Edgar Filing: PREMIER FINANCIAL BANCORP INC

pfbi10q063013.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2013

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

For the transition period from ___________ to ___________

Commission file number 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 þ No o.

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

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

Large accelerated filer o.

Accelerated filer o.

Non-accelerated filer o

(Do not check if smaller reporting company)

Smaller reporting company þ

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

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

Common stock, no par value, – 8,011,310 shares outstanding at August 1, 2013

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2013

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management’s Discussion and Analysis	41
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

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2013

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2012 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 Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2013 AND DECEMBER 31, 2012

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	(UNAUDITED)
	2013			2012
ASSETS
Cash and due from banks	$	27,903		$	32,473
Interest bearing bank balances		38,161			33,536
Federal funds sold		4,266			4,236
Cash and cash equivalents		70,330			70,245
Securities available for sale		258,120			283,975
Loans held for sale		247			200
Loans		714,277			704,625
Allowance for loan losses		(12,198	)		(11,488	)
Net loans		702,079			693,137
Federal Home Loan Bank stock, at cost		4,183			4,181
Premises and equipment, net		15,620			15,952
Real estate and other property acquired through foreclosure		13,556			13,366
Interest receivable		3,107			3,403
Goodwill		29,875			29,875
Other intangible assets		2,417			2,721
Deferred taxes		3,817			2,624
Other assets		1,598			1,108
Total assets	$	1,104,949		$	1,120,787

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	199,222		$	198,084
Time deposits, $100,000 and over		151,247			146,198
Other interest bearing		582,475			586,301
Total deposits		932,944			930,583
Securities sold under agreements to repurchase		8,515			26,102
Other borrowed funds		15,000			16,049
Interest payable		430			489
Other liabilities		3,416			3,268
Total liabilities		960,305			976,491

Stockholders' equity
Preferred stock, no par value; $12,000 liquidation preference, 5% cumulative, 1,000,000 shares authorized; 12,000 shares issued and outstanding		11,926			11,896
Common stock, no par value; 20,000,000 shares authorized; 8,011,310 shares issued and outstanding at June 30, 2013, and 7,962,693 shares issued and outstanding at December 31, 2012		73,308			72,849
Retained earnings		56,502			52,975
Accumulated other comprehensive income		2,908			6,576
Total stockholders' equity		144,644			144,296
Total liabilities and stockholders' equity	$	1,104,949		$	1,120,787

See Accompanying Notes to Consolidated Financial Statements

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013		2012
Interest income
Loans, including fees	$	10,706		$	10,027	$	20,466	$	22,364
Securities available for sale
Taxable		1,528			1,829		3,110		3,620
Tax-exempt		41			56		84		112
Federal funds sold and other		42			44		72		76
Total interest income		12,317			11,956		23,732		26,172

Interest expense
Deposits		1,054			1,437		2,145		2,972
Repurchase agreements and other		6			22		18		48
FHLB advances and other borrowings		164			189		336		426
Total interest expense		1,224			1,648		2,499		3,446

Net interest income		11,093			10,308		21,233		22,726
Provision for loan losses		(70	)		750		500		1,700
Net interest income after provision for loan losses		11,163			9,558		20,733		21,026

Non-interest income
Service charges on deposit accounts		847			873		1,636		1,703
Electronic banking income		517			522		987		1,010
Secondary market mortgage income		47			103		141		128
Gain on disposition of securities		-			-		148		-
Other		170			134		314		308
		1,581			1,632		3,226		3,149
Non-interest expenses
Salaries and employee benefits		3,845			3,858		7,437		7,821
Occupancy and equipment expenses		1,103			1,121		2,182		2,301
Outside data processing		855			873		1,675		1,745
Professional fees		289			300		445		584
Taxes, other than payroll, property and income		151			190		363		345
Write-downs, expenses, sales of other real estate owned, net		272			293		596		507
Amortization of intangibles		152			174		304		347
FDIC insurance		200			239		412		481
Loan collection expenses		129			184		266		853
Other expenses		813			834		1,516		1,676
		7,809			8,066		15,196		16,660
Income before income taxes		4,935			3,124		8,763		7,515
Provision for income taxes		1,826			1,032		3,150		2,593

Net income	$	3,109		$	2,092	$	5,613	$	4,922

Preferred stock dividends and accretion		165			306		330		611
Net income available to common stockholders	$	2,944		$	1,786	$	5,283	$	4,311

Net income per share:
Basic	$	0.37		$	0.23	$	0.66	$	0.54
Diluted		0.35			0.22		0.63		0.53

See Accompanying Notes to Consolidated Financial Statements

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
Net income	$	3,109		$	2,092	$	5,613		$	4,922

Other comprehensive income:
Unrealized gains (losses) arising during the period		(4,830	)		786		(5,409	)		1,792
Reclassification of realized amount		-			-		(148	)		-
Net change in unrealized gain (loss) on securities		(4,830	)		786		(5,557	)		1,792
Less tax impact		1,642			267		1,889			609
Other comprehensive income (loss)		(3,188	)		519		(3,668	)		1,183

Comprehensive income (loss)	$	(79	)	$	2,611	$	1,945		$	6,105

See Accompanying Notes to Consolidated Financial Statements

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

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

	2013			2012
Cash flows from operating activities
Net income	$	5,613		$	4,922
Adjustments to reconcile net income to net cash from operating activities
Depreciation		677			731
Provision for loan losses		500			1,700
Amortization (accretion), net		131			(1,121	)
OREO writedowns (gains on sales), net		(74	)		(38	)
Stock compensation expense		87			85
Loans originated for sale		(6,703	)		(7,084	)
Secondary market loans sold		6,797			7,061
Secondary market income		(141	)		(128	)
Gain on disposition of securities		(148	)		-
Changes in :
Interest receivable		296			50
Other assets		205			3,796
Interest payable		(59	)		(116	)
Other liabilities		148			226
Net cash from operating activities		7,329			10,084

Cash flows from investing activities
Purchases of securities available for sale		(27,230	)		(57,685	)
Proceeds from maturities and calls of securities available for sale		46,900			31,736
Redemption of FRB and FHLB stock, (net of purchases)		-			811
Net change in loans		(9,401	)		18,400
Purchases of premises and equipment, net		(345	)		(533	)
Proceeds from sales of other real estate owned, net		766			1,782
Net cash from investing activities		10,690			(5,489	)

Cash flows from financing activities
Net change in deposits		2,386			24,857
Net change in agreements to repurchase securities		(17,587	)		(3,498	)
Repayment of Federal Home Loan Bank advances		-			(10,036	)
Repayment of other borrowed funds		(1,049	)		(1,036	)
Proceeds from stock option exercises		372			-
Common Stock dividends paid		(1,756	)		-
Preferred Stock dividends paid		(300	)		(556	)
Net cash from financing activities		(17,934	)		9,731

Net change in cash and cash equivalents		85			14,326

Cash and cash equivalents at beginning of period		70,245			82,888

Cash and cash equivalents at end of period	$	70,330		$	97,214

See Accompanying Notes to Consolidated Financial Statements

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

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

	2013		2012
Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	2,559	$	3,562

Cash paid during period for income taxes		3,376		(623	)

Loans transferred to real estate acquired through foreclosure		882		2,837

See Accompanying Notes to Consolidated Financial Statements

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 - BASIS OF PRESENTATION

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

					June 30, 2013
		Year	Total		Net Income
Subsidiary	Location	Acquired	Assets		QTD			YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	369,124	$	1,178		$	2,359
Premier Bank, Inc.	Huntington, West Virginia	1998		728,006		2,387			4,152
Parent and Intercompany Eliminations				7,819		(456	)		(898	)
Consolidated Total			$	1,104,949	$	3,109		$	5,613

All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI).” The amendment requires an entity to present the reclassification adjustments out of AOCI and into net income for each component reported. These amounts may be disclosed before-tax or after-tax, and must be disclosed in either the income statement or the notes to the financial statements. This update is intended to supplement changes made in 2012 to increase the prominence of items reported in other comprehensive income. The standard became effective for the Company on January 1, 2013. The adoption of this guidance resulted in the disclosures in Note 9 below and did not have a material impact upon the Company’s financial statements.

