Premier Financial Bancorp (PFBI) 10-Q 2015 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

or

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

For the transition period from ___________ to ___________

Commission file number 000-20908

PREMIER FINANCIAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky	61-1206757
(State or other jurisdiction of incorporation organization)	(I.R.S. Employer Identification No.)
2883 Fifth Avenue Huntington, West Virginia	25702
(Address of principal executive offices)	(Zip Code)
Registrant's telephone number    (304) 525-1600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes      No .

Indicate by check mark whether the registrant has submitted electronically 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      No .

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

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

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

Common stock, no par value, – 8,175,021 shares outstanding at October 31, 2015

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2015

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management's Discussion and Analysis	42
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	54
Item 4 – Controls and Procedures	54
Part II - Other Information	55
Item 1 – Legal Proceedings	55
Item 1A – Risk Factors	55
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3 – Defaults Upon Senior Securities	55
Item 4 – Mine Safety Disclosures	55
Item 5 – Other Information	55
Item 6 – Exhibits	55
Signatures -	56

2

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2015

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

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, 2014 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 (Loss)	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

3

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2015 AND DECEMBER 31, 2014

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

	September 30,			December 31,
	2015			2014
ASSETS
Cash and due from banks	$	33,073		$	35,147
Interest bearing bank balances		74,585			35,251
Federal funds sold		4,193			4,986
Cash and cash equivalents		111,851			75,384
Securities available for sale		228,610			229,750
Loans held for sale		-			226
Loans		855,062			879,711
Allowance for loan losses		(9,825	)		(10,347	)
Net loans		845,237			869,364
Federal Home Loan Bank stock, at cost		3,072			2,996
Premises and equipment, net		19,958			21,384
Real estate and other property acquired through foreclosure		13,674			12,208
Interest receivable		3,407			3,219
Goodwill		33,796			33,796
Other intangible assets		2,390			3,033
Other assets		1,249			1,464
Total assets	$	1,263,244		$	1,252,824
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	269,544		$	252,828
Time deposits, $250,000 and over		65,577			66,216
Other interest bearing		743,631			756,199
Total deposits		1,078,752			1,075,243
Securities sold under agreements to repurchase		20,532			15,580
Other borrowed funds		11,999			11,722
Interest payable		339			434
Other liabilities		4,560			4,063
Total liabilities		1,116,182			1,107,042
Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 8,175,021 shares issued and outstanding at September 30, 2015, and 8,142,056 shares issued and outstanding at December 31, 2014		69,299			74,568
Retained earnings		75,967			69,719
Accumulated other comprehensive income (loss)		1,796			1,495
Total stockholders' equity		147,062			145,782
Total liabilities and stockholders' equity	$	1,263,244		$	1,252,824

See Accompanying Notes to Consolidated Financial Statements

4

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015		2014
Interest income
Loans, including fees	$	12,506	$	12,056		$	35,812	$	34,981
Securities available for sale
Taxable		1,176		1,365			3,639		4,080
Tax-exempt		51		59			162		157
Federal funds sold and other		49		46			137		142
Total interest income		13,782		13,526			39,750		39,360
Interest expense
Deposits		858		953			2,661		2,800
Repurchase agreements and other		9		8			28		24
Other borrowings		132		139			391		427
Total interest expense		999		1,100			3,080		3,251
Net interest income		12,783		12,426			36,670		36,109
Provision for loan losses		309		536			232		147
Net interest income after provision for loan losses		12,474		11,890			36,438		35,962
Non-interest income
Service charges on deposit accounts		948		924			2,740		2,562
Electronic banking income		670		647			2,016		1,797
Secondary market mortgage income		38		73			98		142
Gain on disposition of securities		-		28			-		28
Other		146		186			415		493
		1,802		1,858			5,269		5,022
Non-interest expenses
Salaries and employee benefits		4,149		4,400			12,965		13,257
Occupancy and equipment expenses		1,328		1,281			3,918		3,741
Outside data processing		1,104		1,079			3,275		2,977
Professional fees		189		(104	)		497		641
Taxes, other than payroll, property and income		135		203			476		507
Write-downs, expenses, sales of other real estate owned, net		669		450			1,351		56
Amortization of intangibles		210		225			644		593
FDIC insurance		232		247			653		708
Other expenses		1,070		1,047			3,028		3,091
		9,086		8,828			26,807		25,571
Income before income taxes		5,190		4,920			14,900		15,413
Provision for income taxes		1,865		1,769			5,306		5,492
Net income	$	3,325	$	3,151		$	9,594	$	9,921
Preferred stock dividends and accretion		-		(205	)		-		(535	)
Net income available to common stockholders	$	3,325	$	2,946		$	9,594	$	9,386
Net income per share:
Basic	$	0.41	$	0.36		$	1.18	$	1.16
Diluted		0.40		0.34			1.14		1.09
Dividends per share		0.15		0.12			0.41		0.47

See Accompanying Notes to Consolidated Financial Statements

5

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	3,325		$	3,151		$	9,594		$	9,921
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period		732			(577	)		456			2,882
Reclassification of realized amount		-			(28	)		-			(28	)
Net change in unrealized gain on securities		732			(605	)		456			2,854
Less tax impact		(249	)		206			(155	)		(970	)
Other comprehensive income (loss)		483			(399	)		301			1,884
Comprehensive income	$	3,808		$	2,752		$	9,895		$	11,805

See Accompanying Notes to Consolidated Financial Statements

6

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(UNAUDITED, DOLLARS IN THOUSANDS)

	2015			2014
Cash flows from operating activities
Net income	$	9,594		$	9,921
Adjustments to reconcile net income to net cash from operating activities
Depreciation		1,290			1,151
Provision for loan losses		232			147
Amortization (accretion), net		154			627
OREO writedowns (gains on sales), net		625			(679	)
Stock compensation expense		188			208
Loans originated for sale		(1,679	)		(5,167	)
Secondary market loans sold		1,941			4,991
Secondary market income		(38	)		(142	)
Gain on disposition of securities		-			(28	)
Changes in :
Interest receivable		(188	)		461
Other assets		221			1,180
Interest payable		(95	)		(74	)
Other liabilities		337			981
Net cash from operating activities		12,582			13,577
Cash flows from investing activities
Purchases of securities available for sale		(51,610	)		(36,435	)
Proceeds from the sale of securities available for sale		-			4,842
Proceeds from maturities and calls of securities available for sale		52,396			36,654
Purchase of FHLB stock		(76	)		-
Redemption of FHLB stock		-			408
Net change in loans		19,330			(20,249	)
Acquisition of subsidiary, net of cash received		-			40,973
Purchases of premises and equipment, net		(624	)		(725	)
Improvements to OREO property		(29	)		(189	)
Proceeds from sales of other real estate acquired through foreclosure		4,424			3,370
Net cash from investing activities		23,811			28,649
Cash flows from financing activities
Net change in deposits		3,648			(31,373	)
Net change in agreements to repurchase securities		4,952			1,836
Net change in short-term Federal Home Loan Bank advances		-			5,000
Redemption of Preferred Stock		-			(7,000	)
Repayment of other borrowed funds		(15,669	)		(1,814	)
Proceeds from other borrowings		15,946			-
Proceeds from stock option exercises		218			567
Purchase of warrant		(5,675	)		-
Common stock dividends paid		(3,346	)		(3,796	)
Preferred stock dividends paid		-			(490	)
Net cash from financing activities		74			(37,070	)
Net change in cash and cash equivalents		36,467			5,156
Cash and cash equivalents at beginning of period		75,384			76,761
Cash and cash equivalents at end of period	$	111,851		$	81,917

See Accompanying Notes to Consolidated Financial Statements

7

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(UNAUDITED, DOLLARS IN THOUSANDS)

	2015		2014
Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	3,175	$	3,325
Cash paid during period for income taxes		4,686		4,179
Loans transferred to real estate acquired through foreclosure		5,726		1,552
Premises transferred to other real estate owned		760		-

See Accompanying Notes to Consolidated Financial Statements

8

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 - BASIS OF PRESENTATION

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

					September 30, 2015
		Year	Total		Net Income
Subsidiary	Location	Acquired	Assets		Qtr			YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	384,262	$	1,067		$	3,012
Premier Bank, Inc.	Huntington, West Virginia	1998		877,056		2,704			7,979
Parent and Intercompany Eliminations				1,926		(446	)		(1,397	)
Consolidated Total			$	1,263,244	$	3,325		$	9,594

All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Companies have the option to apply ASU 2014-09 as of the original effective date. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company's financial statements.

