearing bank balances and federal funds sold increased by $134,000, or 65%, largely due to an increase in the yield on these balances in 2017 resulting from the Federal Reserve Board of Governors' decisions to increase the federal funds target rate by a total of 75 basis points in the last twelve months, on a slightly lower average balance outstanding during the first six months of 2017.

Complementing the increase in interest income in the first six months of 2017 was a $106,000, or 4.5%, decrease in interest expense. Interest expense on deposits decreased by $52,000, or 2.7% in the first half of 2017 primarily due to a lower average balance of higher rate certificates of deposit in the first six months of 2017 compared to the same six months of 2016. The decrease in the average of these deposit balances were more than replaced by an increase in average transaction based interest-bearing deposits and savings deposits which typically pay a lower interest rate than certificates of deposit. Interest expense on borrowings in the first half of 2017 decreased by $76,000, or 31.4%, largely due to a decrease in outstanding borrowings from principal payments, including the full repayment of bank based FHLB borrowings during 2016. Partially offsetting the decrease in interest expense on borrowings was a $26,000, or 22.0%, increase in interest expense on Premier's subordinated debt due to an increase in the variable rate interest rate paid in 2017. The variable interest rate is indexed to the three month London Interbank Offered Rate, which is sensitive to moves in the short-term interest rate market.

Premier's net interest margin during the first six months of 2017 was 4.26% compared to 3.93% for the same period in 2016. A portion of the interest income on loans is the result of recognizing deferred interest income and discounts on loans that paid-off during the period. Excluding this income, Premier's net interest margin during the first six months of 2017 would have been 4.03% compared to 3.92% for the same period in 2016. As shown in the table below, Premier's yield earned on federal funds sold and interest bearing bank balances increased to 1.26% in the first six months of 2017, from the 0.63% earned in the first six months of 2016. The average yield earned on securities available for sale and total loans outstanding also increased when compared to the first six months of 2016. Further improving Premier's net interest margin, the average rate paid on interest bearing liabilities decreased in the first six months of 2017, as decreases in the average rates paid on interest-bearing deposits, and short-term borrowings, were partially offset by a higher average rate paid on Premier's variable rate subordinated debentures and other borrowings. The overall effect was to increase Premier's net interest spread by 32 basis points to 4.13% and its net interest margin by 33 basis points to 4.26% in the first six months of 2017 when compared to the first six months of 2016.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

Additional information on Premier's net interest income for the first six months of 2017 and first six months of 2016 is contained in the following table.

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

	Six Months Ended June 30, 2017								Six Months Ended June 30, 2016
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	54,253		$	339		1.26	%	$	65,063		$	205		0.63	%
Securities available for sale
Taxable		285,769			2,809		1.97			298,133			2,790		1.87
Tax-exempt		13,003			136		3.22			18,681			172		2.83
Total investment securities		298,772			2,945		2.02			316,814			2,962		1.93
Total loans		1,034,407			28,198		5.50			979,597			25,709		5.28
Total interest-earning assets		1,387,432			31,482		4.58	%		1,361,474			28,876		4.28	%
Allowance for loan losses		(10,962	)							(9,929	)
Cash and due from banks		40,419								36,303
Other assets		81,444								81,899
Total assets	$	1,498,333							$	1,469,747

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	966,214			1,900		0.40		$	955,948			1,952		0.41
Short-term borrowings		22,374			14		0.13			22,792			18		0.16
FHLB advances		-			-		-			1,792			22		2.47
Other borrowings		8,111			166		4.13			10,708			220		4.13
Subordinated debentures		5,350			144		5.43			4,875			118		4.87
Total interest-bearing liabilities		1,002,049			2,224		0.45	%		996,115			2,330		0.47	%
Non-interest bearing deposits		312,031								297,331
Other liabilities		4,604								4,111
Stockholders' equity		179,649								172,190
Total liabilities and equity	$	1,498,333							$	1,469,747

Net interest earnings				$	29,258							$	26,546
Net interest spread							4.13	%							3.81	%
Net interest margin							4.26	%							3.93	%

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

Additional information on Premier's net interest income for the second quarter of 2017 and second quarter of 2016 is contained in the following table.

