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EX-31.2 - CFO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INCexhibit31-2.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INCexhibit31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - PREMIER FINANCIAL BANCORP INCFinancial_Report.xls
EX-32 - CEO AND CFO SECTION 906 CERTIFICATION - PREMIER FINANCIAL BANCORP INCexhibit32.htm


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

FORM 10-Q

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

 
For the quarterly period ended June 30, 2014

 
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 000-20908

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

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

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

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

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

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

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

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

Common stock, no par value, – 8,102,745 shares outstanding at July 31, 2014

JUNE 30, 2014
INDEX TO REPORT





 
 
- 2 -

PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2014



Item 1.  Financial Statements

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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2013 for further information in this regard.

Index to consolidated financial statements:










 
 
- 3 -

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2014 AND DECEMBER 31, 2013
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


    (UNAUDITED)        
   
2014
   
2013
 
ASSETS
           
Cash and due from banks
  $ 39,081     $ 27,378  
Interest bearing bank balances
    54,296       36,606  
Federal funds sold
    3,548       12,777  
Cash and cash equivalents
    96,925       76,761  
Securities available for sale
    269,770       218,066  
Loans held for sale
    487       77  
Loans
    832,841       740,770  
Allowance for loan losses
    (9,877 )     (11,027 )
Net loans
    822,964       729,743  
Federal Home Loan Bank stock, at cost
    3,895       4,183  
Premises and equipment, net
    21,123       17,798  
Real estate and other property acquired through foreclosure
    12,842       13,524  
Interest receivable
    3,386       3,132  
Goodwill
    33,796       29,875  
Other intangible assets
    3,483       2,121  
Deferred taxes
    2,540       4,439  
Other assets
    644       460  
Total assets
  $ 1,271,855     $ 1,100,179  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Non-interest bearing
  $ 255,430     $ 210,193  
Time deposits, $100,000 and over
    174,693       146,905  
Other interest bearing
    659,438       566,925  
Total deposits
    1,089,561       924,023  
Securities sold under agreements to repurchase
    11,003       11,319  
Other borrowed funds
    12,937       13,800  
Interest payable
    461       383  
Other liabilities
    4,403       3,714  
Total liabilities
    1,118,365       953,239  
                 
Stockholders' equity
               
Preferred stock, no par value; $12,000 liquidation preference,
               
5% cumulative, 1,000,000 shares authorized;
12,000 shares issued and outstanding
    11,985       11,955  
Common stock, no par value; 20,000,000 shares authorized;
8,101,545 shares issued and outstanding at June 30, 2014, and
8,038,345 shares issued and outstanding at December 31, 2013
    74,208       73,589  
Retained earnings
    65,639       62,021  
Accumulated other comprehensive income (loss)
    1,658       (625 )
Total stockholders' equity
    153,490       146,940  
Total liabilities and stockholders' equity
  $ 1,271,855     $ 1,100,179  
                 


CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Interest income
                       
Loans, including fees
  $ 11,262     $ 10,706     $ 22,925     $ 20,466  
Securities available for sale
                               
Taxable
    1,400       1,528       2,715       3,110  
Tax-exempt
    63       41       98       84  
Federal funds sold and other
    64       42       96       72  
Total interest income
    12,789       12,317       25,834       23,732  
                                 
Interest expense
                               
Deposits
    960       1,054       1,847       2,145  
Repurchase agreements and other
    9       6       16       18  
Other borrowings
    144       164       288       336  
Total interest expense
    1,113       1,224       2,151       2,499  
                                 
Net interest income
    11,676       11,093       23,683       21,233  
Provision for loan losses
    (79 )     (70 )     (389 )     500  
Net interest income after provision for loan losses
    11,755       11,163       24,072       20,733  
                                 
Non-interest income
                               
Service charges on deposit accounts
    899       847       1,638       1,636  
Electronic banking income
    655       517       1,150       987  
Secondary market mortgage income
    50       47       69       141  
Gain on disposition of securities
    -       -       -       148  
Other
    179       170       307       314  
      1,783       1,581       3,164       3,226  
Non-interest expenses
                               
Salaries and employee benefits
    4,873       3,845       8,857       7,437  
Occupancy and equipment expenses
    1,307       1,103       2,460       2,182  
Outside data processing
    1,029       855       1,898       1,675  
Professional fees
    209       289       745       445  
Taxes, other than payroll, property and income
    152       151       304       363  
Write-downs, expenses, sales of other real estate owned, net
    (488 )     272       (394 )     596  
Amortization of intangibles
    224       152       368       304  
FDIC insurance
    260       200       461       412  
Loan collection expenses
    127       129       194       266  
Other expenses
    1,021       813       1,850       1,516  
      8,714       7,809       16,743       15,196  
Income before income taxes
    4,824       4,935       10,493       8,763  
Provision for income taxes
    1,724       1,826       3,723       3,150  
                                 
Net income
  $ 3,100     $ 3,109     $ 6,770     $ 5,613  
                                 
Preferred stock dividends and accretion
    (165 )     (165 )     (330 )     (330 )
Net income available to common stockholders
  $ 2,935     $ 2,944     $ 6,440     $ 5,283  
                                 
Net income per share:
                               
Basic
  $ 0.36     $ 0.37     $ 0.80     $ 0.66  
Diluted
    0.34       0.35       0.75       0.63  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net income
  $ 3,100     $ 3,109     $ 6,770     $ 5,613  
                                 
Other comprehensive income (loss):
                               
Unrealized gains (losses) on securities available for sale arising during the period
    741       (4,830 )     3,459       (5,409 )
Reclassification of realized gain on the disposition of securities
    -       -       -       (148 )
Net change in unrealized gain (loss) on securities available for sale
    741       (4,830 )     3,459       (5,557 )
Less tax impact
    (252 )     1,642       (1,176 )     1,889  
Other comprehensive income (loss)
    489       (3,188 )     2,283       (3,668 )
                                 
Comprehensive income (loss)
  $ 3,589     $ (79 )   $ 9,053     $ 1,945  
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(UNAUDITED, DOLLARS IN THOUSANDS)


   
2014
   
2013
 
Cash flows from operating activities
           
Net income
  $ 6,770     $ 5,613  
Adjustments to reconcile net income to net cash from operating activities
               
Depreciation
    735       677  
Provision for loan losses
    (389 )     500  
Amortization (accretion), net
    484       131  
OREO writedowns (gains on sales), net
    (800 )     (74 )
Stock compensation expense
    170       87  
Loans originated for sale
    (3,192 )     (6,703 )
Secondary market loans sold
    2,851       6,797  
Secondary market income
    (69 )     (141 )
Gain on disposition of securities
    -       (148 )
Changes in :
               
Interest receivable
    417       296  
Other assets
    1,066       205  
Interest payable
    (56 )     (59 )
Other liabilities
    174       148  
Net cash from operating activities
    8,161       7,329  
                 
Cash flows from investing activities
               
Purchases of securities available for sale
    (34,453 )     (27,230 )
Proceeds from maturities and calls of securities available for sale
    24,298       46,900  
Redemption of FHLB stock
    408       -  
Net change in loans
    1,605       (9,401 )
Acquisition of subsidiary, net of cash received
    40,973       -  
Purchases of premises and equipment, net
    (290 )     (345 )
Improvements to OREO property
    (242 )     (1,029 )
Proceeds from sales of other real estate acquired through foreclosure
    2,803       1,795  
Net cash from investing activities
    35,102       10,690  
                 
Cash flows from financing activities
               
Net change in deposits
    (18,903 )     2,386  
Net change in agreements to repurchase securities
    (316 )     (17,587 )
Repayment of other borrowed funds
    (1,207 )     (1,049 )
Proceeds from stock option exercises
    449       372  
Common stock dividends paid
    (2,822 )     (1,756 )
Preferred stock dividends paid
    (300 )     (300 )
Net cash from financing activities
    (23,099 )     (17,934 )
                 
Net change in cash and cash equivalents
    20,164       85  
                 
Cash and cash equivalents at beginning of period
    76,761       70,245  
                 
Cash and cash equivalents at end of period
  $ 96,925     $ 70,330  

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(UNAUDITED, DOLLARS IN THOUSANDS)


   
2014
   
2013
 
Supplemental disclosures of cash flow information:
           
Cash paid during period for interest
  $ 2,207     $ 2,559  
                 
Cash paid during period for income taxes
    2,299       3,376  
                 
Loans transferred to real estate acquired through foreclosure
    1,079       882  
                 
 
 
 
 
 
 
 
 
 
 
 
 
 

 


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


NOTE  1 - BASIS OF PRESENTATION

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

                 
June 30, 2014
 
       
Year
 
Total
   
Net Income
 
Subsidiary                               
 
Location                      
 
Acquired
 
Assets
   
Qtr
   
YTD
 
Citizens Deposit Bank & Trust
 
Vanceburg, Kentucky
 
1991
  $ 368,479     $ 955     $ 2,260  
Premier Bank, Inc.
 
Huntington, West Virginia
 
1998
    896,228       2,193       5,087  
Parent and Intercompany Eliminations
            7,148       (48 )     (577 )
  Consolidated Total
          $ 1,271,855     $ 3,100     $ 6,770  


All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In January 2014, FASB issued Accounting Standards Update 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements, but will result in additional disclosures.
 
In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.