9

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  1 - BASIS OF PRESENTATION - continued

In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this update require two accounting changes. First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counter-party, which will result in secured borrowing accounting for the repurchase agreement. This update also requires certain disclosures for these types of transactions. This ASU became effective for the Company on January 1, 2015. The adoption of ASU 2014-11 did not have a material impact on the Company's financial statements.

10

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at September 30, 2015 are summarized as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	93,376	$	1,022	$	(54	)	$	94,344
U. S. sponsored agency CMO's - residential		112,974		1,995		(506	)		114,463
Total mortgage-backed securities of government sponsored agencies		206,350		3,017		(560	)		208,807
U. S. government sponsored agency securities		10,445		76		-			10,521
Obligations of states and political subdivisions		9,094		197		(9	)		9,282
Total available for sale	$	225,889	$	3,290	$	(569	)	$	228,610

Amortized cost and fair value of investment securities, by category, at December 31, 2014 are summarized as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	52,006	$	774	$	-		$	52,780
U. S. sponsored agency CMO's - residential		142,932		2,167		(911	)		144,188
Total mortgage-backed securities of government sponsored agencies		194,938		2,941		(911	)		196,968
U. S. government sponsored agency securities		22,533		30		(57	)		22,506
Obligations of states and political subdivisions		10,015		261		-			10,276
Total available for sale	$	227,486	$	3,232	$	(968	)	$	229,750

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2–SECURITIES - continued

The amortized cost and fair value of securities at September 30, 2015 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	$	5,776	$	5,793
Due after one year through five years		11,264		11,453
Due after five years through ten years		2,252		2,308
Due after ten years		247		249
Mortgage-backed securities of government sponsored agencies		206,350		208,807
Total available for sale	$	225,889	$	228,610

There were no sales of securities during the first nine months of 2015.  Proceeds from the sale of securities were $4,842,000 during the first nine months of 2014, while a $28,000 gain was recognized on the sale of those securities.

Securities with unrealized losses at September 30, 2015 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	$	17,479	$	(54	)	$	-	$	-		$	17,479	$	(54	)
U.S government sponsored agency CMO – residential		3,908		(72	)		20,894		(434	)		24,802		(506	)
Obligations of states and political subdivisions		920		(9	)		-		-			920		(9	)
Total temporarily impaired	$	22,307	$	(135	)	$	20,894	$	(434	)	$	43,201	$	(569	)

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2–SECURITIES - continued

Securities with unrealized losses at December 31, 2014 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S government sponsored agency securities	$	9,971	$	(57	)	$	-	$	-		$	9,971	$	(57	)
U.S government sponsored agency CMO's – residential		5,194		(52	)		26,471		(859	)		31,665		(911	)
Total temporarily impaired	$	15,165	$	(109	)	$	26,471	$	(859	)	$	41,636	$	(968	)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at September 30, 2015 and December 31, 2014 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities.  Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery. Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.

NOTE 3 - LOANS

Major classifications of loans at September 30, 2015 and December 31, 2014 are summarized as follows:

	2015		2014
Residential real estate	$	284,052	$	278,212
Multifamily real estate		37,202		30,310
Commercial real estate:
Owner occupied		117,125		120,861
Non owner occupied		208,101		230,750
Commercial and industrial		76,314		85,943
Consumer		31,894		32,745
All other		100,374		100,890
	$	855,062	$	879,711

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2015 was as follows:

Loan Class	Balance Dec 31, 2014		Provision (Credit) for loan losses			Loans charged-off		Recoveries		Balance Sept 30, 2015
Residential real estate	$	2,093	$	557		$	102	$	74	$	2,622
Multifamily real estate		304		291			-		-		595
Commercial real estate:
Owner occupied		1,501		(3	)		2		2		1,498
Non owner occupied		2,316		(599	)		-		659		2,376
Commercial and industrial		1,444		71			403		7		1,119
Consumer		243		128			167		82		286
All other		2,446		(213	)		1,058		154		1,329
Total	$	10,347	$	232		$	1,732	$	978	$	9,825

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2014 was as follows:

Loan Class	Balance Dec 31, 2013		Provision (Creidt) for loan losses			Loans charged-off		Recoveries		Balance Sept 30, 2014
Residential real estate	$	2,694	$	(419	)	$	308	$	55	$	2,022
Multifamily real estate		417		(137	)		-		-		280
Commercial real estate:
Owner occupied		1,407		112			207		-		1,312
Non owner occupied		2,037		310			323		-		2,024
Commercial and industrial		2,184		(335	)		111		11		1,749
Consumer		297		(12	)		105		45		225
All other		1,991		628			267		216		2,568
Total	$	11,027	$	147		$	1,321	$	327	$	10,180

14

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2015 was as follows:

Loan Class	Balance June 30, 2015		Provision (Credit) for loan losses			Loans charged-off		Recoveries		Balance Sept. 30, 2015
Residential real estate	$	2,466	$	185		$	35	$	6	$	2,622
Multifamily real estate		512		83			-		-		595
Commercial real estate:
Owner occupied		1,476		21			-		1		1,498
Non owner occupied		2,332		44			-		-		2,376
Commercial and industrial		1,139		211			234		3		1,119
Consumer		274		23			35		24		286
All other		2,495		(258	)		946		38		1,329
Total	$	10,694	$	309		$	1,250	$	72	$	9,825

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2014 was as follows:

Loan Class	Balance June 30, 2014		Provision (Credit) for loan losses			Loans charged-off		Recoveries		Balance Sept 30, 2014
Residential real estate	$	2,140	$	(28	)	$	137	$	47	$	2,022
Multifamily real estate		311		(31	)		-		-		280
Commercial real estate:
Owner occupied		1,364		73			125		-		1,312
Non owner occupied		2,270		(246	)		-		-		2,024
Commercial and industrial		1,489		281			27		6		1,749
Consumer		232		21			46		18		225
All other		2,071		466			63		94		2,568
Total	$	9,877	$	536		$	398	$	165	$	10,180

15

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at September 30, 2015 and December 31, 2014.

	2015		2014
Multifamily real estate	$	-	$	497
Commercial real estate
Owner occupied		131		131
Non owner occupied		5,587		5,695
Commercial and industrial		114		136
All other		-		5,128
Total carrying amount	$	5,832	$	11,587
Contractual principal balance	$	7,450	$	21,250
Carrying amount, net of allowance	$	5,718	$	10,639

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $66,000 for the three and nine months ended September 30, 2015. The allowance for loan losses was not increased for purchased impaired loans during the three and nine months ended September 30, 2014.

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

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

16

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at September 30, 2015 and September 30, 2014.

	2015			2014
Balance at January 1	$	204		$	217
New loans purchased		-			-
Accretion of income		(14	)		(9	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at September 30	$	190		$	208

17

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2015 and December 31, 2014.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

September 30, 2015	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	2,439	$	2,188	$	971
Multifamily real estate		411		70		-
Commercial real estate
Owner occupied		879		806		1,132
Non owner occupied		1,928		1,628		1,811
Commercial and industrial		1,465		354		1,388
Consumer		211		198		-
All other		88		33		-
Total	$	7,431	$	5,277	$	5,302

December 31, 2014	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	1,996	$	1,768	$	668
Multifamily real estate		1,803		1,033		564
Commercial real estate
Owner occupied		2,115		1,928		-
Non owner occupied		2,020		1,819		26
Commercial and industrial		2,012		806		8
Consumer		213		185		-
All other		12,608		5,173		-
Total	$	22,767	$	12,712	$	1,266

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

18

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of September 30, 2015 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	$	284,052	$	5,320	$	2,086	$	7,406	$	276,646
Multifamily real estate		37,202		312		70		382		36,820
Commercial real estate:
Owner occupied		117,125		2,137		1,674		3,811		113,314
Non owner occupied		208,101		4,115		3,439		7,554		200,547
Commercial and industrial		76,314		303		1,571		1,874		74,440
Consumer		31,894		442		91		533		31,361
All other		100,374		904		-		904		99,470
Total	$	855,062	$	13,533	$	8,931	$	22,464	$	832,598

