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EX-32 - CEO & CFO SECTION 906 CERTIFICATION - PREMIER FINANCIAL BANCORP INCexhibit32.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INCexhibit31-1.htm
EX-31.2 - CFO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INCexhibit31-2.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

 
For the quarterly period ended March 31, 2011

 
or

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

 
For the transition period from ___________ to ___________

 
Commission file number 0-20908

 
PREMIER FINANCIAL BANCORP, INC.
 
(Exact name of registrant as specified in its charter)

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

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

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

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

Large accelerated filer  o.
Accelerated filer  o.
   Non-accelerated filer  o
(Do not check if smaller reporting company)
Smaller reporting company  þ

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

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

Common stock, no par value, – 7,937,143 shares outstanding at May 1, 2011

 
 

 

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2011
INDEX TO REPORT





 
 
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PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2011


PART I  - FINANCIAL INFORMATION


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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2010 for further information in this regard.

Index to consolidated financial statements:










 
 
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CONSOLIDATED BALANCE SHEETS
MARCH 31, 2011 AND DECEMBER 31, 2010
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
(UNAUDITED)
     
   
2011
   
2010
 
ASSETS
           
Cash and due from banks
  $ 23,327     $ 20,001  
Interest bearing bank balances
    75,769       78,649  
Federal funds sold
    17,826       23,598  
Cash and cash equivalents
    116,922       122,248  
Securities available for sale
    281,497       256,520  
Loans held for sale
    316       1,477  
Loans
    713,436       725,964  
Allowance for loan losses
    (10,282 )     (9,865 )
Net loans
    703,154       716,099  
Federal Home Loan Bank and Federal Reserve Bank stock
    7,037       7,096  
Premises and equipment, net
    16,334       16,566  
Real estate and other property acquired through foreclosure
    11,051       11,249  
Interest receivable
    3,639       3,742  
Goodwill
    29,875       29,875  
Other intangible assets
    3,975       4,185  
Prepaid FDIC insurance premiums
    1,839       2,068  
Deferred taxes
    10,019       10,743  
Other assets
    1,422       1,383  
Total assets
  $ 1,187,080     $ 1,183,251  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Non-interest bearing
  $ 226,654     $ 214,665  
Time deposits, $100,000 and over
    154,152       158,962  
Other interest bearing
    615,576       611,664  
Total deposits
    996,382       985,291  
Securities sold under agreements to repurchase
    22,475       29,637  
Federal Home Loan Bank advances
    10,393       12,896  
Other borrowed funds
    19,668       20,178  
Interest payable
    875       899  
Other liabilities
    3,365       2,953  
Total liabilities
    1,053,158       1,051,854  
                 
Stockholders' equity
               
Preferred stock, no par value; $22,808 liquidation preference,
               
5% cumulative, 1,000,000 shares authorized;
22,252 shares issued and outstanding
    21,868       21,841  
Common stock, no par value; 20,000,000 shares authorized;
               
7,937,143 shares issued and outstanding
    71,482       71,465  
Retained earnings
    40,892       39,526  
Accumulated other comprehensive income (loss)
    (320 )     (1,435 )
Total stockholders' equity
    133,922       131,397  
Total liabilities and stockholders' equity
  $ 1,187,080     $ 1,183,251  
                 



CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Interest income
           
Loans, including fees
  $ 10,940     $ 11,552  
Securities available for sale
               
Taxable
    1,936       1,973  
Tax-exempt
    62       65  
Federal funds sold and other
    53       27  
Total interest income
    12,991       13,617  
                 
Interest expense
               
Deposits
    1,932       2,223  
Repurchase agreements and other
    47       43  
FHLB advances and other borrowings
    263       288  
Total interest expense
    2,242       2,554  
                 
Net interest income
    10,749       11,063  
Provision for loan losses
    520       571  
Net interest income after provision for loan losses
    10,229       10,492  
                 
Non-interest income
               
Service charges on deposit accounts
    888       922  
Electronic banking income
    449       340  
Secondary market mortgage income
    88       89  
Other
    186       166  
      1,611       1,517  
Non-interest expenses
               
Salaries and employee benefits
    4,031       4,071  
Occupancy and equipment expenses
    1,236       1,139  
Outside data processing
    1,207       1,009  
Professional fees
    260       225  
Taxes, other than payroll, property and income
    193       256  
Write-downs, expenses, sales of
other real estate owned, net
    84       155  
Amortization of intangibles
    210       143  
Conversion expenses
    379       -  
FDIC insurance
    508       455  
Other expenses
    1,199       1,057  
      9,307       8,510  
Income before income taxes
    2,533       3,499  
Provision for income taxes
    862       1,186  
                 
Net income
  $ 1,671     $ 2,313  
                 
Preferred stock dividends and accretion
    305       332  
Net income available to common stockholders
  $ 1,366     $ 1,981  
                 
Net income per share:
               
Basic
  $ 0.17     $ 0.25  
Diluted
    0.17       0.24  


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Net income
  $ 1,671     $ 2,313  
                 
Other comprehensive income:
               
Unrealized gains arising during the period
    1,689       114  
Net change in unrealized gain (loss) on securities
    1,689       114  
Less tax impact
    574       39  
Other comprehensive income:
    1,115       75  
                 
Comprehensive income
  $ 2,786     $ 2,388  
                 


CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
2011
   
2010
 
Cash flows from operating activities
           
Net income
  $ 1,671     $ 2,313  
Adjustments to reconcile net income to net cash from operating activities
               
Depreciation
    376       365  
Provision for loan losses
    520       571  
Amortization (accretion), net
    (334 )     (836 )
OREO writedowns (gains on sales), net
    (16 )     (31 )
Stock compensation expense
    17       10  
Loans originated for sale
    (4,375 )     (3,901 )
Secondary market loans sold
    5,635       3,983  
Secondary market income
    (88 )     (89 )
Gain on sale of buildings
    -       (81 )
Changes in :
               
Interest receivable
    103       221  
Other assets
    329       1,265  
Interest payable
    (24 )     63  
Other liabilities
    134       1,305  
Net cash from operating activities
    3,948       5,158  
                 
Cash flows from investing activities
               
Purchases of securities available for sale
    (36,815 )     (67,895 )
Proceeds from maturities and calls of securities available for sale
    13,208       54,934  
Redemption of FRB and FHLB  stock, (net of purchases)
    59       (10 )
Net change in loans
    12,928       15,739  
Purchases of premises and equipment, net
    (144 )     374  
Proceeds from sales of other real estate acquired through foreclosure
    359       874  
Net cash from investing activities
    (10,405 )     4,016  
                 
Cash flows from financing activities
               
Net change in deposits
    11,244       (13,329 )
Common Stock dividends paid
    -       (874 )
Preferred Stock dividends paid
    -       (278 )
Net change in short-term Federal Home Loan Bank advances
    (2,400 )     -  
Repayment of Federal Home Loan Bank advances
    (41 )     (42 )
Repayment of other borrowed funds
    (510 )     (474 )
Net change in agreements to repurchase securities
    (7,162 )     (2,439 )
Net cash from financing activities
    1,131       (17,436 )
                 