 
 
- 9 -

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


NOTE  2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at June 30, 2014 are summarized as follows:

2014
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
  $ 58,787     $ 715     $ (12 )   $ 59,490  
U. S. sponsored agency CMO’s - residential
    161,632       2,661       (1,244 )     163,049  
Total mortgage-backed securities of government sponsored agencies
    220,419       3,376       (1,256 )     222,539  
U. S. government sponsored agency securities
    36,045       125       (25 )     36,145  
Obligations of states and political subdivisions
    10,794       292       -       11,086  
Total available for sale
  $ 267,258     $ 3,793     $ (1,281 )   $ 269,770  

Amortized cost and fair value of investment securities, by category, at December 31, 2013 are summarized as follows:

2013
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
  $ 27,681     $ 463     $ (321 )   $ 27,823  
U. S. sponsored agency CMO’s - residential
    178,000       1,167       (2,445 )     176,722  
Total mortgage-backed securities of government sponsored agencies
    205,681       1,630       (2,766 )     204,545  
U. S. government sponsored agency securities
    7,058       30       (107 )     6,981  
Obligations of states and political subdivisions
    6,275       265       -       6,540  
Total available for sale
  $ 219,014     $ 1,925     $ (2,873 )   $ 218,066  


 
 
- 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 June 30, 2014 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
  $ 6,728     $ 6,729  
Due after one year through five years
    29,053       29,417  
Due after five years through ten years
    9,854       9,866  
Due after ten years
    1,204       1,219  
Mortgage-backed securities of government sponsored agencies
    220,419       222,539  
Total available for sale
  $ 267,258     $ 269,770  
                 

A $148,000 gain was recognized from calls of securities during the first six months of 2013 while no gains were recorded in the first six months of 2014.  There were no sales of securities during the first six months of 2014 nor the first six months of 2013.

Securities with unrealized losses at June 30, 2014 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S. government sponsored agency securities
  $ 4,107     $ (17 )   $ 3,990     $ (8 )   $ 8,097     $ (25 )
U.S government sponsored agency MBS's – residential
    4,354       (6 )     4,155       (6 )     8,509       (12 )
U.S government sponsored agency CMO's – residential
    14,457       (167 )     27,641       (1,077 )     42,098       (1,244 )
Total temporarily impaired
  $ 22,918     $ (190 )   $ 35,786     $ (1,091 )   $ 58,704     $ (1,281 )


 
 
- 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, 2013 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S government sponsored agency securities
  $ 3,890     $ (107 )   $ -     $ -     $ 3,890     $ (107 )
U.S government sponsored agency MBS’s – residential
    13,797       (321 )     -       -       13,797       (321 )
U.S government sponsored agency CMO’s – residential
    102,341       (2,445 )     -       -       102,341       (2,445 )
Total temporarily impaired
  $ 120,028     $ (2,873 )   $ -     $ -     $ 120,028     $ (2,873 )

The investment portfolio is predominately high quality interest-bearing debt securities with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at June 30, 2014 and December 31, 2013 are price changes resulting from changes in the interest rate environment and are considered to be 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 June 30, 2014 and December 31, 2013 are summarized as follows:

   
2014
   
2013
 
Residential real estate
  $ 279,116     $ 216,081  
Multifamily real estate
    32,424       38,456  
Commercial real estate:
               
Owner occupied
    103,070       90,539  
Non owner occupied
    218,113       208,756  
Commercial and industrial
    79,978       85,301  
Consumer
    35,090       25,113  
All other
    85,050       76,524  
    $ 832,841     $ 740,770  


 
 
- 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 six months ended June 30, 2014 was as follows:

Loan Class
 
Balance
Dec 31, 2013
   
Provision for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
June 30, 2014
 
                               
Residential real estate
  $ 2,694     $ (391 )   $ 171     $ 8     $ 2,140  
Multifamily real estate
    417       (106 )     -       -       311  
Commercial real estate:
                                       
Owner occupied
    1,407       39       82       -       1,364  
Non owner occupied
    2,037       556       323       -       2,270  
Commercial and industrial
    2,184       (616 )     84       5       1,489  
Consumer
    297       (33 )     59       27       232  
All other
    1,991       162       204       122       2,071  
Total
  $ 11,027     $ (389 )   $ 923     $ 162     $ 9,877  

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

Loan Class
 
Balance
Dec 31, 2012
   
Provision for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
June 30, 2013
 
                               
Residential real estate
  $ 2,163     $ 358     $ 156     $ 6     $ 2,371  
Multifamily real estate
    331       98       -       -       429  
Commercial real estate:
                                       
Owner occupied
    1,117       (255 )     67       299       1,094  
Non owner occupied
    1,888       80       -       -       1,968  
Commercial and industrial
    3,046       987       12       52       4,073  
Consumer
    244       27       63       25       233  
All other
    2,699       (795 )     94       220       2,030  
Total
  $ 11,488     $ 500     $ 392     $ 602     $ 12,198  


 
 
- 13 -

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


NOTE  3–LOANS - continued

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

Loan Class
 
Balance
March 31, 2014
   
Provision for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
June 30, 2014
 
                               
Residential real estate
  $ 2,250     $ 36     $ 152     $ 6     $ 2,140  
Multifamily real estate
    297       14       -       -       311  
Commercial real estate:
                                       
Owner occupied
    1,477       (32 )     81       -       1,364  
Non owner occupied
    2,385       (92 )     23       -       2,270  
Commercial and industrial
    1,527       (20 )     21       3       1,489  
Consumer
    220       37       33       8       232  
All other
    2,188       (22 )     167       72       2,071  
Total
  $ 10,344     $ (79 )   $ 477     $ 89     $ 9,877  

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

Loan Class
 
Balance 
March 31, 2013
   
Provision for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
June 30, 2013
 
                               
Residential real estate
  $ 2,066     $ 386     $ 85     $ 4     $ 2,371  
Multifamily real estate
    347       82       -       -       429  
Commercial real estate:
                                       
Owner occupied
    1,191       (97 )     -       -       1,094  
Non owner occupied
    1,967       1       -       -       1,968  
Commercial and industrial
    4,096       (23 )     2       2       4,073  
Consumer
    174       66       16       9       233  
All other
    2,501       (485 )     38       52       2,030  
Total
  $ 12,342     $ (70 )   $ 141     $ 67     $ 12,198  


 
 
- 14 -

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


NOTE  3–LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at June 30, 2014 and December 31, 2013.

   
2014
   
2013
 
Residential real estate
  $ 174     $ 183  
Multifamily real estate
    534       1,229  
Commercial real estate
               
Owner occupied
    246       250  
Non owner occupied
    5,752       6,782  
Commercial and industrial
    486       496  
All other
    4,665       4,623  
Total carrying amount
  $ 11,857     $ 13,563  
                 
Carrying amount, net of allowance
  $ 11,225     $ 12,931  

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the six months ended June 30, 2014, nor did it increase the allowance for loan losses for purchased impaired loans during the six months ended June 30, 2013.

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

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

 
 
- 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 accretable yield, or income expected to be collected, on the purchased loans above is as follows at June 30, 2014 and June 30, 2013.

   
2014
   
2013
 
Balance at January 1
  $ 217     $ 635  
New loans purchased
    -       -  
Accretion of income
    (6 )     (18 )
Reclassifications from non-accretable difference
    -       -  
Disposals
    -       -  
Balance at June 30
  $ 211     $ 617  



 
 
- 16 -

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


NOTE  3–LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2014 and December 31 2013.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

June 30, 2014
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential  real estate
  $ 2,435     $ 2,150     $ 1,774  
Multifamily real estate
    1,941       1,197       1,366  
Commercial real estate
                       
Owner occupied
    2,257       2,003       1,261  
Non owner occupied
    2,028       1,892       308  
Commercial and industrial
    2,907       1,561       101  
Consumer
    235       215       33  
All other
    12,144       4,710       210  
Total
  $ 23,947     $ 13,728     $ 5,053  
                         

December 31, 2013
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential  real estate
  $ 2,021     $ 1,725     $ 1,737  
Multifamily real estate
    3,282       1,889       1,369  
Commercial real estate
                       
Owner occupied
    1,364       1,147       1,387  
Non owner occupied
    2,683       1,973       3,739  
Commercial and industrial
    6,838       4,961       84  
Consumer
    167       148       16  
All other
    12,212       4,798       146  
Total
  $ 28,567     $ 16,641     $ 8,478  
                         

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.

 
 
- 17 -

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


NOTE  3–LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of June 30, 2014 by class of loans:
Loan Class
 
Total Loans
   
30-89 Days
Past Due
   
Greater than 90 days past due
   
Total Past Due
   
Loans Not Past Due
 
                               
Residential real estate
  $ 279,116     $ 6,874     $ 2,781     $ 9,655     $ 269,461  
Multifamily real estate
    32,424       907       2,029       2,936       29,488  
Commercial real estate:
                                       
Owner occupied
    103,070       790       2,484       3,274       99,796  
Non owner occupied
    218,113       9,097       1,993       11,090       207,023  
Commercial and industrial
    79,978       2,553       1,404       3,957       76,021  
Consumer
    35,090       691       114       805       34,285  
All other
    85,050       761       4,875       5,636       79,414  
Total
  $ 832,841     $ 21,673     $ 15,680     $ 37,353     $ 795,488  

The table above includes approximately $3,574,000 of loans 30-89 days past due and $1,335,000 of loans greater than 90 days past due that were acquired via the purchase of the Bank of Gassaway on April 4, 2014.  See Note 9 below for additional details on purchase of the Bank of Gassaway.