The following table presents the aging of the recorded investment in past due loans as of December 31, 2014 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	$	278,212	$	5,810	$	1,706	$	7,516	$	270,696
Multifamily real estate		30,310		177		1,100		1,277		29,033
Commercial real estate:
Owner occupied		120,861		250		1,530		1,780		119,081
Non owner occupied		230,750		2,173		1,670		3,843		226,907
Commercial and industrial		85,943		1,720		608		2,328		83,615
Consumer		32,745		497		71		568		32,177
All other		100,890		234		5,127		5,361		95,529
Total	$	879,711	$	10,861	$	11,812	$	22,673	$	857,038

19

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2015:

	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	$	177	$	2,445	$	-	$	2,622	$	475	$	283,577	$	-	$	284,052
Multifamily real estate		-		595		-		595		71		37,131		-		37,202
Commercial real estate:
Owner occupied		33		1,465		-		1,498		772		116,222		131		117,125
Non-owner occupied		-		2,376		-		2,376		4,212		198,302		5,587		208,101
Commercial and industrial		139		866		114		1,119		546		75,654		114		76,314
Consumer		-		286		-		286		-		31,894		-		31,894
All other		-		1,329		-		1,329		912		99,462		-		100,374
Total	$	349	$	9,362	$	114	$	9,825	$	6,988	$	842,242	$	5,832	$	855,062

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2014:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total
Residential real estate	$	-	$	2,093	$	-	$	2,093	$	137	$	278,075	$	-	$	278,212
Multifamily real estate		-		304		-		304		536		29,277		497		30,310
Commercial real estate:
Owner occupied		107		1,394		-		1,501		2,011		118,719		131		120,861
Non-owner occupied		54		2,262		-		2,316		4,874		220,181		5,695		230,750
Commercial and industrial		291		1,105		48		1,444		902		84,905		136		85,943
Consumer		-		243		-		243		-		32,745		-		32,745
All other		-		1,546		900		2,446		1,109		94,653		5,128		100,890
Total	$	452	$	8,947	$	948	$	10,347	$	9,569	$	858,555	$	11,587	$	879,711

20

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2015.  The table includes $114,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	295	$	254	$	-
Multifamily real estate		412		71		-
Commercial real estate
Owner occupied		457		392		-
Non owner occupied		4,512		4,212		-
Commercial and industrial		1,180		407		-
All other		967		912		-
		7,823		6,248		-
With an allowance recorded:
Residential real estate	$	227	$	221	$	177
Commercial real estate
Owner occupied		380		380		33
Commercial and industrial		536		253		253
		1,143		854		463
Total	$	8,966	$	7,102	$	463

21

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, 2014. The table includes $5,673,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	179	$	137	$	-
Multifamily real estate		1,803		1,033		-
Commercial real estate
Owner occupied		1,404		1,304		-
Non owner occupied		4,398		4,190		-
Commercial and industrial		1,030		270		-
All other		1,144		1,108		-
		9,958		8,042		-
With an allowance recorded:
Commercial real estate
Owner occupied	$	707	$	707	$	107
Non owner occupied		684		684		54
Commercial and industrial		929		680		339
All other		12,525		5,129		900
		14,845		7,200		1,400
Total	$	24,803	$	15,242	$	1,400

22

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the nine months ended September 30, 2015 and September 30, 2014. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Nine months ended Sept. 30, 2015						Nine months ended Sept. 30, 2014
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	$	329	$	5	$	5	$	2,421	$	209	$	209
Multifamily real estate		1,051		685		685		2,518		746		746
Commercial real estate:
Owner occupied		1,157		25		25		2,171		39		30
Non-owner occupied		4,552		137		115		1,388		644		634
Commercial and industrial		856		20		20		2,152		546		546
All other		4,841		43		28		7,624		126		126
Total	$	12,786	$	915	$	878	$	18,274	$	2,310	$	2,291

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended September 30, 2015 and September 30, 2014. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended Sept. 30, 2015						Three months ended Sept. 30, 2014
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	$	523	$	3	$	3	$	2,166	$	148	$	148
Multifamily real estate		305		671		671		2,328		19		19
Commercial real estate:
Owner occupied		857		7		7		2,080		10		9
Non-owner occupied		4,304		43		34		1,679		17		7
Commercial and industrial		726		6		6		1,337		4		4
All other		3,487		14		-		7,475		45		45
Total	$	10,202	$	744	$	721	$	17,065	$	243	$	232

23

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR's as of September 30, 2015 and December 31, 2014:

September 30, 2015	TDR's on Non-accrual		Other TDR's		Total TDR's
Residential real estate	$	8	$	176	$	184
Commercial real estate
Non owner occupied		-		459		459
Commercial and industrial		-		406		406
All other		-		886		886
Total	$	8	$	1,927	$	1,935

December 31, 2014	TDR's on Non-accrual		Other TDR's		Total TDR's
Residential real estate	$	13	$	191	$	204
Commercial real estate
Non owner occupied		-		474		474
Commercial and industrial		-		761		761
All other		-		1,063		1,063
Total	$	13	$	2,489	$	2,502

At September 30, 2015 and December 31, 2014 there were no specific reserves allocated to loans that had restructured terms and there were no commitments to lend additional amounts on these loans.

24

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 nine months ended September 30, 2015.  There were no TDR's that occurred during the nine months ended September 30, 2014.

	Nine months ended Sept. 30, 2015
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Multifamily Real Estate		1	$	1,543	$	1,543
Total		1	$	1,543	$	1,543

The modification of the multifamily residential real estate loan above occurred during the three months ended March 31, 2015 and was fully repaid during the three months ended June 30, 2015.  The modification did not include a permanent reduction of the recorded investment in the loan and did not increase the allowance for loan losses during the period.  The modification included a lengthening of the amortization period and reduction in the stated interest rate, however the maturity date was reduced to the end of a fifteen month forbearance period with a balloon payment due at maturity.

During the three and nine months ended September 30, 2015 and the three and nine months ended September 30, 2014, 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.

25

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.

26

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3–LOANS - continued

As of September 30, 2015 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	$	271,872	$	5,268	$	6,904	$	8	$	284,052
Multifamily real estate		32,858		2,055		2,289		-		37,202
Commercial real estate:
Owner occupied		110,387		3,814		2,924		-		117,125
Non-owner occupied		198,092		2,917		7,092		-		208,101
Commercial and industrial		73,507		1,839		921		47		76,314
Consumer		31,503		223		168		-		31,894
All other		97,686		1,348		1,340		-		100,374
Total	$	815,905	$	17,464	$	21,638	$	55	$	855,062

As of December 31, 2014, 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	$	265,285	$	8,292	$	4,622	$	13	$	278,212
Multifamily real estate		27,260		2,017		1,033		-		30,310
Commercial real estate:
Owner occupied		111,024		6,505		3,332		-		120,861
Non-owner occupied		218,971		6,652		5,127		-		230,750
Commercial and industrial		83,634		1,007		1,275		27		85,943
Consumer		32,364		267		114		-		32,745
All other		89,173		4,873		6,844		-		100,890
Total	$	827,711	$	29,613	$	22,347	$	40	$	879,711

27

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 2015 the Banks could, without prior approval, declare dividends to Premier of approximately $5.5 million plus any 2015 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 Common Equity Tier 1 Capital, Tier 1 Capital and Total Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 Capital (as defined) to average assets (as defined).  The Common Equity Tier 1 Capital measurement became effective with the March 31, 2015 reporting period.  Management believes, as of September 30, 2015 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:

	September 30, 2015			December 31, 2014			Regulatory Minimum Requirements (1)			To Be Considered Well Capitalized (1)
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		13.3	%		n/	a		4.5	%		6.5	%
Tier 1 Capital (to Risk-Weighted Assets) (1)		13.3	%		13.3	%		6.0	%		8.0	%
Total Capital (to Risk-Weighted Assets)		14.4	%		14.6	%		8.0	%		10.0	%
Tier 1 Capital (to Average Assets)		9.3	%		9.1	%		4.0	%		5.0	%
(1)The regulatory requirements presented in the table are effective as of January 1, 2015. At December 31, 2014, the minimum Tier 1 capital to risk-weighted assets ratio was 4.0% and to be considered well capitalized the ratio was required to be at least 6.0%

As of September 30, 2015, 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 Common Equity Tier 1 risk-based, Tier 1 risk-based, Total risk-based and Tier 1 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.

