Premier Financial Bancorp (PFBI) 10-Q 2018 Q3 Quarterly report

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 September 30, 2018

or

 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 every Interactive Data File required to be submitted 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 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.

Large accelerated filer 		Accelerated filer  
Non-accelerated filer  	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, – 14,618,648 shares outstanding at November 5, 2018

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2018

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management's Discussion and Analysis	43
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	55
Item 4 – Controls and Procedures	55
Part II - Other Information	56
Item 1 – Legal Proceedings	56
Item 1A – Risk Factors	56
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3 – Defaults Upon Senior Securities	56
Item 4 – Mine Safety Disclosures	56
Item 5 – Other Information	56
Item 6 – Exhibits	56
Signatures	57

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PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2018

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, and the impairment of goodwill.  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.

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, 2017 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	8

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2018 AND DECEMBER 31, 2017

(DOLLARS IN THOUSANDS)

	(UNAUDITED)
	September 30, 2018			December 31, 2017
ASSETS
Cash and due from banks	$	22,048		$	40,814
Interest bearing bank balances		85,568			37,191
Federal funds sold		7,589			4,658
Cash and cash equivalents		115,205			82,663
Time deposits with other banks		2,086			2,582
Securities available for sale		315,225			278,466
Loans		1,037,066			1,049,052
Allowance for loan losses		(13,483	)		(12,104	)
Net loans		1,023,583			1,036,948
Federal Home Loan Bank stock, at cost		3,173			3,185
Premises and equipment, net		25,184			23,815
Real estate acquired through foreclosure		14,379			19,966
Interest receivable		4,109			4,043
Goodwill		35,371			35,371
Other intangible assets		2,800			3,375
Other assets		3,355			3,010
Total assets	$	1,544,470		$	1,493,424
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	365,629		$	332,588
Time deposits, $250,000 and over		63,173			63,905
Other interest bearing		890,821			876,182
Total deposits		1,319,623			1,272,675
Securities sold under agreements to repurchase		24,728			23,310
Other borrowed funds		3,350			5,000
Subordinated debt		5,398			5,376
Interest payable		497			393
Other liabilities		3,296			3,315
Total liabilities		1,356,892			1,310,069
Stockholders' equity
Common stock, no par value; 30,000,000 shares authorized; 13,369,600 shares issued and outstanding at September 30, 2018, and 13,345,535 shares issued and outstanding at December 31, 2017		110,830			110,445
Retained earnings		83,888			74,983
Accumulated other comprehensive income (loss)		(7,140	)		(2,073	)
Total stockholders' equity		187,578			183,355
Total liabilities and stockholders' equity	$	1,544,470		$	1,493,424

Shares have been adjusted to reflect the 5 for 4 stock split issued on June 8, 2018 to shareholders of record on June 4, 2018.

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018			2017
Interest income
Loans, including fees	$	13,731	$	13,469	$	41,449		$	41,667
Securities available for sale
Taxable		1,745		1,427		4,787			4,236
Tax-exempt		52		62		166			198
Federal funds sold and other		473		176		1,151			515
Total interest income		16,001		15,134		47,553			46,616
Interest expense
Deposits		1,355		954		3,583			2,854
Repurchase agreements and other		10		7		25			21
Other borrowings		37		68		125			234
Subordinated debt		90		74		257			218
Total interest expense		1,492		1,103		3,990			3,327
Net interest income		14,509		14,031		43,563			43,289
Provision for loan losses		275		891		1,890			2,033
Net interest income after provision for loan losses		14,234		13,140		41,673			41,256
Non-interest income
Service charges on deposit accounts		1,183		1,136		3,343			3,201
Electronic banking income		968		811		2,677			2,424
Secondary market mortgage income		29		67		142			173
Other		257		163		572			530
		2,437		2,177		6,734			6,328
Non-interest expenses
Salaries and employee benefits		4,846		4,760		14,667			14,703
Occupancy and equipment expenses		1,570		1,511		4,660			4,481
Outside data processing		1,315		1,344		3,841			4,019
Professional fees		526		196		1,261			721
Taxes, other than payroll, property and income		217		189		669			589
Write-downs, expenses, sales of other real estate owned, net		26		346		(335	)		1,139
Amortization of intangibles		190		252		575			768
FDIC insurance		171		159		443			506
Other expenses		1,306		1,168		3,833			3,401
		10,167		9,925		29,614			30,327
Income before income taxes		6,504		5,392		18,793			17,257
Provision for income taxes		1,483		1,925		4,264			6,207
Net income	$	5,021	$	3,467	$	14,529		$	11,050
Net income per share:
Basic	$	0.38	$	0.26	$	1.09		$	0.83
Diluted		0.37		0.26		1.08			0.82

Per share data has been adjusted to reflect the 5 for 4 stock split issued on June 8, 2018 to shareholders of record on June 4, 2018.

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net income	$	5,021		$	3,467		$	14,529		$	11,050
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period		(1,451	)		(68	)		(6,414	)		3,658
Reclassification of realized amount		-			-			-			-
Net change in unrealized gain (loss) on securities		(1,451	)		(68	)		(6,414	)		3,658
Less tax impact		305			24			1,347			(1,281	)
Other comprehensive income (loss)		(1,146	)		(44	)		(5,067	)		2,377
Comprehensive income	$	3,875		$	3,423		$	9,462		$	13,427

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2018

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

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, January 1, 2018	$	110,445	$	74,983		$	(2,073	)	$	183,355
Net income		-		14,529			-			14,529
Other comprehensive income (loss)		-		-			(5,067	)		(5,067	)
Cash dividends paid ($0.42 per share)		-		(5,611	)		-			(5,611	)
Cash in lieu of fractional share for 5 for 4 stock split		-		(13	)		-			(13	)
Stock options exercised		168		-			-			168
Stock based compensation expense		217		-			-			217
Balances, September 30, 2018	$	110,830	$	83,888		$	(7,140	)	$	187,578

Per share data has been adjusted to reflect the 5 for 4 stock split issued on June 8, 2018 to shareholders of record on June 4, 2018.

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(UNAUDITED, DOLLARS IN THOUSANDS)

	2018			2017
Cash flows from operating activities
Net income	$	14,529		$	11,050
Adjustments to reconcile net income to net cash from operating activities
Depreciation		1,274			1,303
Provision for loan losses		1,890			2,033
Amortization (accretion), net		984			1,166
Writedowns (gains on the sale) of other real estate owned, net		(909	)		434
Stock compensation expense		217			194
Changes in:
Interest receivable		(66	)		(198	)
Other assets		1,002			(24	)
Interest payable		104			(6	)
Other liabilities		(19	)		(1,045	)
Net cash from operating activities		19,006			14,907
Cash flows from investing activities
Net change on time deposits with other banks		496			(250	)
Purchases of securities available for sale		(92,644	)		(49,210	)
Proceeds from maturities and calls of securities available for sale		48,355			50,787
Redemption of FHLB stock		12			15
Net change in loans		11,156			(30,865	)
Purchases of premises and equipment, net		(2,643	)		(654	)
Proceeds from sales of other real estate acquired through foreclosure		7,562			1,827
Net cash from (used in) investing activities		(27,706	)		(28,350	)
Cash flows from financing activities
Net change in deposits		46,930			(10,020	)
Net change in agreements to repurchase securities		1,418			1,296
Repayment of other borrowed funds		(1,650	)		(2,859	)
Proceeds from stock option exercises		168			248
Cash in lieu of fractional shares		(13	)		-
Common stock dividends paid		(5,611	)		(4,796	)
Net cash from (used in) financing activities		41,242			(16,131	)
Net change in cash and cash equivalents		32,542			(29,574	)
Cash and cash equivalents at beginning of period		82,663			104,718
Cash and cash equivalents at end of period	$	115,205		$	75,144

Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	3,886	$	3,333
Cash paid during period for income taxes		2,807		6,395
Loans transferred to real estate acquired through foreclosure		1,066		983
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"):

					September 30, 2018
		Year	Total		Net Income
Subsidiary	Location	Acquired	Assets		Qtr			YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	437,154	$	1,470		$	4,154
Premier Bank, Inc.	Huntington, West Virginia	1998		1,100,317		4,162			12,240
Parent and Intercompany Eliminations				6,999		(611	)		(1,865	)
Consolidated Total			$	1,544,470	$	5,021		$	14,529

All significant intercompany transactions and balances have been eliminated.

On June 8, 2018, Premier issued a 5 for 4 stock split to shareholders of record on June 4, 2018.  Each shareholder received 1 additional share of common stock for every 4 shares of common stock already owned on the record date.  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 split to aid in the comparison to current period results.