In July 2012, the FASB amended existing guidance relating to testing indefinite-lived intangible assets for impairment. The amendment permits an assessment of qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, it is concluded that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. However, after the same assessment, if it is concluded that it is more likely than not that the indefinite-lived intangible asset is impaired, then a quantitative impairment test should be performed whereby the fair value of the indefinite-lived intangible asset is compared to the carrying amount. The amendments in this guidance are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact upon the Company’s financial statements.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at June 30, 2013 are summarized as follows:

2013	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	37,366	$	1,035	$	(177	)	$	38,224
U. S. sponsored agency CMO’s - residential		201,458		3,690		(1,030	)		204,118
Total mortgage-backed securities of government sponsored agencies		238,824		4,725		(1,207	)		242,342
U. S. government sponsored agency securities		7,070		23		(124	)		6,969
Obligations of states and political subdivisions		6,447		300		-			6,747
Other securities		1,373		761		(72	)		2,062
Total available for sale	$	253,714	$	5,809	$	(1,403	)	$	258,120

Amortized cost and fair value of investment securities, by category, at December 31, 2012 are summarized as follows:

2012	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	35,172	$	1,928	$	-		$	37,100
U. S. sponsored agency CMO’s - residential		206,466		6,392		(11	)		212,847
Total mortgage-backed securities of government sponsored agencies		241,638		8,320		(11	)		249,947
U. S. government sponsored agency securities		22,062		182		-			22,244
Obligations of states and political subdivisions		7,419		441		-			7,860
Other securities		2,892		1,105		(73	)		3,924
Total available for sale	$	274,011	$	10,048	$	(84	)	$	283,975

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2–SECURITIES - continued

The amortized cost and fair value of securities at June 30, 2013 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	$	1,748	$	1,708
Due after one year through five years		8,346		8,647
Due after five years through ten years		3,997		3,873
Due after ten years		377		790
Corporate preferred securities		422		760
Mortgage-backed securities of government sponsored agencies		238,824		242,342
Total available for sale	$	253,714	$	258,120

A $148,000 gain was recognized from calls of securities during the first six months of 2013 while no gains on securities were recorded during the first six months of 2012. There were no sales of securities during the first six months of 2013 or 2012.

Securities with unrealized losses at June 30, 2013 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 MBS – residential	$	10,415	$	(177	)	$	-	$	-		$	10,415	$	(177	)
U.S government sponsored agency CMO – residential		46,143		(1,030	)		-		-			46,143		(1,030	)
U.S government sponsored agency securities		3,873		(124	)		-		-			3,873		(124	)
Other securities		-		-			4		(72	)		4		(72	)

Total temporarily impaired	$	60,431	$	(1,331	)	$	4	$	(72	)	$	60,435	$	(1,403	)

Table of Contents

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, 2012 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 CMO – residential	$	2,077	$	(11	)	$	-	$	-		$	2,077	$	(11	)
Other securities		-		-			4		(73	)		4		(73	)

Total temporarily impaired	$	2,077	$	(11	)	$	4	$	(73	)	$	2,081	$	(84	)

The investment portfolio is predominately high quality interest-bearing debt securities with defined maturity dates backed by the U.S. Government or Government sponsored entities. The unrealized losses at June 30, 2013 and December 31, 2012 are price changes resulting from changes in the interest rate environment and are not considered to be other than temporary declines in the value of the securities. Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.

NOTE 3 - LOANS

Major classifications of loans at June 30, 2013 and December 31, 2012 are summarized as follows:

	2013		2012
Residential real estate	$	213,139	$	214,743
Multifamily real estate		35,281		28,673
Commercial real estate:
Owner occupied		93,927		91,902
Non owner occupied		179,308		178,849
Commercial and industrial		94,775		84,430
Consumer		26,087		28,128
All other		71,760		77,900
	$	714,277	$	704,625

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the six months ending June 30, 2013 was as follows:

Loan Class	Balance Dec 31, 2012		Provision for loan losses			Loans charged-off		Recoveries		Balance June 30, 2013

Residential real estate	$	2,163	$	358		$	156	$	6	$	2,371
Multifamily real estate		331		98			-		-		429
Commercial real estate:
Owner occupied		1,117		(255	)		67		299		1,094
Non owner occupied		1,888		80			-		-		1,968
Commercial and industrial		3,046		987			12		52		4,073
Consumer		244		27			63		25		233
All other		2,699		(795	)		94		220		2,030
Total	$	11,488	$	500		$	392	$	602	$	12,198

Activity in the allowance for loan losses by portfolio segment for the six months ending June 30, 2012 was as follows:

Loan Class	Balance Dec 31, 2011		Provision for loan losses			Loans charged-off		Recoveries		Balance June 30, 2012

Residential real estate	$	2,134	$	221		$	119	$	32	$	2,268
Multifamily real estate		284		143			-		-		427
Commercial real estate:
Owner occupied		918		76			15		-		979
Non owner occupied		2,381		(37	)		41		3		2,306
Commercial and industrial		1,880		1,095			992		1		1,984
Consumer		298		98			139		53		310
All other		1,900		104			474		58		1,588
Total	$	9,795	$	1,700		$	1,780	$	147	$	9,862

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ending June 30, 2013 was as follows:

Loan Class	Balance March 31, 2013		Provision for loan losses			Loans charged-off		Recoveries		Balance June 30, 2013

Residential real estate	$	2,066	$	386		$	85	$	4	$	2,371
Multifamily real estate		347		82			-		-		429
Commercial real estate:
Owner occupied		1,191		(97	)		-		-		1,094
Non owner occupied		1,967		1			-		-		1,968
Commercial and industrial		4,096		(23	)		2		2		4,073
Consumer		174		66			16		9		233
All other		2,501		(485	)		38		52		2,030
Total	$	12,342	$	(70	)	$	141	$	67	$	12,198

Activity in the allowance for loan losses by portfolio segment for the three months ending June 30, 2012 was as follows:

Loan Class	Balance March 31, 2012		Provision for loan losses			Loans charged-off		Recoveries		Balance June 30, 2012

Residential real estate	$	2,368	$	(55	)	$	54	$	9	$	2,268
Multifamily real estate		434		(7	)		-		-		427
Commercial real estate:
Owner occupied		1,024		(45	)		-		-		979
Non owner occupied		2,321		(15	)		3		3		2,306
Commercial and industrial		2,422		551			990		1		1,984
Consumer		305		51			73		27		310
All other		1,437		270			139		20		1,588
Total	$	10,311	$	750		$	1,259	$	60	$	9,862

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Purchased Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at June 30, 2013 and December 31, 2012.

	2013		2012
Residential real estate	$	193	$	202
Multifamily real estate		1,341		3,173
Commercial real estate
Owner occupied		263		271
Non owner occupied		5,792		5,896
Commercial and industrial		518		511
All other		4,493		4,496
Total carrying amount	$	12,600	$	14,549

Carrying amount, net of allowance	$	12,100	$	14,049

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the six-months ended June 30, 2013 or the six-months ended June 30, 2012.

For the majority of these loans, the Company cannot reasonably estimate the cash flows expected to be collected on the loans and therefore has continued to account for the 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. 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.

During 2012, the Company determined that the cash flows from borrowers on a limited number of purchased loans could be reasonably estimated. As such, a portion of the non-accretable difference was reclassified to accretable yield and is being recognized as interest income over the remaining life of the loan(s).

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at June 30, 2013 and June 30, 2012. There was no accretable yield on the purchased loans above prior to October 1, 2012.

	2013			2012
Balance at January 1	$	635		$	-
New loans purchased		-			-
Accretion of income		(18	)		-
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at June 30	$	617		$	-

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2013 and December 31 2012. The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

June 30, 2013	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,027	$	2,702	$	68
Multifamily real estate		5,514		4,233		596
Commercial real estate
Owner occupied		1,039		851		408
Non owner occupied		3,206		2,081		643
Commercial and industrial		9,893		8,198		31
Consumer		199		184		15
All other		12,454		5,034		402
Total	$	35,332	$	23,283	$	2,163

December 31, 2012	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,145	$	2,813	$	208
Multifamily real estate		5,501		4,390		227
Commercial real estate
Owner occupied		1,153		976		783
Non owner occupied		3,207		2,174		74
Commercial and industrial		11,407		9,897		555
Consumer		278		267		-
All other		5,468		5,289		2,043
Total	$	30,159	$	25,806	$	3,890

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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 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	$	213,139	$	3,862	$	1,783	$	5,645	$	207,494
Multifamily real estate		35,281		346		4,222		4,568		30,713
Commercial real estate:
Owner occupied		93,927		2,343		789		3,132		90,795
Non owner occupied		179,308		666		2,469		3,135		176,173
Commercial and industrial		94,775		3,137		3,328		6,465		88,310
Consumer		26,087		395		92		487		25,600
All other		71,760		232		5,356		5,588		66,172
Total	$	714,277	$	10,981	$	18,039	$	29,020	$	685,257

The following table presents the aging of the recorded investment in past due loans as of December 31, 2012 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	$	214,743	$	9,356	$	2,040	$	11,396	$	203,347
Multifamily real estate		28,673		695		3,893		4,588		24,085
Commercial real estate:
Owner occupied		91,902		6,212		1,129		7,341		84,561
Non owner occupied		178,849		5,267		2,248		7,515		171,334
Commercial and industrial		84,430		2,306		2,485		4,791		79,639
Consumer		28,128		602		176		778		27,350
All other		77,900		468		7,332		7,800		70,100
Total	$	704,625	$	24,906	$	19,303	$	44,209	$	660,416