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

	Three Months Ended June 30, 2017								Three Months Ended June 30, 2016
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	52,893		$	182		1.38	%	$	71,529		$	108		0.61	%
Securities available for sale
Taxable		293,437			1,464		2.00			297,233			1,362		1.83
Tax-exempt		12,453			64		3.16			19,251			88		2.81
Total investment securities		305,890			1,528		2.04			316,484			1,450		1.89
Total loans		1,036,258			14,663		5.68			995,501			13,108		5.30
Total interest-earning assets		1,395,041			16,373		4.72	%		1,383,514			14,666		4.27	%
Allowance for loan losses		(11,012	)							(10,116	)
Cash and due from banks		40,912								39,612
Other assets		80,497								82,944
Total assets	$	1,505,438							$	1,495,954

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	969,483			951		0.39		$	971,266			975		0.40
Short-term borrowings		21,252			7		0.13			25,256			11		0.18
FHLB advances		-			-		-			2,525			15		2.39
Other borrowings		7,663			79		4.14			10,402			107		4.14
Subordinated debentures		5,355			74		5.54			5,371			67		5.02
Total interest-bearing liabilities		1,003,753			1,111		0.44	%		1,014,820			1,175		0.47	%
Non-interest bearing deposits		315,848								302,079
Other liabilities		4,140								3,574
Stockholders' equity		181,697								175,481
Total liabilities and equity	$	1,505,438							$	1,495,954

Net interest earnings				$	15,262							$	13,491
Net interest spread							4.28	%							3.80	%
Net interest margin							4.40	%							3.93	%

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

Net interest income for the quarter ended June 30, 2017 totaled $15.262 million, up $1.771 million, or 13.1%, from the $13.491 million of net interest income earned in the second quarter of 2016. Interest income in 2017 increased by $1.707 million, or 11.6%, largely due to a $1.555 million, or 11.9%, increase in interest income on loans. Interest income on loans in the second quarter of 2017 included approximately $1.161 million of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter compared to $70,000 of interest income of this kind recognized during the second quarter of 2016. Otherwise, interest income on loans increased by $464,000, or 3.5%, in the second quarter of 2017, largely due to a higher average balance of loans outstanding during the quarter. Interest income on investment securities in the second quarter of 2017 increased by $78,000, or 5.4%, largely due to a higher average yield on the investment portfolio although on a lower average balance of investments outstanding during the quarter. Interest income from interest-bearing bank balances and federal funds sold increased by $74,000, or 69%, largely due to an increase in the yield on these balances in 2017 on a slightly lower average balance outstanding during the quarter.

Interest expense decreased in total during the second quarter of 2017 by $64,000, or 5.4%, when compared to the same quarter of 2016. Interest expense on deposits decreased by $24,000, or 2.4%, in the second quarter of 2017, primarily due to a slightly lower average of interest-bearing deposits outstanding during the quarter. Interest expense on repurchase agreements in the second quarter of 2017 decreased by $4,000, or 36.4%, due to both a decrease in the average rate paid on these agreements as well as a lower average balance outstanding during the quarter. Interest expense on borrowings in the second quarter of 2017 decreased by $43,000, or 35.2%, largely due to a decrease in outstanding borrowings, including the full repayment of bank based FHLB borrowings during 2016. Partially offsetting the decrease in interest expense on borrowings was a $7,000, or 10.4%, increase in interest expense on Premier's subordinated debt due to an increase in the variable interest rate paid in 2017.