During the first three months of 2018, management updated its policies regarding estimation of probable incurred losses.  The updates included incorporating a common estimated loss ratio for all pass credits within a given loan classification, adding an additional qualitative factor for document exceptions on collectively impaired loans, and reallocating the qualitative portion of the allowance to align more closely to the inputs used to determine the qualitative portion.  The previous methodology allocated a higher loss ratio to loans graded "Watch" to estimate a higher credit risk on these loans due to risk downgrades resulting from document exceptions.  Loans graded "Watch" are considered pass credits.  The changes did not have a material impact on the overall allowance for loan losses or the provision for loan losses for the three and nine months ended September 30, 2018.

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.  The guidance provides the following steps to achieve the core principle (1) Identify the contract(s) with the customer, (2) Identify the performance obligations in the contract, (3) Determine the transaction price, (4) Allocate the transaction price to the performance obligations in the contract, and (5) Recognize revenue when (or as) the entity satisfies a performance obligation.   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, as amended, is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, including interim periods within those reporting periods.

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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

Management's assessment on revenue recognition by following the five steps resulted in no material changes from the current revenue recognition because the majority of revenues earned by the Company are not within the scope of ASU 2014-09.  As interest income on loans and securities are both excluded from Topic 606, the majority of revenue earned is not subject to the new guidance.  Service charges on deposit accounts, debit card interchange fees, and ATM fees are services provided that fall within the scope of Topic 606 and are presented within non-interest income as revenue when the obligation to the customer is satisfied.  Gains on the sale of OREO fall within the scope of Topic 606 and are recognized as a credit to non-interest expense as an offset to writedowns of carrying value and losses on the sale of OREO, as permitted.  The Company adopted Topic 606 as of January 1, 2018 with no material change in how revenues are recognized in the Company's financial statements.  Significant items of non-interest income are described below.

Service charges on deposit accounts – Fees are earned from our deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which we satisfy our performance obligation.

Debit card interchange fees - Revenue earned from a portion of the fee charged to merchants for the immediate approval of credit for funds (whether debit or credit card usage) is recognized on a daily cash basis and the commission is paid through Premier's third-party processor.  The revenue is earned on a transaction basis determined by customer activity.  Premier records this revenue on a gross revenue basis and expenses the processing charges incurred as a non-interest expense.

Non-customer ATM fees – Fees charged to non-deposit customers for using bank owned automated teller machines are charged on a transaction basis and withdrawn from the user's deposit account at another financial institution upon completion of the transaction.

Gain on sale of OREO – A gain is recognized upon the sale of OREO when a contract exists between the seller and purchaser and the control of the asset is transferred to the buyer.  The gain is then reported as a reduction of non-interest expense under the heading "Write-downs, expenses, sales of other real estate owned, net."

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 targeted improvement modifications to Subtopic 825-10, which (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (2) Simplify the impairment assessment of equity investments without readily

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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

determinable fair values by requiring a qualitative assessment to identify impairment and when an impairment exists, an entity is required to measure the investment at fair value, (3) Eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) Use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) Present separately in other comprehensive income the portion of the total changes in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option of financial instruments, (6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial instruments, and (7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.  The Company adopted subtopic 825-10 on January 1, 2018 which resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis.  See footnote 7 for additional information on fair value.

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 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, in which organizations will now use forward-looking information to enhance their credit loss estimates on these assets.  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, although early adoption is permitted beginning after December 15, 2018. The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method.  The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures.

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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

Management is currently evaluating the impact of the adoption of this guidance on the Company's financial statements.  Upon adoption, an initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard but management cannot yet determine the one-time adjustment.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This ASU amends Topic 220, Income Statement – Reporting Comprehensive Income to permit the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and any future change in corporate income tax rates.  The update does not affect the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations.  The Company adopted ASU 2018-02 retroactively to December 31, 2017 as permitted by the guidance.

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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 September 30, 2018 are summarized as follows:

2018	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	229,307	$	42	$	(7,192	)	$	222,157
U. S. sponsored agency CMO's - residential		72,971		13		(1,604	)		71,380
Total mortgage-backed securities of government sponsored agencies		302,278		55		(8,796	)		293,537
U. S. government sponsored agency securities		13,246		-		(244	)		13,002
Obligations of states and political subdivisions		8,739		23		(76	)		8,686
Total available for sale	$	324,263	$	78	$	(9,116	)	$	315,225

Amortized cost and fair value of investment securities, by category, at December 31, 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	$	198,631	$	175	$	(2,216	)	$	196,590
U. S. sponsored agency CMO's - residential		51,548		241		(681	)		51,108
Total mortgage-backed securities of government sponsored agencies		250,179		416		(2,897	)		247,698
U. S. government sponsored agency securities		19,312		1		(179	)		19,134
Obligations of states and political subdivisions		11,599		61		(26	)		11,634
Total available for sale	$	281,090	$	478	$	(3,102	)	$	278,466

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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 September 30, 2018 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	$	8,669	$	8,644
Due after one year through five years		10,820		10,658
Due after five years through ten years		2,496		2,386
Mortgage-backed securities of government sponsored agencies		302,278		293,537
Total available for sale	$	324,263	$	315,225

Securities with unrealized losses at September 30, 2018 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	$	-	$	-		$	13,001	$	(244	)	$	13,001	$	(244	)
U.S government sponsored agency MBS – residential		110,405		(2,186	)		110,867		(5,006	)		221,272		(7,192	)
U.S government sponsored agency CMO – residential		51,733		(597	)		17,710		(1,007	)		69,443		(1,604	)
Obligations of states and political subdivisions		2,920		(45	)		1,456		(31	)		4,376		(76	)
Total temporarily impaired	$	165,058	$	(2,828	)	$	143,034	$	(6,288	)	$	308,092	$	(9,116	)

- 13 -

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, 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	$	6,780	$	(41	)	$	10,335	$	(138	)	$	17,115	$	(179	)
U.S government sponsored agency MBS – residential		134,211		(1,076	)		47,682		(1,140	)		181,893		(2,216	)
U.S government sponsored agency CMO's – residential		8,306		(64	)		17,868		(617	)		26,174		(681	)
Obligations of states and political subdivisions		3,512		(20	)		474		(6	)		3,986		(26	)
Total temporarily impaired	$	152,809	$	(1,201	)	$	76,359	$	(1,901	)	$	229,168	$	(3,102	)

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 September 30, 2018 and December 31, 2017 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 September 30, 2018 and December 31, 2017 are summarized as follows:

	2018		2017
Residential real estate	$	340,478	$	338,829
Multifamily real estate		54,602		62,151
Commercial real estate:
Owner occupied		135,884		136,048
Non-owner occupied		226,710		230,702
Commercial and industrial		85,585		78,259
Consumer		28,129		28,293
Construction and land		132,141		139,012
All other		33,537		35,758
Total	$	1,037,066	$	1,049,052

- 14 -

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 nine months ended September 30, 2018 was as follows:

Loan Class	Balance Dec 31, 2017		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2018
Residential real estate	$	2,986	$	(509	)	$	(229	)	$	30	$	2,278
Multifamily real estate		978		(504	)		(11	)		-		463
Commercial real estate:
Owner occupied		1,653		174			(21	)		1		1,807
Non-owner occupied		2,313		500			(16	)		2		2,799
Commercial and industrial		1,101		1,108			(525	)		40		1,724
Consumer		328		90			(105	)		50		363
Construction and land		2,408		651			(20	)		400		3,439
All other		337		380			(203	)		96		610
Total	$	12,104	$	1,890		$	(1,130	)	$	619	$	13,483

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

Loan Class	Balance Dec 31, 2016		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2017
Residential real estate	$	2,948	$	363		$	(362	)	$	52	$	3,001
Multifamily real estate		785		451			-			-		1,236
Commercial real estate:
Owner occupied		1,543		(161	)		(7	)		242		1,617
Non-owner occupied		2,350		265			(8	)		-		2,607
Commercial and industrial		1,140		3			(138	)		95		1,100
Consumer		347		148			(214	)		86		367
Construction and land		1,397		683			(127	)		10		1,963
All other		326		281			(246	)		107		468
Total	$	10,836	$	2,033		$	(1,102	)	$	592	$	12,359

- 15 -

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 September 30, 2018 was as follows:

Loan Class	Balance June 30, 2018		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2018
Residential real estate	$	2,254	$	100		$	(81	)	$	5	$	2,278
Multifamily real estate		557		(94	)		-			-		463
Commercial real estate:
Owner occupied		1,917		(92	)		(18	)		-		1,807
Non-owner occupied		2,437		360			-			2		2,799
Commercial and industrial		1,599		132			(21	)		14		1,724
Consumer		354		39			(42	)		12		363
Construction and land		3,253		(213	)		(1	)		400		3,439
All other		611		43			(73	)		29		610
Total	$	12,982	$	275		$	(236	)	$	462	$	13,483

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

Loan Class	Balance June 30, 2017		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2017
Residential real estate	$	2,973	$	170		$	(163	)	$	21	$	3,001
Multifamily real estate		1,337		(101	)		-			-		1,236
Commercial real estate:
Owner occupied		1,618		5			(7	)		1		1,617
Non-owner occupied		2,334		276			(3	)		-		2,607
Commercial and industrial		1,093		(6	)		(4	)		17		1,100
Consumer		373		10			(49	)		33		367
Construction and land		1,675		292			(4	)		-		1,963
All other		292		245			(106	)		37		468
Total	$	11,695	$	891		$	(336	)	$	109	$	12,359

- 16 -

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 September 30, 2018 and December 31, 2017.