Net change in cash and cash equivalents
    (5,326 )     (8,262 )
                 
Cash and cash equivalents at beginning of period
    122,248       84,596  
                 
Cash and cash equivalents at end of period
  $ 116,922     $ 76,334  


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
2011
   
2010
 
Supplemental disclosures of cash flow information:
           
Cash paid during period for interest
  $ 2,266     $ 2,491  
                 
Loans transferred to real estate acquired through foreclosure
    145       1,264  
                 




PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)



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

             
March 31, 2011
 
   
Year
 
Total
   
Net Income
 
Subsidiary                               
Location                      
Acquired
 
Assets
   
Qtr
 
Citizens Deposit Bank & Trust
Vanceburg, Kentucky
1991
  $ 204,911     $ 533  
Farmers Deposit Bank
Eminence, Kentucky
1996
    60,836       18  
Ohio River Bank
Ironton, Ohio
1998
    97,187       236  
* First Central Bank, Inc.
Philippi, West Virginia
1998
    136,174       298  
* Boone County Bank, Inc.
Madison, West Virginia
1998
    181,015       392  
* Traders Bank, Inc.
Ravenswood, West Virginia
2008
    158,620       144  
* Adams National Bank
Washington, DC
2009
    271,059       382  
* Consolidated Bank & Trust
Richmond, Virginia
2009
    71,500       90  
Mt. Vernon Financial Holdings, Inc.
Huntington, West Virginia
1999
    242       -  
Parent and Intercompany Eliminations
        5,536       (422 )
  Consolidated Total
      $ 1,187,080     $ 1,671  

*  Merged to create Premier Bank, Inc. as of the close of business on April 8, 2011.

All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring.  The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to determining whether a concession has been granted, the ASU clarifies that creditors are precluded from using the effective interest method to determine whether a concession has been granted. In the absence of using the effective interest method, a creditor must now focus on other considerations such as the value of the underlying collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and whether the restructuring results in a delay in payment that is insignificant.   This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations or financial position.



.
 
- 9 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)



Amortized cost and fair value of investment securities, by category, at March 31, 2011 are summarized as follows:

   
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 33,424     $ 1,886     $ -     $ 35,310  
U. S. agency CMO’s - residential
    186,352       613       (3,884 )     183,081  
Total mortgage-backed securities of government sponsored agencies
    219,776       2,499       (3,884 )     218,391  
U. S. government sponsored agency securities
    46,906       58       (583 )     46,381  
Obligations of states and political subdivisions
    9,955       217       (30 )     10,142  
Other securities
    5,345       1,239       (1 )     6,583  
Total available for sale
  $ 281,982     $ 4,013     $ (4,498 )   $ 281,497  

Amortized cost and fair value of investment securities, by category, at December 31, 2010 are summarized as follows:

   
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 36,798     $ 1,922     $ -     $ 38,720  
U. S. agency CMO’s - residential
    153,502       670       (5,388 )     148,784  
Total mortgage-backed securities of government sponsored agencies
    190,300       2,592       (5,388 )     187,504  
U. S. government sponsored agency securities
    52,912       154       (639 )     52,427  
Obligations of states and political subdivisions
    10,152       196       (42 )     10,306  
Other securities
    5,330       954       (1 )     6,283  
Total available for sale
  $ 258,694     $ 3,896     $ (6,070 )   $ 256,520  


.
 
- 10 -

 

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 March 31, 2011 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
  $ 6,732     $ 6,752  
Due after one year through five years
    13,927       14,021  
Due after five years through ten years
    37,771       37,457  
Due after ten years
    2,684       3,430  
Corporate preferred securities
    1,092       1,446  
Mortgage-backed securities of government sponsored agencies
    219,776       218,391  
Total available for sale
  $ 281,982     $ 281,497  
                 

Securities with unrealized losses at March 31, 2011 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
  $ 22,280     $ (583 )   $ -     $ -     $ 22,280     $ (583 )
Obligations of states and political subdivisions
    2,241       (30 )     -       -       2,241       (30 )
U.S. government sponsored agency CMO-residential
    907       (13 )     -       -       907       (13 )
U.S. agency CMO-residential
    149,989       (3,871 )                     149,989       (3,871 )
Other securities
    443       (1 )     -       -       443       (1 )
                                                 
Total temporarily impaired
  $ 175,860     $ (4,498 )   $ -     $ -     $ 175,860     $ (4,498 )


.
 
- 11 -

 

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, 2010 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
  $ 28,724     $ (639 )   $ -     $ -     $ 28,724     $ (639 )
Obligations of states and political subdivisions
    1,987       (42 )     -       -       1,987       (42 )
U.S. government sponsored agency CMO-residential
    1,012       (10 )                     1,012       (10 )
U.S. agency CMO-residential
    129,647       (5,378 )                     129,647       (5,378 )
Other securities
    443       (1 )     -       -       443       (1 )
                                                 
Total temporarily impaired
  $ 161,813     $ (6,070 )   $ -     $ -     $ 161,813     $ (6,070 )

The investment portfolio is predominately high quality interest-bearing debt securities with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at March 31, 2011 and December 31, 2010 are price changes resulting from changes in the interest rate environment and are not considered to be other than temporary declines in the value of the securities.  Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.


Major classifications of loans at March 31, 2011 and December 31, 2010 are summarized as follows:

   
2011
   
2010
 
Commercial, secured by real estate
  $ 326,364     $ 319,048  
Commercial, other
    77,788       82,591  
Real estate construction
    38,129       48,213  
Residential real estate, including home equity
    229,681       233,513  
Agricultural
    2,484       2,564  
Consumer
    31,682       32,926  
Other
    7,308       7,109  
    $ 713,436     $ 725,964  


.
 
- 12 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ending March 31, 2011 was as follows:

Loan Class
 
Balance
Dec 31, 2010
   
Provision for
loan losses
   
Loans charged-off
   
Recoveries
   
Balance
March 31, 2011
 
                               
Residential real estate
  $ 2,666     $ 168     $ 80     $ 6     $ 2,760  
Multifamily real estate
    252       51       -       -       303  
Commercial real estate:
                                       
Owner occupied
    1,141       115       -       2       1,258  
Non owner occupied
    1,644       267       16       1       1,896  
Commercial and industrial
    2,421       (151 )     16       8       2,262  
Consumer
    366       23       28       25       386  
All other
    1,375       47       40       35       1,417  
Total
  $ 9,865     $ 520     $ 180     $ 77     $ 10,282  

Changes in the allowance for loan losses for the three months ended March 31, 2010 are as follows:
   
Three Months Ended
March 31, 2010
 
Balance, beginning of period
  $ 7,569  
Gross charge-offs
    (205 )
Recoveries
    133  
Provision for loan losses
    571  
Balance, end of period
  $ 8,068  


The following table sets forth information with respect to the Company’s nonperforming loans at March 31, 2011 and December 31, 2010.
   
2011
   
2010
 
Non-accrual loans
  $ 54,834     $ 47,131  
Accruing loans which are contractually past due 90 days or more
    324       414  
Restructured loans
    403       2,639  
Total
  $ 55,561     $ 50,184  


 
 
- 13 -

 

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 recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2011 and December 31, 2010.  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.