The following table presents the aging of the recorded investment in past due loans as of December 31, 2013 by class of loans:
Loan Class
 
Total Loans
   
30-89 Days
Past Due
   
Greater than 90 days past due
   
Total Past Due
   
Loans Not Past Due
 
                               
Residential real estate
  $ 216,081     $ 4,770     $ 2,431     $ 7,201     $ 208,880  
Multifamily real estate
    38,456       367       2,688       3,055       35,401  
Commercial real estate:
                                       
Owner occupied
    90,539       516       2,073       2,589       87,950  
Non owner occupied
    208,756       278       5,478       5,756       203,000  
Commercial and industrial
    85,301       1,433       1,438       2,871       82,430  
Consumer
    25,113       421       82       503       24,610  
All other
    76,524       2,510       4,881       7,391       69,133  
Total
  $ 740,770     $ 10,295     $ 19,071     $ 29,366     $ 711,404  



 
 
- 18 -

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


NOTE  3–LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2014:
   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
  $ 32     $ 2,108     $ -     $ 2,140     $ 2,081     $ 276,861     $ 174     $ 279,116  
Multifamily real estate
    28       283       -       311       1,806       30,084       534       32,424  
Commercial real estate:
                                                               
Owner occupied
    129       1,235       -       1,364       1,830       100,994       246       103,070  
Non-owner occupied
    -       2,270       -       2,270       207       212,154       5,752       218,113  
Commercial and industrial
    338       1,019       132       1,489       868       78,624       486       79,978  
Consumer
    -       232       -       232       -       35,090       -       35,090  
All other
    -       1,571       500       2,071       2,595       77,790       4,665       85,050  
Total
  $ 527     $ 8,718     $ 632     $ 9,877     $ 9,387     $ 811,597     $ 11,857     $ 832,841  

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2013:
   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
  $ 138     $ 2,556     $ -     $ 2,694     $ 2,787     $ 213,111     $ 183     $ 216,081  
Multifamily real estate
    -       417       -       417       1,822       35,405       1,229       38,456  
Commercial real estate:
                                                               
Owner occupied
    170       1,237       -       1,407       2,386       87,903       250       90,539  
Non-owner occupied
    362       1,675       -       2,037       1,024       200,950       6,782       208,756  
Commercial and industrial
    1,088       964       132       2,184       4,270       80,535       496       85,301  
Consumer
    -       297       -       297       -       25,113       -       25,113  
All other
    102       1,389       500       1,991       3,279       68,622       4,623       76,524  
Total
  $ 1,860     $ 8,535     $ 632     $ 11,027     $ 15,568     $ 711,639     $ 13,563     $ 740,770  


.
 
- 19 -


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


NOTE  3–LOANS - continued

As of June 30, 2014, the table above includes approximately $92,650,000 of loans acquired from the purchase of the Bank of Gassaway reported as collectively evaluated for impairment with no loans deemed by management to be reported as individually evaluated for impairment or acquired with deteriorated credit quality.

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

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2014.  The table includes $5,869,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Residential real estate
  $ 1,550     $ 1,384     $ -  
Multifamily real estate
    2,725       1,980       -  
Commercial real estate
                       
Owner occupied
    1,651       1,468       -  
Non owner occupied
    275       207       -  
Commercial and industrial
    792       44       -  
All other
    2,631       2,595       -  
      9,624       7,678       -  
With an allowance recorded:
                       
Residential real estate
  $ 882     $ 871     $ 32  
Multifamily real estate
    365       360       28  
Commercial real estate
                       
Owner occupied
    475       475       129  
Commercial and industrial
    1,616       1,207       470  
All other
    12,063       4,665       500  
      15,401       7,578       1,159  
Total
  $ 25,025     $ 15,256     $ 1,159  
                         


 
 
- 20 -

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


NOTE  3–LOANS - continued
 
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013.  The table includes $7,483,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Residential  real estate
  $ 1,513     $ 1,314     $ -  
Multifamily real estate
    4,449       3,051       -  
Commercial real estate
                       
Owner occupied
    2,601       1,986       -  
Non owner occupied
    1,861       1,184       -  
Commercial and industrial
    809       49       -  
All other
    3,185       3,167       -  
      14,418       10,751       -  
With an allowance recorded:
                       
Residential  real estate
  $ 1,668     $ 1,656     $ 138  
Commercial real estate
                       
Owner occupied
    515       515       170  
Non owner occupied
    810       790       362  
Commercial and industrial
    5,543       4,604       1,220  
All other
    12,132       4,735       602  
      20,668       12,300       2,492  
Total
  $ 35,086     $ 23,051     $ 2,492  
                         


 

 
 
- 21 -

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


NOTE  3–LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the six months ended June 30, 2014 and June 30, 2013.   The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

   
Six months ended June 30, 2014
   
Six months ended June 30, 2013
 
Loan Class
 
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
   
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
 
Residential real estate
  $ 2,536     $ 61     $ 61     $ 4,486     $ 98     $ 97  
Multifamily real estate
    2,586       727       727       4,006       796       796  
Commercial real estate:
                                               
Owner occupied
    2,155       29       21       2,655       88       71  
Non-owner occupied
    800       627       627       2,801       17       17  
Commercial and industrial
    2,395       542       542       10,082       40       40  
All other
    7,603       81       81       9,393       161       161  
Total
  $ 18,075     $ 2,067     $ 2,059       33,423       1,200       1,182  

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended June 30, 2014 and June 30, 2013.   The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

   
Three months ended June 30, 2014
   
Three months ended June 30, 2013
 
Loan Class
 
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
   
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
 
                                     
Residential real estate
  $ 2,318     $ 27     $ 27     $ 4,323     $ 48     $ 47  
Multifamily real estate
    2,353       19       19       3,743       766       766  
Commercial real estate:
                                               
Owner occupied
    1,983       14       10       2,592       49       42  
Non-owner occupied
    214       -       -       2,349       16       16  
Commercial and industrial
    1,265       9       9       9,468       36       36  
All other
    7,453       38       38       9,706       79       79  
Total
  $ 15,586     $ 107     $ 103     $ 32,181     $ 994     $ 986  

 
 
- 22 -

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


NOTE  3–LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR’s as of June 30, 2014 and December 31, 2013:

June 30, 2014
 
TDR’s on Non-accrual
   
Other TDR’s
   
Total TDR’s
 
                   
Residential  real estate
  $ 20     $ 199     $ 219  
Commercial real estate
                       
Non owner occupied
    -       495       495  
Commercial and industrial
    -       796       796  
Consumer
    -       4       4  
All other
    -       1,838       1,838  
Total
  $ 20     $ 3,332     $ 3,352  
                         

December 31, 2013
 
TDR’s on Non-accrual
   
Other TDR’s
   
Total TDR’s
 
                   
Residential  real estate
  $ 23     $ 296     $ 319  
Commercial real estate
                       
Non owner occupied
    -       506       506  
Commercial and industrial
    -       831       831  
Consumer
    -       5       5  
All other
    -       2,017       2,017  
Total
  $ 23     $ 3,655     $ 3,678  
                         

At June 30, 2014 and December 31, 2013 there were no specific reserves allocated to loans that had restructured terms.


 
 
- 23 -

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


NOTE  3–LOANS - continued

The following table presents TDR’s that occurred during the six months ended June 30, 2014 and June 30, 2013:

   
Six months ended June 30, 2014
   
Six months ended June 30, 2013
 
Loan Class
 
Number of Loans
   
Pre-Modification Outstanding Recorded Investment
   
Post-Modification Outstanding Recorded Investment
   
Number of Loans
   
Pre-Modification Outstanding Recorded Investment
   
Post-Modification Outstanding Recorded Investment
 
                                     
All other
    -       -       -       1     $ 16     $ 16  
Total
    -     $ -     $ -       1     $ 16     $ 16  

The troubled debt restructurings described above did not increase the allowance for loan losses during the period ended June 30, 2014 and did not increase the allowance for loan losses during the period ended June 30, 2013.

During the three and six months ended June 30, 2014 and the three and six months ended June 30, 2013, there were no TDR’s for which there as a payment default within twelve months following the modification.

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

 
 
- 24 -


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


NOTE  3–LOANS - continued

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured residential real estate, on a monthly basis.  For consumer loans, including consumer loans secured by residential real estate, the analysis involves monitoring the performing status of the loan.  At the time such loans become past due by 30 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

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

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

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

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


 
 
- 25 -

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


NOTE  3–LOANS - continued

As of June 30, 2014 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total Loans
 
                               
Residential real estate
  $ 263,898     $ 7,661     $ 7,537     $ 20     $ 279,116  
Multifamily real estate
    29,177       907       2,340       -       32,424  
Commercial real estate:
                                       
Owner occupied
    91,650       7,371       4,049       -       103,070  
Non-owner occupied
    207,435       8,300       2,378       -       218,113  
Commercial and industrial
    76,162       2,138       1,646       32       79,978  
Consumer
    34,645       278       167       -       35,090  
All other
    71,367       5,789       7,894       -       85,050  
Total
  $ 744,334     $ 32,444     $ 26,011     $ 52     $ 832,841  

The table above includes approximately $83,930,000 of loans risk rated as “pass”, $3,129,000 of loans risk rated as “special mention”, $2,771,000 of loans risk rated as “substandard” and no loans risk rated as doubtful that were acquired via the purchase of the Bank of Gassaway on April 4, 2014.  See Note 9 below for additional details on purchase of the Bank of Gassaway.

As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total Loans
 
                               
Residential real estate
  $ 202,789     $ 6,204     $ 7,065     $ 23     $ 216,081  
Multifamily real estate
    34,487       918       3,051       -       38,456  
Commercial real estate:
                                       
Owner occupied
    79,694       7,431       3,348       66       90,539  
Non-owner occupied
    196,338       8,569       3,849       -       208,756  
Commercial and industrial
    78,205       2,269       4,753       74       85,301  
Consumer
    24,772       204       137       -       25,113  
All other
    62,180       5,947       8,285       112       76,524  
                                         
Total
  $ 678,465     $ 31,542     $ 30,488     $ 275     $ 740,770  

 

 
 
- 26 -

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 2014 the Banks could, without prior approval, declare dividends to Premier of approximately $3.8 million plus any 2014 net profits retained to the date of the dividend declaration.