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2013:

	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	$	232	$	2,139	$	-	$	2,371	$	3,892	$	209,054	$	193	$	213,139
Multifamily real estate		-		429		-		429		1,651		32,289		1,341		35,281
Commercial real estate:
Owner occupied		35		1,059		-		1,094		2,310		91,354		263		93,927
Non-owner occupied		362		1,606		-		1,968		1,287		172,229		5,792		179,308
Commercial and industrial		2,871		1,202		-		4,073		7,442		86,815		518		94,775
Consumer		-		233		-		233		-		26,087		-		26,087
All other		150		1,380		500		2,030		5,006		62,261		4,493		71,760
Total	$	3,650	$	8,048	$	500	$	12,198	$	21,588	$	680,089	$	12,600	$	714,277

The following tables present 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, 2012:

	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	$	358	$	1,805	$	-	$	2,163	$	4,609	$	209,932	$	202	$	214,743
Multifamily real estate		-		331		-		331		1,670		23,830		3,173		28,673
Commercial real estate:
Owner occupied		74		1,043		-		1,117		2,511		89,120		271		91,902
Non-owner occupied		362		1,526		-		1,888		2,627		170,326		5,896		178,849
Commercial and industrial		2,173		873		-		3,046		10,799		73,120		511		84,430
Consumer		-		244		-		244		-		28,128		-		28,128
All other		375		1,824		500		2,699		4,271		69,133		4,496		77,900
Total	$	3,342	$	7,646	$	500	$	11,488	$	26,487	$	663,589	$	14,549	$	704,625

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013. The table includes $7,845 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	1,515	$	1,328	$	-
Multifamily real estate		4,170		2,992		-
Commercial real estate
Owner occupied		2,697		2,026		-
Non owner occupied		2,625		1,533		-
Commercial and industrial		1,960		849		-
All other		4,414		4,395		-
		17,381		13,123		-
With an allowance recorded:
Residential real estate	$	2,772	$	2,757	$	232
Commercial real estate
Owner occupied		547		547		35
Non owner occupied		809		790		362
Commercial and industrial		7,666		7,111		2,871
All other		12,503		5,104		650
		24,297		16,309		4,150
Total	$	41,678	$	29,432	$	4,150

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012. The table includes $9,421 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	1,886	$	1,714	$	-
Multifamily real estate		6,332		4,533		-
Commercial real estate
Owner occupied		2,876		2,196		-
Non owner occupied		3,912		2,916		-
Commercial and industrial		2,031		837		-
All other		3,426		3,427		-
		20,463		15,623		-
With an allowance recorded:
Residential real estate	$	3,118	$	3,097	$	358
Commercial real estate
Owner occupied		586		586		74
Non owner occupied		809		789		362
Commercial and industrial		10,771		10,473		2,173
All other		5,517		5,340		875
		20,801		20,285		3,842
Total	$	41,264	$	35,908	$	3,842

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the six months ended June 30, 2013 and June 30, 2012. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Six months ended June 30, 2013						Six months ended June 30, 2012
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	$	4,486	$	98	$	97	$	10,165	$	318	$	304
Multifamily real estate		4,006		796		796		7,334		1,350		1,341
Commercial real estate:
Owner occupied		2,655		88		71		8,612		938		923
Non-owner occupied		2,801		17		17		11,479		55		51
Commercial and industrial		10,082		40		40		9,055		240		233
Consumer		-		-		-		37		1		1
All other		9,393		161		161		7,896		194		183
Total	$	33,423	$	1,200	$	1,182	$	54,578	$	3,096	$	3,036

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended June 30, 2013 and June 30, 2012. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended June 30, 2013						Three months ended June 30, 2012
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	$	4,323	$	48	$	47	$	10,209	$	189	$	181
Multifamily real estate		3,743		766		766		4,850		43		37
Commercial real estate:
Owner occupied		2,592		49		42		7,619		44		38
Non-owner occupied		2,349		16		16		11,432		20		25
Commercial and industrial		9,468		36		36		11,473		133		126
Consumer		-		-		-		36		1		1
All other		9,706		79		79		6,696		98		101
Total	$	32,181	$	994	$	986	$	52,315	$	528	$	509

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR’s as of June 30, 2013 and December 31, 2012:

June 30, 2013	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	852	$	306	$	1,158
Commercial real estate
Owner occupied		-		4,361		4,361
Non owner occupied		-		3,308		3,308
Commercial and industrial		1,655		854		2,509
All other		16		2,167		2,183
Total	$	2,523	$	10,996	$	13,519

December 31, 2012	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	1,020	$	240	$	1,260
Commercial real estate
Owner occupied		-		4,224		4,224
Non owner occupied		-		4,920		4,920
Commercial and industrial		2		2,525		2,527
All other		-		2,197		2,197
Total	$	1,022	$	14,106	$	15,128

At June 30, 2013 $789,000 in specific reserves was allocated to loans that had restructured terms. At December 31, 2012 $220,000 in specific reserves was allocated to loans that had restructured terms.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents TDR’s that occurred during the six months ended June 30, 2013 and June 30, 2012:

	Six months ended June 30, 2013						Six months ended June 30, 2012
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 and industrial		-	$	-	$	-		2	$	1,999	$	1,999
All other		1		16		16		-		-		-
Total		1	$	16	$	16		2	$	1,999	$	1,999

The troubled debt restructurings described above did not increase the allowance for loan losses during the six months ending June 30, 2013 and increased the allowance for loan losses by $40,000 during the six months ending June 30, 2012.

There were no TDR’s that occurred during the three months ended June 30, 2013 or June 30, 2012.

During the three months and six months ended June 30, 2013 there were no TDR’s for which there was a payment default within twelve months following the modification. During the three months and six months ended June 30, 2012 there were no TDR’s for which there was a payment default within twelve months following the modification.

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

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

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 residential real estate, on a monthly basis. For consumer loans, including consumer loans secured by residential real estate, the analysis involves monitoring the performing status of the loan. At the time such loans become past due by 30 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

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

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

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

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

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

As of June 30, 2013, 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	$	195,461	$	9,300	$	8,296	$	82	$	213,139
Multifamily real estate		28,634		1,241		5,406		-		35,281
Commercial real estate:
Owner occupied		81,698		7,257		4,972		-		93,927
Non-owner occupied		169,137		5,343		4,828		-		179,308
Commercial and industrial		85,152		641		8,940		42		94,775
Consumer		25,874		152		61		-		26,087
All other		57,251		665		13,383		461		71,760
Total	$	643,207	$	24,599	$	45,886	$	585	$	714,277

As of December 31, 2012, 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	$	195,210	$	10,115	$	9,327	$	91	$	214,743
Multifamily real estate		19,747		1,912		7,014		-		28,673
Commercial real estate:
Owner occupied		74,529		8,994		8,379		-		91,902
Non-owner occupied		163,337		7,685		7,827		-		178,849
Commercial and industrial		70,180		2,739		11,508		3		84,430
Consumer		27,931		123		74		-		28,128
All other		64,009		814		12,386		691		77,900
Total	$	614,943	$	32,382	$	56,515	$	785	$	704,625

Table of Contents

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 2013 the Banks could, without prior approval, declare dividends to Premier of approximately $2.1 million plus any 2013 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 table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2013 the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

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

	June 30, 2013			December 31, 2012			Regulatory Minimum Requirements			To Be Considered Well Capitalized
Tier I Capital (to Risk-Weighted Assets)		16.7	%		16.1	%		4.0	%		6.0	%
Total Capital (to Risk-Weighted Assets)		17.9	%		17.4	%		8.0	%		10.0	%
Tier I Capital (to Average Assets)		10.5	%		10.0	%		4.0	%		5.0	%

As of June 30, 2013, the most recent notification from each of the Banks’ primary Federal regulators categorized the subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the preceding table. There are no conditions or events since that notification that management believes have changed the Banks’ categories.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 – PREFERRED STOCK

On October 2, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“U.S. Treasury”). Pursuant to the Purchase Agreement, the Company issued and sold to the U.S. Treasury 22,252 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of one thousand dollars per share (the “Series A Preferred Stock”) and a ten-year warrant (the “Warrant”) to purchase 628,587 shares of the Company’s common stock, no par value, at an exercise price of $5.31 per share, for an aggregate purchase price of $22,252,000 in cash.

Under standardized TARP Capital Purchase Program terms, cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum until November 14, 2014, and at a rate of 9% per annum thereafter. These dividends will be paid only if, as and when declared by Premier’s Board of Directors. The Series A Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of Premier. Subject to the approval of the Appropriate Federal Banking Agency (as defined in the Securities Purchase Agreement, which for Premier is the Board of Governors of the Federal Reserve System), the Series A Preferred Stock is redeemable at the option of Premier at 100% of its liquidation preference plus accrued and unpaid dividends, without penalty, delay or the need to raise additional replacement capital.