March 31, 2011
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential  real estate
  $ 4,142     $ 3,890     $ 244  
Multifamily real estate
    9,538       8,594       0  
Commercial real estate
                       
Owner occupied
    12,176       10,883       0  
Non owner occupied
    10,563       9,900       0  
Commercial and industrial
    8,146       7,788       75  
Consumer
    43       42       5  
All other
    13,740       13,737       0  
Total
  $ 58,348     $ 54,834     $ 324  
                         

December 31, 2010
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential  real estate
  $ 4,845     $ 3,764     $ 80  
Multifamily real estate
    6,764       4,742       -  
Commercial real estate
                       
Owner occupied
    12,680       10,493       -  
Non owner occupied
    14,624       12,081       -  
Commercial and industrial
    7,939       5,813       319  
Consumer
    15       15       15  
All other
    14,805       10,223       -  
Total
  $ 61,672     $ 47,131     $ 414  
                         

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.

.
 
- 14 -

 

 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  March 31, 2011 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
  $ 229,681     $ 6,550     $ 2,492     $ 9,042     $ 220,639  
Multifamily real estate
    40,043       1,333       6,177       7,510       32,533  
Commercial real estate:
                                       
Owner occupied
    109,923       7,868       3,201       11,069       98,854  
Non owner occupied
    161,095       4,322       6,536       10,858       150,237  
Commercial and industrial
    77,788       293       7,176       7,469       70,319  
Consumer
    31,682       340       31       371       31,311  
All other
    63,224       927       12,953       13,880       49,344  
Total
  $ 713,436     $ 21,633     $ 38,566     $ 60,199     $ 653,237  

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 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
  $ 233,513     $ 5,902     $ 2,266     $ 8,168     $ 225,345  
Multifamily real estate
    41,037       4,471       2,140       6,611       34,426  
Commercial real estate:
                                       
Owner occupied
    106,924       5,638       5,797       11,435       95,489  
Non owner occupied
    155,839       1,141       6,907       8,048       147,791  
Commercial and industrial
    82,591       1,216       5,965       7,181       75,410  
Consumer
    32,926       395       29       424       32,502  
All other
    73,134       4,852       10,203       15,055       58,079  
Total
  $ 725,964     $ 23,615     $ 33,307     $ 56,922     $ 669,042  


 
 
- 15 -

 

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 tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011:

   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Total
 
                                     
Residential real estate
  $ 120     $ 2,640     $ 2,760     $ 318     $ 229,363     $ 229,681  
Multifamily real estate
    -       303       303       8,594       31,449       40,043  
Commercial real estate:
                                               
Owner occupied
    200       1,058       1,258       11,687       98,236       109,923  
Non-owner occupied
    538       1,358       1,896       10,192       150,903       161,095  
Commercial and industrial
    1,266       996       2,262       8,215       69,573       77,788  
Consumer
    19       367       386       38       31,644       31,682  
All other
    394       1,023       1,417       14,036       49,188       63,224  
Total
  $ 2,537     $ 7,745     $ 10,282     $ 53,080     $ 660,356     $ 713,436  

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2010:

   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Total
 
                                     
Residential real estate
  $ 48     $ 2,618     $ 2,666     $ 207     $ 233,306     $ 233,513  
Multifamily real estate
    -       252       252       4,742       36,295       41,037  
Commercial real estate:
                                               
Owner occupied
    280       861       1,141       11,892       95,032       106,924  
Non-owner occupied
    619       1,025       1,644       12,220       143,619       155,839  
Commercial and industrial
    1,389       1,032       2,421       8,544       74,047       82,591  
Consumer
    23       343       366       43       32,883       32,926  
All other
    163       1,212       1,375       11,452       61,682       73,134  
Total
  $ 2,522     $ 7,343     $ 9,865     $ 49,100     $ 676,864     $ 725,964  



 
 
- 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 following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011:

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
   
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
 
With no related allowance recorded:
                                   
Residential  real estate
  $ -     $ -     $ -     $ 5     $ -     $ -  
Multifamily real estate
    10,799       8,594       -       6,668       -       -  
Commercial real estate
                                               
Owner occupied
    10,453       8,621       -       8,671       -       -  
Non owner occupied
    10,592       8,347       -       6,726       3       4  
Commercial and industrial
    4,617       3,429       -       3,633       148       148  
All other
    14,058       9,278       -       9,283       -       -  
      50,519       38,269       -       34,986       151       152  
With an allowance recorded:
                                               
Residential  real estate
  $ 319     $ 318     $ 120     $ 258     $ 2     $ 2  
Commercial real estate
                                               
Owner occupied
    3,507       3,066       200       3,119       13       14  
Non owner occupied
    2,297       1,845       538       4,480       4       3  
Commercial and industrial
    5,976       4,786       1,266       4,746       25       26  
Consumer
    38       38       19       41       1       1  
All other
    4,760       4,758       394       3,460       6       9  
      16,897       14,811       2,537       16,104       51       55  
Total
  $ 67,416     $ 53,080     $ 2,537     $ 51,090     $ 202     $ 207  

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Residential real estate
  $ 207     $ 10     $ -  
Multifamily real estate
    6,764       4,742       -  
Commercial real estate
                       
Owner occupied
    10,437       8,720          
Non owner occupied
    6,338       5,105       -  
Commercial and industrial
    5,043       3,837       -  
All other
    13,868       9,289       -  
      42,657       31,703       -  
With an allowance recorded:
                       
Residential real estate
  $ 197     $ 197     $ 48  
Commercial real estate
                       
Owner occupied
    3,596       3,172       280  
Non owner occupied
    8,484       7,115       619  
Commercial and industrial
    5,891       4,707       1,389  
Consumer
    43       43       23  
All other
    2,165       2,163       163  
      20,376       17,397       2,522  
Total
  $ 63,033     $ 49,100     $ 2,522  

 
 
- 17 -

 

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 loans individually by classifying the loans as to credit risk.  This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans.  This analysis is performed on a monthly basis.  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.


 
 
- 18 -

 

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 March 31, 2011, 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
  $ 206,226     $ 11,548     $ 11,589     $ 318     $ 229,681  
Multifamily real estate
    23,962       6,363       9,718       -       40,043  
Commercial real estate:
                                       
Owner occupied
    83,020       9,084       17,434       385       109,923  
Non-owner occupied
    143,494       2,917       14,684       -       161,095  
Commercial and industrial
    56,515       12,968       8,220       85       77,788  
Consumer
    31,233       299       112       38       31,682  
All other
    43,716       5,343       13,597       568       63,224  
Total
  $ 588,166     $ 48,522     $ 75,354     $ 1,394     $ 713,436  

As of December 31, 2010, 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
  $ 210,519     $ 13,696     $ 9,091     $ 207     $ 233,513  
Multifamily real estate
    24,231       5,955       10,851       -       41,037  
Commercial real estate:
                                       
Owner occupied
    79,147       11,024       16,373       380       106,924  
Non-owner occupied
    136,019       3,086       16,734       -       155,839  
Commercial and industrial
    56,842       17,112       8,524       113       82,591  
Consumer
    32,537       233       113       43       32,926  
All other
    57,106       4,336       11,119       573       73,134  
Total
  $ 596,401     $ 55,442     $ 72,805     $ 1,316     $ 725,964  

 

 
 
- 19 -

 

 PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)



The Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio, the FHLB of Pittsburgh, Pennsylvania, and the FHLB of Atlanta, Georgia. This stock allows the Banks to borrow advances from the FHLB.