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

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of June 30, 2014 the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

Shown below is a summary of regulatory capital ratios for the Company:
   
June 30,
2014
 
December 31,
2013
 
Regulatory
Minimum
Requirements
 
To Be Considered
Well Capitalized
 
Tier I Capital (to Risk-Weighted Assets)
    15.0%     16.9%     4.0%     6.0%  
Total Capital (to Risk-Weighted Assets)
    16.2%     18.2%     8.0%     10.0%  
Tier I Capital (to Average Assets)
    9.5%     11.0%     4.0%     5.0%  

As of June 30, 2014, the most recent notification from each of the Banks’ primary Federal regulators categorized the subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the preceding table.  There are no conditions or events since that notification that management believes have changed the Banks’ categories.


 
 
- 27 -

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 628,588 shares of the Company’s common stock, no par value, at an exercise price of $5.31 per share, for an aggregate purchase price of $22,252 in cash.

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

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

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


 
 
- 28 -

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


NOTE  5 – PREFERRED STOCK - continued

The U.S. Treasury has agreed not to exercise voting power with respect to any common stock issued to it upon exercise of the Warrant.  The common stock will be issued from authorized but unissued common stock and thus will dilute the interests of existing Premier common shareholders.  Under terms of the Warrant, the exercise price and the number of shares that can be purchased are adjusted based upon certain events including common stock dividends paid to shareholders that exceed the $0.11 per share regular quarterly dividend paid by Premier at the time the Warrant was issued.  Due to dividends paid in 2014 that were either special cash dividends or dividends that exceeded the $0.11 regular quarterly cash dividend per share defined in the terms of the Warrant, the Warrant has been adjusted as of June 30, 2014 to permit the purchase of 634,322 shares of the Company’s common stock at an exercise price of $5.26 per share. As of June 30, 2014, the Warrant has not yet been exercised.  Since the Series A Preferred Stock was disposed of by the U.S. Treasury, Premier has the right to repurchase the Warrant at its appraised value.  If Premier chooses not to repurchase the Warrant, the U.S. Treasury may liquidate the Warrant at its current market price.



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 19, 2014, 46,300 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $14.43, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 19, 2017.  On March 20, 2013, 52,900 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $11.39, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 20, 2016.

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:

   
2014
   
2013
 
Risk-free interest rate
    2.78 %     1.96 %
Expected option life (yrs)
    10.00       10.00  
Expected stock price volatility
    31.19 %     35.24 %
Dividend yield
    3.33 %     3.86 %
Weighted average fair value of options granted
  $ 3.74     $ 2.85  

.
 
- 29 -

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


NOTE  6 – STOCK COMPENSATION EXPENSE - 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.

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

Stock-based compensation expense of $170,000 was recorded for the first six months of 2014 compared to $87,000 for the first six months of 2013.  For the three months ended June 30, $128,000 was recorded for 2014 while $41,000 was recorded for 2013.  Stock-based compensation expense is recognized ratably over the requisite vesting period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $186,000 at June 30, 2014. This unrecognized expense is expected to be recognized over the next 32 months based on the vesting periods of the options.

A summary of the Company’s stock option activity and related information is presented below for the six months ended June 30:
 
   
- - - - - - 2014 - - - - - -
   
- - - - - - 2013 - - - - - -
 
   
Options
   
Weighted
Average
Exercise
Price
   
Options
   
Weighted
Average
Exercise
Price
 
Outstanding at beginning of year
    354,281     $ 9.84       392,366     $ 9.24  
Grants
    46,300       14.43       52,900       11.39  
Exercises
    (63,297 )     8.45       (48,617 )     7.65  
Forfeitures or expired
    (8,133 )     9.27       (12,201 )     8.03  
Outstanding at June 30,
    329,151     $ 10.77       384,448     $ 9.70  
                                 
Exercisable at June 30,
    223,898               242,898          
Weighted average remaining life of options outstanding
    6.2               6.5          
Weighted average fair value of options granted during the year
  $ 3.74             $ 2.85          

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

 
 
- 30 -

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


NOTE  6 – STOCK COMPENSATION EXPENSE - continued

Additional information regarding stock options outstanding and exercisable at June 30,2014, 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       144,648     $ 7.47     $ 1,245       116,955       6.6     $ 7.47     $ 1,006  
$10.01 to $12.50       61,603       11.45       285       30,343       4.4       11.51       139  
$12.51 to $15.00       99,400       13.91       216       53,100       3.2       13.46       139  
$15.01 to $17.50       23,500       16.00       2       23,500       1.6       16.00       2  
Outstanding - Jun 30, 2014
      329,151       10.77     $ 1,748       223,898       5.0       10.34     $ 1,286  
                                                           



A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and six months ended June 30, 2014 and 2013 is presented below:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
Basic earnings per share
                       
Income available to common stockholders
  $ 2,935     $ 2,944     $ 6,440     $ 5,283  
Weighted average common shares outstanding
    8,079,629       7,980,923       8,061,522       7,971,859  
Earnings per share
  $ 0.36     $ 0.37     $ 0.80     $ 0.66  
                                 
Diluted earnings per share
                               
Income available to common stockholders
  $ 2,935     $ 2,944     $ 6,440     $ 5,283  
Weighted average common shares outstanding
    8,079,629       7,980,923       8,061,522       7,971,859  
Add dilutive effects of potential additional common stock
    502,839       451,072       504,519       439,194  
Weighted average common and dilutive potential common shares outstanding
    8,582,468       8,431,995       8,566,041       8,411,053  
Earnings per share assuming dilution
  $ 0.34     $ 0.35     $ 0.75     $ 0.63  

Stock options for 23,500 and 84,100 shares of common stock were not considered in computing diluted earnings per share for the six months ended June 30, 2014 and 2013 because they were antidilutive.  Stock options for 23,500 and 84,100 shares of common stock were not considered in computing diluted earnings per share for the three months ended June 30, 2014 and 2013 because they were antidilutive.

 
 
- 31 -

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.

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

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

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


 
 
- 32 -

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


NOTE  8 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at June 30, 2014 were as follows:

         
Fair Value Measurements at June 30, 2014 Using
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
  $ 93,377     $ 93,377     $ -     $ -     $ 93,377  
Federal funds sold
    3,548       3,548       -       -       3,548  
Securities available for sale
    269,770       -       269,630       140       269,770  
Loans held for sale
    487       -       -       487       487  
Loans, net
    822,964       -       -       825,813       825,813  
Federal Home Loan Bank stock
    3,895       n/a       n/a       n/a       n/a  
Interest receivable
    3,386       -       807       2,579       3,386  
                                         
Financial liabilities
                                       
Deposits
  $ (1,089,561 )   $ (716,889 )   $ (373,389 )   $ -     $ (1,090,278 )
Securities sold under agreements to repurchase
    (11,003 )     -       (11,003 )     -       (11,003 )
Other borrowed funds
    (12,937 )     -       (12,984 )     -       (12,984 )
Interest payable
    (461 )     (6 )     (455 )     -       (461 )
                                         

The carrying amounts and estimated fair values of financial instruments at December 31, 2013 were as follows:

         
Fair Value Measurements at December 31, 2013 Using
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
  $ 63,984     $ 63,984     $ -     $ -     $ 63,984  
Federal funds sold
    12,777       12,777       -       -       12,777  
Securities available for sale
    218,066       -       217,926       140       218,066  
Loans held for sale
    77       -       -       77       77  
Loans, net
    729,743       -       -       725,588       725,588  
Federal Home Loan Bank stock
    4,183       n/a       n/a       n/a       n/a  
Interest receivable
    3,132       -       593       2,539       3,132  
                                         
Financial liabilities
                                       
Deposits
  $ (924,023 )   $ (592,664 )   $ (332,475 )   $ -     $ (925,139 )
Securities sold under agreements to repurchase
    (11,319 )     -       (11,319 )     -       (11,319 )
Other borrowed funds
    (13,800 )     -       (13,811 )     -       (13,811 )
Interest payable
    (383 )     (5 )     (378 )     -       (383 )
                                         


 
 
- 33 -

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


NOTE  8 – FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

         
Fair Value Measurements at
June 30, 2014 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
 (Level 1)
   
Significant Other Observable Inputs
 (Level 2)
   
Significant Unobservable Inputs
 (Level 3)
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 59,490     $ -     $ 59,490     $ -  
U. S. agency CMO’s - residential
    163,049       -       163,049       -  
Total mortgage-backed securities of government sponsored agencies
    222,539       -       222,539       -  
U. S. government sponsored agency securities
    36,145       -       36,145       -  
Obligations of states and political subdivisions
    11,086       -       10,946       140  
Total available for sale
  $ 269,770     $ -     $ 269,630     $ 140  

         
Fair Value Measurements at
 December 31, 2013 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
 (Level 1)
   
Significant Other Observable Inputs
 (Level 2)
   
Significant Unobservable Inputs
 (Level 3)
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 27,823     $ -     $ 27,823     $ -  
U. S. agency CMO’s
    176,722       -       176,722       -  
Total mortgage-backed securities of government sponsored agencies
    204,545       -       204,545       -  
U. S. government sponsored agency securities
    6,981       -       6,981       -  
Obligations of states and political subdivisions
    6,540       -       6,400       140  
Total securities available for sale
  $ 218,066     $ -     $ 217,926     $ 140  
Mortgage-backed securities
                               

There were no transfers between Level 1 and Level 2 during 2014 or 2013.

 
 
- 34 -

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


NOTE  8 – FAIR VALUE - continued

Assets and Liabilities Measured on a Non-Recurring Basis

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

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and unique to each property and result in a Level 3 classification of the inputs for determining fair value.  Management periodically evaluates the appraised values and will discount a property’s appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property.  To the extent an adjusted appraised value is lower than the carrying value of an impaired loan, a specific allocation of the allowance for loan losses is assigned to the loan.

Other real estate owned (OREO):  The fair value of OREO is based on appraisals less cost to sell at the date of foreclosure.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.  Management periodically evaluates the appraised values and will discount a property’s appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property. To the extent an adjusted appraised value is lower than the carrying value of an OREO property, a direct charge to earnings is recorded as an OREO writedown.