Premier's net interest margin during the second quarter of 2017 was 4.40% compared to 3.93% for the same period in 2016. A portion of the interest income on loans was the result of recognizing deferred interest income and discounts on loans that paid-off during the period. Excluding this income, Premier's net interest margin during the second quarter of 2017 would have been 4.06% compared to 3.91% for the same period in 2016. As shown in the table above, Premier's yield earned on federal funds sold and interest bearing bank balances increased to 1.38% in the second quarter of 2017, from the 0.61% earned in the second quarter of 2016. The average yield earned on securities available for sale and total loans outstanding also increased when compared to the second quarter of 2016. Further improving Premier's net interest margin, the average rate paid on interest bearing liabilities decreased in the second quarter of 2017, as decreases in the average rates paid on interest-bearing deposits, and short-term borrowings, were partially offset by a higher average rate paid on Premier's variable rate subordinated debentures and other borrowings. The overall effect was to increase Premier's net interest spread by 48 basis points to 4.28% and its net interest margin by 47 basis points to 4.40% in the second quarter of 2017 when compared to the same quarter of 2016.

Non-interest income increased by $149,000, or 3.7%, to $4,151,000 for the first six months of 2017 compared to the same period of 2016. Service charges on deposit accounts increased by $121,000, or 6.2% and electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $49,000, or 3.1%. Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, particularly in the second quarter of 2017, while electronic banking income increased primarily due to an increase in income from debit card transaction activity. Partially offsetting these increases was a $28,000, or 7.1%, decrease in other non-interest income, largely due to income recognized in 2016 from the liquidation of non-marketable investments obtained in the acquisition of First National Bankshares.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

For the quarter ending June 30, 2017, non-interest income increased by $69,000, or 3.3%, to $2,134,000 compared to $2,065,000 recognized during the same quarter of 2016. Service charges on deposit accounts increased by $106,000, or 10.8% and electronic banking income increased by $31,000, or 3.9%. Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, particularly in the second quarter of 2017, while electronic banking income increased primarily due to an increase in income from debit card transaction activity and an increase in revenue from non-customer use of bank owned automated teller machines. Partially offsetting these increases was a $20,000, or 33.9%, decrease in secondary market mortgage income and a $48,000, or 21.7% decrease in other non-interest income. Secondary market mortgage income decreased due to a lower level of home purchasing and refinancing activity in Premier's markets while other non-interest income decreased largely due to lower levels of income related to lending activities such as credit life commissions and loan fees related to late payments. Also reducing other non-interest income in the second quarter of 2017 compared to the second quarter of 2016 was the income recognized in 2016 from the liquidation of non-marketable investments obtained in the acquisition First National Bankshares.

Non-interest expenses for the first six months of 2017 totaled $20.40 million, or 2.75% of average assets on an annualized basis, compared to $20.71 million, or 2.83% of average assets for the same period of 2016. The $310,000, or 1.5%, decrease in non-interest expenses in 2017 when compared to the first six months of 2016 is largely due to a $265,000, or 2.6% decrease in staff costs, a $127,000, or 26.8%, decrease in FDIC insurance expense, a $92,000, or 3.0%, decrease in occupancy and equipment expenses and a $229,000, or 9.3%, decrease in other non-interest expenses. Staff costs decreased largely due to reductions in salary expense, payroll taxes, medical benefit costs, and retirement benefit costs related to reductions in personnel and changes to benefit plans at the acquired First National Bankshares locations. These savings were partially offset by normal salary increases at Premier's other operations. Occupancy and equipment expense decreased largely due to lower equipment costs related to maintenance, repairs, rent expense, and deprecation particularly related to information technology equipment. FDIC insurance decreased, largely due to lower rates charged on the assessment base. Other non-interest expenses decreased due in large part to $195,000 of conversion related expenses incurred in 2016 related to the acquisition and data systems conversion of First National Bankshares versus only $17,000 of conversion costs expensed in 2017. These decreases in non-interest expense were partially offset by a $192,000, or 57.7%, increase in professional fees, a $156,000, or 24.5%, increase in expenses and write-downs of OREO, and an $83,000, or 26.2%, increase in taxes not on income and a $40,000, or 1.5%, increase in data processing costs when compared to the first six months of 2016. Professional fees increased largely due to increases in legal fees, audit costs, and expenditures on third party consultants. OREO expenses increased largely due to $363,000 of write-downs on existing OREO properties in 2017 compared to no write-downs during the first six months of 2016. The increase in OREO write-down expense was partially offset by a lower level of expenses related to the maintenance and repairs of OREO properties held while being marketed for sale. Taxes not on income increased largely due to increases in equity and deposit based taxes in Kentucky and Ohio due to growth in those markets from Premier's expanding branch network into the metro Cincinnati, Ohio area.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