28

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 – PREFERRED STOCK AND COMMON STOCK WARRANT

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 628,588 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 accrued on the liquidation preference at a rate of 5% per annum until November 14, 2014. As of November 14, 2014, all of the 22,252 shares of the Series A Preferred Stock have been repurchased or redeemed. The Series A Preferred Stock had no maturity date and ranked 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.

Under terms of the Warrant, the exercise price and the number of shares that can be purchased were adjusted based upon certain events including common stock dividends paid to shareholders that exceed the $0.11 per share regular quarterly dividend paid by Premier at the time the Warrant was issued.  Due to dividends paid in 2015 and 2014 that were either special cash dividends or dividends that exceeded the $0.11 regular quarterly cash dividend per share defined in the terms of the Warrant, the Warrant was adjusted to permit the purchase of 636,378 shares of the Company's common stock at an exercise price of $5.25 per share.  On May 6, 2015, Premier purchased the Warrant from the U.S. Treasury for $5,675,000. Premier borrowed $4,000,000 on its line of credit with the Bankers Bank of Kentucky and used $1,675,000 of its cash and cash equivalents to complete the purchase.  The purchase reduced shareholders' equity and regulatory capital by the $5,675,000 purchase price but also reduced the dilutive effect of potential additional common shares. See Note 7 below for additional information on the calculation of diluted earnings per share.

29

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 18, 2015, 47,650 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $14.72, the closing market price of Premier's common stock on the grant date. These options vest in three equal annual installments ending on March 18, 2018.  On March 19, 2014, 46,300 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $14.43, the closing market price of Premier's common stock on the grant date. These options vest in three equal annual installments ending on March 19, 2017.

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:

	2015			2014
Risk-free interest rate		1.41	%		2.78	%
Expected option life (yrs)		5.00			10.00
Expected stock price volatility		17.20	%		31.19	%
Dividend yield		3.53	%		3.33	%
Weighted average fair value of options granted	$	1.37		$	3.74

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 for the 2015 grant was based upon the weighted-average life of options exercised from January 1, 2012 through December 31, 2014.  The expected option life for the 2014 grant was estimated since there had been little option exercise history at the time of the grant.  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.

On March 18, 2015, 7,000 shares of Premier's common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $14.72 per share based upon the closing price of Premier's stock on the date of grant and $103,000 of stock-based compensation was recorded as a result.

30

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

On April 16, 2014, 6,000 shares of Premier's common stock were granted to Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $14.20 per share based upon the closing price of Premier's stock of the date of grant and $85,000 of stock-based compensation was recorded as a result.

Stock-based compensation expense of $188,000 was recorded for the first nine months of 2015 compared to $208,000 for the first nine months of 2014.  For the three months ended September 30, $25,000 was recorded for 2015 while $38,000 was recorded for 2014.  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 $65,000 at September 30, 2015. This unrecognized expense is expected to be recognized over the next 29 months based on the vesting periods of the options.

A summary of the Company's stock option activity and related information is presented below for the nine months ended September 30:

	- - - - - - 2015 - - - - - -					- - - - - - 2014 - - - - - -
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of year		273,942		$	11.06		354,281		$	9.84
Grants		47,650			14.72		46,300			14.43
Exercises		(37,081	)		10.65		(77,896	)		8.52
Forfeitures or expired		(24,382	)		14.03		(8,133	)		9.27
Outstanding at September 30,		260,129		$	11.51		314,552		$	10.86
Exercisable at September 30,		184,794					209,299
Weighted average remaining life of options outstanding		6.0					6.1
Weighted average fair value of options granted during the year	$	1.37				$	3.74

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

31

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 September 30, 2015, 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		96,878	$	7.54	$	649		96,878		5.6	$	7.54	$	649
$10.01 to $12.50		34,667		11.39		99		22,874		7.5		11.39		65
$12.51 to $15.00		108,084		14.26		24		44,542		3.8		13.75		24
$15.01 to $17.50		20,500		16.00		-		20,500		0.4		16.00		-
Outstanding - Sept. 30, 2015		260,129		11.51	$	772		184,794		4.8		10.46	$	738

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 nine months ended September 30, 2015 and 2014 is presented below:

	Three Months Ended Sept. 30,				Nine Months Ended Sept. 30,
	2015		2014		2015		2014
Basic earnings per share
Income available to common stockholders	$	3,325	$	2,946	$	9,594	$	9,386
Weighted average common shares outstanding		8,172,577		8,108,722		8,158,003		8,077,428
Earnings per share	$	0.41	$	0.36	$	1.18	$	1.16
Diluted earnings per share
Income available to common stockholders	$	3,325	$	2,946	$	9,594	$	9,386
Weighted average common shares outstanding		8,172,577		8,108,722		8,158,003		8,077,428
Add dilutive effects of potential additional common stock		65,090		512,166		259,466		506,420
Weighted average common and dilutive potential common shares outstanding		8,237,667		8,620,888		8,417,469		8,583,848
Earnings per share assuming dilution	$	0.40	$	0.34	$	1.14	$	1.09

Stock options for 23,500 and 23,500 shares of common stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2015 and 2014 because they were antidilutive.  Stock options for 23,500 and 23,500 shares of common stock were not considered in computing diluted earnings per share for the three months ended September 30, 2015 and 2014 because they were antidilutive.

32

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.

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 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).

33

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 September 30, 2015 were as follows:

				Fair Value Measurements at September 30, 2015 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	107,658		$	107,658		$	-		$	-	$	107,658
Federal funds sold		4,193			4,193			-			-		4,193
Securities available for sale		228,610			-			228,610			-		228,610
Loans, net		845,237			-			-			847,567		847,567
Federal Home Loan Bank stock		3,072			n/a			n/a			n/a		n/a
Interest receivable		3,407			-			626			2,781		3,407
Financial liabilities
Deposits	$	(1,078,752	)	$	(735,228	)	$	(342,422	)	$	-	$	(1,077,650	)
Securities sold under agreements to repurchase		(20,532	)		-			(20,532	)		-		(20,532	)
Other borrowed funds		(11,999	)		-			(12,051	)		-		(12,051	)
Interest payable		(339	)		(6	)		(333	)		-		(339	)

The carrying amounts and estimated fair values of financial instruments at December 31, 2014 were as follows:

				Fair Value Measurements at December 31, 2014 Using
	Carrying Amount			Level 1			Level 2			Level 3			Total
Financial assets
Cash and due from banks	$	70,398		$	70,398		$	-		$	-		$	70,398
Federal funds sold		4,986			4,986			-			-			4,986
Securities available for sale		229,750			-			229,610			140			229,750
Loans held for sale		226			-			-			226			226
Loans, net		869,364			-			-			870,273			870,273
Federal Home Loan Bank stock		2,996			n/	a		n/	a		n/	a		n/	a
Interest receivable		3,219			-			625			2,594			3,219
Financial liabilities
Deposits	$	(1,075,243	)	$	(711,118	)	$	(363,481	)	$	-		$	(1,074,599	)
Securities sold under agreements to repurchase		(15,580	)		-			(15,580	)		-			(15,580	)
Other borrowed funds		(11,722	)		-			(11,760	)		-			(11,760	)
Interest payable		(434	)		(6	)		(428	)		-			(434	)

34

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 September 30, 2015 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	$	94,344	$	-	$	94,344	$	-
U. S. agency CMO's - residential		114,463		-		114,463		-
Total mortgage-backed securities of government sponsored agencies		208,807		-		208,807		-
U. S. government sponsored agency securities		10,521		-		10,521		-
Obligations of states and political subdivisions		9,282		-		9,282		-
Total available for sale	$	228,610	$	-	$	228,610	$	-

			Fair Value Measurements at December 31, 2014 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	$	52,780	$	-	$	52,780	$	-
U. S. agency CMO's		144,188		-		144,188		-
Total mortgage-backed securities of government sponsored agencies		196,968		-		196,968		-
U. S. government sponsored agency securities		22,506		-		22,506		-
Obligations of states and political subdivisions		10,276		-		10,136		140
Total securities available for sale	$	229,750	$	-	$	229,610	$	140

There were no transfers between Level 1 and Level 2 during 2015 or 2014.