 
 
- 35 -

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


NOTE  8 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2014 are summarized below:

         
Fair Value Measurements at June 30, 2014 Using
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans:
                       
Residential Real Estate
  $ 839     $ -     $ -     $ 839  
Multifamily Residential
    332       -       -       332  
Commercial Real Estate
                               
Owner Occupied
    346       -       -       346  
Commercial and Industrial
    737       -       -       737  
All Other
    4,165       -       -       4,165  
Total impaired loans
    6,419     $ -     $ -     $ 6,419  
                                 
Other real estate owned:
                               
Commercial Real Estate
                               
Non-owner Occupied
  $ 290       -       -     $ 290  
All Other
    8,448       -       -       8,448  
Total OREO
  $ 8,738     $ -     $ -     $ 8,738  

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $6,419,000 at June 30, 2014 made up of an outstanding balance of $7,578,000, net of a valuation allowance of $1,159,000.  At December 31, 2013, impaired loans had a carrying amount of $9,808,000,  made up of an outstanding balance of $12,300,000, net of a valuation allowance of $2,492,000.  The change resulted in a negative provision for loan losses of $886,000 for the six months ended June 30, 2014, compared to a $483,000 provision for loan losses for the six months ended June 30, 2013; and a negative $143,000 provision for loan losses for the three months ended June 30, 2014, compared to a negative $429,000 provision for loan losses for the three months ended June 30, 2013.  The detail of impaired loans by loan class is contained in Note 3 above.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $8,738,000 which is made up of the outstanding balance of $11,395,000 net of a valuation allowance of $2,657,000 at June 30, 2014. There were $280,000 of additional write downs during the six months ended June 30, 2014, compared to no additional write downs during the six months ended June 30, 2013.  For the three months ended June 30, 2014 there were $280,000 of additional write downs compared to no additional write downs during the three months ended   June 30, 2013. At December 31, 2013, other real estate owned had a net carrying amount of $8,786,000, made up of the outstanding balance of $11,163,000, net of a valuation allowance of $2,377,000.

 
 
- 36 -

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


NOTE  8 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at June 30, 2014 are summarized below:

   
June 30, 2014
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Avg)
Impaired loans:
               
Residential Real Estate
  $ 839  
sales comparison
 
adjustment for differences between the comparable sales
    3.3%-3.3%(3.3%)
Multifamily Residential
    332  
sales comparison
 
adjustment for differences between the comparable sales
    36.8%-36.8%(36.8%)
Commercial Real Estate
                   
Owner Occupied
    346  
sales comparison
 
adjustment for limited salability of specialized property
    65.5%-72.4%(66.9%)
Commercial and Industrial
    737  
sales comparison
 
adjustment for limited salability of specialized property
    16.4%-41.2%(27.7%)
All Other
    4,165  
sales comparison
 
adjustment for percentage of completion of construction
    57.2%-57.2%(57.2%)
Total impaired loans
    6,419              
                     
Other real estate owned:
                   
Commercial Real Estate
                   
Non-owner Occupied
    290  
sales comparison
 
adjustment for differences between the comparable sales
    42.7%-42.7%(42.7%)
All Other
    8,448  
sales comparison
 
adjustment for estimated realizable value
    24.6%-49.1%(44.2%)
Total OREO
  $ 8,738              



 
 
- 37 -

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


NOTE  8 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2013 are summarized below:

         
Fair Value Measurements at December 31, 2013 Using
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans:
                       
Residential Real Estate
  $ 1,518     $ -     $ -     $ 1,518  
Commercial Real Estate
                               
Owner Occupied
    345       -       -       345  
Non-owner Occupied
    428       -       -       428  
Commercial and Industrial
    3,384       -       -       3,384  
All Other
    4,133       -       -       4,133  
Total impaired loans
    9,808     $ -     $ -     $ 9,808  
                                 
Other real estate owned:
                               
Commercial Real Estate
                               
Non-owner Occupied
    290       -       -       290  
All Other
    8,496       -       -       8,496  
Total OREO
  $ 8,786     $ -     $ -     $ 8,786  



 
 
- 38 -

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


NOTE  8 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2013 are summarized below:

   
December 31, 2013
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Avg)
Impaired loans:
               
Residential Real Estate
  $ 1,518  
sales comparison
 
adjustment for differences between the comparable sales
    0.8%-63.5%(11.9%)
Commercial Real Estate
                   
Owner Occupied
    345  
sales comparison
 
adjustment for limited salability of specialized property
    62.5%-70.0%(64.0%)
Non-owner Occupied
    428  
sales comparison
 
adjustment for limited salability of specialized property
    50.6%-50.6%(50.6%)
Commercial and Industrial
    3,384  
sales comparison
 
adjustment for limited salability of specialized property
    25.0%-65.5%(57.8%)
All Other
    4,133  
sales comparison
 
adjustment for percentage of completion of construction
    57.6%-99.3%(57.7%)
Total impaired loans
    9,808              
                     
Other real estate owned:
                   
Commercial Real Estate
                   
Non-owner Occupied
    290  
sales comparison
 
adjustment for differences between the comparable sales
    42.7%-42.7%(42.7%)
All Other
    8,496  
sales comparison
 
adjustment for estimated realizable value
    9.5%-24.6%(12.5%)
Total OREO
  $ 8,786              


 
 
- 39 -

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



Effective with the close of business on April 4, 2014, Premier completed its purchase of the Bank of Gassaway (“Gassaway”), a $201.52 million bank headquartered in Gassaway, West Virginia.  Under terms of an amended and restated agreement of merger dated January 3, 2014, Premier Bank, Inc., a wholly owned subsidiary of Premier, paid $20.25 million in cash for the Bank of Gassaway and merged Gassaway’s five branch locations into its operating systems.  The purchase price resulted in approximately $3.92 million in goodwill and $1.73 million in core deposit intangible, none of which is deductible for tax purposes.  The core deposit intangible will be amortized using an accelerated method.  The following table presents estimated amortization of the Gassaway core deposit intangible for each of the next five years.

2014
  $ 243  
2015
    279  
2016
    226  
2017
    193  
2018
    186  
2019 and thereafter
    603  
Total core deposit intangible acquired
  $ 1,730  
         

United States generally accepted accounting principles (“U.S. GAAP”) provides up to twelve months following the date of acquisition in which management can finalize the fair values of acquired assets and assumed liabilities. Material events that occur during the measurement period will be analyzed to determine if the new information reflected facts and circumstances that existed on the acquisition date. The measurement period ends as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns more information is unobtainable. The measurement period is limited to one year from the acquisition date. Once management has finalized the fair values of acquired assets and assumed liabilities within this twelve month period, management considers such values to be the “Day One Fair Values.”.

Net assets acquired via the acquisition are shown in the table below.

   
Gassaway
 
Cash and due from banks
  $ 61,223  
Securities available for sale
    38,741  
Loans, net
    95,094  
Goodwill and other intangible assets
    5,651  
Other assets
    5,089  
Total assets acquired
    205,798  
         
Deposits
    (184,555 )
Other liabilities
    (993 )
Total liabilities assumed
    (185,548 )
Net assets acquired
  $ 20,250  
 

 
 
- 40 -

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



The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows.  Non-impaired loans with a fair value of $95,094,000 had gross contractual amounts receivable of $97,588,000 on the date of acquisition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
- 41 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014

   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 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.

Effective with the close of business on April 4, 2014, Premier completed its purchase of the Bank of Gassaway (“Gassaway”), a $201.52 million bank headquartered in Gassaway, West Virginia.  Under terms of an amended and restated agreement of merger dated January 3, 2014, Premier Bank, Inc., a wholly owned subsidiary of Premier, paid $20.25 million in cash for the Bank of Gassaway and merged Gassaway’s five branch locations into its operating systems.  The balances and results of operations of Gassaway are included in Premier’s balances and operating results only since the date of acquisition.

Net income for the six months ended June 30, 2014 was $6,770,000, or $0.75 per diluted share, compared to net income of $5,613,000, or $0.63 per diluted share, for the six months ended June 30, 2013.  The increase in income in 2014 is largely due to an increase in interest income on loans, a decrease in interest expense, and a decrease in the provision for loan losses, all of which more than offset a decrease in non-interest income and an increase in non-interest expenses.  The increase in interest income on loans in the first six months of 2014 is largely due to approximately $1.8 million of income recognized from purchase discounts and interest income collected on non-accrual loans liquidated during the first quarter of 2014.  The annualized returns on average common shareholders’ equity and average assets were approximately 9.15% and 1.12% for the six months ended June 30, 2014 compared to 7.81% and 1.00% for the same period of 2013.


 
 
- 42 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014

Net income for the three months ended June 30, 2014 was $3,100,000, or $0.34 per diluted share, compared to net income of $3,109,000, or $0.35 per diluted share for the three months ended June 30, 2013.  The slight decrease in income for the three months ended June 30, 2014 is largely due to an increase in non-interest expenses, which more than offset an increase in interest income on loans, a decrease in interest expense and an increase in non-interest income.  The annualized returns on common shareholders’ equity and average assets were approximately 8.29% and 0.96% for the three months ended June 30, 2014 compared to 8.72% and 1.11% for the same period in 2013.

Net interest income for the six months ended June 30, 2014 totaled $23.68 million, up $2.45 million, or 11.5%, from the $21.23 million of net interest income earned in the first six months of 2013, as an increase in interest income was complemented by a decrease in interest expense.  Interest income in 2014 increased by $2.10 million, or 8.9%, largely due to a $2.46 million increase in interest income on loans.  In the first six months of 2014, interest income on loans included approximately $1.85 million of income recognized from purchase discounts and interest income collected on non-accrual loans liquidated during the first quarter of 2014, while in 2013, interest income on loans included $770,000 of similar income on non-accrual loans liquidated during the second quarter of 2013.  The timing of these liquidations is difficult to predict, which creates fluctuations in reported loan interest income.  Excluding the income from liquidation of these non-accrual loans, interest income on loans increased by $1.38 million, or 6.8%, largely due to the additional interest income on loans acquired from the Gassaway purchase.  Interest income on investments decreased by $381,000, or 11.9% due to a lower average volume of investments and a slightly lower average yield on those investments.  Interest earned on federal funds sold and interest bearing bank balances increased by $24,000, largely due to a higher average volume of assets held in this category resulting from the funds added from the Gassaway purchase.