Advances from the FHLB at March 31, 2011 and December 31, 2010 were as follows:

   
2011
   
2010
 
Payments due at maturity in March 2012, fixed rate at 1.81%
  $ 10,229     $ 10,291  
Payments due monthly with maturities from November 2011 to July 2012, fixed rates from 4.10% to 4.40%, averaging 4.26%
    164       205  
Overnight borrowed funds
    -       2,400  
    $ 10,393     $ 12,896  
                 

Advances are secured by the FHLB stock, certain pledged investment securities and substantially all single family first mortgage loans of the participating Banks.  Scheduled principal payments due on advances during the five years subsequent to March 31, 2011 are as follows:

2011 (remaining nine months)
  $ 306  
2012
    10,087  
2013
    -  
2014
    -  
2015
    -  
Thereafter
    -  
    $ 10,393  
         



 
 
- 20 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)



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 2011 the Banks could, without prior approval, declare dividends of approximately $1.3 million plus any 2011 net profits retained to the date of the dividend declaration.

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

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2011, that 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:
   
Mar 31,
2011
   
December 31,
2010
   
Regulatory
Minimum
Requirements
   
To Be Considered
Well Capitalized
 
Tier I Capital (to Risk-Weighted Assets)
    14.5 %     14.1 %     4.0 %     6.0 %
Total Capital (to Risk-Weighted Assets)
    15.8 %     15.3 %     8.0 %     10.0 %
Tier I Capital (to Average Assets)
    8.7 %     8.5 %     4.0 %     5.0 %

Adams National Bank entered into an agreement with the Office of the Comptroller of the Currency (“OCC”) on October 1, 2008 restricting the bank from declaring or paying dividends, without prior approval from the OCC.  During 2009, Farmers Deposit Bank requested and received approval from its primary regulatory authority to make a dividend payment to the Company in an amount that exceeded the retained net profits of the preceding two years.  As such, Farmers Deposit will be required to continue to request permission to pay any additional dividends to the Company for up to two years.

As of March 31, 2011, 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, except Adams National Bank.  To be categorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as

 
 
- 21 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  5 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS - continued

set forth in the preceding table.  There are no conditions or events since that notification that management believes have changed the Banks’ categories.  Adams National Bank is subject to a written agreement with the OCC and is required to maintain minimum capital ratios in excess of the ratios required to be defined as well capitalized under the framework for prompt corrective action.  This requirement means that the bank may not be deemed to be well capitalized while the written agreement is in effect.  At March 31, 2011, Adams National Bank’s capital ratios met or exceeded the minimum capital ratios required by its written agreement with the OCC.

On July 29, 2010, Consolidated Bank and Trust Company (“CB&T” or “the Bank”), a wholly owned subsidiary of Premier, the Federal Reserve Bank of Richmond (“FRB”) and the State Corporation Commission Bureau of Financial Institutions (“Virginia Bureau”) entered into a written agreement (“Written Agreement”) requiring CB&T to perform certain actions primarily designed to improve the credit quality of the Bank.  Abigail Adams National Bancorp, Inc. (“AANBI”), as parent of CB&T, and Premier, as parent of AANBI, were also named as parties to the Written Agreement to ensure that the Bank complies with the Written Agreement.

The Written Agreement requires the Bank to submit written plans to strengthen board oversight of the Bank, improve the Bank’s asset quality, review and revise the Bank’s methodology for determining the allowance for loan losses, maintain sufficient capital at the Bank, improve the Bank’s earnings, and enhance the Bank’s liquidity position and funds management practices.  The Bank is also required to submit quarterly written progress reports.  The agreement restricts the Bank’s ability to declare and pay dividends without prior written approval of the regulatory agencies or incur, increase, or guarantee any debt without prior written approval of the regulatory agencies.

In addition to ensuring the Bank complies with provisions of the Written Agreement, Premier is also specifically subject to the provision requiring prior written approval of the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System for declaring or paying any dividends, and the provision requiring prior written approval of the FRB before incurring, increasing or guaranteeing any debt or purchasing or redeeming any shares of its stock.

The dividend rights of holders of Premier’s common shares are also qualified and subject to the dividend rights of holders of Premier’s Series A Preferred Shares.  Premier has not paid the November 15, 2010 and February 15, 2011 quarterly dividends on its Series A Preferred Shares due to restrictions placed on it by the Federal Reserve Board of Governors in conjunction with the July 29, 2010 Written Agreement between Consolidated Bank & Trust and the FRB.  Until such dividends are paid on the Series A Preferred Shares, dividends to holders of Premier’s common shares will also be prohibited.



 
 
- 22 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)



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

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

The Series A Preferred Stock is non-voting, but has class voting rights on (i) any authorization or issuance of shares ranking senior to the Series A Preferred Stock; (ii) any amendment to the rights of the Series A Preferred Stock; or (iii) any merger, consolidation, share exchange, reclassification or similar transaction which would adversely affect the rights of the Series A Preferred Stock.  In the event that the cumulative dividends described above are not paid in full for an aggregate of six dividend periods or more, whether or not consecutive, the authorized number of directors of Premier would automatically be increased by two and the holders of the Series A Preferred Stock would have the right to elect two directors.  The right to elect directors would end when dividends have been paid in full for four consecutive dividend periods. As previously disclosed, through April 30, 2011, Premier has deferred two dividend payments on the Series A Preferred Stock as a result of the Federal Reserve Board’s refusal to approve the dividends under a Written Agreement dated July 29, 2010, among Consolidated Bank and Trust Company, a wholly owned subsidiary of Premier; the Federal Reserve Bank of Richmond, the Virginia State Corporation Commission Bureau of Financial Institutions and Premier.


 
 
- 23 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  6 – PREFERRED STOCK - continued

The U.S. Treasury has agreed not to exercise voting power with respect to any common stock issued to it upon exercise of the Warrant.  The common stock will be issued from authorized but unissued common stock and thus will dilute the interests of existing Premier common shareholders.  As of December 31, 2010, the Warrant has not yet been exercised.

Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.11) declared on the common stock prior to October 2, 2009.


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 16, 2011, 102,000 incentive stock options were granted out of the 2002 Employee Stock Option Plan at an exercise price of $6.95, the closing market price of Premier on the grant date.  These options vest in three equal annual installments ending on March 16, 2014.  On March 17, 2010, 47,700 incentive stock options were granted out of the 2002 Plan at an exercise price of $8.90.  These options vest in three equal annual installments ending on March 17, 2013.  On February 18, 2009, 47,100 incentive stock options were granted out of the 2002 Plan at an exercise price of $6.55.  These options vest in three equal annual installments ending on February 18, 2012.