Premier sought and obtained regulatory permission to participate in the U.S. Treasury’s auction to sell its investment in Premier’s Series A Preferred Stock. In the auction, Premier successfully bid to repurchase 10,252 shares of the 22,252 outstanding shares and on August 10, 2012 the 10,252 shares repurchased at the auction closing price of $901.03.

The Series A Preferred Stock is non-voting, but has class voting rights on (i) any authorization or issuance of shares ranking senior to the Series A Preferred Stock; (ii) any amendment to the rights of the Series A Preferred Stock; or (iii) any merger, consolidation, share exchange, reclassification or similar transaction which would adversely affect the rights of the Series A Preferred Stock. In the event that the cumulative dividends described above are not paid in full for an aggregate of six dividend periods or more, whether or not consecutive, the authorized number of directors of Premier would automatically be increased by two and the holders of the Series A Preferred Stock would have the right to elect two directors. The right to elect directors would end when dividends have been paid in full for four consecutive dividend periods. As previously disclosed, Premier has already deferred two dividend payments on the Series A Preferred Stock as a result of the Federal Reserve Board’s refusal to initially approve the November 15, 2010 and February 15, 2011 dividends under the Written Agreement dated July 29, 2010, among CB&T, a wholly owned subsidiary of Premier; the FRB, and the Virginia Bureau. These deferred dividends were paid along with the regularly scheduled May 15, 2011 Series A Preferred Stock quarterly dividend.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 – PREFERRED STOCK - continued

The U.S. Treasury has agreed not to exercise voting power with respect to any common stock issued to it upon exercise of the Warrant. The common stock will be issued from authorized but unissued common stock and thus will dilute the interests of existing Premier common shareholders. As of June 30, 2013, the Warrant has not yet been exercised. Since the Series A Preferred Stock was disposed of by the U.S. Treasury, Premier has the right to repurchase the Warrant at its appraised value. If Premier chooses not to repurchase the Warrant, the U.S. Treasury may liquidate the Warrant at its current market price.

NOTE 6 – 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 20, 2013, 52,900 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $11.39, the closing market price of Premier’s common stock on the grant date. These options vest in three equal annual installments ending on March 20, 2016. On March 21, 2012, 105,700 incentive stock options were granted out of the 2002 Employee Stock Option Plan at an exercise price of $7.47, 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, 2015. On March 18, 2011, 102,000 incentive stock options were granted out of the 2002 Employee Stock Option Plan at an exercise price of $6.95 the closing market price of Premier on the grant date. These options vest in three equal annual installments ending on March 18, 2014.

The fair value of the Company's employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. The assumptions used in the Black-Scholes option-pricing model are as follows:

	2013			2012			2011
Risk-free interest rate		1.96	%		2.31	%		3.58	%
Expected option life (yrs)		10.00			10.00			10.00
Expected stock price volatility		35.24	%		34.93	%		30.01	%
Dividend yield		3.86	%		2.68	%		4.03	%
Weighted average fair value of options granted during the year	$	2.85		$	2.34		$	1.63

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6 – STOCK COMPENSATION EXPENSE - continued

The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield in effect at the time of the grant. The expected option life was estimated since there has been little option exercise history. The expected stock price volatility is based on historical volatilities of the Company’s common stock. The dividend yield was estimated by annualizing the current quarterly dividend on the Company’s common stock at the time of the option grant or by using historical dividends and dividend yields during the time the Company was restricted from paying dividends by its primary regulator.

Compensation expense of $87,000 was recorded for the first six months of 2013 compared to $85,000 for the first six months of 2012. For the three months ended June 30, $41,000 was recorded for 2013 while $57,000 was recorded for 2012. Stock-based compensation expense is recognized ratably over the requisite vesting period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $191,000 at June 30, 2013. This unrecognized expense is expected to be recognized over the next 32 months based on the vesting periods of the options.

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

	- - - - - - 2013 - - - - - -					- - - - - - 2012 - - - - - -
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		392,366		$	9.24		350,949		$	10.77
Grants		52,900			11.39		105,700			7.47
Exercises		(48,617	)		7.65		-			-
Forfeitures or expired		(12,201	)		8.03		(4,332	)		7.70
Outstanding at June 30,		384,448		$	9.70		452,317		$	9.19

Exercisable at June 30,		242,898					268,364
Weighted average remaining life of options outstanding		6.5					7.0
Weighted average fair value of options granted during the year	$	2.85				$	2.34

Options outstanding at period-end are expected to fully vest.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6 – STOCK COMPENSATION EXPENSE - continued

Additional information regarding stock options outstanding and exercisable at June 30, 2013, is provided in the following table:

	- - - - - - - - Outstanding - - - - - - - -						- - - - - - - - Currently Exercisable - - - - - - - -
Range of Exercise Prices	Number		Weighted Average Exercise Price		Aggregate Intrinsic Value		Number		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Aggregate Intrinsic Value

$6.50 to $10.00		227,415	$	7.48	$	1,038		136,965		6.6	$	7.59	$	610
$10.01 to $12.50		72,933		11.46		42		21,833		1.6		11.62		9
$12.51 to $15.00		60,600		13.46		-		60,600		4.2		13.46		-
$15.01 to $17.50		23,500		16.00		-		23,500		2.6		16.00		-
Outstanding - Jun 30, 2013		384,448		9.70	$	1,080		242,898		5.2		10.23	$	619

NOTE 7 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and six months ended June 30, 2013 and 2012 is presented below:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Basic earnings per share
Income available to common stockholders	$	2,944	$	1,786	$	5,283	$	4,311
Weighted average common shares outstanding		7,980,923		7,937,143		7,971,859		7,937,143
Earnings per share	$	0.37	$	0.23	$	0.66	$	0.54

Diluted earnings per share
Income available to common stockholders	$	2,944	$	1,786	$	5,283	$	4,311
Weighted average common shares outstanding		7,980,923		7,937,143		7,971,859		7,937,143
Add dilutive effects of potential additional common stock		451,072		202,258		439,194		144,075
Weighted average common and dilutive potential common shares outstanding		8,431,995		8,139,401		8,411,053		8,081,218
Earnings per share assuming dilution	$	0.35	$	0.22	$	0.63	$	0.53

Stock options for 84,100 and 405,349 shares of common stock were not considered in computing diluted earnings per share for the six months ended June 30, 2013 and 2012 because they were antidilutive. Stock options for 84,100 and 202,449 shares of common stock were not considered in computing diluted earnings per share for the three months ended June 30, 2013 and 2012 because they were antidilutive.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – 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.

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).

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at June 30, 2013 were as follows:

				Fair Value Measurements at June 30, 2013 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	66,064		$	66,064		$	-		$	-	$	66,064
Federal funds sold		4,266			4,266			-			-		4,266
Securities available for sale		258,120			-			257,980			140		258,120
Loans held for sale		247			-			-			247		247
Loans, net		702,079			-			-			703,276		703,276
Federal Home Loan Bank stock		4,183			n/a			n/a			n/a		n/a
Interest receivable		3,107			-			699			2,408		3,107

Financial liabilities
Deposits	$	(932,944	)	$	(585,486	)	$	(349,296	)	$	-	$	(934,782	)
Securities sold under agreements to repurchase		(8,515	)		-			(8,515	)		-		(8,515	)
Other borrowed funds		(15,000	)		-			(14,975	)		-		(14,975	)
Interest payable		(430	)		(5	)		(425	)		-		(430	)

The carrying amounts and estimated fair values of financial instruments at December 31, 2012 were as follows:

				Fair Value Measurements at December 31, 2012 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	66,009		$	66,009		$	-		$	-	$	66,009
Federal funds sold		4,236			4,236			-			-		4,236
Securities available for sale		283,975			-			283,835			140		283,975
Loans held for sale		200			-			-			200		200
Loans, net		693,137			-			-			691,519		691,519
Federal Home Loan Bank stock		4,181			n/a			n/a			n/a		n/a
Interest receivable		3,403			-			827			2,576		3,403

Financial liabilities
Deposits	$	(930,583	)	$	(577,274	)	$	(356,730	)	$	-	$	(934,004	)
Securities sold under agreements to repurchase		(26,102	)		-			(26,102	)		-		(26,102	)
Other borrowed funds		(16,049	)		-			(16,022	)		-		(16,022	)
Interest payable		(489	)		(6	)		(483	)		-		(489	)