Complementing the increase in interest income in the first six months of 2014 was $348,000 of interest expense savings.  Interest expense decreased in total during the first six months of 2014 by $348,000, or 13.9%, when compared to the same six months of 2013.  This decrease includes the addition of $88,000 of interest expense on the interest-bearing deposits and other borrowings assumed from the Gassaway purchase.  Interest expense on deposits decreased by $298,000, or 13.9%, largely due to a continuing decrease in rates paid on deposits.  This decrease in interest expense includes $83,000 of additional interest expense from the Gassaway purchase.  Otherwise, interest expense in the first six months of 2014 would have decreased by $381,000, or 17.8%, when compared to the same six months of 2013.  Interest expense on repurchase agreements and other short-term borrowings decreased by $2,000, largely due to a lower average balance outstanding.  Interest expense on other borrowings decreased by $48,000, or 14.3%, in the first six months of 2014 compared to the first six months of 2013, largely due to a decrease in the average amount of borrowings outstanding which more than offset an additional $5,000 of interest expense from the borrowing assumed from the Gassaway purchase.

 
 
- 43 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014
 
The Federal Reserve System Board of Governors’ policy to maintain the federal funds rate at nearly zero, coupled with the U.S. Treasury actively buying investment securities, has significantly reduced the yield on much of Premier’s earning assets, including investments, federal funds sold and variable rate loans.  Premier has tried to offset the lower interest income by lowering the rates paid on its deposits and repurchase agreements with customers.  With the recognition of additional loan interest income upon the liquidation of non-accrual loans in 2014, Premier’s overall net interest margin increased in the first six months of 2014.  Premier’s net interest margin during the first six months of 2014 was 4.32% compared to 4.16% for the same period in 2013.  A portion of the interest income on loans is the result of recognizing into interest income the remaining fair value discounts on loans acquired via a business acquisition if that loan was paid-off during the period.  These events cannot be predicted with certainty and may positively or negatively affect the comparison of interest income on loans in future periods.  Also impacting the comparison of Premier’s net interest margin in 2014 with its net interest margin in 2013 are the assets and liabilities acquired via the Gassaway purchase which generated additional net interest income in the second quarter of 2014 but not necessarily at the same net interest margin as Premier’s historical yields.

 
 
- 44 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014

Additional information on Premier’s net interest income for the first six months of 2014 and first six months of 2013 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
 
AVERAGE CONSOLIDATED BALANCE SHEETS
 
AND NET INTEREST INCOME ANALYSIS
 
   
   
Six Months Ended June 30, 2014
   
Six Months Ended June 30, 2013
 
   
Balance
   
Interest
   
Yield/Rate
   
Balance
   
Interest
   
Yield/Rate
 
Assets
                                   
Interest Earning Assets
                                   
Federal funds sold and other
  $ 71,207     $ 96       0.27 %   $ 53,220     $ 72       0.27 %
Securities available for sale
                                               
Taxable
    239,478       2,715       2.27       271,044       3,110       2.30  
Tax-exempt
    7,208       98       4.12       5,944       84       4.28  
Total investment securities
    246,686       2,813       2.32       276,988       3,194       2.34  
Total loans
    788,493       22,925       5.86       703,214       20,466       5.87  
Total interest-earning assets
    1,106,386       25,834       4.71 %     1,033,422       23,732       4.63 %
Allowance for loan losses
    (10,505 )                     (12,159 )                
Cash and due from banks
    30,683                       26,791                  
Other assets
    74,315                       68,902                  
Total assets
  $ 1,200,879                     $ 1,116,956                  
                                                 
Liabilities and Equity
                                               
Interest-bearing liabilities
                                               
Interest-bearing deposits
  $ 785,019       1,847       0.47     $ 739,503       2,145       0.58  
Short-term borrowings
    12,784       16       0.25       14,919       18       0.24  
FHLB advances
    -       -       -       -       -       -  
Other borrowings
    13,340       288       4.35       15,509       336       4.37  
Total interest-bearing liabilities
    811,143       2,151       0.53 %     769,931       2,499       0.65 %
Non-interest bearing deposits
    232,768                       196,818                  
Other liabilities
    5,016                       3,659                  
Stockholders’ equity
    151,952                       146,548                  
Total liabilities and equity
  $ 1,200,879                     $ 1,116,956                  
                                                 
Net interest earnings
          $ 23,683                     $ 21,233          
Net interest spread
                    4.18 %                     3.98 %
Net interest margin
                    4.32 %                     4.16 %
                                                 



.
 
- 45 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014

Additional information on Premier’s net interest income for the second quarter of 2014 and second quarter of 2013 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
 
AVERAGE CONSOLIDATED BALANCE SHEETS
 
AND NET INTEREST INCOME ANALYSIS
 
   
   
Three Months Ended June 30, 2014
   
Three Months Ended June 30, 2013
 
   
Balance
   
Interest
   
Yield/Rate
   
Balance
   
Interest
   
Yield/Rate
 
Assets
                                   
Interest Earning Assets
                                   
Federal funds sold and other
  $ 86,456     $ 64       0.30 %   $ 57,782     $ 42       0.28 %
Securities available for sale
                                               
Taxable
    261,020       1,400       2.15       264,356       1,528       2.31  
Tax-exempt
    9,798       63       3.90       5,852       41       4.25  
Total investment securities
    270,818       1,463       2.21       270,208       1,569       2.36  
Total loans
    832,756       11,262       5.42       704,780       10,706       6.09  
Total interest-earning assets
    1,190,030       12,789       4.32 %     1,032,770       12,317       4.79 %
Allowance for loan losses
    (10,158 )                     (12,478 )                
Cash and due from banks
    35,155                       26,963                  
Other assets
    78,138                       68,625                  
Total assets
  $ 1,293,165                     $ 1,115,880                  
                                                 
Liabilities and Equity
                                               
Interest-bearing liabilities
                                               
Interest-bearing deposits
  $ 849,505       960       0.45     $ 741,436       1,054       0.57  
Short-term borrowings
    13,200       9       0.27       10,241       6       0.23  
FHLB advances
    -       -       -       -       -       -  
Other borrowings
    13,198       144       4.38       15,262       164       4.31  
Total interest-bearing liabilities
    875,903       1,113       0.51 %     766,939       1,224       0.64 %
Non-interest bearing deposits
    258,038                       198,372                  
Other liabilities
    5,593                       3,560                  
Stockholders’ equity
    153,630                       147,009                  
Total liabilities and equity
  $ 1,293,165                     $ 1,115,880                  
                                                 
Net interest earnings
          $ 11,676                     $ 11,093          
Net interest spread
                    3.81 %                     4.15 %
Net interest margin
                    3.94 %                     4.31 %
                                                 


 
 
- 46 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014


Net interest income for the quarter ended June 30, 2014 totaled $11.68 million, up $583,000, or 5.3%, from the $11.09 million of net interest income earned in the second quarter of 2013.  Interest income in the second quarter of 2014 increased by $472,000, or 3.8%, as an increase in interest income on loans more than offset a decrease in interest income on investments.  Interest income on loans increased by $556,000, or 5.2%.  In the second quarter of 2014, interest income on loans included an increase of $1.37 million from the loans acquired from the Gassaway purchase.  Partially offsetting this increase was $770,000 of deferred interest and purchase discounts recognized on non-accrual loans liquidated during the second quarter of 2013.  When a loan that has been discounted as a result of being purchased in a business acquisition is paid-off, any remaining discount is recognized as interest income on loans.  These events cannot be predicted with certainty and may positively or negatively affect interest income on loans in future periods, which creates fluctuations in reported loan interest income.  Interest earned on investments decreased by $106,000, or 6.8%, in the second quarter of 2014 largely due to lower average yields on the investment portfolio.  Interest earned on federal funds sold and interest bearing bank balances increased by $22,000, largely due to a higher average volume of assets held in this category as a result of the Gassaway purchase.

Also adding to the increase in net interest income, interest expense decreased in total during the second quarter of 2014 by $111,000, or 9.1%, when compared to the same quarter of 2013.  Interest expense on deposits decreased by $94,000, or 8.9%, largely due to a continuing decrease in the average rates paid on interest-bearing deposits.  This decrease in interest expense includes $83,000 of additional interest expense on deposits from the Gassaway purchase.  Otherwise, interest expense on deposits in the second quarter of 2014 would have decreased by $177,000, or 16.8%, when compared to the second quarter of 2013.  Interest expense on repurchase agreements and other short-term borrowings decreased by $3,000, largely due to an increase in repurchase agreement balances.  Interest expense on other borrowings decreased by $20,000, or 12.2%, in the second quarter of 2014 compared to the second quarter of 2013, largely due to a decrease in the average amount of borrowings outstanding which more than offset the additional interest expense incurred on the borrowings assumed in the Gassaway purchase.  The Board of Governors’ policy to reduce the federal funds rate to nearly zero, coupled with the U.S. Treasury continuing to buy investment securities, has significantly reduced the yield on much of Premier’s earning assets, including investments, federal funds sold and variable rate loans.  New fixed rate loans are also pricing lower than loans originated in prior periods.  Premier has tried to offset the lower interest earning yields by lowering the rates paid on its deposits and repurchase agreements with customers.  During the second quarter of 2014, the decrease in the yields earned on loans, partially due to the increase in interest income on loans from the liquidation of non-accrual loans during the second quarter of 2013, outpaced the lower average rate paid on deposits which had the effect of lowering Premier’s overall net interest margin.  Premier’s net interest margin during the second quarter of 2014 was 3.94% compared to 4.31% for the same period in 2013.