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

   
2011
   
2010
   
2009
 
Risk-free interest rate
    3.58 %     3.65 %     2.74 %
Expected option life (yrs)
    10.00       10.00       10.00  
Expected stock price volatility
    30.01 %     24.67 %     19.26 %
Dividend yield
    4.03 %     4.94 %     6.72 %
Weighted average fair value of options granted during the year
  $ 1.63     $ 1.41     $ 0.37  


 
 
- 24 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7– STOCK COMPENSATION EXPENSE - continued

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

Compensation expense of $17,000 was recorded for the first three months of 2011 while $10,000 was recorded for the first three months of 2010.  Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $180,000 at March 31, 2011. This unrecognized expense is expected to be recognized over the next 35 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 three months ended March 31:
 
      - - - - - - 2011 - - - - - -       - - - - - - 2010 - - - - - -  
         
Weighted
Average
Exercise
         
Weighted
Average
Exercise
 
   
Options
   
Price
   
Options
   
Price
 
Outstanding at beginning of year
    255,649     $ 10.77       212,449     $ 11.18  
Grants
    102,000       6.95       47,700       8.90  
Exercises
    -       -       -       -  
Forfeitures or expired
    -       -       -       -  
Outstanding at March 31,
    357,649     $ 9.68       260,149     $ 10.76  
                                 
Exercisable at March 31,
    209,996               167,203          
Weighted average remaining life of options outstanding
    7.2               7.1          
Weighted average fair value of options granted during the year
  $ 1.63             $ 1.41          

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

 
 
- 25 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – STOCK COMPENSATION EXPENSE - continued

Additional information regarding stock options outstanding and exercisable at March 31, 2011, 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       231,216     $ 7.53     $ 41       83,563       5.6     $ 7.93     $ 17  
$10.01 to $12.50       28,333       11.62       -       28,333       3.8       11.62       -  
$12.51 to $15.00       70,600       13.47       -       70,600       6.4       13.46       -  
$15.01 to $17.50       27,500       16.00       -       27,500       4.9       16.00       -  
Outstanding - Mar 31, 2011
      357,649       9.68     $ 41       209,996       5.6       11.34     $ 17  
                                                           



A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three months ended March 31, 2011 and 2010 is presented below:

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Basic earnings per share
           
Income available to common stockholders
  $ 1,366     $ 1,981  
Weighted average common shares outstanding
    7,937       7,937  
Earnings per share
  $ 0.17     $ 0.25  
                 
Diluted earnings per shares
               
Income available to common stockholders
  $ 1,366     $ 1,981  
Weighted average common shares outstanding
    7,937       7,937  
Add dilutive effects of potential additional common stock
    143       202  
Weighted average common and dilutive potential common shares outstanding
    8,080       8,139  
Earnings per share assuming dilution
  $ 0.17     $ 0.24  
                 

Stock options for 311,049 and 213,049 shares of common stock were not considered in computing diluted earnings per share for the three months ended March 31, 2011 and 2010 because they were antidilutive.



 
 
- 26 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)



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

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
 
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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

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

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

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


 
 
- 27 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  9 – 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
 March 31, 2011Using:
 
   
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
  $ 35,310     $ -     $ 35,310     $ -  
U. S. agency CMO’s - residential
    183,081       -       183,081       -  
Total mortgage-backed securities of government sponsored agencies
    218,391       -       218,391       -  
U. S. government sponsored agency securities
    46,381       -       46,381       -  
Obligations of states and political subdivisions
    10,142       -       10,002       140  
Other securities
    6,583       -       6,583       -  
Total available for sale
  $ 281,497     $ -     $ 281,357     $ 140  

         
Fair Value Measurements at
 December 31, 2010 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
 (Level 1)
   
Significant Other Observable Inputs
 (Level 2)
   
Significant Unobservable Inputs
 (Level 3)
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 38,720     $ -     $ 38,720     $ -  
U. S. agency CMO’s - residential
    148,784       -       148,784       -  
Total mortgage-backed securities of government sponsored agencies
    187,504       -       187,504       -  
U. S. government sponsored agency securities
    52,427       -       52,427       -  
Obligations of states and political subdivisions
    10,306       -       10,166       140  
Other securities
    6,283       -       6,283       -  
Total available for sale
  $ 256,520     $ -     $ 256,380     $ 140  


 
 
- 28 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  9 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at March 31, 2011 and December 31, 2010 were as follows:

   
March 31, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial assets
                       
Cash and due from banks
  $ 99,096     $ 99,096     $ 98,650     $ 98,650  
Federal funds sold
    17,826       17,826       23,598       23,598  
Securities available for sale
    281,497       281,497       256,520       256,520  
Loans held for sale
    316       316       1,477       1,477  
Loans, net
    703,154       708,810       716,099       715,992  
Federal Home Loan Bank and
Federal Reserve Bank stock
    7,037       n/a       7,096       n/a  
Interest receivable
    3,639       3,639       3,742       3,742  
                                 
Financial liabilities
                               
Deposits
  $ (996,382 )   $ (996,667 )   $ (985,291 )   $ (986,261 )
Securities sold under agreements
to repurchase
    (22,475 )     (22,475 )     (29,637 )     (29,637 )
Federal Home Loan Bank advances
    (10,393 )     (10,509 )     (12,896 )     (13,045 )
Other borrowed funds
    (19,668 )     (19,638 )     (20,178 )     (20,148 )
Interest payable
    (875 )     (875 )     (899 )     (899 )
                                 

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 and Federal Reserve Bank stock due to the restrictions placed on its transferability.  For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk.  Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values.  Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not material.

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

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.


 
 
- 29 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  9 – FAIR VALUE - continued

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.  Valuations are periodically performed by management and the assets are carried at fair value, less cost to sell.

Assets and Liabilities Measured on a Non-Recurring Basis

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

         
Fair Value Measurements at March 31, 2011 Using
 
   
March 31, 2011
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans
  $ 12,274     $ -     $ -     $ 12,274  
Other real estate owned
                               
Residential Real Estate
  $ 928     $ -     $ -     $ 928  
Multifamily Real Estate
    3,376       -       -       3,376  
Commercial Real Estate
                               
Owner Occupied
    274       -       -       274  
Non-owner Occupied
    2,542       -       -       2,542  
Commercial and Industrial
    66       -       -       66  
All Other
    3,865       -       -       3,865  
Total OREO
    11,051     $ -     $ -       11,051  

 
 
- 30 -

 
 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  9 – FAIR VALUE - continued
 
         
Fair Value Measurements at December 31, 2010 Using
 
   
Dec 31, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired Loans
  $ 14,875     $ -     $ -     $ 14,875  
Other real estate owned
                               
Residential Real Estate
  $ 818     $ -     $ -     $ 818  
   Multifamily Real Estate
    3,385       -       -       3,385  
   Commercial Real Estate
                               
      Owner Occupied
    352       -       -       352  
Non-owner Occupied
    2,778       -       -       2,778  
Commercial and Industrial
    66       -       -       66  
All Other
    3,850       -       -       3,850  
      Total OREO
  $ 11,249     $ -     $ -     $ 11,249  
 
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $14,811,000 at March 31, 2011 with a valuation allowance of $2,537,000 and a carrying amount of $17,397,000 at December 31, 2010 with a valuation allowance of $2,522,000, resulting in a provision for loan losses of $15,000 for the three months ended March 31, 2011, compared to a $173,000 provision for loan losses for the three months ended March 31, 2010.  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 $11,051, which is made up of the outstanding balance of $11,747, net of a valuation allowance of $696 at March 31, 2011, resulting in write downs of $286 for the three months ended March 31, 2011.  At December 31, 2010, other real estate owned had a net carrying amount of 11,249, made up of the outstanding balance of $11,659, net of a valuation allowance of $410.