	2018		2017
Residential real estate	$	1,099	$	1,321
Commercial real estate
Owner occupied		1,385		1,508
Commercial and industrial		3		211
Construction and land		1,274		1,450
All other		284		286
Total carrying amount	$	4,045	$	4,776
Contractual principal balance	$	5,646	$	6,728
Carrying amount, net of allowance	$	4,045	$	4,676

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the nine months ended September 30, 2018, but did increase the allowance for loan losses by $50,000 during the nine-months ended September 30, 2017.

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.

- 17 -

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 September 30, 2018 and September 30, 2017.

	2018			2017
Balance at January 1	$	754		$	1,208
New loans purchased		-			-
Accretion of income		(141	)		(201	)
Loans placed on non-accrual		(52	)		-
Income recognized upon full repayment		(38	)		(197	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at September 30	$	523		$	810

- 18 -

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 September 30, 2018 and December 31, 2017.  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.

September 30, 2018	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	4,015	$	3,265	$	917
Multifamily real estate		2,118		2,012		-
Commercial real estate
Owner occupied		3,114		3,063		-
Non-owner occupied		4,373		4,285		75
Commercial and industrial		1,043		481		-
Consumer		373		342		-
Construction and land		4,842		4,669		-
All other		176		176		-
Total	$	20,054	$	18,293	$	992

December 31, 2017	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	2,944	$	2,422	$	869
Multifamily real estate		2,128		2,128		334
Commercial real estate
Owner occupied		2,623		2,483		134
Non-owner occupied		1,862		1,755		85
Commercial and industrial		1,313		544		1,139
Consumer		268		241		-
Construction and land		5,824		5,673		830
Total	$	16,962	$	15,246	$	3,391

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.

- 19 -

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 September 30, 2018 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	$	340,478	$	5,366	$	1,697	$	7,063	$	333,415
Multifamily real estate		54,602		-		1,165		1,165		53,437
Commercial real estate:
Owner occupied		135,884		1,719		1,343		3,062		132,822
Non-owner occupied		226,710		281		2,889		3,170		223,540
Commercial and industrial		85,585		328		237		565		85,020
Consumer		28,129		198		163		361		27,768
Construction and land		132,141		1,869		4,657		6,526		125,615
All other		33,537		9		176		185		33,352
Total	$	1,037,066	$	9,770	$	12,327	$	22,097	$	1,014,969

The following table presents the aging of the recorded investment in past due loans as of December 31, 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	$	338,829	$	5,242	$	1,835	$	7,077	$	331,752
Multifamily real estate		62,151		-		334		334		61,817
Commercial real estate:
Owner occupied		136,048		311		1,784		2,095		133,953
Non-owner occupied		230,702		12		225		237		230,465
Commercial and industrial		78,259		123		1,611		1,734		76,525
Consumer		28,293		492		87		579		27,714
Construction and land		139,012		144		2,508		2,652		136,360
All other		35,758		-		-		-		35,758
Total	$	1,049,052	$	6,324	$	8,384	$	14,708	$	1,034,344

- 20 -

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 September 30, 2018:

	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	$	-	$	2,278	$	-	$	2,278	$	298	$	339,081	$	1,099	$	340,478
Multifamily real estate		6		457		-		463		1,906		52,696		-		54,602
Commercial real estate:
Owner occupied		385		1,422		-		1,807		3,029		131,470		1,385		135,884
Non-owner occupied		256		2,543		-		2,799		7,415		219,295		-		226,710
Commercial and industrial		111		1,613		-		1,724		525		85,057		3		85,585
Consumer		-		363		-		363		-		28,129		-		28,129
Construction and land		1,195		2,244				3,439		4,423		126,444		1,274		132,141
All other		-		610		-		610		-		33,253		284		33,537
Total	$	1,953	$	11,530	$	-	$	13,483	$	17,596	$	1,015,425	$	4,045	$	1,037,066

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, 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	$	-	$	2,986	$	-	$	2,986	$	308	$	337,200	$	1,321	$	338,829
Multifamily real estate		218		760		-		978		2,462		59,689		-		62,151
Commercial real estate:
Owner occupied		307		1,346		-		1,653		3,314		131,226		1,508		136,048
Non-owner occupied		88		2,225		-		2,313		11,578		219,124		-		230,702
Commercial and industrial		104		897		100		1,101		1,304		76,744		211		78,259
Consumer		-		328		-		328		-		28,293		-		28,293
Construction and land		685		1,723		-		2,408		5,672		131,890		1,450		139,012
All other		-		337		-		337		293		35,179		286		35,758
Total	$	1,402	$	10,602	$	100	$	12,104	$	24,931	$	1,019,345	$	4,776	$	1,049,052

- 21 -

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 September 30, 2018.  The table does not include any loans acquired with deteriorated credit quality.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	430	$	298	$	-
Commercial real estate
Owner occupied		2,184		2,175		-
Non-owner occupied		4,022		4,022		-
Commercial and industrial		801		270		-
Construction and land		578		578		-
		8,015		7,343		-
With an allowance recorded:
Multifamily real estate		2,012		1,906		6
Commercial real estate
Owner occupied		887		854		385
Non-owner occupied		3,474		3,393		256
Commercial and industrial		263		255		111
Construction and land		4,017		3,845		1,195
		10,653		10,253		1,953
Total	$	18,668	$	17,596	$	1,953

- 22 -

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, 2017.  The table includes $199,000 of loans acquired with deteriorated credit quality for which 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	$	446	$	308	$	-
Multifamily real estate		334		334		-
Commercial real estate
Owner occupied		2,451		2,439		-
Non-owner occupied		9,602		9,506		-
Commercial and industrial		1,719		1,188		-
Construction and land		1,798		1,678		-
All other		293		293		-
		16,643		15,746		-
With an allowance recorded:
Multifamily real estate	$	2,128	$	2,128	$	218
Commercial real estate
Owner occupied		895		875		307
Non-owner occupied		2,072		2,072		88
Commercial and industrial		466		315		204
Construction and land		4,024		3,994		685
		9,585		9,384		1,502
Total	$	26,228	$	25,130	$	1,502

- 23 -

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 nine months ended September 30, 2018 and September 30, 2017.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Nine months ended Sept 30, 2018						Nine months ended Sept 30, 2017
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	$	301	$	-	$	-	$	339	$	1	$	1
Multifamily real estate		2,192		11		11		13,605		196		181
Commercial real estate:
Owner occupied		3,163		54		54		3,340		49		49
Non-owner occupied		9,005		327		327		2,955		124		124
Commercial and industrial		990		21		21		1,474		114		114
Consumer		-		-		-		5		-		-
Construction and land		4,633		12		12		8,337		328		327
All other		216		10		10		304		14		14
Total	$	20,500	$	435	$	435	$	30,359	$	826	$	810

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 September 30, 2018 and September 30, 2017.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended Sept 30, 2018						Three months ended Sept 30, 2017
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	$	299	$	-	$	-	$	323	$	-	$	-
Multifamily real estate		1,939		-		-		13,590		66		60
Commercial real estate:
Owner occupied		3,041		3		3		3,910		27		27
Non-owner occupied		7,489		86		86		3,749		63		63
Commercial and industrial		532		5		5		1,390		13		13
Consumer		-		-		-		9		-		-
Construction and land		4,467		9		9		6,884		48		48
All other		142		6		6		299		5		5
Total	$	17,909	$	109	$	109	$	30,154	$	222	$	216

- 24 -

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 September 30, 2018 and December 31, 2017:

September 30, 2018	TDR's on Non-accrual		Other TDR's		Total TDR's
Residential real estate	$	351	$	100	$	451
Multifamily real estate		1,906		-		1,906
Commercial real estate
Owner occupied		1,949		226		2,175
Non-owner occupied		-		5,981		5,981
Commercial and industrial		191		270		461
Construction and land		3,846		-		3,846
Total	$	8,243	$	6,577	$	14,820

December 31, 2017	TDR's on Non-accrual		Other TDR's		Total TDR's
Residential real estate	$	393	$	107	$	500
Multifamily real estate		2,128		-		2,128
Commercial real estate
Owner occupied		601		1,783		2,384
Non-owner occupied		-		9,904		9,904
Commercial and industrial		56		497		553
Construction and land		3,994		-		3,994
All other		-		293		293
Total	$	7,172	$	12,584	$	19,756

At September 30, 2018, $1,275,000 in specific reserves were allocated to loans that had restructured terms resulting in a provision for loan losses of $140,000 for the three months ended September 30, 2018 and $303,000 for the nine months ended September 30, 2018..  This compares to a provision for loan losses on restructured loans of $706,000 for the three and nine months ended September 30, 2017.  At December 31, 2017, $1,029,000 in specific reserves were allocated to loans that had restructured terms.  There were no commitments to lend additional amounts to these borrowers.