 
 
- 47 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014
 
Non-interest income decreased by $62,000, or 1.9%, to $3,164,000 for the first six months of 2014 compared to the same period of 2013.  However, this decrease includes a $148,000 gain in 2013 from the disposition of an investment security that was called during the first six months of that year.  Excluding that gain, electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $163,000, or 16.5%, largely due to the inclusion of the Gassaway operations since the bank’s acquisition date.  Service charges on deposit accounts remained relatively unchanged as the increase in revenue from the Gassaway operations was largely offset by decreases in customer overdraft activity as customers reduced their propensity to incur overdraft charges as they managed their checking accounts more closely.  Income from selling mortgages in the secondary market decreased by $72,000, or 51.0%, largely due to a decrease in customer demand for refinancing existing mortgage loans compared to one-year ago as a result of an increase in long-term mortgage rates, while other non-interest income decreased by $7,000, or 2.2%.
 
For the quarter ending June 30, 2014, non-interest income increased by $202,000 to $1,783,000 compared to $1,581,000 recognized during the same quarter of 2013.  Service charges on deposit accounts increased by $52,000, or 6.1%, and electronic banking income increased by $138,000, or 26.7%, largely due to the inclusion of the operations of Gassaway since its acquisition early in the second quarter of 2014.  Secondary market mortgage income increased by $3,000 in 2014, largely the result of a slight increase in activity compared to the same period in 2013.  Other non-interest income increased by $9,000, largely due to the inclusion of the operations of Gassaway.
 
Non-interest expenses for the first six months of 2014 totaled $16.74 million, or 2.81% of average assets on an annualized basis, compared to $15.20 million, or 2.74% of average assets for the same period of 2013.  The $1.55 million increase in non-interest expenses in 2014 when compared to the first six months of 2013 is largely due to the inclusion of the operations of Gassaway since its purchase early in the second quarter of 2014.  Staff costs increased by $1.4 million, or 19.1%, due to a $707,000, or 11.7%, increase in salaries and wages (net of deferred loan costs) and a $713,000, or 51.7%, increase in benefit plan costs, namely employee medical insurance benefits.  Occupancy and equipment expenses increased by $278,000, or 12.7%, largely due to the costs associated with operating the five branches from the Gassaway purchase plus additional expenditures on information technology maintenance and software.  Outside data processing increased by $223,000, or 13.3%, largely due to the additional costs associated with the Gassaway operations.  Professional fees increased by $300,000.  The increase in professional fees includes a $69,000 increase in legal fees related to the acquisition of the Bank of Gassaway, $275,000 paid for legal related matters and an $89,000 increase in external audit costs, some of which is related to the Company’s newly required internal control audit as an accelerated filer under Sarbanes-Oxley section 404.  These increases were partially offset by lower consulting expenses in 2014.  Amortization of intangibles increased by $64,000 due to the addition of a core deposit intangible asset from the Gassaway purchase.  FDIC insurance increased by $49,000, largely due to the increase in the assessment base as a result of the Gassaway purchase.  Other expenses increased by $334,000, largely due to increased supply costs, direct data system conversion costs incurred and other expenses related to the acquisition of Gassaway.  Decreases in non-interest expense during the first six months of 2014 include a $990,000 decrease in expenses and writedowns on other real estate owned (OREO), a $59,000 decrease in taxes not based on income, and a $72,000 decrease in loan collection expenses.  OREO expenses decreased largely due to $1.14 million of gains recognized on the sale of OREO properties during the second quarter of 2014, net of $342,000 of additional write downs on other OREO still owned, and a decrease in the amount of expenses related to the maintenance of OREO properties that were either sold in 2013 or under construction in 2013.  Taxes not on income decreased largely due to a decrease in state based franchise taxes.

 
 
- 48 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014
 
Non-interest expenses for the second quarter of 2014 totaled $8.71 million, or 2.70% of average assets on an annualized basis, compared to $7.81 million, or 2.81% of average assets for the same period of 2013.  The $905,000 increase in non-interest expenses in the second quarter of 2014 when compared to the second quarter of 2013 is largely due to the inclusion of the operations of Gassaway since its purchase early in the second quarter of 2014.  Staff costs increased by $1.02 million, or 26.7%, due to a $608,000, or 19.1%, increase in salaries and wages (net of deferred loan costs) and a $421,000, or 62.7%, increase in benefit plan costs, namely employee medical insurance benefits.  Occupancy and equipment expenses increased by $204,000, or 18.5%, largely due to the costs associated with operating the five branches from the Gassaway purchase.  Outside data processing increased by $174,000, or 20.4%, largely due to the additional costs associated with the Gassaway operations.  Amortization of intangibles increased by $72,000 due to the addition of a core deposit intangible asset from the Gassaway purchase.  FDIC insurance increased by $60,000, largely due to the increase in the assessment base as a result of the Gassaway purchase.  Other expenses increased by $208,000, largely due to increased supply costs, direct data system conversion costs incurred and other expenses related to the acquisition of Gassaway.  Decreases in non-interest expense during the second quarter of 2014 include a $760,000 decrease in expenses and writedowns on OREO, and an $80,000 decrease professional fees.  OREO expenses decreased largely due to $1.04 million of gains recognized on the sale of OREO properties during the second quarter of 2014, net of $342,000 of additional write downs on other OREO still owned, and a $23,000 decrease in the amount of expenses related to the maintenance of OREO properties.  Professional fees decreased largely due to a decrease in legal fees and consulting expenditures.
 
Income tax expense was $3.72 million for the first six months of 2014 compared to $3.15 million for the first six months of 2013.  The effective tax rate for the six months ended June 30, 2014 was 35.5% compared to 35.9% for the same period in 2013.  For the quarter ended June 30, 2014, income tax expense was $1.724 million, a 35.7% effective tax rate, compared to $1.83 million (a 37.0% effective tax rate) for the same period in 2013.  The increase in income tax expense during the first six months of 2014 can be primarily attributed to the increase in pre-tax income detailed above.  The decrease in income tax expense during the second quarter of 2014 when compared to the same quarter of 2013 can be primarily attributed to the decrease in pre-tax income for the quarter as detailed above coupled with an increase in the effective income tax rate in 2013 largely due to increases in the amount of income subject to state income taxes and the Company’s taxable income reaching the phase-in threshold of the 35% Federal corporate income tax rate.




 
 
- 49 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014

 
Total assets at June 30, 2014 increased by $171.7 million to $1.272 billion from the $1.100 billion at December 31, 2013.  Earning assets increased by $151.9 million from the $1.012 billion at year-end 2013 to end the quarter at $1.164 billion.  The increase in total assets and earning assets was largely due to the acquisition of Gassaway, which added approximately $185.5 million in total assets (net of the $20.3 million cash purchase price) and $160.3 million in earning assets, including $95.1 million in loans, $38.7 million in investment securities, $41.0 million in liquid assets (net of the $20.3 million cash purchase price) and $3.8 million in premises and equipment.  Premier also recorded approximately $5.7 million in intangible assets including goodwill and core deposit intangible.   See Note 9 to the financial statements for more information on the acquisition of Gassaway.
 
Cash and due from banks at June 30, 2014 was $39.1 million, an $11.7 million increase from the $27.4 million at December 31, 2013.  Interest bearing bank balances increased by $17.7 million from the $36.6 million reported at December 31, 2013, while federal funds sold decreased by $9.2 million to 3.5 million at June 30, 2014.  Gassaway added approximately $41.0 million in cash and cash equivalents, net of the $20.25 million purchase price.  During the quarter, a portion of these liquid assets were invested in the securities portfolio.  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.
 
Securities available for sale totaled $269.8 million at June 30, 2014, a $51.7 million increase from the $218.1 million at December 31, 2013.  The increase was largely due to the $38.7 million of investment securities acquired via the Gassaway purchase.  In addition to these securities, the $34.5 million of investment security purchases in 2014 have exceeded the $24.3 million of proceeds from monthly principal payments on Premier’s mortgage backed securities portfolio and securities maturing during the year.  The securities added to the portfolio as a result of the Gassaway purchase were predominantly fixed maturity U.S. Government sponsored agency securities, recorded at fair value on the date of acquisition.  These securities complemented Premier’s existing mix of securities of predominantly mortgage-backed securities as illustrated in the tables in Note 2 to the financial statements.  The investment portfolio is predominantly high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies.  Any unrealized losses on securities within the portfolio at June 30, 2014 and December 31, 2013 are believed to be price changes resulting from increases in the long-term interest rate since the security was purchased 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.

 
 
- 50 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014
 
Total loans at June 30, 2014 were $832.8 million compared to $740.8 million at December 31, 2013, an increase of approximately $92.1 million, or 12.4%.  The increase in loans was due to the $95.1 million of loans acquired via the Gassaway purchase.  These loans were recorded at fair value, incorporating estimated credit risk and interest rate yield adjustments into the recorded value.  As such, under current accounting guidance, no increase in the allowance for loan losses was recorded as a result of the Gassaway purchase.  The loans acquired via the Gassaway purchase will be monitored for any deterioration in credit quality in the future under Premier’s loan underwriting and credit monitoring standards and any provisions for loan losses will be charged to future operations.  Excluding the loans added via the Gassaway purchase, total loans decreased by approximately $3.0 million, or 0.4%, during the first six months of 2014, largely due to loan payoffs, transfers of loans to OREO upon foreclosure and principal payments on loans, all of which more than offset loan demand.  Loan payoffs during the first quarter of 2014 included $4.9 million of payoffs on non-accrual loans which resulted in recognizing approximately $1.6 million of interest income deferred while the loans were on non-accrual status and $232,000 of remaining purchase discounts associated with the loans.  The timing of these liquidations is difficult to predict, which creates fluctuations in reported loan interest income.
 