 
 
- 31 -

 

PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)



On April 8, 2011, Premier consummated the merger of five of its subsidiary banks to form Premier Bank, Inc., an $820 million West Virginia chartered bank with 23 locations in West Virginia, Virginia, Washington, the District of Columbia and Maryland.  Premier filed applications with state and federal banking regulatory authorities in September 2010 to merge two of its wholly owned West Virginia banks (First Central Bank and Traders Bank) and the two subsidiary banks obtained via the acquisition of Abigail Adams National Bancorp (Adams National Bank and Consolidated Bank & Trust) with and into Boone County Bank, also a West Virginia chartered bank under the name “Premier Bank, Inc.”  In the first quarter of 2011, Premier received the required approvals from all federal and state banking regulatory authorities to go ahead with its plans.  As of the close of business on Friday, April 8, 2011, the five banks were merged to form Premier Bank, Inc.

With the surrender of the Adams National Bank charter as part of the merger to form Premier Bank, the October 1, 2008 Written Agreement between Adams National Bank and the OCC ceased to have any future effect on the Company or Premier Bank.
 
On April 19, 2011, Premier submitted a request to the FRB for written approval from the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors to declare and pay its quarterly dividend obligation to the U.S. Treasury due on May 15, 2011 and the two dividends in arrears due on November 15, 2010 and February 15, 2011, respectively.  On May 13, 2011, Premier received notice from the FRB that the Director of the Division of Banking Supervision and Regulation of the Board of Governors approved Premier’s request to pay all current and deferred cash dividends on its Series A, Fixed Rate Cumulative Perpetual Preferred Stock as Premier had requested.  The dividends were paid as scheduled on May 16, 2011.  See Note 6 for additional details on Premier’s Series A, Fixed Rate Cumulative Perpetual Preferred Stock.



 
 
- 32 -

 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

   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 three months ended March 31, 2011 was $1,671,000, or $0.17 per share, compared to net income of $2,313,000, or $0.25 per share for the three months ended March 31, 2010.  The decrease in income in 2011 is largely due to increased data processing and conversion expenses as well as decreases in interest income exceeding decreases in interest expense.  The annualized returns on common shareholders’ equity and average assets were approximately 4.90% and 0.56% for the three months ended March 31, 2011 compared to 7.29% and 0.85% for the same period in 2010.
 
Net interest income for the three months ended March 31, 2011 totaled $10.75 million, down $314,000, or 2.8%, from the $11.06 million of net interest income earned in the first three months of 2010.  Interest income in 2011 decreased by $626,000, or 4.6%, largely due to a $612,000 decrease in interest income on loans.  Interest income on loans decreased due to lower average yields earned even as the volume of outstanding loans increased.  The lower average yield earned on loans was made worse by an increase in loans placed on non-accrual status during the quarter whereby the accrued interest on these loans was reversed against the current year’s loan interest income.  Interest earned on investments decreased by $40,000 due to lower average yields even though on a higher average volume of investments.  Interest earned on federal funds sold and interest bearing bank balances increased by $26,000 largely due to a higher average volume of assets held in this category.


 
 
- 33 -

 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

Partially offsetting the decrease in interest income, interest expense decreased in total during the first three months of 2011 by $312,000, or 12.2%, when compared to the same three months of 2010.  Interest expense on deposits decreased by $291,000, or 13.1%, largely due to a continuing decrease in the rates paid on deposits, although on a higher average balance of deposits outstanding.  Interest expense on repurchase agreements and other short-term borrowings increased by $4,000, largely due to a higher average balance outstanding.  Interest expense on FHLB advances decreased by $89,000, due to a decrease in the average balance outstanding and the average rate paid due to the payoff of higher rate borrowings at maturity during the second quarter of 2010.  Interest expense on other borrowings increased by $64,000 in the first three months of 2011 compared to the first three months of 2010, largely due to an increase in borrowings in during the third quarter of 2010 at a slightly higher cost.  The Board of Governors’ policy to reduce the federal funds rate to nearly zero, coupled with the U.S. Treasury actively buying investment securities, has significantly reduced the yield on much of Premier’s earning assets, including investments, federal funds sold and variable rate loans.  Premier has tried to offset some of the lower interest income by lowering the rates paid on its deposits and repurchase agreements with customers.  However, the lower yield on the loans and investments, coupled with the higher rates paid on other borrowings, have combined to reduce Premier’s overall net interest margin.  Premier’s net interest margin in the first three months of 2011 was 3.99% compared to 4.47% for the same period in 2010.  A portion of the interest income on loans is the result of recognizing into interest income the remaining fair value discount on a note acquired via a business acquisition if that note was fully paid-off during the quarter.  These events cannot be predicted with certainty and may positively or negatively affect interest income on loans in future months.



 
 
- 34 -

 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

Additional information on Premier’s net interest income for the first quarter of 2011 and first quarter of 2010 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
 
AVERAGE CONSOLIDATED BALANCE SHEETS
 
AND NET INTEREST INCOME ANALYSIS
 
   
   
Three Months Ended March 31, 2011
   
Three Months Ended March 31, 2010
 
   
Balance
   
Interest
   
Yield/Rate
   
Balance
   
Interest
   
Yield/Rate
 
Assets
                                   
Interest Earning Assets
                                   
Federal funds sold and other
  $ 100,033     $ 53       0.21 %   $ 63,229     $ 27       0.17 %
Securities available for sale
                                               
Taxable
    265,971       1,936       2.91       240,846       1,973       3.28  
Tax-exempt
    8,375       62       4.49       8,468       65       4.65  
Total investment securities
    274,346       1,998       2.96       249,314       2,038       3.32  
Total loans
    718,778       10,940       6.17       692,382       11,552       6.77  
Total interest-earning assets
    1,093,157       12,991       4.82 %     1,004,925       13,617       5.50 %
Allowance for loan losses
    (10,021 )                     (7,679 )                
Cash and due from banks
    24,339                       20,201                  
Other assets
    80,086                       76,158                  
Total assets
  $ 1,187,561                     $ 1,093,605                  
                                                 
Liabilities and Equity
                                               
Interest-bearing liabilities
                                               
Interest-bearing deposits
  $ 772,265       1,932       1.01     $ 735,364       2,223       1.23  
Short-term borrowings
    27,306       47       0.70       24,033       43       0.73  
FHLB advances
    11,116       47       1.71       14,888       136       3.70  
Other borrowings
    19,897       216       4.40       15,779       152       3.91  
Total interest-bearing liabilities
    830,584       2,242       1.09 %     790,064       2,554       1.31 %
Non-interest bearing deposits
    219,751                       168,852                  
Other liabilities
    3,924                       4,350                  
Shareholders’ equity
    133,302                       130,339                  
Total liabilities and equity
  $ 1,187,561                     $ 1,093,605                  
                                                 