- 25 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

There were no new TDR's that occurred during the three and nine months ended September 30, 2018.

The following table presents TDR's that occurred during the three and nine months ended September 30, 2017.

	Three months ended Sept 30, 2017						Nine months ended Sept 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
Non owner occupied		2		3,875		3,875		2		3,875		3,875
Commercial & industrial		-		-		-		1		191		191
Total		2	$	3,875	$	3,875		5	$	5,591	$	5,591

The modifications reported above for the three and nine months ended September 30, 2017 involve reducing the borrowers' required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current.  The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans.   The Company increased the allowance for loan losses related to these loans by $88,000 during the three and nine months ended September 30, 2017.

- 26 -

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 nine months ended September 30, 2018 and the three and nine months ended September 30, 2017, there were no TDR's for which there as 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, and smaller balance non-homogeneous loans, the analysis involves monitoring the performing status of the loan.  At the time such loans become past due by 90 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.

- 27 -

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 September 30, 2018, 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	$	330,283	$	1,107	$	9,088	$	-	$	340,478
Multifamily real estate		47,634		4,956		2,012		-		54,602
Commercial real estate:
Owner occupied		124,609		4,950		6,325		-		135,884
Non-owner occupied		209,611		6,223		10,876		-		226,710
Commercial and industrial		78,626		4,224		2,735		-		85,585
Consumer		27,649		-		480		-		28,129
Construction and land		106,328		20,441		5,372		-		132,141
All other		32,343		440		754		-		33,537
Total	$	957,083	$	42,341	$	37,642	$	-	$	1,037,066

As of December 31, 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	$	327,185	$	667	$	10,976	$	1	$	338,829
Multifamily real estate		55,084		4,605		2,462		-		62,151
Commercial real estate:
Owner occupied		124,244		4,937		6,867		-		136,048
Non-owner occupied		216,079		2,428		12,195		-		230,702
Commercial and industrial		70,078		5,851		2,330		-		78,259
Consumer		27,889		-		404		-		28,293
Construction and land		126,323		5,460		7,229				139,012
All other		34,468		795		495		-		35,758
Total	$	981,350	$	24,743	$	42,958	$	1	$	1,049,052

- 28 -

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 2018 the Banks could, without prior approval, declare dividends to the Company of approximately $7.7 million plus any 2018 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 September 30, 2018, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

- 29 -

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, exclusive of the capital conservation buffer, for the Company:

	September 30, 2018			December 31, 2017			Regulatory Minimum Requirements			To Be Considered Well Capitalized
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		14.9	%		13.9	%		4.5	%		6.5	%
Tier 1 Capital (to Risk-Weighted Assets)		15.4	%		14.4	%		6.0	%		8.0	%
Total Capital (to Risk-Weighted Assets)		16.7	%		15.6	%		8.0	%		10.0	%
Tier 1 Capital (to Average Assets)		11.1	%		10.7	%		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. The required capital conservation buffer was 1.25% in 2017, and is 1.875% in 2018.  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 8.67% at September 30, 2018 and 7.56% at December 31, 2017, well in excess of the fully phased-in 2.50% required by March 31, 2019.

- 30 -

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 21, 2018, 67,875 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $15.12, the closing market price of Premier's common stock on the grant date.  These options vest in three equal annual installments ending on March 21, 2021.  On March 15, 2017, 69,375 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $15.21, 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 April 25, 2018, 7,500 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 $15.82 per share based upon the closing price of Premier's stock on the date of grant and $119,000 of stock-based compensation was recorded as a result.  On April 19, 2017, 7,500 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 $16.56 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.

Compensation expense of $217,000 was recorded for the first nine months of 2018 while $194,000 was recorded for the first nine months of 2017.  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 $136,000 at September 30, 2018. This unrecognized expense is expected to be recognized over the next 29 months based on the vesting periods of the options.

- 31 -

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 nine months ended September 30, 2018 and 2017 is presented below:

	Three Months Ended Sept 30,				Nine Months Ended Sept 30,
	2018		2017		2018		2017
Basic earnings per share
Income available to common stockholders	$	5,021	$	3,467	$	14,529	$	11,050
Weighted average common shares outstanding		13,368,782		13,326,446		13,356,998		13,316,993.
Earnings per share	$	0.38	$	0.26	$	1.09	$	0.83
Diluted earnings per share
Income available to common stockholders	$	5,021	$	3,467	$	14,529	$	11,050
Weighted average common shares outstanding		13,368,782		13,326,446		13,356,998		13,316,993
Add dilutive effects of potential additional common stock		123,624		97,243		102,578		100,522
Weighted average common and dilutive potential common shares outstanding		13,492,406		13,423,689		13,459,576		13,417,515
Earnings per share assuming dilution	$	0.37	$	0.26	$	1.08	$	0.82

There were no stock options considered antidilutive for the nine months ended September 30, 2018 and 2017 and there were no stock options considered antidilutive for the three or nine months ended September 30, 2018 and 2017.

On June 8, 2018, Premier issued a 5 for 4 stock split to shareholders of record on June 4, 2018.  Each shareholder received 1 additional share of common stock for every 4 shares of common stock already owned on the record date.  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 split to aid in the comparison to current period results.

- 32 -

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 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 deposits and variable rate deposits with infrequent repricing, fair value is based on discounted cash flows using current market rates applied to the estimated life.  The methodology for the fair value valuation of loans held for investment has been impacted by the adoption of ASU 2016-01.  Fair values for loans had been previously based upon the measured at the entry price notion by using the discounted cash flow or collateral value.  The newly adopted exit price notion uses the same approach but also incorporates additional factors such as using economic factors, credit risk, and market rates and conditions.  The new definition using the exit price focuses on the price that would be received to sell the asset or paid to transfer the liability, not the price that would be paid to acquire the asset or received to assume the liability.  As of September 30, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company's loan portfolio is initially fair valued using a segmented approach, using the eight categories as disclosed in Note 3 – Loans.

- 33 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 – FAIR VALUE - continued

Fair values for impaired loans are estimated using a discounted cash flow analysis or the 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).

- 34 -

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 September 30, 2018 were as follows:

				Fair Value Measurements at September 30, 2018 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	107,616		$	107,616		$	-		$	-	$	107,616
Time deposits with other banks		2,086			-			2,075			-		2,075
Federal funds sold		7,589			7,589			-			-		7,589
Securities available for sale		315,225			-			315,225			-		315,225
Loans, net		1,023,583			-			-			1,012,036		1,012,036
Federal Home Loan Bank stock		3,173			n/a			n/a			n/a		n/a
Interest receivable		4,109			-			858			3,251		4,109
Financial liabilities
Deposits	$	(1,319,623	)	$	(979,382	)	$	(333,508	)	$	-	$	(1,312,890	)
Securities sold under agreements to repurchase		(24,728	)		-			(24,728	)		-		(24,728	)
Other borrowed funds		(3,350	)		-			(3,301	)		-		(3,301	)
Subordinated debt		(5,398	)		-			(5,482	)		-		(5,482	)
Interest payable		(497	)		(14	)		(483	)		-		(497	)

The carrying amounts and estimated fair values of financial instruments at December 31, 2017 were as follows:

				Fair Value Measurements at December 31, 2017 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	78,005		$	78,005		$	-		$	-	$	78,005
Time deposits with other banks		2,582			-			2,581			-		2,581
Federal funds sold		4,658			4,658			-			-		4,658
Securities available for sale		278,466			-			278,466			-		278,466
Loans, net		1,036,948			-			-			1,016,723		1,016,723
Federal Home Loan Bank stock		3,185			n/a			n/a			n/a		n/a
Interest receivable		4,043			-			700			3,343		4,043
Financial liabilities
Deposits	$	(1,272,675	)	$	(929,202	)	$	(338,291	)	$	-	$	(1,267,493	)
Securities sold under agreements to repurchase		(23,310	)		-			(23,310	)		-		(23,310	)
Other borrowed funds		(5,000	)		-			(4,955	)		-		(4,955	)
Subordinated debt		(5,376	)		-			(5,439	)		-		(5,439	)
Interest payable		(393	)		(7	)		(386	)		-		(393	)

- 35 -

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 September 30, 2018 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	$	222,157	$	-	$	222,157	$	-
U. S. agency CMO's - residential		71,380		-		71,380		-
Total mortgage-backed securities of government sponsored agencies		293,537		-		293,537		-
U. S. government sponsored agency securities		13,002		-		13,002		-
Obligations of states and political subdivisions		8,686		-		8,686		-
Total securities available for sale	$	315,225	$	-	$	315,225	$	-

			Fair Value Measurements at December 31, 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	$	196,590	$	-	$	196,590	$	-
U. S. agency CMO's		51,108		-		51,108		-
Total mortgage-backed securities of government sponsored agencies		247,698		-		247,698		-
U. S. government sponsored agency securities		19,134		-		19,134		-
Obligations of states and political subdivisions		11,634		-		11,634		-
Total securities available for sale	$	278,466	$	-	$	278,466	$	-

There were no transfers between Level 1 and Level 2 during 2018 or 2017.

- 36 -

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.

- 37 -

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 September 30, 2018 are summarized below:

			Fair Value Measurements at September 30, 2018 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	$	1,900	$	-	$	-	$	1,900
Commercial real estate
Owner occupied		469		-		-		469
Non-owner occupied		3,137		-		-		3,137
Commercial and industrial		144		-		-		144
Construction and land		2,650		-		-		2,650
Total impaired loans	$	8,300	$	-	$	-	$	8,300
Other real estate owned:
Residential real estate	$	281	$	-	$	-	$	281
Commercial real estate
Owner occupied		175		-		-		175
Non-owner occupied		200		-		-		200
Construction and land		150		-		-		150
Total OREO	$	806	$	-	$	-	$	806

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $10,253,000 at September 30, 2018 with a valuation allowance of $1,953,000 and a carrying amount of $9,384,000 at December 31, 2017 with a valuation allowance of $1,502,000.  The change resulted in a provision for loan losses of $868,000 for the nine-months ended September 30, 2018, compared to a $1,165,000 provision for loan losses for the nine-months ended September 30, 2017 and a $348,000 increase in provision for loans losses for the three months ended September 30, 2018, compared to a $423,000 provision for loan losses for the three months ended September 30, 2017.  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 $806,000 which is made up of the outstanding balance of $1,438,000 net of a valuation allowance of $632,000 at September 30, 2018.  There were $120,000 of write downs during the nine months ended September 30, 2018, compared to $474,000 of write downs during the nine months ended September 30, 2017. For the three months ended September 30, 2018 there were no additional write downs compared to $111,000 of additional write downs during the three months ended September 30, 2017.  At December 31, 2017, other real estate owned had a net carrying amount of $2,641,000, made up of the outstanding balance of $4,082,000, net of a valuation allowance of $1,441,000.

- 38 -

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 September 30, 2018 are summarized below:

	September 30, 2018		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	1,900	sales comparison	adjustment for estimated realizable value	46.7%-46.7% (46.7%)
Commercial real estate
Owner occupied		469	sales comparison	adjustment for estimated realizable value	36.9%-36.9% (36.9%)
Non-owner occupied		3,137	income approach	adjustment for differences in net operating income expectations	65.9%-93.6% (70.5%)
Commercial and industrial		144	discounted cash flows	recovery probability	N/A
Construction and land		2,650	sales comparison	adjustment for percentage of completion of construction	42.3%-42.3% (42.3%)
Total impaired loans	$	8,300	��
Other real estate owned:
Residential real estate	$	281	sales comparison	adjustment for estimated realizable value	11.0%-19.2% (14.2%)
Commercial real estate
Owner occupied		175	sales comparison	adjustment for estimated realizable value	21.8%-21.8% (21.8%)
Non-owner occupied		200	sales comparison	adjustment for estimated realizable value	58.9%-58.9% (58.9%)
Construction and land		150	sales comparison	adjustment for estimated realizable value	50.3%-50.3% (50.3%)
Total OREO	$	806

- 39 -

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, 2017 are summarized below:

			Fair Value Measurements at December 31, 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	$	1,910	$	-	$	-	$	1,910
Commercial real estate
Owner occupied		568		-		-		568
Non-owner occupied		1,984		-		-		1,984
Commercial and industrial		111		-		-		111
Construction and land		3,309		-		-		3,309
Total impaired loans	$	7,882	$	-	$	-	$	7,882
Other real estate owned:
Residential real estate	$	352	$	-	$	-	$	352
Commercial real estate
Owner occupied		175		-		-		175
Non-owner occupied		200		-		-		200
Construction and land		1,914		-		-		1,914
Total OREO	$	2,641	$	-	$	-	$	2,641

- 40 -

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, 2017 are summarized below:

	December 31, 2017			Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	1,910		sales comparison	adjustment for estimated realizable value	46.0%-46.7% (46.4%)
Commercial real estate
Owner occupied		568		sales comparison	adjustment for estimated realizable value	23.1%-23.1% (23.1%)
Non-owner occupied		1,984		income approach	adjustment for differences in net operating income expectations	67.4%-67.4% (67.4%)
Commercial and industrial		111		sales comparison	adjustment for estimated realizable value	8.0%-71.1% (64.2%)
Construction and land		3,309		sales comparison	adjustment for percentage of completion of construction	27.7%-27.7% (27.7%)
Total impaired loans	$	7,882
Other real estate owned:
Residential real estate	$	352	��	sales comparison	adjustment for estimated realizable value	8.8%-50.2% (20.0%)
Commercial real estate
Owner occupied		175		sales comparison	adjustment for estimated realizable value	21.8%-21.8% (21.8%)
Non-owner occupied		200		sales comparison	adjustment for estimated realizable value	58.9%-58.9% (58.9%)
Construction and land		1,914		sales comparison	adjustment for estimated realizable value	25.2%-69.0% (27.8%)
Total OREO	$	2,641

- 41 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – SUBSEQUENT EVENT

Effective with the close of business on October 12, 2018, Premier completed its purchase of First Bank of Charleston, Inc. ("First Bank"), a $174.1 million bank (as of September 30, 2018) headquartered in Charleston, West Virginia.  Under terms of an amended and restated agreement of merger dated April 18, 2018, each share of First Bank common stock is entitled to merger consideration of 1.199 shares of Premier common stock and $5.00 cash from Premier.  Premier will issue approximately 1.249 million shares of its common stock to the shareholders of First Bank.  In addition to the cash and shares of common stock from Premier, First Bank shareholders also received a regulatorily approved special dividend of $5.00 per share from the equity of First Bank as part of the acquisition transaction.  The value of the transaction, including the special dividend, is estimated at $32.8 million.  In conjunction with the acquisition by Premier, First Bank was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier.  Management has not yet completed all of the analyses needed to estimate the fair value of the assets and liabilities acquired, both tangible and intangible.

- 42 -

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

Item 2.  Management's Discussion and Analysis

   of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

A.Results of Operations

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

Net income for the nine months ended September 30, 2018 was $14,529,000, or $1.08 per diluted share, compared to net income of $11,050,000, or $0.82 per diluted share, for the nine months ended September 30, 2017.   Per share information has been recalculated to reflect a 5 for 4 stock split issued on June 8, 2018 to shareholders of record on June 4, 2018.  The 5 for 4 stock split resulted in the issuance of one additional share for each four shares owned by a shareholder as of the record date.  The increase in income in the first nine months of 2018 is largely due to gains on the sale of OREO, an increase in interest income on investments, a decrease in provision for loan losses, an increase in non-interest income, and a decrease in income taxes, all of which more than offset increases in non-interest expense (excluding gains on the sale of OREO) and interest expense.  The annualized returns on average common shareholders' equity and average assets were approximately 10.38% and 1.28% for the nine months ended September 30, 2018 compared to 8.13% and 0.99% for the same period in 2017.

