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EX-32 - CEO AND CFO SECTION 906 CERTIFICATION - PREMIER FINANCIAL BANCORP INCexhibit32.htm
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

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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission file number 000-20908

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§230.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No .

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

Large accelerated filer  
 
Accelerated filer 
Non-accelerated filer 
(Do not check if smaller reporting company)
Smaller reporting company 
Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

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

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

Common stock, no par value, – 10,668,589 shares outstanding at November 1, 2017



PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017
INDEX TO REPORT


PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017

 
PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2016 for further information in this regard.

Index to consolidated financial statements:


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2017 AND DECEMBER 31, 2016
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
(UNAUDITED)
       
   
September 30,
   
December 31,
 
   
2017
   
2016
 
ASSETS
           
Cash and due from banks
 
$
41,831
   
$
41,443
 
Interest bearing bank balances
   
21,681
     
55,720
 
Federal funds sold
   
11,632
     
7,555
 
Cash and cash equivalents
   
75,144
     
104,718
 
Time deposits with other banks
   
2,582
     
2,332
 
Securities available for sale
   
289,203
     
288,607
 
Loans
   
1,055,324
     
1,024,823
 
Allowance for loan losses
   
(12,359
)
   
(10,836
)
Net loans
   
1,042,965
     
1,013,987
 
Federal Home Loan Bank stock, at cost
   
3,185
     
3,200
 
Premises and equipment, net
   
23,504
     
24,224
 
Real estate and other property acquired through foreclosure
   
11,458
     
12,665
 
Interest receivable
   
4,060
     
3,862
 
Goodwill
   
35,371
     
35,371
 
Other intangible assets
   
3,581
     
4,349
 
Other assets
   
1,622
     
2,878
 
Total assets
 
$
1,492,675
   
$
1,496,193
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Non-interest bearing
 
$
327,965
   
$
319,618
 
Time deposits, $250,000 and over
   
64,919
     
66,378
 
Other interest bearing
   
876,500
     
893,390
 
Total deposits
   
1,269,384
     
1,279,386
 
Securities sold under agreements to repurchase
   
25,116
     
23,820
 
Other borrowed funds
   
6,000
     
8,859
 
Subordinated debt
   
5,368
     
5,343
 
Interest payable
   
358
     
364
 
Other liabilities
   
3,192
     
4,237
 
Total liabilities
   
1,309,418
     
1,322,009
 
                 
Stockholders' equity
               
Common stock, no par value; 20,000,000 shares authorized; 10,668,589 shares issued and outstanding at September 30, 2017, and 10,640,735 shares issued and outstanding at December 31, 2016
   
110,353
     
109,911
 
Retained earnings
   
72,449
     
66,195
 
Accumulated other comprehensive income (loss)
   
455
     
(1,922
)
Total stockholders' equity
   
183,257
     
174,184
 
Total liabilities and stockholders' equity
 
$
1,492,675
   
$
1,496,193
 
                 

