PART I - FINANCIAL INFORMATION

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”'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, and the impairment of goodwill.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 registered public accounting firm.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’sregistrant's annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’sregistrant's Form 10-K for the year ended December 31, 20152016 for further information in this regard.

Index to consolidated financial statements:

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

All significant intercompany transactions and balances have been eliminated.

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 iswas 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 is currently evaluatingcontinues 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 this guidanceASU 2014-09 will have on the Company’sconsolidated financial statements.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.

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, and requiresrequiring equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income.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 impact ofamounts to be recognized upon the adoption of this guidance onin the Company’sCompany'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 will requirerequires 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 will become effective for interim and annual reporting periodswas adopted by the Company beginning after December 15, 2016, with early adoption permitted.January 1, 2017.  The adoption of ASU No. 2016-09 isdid not expected to 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"current expected credit loss”loss" or “CECL”"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 currently evaluating the impact ofdata 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’sCompany's financial statements.

Amortized cost and fair value of investment securities, by category, at SeptemberJune 30, 20162017 are summarized as follows:

Amortized cost and fair value of investment securities, by category, at December 31, 20152016 are summarized as follows:

The amortized cost and fair value of securities at SeptemberJune 30, 20162017 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.

Securities with unrealized losses at SeptemberJune 30, 20162017 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

Securities with unrealized losses at December 31, 20152016 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

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 SeptemberJune 30, 20162017 and December 31, 20152016 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.

Major classifications of loans at SeptemberJune 30, 20162017 and December 31, 20152016 are summarized as follows:

As more fully discussed under Note 10 below, the table above includes loans purchasedActivity in the acquisition of First National Bankshares Corporation (“Bankshares”).  The composition ofallowance for loan losses by portfolio segment for the major classifications of the loans acquired from Bankshares at Septembersix months ended June 30, 2016 are summarized2017 was as follows:

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