Non-interest expenses for the second quarter of 2016 totaled $10.40 million, or 2.77% of average assets on an annualized basis, compared to $10.64 million, or 2.86% of average assets for the same period of 2016. The $233,000, or 2.2%, decrease in non-interest expenses in the second quarter of 2017 when compared to the second quarter of 2016 is largely due to a $244,000, or 4.7%, decrease in staff costs, a $101,000, or 6.5%, decrease in occupancy and equipment expense, a $66,000, or 20.8% decrease in amortization of intangibles, a $60,000, or 28.0%, decrease in FDIC insurance expense and a $104,000, or 8.1%, decrease in other non-interest expense. Staff costs decreased largely due to reductions in salary expense, payroll taxes, medical benefit costs, and retirement benefit costs related to reductions in personnel and changes to benefit plans at the acquired First National Bankshares locations. Occupancy and equipment expense decreased largely due to lower equipment costs related to maintenance, repairs, rent expense, and deprecation particularly related to information technology equipment. Amortization of intangible assets decreased largely due to the full amortization of the core deposit intangibles recorded as the result of two bank acquisitions completed in 2008. FDIC insurance decreased largely due to lower rates charged on the assessment base. Other non-interest expenses decreased due in large part to a $59,000 reduction in conversion expense primarily related to expenses incurred in 2016 related to the acquisition and data systems conversion of First National Bankshares. These decreases were partially offset by a $94,000, or 51.4%, increase in professional fees, a $52,000, or 32.7%, increase in taxes not on income, a $155,000, or 38.9% increase in OREO expenses and write-downs and a $41,000, or 3.1%, increase in data processing costs. Professional fees increased largely due to increases in legal fees, audit costs, and expenditures on third party consultants. OREO expenses increased largely due to $324,000 of write-downs on existing OREO properties in the second quarter of 2017 compared to no write-downs during the second quarter of 2016. The increase in OREO write-down expense was partially offset by a lower level of expenses related to the maintenance and repairs of OREO properties held while being marketed for sale. Taxes not on income increased largely due to increases in equity and deposit based taxes in Kentucky and Ohio due to growth in those markets from Premier's expanding branch network into the metro Cincinnati, Ohio area.

Income tax expense was $4,282,000 for the first six months of 2017 compared to $3,109,000 for the first six months of 2016. The effective tax rate for the six months ended June 30, 2017 was 36.1% compared to 35.7% for the same period in 2016. For the quarter ended June 30, 2017, income tax expense was $2,297,000, a 37.0% effective tax rate, compared to $1,483,000 (a 36.1% effective tax rate) for the same period in 2016. The increase in income tax expense during the first six months of 2017 can be primarily attributed to the increase in pre-tax income detailed above, as the effective tax rate was essentially unchanged. Similarly, the increase in income tax expense during the second quarter of 2017 when compared to the same quarter of 2016 can also be primarily attributed to the increase in pre-tax income for the quarter as detailed above.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

B. Financial Position

Total assets at June 30, 2017 decreased by $851,000 to $1.495 billion from the $1.496 billion at December 31, 2016. The decrease in total assets since year-end is largely due to a $17.9 million decrease in interest bearing bank balances, a $5.2 million decrease in federal funds sold, and a $1.1 million decrease in other real estate owned. These decreases were partially offset by a $12.6 million increase in securities available for sale and a $13.1 million increase in total loans outstanding. Contrary to the decrease in total assets, earning assets increased by $2.6 million from the $1.382 billion at year-end 2016 to end the quarter at $1.385 billion.