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Interest income
                       
Loans, including fees
 
$
13,469
   
$
13,375
   
$
41,667
   
$
39,084
 
Securities available for sale
                               
Taxable
   
1,427
     
1,285
     
4,236
     
4,075
 
Tax-exempt
   
62
     
82
     
198
     
254
 
Federal funds sold and other
   
176
     
123
     
515
     
328
 
Total interest income
   
15,134
     
14,865
     
46,616
     
43,741
 
                                 
Interest expense
                               
Deposits
   
954
     
965
     
2,854
     
2,917
 
Repurchase agreements and other
   
7
     
10
     
21
     
28
 
FHLB advances
   
-
     
10
     
-
     
32
 
Other borrowings
   
68
     
101
     
234
     
321
 
Subordinated debt
   
74
     
63
     
218
     
181
 
Total interest expense
   
1,103
     
1,149
     
3,327
     
3,479
 
                                 
Net interest income
   
14,031
     
13,716
     
43,289
     
40,262
 
Provision for loan losses
   
891
     
312
     
2,033
     
1,436
 
Net interest income after provision for loan losses
   
13,140
     
13,404
     
41,256
     
38,826
 
                                 
Non-interest income
                               
Service charges on deposit accounts
   
1,136
     
1,031
     
3,201
     
2,975
 
Electronic banking income
   
811
     
791
     
2,424
     
2,355
 
Secondary market mortgage income
   
67
     
64
     
173
     
163
 
Other
   
163
     
176
     
530
     
571
 
     
2,177
     
2,062
     
6,328
     
6,064
 
Non-interest expenses
                               
Salaries and employee benefits
   
4,760
     
4,817
     
14,703
     
15,025
 
Occupancy and equipment expenses
   
1,511
     
1,635
     
4,481
     
4,697
 
Outside data processing
   
1,344
     
1,300
     
4,019
     
3,935
 
Professional fees
   
196
     
167
     
721
     
500
 
Taxes, other than payroll, property and income
   
189
     
156
     
589
     
473
 
Write-downs, expenses, sales of other real estate owned, net
   
346
     
765
     
1,139
     
1,402
 
Amortization of intangibles
   
252
     
278
     
768
     
862
 
FDIC insurance
   
159
     
278
     
506
     
752
 
Other expenses
   
1,168
     
1,212
     
3,401
     
3,674
 
     
9,925
     
10,608
     
30,327
     
31,320
 
Income before income taxes
   
5,392
     
4,858
     
17,257
     
13,570
 
Provision for income taxes
   
1,925
     
1,694
     
6,207
     
4,803
 
                                 
Net income
 
$
3,467
   
$
3,164
   
$
11,050
   
$
8,767
 
                                 
Net income per share:
                               
Basic
 
$
0.33
   
$
0.30
   
$
1.04
   
$
0.83
 
Diluted
   
0.32
     
0.30
     
1.03
     
0.83
 
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net income
 
$
3,467
   
$
3,164
   
$
11,050
   
$
8,767
 
                                 
Other comprehensive income (loss):
                               
Unrealized gains (losses) arising during the period
   
(68
)
   
15
     
3,658
     
4,504
 
Reclassification of realized amount
   
-
     
-
     
-
     
(4
)
Net change in unrealized gain on securities
   
(68
)
   
15
     
3,658
     
4,500
 
Less tax impact
   
24
     
(5
)
   
(1,281
)
   
(1,576
)
Other comprehensive income (loss)
   
(44
)
   
10
     
2,377
     
2,924
 
                                 
Comprehensive income
 
$
3,423
   
$
3,174
   
$
13,427
   
$
11,691
 



PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2017
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Total
 
Balances, January 1, 2017
 
$
109,911
   
$
66,195
   
$
(1,922
)
 
$
174,184
 
Net income
   
-
     
11,050
     
-
     
11,050
 
Other comprehensive income
   
-
     
-
     
2,377
     
2,377
 
Cash dividends paid ($0.45 per share)
   
-
     
(4,796
)
   
-
     
(4,796
)
Stock based compensation expense
   
194
     
-
     
-
     
194
 
Stock options exercised
   
248
     
-
     
-
     
248
 
Balances, September 30, 2017
 
$
110,353
   
$
72,449
   
$
455
   
$
183,257
 

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(UNAUDITED, DOLLARS IN THOUSANDS)


   
2017
   
2016
 
Cash flows from operating activities
           
Net income
 
$
11,050
   
$
8,767
 
Adjustments to reconcile net income to net cash from operating activities
               
Depreciation
   
1,303
     
1,461
 
Provision for loan losses
   
2,033
     
1,436
 
Amortization (accretion), net
   
1,166
     
2,010
 
OREO writedowns, net
   
434
     
508
 
Stock compensation expense
   
194
     
160
 
Changes in :
               
Interest receivable
   
(198
)
   
(259
)
Other assets
   
(24
)
   
(140
)
Interest payable
   
(6
)
   
(76
)
Other liabilities
   
(1,045
)
   
(2,071
)
Net cash from operating activities
   
14,907
     
11,796
 
                 
Cash flows from investing activities
               
Net change in time deposits with other banks
   
(250
)
   
-
 
Purchases of securities available for sale
   
(49,210
)
   
(22,512
)
Proceeds from maturities and calls of securities available for sale
   
50,787
     
62,011
 
Redemption of FRB and FHLB stock
   
15
     
190
 
Net change in loans
   
(30,865
)
   
(51,417
)
Acquisition of subsidiary, net of cash received
   
-
     
16,385
 
Purchases of premises and equipment, net
   
(654
)
   
(413
)
Proceeds from sales of other real estate acquired through foreclosure
   
1,827
     
870
 
Net cash from (used in) investing activities
   
(28,350
)
   
5,114
 
                 
Cash flows from financing activities
               
Net change in deposits
   
(10,020
)
   
8,246
 
Net change in agreements to repurchase securities
   
1,296
     
3,282
 
Repayment of other borrowed funds
   
(2,859
)
   
(1,824
)
Proceeds from stock option exercises
   
248
     
645
 
Repayment of FHLB advances, net
   
-
     
(772
)
Common stock dividends paid
   
(4,796
)
   
(4,338
)
Net cash from (used in) financing activities
   
(16,131
)
   
5,239
 
                 
Net change in cash and cash equivalents
   
(29,574
)
   
22,149
 
                 
Cash and cash equivalents at beginning of period
   
104,718
     
72,539
 
                 
Cash and cash equivalents at end of period
 
$
75,144
   
$
94,688
 
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(UNAUDITED, DOLLARS IN THOUSANDS)


   
2017
   
2016
 
Supplemental disclosures of cash flow information:
           
Cash paid during period for interest
 
$
3,333
   
$
3,555
 
                 
Cash paid during period for income taxes
   
6,395
     
5,122
 
                 
Loans transferred to real estate acquired through foreclosure
   
983
     
631
 
                 
Stock issued to acquire subsidiary
   
-
     
22,041
 
                 
Premises transferred to other real estate owned
   
71
     
-
 

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


NOTE  1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the Company) and its wholly owned subsidiaries (the “Banks”):
 
                September 30, 2017  
        Year   Total   Net Income  
Subsidiary 
 
Location 
 
Acquired
 
Assets
  Qtr   YTD  
Citizens Deposit Bank & Trust
 
Vanceburg, Kentucky
 
1991
 
$
425,115
   
$
1,209
   
$
3,509
 
Premier Bank, Inc.
 