35

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 table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended September 30, 2015:

	Securities Available-for-sale
	Quarter Ended September 30, 2015
Balance of recurring Level 3 assets at beginning of period	$	140
Total gains or losses (realized/unrealized):
Included in earnings – realized		-
Included in earnings – unrealized		-
Included in other comprehensive income		-
Purchases, sales, issuances and settlements, net		(140	)
Transfers in and/or out of Level 3		-
Balance of recurring Level 3 assets at period-end	$	-

Assets and Liabilities Measured on a Non-Recurring Basis

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

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent 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.

36

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 September 30, 2015 are summarized below:

			Fair Value Measurements at September 30, 2015 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	$	44	$	-	$	-	$	44
Commercial real estate:
Owner occupied		347		-		-		347
Total impaired loans	$	391	$	-	$	-	$	391
Other real estate owned:
Residential real estate	$	648	$	-	$	-	$	648
Commercial real estate:
Owner occupied		39		-		-		39
Non-owner occupied		2,253		-		-		2,253
All other		5,339		-		-		5,339
Total OREO	$	8,279	$	-	$	-	$	8,279

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $854,000 at September 30, 2015 with a valuation allowance of $463,000 and a carrying amount of $7,200,000 at December 31, 2014 with a valuation allowance of $1,400,000.  The change resulted in a provision for loan losses of $136,000 for the nine months ended September 30, 2015, compared to an $473,000 negative provision for loan losses for the nine months ended September 30, 2014 and an $18,000 provision for loan losses for the three months ended September 30, 2015, compared to a $413,000 negative provision for loan losses for the three months ended September 30, 2014.  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 $8,279,000 which is made up of the outstanding balance of $10,599,000 net of a valuation allowance of $2,320,000 at September 30, 2015.  There were $614,000 of additional write downs during the nine months ended September 30, 2015, compared to $380,000 of additional write downs during the nine months ended September 30, 2014.  For the three months ended September 30, 2015 there were $368,000 of additional write downs compared to $100,000 of additional write downs during the three months ended September 30, 2014.  At December 31, 2014, other real estate owned had a net carrying amount of $10,206,000, made up of the outstanding balance of $12,343,000, net of a valuation allowance of $2,137,000.

37

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 September 30, 2015 are summarized below:

	September 30, 2015		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Residential real estate	$	44	sales comparison	adjustment for differences between the comparable sales	69.6%-69.6% (69.6%)
Commercial real estate:
Owner occupied		347	sales comparison	adjustment for limited salability of specialized property	65.5%-72.4% (66.9%)
Total impaired loans	$	391
Other real estate owned:
Residential real estate	$	648	sales comparison	adjustment for differences between the comparable sales	0.7%-31.6% (24.7%)
Commercial real estate:
Owner occupied		39	sales comparison	adjustment for estimated realizable value	25.4%-25.4% (25.4%)
Non-owner occupied		2,253	sales comparison	adjustment for differences between the comparable sales	21.8%-23.4% (23.1%)
All other		5,339	sales comparison	adjustment for estimated realizable value	10.7%-37.6% (14.5%)
Total OREO	$	8,279

38

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, 2014 are summarized below:

			Fair Value Measurements at December 31, 2014 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate:
Owner occupied	$	600	$	-	$	-	$	600
Non-owner occupied		630		-		-		630
Commercial and industrial		341		-		-		341
All other		4,229		-		-		4,229
Total impaired loans	$	5,800	$	-	$	-	$	5,800
Other real estate owned:
Commercial real estate:
Non-owner occupied	$	2,003	$	-	$	-	$	2,003
All other		8,203		-		-		8,203
Total OREO	$	10,206	$	-	$	-	$	10,206

39

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, 2014 are summarized below:

	December 31, 2014		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Commercial real estate:
Owner occupied	$	600	sales comparison	adjustment for limited salability of specialized property	44.8%-72.4% (58.9%)
Non-owner occupied		630	sales comparison	adjustment for differences between the comparable sales	16.9%-54.6% (16.9%)
Commercial and industrial		341	sales comparison	adjustment for limited salability of specialized property	26.2%-41.2% (27.0%)
All other		4,229	sales comparison	adjustment for percentage of completion of construction	57.3%-57.3% (57.3%)
Total impaired loans	$	5,800
Other real estate owned:
Commercial real estate:
Non-owner occupied	$	2,003	sales comparison	adjustment for differences between the comparable sales	17.8%-17.8% (17.8%)
All other		8,203	sales comparison	adjustment for estimated realizable value	24.6%-50.3% (45.0%)
Total OREO	$	10,206

40

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9 – PENDING ACQUISITION

On July 6, 2015, Premier Financial Bancorp, Inc. ("Premier") entered into a material definitive merger agreement (the "Merger Agreement") with First National Bankshares Corporation ("First National"), a $245 million single bank holding company headquartered in Ronceverte, West Virginia whereby Premier will acquire First National in exchange for a combination of cash and Premier common stock valued on the date of the announcement at approximately $26.5 million.

Under terms of the Merger Agreement, First National shareholders will be entitled to a combination of Premier common stock and cash valued on the date of the announcement at approximately $31.82 per First National share, or an aggregate value of $26.5 million, with Premier issuing approximately 1.4 million shares in the acquisition.  The transaction, which is subject to satisfaction of various contractual conditions and requires approval by bank regulatory agencies and the shareholders of First National, is anticipated to close in the first quarter of 2016.

41

Item 2.  Management's Discussion and Analysis

   of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

A.Results of Operations

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

Net income for the nine months ended September 30, 2015 was $9,594,000, or $1.14 per diluted share, compared to net income of $9,921,000, or $1.09 per diluted share, for the nine months ended September 30, 2014.  The decrease in income in 2015 is largely due to a gain on the sale of OREO in 2014 and higher provision for loan losses in 2015 compared to 2014, both of which more than offset an increase in net interest income and an increase in non-interest income. The annualized returns on average common shareholders' equity and average assets were approximately 8.66% and 1.01% for the nine months ended September 30, 2015 compared to 8.75% and 1.07% for the same period of 2014.

Net income for the three months ended September 30, 2015 was $3,325,000, or $0.40 per diluted share, compared to net income of $3,151,000, or $0.34 per diluted share for the three months ended September 30, 2014.  The increase in income for the three months ended September 30, 2015 is largely due to an increase in interest income, a decrease in interest expense and a decrease in the provision for loan losses, all of which more than offset an increase in net operating expenses.  The annualized returns on average common shareholders' equity and average assets were approximately 9.04% and 1.05% for the three months ended September 30, 2015 compared to 8.18% and 0.99% for the same period in 2014.

Net interest income for the nine months ended September 30, 2015 totaled $36.67 million, up $561,000, or 1.6%, from the $36.11 million of net interest income earned in the first nine months of 2014, as an increase in interest income was complemented by a decrease in interest expense.  Interest income in 2015 increased by $390,000, or 1.0%, largely due to an $831,000 increase in interest income on loans.  As a result of the purchase of the Bank of Gassaway ("Gassaway") on April 4, 2014, interest income on loans in the first nine months of 2015 included the Gassaway loan interest income for the full nine months while interest income in the first nine months of 2014 included this income only in the second and third quarters of 2014.  The impact increased 2015 interest income on loans by approximately $1.5 million.  Interest income on loans in 2015 was also increased by $671,000 as a result of income recognized from purchase discounts and interest income collected on non-accrual loans liquidated during the first nine months and another $1.03 million, or 3.0%, from an increase in average loans outstanding from Premier’s core operations.  These increases more than offset approximately $2.37 million of income recognized from purchase discounts and interest income collected on non-accrual loans liquidated during the first nine months of 2014.  The timing of these liquidations is difficult to predict, which creates fluctuations in reported loan interest income.  Interest earned on investments decreased by $436,000, or 10.3%, due to a lower average balance of investments outstanding during the first nine months of 2015 compared to the same period of 2014.  Interest earned on federal funds sold and interest bearing bank balances decreased by $5,000, largely due to slightly lower yields on the assets held in this category.