Net income for the three months ended September 30, 2018 was $5,021,000, or $0.37 per diluted share, compared to net income of $3,467,000, or $0.26 per diluted share for the three months ended September 30, 2017.  The increase in net income during the third quarter of 2018 is largely due to increases in interest income and non-interest income as well as decreases in the provision for loan losses and income tax expense.  The annualized returns on average common shareholders' equity and average assets were approximately 10.65% and 1.32% for the three months ended September 30, 2018 compared to 7.53% and 0.93% for the same period in 2017.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

Net interest income for the nine months ended September 30, 2018 totaled $43.563 million, an increase of $274,000, or 0.6%, from the $43.289 million of net interest income earned in the first nine months of 2017.  Interest income in 2018 increased by $937,000, or 2.0%, largely due to a $519,000 increase in interest income on investments and a $636,000 increase in interest income on federal funds sold and other interest-bearing bank balances.  These increases more than offset a $218,000, or 0.5%, decrease in interest income on loans.  Interest income on loans in the first nine months of 2017 (prior year) included approximately $1,607,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the first nine months of 2017 compared to $843,000 of interest income of this kind recognized during the first nine months of 2018 (current year).  The loan payoffs included both non-accrual loans and performing loans that were once on non-accrual status.  Otherwise, interest income on loans increased by $546,000, or 1.3%, in the first nine months of 2018, largely due to a higher average yield on a lower average balance of loans outstanding during 2018 when compared to the first nine months of 2017.  Interest income on investment securities in the first nine months of 2018 increased by $519,000, or 11.7%, largely due to higher average yields on a lower average balance of investments outstanding.  Interest income from interest-bearing bank balances and federal funds sold increased by $636,000, or 123.5%, largely due to an increase in the yield on these balances in 2018 resulting from the Federal Reserve Board of Governors' decisions to increase the federal funds target rate by a total of 100 basis points in the last twelve months, but also due to a higher average balance outstanding during the first nine months of 2018.  A portion of the increase in the average balance of these highly liquid earning assets was the result of a decrease in reserves required to be kept in non-interest bearing bank accounts under Federal Reserve Regulation D.  These funds were moved to interest-bearing bank balances, improving Premier's overall interest income from short-term investments.

Partially offsetting the increase in interest income in the first nine months of 2018 was a $663,000, or 19.9%, increase in interest expense, driven by an increase in interest expense on deposits.  Interest expense on deposits increased by $729,000, or 25.5% in the first nine months of 2018 due to increases in the average rate paid on certificates of deposit, savings deposits, and NOW and money market deposits during the first nine months of 2018 compared to the same period in 2017.  While average interest-bearing deposit balances were down $12.8 million, or 1.3%, in the first nine months of 2018 compared to the same period of 2017, the average interest rate paid on interest-bearing deposits was up 11 basis points in 2018, from 0.40% in 2017 to 0.51% in 2018.  Increases in short-term rates have increased competition for deposits and time deposits in particular. The related rates of interest paid on time deposits increased by 24 basis points, driving the overall increase in interest expense on deposits in the first nine months of 2018 when compared to the same period of 2017.  Partially offsetting the increase in interest expense on deposits accounts, interest expense on borrowings in the first nine months of 2018 decreased by $109,000, or 46.6%, largely due to a decrease in outstanding borrowings from scheduled and accelerated principal payments.  Also, adding to the overall increase in interest expense during 2018 was a $39,000, or 17.9%, increase in interest expense on Premier's subordinated debt due to an increase in the variable rate interest rate paid in 2018.  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.

- 44 -

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

Premier's net interest margin during the first nine months of 2018 was 4.13% compared to 4.19% for the same period in 2017.  A portion of the interest income on loans in both 2018 and 2017 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 first nine months of 2018 would have been 4.05% compared to 4.03% for the same period in 2017.  As shown in the table below, Premier's yield earned on federal funds sold and interest bearing bank balances increased to 1.90% in the first nine months of 2018, from the 1.47% earned in the first nine months of 2017.  The average yield earned on securities available for sale also increased when compared to the first nine months of 2017.  However, the average yield earned on the loan portfolio decreased slightly in 2018 due to the higher amounts of deferred interest income and discounts recognized on loans that paid-off during 2017 versus the amounts recognized in 2018.  Further illustrating the increase in interest expense discussed above, the average rate paid on interest-bearing liabilities increased by 10 basis points in the first nine months of 2018, as a result of increases in the average rates paid on interest-bearing deposits, short-term borrowings, and Premier's variable rate subordinated debentures.  The overall effect was a decrease Premier's net interest spread by 10 basis points to 3.96% and its net interest margin by 6 basis points to 4.13% in the first nine months of 2018 when compared to the first nine months of 2017.

Additional information on Premier's net interest income for the nine months of 2018 and nine months of 2017 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS
	Nine Months Ended Sept 30, 2018								Nine Months Ended Sept 30, 2017
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	80,960		$	1,151		1.90	%	$	46,851		$	515		1.47	%
Securities available for sale
Taxable		284,136			4,787		2.25			286,602			4,236		1.97
Tax-exempt		9,362			166		3.01			12,523			198		3.24
Total investment securities		293,498			4,953		2.27			299,125			4,434		2.02
Total loans		1,035,634			41,449		5.35			1,038,719			41,667		5.36
Total interest-earning assets		1,410,092			47,553		4.51	%		1,384,695			46,616		4.51	%
Allowance for loan losses		(12,843	)							(11,231	)
Cash and due from banks		25,967								40,700
Other assets		86,392								80,857
Total assets	$	1,509,608							$	1,495,021
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	946,718			3,583		0.51		$	959,489			2,854		0.40
Short-term borrowings		21,769			25		0.15			22,512			21		0.12
Other borrowings		4,080			125		4.10			7,586			234		4.12
Subordinated debt		5,386			257		6.38			5,355			218		5.44
Total interest-bearing liabilities		977,953			3,990		0.55	%		994,942			3,327		0.45	%
Non-interest bearing deposits		340,922								314,344
Other liabilities		4,121								4,582
Stockholders' equity		186,612								181,153
Total liabilities and equity	$	1,509,608							$	1,495,021
Net interest earnings				$	43,563							$	43,289
Net interest spread							3.96	%							4.06	%
Net interest margin							4.13	%							4.19	%

- 45 -

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

Additional information on Premier's net interest income for the third quarter of 2018 and third quarter of 2017 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS
	Three Months Ended Sept 30, 2018								Three Months Ended Sept 30, 2017
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	89,644		$	473		2.09	%	$	32,288		$	176		2.16	%
Securities available for sale
Taxable		297,367			1,745		2.35			288,241			1,427		1.98
Tax-exempt		8,555			52		3.14			11,579			62		3.30
Total investment securities		305,922			1,797		2.37			299,820			1,489		2.03
Total loans		1,032,099			13,731		5.28			1,047,202			13,469		5.10
Total interest-earning assets		1,427,665			16,001		4.46	%		1,379,310			15,134		4.37	%
Allowance for loan losses		(13,252	)							(11,760	)
Cash and due from banks		22,410								41,253
Other assets		85,166								79,702
Total assets	$	1,521,989							$	1,488,505
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	947,588			1,355		0.57		$	946,258			954		0.40
Short-term borrowings		23,233			10		0.17			22,784			7		0.12
Other borrowings		3,592			37		4.09			6,553			68		4.12
Subordinated debentures		5,394			90		6.62			5,365			74		5.47
Total interest-bearing liabilities		979,807			1,492		0.60	%		980,960			1,103		0.45	%
Non-interest bearing deposits		349,028								318,894
Other liabilities		4,634								4,539
Stockholders' equity		188,520								184,112
Total liabilities and equity	$	1,521,989							$	1,488,505
Net interest earnings				$	14,509							$	14,031
Net interest spread							3.86	%							3.92	%
Net interest margin							4.04	%							4.05	%

Net interest income for the quarter ended September 30, 2018 totaled $14.509 million, up $478,000, or 3.4%, from the $14.031 million of net interest income earned in the third quarter of 2017.  Interest income in 2018 increased by $867,000, or 5.7%, largely due to increases in all three major sources of interest income.  Interest income on loans increased by $262,000, or 1.9%, in the third quarter of 2018.  Interest income on loans in the third quarter of 2018 included approximately $141,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter compared to no interest income of this kind recognized during the third quarter of 2017.  Otherwise, interest income on loans was relatively consistent and increased by $121,000, or 0.9%, in the third quarter of 2018, largely due to a higher average yield on a lower average balance of loans outstanding during the quarter when compared to the third quarter of 2017.  Interest income on investment securities in the third quarter of 2018 increased by $308,000, or 20.7%, largely due to higher average yields on a higher average balance of investments outstanding during the third quarter of 2018.  Interest income from interest-bearing bank balances and federal funds sold increased by $297,000, or 168.8%, largely due to a 177.6% increase in the average balance outstanding during the third quarter of 2018 compared to the same quarter of 2017, although on a slightly lower average yield.