Deposits totaled $1.090 billion as of June 30, 2014, a $165.5 million increase from the $924.0 million in deposits at December 31, 2013.  The increase in deposits is primarily due to the $184.6 million of deposit balances assumed in the Gassaway purchase.  Excluding the acquired deposits, total deposits have decreased by approximately $19.0 million since year-end 2013.  The deposits assumed in the Gassaway purchase included the proceeds of purchase price of the bank placed on deposit with Gassaway by the seller at closing.  Since closing, a significant portion of the purchase proceeds was withdrawn from the bank prior to June 30, 2014, as anticipated, accounting for a large portion of the decrease in total deposits.  Repurchase agreements with corporate and public entity customers decreased in the first six months of 2014 by $316,000, or 2.8%.  Other borrowed funds decreased by $863,000 during the first six months of 2014 as $1.2 million of principal payments was partially offset by $344,000 of long-term borrowings assumed in the Gassaway purchase.
 
The following table sets forth information with respect to the Company’s nonperforming assets at June 30, 2014 and December 31, 2013.
   
(In Thousands)
 
   
2014
   
2013
 
Non-accrual loans
  $ 13,728     $ 16,641  
Accruing loans which are contractually past due 90 days or more
    5,053       8,478  
Accruing restructured loans
    3,332       3,655  
Total non-performing loans
    22,113       28,774  
Other real estate acquired through foreclosure (OREO)
    12,842       13,524  
Total non-performing assets
  $ 34,955     $ 42,298  
                 
Non-performing loans as a percentage of total loans
    2.66 %     3.88 %
                 
Non-performing assets as a percentage of total assets
    2.75 %     3.84 %
 
 
 
 
- 51 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014
 
     Total non-performing loans have decreased since year-end, largely due to $4.9 million of payoffs on non-accrual loans during the first quarter of 2014.  These non-accrual loan payoffs have been partially offset by additional loans placed on non-accrual status during the first six months of 2014.  Also affecting the decrease in non-performing loans was a $3.4 million decrease in loans past due 90 days or more and a $323,000 decrease in restructured loans that have been performing as agreed.  The cumulative effect has been a $6.7 million decrease in total non-performing loans since December 31, 2013.  Total non-performing assets have decreased since year-end, largely due to the reduction in non-performing loans plus a $682,000 decrease in other real estate acquired through foreclosure (OREO).  A significant portion of the non-performing assets are legacy assets that came with the acquisition of Abigail Adams National Bancorp and its two subsidiary banks in October 2009 (“Abigail Adams”.)  Management continues to work its various plans to liquidate these assets or bring them to a current performing status.  It is important to note that the table above includes non-performing loans obtained via the purchase of Gassaway.  Premier added no OREO as a result of the purchase of Gassaway and a minimal amount of loans on non-accrual status were added to the loan portfolio as of the acquisition date.

     Many of the non-accrual loans obtained from the Abigail Adams acquisition 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 Abigail Adams 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.
 
Gross charge-offs totaled $923,000 during the first six months of 2014, largely due to the partial charge-off of previously identified impaired loans that were foreclosed upon and placed into OREO.  Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance.  Recoveries recorded during the first six months of 2014 totaled $162,000, resulting in net charge-offs for the first six months of 2014 of $761,000.  This amount compares to $210,000 of net recoveries recorded in the first six months of 2014.  The allowance for loan losses at June 30, 2014 was 1.19% of total loans compared to 1.49% at December 31, 2013.  The decrease in the ratio is largely due to the $95.1 million increase in total loans from the Gassaway purchase.  These loans were recorded at fair value, incorporating estimated credit risk and interest rate yield adjustments into the recorded value.  As such, under current accounting guidance, no increase in the allowance for loan losses was recorded as a result of the Gassaway purchase.  Excluding the initial $95.1 million in loans from the Gassaway purchase, the allowance for loan losses would be 1.34% of the remaining loans in the portfolio.  The remaining decrease in the ratio since year-end is largely due to the decrease in the amount of allowance allocated to loans individually evaluated for impairment due to payoffs received or recording a partial charge-off upon foreclosure and transfer of the remaining loan balance to OREO.

 
 
- 52 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014
 
During the first six months of 2014, Premier reversed a portion of its allowance for loan losses into income by recording a $389,000 negative provision for loan losses.  This negative provision compares to $500,000 of provision expense recorded during the first six months of 2013.  The negative provision for loan losses was largely the result of specific reserves allocated to impaired loans that ultimately paid in full during the first quarter of 2014.  As a result, the specific reserves were no longer needed and reversed into income.  During the second quarter a $79,000 negative provision was recorded as scheduled payments were received on impaired loans in addition to a reduction in the estimated credit risk in the remaining loan portfolio.  The allowance for loan losses allocated to loans individually evaluated for impairment decreased from $1.9 million at December 31, 2013 to $527,000 at June 30, 2014, which included a $300,000 partial charge-off of a previously identified impaired loan that was foreclosed upon and placed into OREO during the first quarter of 2014.  The $79,000 negative provision for loan losses recorded in the second quarter of 2014 compares to a $70,000 negative provision for loan losses recorded in the second quarter of 2013.  The negative provision for loan losses in the second quarter of 2013 was the result of management’s updated assessment of the level of credit risk in the loan portfolio in accordance with Premier’s policies regarding the estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, including updated historical charge-off ratios, the level of net recoveries in 2013, payments received on impaired loans previously identified with specific reserve allocations as well as increases in specific reserve allocations on existing loans.
 
During the first six months of 2013, Premier recorded $500,000 of provision for loan losses.  In the first quarter of 2013, Premier received $535,000 of payments on loans previously charged off (loan recoveries) which added to the balance of the allowance for loan losses.  The recoveries partially offset the estimated increase in the overall credit risk in the loan portfolio resulting largely from specific reserve allocations on impaired loans.  The allowance for loan losses allocated to loans individually evaluated for impairment increased from $3.3 million at   December 31, 2012 to $4.2 million at March 31, 2013.
 
The provisions for loan losses recorded in 2014 and 2013 were made in accordance with Premier’s policies regarding management’s estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  Premier continues to monitor and evaluate the impact that national housing market price declines may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses.  While some price deterioration has occurred, it is not currently anticipated that Premier’s markets will be impacted as severely as other areas of the country due to the historically modest increases in real estate values in the Company’s markets in West Virginia, Ohio and Kentucky. With the concentrations of commercial real estate loans acquired in the Washington, DC and Richmond, Virginia markets, fluctuations in commercial real estate values will also be monitored. For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans and restructured loans, see Note 3 to the consolidated financial statements.



 
 
- 53 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014


 
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, 2013.  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, 2013.  There have been no significant changes in the application of these accounting policies since December 31, 2013.
 
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.


 
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 $269.8 million of securities at fair value as of June 30, 2014.
 
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.

 
 
- 54 -

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
JUNE 30, 2014

 
At June 30, 2014, total shareholders’ equity of $153.5 million was 12.1% of total assets.  This compares to total shareholders’ equity of $146.9 million, or 13.4% of total assets on December 31, 2013.  While total shareholders’ equity increased in the first six months of 2014, the ratio to total assets decreased as a result of the Gassaway acquisition.  Per the terms of the acquisition, Premier Bank paid cash to the sellers and no equity was issued by the Company.  As a result, total assets increased by approximately $185.5 million with no increase in total shareholders’ equity.
 
The acquisition of Gassaway had a similar impact on Premier’s regulatory capital ratios.  Tier I capital totaled $119.2 million at June 30, 2014, which represents a Tier I leverage ratio of 9.48%.  While total shareholders’ equity increased, Tier I capital decreased slightly as the growth in equity was offset by an increase in intangible assets recorded as part of the Gassaway purchase.  Tier I capital at December 31, 2013 was $119.9 million.  Therefore the leverage ratio at June 30, 2014 was lower than the 11.0% leverage ratio at December 31, 2013 as the minor decrease in Tier I capital was divided by a higher base of average total assets at June 30, 2014.
 
Book value per common share was $17.47 at June 30, 2014, and $16.79 at December 31, 2013.  The increase in book value per shares was largely the result of the $0.75 per share earned during the first six months of 2014, including an approximate $0.04 per share reduction for the $300,000 of preferred stock dividends and related accretion.  This increase was partially offset by the $0.11 per share special cash dividend to common shareholders declared and paid during January 2014 and by the $0.12 per share quarterly cash dividend to common shareholders declared and paid during the first two quarters of 2014.  Also increasing book value per share was the $2,283,000 of other comprehensive income for the first six months of 2014 related to the after tax increase in the market value of investment securities available for sale, which increased book value by approximately $0.28 per share.



 
 
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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2014


 
The Company currently does not engage in any derivative or hedging activity.  Refer to the Company’s 2013 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 2013 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 second fiscal quarter that have materially affected or are reasonably likely to materially affect Premier's internal controls over financial reporting.

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

 
 
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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2014


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, 2013 for disclosures with respect to Premier’s risk factors at December 31, 2013. There have been no material changes since year-end 2013 in the specified risk factors disclosed in the Annual Report on Form 10-K.

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

Item 3.              Defaults Upon Senior Securities                                                                       None

Item 4.              Mine Safety Disclosures                                                                                    Not Applicable

Item 5.              Other Information                                                                                             None

Item 6.              Exhibits

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




 
 
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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2014



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

PREMIER FINANCIAL BANCORP, INC.



Date: August 8, 2014                                     /s/ Robert W. Walker                                                                                               
Robert W. Walker
President & Chief Executive Officer


Date: August 8, 2014                                     /s/ Brien M. Chase                                                                                                   
Brien M. Chase
Senior Vice President & Chief Financial Officer


 
 
 
 
 
 
 
 
 
 
 
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