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Complementing the increase in interest income in the first nine months of 2015 was $171,000 of interest expense savings.  Interest expense decreased in total during the first nine months of 2015 by $171,000, or 5.3%, when compared to the same nine months of 2014.    Interest expense on deposits decreased by $139,000, or 5.0%, in the first nine months of 2015 largely due to a continuing decrease in the average rates paid on deposits.  Similar to the interest income on loans from the purchase of Gassaway, interest expense on the deposits from Gassaway is included in the first nine months of 2014 only during the second and third quarters.  The effect is an additional $100,000 of interest expense on the interest-bearing deposits assumed from the Gassaway purchase reported in the first nine months of 2015.  Otherwise, interest expense in the first nine months of 2015 would have decreased by $239,000, or 8.5%, when compared to the same nine months of 2014.  Interest expense on repurchase agreements and other short-term borrowings increased by $4,000 in the first nine months of 2015, largely due to a higher average balance outstanding.  Interest expense on other borrowings decreased by $36,000, or 8.4%, in the first nine months of 2015 compared to the first nine months of 2014, largely due to a decrease in the average amount of borrowings outstanding which more than offset an additional $5,000 of interest expense from the borrowing assumed from the Gassaway purchase.

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 in 2014, 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.  Premier's net interest margin during the first nine months of 2015 was 4.19% compared to 4.28% for the same period in 2014.  With the recognition of additional loan interest income upon the liquidation of non-accrual loans in 2014 exceeding the amount recognized in 2015, Premier's overall net interest margin decreased in the first nine months of 2015.  A portion of the interest income on loans is the result of recognizing into interest income the remaining fair value discounts on loans acquired via a business acquisition if that loan 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.  Also impacting the comparison of Premier's net interest margin in 2015 with its net interest margin in 2014 are the assets and liabilities acquired via the Gassaway purchase, which generated additional net interest income in the first nine months of 2015 compared to the net interest income in the first nine months of 2014 but not necessarily at the same net interest margin as Premier's historical yields.

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Additional information on Premier's net interest income for the first nine months of 2015 and first nine months of 2014 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS
	Nine Months Ended Sept. 30, 2015								Nine Months Ended Sept. 30, 2014
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	69,725		$	137		0.26	%	$	69,041		$	142		0.27	%
Securities available for sale
Taxable		221,184			3,639		2.19			246,487			4,080		2.21
Tax-exempt		8,273			162		3.96			7,914			157		4.01
Total investment securities		229,457			3,801		2.26			254,401			4,237		2.26
Total loans		873,884			35,812		5.48			806,487			34,981		5.80
Total interest-earning assets		1,173,066			39,750		4.54	%		1,129,929			39,360		4.67	%
Allowance for loan losses		(10,436	)							(10,291	)
Cash and due from banks		32,040								31,577
Other assets		73,471								75,929
Total assets	$	1,268,141							$	1,227,144
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	823,933			2,661		0.43		$	800,713			2,800		0.47
Short-term borrowings		16,102			28		0.23			12,408			23		0.25
FHLB advances		-			-		0.00			1,117			1		0.12
Other borrowings		12,008			391		4.35			13,094			427		4.36
Total interest-bearing liabilities		852,043			3,080		0.48	%		827,332			3,251		0.53	%
Non-interest bearing deposits		263,475								241,043
Other liabilities		4,888								5,572
Stockholders' equity		147,735								153,197
Total liabilities and equity	$	1,268,141							$	1,227,144
Net interest earnings				$	36,670							$	36,109
Net interest spread							4.06	%							4.14	%
Net interest margin							4.19	%							4.28	%

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Additional information on Premier's net interest income for the third quarter of 2015 and third quarter of 2014 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS
	Three Months Ended Sept. 30, 2015								Three Months Ended Sept. 30, 2014
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	76,900		$	49		0.25	%	$	64,780		$	46		0.28	%
Securities available for sale
Taxable		216,468			1,176		2.17			260,276			1,365		2.10
Tax-exempt		7,917			51		3.98			9,303			59		3.84
Total investment securities		224,385			1,227		2.24			269,579			1,424		2.16
Total loans		868,372			12,506		5.71			841,888			12,056		5.68
Total interest-earning assets		1,169,657			13,782		4.69	%		1,176,247			13,526		4.58	%
Allowance for loan losses		(10,310	)							(9,870	)
Cash and due from banks		31,656								33,336
Other assets		73,902								79,104
Total assets	$	1,264,905							$	1,278,817
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	816,673			858		0.42		$	831,589			953		0.45
Short-term borrowings		15,215			9		0.23			11,668			7		0.24
FHLB advances		-			-		-			3,315			1		0.12
Other borrowings		12,254			132		4.27			12,610			139		4.37
Total interest-bearing liabilities		844,142			999		0.47	%		859,182			1,100		0.51	%
Non-interest bearing deposits		268,661								257,323
Other liabilities		4,941								6,666
Stockholders' equity		147,161								155,646
Total liabilities and equity	$	1,264,905							$	1,278,817
Net interest earnings				$	12,783							$	12,426
Net interest spread							4.22	%							4.07	%
Net interest margin							4.35	%							4.21	%

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Net interest income for the quarter ended September 30, 2015 totaled $12.78 million, up $357,000, or 2.9%, from the $12.43 million of net interest income earned in the third quarter of 2014.  Interest income in the third quarter of 2015 increased by $256,000, or 1.9%, as an increase in interest income on loans more than offset a decrease in interest income on investments. Interest income on loans increased by $450,000, or 3.7%, due in part to a $153,000 increase in income recognized from purchase discounts and interest income collected on non-accrual loans liquidated during the third quarter of 2015 compared to the third quarter of 2014.  Otherwise, interest income on loans increased by $297,000, or 2.5%, largely due to an increase in average loans outstanding in 2015.    Interest earned on investments decreased by $197,000, or 13.8%, in the third quarter of 2015, largely due to a lower average balance of investments outstanding partially offset by a higher average yield earned.  Interest earned on federal funds sold and interest bearing bank balances increased by $3,000, largely due to a higher average volume of assets held in this category.

Also adding to the increase in net interest income, interest expense decreased in total during the third quarter of 2015 by $101,000, or 9.2%, when compared to the same quarter of 2014.  Interest expense on deposits decreased by $95,000, or 10.0%, largely due to a continuing decrease in the average rates paid on interest-bearing deposits on a lower average balance outstanding.  Interest expense on repurchase agreements and other short-term borrowings remained relatively unchanged as higher average repurchase agreement balances were partially offset by an lower average rate paid.   Interest expense on other borrowings decreased by $7,000, or 5.0%, in the third quarter of 2015 compared to the third quarter of 2014, largely due to a decrease in the average amount of borrowings outstanding as well as a slightly lower rate paid on the borrowings due to refinancing.  The Board of Governors' policy to reduce the federal funds rate to nearly zero, coupled with the U.S. Treasury continuing to buy investment securities in 2014, 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 third quarter of 2015, while the yields earned on loans increased only slightly when compared to the same quarter of 2014, the average loans outstanding as a percentage of average earning assets was significantly higher.  As loans are Premier's highest earning asset, the overall yield of average earning assets was elevated to 4.69% compared to 4.58% in the third quarter of 2014.  Combined with the lower average rate paid on interest bearing liabilities in the third quarter of 2015, the increase in the yield on average earning assets resulted in an increase in Premier's net interest margin.  Premier's net interest margin during the third quarter of 2015 was 4.35% compared to 4.21% for the same period in 2014.

Non-interest income increased by $247,000, or 4.9%, to $5,269,000 for the first nine months of 2015 compared to the same period of 2014. Electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $219,000, or 12.2%, largely due to the inclusion of the Gassaway operations for the full nine months in 2015 compared to only the second and third quarters of 2014. Service charges on deposit accounts increased by $178,000, or 6.9% as the increase in revenue from the Gassaway operations in the first nine months of 2015 compared to Gassaway revenue for only six months in 2014. Income from selling mortgages in the secondary market decreased by $44,000, or 31.0%, largely due to a decrease in customer demand for refinancing existing mortgage loans compared to one-year ago, while other non-interest income decreased by $78,000, or 15.8%.  Also included in the first nine months of 2014 was $28,000 recognized on the disposition of securities.