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at June 30, 2013 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	$	38,224	$	-	$	38,224	$	-
U. S. agency CMO’s - residential		204,118		-		204,118		-
Total mortgage-backed securities of government sponsored agencies		242,342		-		242,342		-
U. S. government sponsored agency securities		6,969		-		6,969		-
Obligations of states and political subdivisions		6,747		-		6,607		140
Other securities		2,062		-		2,062		-
Total available for sale	$	258,120	$	-	$	257,980	$	140

			Fair Value Measurements at December 31, 2012 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	$	37,100	$	-	$	37,100	$	-
U. S. agency CMO’s - residential		212,847		-		212,847		-
Total mortgage-backed securities of government sponsored agencies		249,947		-		249,947		-
U. S. government sponsored agency securities		22,244		-		22,244		-
Obligations of states and political subdivisions		7,860		-		7,720		140
Other securities		3,924		-		3,924		-
Total available for sale	$	283,975	$	-	$	283,835	$	140

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – FAIR VALUE - continued

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

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a 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 real estate appraisals. 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 unique to each property 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 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. 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 writedown.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – FAIR VALUE - continued

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2013 are summarized below:

			Fair Value Measurements at June 30, 2013 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:
Residential Real Estate	$	2,525	$	-	$	-	$	2,525
Commercial Real Estate
Owner Occupied		512		-		-		512
Non-owner Occupied		428		-		-		428
Commercial and Industrial		4,240		-		-		4,240
All Other		4,454		-		-		4,454
Total impaired loans		12,159	$	-	$	-	$	12,159

Other real estate owned:
Commercial Real Estate
Non-owner Occupied		490		-		-		490
All Other		7,211		-		-		7,211
Total OREO	$	7,701	$	-	$	-	$	7,701

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $16,309,000 at June 30, 2013 with a valuation allowance of $4,150,000 and a carrying amount of $20,285,000 at December 31, 2012 with a valuation allowance of $3,842,000, resulting in a provision for loan losses of $483,000 for the six months ended June 30, 2013, compared to a $1,000 provision for loan losses for the six months ended June 30, 2012; and a negative $429,000 provision for loan losses for the three months ended June 30, 2013, compared to a negative $527,000 provision for loan losses for the three months ended June 30, 2012. 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 $7,701,000 which is made up of the outstanding balance of $9,296,000 net of a valuation allowance of $1,595,000 at June 30, 2013. There were no additional write downs during the six months ended June 30, 2013, compared to $85,000 of additional write downs during the six months ended June 30, 2012. For the three months ended June 30, 2013 no additional write downs were recorded compared to $41,000 of write downs during the three months ended June 30, 2012. At December 31, 2012, other real estate owned had a net carrying amount of $7,968,000, made up of the outstanding balance of $9,945,000, net of a valuation allowance of $1,977,000.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at June 30, 2013 are summarized below:

	June 30, 2013		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Residential Real Estate	$	2,525	sales comparison	adjustment for differences between the comparable sales		0.8%-16.7%(9.0%)
Commercial Real Estate
Owner Occupied		512	sales comparison	adjustment for limited salability of specialized property		40.0%-70.0%(44.1%)
Non-owner Occupied		428	sales comparison	adjustment for limited salability of specialized property		50.5%-50.5%(50.5%)
Commercial and Industrial		4,240	sales comparison	adjustment for limited salability of specialized property		0.0%-80.5%(57.0%)
All Other		4,454	sales comparison	adjustment for percentage of completion of construction		10.0%-91.4%(66.2%)
Total impaired loans		12,159

Other real estate owned:
Commercial Real Estate
Non-owner Occupied		490	sales comparison	adjustment for differences between the comparable sales		1.9%-1.9%(1.9%)
All Other		7,211	sales comparison	adjustment for estimated realizable value		4.7%-15.9%(12.6%)
Total OREO	$	7,701

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2012 are summarized below:

			Fair Value Measurements at December 31, 2012 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:
Residential Real Estate	$	2,739	$	-	$	-	$	2,739
Commercial Real Estate
Owner Occupied		512		-		-		512
Non-owner Occupied		427		-		-		427
Commercial and Industrial		8,300		-		-		8,300
All Other		4,465		-		-		4,465
Total impaired loans		16,443	$	-	$	-	$	16,443

Other real estate owned:
Residential Real Estate	$	255	$	-	$	-	$	255
Commercial Real Estate
Owner Occupied		250		-		-		250
Non-owner Occupied		1,031		-		-		1,031
All Other		6,432		-		-		6,432
Total OREO	$	7,968	$	-	$	-	$	7,968

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2012 are summarized below:

	December 31, 2012		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Residential Real Estate	$	2,739	sales comparison	adjustment for differences between the comparable sales		0.8%-76.8%(10.5%)
Commercial Real Estate
Owner Occupied		512	sales comparison	adjustment for limited salability of specialized property		40.0%-70.0%(44.1%)
Non-owner Occupied		427	sales comparison	adjustment for limited salability of specialized property		59.0%-59.0%(59.0%)
Commercial and Industrial		8,300	sales comparison	adjustment for limited salability of specialized property		0.0%-70.0%(44.3%)
All Other		4,465	sales comparison	adjustment for percentage of completion of construction		64.0%-91.4%(64.8%)
Total impaired loans		16,443

Other real estate owned:
Residential Real Estate	$	255	sales comparison	adjustment for differences between the comparable sales		0.0%-62.3%(44.1%)
Commercial Real Estate
Owner Occupied		250	sales comparison	adjustment for estimated realizable value		0.0%-17.9%(7.2%)
Non-owner Occupied		1,031	sales comparison	adjustment for differences between the comparable sales		82.7%-82.7%(82.7%)
All Other		6,432	sales comparison	adjustment for estimated realizable value		4.7%-16.6%(12.7%)
Total OREO	$	7,968

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table details the changes in the single component of accumulated other comprehensive income for the six months ended June 30, 2013:

Accumulated Other Comprehensive Income	Unrealized Gain on Securities Available for Sale
Balance, December 31, 2012	$	6,576
Reclassification adjustments to net income:
Realized gain on disposition of securities		(148	)
Provision for income taxes		50
Unrealized losses arising during the period, net of tax		(3,570	)
Balance, June 30, 2013	$	2,908

The following table details the changes in the single component of accumulated other comprehensive income for the three months ended June 30, 2013:

Accumulated Other Comprehensive Income	Unrealized Gain on Securities Available for Sale
Balance, March 31, 2013	$	6,096
Unrealized losses arising during the period, net of tax		(3,188	)
Balance, June 30, 2013	$	2,908

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

A. Results of Operations

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

Net income for the six months ended June 30, 2013 was $5,613,000, or $0.63 per diluted share, compared to net income of $4,922,000, or $0.53 per diluted share, for the six months ended June 30, 2012. The increase in net income in 2013 is largely due to a decrease in total interest expense, a decrease in the provision for loan losses, and decreases in staff costs, occupancy and equipment expenses, professional fees and collection costs. These decreases in expenses more than offset decreases in interest income and non-interest income. The annualized returns on average common shareholders’ equity and average assets were approximately 7.81% and 1.00% for the six months ended June 30, 2013 compared to 6.76% and 0.86% for the same period in 2012.

Net income for the three months ended June 30, 2013 was $3,109,000, or $0.35 per diluted share, compared to net income of $2,092,000, or $0.22 per diluted share for the three months ended June 30, 2012. The increase in income in 2013 is largely due to an increase in total interest income, a decrease in total interest expense, a decrease in the provision for loan losses, and decreases in non-interest expenses which more than offset a decrease in non-interest income. The annualized returns on common shareholders’ equity and average assets were approximately 8.72% and 1.11% for the three months ended June 30, 2013 compared to 5.62% and 0.73% for the same period in 2012.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Net interest income for the six months ended June 30, 2013 totaled $21.23 million, down $1.49 million, or 6.6%, from the $22.73 million of net interest income earned in the first six months of 2012, as the decrease in total interest income exceeded the decrease in total interest expense. Interest income in 2013 decreased by $2.44 million, or 9.3%, largely due to a decrease in interest and fees on loans. In the first six months of 2013, interest income on loans decreased by $1.90 million, or 8.5%, compared to the same period in 2012. In 2012, interest income on loans included $2.10 million from the recognition of deferred interest and purchase discounts on non-accrual loans liquidated during the first quarter of 2012 while in 2013, interest income on loans included $770,000 of similar income on non-accrual loans liquidated during the second quarter of 2013. The timing of these liquidations is difficult to predict, which creates fluctuations in reported loan interest income. Otherwise, interest income on loans would have decreased by $567,000 in the first six months of 2013 due to lower yields on a higher average balance of loans outstanding. Interest earned on investments decreased by $538,000, or 14.4%, due to lower average yields on a lower average volume of investments. Interest earned on federal funds sold and interest bearing bank balances decreased by $4,000, largely due to a lower average volume of assets held in this category.