Cash and due from banks at June 30, 2017 was $42.9 million, a $1.5 million increase from the $41.4 million at December 31, 2016. Interest-bearing bank balances decreased by $17.9 million from the $58.1 million reported at December 31, 2016, and federal funds sold decreased by $5.2 million to $2.4 million at June 30, 2017. Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases and are part of Premier's management of its liquidity and interest rate risks. The decrease in interest bearing bank balances and federal funds sold during the first six months of 2017 was largely in response to the funding of investment purchases plus an increase in total loans outstanding.

Securities available for sale totaled $301.2 million at June 30, 2017, a $12.6 million increase from the $288.6 million at December 31, 2016. The increase was largely due to the purchase of $43.2 million of investment securities and a $3.7 million increase in the market value of the securities available for sale, which more than offset $33.3 million of proceeds from monthly principal payments on Premier's mortgage backed securities portfolio and securities that matured or were called during the year. The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies. Any unrealized losses on securities within the portfolio at June 30, 2017 and December 31, 2016 are believed to be price changes resulting from increases in the long-term interest rate environment since acquiring the investment security and management anticipates receiving all principal and interest on these investments as they come due. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

Total loans at June 30, 2017 were $1.038 billion compared to $1.025 billion at December 31, 2016, an increase of approximately $13.1 million, or 1.3%. The increase is largely due to internal loan growth partially offset by regular principal payments, loan payoffs and transfers of loans to OREO upon foreclosure. Loan payoffs during the first six months of 2017 included payoffs on $5.6 million of non-accrual loans and $5.4 million of performing loans which resulted in recognizing approximately $1,407,000 of interest income deferred while the loans were on non-accrual status and $199,000 of remaining purchase discounts associated with the loans.

Premises and equipment decreased by $645,000 largely due to normal quarterly depreciation of fixed assets. Other real estate owned acquired through foreclosure ("OREO") decreased by $1.1 million largely due to $1.5 million of sales and $363,000 of OREO write-downs on existing OREO, partially off offset by $671,000 of new additions. Other intangible assets decreased by $517,000, due to the amortization of core deposit intangibles. Other assets decreased by $1.6 million primarily due to a decrease in deferred tax assets.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

Deposits totaled $1.277 billion as of June 30, 2017, a $2.2 million, or 0.2%, decrease from the $1.279 billion in deposits at December 31, 2016. The overall decrease in deposits is largely due to a $13.4 million, or 3.7%, decrease in certificates of deposit and a $558,000, or 0.2%, decrease in non-interest bearing demand deposits. These decreases were substantially offset by a $5.0 million, or 2.1%, increase in interest bearing transaction accounts and a $6.8 million, or 1.9%, increase in savings and money market accounts Repurchase agreements with corporate and public entity customers decreased in the first six months of 2017 by $3.3 million, or 14.0%. Other borrowings decreased by $1.9 million since year-end 2016 due to the $248,000 payment at maturity of a subsidiary bank borrowing as well as scheduled principal payments and additional principal payments on Premier's existing parent company borrowings. Subordinated debentures increased $17,000, due to the continuing monthly accretion of the fair value adjustment recorded in 2016 as part of the acquisition of First National Bankshares.

The following table sets forth information with respect to the Company's nonperforming assets at June 30, 2017 and December 31, 2016.