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For the quarter ending September 30, 2015, non-interest income decreased by $56,000 to $1,802,000 compared to $1,858,000 recognized during the same quarter of 2014. Service charges on deposit accounts increased by $24,000, or 2.6%, and electronic banking income increased by $23,000, or 3.6%. More than offsetting these increases, secondary market mortgage income decreased by $35,000 in 2015, largely the result of a decrease in activity compared to the same period in 2014, and other non-interest income decreased by $40,000. Also included in the third quarter of 2014 was $28,000 recognized on the disposition of securities.

Non-interest expenses for the first nine months of 2015 totaled $26.81 million, or 2.83% of average assets on an annualized basis, compared to $25.57 million, or 2.79% of average assets for the same period of 2014. The $1.24 million increase in non-interest expenses in 2015 when compared to the first nine months of 2014 is largely due to $1.22 million of gains on sale of OREO in the first nine months of 2014 compared to only $36,000 of gains recorded during the first nine months of 2015.  Staff costs decreased by $292,000 or 2.2%, as an $85,000, or 0.1%, increase in salaries and wages (net of deferred loan costs) was more than offset by a $377,000, or 12.5%, decrease in benefit plan costs, namely employee medical insurance benefits resulting from a change in insurance providers.  Occupancy and equipment expenses increased by $177,000, or 4.7%, largely due to the costs associated with operating the five branches from the Gassaway purchase for a full nine months versus only six months in 2014.   Outside data processing increased by $298,000, or 10.0%, largely due to the additional costs associated with the Gassaway operations in the first nine months of 2015 compared to the first nine months of 2014.  OREO expense increased by $1.30 million largely due to the $1.22 million of gains on sale of OREO in the first nine months of 2014.  Also contributing to the increase in OREO expense was an increase in the expenses of maintaining OREO properties and a higher level of carrying value write downs in the first nine months of 2015.  Amortization of intangibles increased by $51,000 largely due to the inclusion of core deposit intangible asset amortization from the purchase of Gassaway for nine months in 2015 compared to only six months in 2014.  These increases were partially offset by lower professional fees, taxes not on income, FDIC insurance and other operating expenses in 2015. Professional fees decreased by $144,000 largely due to higher legal fees in 2014 including those related to the acquisition of the Bank of Gassaway partially offset by a $26,000 decrease in audit and accounting costs and a $15,000 decrease in consulting expenses.  Taxes not based on income decreased $31,000, as an increase in Kentucky equity based taxes were more than offset by a decrease in Virginia and Ohio equity based taxes and the termination of the West Virginia franchise tax.  FDIC insurance decreased by $55,000, largely due to a decrease in the assessment base.  Other operating expenses decreased  by $63,000 as decreases in supplies and conversion expenses related to the acquisition of Gassaway in 2014 were partially offset by higher collection expenses and other operating costs.

Non-interest expenses for the third quarter of 2015 totaled $9.09 million, or 2.85% of average assets on an annualized basis, compared to $8.83 million, or 2.74% of average assets for the same period of 2014.  The $258,000 increase in non-interest expenses in the third quarter of 2015 when compared to the third quarter of 2014 was largely due to a $219,000 increase in expenses and writedowns of other real estate owned in 2015 and reduced net non-interest expense in the third quarter of 2014 resulting from the reimbursement of $275,000 legal matters expensed earlier in 2014.In addition to the third quarter 2014 reimbursement of legal fees, professional fees also increased in the third quarter of 2015 as a result of higher audit costs, external loan review expenditures and tax return preparation expenses.  The increase in OREO expenses was a combination of higher writedowns of OREO carrying values in the third quarter of 2015 coupled with a higher level of gains on the sale of OREO recorded during the third quarter of 2014.

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Other increases in non-interest expenses in the third quarter of 2015 include a $47,000, or 3.7%, increase in occupancy and equipment expenses, largely due to increases in building repairs, real estate taxes, and equipment maintenance costs partially offset by decreases in information technology depreciation. Outside data processing increased by $25,000, or 2.3%,mainly due to an increase in ATM processing costs and internet banking charges.  Other non-interest expenses increased by $23,000, or 2.2%, primarily due to expenses related to new deposit product features and an increase in loan collection expenses. Partially offsetting the increases in non-interest expenses,  staff costs decreased by $251,000, or 5.7%, due to an $126,000, or 3.7%, decrease in salaries and wages (net of deferred loan costs) and a $125,000, or 13.4%, decrease in benefit plan costs, primarily employee medical insurance benefits and employer payroll taxes.  Taxes not based on income decreased $68,000, as an increase in Kentucky equity based taxes was more than offset by decreases in Virginia and Ohio equity based taxes and the termination of the West Virginia franchise tax.  FDIC insurance decreased by $15,000, largely due to the decrease in the assessment base in 2015.  Amortization of intangibles decreased by $15,000 due to the decrease in the monthly amortization as Premier uses an accelerated method to amortize its core deposit intangible assets.

Income tax expense was $5.31 million for the first nine months of 2015 compared to $5.49 million for the first nine months of 2014.  The effective tax rate for the nine months ended September 30, 2015 was 35.6% equal to the 35.63% effective tax rate for the same period in 2014. For the quarter ended September 30, 2015, income tax expense was $1.87 million, a 35.9% effective tax rate, compared to $1.77 million (a 36.0% effective tax rate) for the same period in 2014. The decrease in income tax expense during the first nine months of 2015 can be primarily attributed to the decrease in pre-tax income detailed above, as the effective tax rate was unchanged. The increase in income tax expense during the third quarter of 2015 when compared to the same quarter of 2014 can be primarily attributed to the increase in pre-tax income for the quarter as detailed above, as the effective tax rate was essentially unchanged.

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B.Financial Position

Total assets at September 30, 2015 increased by $10.4 million to $1.263 billion from the $1.253 billion at December 31, 2014.  Earning assets increased by $12.8 million from the $1.153 billion at year-end 2014 to end the quarter at $1.166 billion.  The increase in total assets was largely due to an increase in interest bearing bank balances partially resulting from an increase in funding from deposits and repurchase agreements.  Also increasing interest bearing bank balances were the proceeds received from a net decrease in total loans.   .

Cash and due from banks at September 30, 2015 was $33.1 million, a $2.0 million decrease from the $35.1 million at December 31, 2014. Interest bearing bank balances increased by $39.3 from the $35.3 million reported at December 31, 2014, while federal funds sold decreased by $793,000 million to $4.2 million at September 30, 2015. 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 nine months of 2015 was largely in response to an increase in total deposits outstanding at the end of the quarter combined with a $24.6 million decrease in loans outstanding.

Securities available for sale totaled $228.6 million at September 30, 2015, a $1.1 million decrease from the $229.7 million at December 31, 2014. The decrease was largely due to $52.4 million of proceeds from monthly principal payments on Premier's mortgage backed securities portfolio and securities maturing during the first nine months. These decreases more than offset $51.6 million of purchases of investment securities.The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies. Any unrealized losses on securities within the portfolio at September 30, 2015 and December 31, 2014 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 September 30, 2015 were $855.1 million compared to $879.7 million at December 31, 2014, a decrease of approximately $24.6 million, or 2.8%. The decrease in loans was largely due to loan payoffs and transfers of loans to OREO upon foreclosure, primarily during the third quarter of 2015, as well as principal payments on loans received during the first nine months of the year all of which more than offset loan demand.

Deposits totaled $1.079 billion as of September 30, 2015, a $3.5 million, or 0.3%, increase from the $1.075 billion in deposits at December 31, 2014.  The overall increase in deposits is largely due to a $16.7 million, or 6.6%, increase in non-interest bearing deposits and a $9.3 million, or 5.1%, increase in interest bearing transaction accounts.  These increases more than offset a $1.9 million, or 0.7%, decrease in savings and money market accounts and a $20.6 million, or 5.7% decrease in certificates of deposit.  Repurchase agreements with corporate and public entity customers increased in the first nine months of 2015 by $5.0 million, or 31.8%.  Other borrowed funds increased by $277,000 during the first nine months of 2015 as a $2.0 million net borrowing to purchase the outstanding warrant was substantially offset by regularly scheduled principal payments.