Partially offsetting the decrease in interest income in the first six months of 2013 was $946,000 of interest expense savings. Interest expense decreased in total during the first six months of 2013 by $946,000, or 27.5%, when compared to the same six months of 2012. Interest expense on deposits decreased by $827,000, or 27.8%, largely due to a continuing decrease in rates paid on deposits combined with a lower average balance of interest-bearing deposits outstanding. Interest expense on repurchase agreements and other short-term borrowings decreased by $30,000, largely due to lower rates paid and a lower average balance outstanding. All FHLB advances were repaid in 2012 saving $41,000 of interest expense in the first six months of 2013 compared to 2012. Interest expense on other borrowings decreased by $49,000, or 12.7%, in the first six months of 2013 compared to the first six months of 2012, largely due to a decrease in the average amount of borrowings outstanding.

The Federal Reserve System Board of Governors’ policy to maintain the federal funds rate at nearly zero, coupled with the U.S. Treasury actively buying investment securities, has significantly reduced the yield on much of Premier’s earning assets, including investments, federal funds sold and variable rate loans. Premier has tried to offset the lower interest income by lowering the rates paid on its deposits and repurchase agreements with customers. However, with the recognition of additional loan interest income upon the liquidation of non-accrual loans in 2012 coupled with the lower amount of decrease in the rates paid on deposit accounts versus the decrease in earning asset yields, Premier’s overall net interest margin decreased in the first six months of 2013. Premier’s net interest margin during the first six months of 2013 was 4.16% compared to 4.38% for the same period in 2012. A portion of the interest income on loans is the result of recognizing into interest income the remaining fair value discounts on notes acquired via a business acquisition if that note was paid-off during the period. These events cannot be predicted with certainty and may positively or negatively affect the comparison of interest income on loans in future periods.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Additional information on Premier’s net interest income for the first six months of 2013 and 2012 is contained in the following table.

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

	Six Months Ended June 30, 2013								Six Months Ended June 30, 2012
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	53,220		$	72		0.27	%	$	65,767		$	76		0.23	%
Securities available for sale
Taxable		271,044			3,110		2.30			291,631			3,620		2.48
Tax-exempt		5,944			84		4.28			7,647			112		4.44
Total investment securities		276,988			3,194		2.34			299,278			3,732		2.53
Total loans		703,214			20,466		5.87			677,189			22,364		6.62
Total interest-earning assets		1,033,422			23,732		4.63	%		1,042,234			26,172		5.05	%
Allowance for loan losses		(12,159	)							(10,039	)
Cash and due from banks		26,791								28,689
Other assets		68,902								75,598
Total assets	$	1,116,956							$	1,136,482

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	739,503			2,145		0.58		$	745,796			2,972		0.80
Short-term borrowings		14,919			18		0.24			21,323			48		0.45
FHLB advances		-			-		-			3,757			41		2.19
Other borrowings		15,509			336		4.37			17,482			385		4.42
Total interest-bearing liabilities		769,931			2,499		0.65	%		788,358			3,446		0.88	%
Non-interest bearing deposits		196,818								195,866
Other liabilities		3,659								4,185
Shareholders’ equity		146,548								148,073
Total liabilities and equity	$	1,116,956							$	1,136,482

Net interest earnings				$	21,233							$	22,726
Net interest spread							3.98	%							4.17	%
Net interest margin							4.16	%							4.38	%

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Additional information on Premier’s net interest income for the second quarter of 2013 and second quarter of 2012 is contained in the following table.

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

	Three Months Ended June 30, 2013								Three Months Ended June 30, 2012
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	57,782		$	42		0.28	%	$	66,149		$	44		0.27	%
Securities available for sale
Taxable		264,356			1,528		2.31			300,694			1,829		2.43
Tax-exempt		5,852			41		4.25			7,608			56		4.46
Total investment securities		270,208			1,569		2.36			308,302			1,885		2.48
Total loans		704,780			10,706		6.09			674,332			10,027		5.96
Total interest-earning assets		1,032,770			12,317		4.79	%		1,048,783			11,956		4.58	%
Allowance for loan losses		(12,478	)							(10,244	)
Cash and due from banks		26,963								28,937
Other assets		68,625								74,931
Total assets	$	1,115,880							$	1,142,407

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	741,436			1,054		0.57		$	752,332			1,437		0.77
Short-term borrowings		10,241			6		0.23			20,260			22		0.44
FHLB advances		-			-		-			12			-		0.00
Other borrowings		15,262			164		4.31			17,323			189		4.38
Total interest-bearing liabilities		766,939			1,224		0.64	%		789,927			1,648		0.84	%
Non-interest bearing deposits		198,372								198,816
Other liabilities		3,560								4,474
Shareholders’ equity		147,009								149,190
Total liabilities and equity	$	1,115,880							$	1,142,407

Net interest earnings				$	11,093							$	10,308
Net interest spread							4.15	%							3.74	%
Net interest margin							4.31	%							3.95	%

Net interest income for the quarter ending June 30, 2013 totaled 11.09 million, up $784,000, or 7.6%, from the $10.31 million of net interest income earned in the second quarter of 2012. Interest income in the second quarter of 2013 increased by $361,000, or 3.0%, as an increase in interest income on loans more than offset a decrease in interest income on investments. Interest income on loans increased by $679,000, or 6.8%. In the second quarter of 2013, interest income on loans included $770,000 from the recognition of deferred interest and purchase discounts on non-accrual loans liquidated during the quarter. When a loan that has been discounted as a result being purchased in a business acquisition is paid-off, any remaining discount is recognized as interest income on loans. These events cannot be predicted with certainty and may positively or negatively affect interest income on loans in future periods, which creates fluctuations in reported loan interest income. Otherwise, interest income on loans would have decreased by $91,000 in the second quarter of 2013 due to lower yields on a higher average balance of loans outstanding. Interest earned on investments decreased by $316,000, or 16.8%, due to lower average yields on a lower average volume of investments. Average investment balances have decreased as maturing funds have been placed into loans or used to satisfy deposit withdrawals. Interest earned on federal funds sold and interest bearing bank balances decreased by $2,000, largely due to a lower average volume of assets held in this category.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Also adding to the increase in net interest income, interest expense decreased in total during the second quarter of 2013 by $424,000, or 25.7%, when compared to the same quarter of 2012. Interest expense on deposits decreased by $383,000, or 26.7%, largely due to a continuing decrease in the rates paid combined with a lower average balance of interest-bearing deposits outstanding. Interest expense on repurchase agreements and other short-term borrowings decreased by $16,000, again largely due to a decrease in the interest rates paid combined with a lower average balance outstanding. Interest expense on other borrowings decreased by $25,000, or 13.2%, in the second quarter of 2013 compared to the second quarter of 2012, largely due to a decrease in the average amount of borrowings outstanding. The Board of Governors’ policy to reduce the federal funds rate to nearly zero, coupled with the U.S. Treasury actively buying investment securities, has significantly reduced the yield on much of Premier’s earning assets, including investments, federal funds sold and variable rate loans. New fixed rate loans are also pricing lower than loans originated in prior periods. Premier has tried to offset the lower interest earning yields by lowering the rates paid on its deposits and repurchase agreements with customers. During the second quarter of 2013, the decrease in the rates paid on deposits outpaced the lower yields on investments. This interest savings along with the increase in interest income on loans from the liquidation of non-accrual loans during the quarter has improved Premier’s overall net interest margin. Premier’s net interest margin during the second quarter of 2013 was 4.31% compared to 3.95% for the same period in 2012.

Non-interest income increased by $77,000, or 2.4%, to $3,226,000 for the first six months of 2013 compared to the same period of 2012. However, this increase included a $148,000 gain on the disposition of an investment security that was called during the first six months of 2013. Excluding this gain, service charges of deposit accounts decreased by $67,000, or 3.9%, and electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) decreased by $23,000, or 2.3%. The decrease in service charges on deposit accounts is largely due to a decrease in customer overdraft activity as customers reduced their propensity to incur overdraft charges as they managed their checking accounts more closely. These decreases were partially offset by a $13,000, or 10.2%, increase in income from selling mortgages in the secondary market and a $6,000 increase in income from other sources. The increase in secondary market mortgage income is largely due to the stabilization of requirements for customers to qualify for mortgages that are eligible for sale in the secondary market and an increase in customer demand for refinancing existing mortgage loans during the first quarter compared to one-year ago.