Net interest earnings
          $ 10,749                     $ 11,063          
Net interest spread
                    3.73 %                     4.19 %
Net interest margin
                    3.99 %                     4.47 %
                                                 


 
 
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

Non-interest income increased by $94,000, or 6.2%, to $1,611,000 for the first three months of 2011 compared to the same three months of 2010.  Service charges on deposit accounts decreased by $34,000, or 3.7%, and secondary market mortgage income remained relatively unchanged at $88,000 in 2011 compared to $89,000 in the first three months of 2010.  These decreases were more than offset by a $109,000, or 32.1%, increase in electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) and a $20,000 increase in other non-interest income.  Electronic banking income increased largely due to continued increases in Premier’s deposit customer base and customers’ greater propensity to use electronic means to conduct their banking business.  Premier’s conversion to a more modern banking software system in 2005 has allowed Premier to offer more electronic banking services and made it easier for customers to conduct their banking electronically.
 
Non-interest expenses for the first quarter of 2011 totaled $9,307,000, or 3.18% of average assets on an annualized basis, compared to $8,510,000, or 3.16% of average assets for the same period of 2010.  The $797,000 increase in non-interest expenses in 2011 when compared to the first quarter of 2010 is largely due to $379,000 of conversion expenses incurred during 2011, as Premier is changing its operating and customer delivery systems to a more unified platform to be completed in the third quarter of 2011.  Also contributing to the increase in non-interest expenses in 2011 was a $198,000, or 19.6%, increase in data processing expenses, a $97,000, or 8.5%, increase in occupancy and equipment expenses, a $53,000, or 11.6% increase in FDIC insurance expense, a $92,000 increase in loan collection expenses, a $35,000 increase in professional fees and a $67,000 increase in core deposit amortization expense.  Data processing expense has increased due to higher rates charged by Premier’s data providers and an increase in the number accounts processed.  Occupancy and equipment expense increased largely due to $81,000 in gains on the sale of three buildings in the first quarter of 2010 which served to reduce the reported expense for that period.  FDIC insurance expense increased largely due to an increase in the assessed deposit base, resulting in part from the four branches acquired in the third quarter of 2010, while core deposit amortization expense increased due to the core deposit intangible assets associated with the same branch purchase in 2010. These expense increases were partially offset by a $40,000, or 1.0%, decrease in staff costs, a $63,000, or 24.6%, decrease in non-income based taxes, and a $71,000, or 45.8%, decrease in other real estate owned expenses.
 
Income tax expense was $862,000 for the first three months of 2011 compared to $1,186,000 for the first three months of 2010.  The effective tax rate for the three months ended March 31, 2011 was 34.0% compared to the 33.9% effective tax rate for the same period in 2010.  The decrease in income tax expense can be primarily attributed to the decrease in pre-tax income detailed above.

 
 
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

B.         Financial Position
 
Total assets at March 31, 2011 increased by $3.8 million to just over $1.187 billion from the $1.183 billion at December 31, 2010.  Likewise, earning assets increased by $3.7 million from the $1.092 billion at year-end 2010 to end the quarter at $1.096 billion.  The increase in earning assets was largely due to an increase in securities available for sale partially offset by a decrease in total loans outstanding (see below).
 
Cash and due from banks at March 31, 2011 was $23.3 million, a $3.3 million increase from the $20.0 million at December 31, 2010.  Interest bearing bank balances decreased by $2.9 million from the $78.6 million reported at December 31, 2010.  While federal funds sold decreased by $5.8 million to $17.8 million at March 31, 2011.   Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases and are part of Premier’s management of its liquidity and interest rate risks.  The decrease in interest bearing bank balances plus the decrease in federal funds sold during the first three months of 2011 was largely in response to fund an increase in securities available for sale during that time.
 
Securities available for sale totaled $281.5 million at March 31, 2011, a $25.0 million increase from the $256.5 million at December 31, 2010.  The increase was largely due to the investment of surplus funds from the repayment or complete payoff of loans in the first quarter exceeding new loan volume plus additional funds from the net growth in deposits during the quarter.  During the first quarter of 2011, Premier used some of its surplus liquid assets to purchase bonds in the short- to mid-term maturity range in an effort to improve its overall yield on earning assets without unduly increasing interest rate risk.  The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies.  The unrealized losses at March 31, 2011 and December 31, 2010 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 March 31, 2011 were $713.4 million compared to $726.0 million at December 31, 2010, a decrease of approximately $12.6 million.  The decrease in loans was largely due to loan payoffs and principal payments which more than offset sluggish loan demand during the first quarter of 2011.
 
Deposits totaled $996.4 million as of March 31, 2011, an $11.1 million increase from the $985.3 million in deposits at December 31, 2010.  The overall increase in deposits is largely due to a $12.0 million increase in non-interest bearing deposits.   Interest bearing time deposits $100,000 and over decreased by $4.8 million during the first quarter of 2011.  This decrease was partially offset by a $3.9 million increase in all other interest bearing deposits.  Contrary to the growth in total deposits, repurchase agreements with corporate and public entity customers decreased in the first quarter of 2011, declining by $7.2 million to $22.5 million as of March 31, 2011.
 
Federal Home Loan Bank (FHLB) advances declined by $2.5 million in the first three months of 2011 due to regularly scheduled principal payments and Premier’s bank subsidiaries repaying the $2.4 million of overnight FHLB borrowing they had outstanding at December 31, 2010.  Other borrowed funds decreased by $510,000 during the first quarter of 2011 due to regularly scheduled principal payments plus accelerated principal payments.  See Note 4 to the consolidated financial statements for additional information on the Company’s outstanding FHLB advances.

 
 
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011
 
    The following table sets forth information with respect to the Company’s nonperforming assets at March 31, 2011 and December 31, 2010.

   
(In Thousands)
 
   
2011
   
2010
 
Non-accrual loans
  $ 54,834     $ 47,131  
Accruing loans which are contractually past due 90 days or more
    324       414  
Restructured
    403       2,639  
Total non-performing loans
    55,561       50,184  
Other real estate acquired through foreclosure (OREO)
    11,051       11,249  
Total non-performing assets
  $ 66,612     $ 61,433  
                 
Non-performing loans as a percentage of total loans
    7.79 %     6.91 %
                 
Non-performing assets as a percentage of total assets
    5.61 %     5.19 %
 
Total non-performing loans have increased since year-end, largely due to an increase in non-accrual loans.  During the first quarter of 2011, four large loan relationships totaling approximately $10.7 million were placed on non-accrual status and processes put into place to begin foreclosure due to the borrowers’ inability to continue to service their loans.  Any accrued interest on these loans was reversed against current year interest income on loans.  The total $12.5 million of loans placed on non-accrual status during the quarter was partially offset by approximately $4.8 million of payments and payoffs received on non-accrual loans.  The change in other real estate owned is largely due to the foreclosure of approximately $145,000 of non-accrual loans partially offset by sales of $57,000 of OREO properties and OREO write downs of $286,000.  The significant level of non-accrual loans and OREO is due to the non-performing assets that came with the acquisition of Abigail Adams and its two subsidiary banks (the “Acquired Banks”).
 