- 46 -

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

Partially offsetting the increase in interest income in the third quarter of 2018 was a $389,000, or 35.3%, increase in interest expense.  Interest expense on deposits increased by $401,000, or 42.0%, in the third quarter of 2018, mainly due to increase in the average rates paid on interest-bearing deposits during the quarter, with the largest increase in average rates originating from certificates of deposit.  Average interest-bearing deposit balances were relatively unchanged compared to the third quarter of 2017, while the average interest rate paid on interest-bearing deposits increased by 17 basis points in 2018, from 0.40% in the third quarter of 2017 to 0.57% in the third quarter of 2018.  Increases in short-term rates have increased competition for deposits and time deposits in particular. The related rates of interest paid on time deposits increased by 34 basis points, driving the overall increase in interest expense on deposits in the third quarter of 2018 when compared to the third quarter of 2017.  Adding to the overall increase in interest expense during the third quarter of 2018 was a $16,000, or 21.6%, increase in interest expense on Premier's subordinated debt due to an increase in the variable rate interest rate paid in 2018.  The variable interest rate is indexed to the short-term three-month LIBOR interest rate, which has increased over the past twelve months in conjunction with increases in short-term interest rate policy by the Federal Reserve Board of Governors.  Partially offsetting the increase in interest expense on deposit accounts, interest expense on borrowings in the third quarter of 2018 decreased by $31,000, or 45.6%, largely due to a decrease in outstanding borrowings from scheduled and accelerated principal payments on long-term borrowings at the parent company.

Premier's net interest margin during the third quarter of 2018 was 4.04% compared to 4.05% for the same period in 2017.  A portion of the interest income on loans in 2018 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 third quarter of 2018 would have been 4.00% compared to 4.05% for the same period in 2017.  As shown in the table above, Premier's yield earned on federal funds sold and interest bearing bank balances decreased to 2.09% in the third quarter of 2018, from the 2.16% earned in the third quarter of 2017.  The average yield earned on securities available for sale increased when compared to the third quarter of 2017.  The average yield earned on the loan portfolio increased in 2018 due to higher rates earned on loans outstanding as well as the amount of deferred interest income and discounts recognized on loans that paid-off during the third quarter of 2018 versus no amounts recognized in the third quarter of 2017.  Further illustrating the increase in interest expense discussed above, the average rate paid on interest-bearing liabilities increased by 15 basis points in the third quarter of 2018, as a result of increases in the average rates paid on interest-bearing deposits, short-term borrowings, and Premier's variable rate subordinated debentures.  The overall effect was a decrease to Premier's net interest spread by 6 basis points to 3.86% and its net interest margin by 1 basis point to 4.04% in the third quarter of 2018 when compared to the third quarter of 2017.

Non-interest income increased by $406,000, or 6.4%, to $6,734,000 for the first nine months of 2018 compared to the same period of 2017.  Service charges on deposit accounts increased by $142,000, or 4.4% and electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $253,000, or 10.4%.  Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, while electronic banking income increased primarily due to an increase in income from debit card transaction activity and non-customer ATM fees.  Other non-interest income increased by $42,000, or 7.9%, largely due to an increase in proportional income from an investment in a start-up insurance agency in 2018.  Partially offsetting these increases was a decrease in secondary market mortgage income by $31,000, or 17.9%, largely due to a decrease in the level of home purchasing and refinancing activity in Premier's markets.

- 47 -

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

For the quarter ending September 30, 2018, non-interest income increased by $260,000, or 11.9%, to $2,437,000 compared to $2,177,000 recognized during the same quarter of 2017.  Electronic banking income increased by $157,000, or 19.4%, other non-interest income increased by $94,000, or 57.7%, and service charges on deposit accounts increased by $47,000, or 4.1%.  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.  Service charges on deposit accounts increased largely due to an increase in customer overdraft activity and other income increased from the increase in proportional income from an investment in a start-up insurance agency in 2018.  Partially offsetting these increases was a $38,000, or 56.7%, decrease in secondary market mortgage income.  Secondary market mortgage income decreased largely due a decrease in the level of home purchasing and refinancing activity in Premier's markets.

Non-interest expenses for the first nine months of 2018 totaled $29.61 million, or 2.62% of average assets on an annualized basis, compared to $30.33 million, or 2.71% of average assets for the same period of 2017.  The $713,000, or 2.4%, decrease in non-interest expenses in 2018 when compared to the first nine months of 2017 is largely due to $1,080,000 of net gains upon the sale of OREO in the first quarter of 2018.  Premier sold approximately $6.1 million of OREO, or approximately 30% of the carrying value held on the books at year-end 2017, and realized $1,080,000 of net gains upon their liquidation.  OREO expenses and write-downs are traditionally included in Premier's total non-interest expenses, so the net gains from these sales reduced non-interest expense in the first nine months of 2018.  Excluding these net OREO gains, non-interest expenses increased by $367,000, or 1.2%, in the first nine months of 2018 compared to the first nine months of 2017.  Non-interest expenses increased due in large part to a $540,000, or 74.9% increase in professional fees, a $262,000, or 67.9%, increase in collection costs, a $233,000, or 9.1% increase in other operating expenses, and a $179,000, or 4.0%, increase in occupancy and equipment expense.  These increases in non-interest expense were partially offset by a $193,000, or 25.1% decrease in core deposit amortization, as well as a $178,000, or 4.4%, decrease in data processing expense.  Staff costs decreased by $36,000, or 0.2% for the first nine months of 2018.  Professional fees increased largely due to costs incurred related to the purchase of First Bank of Charleston, a general increase in litigation expenses, and an increase in consulting services in the Washington DC market.  The unusually high increase in loan collection expenses was primarily due to expenses related to foreclosure on a large multifamily housing unit that was completed in the first quarter of 2018.

Non-interest expenses for the third quarter of 2018 totaled $10.17 million, or 2.65% of average assets on an annualized basis, compared to $9.93 million, or 2.65% of average assets for the same period of 2017.  The $242,000, or 2.4%, increase in non-interest expenses in the third quarter of 2018 when compared to the third quarter of 2017 is largely due to a $330,000, or 168.4%, increase in professional fees, a $161,000, or 18.0%, increase in other operating expenses, and an $86,000, or 1.8% increase in staff costs. Professional fees increased largely due to costs incurred related to the purchase of First Bank of Charleston.  Staff costs increased largely due to a $113,000, or 2.9%, increase in salaries and wages (net of deferred loan costs) partially offset by a $27,000, or 2.9%, decrease in benefit plan costs, namely employee medical insurance benefits.  These increases were partially offset by a $320,000, or 92.5%, decrease in OREO expenses and write-downs, a $62,000, or 24.3%, decrease in core deposit amortization, and a $29,000, or 2.2%, decrease in data processing costs.  Data processing costs decreased largely due to a decrease in ATM processing expense.

- 48 -

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

Income tax expense was $4,264,000 for the first nine months of 2018 compared to $6,207,000 for the first nine months of 2017.  The effective tax rate for the nine months ended September 30, 2018 was 22.7% compared to 36.0% for the same period in 2017.  For the quarter ended September 30, 2018, income tax expense was $1,483,000, a 22.8% effective tax rate, compared to $1,925,000 (a 35.7% effective tax rate) for the same period in 2017.  The decrease in income tax expense during the first nine months of 2018 can be primarily attributed to the decrease in the corporate income tax rate resulting from the 2017 Tax Cut and Jobs Act.  Similarly, the decrease in income tax expense during the third quarter of 2018 when compared to the same quarter of 2017 can also be primarily attributed to the decrease in the corporate income tax rate resulting from the 2017 Tax Cut and Jobs Act.

- 49 -

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

B.Financial Position

Total assets at September 30, 2018 increased by $51.0 million to $1.544 billion from the $1.493 billion at December 31, 2017.  The increase in total assets since year-end is largely due to a $47.9 million increase in interest-bearing bank balances and a $36.8 million increase in the investment portfolio partially offset by a $12.0 million decrease in total loans, an $18.8 million decrease in cash and due from banks, and a $5.6 million decrease in OREO.  Earning assets increased by $75.6 million from the $1.375 billion at year-end 2017 to end the quarter at $1.451 billion.