For the quarter ending June 30, 2013, non-interest income decreased by $51,000 to $1,581,000 compared to $1,632,000 recognized during the same quarter of 2012. Service charges on deposit accounts decreased by $26,000, or 3.0%, electronic banking income decreased by $5,000, or 1.0%, and secondary market mortgage income decreased by $56,000, or 54.4%. These decreases were partially offset by a $36,000 increase in income from other sources. The decrease in secondary market mortgage income was largely the result of diminished activity. The recent increase in longer-term interest rates in the second quarter of 2013 has resulted in lower demand for mortgage refinancing.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Non-interest expenses for the first six months of 2013 totaled $15.20 million, or 2.74% of average assets on an annualized basis, compared to $16.66 million, or 2.95% of average assets for the same period of 2012. The 1.46 million decrease in non-interest expenses in 2013 when compared to the first six months of 2012 is largely due to a $587,000, or 68.8% decrease in loan collection expenses, namely foreclosure and other loan collection expenses associated with the liquidation of non-accrual loans during the first quarter of 2012. Also contributing to the decrease in non-interest expenses during the first six months of 2013 was a $384,000, or 4.9%, decrease in staff costs following the decrease in the number employees resulting from the internal bank mergers to form Premier Bank, Inc. in 2011 and to consolidate the Kentucky and Ohio operations under Citizens Deposit Bank and Trust in the second half of 2012. Other decreases in non-interest expense during the first six months of 2013 include an $119,000, or 5.2%, decrease in occupancy and equipment expense, a $70,000, or 4.0%, decrease in data processing costs, a $139,000, or 23.8%, decrease in professional fees, a $69,000, or 14.3%, decrease in FDIC insurance expense, and a $43,000, or 12.4%, decrease in core deposit amortization expense. Occupancy expense decreased largely due to lower rent expense and leasehold improvement depreciation from the consolidation of rented facilities. Equipment expense decreased largely due to lower software subscription expenditures and lower depreciation and maintenance expense, partially offset by the write-off of obsolete equipment. Data processing costs decreased due to lower amounts paid for electronic banking processing and the processing of checks and other items. Professional fees decreased as a result of lower legal and audit costs partially offset by an increase in consulting costs. FDIC insurance expense decreased largely due to savings realized by consolidating the Kentucky and Ohio operations under Citizens Deposit Bank and Trust in the second half of 2012. Core deposit amortization expense decreased as Premier utilizes an accelerated method to amortize its core deposit intangible asset. These expense decreases more than offset an $89,000, or 17.6%, increase in expenses and writedowns on other real estate owned (OREO), and a $17,000, or 4.9%, increase in taxes not on income. The increase in expenses on OREO is largely due to a decrease in rental income earned from an OREO property that was sold in late 2012 which more than offset a decrease in OREO writedown expense. The increase in taxes not on income is largely due to an increase in amount subject to Virginia’s franchise tax resulting from the formation of Premier Bank partially offset by a decrease in Ohio’s franchise tax.

Non-interest expenses for the second quarter of 2013 totaled $7.81 million, or 2.81% of average assets on an annualized basis, compared to $8.07 million, or 2.84% of average assets for the same period of 2012. The $257,000 decrease in non-interest expenses in the second quarter of 2013 when compared to the second quarter of 2012 is largely due to a general decrease in operating costs across all major expense categories. FDIC insurance expense decreased by $39,000, or 16.3%, largely due to savings realized by consolidating the Kentucky and Ohio operations under Citizens Deposit Bank and Trust in the second half of 2012. Collection expenses decreased by $55,000, or 28.9%, largely due to lower costs incurred in the Company’s Washington market. Taxes not on income decreased by $39,000, or 20.5%, largely due to decreases in amounts subject to Ohio’s and West Virginia’s franchise tax partially offset by an increase in Virginia’ franchise tax. Otherwise, staff costs decreased by $13,000, or 0.4%. Occupancy and equipment costs decreased by $18,000, or 1.6%. Outside data processing decreased by $18,000, or 2.1%. Professional fees decreased by $11,000, or 3.7%. OREO expenses decreased by $21,000, or 7.2%.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Income tax expense was $3.15 million for the first six months of 2013 compared to $2.59 million for the first six months of 2012. The effective tax rate for the six months ended June 30, 2013 was 35.9% compared to 34.5% for the same period in 2012. For the quarter ending June 30, 2013, income tax expense was $1.83 million, a 37.0% effective tax rate, compared to $1.03 million (a 33.0% effective tax rate) for the same period of 2012. The increase in income tax expense can be primarily attributed to the increase in pre-tax income detailed above, while the increases in the effective income tax rate are largely due to increases in the amount of income subject to state income taxes and the Company’s taxable income reaching the phase-in threshold of the 35% Federal corporate income tax rate.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

B. Financial Position

Total assets at June 30, 2013 decreased by $15.8 million to just under $1.105 billion from the $1.121 billion at December 31, 2012. However, earning assets decreased by only $11.5 from the $1.031 billion at year-end 2012 to end the quarter at $1.019 billion. The decrease in total assets was largely due to a decrease in securities available for sale and cash and due from banks partially offset by an increase in net loans outstanding and interest bearing bank balances (see below).

Cash and due from banks at June 30, 2013 was $27.9 million, a $4.6 million decrease from the $32.5 million at December 31, 2012. Interest bearing bank balances increased by $4.6 million from the $33.5 million reported at December 31, 2012, while federal funds sold remained relatively unchanged at $4.3 million at June 30, 2013. Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases and are part of Premier’s management of its liquidity and interest rate risks. The increase in interest bearing bank balances during the first six months of 2013 was largely in response to a reallocation of some of Premier’s surplus cash and due from banks on hand at December 31, 2012 into an interest earning asset.

Securities available for sale totaled $258.1 million at June 30, 2013, a $25.9 million decrease from the $284.0 million at December 31, 2012. The decrease was largely due to monthly principal payments on Premier’s mortgage backed securities portfolio which returns approximately $4.6 million per month in cash flow to be reinvested, used to fund loans, or satisfy deposit and customer repurchase agreement withdrawals. In addition, Premier received additional funds from maturing and called securities. Not all of these funds were reinvested in the investment portfolio. During the first six months of 2013, some of these funds were used to satisfy customer repurchase agreement withdrawals (see below) and fund the increase in loans. The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies. The unrealized losses at June 30, 2013 and December 31, 2012 are believed to be price changes resulting from increases 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 June 30, 2013 were $714.3 million compared to $704.6 million at December 31, 2012, an increase of approximately $9.7 million, or 1.4%. The increase in loans was largely due to new loan demand, primarily commercial loans, during the second quarter of 2013 which more than offset a decrease in loans during the first three months of 2013, largely due to payoffs, transfers of loans to OREO upon foreclosure and principal payments on loans.

Deposits totaled $932.9 million as of June 30, 2013, a $2.3 million increase from the $930.6 million in deposits at December 31, 2012. The overall increase in deposits is due to a $5.0 million, or 3.5%, increase in certificates of deposit over $100,000, a $9.7 million, or 4.6%, increase in savings and money market accounts and a $1.1 million, or 0.6%, increase in non-interest bearing deposit accounts. These increases were partially offset by an $11.2 million, or 5.3%, decrease in certificates of deposit and individual retirement accounts (IRA’s) under $100k and a $2.3 million or 1.4% decrease in in interest bearing transaction accounts. Contrary to the growth in total deposits, repurchase agreements with corporate and public entity customers decreased in the first six months of 2013, declining by $17.6 million to $8.5 million as of June 30, 2013. Customer repurchase agreement balances are highly sensitive to interest rates and the decrease in balance outstanding at June 30, 2013 was largely due to a lowering of the rate paid by Premier on this kind of short-term liability. Other borrowed funds decreased by $1.0 million during the first six months of 2013 due to regularly scheduled principal payments plus accelerated principal payments.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

The following table sets forth information with respect to the Company’s nonperforming assets at June 30, 2013 and December 31, 2012.

	(In Thousands)
	2013			2012
Non-accrual loans	$	23,283		$	25,806
Accruing loans which are contractually past due 90 days or more		2,163			3,890
Accruing restructured loans		10,773			14,106
Total non-performing loans		36,219			43,802
Other real estate acquired through foreclosure (OREO)		13,556			13,366
Total non-performing assets	$	49,775		$	57,168

Non-performing loans as a percentage of total loans		5.07	%		6.22	%

Non-performing assets as a percentage of total assets		4.50	%		5.10	%

Total non-performing loans have decreased since year-end, largely due to a $3.3 million decrease in in restructured loans performing in accordance with their modified terms and a $2.5 million decrease in non-accrual loans. Also affecting the decrease in non-performing loans was a $1.7 million decrease in accruing loans past due 90 days or more. During the first six months of 2013, a total of $3.0 million of loans have been placed on non-accrual status, including a $1.7 million restructured loan that became significantly past due. These increases in non-accrual loans were more than offset by approximately $4.9 million of payments and payoffs received on non-accrual loans during that time. The remaining $622,000 decrease in non-accrual loans was due to charge-offs and transfers to other real estate owned (“OREO”). The change in OREO during the first six months of 2013 is largely due to foreclosures and expenditures for improvements to existing OREO properties of approximately $1.9 million partially offset by sales of $1.7 million of OREO properties. There have been no additional writedowns on OREO property during the first six months of 2013 while writedowns of $85,000 were recorded during the same period of 2012. The writedowns in the first six months of 2012 were more than offset by $123,000 of gains on the disposition of OREO sold which compares to approximately $74,000 of gains recorded on the disposition of OREO sold during the first six months of 2013. The significant level of non-accrual loans and OREO is primarily due to the non-performing assets that came with the acquisition of Abigail Adams and its two subsidiary banks (the “Acquired Banks”).