At December 31, 2010, the Acquired Banks accounted for $48.7 million or 79.2% of Premier’s non-performing assets while at March 31, 2011 the Acquired Banks accounted for $50.0 million or 75.1% of Premier’s non-performing assets.  However, since these assets were recorded at an estimated fair value on the date of acquisition, the amount of credit risk assumed by Premier is not nearly as great as the volume of non-performing assets suggests taken at face value.  The estimate of fair value on all loans, but particularly on non-performing assets, included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants. These estimates included significant discounts on the non-accrual loans.  Since the estimated fair value of these loans was believed to have accounted for the reasonably estimable credit risk in the loans, consistent with new accounting guidance for acquisitions after 2008, no allowance for loan losses for these loans was recorded at the date of acquisition.  Under previous accounting standards, the loan loss allowance of acquired banks would have carried over to Premier’s books and records, as was the case for the Traders Bank and Citizens First Bank acquisitions.  The following table illustrates the face value of the non-performing assets of the Acquired Banks as of March 31, 2011 and December 31, 2010 and the discounted net carrying value of those non-performing assets.

 
 
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011


NON-PERFORMING ASSETS AT ACQUIRED SUBSIDIARY BANKS
 
(Dollars in thousands)
 
   
March 31, 2011
   
December 31, 2010
 
   
Face Value
   
Discounted Net Carrying Value
   
Face Value
   
Discounted Net Carrying
Value
 
Non-performing Assets
                       
Non-accrual loans
  $ 54,027     $ 43,117     $ 52,337     $ 41,480  
Loans 90+ days past due
    -       -       335       319  
Other real estate owned
    8,203       6,908       8,198       6,903  
Total non-performing assets
  $ 62,230     $ 50,025     $ 60,870     $ 48,702  
                                 
(1) Face value includes reductions for interest payments received on loans while on non-accrual status in accordance with the cost recovery method of accounting for non-accrual loans.
 
 
Many of the non-accrual loans obtained from the Acquired Banks are continuing to be accounted for under cost recovery methods of income recognition as permitted by the guidance for accounting for non-accrual loans acquired in a business combination.  Most of the non-accrual loans at the Acquired Banks were placed in that status due to a lack of predictable cash flows from the borrower.  At acquisition by Premier, these loans were recorded at their estimated fair value.  These estimates included significant discounts on the non-accrual loans.  Yet, the lack of predictable cash flows from the borrowers remains.  As a result, accounting guidance requires these loans to continue to be accounted for under cost recovery methods of income recognition, even though the estimated collateral value may exceed the discounted net carrying value.
 
Premier continues to make a significant effort to reduce its past due and non-performing loans by reviewing loan files, using the courts to bring borrowers current with the terms of their loan agreements and/or the foreclosure and sale of OREO properties.  As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets. Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income.  Also, as these plans are executed, other loans may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses.
 
During the first quarter of 2011, the Company recorded $520,000 of provisions for loan losses, largely due to estimated increases in the overall credit risk in the loan portfolio.  The continuing level of non-performing loans, plus the increase in non-accrual loans are evidence of the increasing credit risk in the loan portfolio.  The longer the downturn in the national and local economy continues, the greater the risk that one or more of Premier’s loan customers may be affected in a negative way and therefore struggle to meet their commitment to repay their loan.  The $520,000 first quarter 2011 provision for loan losses compares to the $571,000 of provision expense recorded during the first quarter of 2010.  The provisions for loan losses 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.  In the coming months, Premier will continue to monitor the impact that national housing market price declines may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses.  While some price deterioration is expected, it is not currently anticipated that Premier’s markets will be impacted as severely as other areas of the country due to the historically modest increases in real estate values in the

 
 
 
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

Company’s Appalachian markets.  However, as local and national unemployment rates remain at elevated levels and the downturn in housing prices extends further into the future, there is an increasing risk of price deterioration in real estate values in the Company’s markets.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.
 
Gross charge-offs totaled $180,000 during the first three months of 2011.  Any collections on these loans would be presented in future financial statements as recoveries of the amounts charged against the allowance.  Recoveries recorded during the first three months of 2011 totaled $77,000 resulting in net charge-offs for the first quarter of 2011 of $103,000.  This compares to $71,000 of net charge-offs recorded in the first quarter of 2010.  The allowance for loan losses at March 31, 2011 was 1.44% of total loans compared to 1.36% at December 31, 2010.  The increase in the ratio is largely due to the $520,000 of additional provisions for loan losses exceeding the $103,000 of net charge-offs recorded in the first quarter of 2011 as well as the $12.5 million decrease in total loans outstanding.




 
 
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

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, 2010.  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, 2010.  There have been no significant changes in the application of these accounting policies since December 31, 2010.
 
Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time.

 
 
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

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

 
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 $281.5 million of securities at fair value as of March 31, 2011.
 
The cash flow statements for the periods presented in the financial statements provide an indication of the Company’s sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity.
 
      E.           Capital
 
At March 31, 2011, total shareholders’ equity of $133.9 million was 11.3% of total assets.  This compares to total shareholders’ equity of $131.4 million or 11.1% of total assets on December 31, 2010.
 
Tier I capital totaled $100.3 million at March 31, 2011, which represents a Tier I leverage ratio of 8.7%.  This ratio is up slightly from the 8.5% at December 31, 2010 as the growth in Tier I capital was divided by a slight increase in total assets during the first quarter of 2011.
 
Book value per common share was $14.12 at March 31, 2011, and $13.80 at December 31, 2010.  The increase in book value per share was the result of the $0.17 per share earned during the quarter, including an approximate $0.04 per share reduction for the $305,000 of preferred stock dividends accrued and related accretion.  Also increasing the book value per share was $1,115,000 of other comprehensive income for the first three months of 2011 related to the after tax increase in the market value of investment securities available for sale, which increased book value by approximately $0.14 per share.


 
 
- 42 -

 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2011

 
The Company currently does not engage in any derivative or hedging activity.  Refer to the Company’s 2010 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 2010 10-K.



A.         Disclosure Controls & Procedures
 
Premier management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to the Securities and Exchange Act of 1934 Rule 13a-15c as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.

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

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

 
 
- 43 -

 
PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2011


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, 2010 for disclosures with respect to Premier’s risk factors at December 31, 2010. There have been no material changes since year-end 2010 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.          Submission of Matters to a vote of Security Holders    [Removed and reserved]

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.




 
 
- 44 -

 
PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2011




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: May 16, 2011                                          /s/ Robert W. Walker                                                          
Robert W. Walker
President & Chief Executive Officer


Date: May 16, 2011                                          /s/ Brien M. Chase                                                          
Brien M. Chase
Senior Vice President & Chief Financial Officer


 
 

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