	(In Thousands)
	2017			2016
Non-accrual loans	$	20,448		$	25,747
Accruing loans which are contractually past due 90 days or more		2,159			1,999
Accruing restructured loans		8,930			8,268
Total non-performing and restructured loans		31,537			36,014
Other real estate acquired through foreclosure (OREO)		11,525			12,665
Total non-performing assets	$	43,062		$	48,679

Non-performing loans as a percentage of total loans		3.04	%		3.51	%

Non-performing assets as a percentage of total assets		2.88	%		3.25	%

Total non-performing and restructured loans have decreased since year-end, largely due to a $5.3 million decrease in non-accrual loans. This decrease in non-performing loans was partially offset by a $662,000 increase in accruing restructured loans and a $160,000 increase in loans past due 90 days or more. Total non-performing assets have decreased since year-end, largely due to the reduction in non-performing loans plus a $1.1 million decrease in other real estate acquired through foreclosure ("OREO"). Other real estate owned decreased as sales of OREO and additional write-downs on existing properties in the first six months of 2017 exceeded new foreclosures.

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.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

Gross charge-offs totaled $766,000 during the first six months of 2017, largely due to consumer lending based charge-offs, including residential real estate loans, and the partial charge-off of loans upon foreclosure and placement into OREO during the period. Any collections on charged-off loans, or partially charged-off 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 2017 totaled $483,000, resulting in net charge-offs for the first six months of 2017 of $283,000. This compares to $33,000 of net recoveries recorded in the first six months of 2016. During the three months ending on June 30, 2017, Premier recorded net recoveries of $25,000 compared to $77,000 of net recoveries recorded in the same three months ending on June 30, 2016. The allowance for loan losses at June 30, 2017 was 1.13% of total loans compared to 1.06% at December 31, 2016. The increase in the ratio is largely due to an increase in the amount of allowance allocated to loans individually evaluated for impairment. At December 31, 2016, specific allocations of the allowance for loan losses related to loans individually evaluated for impairment totaled $606,000. This amount increased to $1,203,000 at June 30, 2017, largely due to a $517,000 increase in estimated credit loss on an impaired multifamily real estate loan.

During the first six months of 2017, Premier recorded a $1,142,000 provision for loan losses. This provision compares to a $1,124,000 provision for loan losses recorded during the same six months of 2016. The provision for loan losses recorded during the second quarter of 2017 was $776,000 compared to an $812,000 provision for loan losses in the second quarter of 2016. The 2017 provision for loan losses was due in large part to increases in specific allocations of the allowance for loan losses related to loans individually evaluated for impairment as well as a $24.4 million, or 2.5%, increase in loans collectively evaluated for impairment. The 2016 provision for loan losses was due in large part to the $45.4 million of growth in outstanding loans in 2016, exclusive of the loans acquired from the January 2016 acquisition of First National Bankshares, and an estimate for the potential loan losses related to the flash flooding that occurred in some of Premier's West Virginia markets during the last week of June 2016. Management's initial estimate of loan losses related to unreimbursed damage to borrowers' collateral or the lasting economic impact to business customers in areas that rely on vacation season tourism resulted in adding $500,000 to the provision for loan losses during the second quarter of 2016. Due to substantial assistance from both public and private sources to the regions of West Virginia affected by the flooding, Premier's actual loan loss experience related to the flooding was minor and management now believes the affected geographic areas demonstrate no more additional credit risk than that of the other general economic areas served by Premier's branch network. As a result, much of the initial provision for loan losses has been reversed and helped offset additional provisions for loan losses related to individually impaired loans and increases in estimates of potential losses from declining economic activity in southern and central West Virginia. Premier also continues to monitor the impact of the decline in coal mining that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry which may have a larger impact in the central area of West Virginia. A resulting decline in employment and local economic activity could increase non-performing assets from loans originated in these areas.