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

At December 31, 2012, the Acquired Banks accounted for $28.4 million, or 49.7%, of Premier’s non-performing assets while at June 30, 2013 the Acquired Banks accounted for $29.2 million, or 58.6% of Premier’s non-performing assets. However, since these assets were recorded at an estimated fair value on the date of acquisition, the amount of credit risk assumed by Premier is not nearly as great as the volume of non-performing assets suggests taken at face value. The estimate of fair value on all loans, but particularly on non-performing assets, included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants. These estimates included significant discounts on the non-accrual loans. Since the estimated fair value of these loans was believed to have accounted for the reasonably estimable credit risk in the loans, consistent with new accounting guidance for acquisitions after 2008, no allowance for loan losses for these loans was recorded at the date of acquisition. Under previous accounting standards, the loan loss allowance of acquired banks would have carried over to Premier’s books and records, as was the case for the Traders Bank and Citizens First Bank acquisitions. The following table illustrates the face value of the non-performing assets of the Acquired Banks as of June 30, 2013 and December 31, 2012 and the discounted net carrying value of those non-performing assets.

NON-PERFORMING ASSETS AT ACQUIRED SUBSIDIARY BANKS
(Dollars in thousands)
	June 30, 2013				December 31, 2012
	Face Value		Discounted Net Carrying Value		Face Value		Discounted Net Carrying Value
Non-performing Assets
Non-accrual loans	$	19,016	$	9,442	$	12,338	$	9,874
Loans 90+ days past due		1,678		1,628		1,458		1,423
Restructured loans		7,957		7,656		7,871		7,565
Other real estate owned		10,996		10,456		10,152		9,573
Total non-performing assets	$	39,647	$	29,182	$	31,819	$	28,435

(1) Face value includes reductions for interest payments received on loans while on non-accrual status in accordance with the cost recovery method of accounting for non-accrual loans.

Many of the non-accrual loans obtained from the Acquired Banks are continuing to be accounted for under cost recovery methods of income recognition as permitted by the guidance for accounting for non-accrual loans acquired in a business combination. Most of the non-accrual loans at the Acquired Banks were placed in that status due to a lack of predictable cash flows from the borrower. At acquisition by Premier, these loans were recorded at their estimated fair value. These estimates included significant discounts on the non-accrual loans. Yet, the lack of predictable cash flows from the borrowers remains. As a result, accounting guidance requires these loans to continue to be accounted for under cost recovery methods of income recognition, even though the estimated collateral value may exceed the discounted net carrying value.

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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

Gross charge-offs totaled $392,000 during the first six months of 2013. Any collections on these loans would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first six months of 2013 totaled $602,000 resulting in net recoveries for the first six months of 2013 of $210,000. These amounts compare to the $1.78 million of gross charge-offs and $147,000 of recoveries recorded during the first six months of 2012, resulting in a net charge of $1.63 million to the allowance for loan losses. During the second quarter of 2012, Premier charged-off loans and portions of loans that had previously been identified as impaired whereby management determined that any eventual liquidation of collateral would be insufficient to repay the entire amount due on the loans. The recoveries in 2013 are largely the result of downpayments and continuing monthly payments toward the collection on two loans that were charge-off in prior years. The allowance for loan losses at June 30, 2013 was 1.71% of total loans compared to 1.63% at December 31, 2012. The increase in the ratio is largely due the $210,000 of net recoveries recorded during the first six months of 2013, plus the $500,000 of provision for loan losses expensed during that time.

During the second quarter of 2013, Premier recorded $70,000 of negative provision for loan losses compared to $750,000 of additional provision for loans losses during the same quarter of 2012. The decrease in the provision for loan losses was the result of management’s updated assessment of the level of credit risk in the loan portfolio in accordance with Premier’s policies regarding the estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, including updated historical charge-off ratios, the level of net recoveries in 2013, payments received on impaired loans previously identified with specific reserve allocations as well as increases in specific reserve allocations on existing loans.

During the first six months of 2013, Premier recorded $500,000 of provision expense which compares to $1.7 million of provision expense recorded during the first six months of 2012. During the first six months of 2012, Premier charged-off $1.78 million of loans and portions of loans that had previously been identified as impaired whereby management determined that any eventual liquidation of collateral would be insufficient to repay the entire amount due on the loans compared to gross charge-offs of $392,000 during the first six months of 2013.

The allowance for loan losses allocated to loans individually evaluated for impairment increased from $3.3 million at December 31, 2012 to $4.2 million at March 31, 2013 and then decreased to $3.7 million at June 30, 2013, largely due to payments received on impaired loans during the second quarter of 2013. The continuing level of non-performing loans, plus additional loans identified as impaired under Premier’s policies for estimating credit risk are evidence of the increased credit risk in the loan portfolio. The actual amount of realized losses, if any, has yet to be determined and may not be determined for some time into the future. However, in management’s opinion, sufficient evidence existed in the first quarter 2013 to reduce the likelihood of full repayment and increase the related estimated credit risk. As the pace of economic recovery continues to be sluggish in Premier’s markets, the ability of borrowers to consistently make their loan payments is increasingly being tested. Evidence of the continuing higher level of credit risk includes a high level of past due and non-accrual loans, loan charge-offs and increases in other real estate owned as a result of foreclosures. The provision for loan losses was 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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

In the coming months, Premier will continue to monitor the impact that national housing market price declines may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses. While some price deterioration has occurred, it is not currently anticipated that Premier’s markets will be impacted as severely as other areas of the country due to the historically modest increases in real estate values in the Company’s Appalachian markets. However, as local and national unemployment rates remain at elevated levels and the downturn in housing prices extends further into the future, there is an increasing risk of further price deterioration in real estate values in the Company’s markets. 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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

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, 2012. Some of these accounting policies, as discussed below, are considered to be critical accounting policies. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified four accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance for loan losses, the identification and evaluation of impaired loans, the impairment of goodwill and the realization of deferred tax assets. A detailed description of these accounting policies is contained in the Company’s annual report on Form 10-K for the year ended December 31, 2012. There have been no significant changes in the application of these accounting policies since December 31, 2012.

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:

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

Cash flow generated by repayment of loans and interest.

Arrangements with correspondent banks for purchase of unsecured federal funds.

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

Maintenance of an adequate available-for-sale security portfolio. The Company owns $258.1 million of securities at fair value as of June 30, 2013.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2013

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

E. Capital

At June 30, 2013, total shareholders’ equity of $144.6 million was 13.1% of total assets. This compares to total shareholders’ equity of $144.3 million or 12.9% of total assets on December 31, 2012.

Tier I capital totaled $113.7 million at June 30, 2013, which represents a Tier I leverage ratio of 10.5%. This ratio is up slightly from the 10.0% at December 31, 2012 as the growth in Tier I capital was divided by a lower base of total assets at June 30, 2013.

Book value per common share was $16.57 at June 30, 2013, and $16.63 at December 31, 2012. The decrease in book value per share was largely the result of additional shares issued during the second quarter as a result of the exercise of employee stock options. Book value per share was also reduced by the $3.7 million of other comprehensive loss for the first six months of 2013 related to the after tax decrease in the market value of investment securities available for sale, which decreased book value by approximately $0.46 per share, and the $0.22 per share cash dividends to common shareholders declared and paid during the first six months of 2013. These decreases offset the $0.63 per share earned during the first six months of 2013, including an approximate $0.04 per share reduction for the $330,000 of preferred stock dividends accrued and related accretion.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2013

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 2012 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 2012 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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2013

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, 2012 for disclosures with respect to Premier’s risk factors at December 31, 2012. There have been no material changes since year-end 2012 in the specified risk factors disclosed in the Annual Report on Form 10-K.

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

Item 3. Defaults Upon Senior Securities None

Item 4. Mine Safety Disclosures Not Applicable

Item 5. Other Information None

Item 6. Exhibits

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

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

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

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

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2013

SIGNATURES

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

PREMIER FINANCIAL BANCORP, INC.

Date: August 8, 2013 /s/ Robert W. Walker

Robert W. Walker

President & Chief Executive Officer

Date: August 8, 2013 /s/ Brien M. Chase

Brien M. Chase

Senior Vice President & Chief Financial Officer