Cash and due from banks at September 30, 2018 was $22.0 million, an $18.8 million decrease from the $40.8 million at December 31, 2017.  Interest-bearing bank balances increased by $47.9 million from the $39.8 million reported at December 31, 2017.  Federal funds sold increased by $2.9 million to $7.6 million at September 30, 2018.  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.  Cash and due from banks decreased by $18.8 million, largely due to a decrease in reserves required to be kept in non-interest bearing bank accounts under Federal Reserve Regulation D.  These funds were moved to interest-bearing bank balances, improving Premier's overall interest income from short-term investments.  The net $32.0 million increase in these liquid assets during the first nine months of 2018 was largely due to an increase in funds from an increase in total deposits and net payoffs on loans.

Securities available for sale totaled $315.2 million at September 30, 2018, a $36.8 million increase from the $278.5 million at December 31, 2017.  The increase was largely due to the purchase of $92.6 million of investment securities, which more than offset $48.4 million of proceeds from monthly principal payments on Premier's mortgage backed securities portfolio and securities that matured or were called during the first nine months of 2018, as well as a $6.4 million decrease in the market value of securities available for sale. 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 September 30, 2018 and December 31, 2017 are believed to be price changes resulting from changes in the long-term interest rate environment 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 September 30, 2018 were $1.037 billion compared to $1.049 billion at December 31, 2017, a decrease of approximately $12.0 million, or 1.1%. The decrease is largely due to payoffs on loans in the first quarter of 2018, including expected sizable payoffs from completed construction projects, exceeding new loans generated during that quarter.  Since March 31, 2018, total loans have increased by $8.3 million, or 0.8%, through the end of the third quarter 2018.  Loan payoffs during the first nine months of 2018 included payoffs on $1.8 million of non-accrual loans which resulted in recognizing approximately $659,000 of interest income deferred while the loans were on non-accrual status and $184,000 of remaining purchase discounts associated with the loans.

Premises and equipment increased by $1.4 million, largely due to the purchase of a new branch in Huntington, West Virginia.  Goodwill and other intangible assets decreased by $575,000, due to the amortization of core deposit intangibles.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

Deposits totaled $1.320 billion as of September 30, 2018, a $46.9 million, or 3.7%, increase from the $1.273 billion in deposits at December 31, 2017.  The overall increase in deposits is largely due to a $33.0 million, or 9.9%, increase in non-interest bearing deposits and a $17.1 million, or 2.9%, increase in savings and money market deposits.  The increases were partially offset by a $3.2 million, or 1.0%, decrease in certificates of deposits.  Repurchase agreements with corporate and public entity customers increased in the first nine months of 2018 by $1.4 million, or 6.1%.  Other borrowings decreased by $1.7 million since year-end 2017 due to scheduled principal payments plus additional principal payments on Premier's existing borrowings.  Subordinated debentures increased by $22,000, due to amortization of the purchase accounting fair value adjustments applied to the $6.186 million face value of the subordinated debentures from previous acquisitions.

The following table sets forth information with respect to the Company's nonperforming assets at September 30, 2018 and December 31, 2017.

	(In Thousands)
	2018			2017
Non-accrual loans	$	18,293		$	15,246
Accruing loans which are contractually past due 90 days or more		992			3,391
Accruing restructured loans		6,577			12,584
Total non-performing loans		25,862			31,221
Other real estate acquired through foreclosure (OREO)		14,379			19,966
Total non-performing assets	$	40,241		$	51,187
Non-performing loans as a percentage of total loans		2.49	%		2.98	%
Non-performing assets as a percentage of total assets		2.61	%		3.43	%

Total non-performing loans have decreased by $5.4 million since year-end, due to a $6.0 million decrease in accruing restructured loans and a $2.4 million decrease in accruing loans past due 90 days or more.  These decreases in non-performing loans were partially offset by a $3.0 million increase in non-accrual loans.  Total non-performing assets have decreased since year-end, largely due to the $5.4 million reduction in non-performing loans plus a $5.6 million decrease in other real estate acquired through foreclosure ("OREO").  Other real estate owned decreased by $5.6 million, or 28.0%, largely due to the first quarter 2018 sale of two of the three largest OREO properties held, which also generated nearly $1.08 million of profit upon liquidation.

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

SEPTEMBER 30, 2018

Gross charge-offs totaled $1.1 million during the first nine months of 2018, largely due to commercial and industrial loan charge-offs.  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 nine months of 2018 totaled $619,000, resulting in net charge-offs for the first nine months of 2018 of $511,000.  The increase was primarily due to two commercial and industrial loan relationships charged-off in 2018 that were previously identified as impaired.  This compares to $510,000 of net charge-offs recorded in the first nine months of 2017.  The allowance for loan losses at September 30, 2018 was 1.30% of total loans compared to 1.15% at December 31, 2017.  The increase in the ratio is largely due to an increase in the amount of allowance attibuted to commercial and industial laons and construction loans collectively evaluated for impairement.

During the first nine months of 2018, Premier recorded $1,890,000 of provision for loan losses.  This provision compares to $2,033,000 of provision for loan losses recorded during the same nine months of 2017.  The $143,000 decrease in the provision for loan losses recorded during the first nine months of 2018 was primarily due to decreases in provision for loan losses on residential real estate and multifamily loans partially offset by an increase in provision for loan losses on commercial and industrial loans.  The level of provision expense is determined under Premier's internal analyses of evaluating credit risk.  The provisions for loan losses recorded in 2017 and 2018 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.  Management updated its policies regarding estimation of probable incurred losses in the first quarter of 2018.  The updates included incorporating a common estimated loss ratio for all pass credits within a given loan classification, addingan additional qualitative factor for document exceptions on collectively impaired loans, and reallocating the qualitative portion of the allowance to align more closely to the inputs used to determine the qualitative portion.  The result was a reduction in the amount of the allowance attributed to collectively impaired residential real estate and multifamily real estate loans and an increase in the amount of allowance attributed to collectively impaired commercial and industrial loans, consumer, construction, and all other loans. 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 will be monitored. Premier also continues to monitor the impact of the decline in the coal mining industry 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 could increase non-performing assets from loans originated in these areas.  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

SEPTEMBER 30, 2018

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, 2017.  Some of these accounting policies, as discussed below, are considered to be critical accounting policies.  Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company has identified two accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements.  These policies relate to determining the adequacy of the allowance for loan losses and the identification and evaluation of impaired loans.  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, 2017.  There have been no significant changes in the application of these accounting policies since December 31, 2017.

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.

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:

1. 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.

2. Cash flow generated by repayment of loans and interest.

3. Arrangements with correspondent banks for purchase of unsecured federal funds.

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

5. Maintenance of an adequate available-for-sale security portfolio.  The Company owns $315.2 million of securities at fair value as of September 30, 2018.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2018

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

E.Capital

At September 30, 2018, total stockholders' equity of $187.6 million was 12.1% of total assets.  This compares to total stockholders' equity of $183.4 million, or 12.3% of total assets on December 31, 2017.  The increase in stockholders' equity was largely due to the $14.5 million of net income earned during the first nine months of 2018.  This increase in stockholders' equity was substantially offset by a $5.1 million, net of tax, decrease in the market value of the investment portfolio available for sale and $0.42 per share cash dividends declared and paid during the first nine months of 2018.

Tier 1 capital totaled $165.4 million at September 30, 2018, which represents a Tier 1 leverage ratio of 11.1%.  This ratio is up from the 10.7% Tier 1 leverage ratio and $156.0 million of Tier 1 capital at December 31, 2017.  The 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 September 30, 2018.

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 September 30, 2018, the Company's capital conservation buffer was 8.67%, well in excess of the 1.875% required.

Book value per common share was $14.03 at September 30, 2018 and $13.74 at December 31, 2017.  Adding to Premier's book value per share in the first nine months of 2018 was the $1.09 per share earned during the period partially offset by the $0.42 per share in total quarterly cash dividends to common shareholders declared and paid during the first nine months of 2018.  Also reducing Premier's book value per share at September 30, 2018 was the $5.1 million of other comprehensive loss for the first nine months of 2018 related to the decrease in the market value of investment securities available for sale, which decreased book value by approximately $0.38 per share.

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PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2018

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 2017 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 2017 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.

SEPTEMBER 30, 2018

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, 2017 for disclosures with respect to Premier's risk factors at December 31, 2017. There have been no material changes since year-end 2017 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.

3.1 Articles of Incorporation of registrant (reflecting amendments through September 6, 2018) [For SEC reporting compliance purposes only – not filed with Kentucky Secretary of State].

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.

SEPTEMBER 30, 2018

SIGNATURES

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

PREMIER FINANCIAL BANCORP, INC.

Date: November 8, 2018                                /s/ Robert W. Walker                               

Robert W. Walker

President & Chief Executive Officer

Date: November 8, 2018                                /s/ Brien M. Chase                                   

Brien M. Chase

Senior Vice President & Chief Financial Officer

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