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The following table sets forth information with respect to the Company's nonperforming assets at September 30, 2015 and December 31, 2014.

	(In Thousands)
	2015			2014
Non-accrual loans	$	5,277		$	12,712
Accruing loans which are contractually past due 90 days or more		5,302			1,266
Accruing restructured loans		1,935			2,502
Total non-performing loans		12,514			16,480
Other real estate acquired through foreclosure (OREO)		13,674			12,208
Total non-performing assets	$	26,188		$	28,688
Non-performing loans as a percentage of total loans		1.46	%		1.87	%
Non-performing assets as a percentage of total assets		2.07	%		2.29	%

Total non-performing loans have decreased since year-end, largely due to a $7.4 million decrease in non-accrual loans and a net decrease in restructured loans due to payments and payoffs in 2015.    These decreases were partially offset by a $4.0 million increase in accruing loans 90 plus days past due during 2015.  Total non-performing assets have decreased since year-end, largely due to the decrease in non-performing loans partially offset by a $1.5 million increase in other real estate acquired through foreclosure (OREO) as new foreclosures in the first nine months of 2015 exceeded OREO sales.

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.

Gross charge-offs totaled $1,732,000 during the first nine months of 2015, largely due to the partial charge-off of previously identified impaired loans upon foreclosure and placement into OREO during the year and the charge-off of the remaining balance over and above the portion guaranteed by the Small Business Administration ("SBA") on some previously identified impaired loans during the first quarter.  Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance.  Gross charge-offs totaled $1,250,000 during the three months ended September 30, 2015, largely due to a $900,000 partial charge-off of a previously identified impaired loan upon foreclosure and placement into OREO.  Recoveries recorded during the first nine months of 2015 totaled $978,000 compared to $327,000 of recoveries recorded during the first nine months of 2014.  The increase in recoveries was largely due to the receipt of the guaranteed portion of an SBA guaranteed loan during the second quarter of 2015 that had previously been charged-off.  As a result net charge-offs totaled $754,000 for the first nine months of 2015.  This compares to $994,000 of net charge-offs recorded in the first nine months of 2014.  The allowance for loan losses at

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September 30, 2015 was 1.15% of total loans compared to 1.18% at December 31, 2014.  The decrease in the allowance as a percentage of total loans is largely due a decrease in the allowance for loan losses resulting from the $937,000 decrease in allowance for loan losses allocated to individually impaired loans which resulted primarily from the $900,000 charge-off in the third quarter described above.

During the first nine months of 2015, Premier recorded $232,000 of provision for loan losses.  This provision compares to $147,000 of provision for loan losses recorded during the same nine months of 2014.  The provision for loan losses recorded in the first nine months of 2015 was largely in response to identified increases in the estimated credit risk in the loan portfolio related to loans collectively evaluated for impairment, along with an increase in specific reserves allocated to impaired loans during the first nine months of 2015. These increases were partially offset by  a large recovery recorded in the second quarter of 2015.

During the quarter ending September 30, 2015, a $309,000 provision for loan losses was recorded compared to a $536,000 provision for loan losses recorded during the third quarter of 2014.  The provision for loan losses recorded in the third quarter of 2015 was largely in response to identified increases in the estimated credit risk in the loan portfolio related to loans collectively evaluated for impairment, along with a slight increase during the quarter in the specific reserves allocated to the remaining portfolio of impaired loans identified at September 30, 2015.  The $536,000 provision for loan losses recorded in the third quarter of 2014 was largely due to an increase in specific reserves allocated to impaired loans during the third quarter of 2014.  Specific reserves on impaired loans increased from $1,159,000 to $1,528,000 during the third quarter of 2014.  The $369,000 increase in specific reserves on impaired loans during the third quarter of 2014 was amplified by an increase in the allowance for loan losses related to growth in the loan portfolio in 2014.  The level of provision expense is determined under Premier's internal analyses of evaluating credit risk. The amount of future provisions for loan losses will depend on any future improvement or further deterioration in the estimated credit risk in the loan portfolio, as well as whether additional payments are received on loans previously identified as having significant credit risk.

The provisions for loan losses recorded in 2014 and 2015 were made in accordance with Premier's policies regarding management's estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  Premier continues to monitor and evaluate the impact that national housing market price declines may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses.  With the concentrations of commercial real estate loans originated in the Washington, DC and Richmond, Virginia markets, fluctuations in commercial real estate values will also be monitored. For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans and restructured loans, see Note 3 to the consolidated financial statements.

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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, 2014.  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, 2014.  There have been no significant changes in the application of these accounting policies since December 31, 2014.

Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time.

D.Liquidity

Liquidity objectives for the Company can be expressed in terms of maintaining sufficient cash flows to meet both existing and unplanned obligations in a cost effective manner. Adequate liquidity allows the Company to meet the demands of both the borrower and the depositor on a timely basis, as well as pursuing other business opportunities as they arise. Thus, liquidity management embodies both an asset and liability aspect while attempting to maximize profitability. In order to provide for funds on a current and long-term basis, the Company's subsidiary banks rely primarily on the following sources:

1. Core deposits consisting of both consumer and commercial deposits and certificates of deposit of $250,000 or more. Management believes that the majority of its $250,000 or more certificates of deposit are no more volatile than its other deposits. This is due to the nature of the markets in which the subsidiaries operate.

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

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

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

5. Maintenance of an adequate available-for-sale security portfolio. The Company owns $228.6 million of securities at fair value as of September 30, 2015.

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.

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E.Capital

At September 30, 2015, total shareholders' equity of $147.1 million was 11.6% of total assets.  This compares to total shareholders' equity of $145.8 million, or 11.6% of total assets on December 31, 2014.  The increase in stockholders' equity was largely due to a $6.2 million net increase in retained earnings during the first half of 2015 as the $9.6 million of net income earned during the first nine months of 2015 was reduced by $3.3 million, or $0.41 per share, in cash dividends declared and paid to stockholders.  Partially offsetting this increase in stockholder's equity was the May 2015 purchase of the outstanding common stock warrant issued to the U.S. Treasury under the TARP program for approximately $5.7 million.  Also increasing shareholders' equity at September 30, 2015 was the $301,000, net of tax, increase in the market value of the investment portfolio available for sale.

Tier 1 capital totaled $114.6 million at September 30, 2015, which represents a Tier 1 leverage ratio of 9.3%.  This ratio is slightly higher than the 9.1% Tier 1 leverage ratio and compares to the $112.1 million of Tier 1 capital at December 31, 2014.  The increase in the Tier I capital ratio is largely due to  the growth in Tier 1 capital was divided by a slightly lower base of average total assets at September 30, 2015.

The regulatory authorities introduced a new capital measure in the first quarter of 2015 for financial institutions of Premier's size, Common Equity Tier 1 Capital.  The Common Equity Tier 1 capital measure seeks to determine how much of the traditional Tier 1 capital is attributable to equity contributed by common shareholders by excluding Tier 1 capital from other sources such as Preferred Stockholders' equity and subordinated debt.  As of September 30, 2015, Premier's and its subsidiary bank's Common Equity Tier 1 capital is identical to their Tier 1 capital as none of the entities have any preferred stock or subordinated debt outstanding.

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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 2014 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 2014 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 second fiscal quarter that have materially affected or are reasonably likely to materially affect Premier's internal controls over financial reporting.

C.Inherent Limitations on Internal Control

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

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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, 2014 for disclosures with respect to Premier's risk factors at December 31, 2014. There have been no material changes since year-end 2014 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.

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

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

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

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SIGNATURES

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

PREMIER FINANCIAL BANCORP, INC.

Date: November 9, 2015/s/ Robert W. Walker

Robert W. Walker

President & Chief Executive Officer

Date: November 9, 2015/s/ Brien M. Chase

Brien M. Chase

Senior Vice President & Chief Financial Officer

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