The provisions for loan losses recorded in 2016 and 2017 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. These methodologies are subject to change in the adoption of ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments issued by the FASB in June 2016 which will become effective for the Company for interim and annual periods beginning after December 15, 2019. 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. With the concentrations of commercial real estate loans in the Washington, DC, Richmond, Virginia, and Cincinnati, Ohio markets, fluctuations in commercial real estate values continue to be monitored. In each of the last five years, Premier sold some OREO properties at a gain while other OREO properties have required subsequent write-downs to net realizable values. These factors are considered in determining the adequacy of the allowance for loan losses. For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans and restructured loans, see Note 3 to the consolidated financial statements.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

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, 2016. 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 four 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, the identification and evaluation of impaired loans, the impairment of goodwill and the realization of deferred tax assets. 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, 2016. There have been no significant changes in the application of these accounting policies since December 31, 2016.

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.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

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 $250,000 or more. Management believes that the majority of its $250,000 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 $301.2 million of securities at fair value as of June 30, 2017.

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, 2017, total stockholders' equity of $181.3 million was 12.1% of total assets. This compares to total stockholders' equity of $174.2 million, or 11.6% of total assets on December 31, 2016. The increase in stockholders' equity was largely due to $7.6 million of net income in the first six months of 2017 as well as a $2.4 million, net of tax, increase in the market value of the investment portfolio available for sale. These increases were partially offset by $3.2 million, or $0.30 per share, in cash dividends declared and paid to stockholders.

Tier 1 capital totaled $153.0 million at June 30, 2017, which represents a Tier 1 leverage ratio of 10.4%. This ratio is up from the 10.1% Tier 1 leverage ratio and $147.6 million of Tier 1 capital at December 31, 2016. The slight increase in the Tier 1 leverage ratio is largely due to the growth in Tier 1 capital exceeding the proportional growth in average total assets at June 30, 2017.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

JUNE 30, 2017

The regulatory authorities introduced a new capital measure in the first quarter of 2015 for financial institutions of Premier's size, Common Equity Tier 1 Capital. The Common Equity Tier 1 capital measure seeks to determine how much of the traditional Tier 1 capital is attributable to equity contributed by common shareholders by excluding Tier 1 capital from other sources such as preferred stockholders' equity and subordinated debt. As of June 30, 2017, Premier's Common Equity Tier 1 capital is $6.0 million lower than its total Tier 1 capital due to the additional Tier 1 capital included from the subordinated debentures. Since the subordinated debentures are held by the parent company, the Common Equity Tier 1 capital of the subsidiary banks is identical to their total Tier 1 capital, as none of the subsidiary banks have issued any preferred stock or subordinated debentures. Beginning January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action. The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over a four year period from 2016 thru 2019. When fully implemented, the capital conservation buffer requirement will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Tier 1 Capital to risk weighted assets, Total Capital to risk weighted assets and Common Equity Tier 1 Capital (CET1) to risk weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company. The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted asset ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%. At June 30, 2017, the Company's capital conservation buffer was 7.53%, well in excess of the 1.250% required.

Book value per common share was $17.01 at June 30, 2017 compared to $16.37 at December 31, 2016. Adding to Premier's book value per share in the first six months of 2017 was the $0.71 per share earned during the period partially offset by the $0.30 per share in total quarterly cash dividends to common shareholders declared and paid during the first six months of 2016. Also adding to Premier's book value per share at June 30, 2017 was the $2,421,000 of other comprehensive income for the first six months of 2017 related to the after tax increase in the market value of investment securities available for sale, which increased book value at June 30, 2017 by approximately $0.23 per share.

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2017

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 2016 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 2016 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 the Securities and Exchange Act of 1934 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.

B. Changes in Internal Controls over Financial Reporting

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

C. Inherent Limitations on Internal Control

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

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2017

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, 2016 for disclosures with respect to Premier's risk factors at December 31, 2016. There have been no material changes since year-end 2016 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.	Mine Safety Disclosures	Not Applicable

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.

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

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2017

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 9, 2017 /s/ Robert W. Walker

Robert W. Walker

President & Chief Executive Officer

Date: August 9, 2017 /s/ Brien M. Chase

Brien M. Chase

Senior Vice President & Chief Financial Officer

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