Huntington, West Virginia
 
1998
   
1,060,991
     
2,734
     
9,007
 
Parent and Intercompany Eliminations
           
6,569
     
(476
)
   
(1,466
)
  Consolidated Total
          
$
1,492,675
   
$
3,467
   
$
11,050
 


All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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 was originally effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.  Companies have the option to apply ASU 2014-09 as of the original effective date. Early adoption is not permitted. The Company plans to adopt the guidance during the first quarter of 2018.  Management continues to evaluate the impact ASU 2014-09 will have on the Company’s consolidated financial statements as well as the most appropriate transition method of application.  Based on this evaluation to date, management has determined that the majority of the revenues earned by the Company are not within the scope of ASU 2014-09 because they are already governed by other accounting standards.  For those revenue streams management has determined to be within the scope of ASU 2014-09, namely elements of non-interest income such as service charges on deposit accounts that are governed by deposit account agreements with customers and the timing of revenue from the sale of real estate acquired through foreclosure, the guidance or any of its amendments is not anticipated to result in any material change in the timing of when the revenue is recognized.  Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on the consolidated financial statements as new interpretations and guidance are issued, such as the applicability of Topic 606 to interchange revenues included in the Company’s electronic banking income, focusing on the new disclosures required by the adoption of ASU 2014-09.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  1 - BASIS OF PRESENTATION – continued

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU makes several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, requiring equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income, and using an exit price notion when measuring the fair value of financial instruments for disclosure purposes.  This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2017. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires organizations to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2018.  The Company leases some of its branch locations.  Upon adoption of this standard, an asset will be recorded to recognize the right of the Company to use the leased facilities and a liability will be recorded representing the obligation to make all future lease payments on those facilities.  At September 30, 2017, the Company had $5,045,000 of future lease obligations excluding optional renewal periods.  Management is currently evaluating the amounts to be recognized upon the adoption of this guidance in the Company’s financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting.  This ASU requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e., Additional Paid-in-Capital pools will be eliminated). The guidance in this ASU was adopted by the Company beginning January 1, 2017.  The adoption of ASU No. 2016-09 did not have a material impact on the Company's financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.  This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss” or “CECL”.  The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts.  The largest impact will be on the allowance for loan and lease losses.  This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2019. Management has formed a steering committee that is evaluating the data gathering requirements, available economic forecasting and loss estimation models and potential software that would be employed by the Company to facilitate the adoption of this guidance and its required disclosures on the Company’s financial statements.  Upon adoption, management anticipates an initial one-time increase in the allowance for loan losses which will be offset by a corresponding decrease in capital as permitted by the standard.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at September 30, 2017 are summarized as follows:

2017
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
199,483
   
$
1,028
   
$
(578
)
 
$
199,933
 
U. S. sponsored agency CMO’s - residential
   
56,330
     
553
     
(369
)
   
56,514
 
Total mortgage-backed securities of government sponsored agencies
   
255,813
     
1,581
     
(947
)
   
256,447
 
U. S. government sponsored agency securities
   
19,344
     
5
     
(74
)
   
19,275
 
Obligations of states and political subdivisions
   
13,346
     
140
     
(5
)
   
13,481
 
Total available for sale
 
$
288,503
   
$
1,726
   
$
(1,026
)
 
$
289,203
 

Amortized cost and fair value of investment securities, by category, at December 31, 2016 are summarized as follows:

2016
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
177,105
   
$
245
   
$
(3,173
)
 
$
174,177
 
U. S. sponsored agency CMO’s - residential
   
73,163
     
761
     
(657
)
   
73,267
 
Total mortgage-backed securities of government sponsored agencies
   
250,268
     
1,006
     
(3,830
)
   
247,444
 
U. S. government sponsored agency securities
   
24,652
     
23
     
(174
)
   
24,501
 
Obligations of states and political subdivisions
   
16,645
     
111
     
(94
)
   
16,662
 
Total available for sale
 
$
291,565
   
$
1,140
   
$
(4,098
)
 
$
288,607
 

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


NOTE  2–SECURITIES - continued

The amortized cost and fair value of securities at September 30, 2017 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
 
$
9,687
   
$
9,701
 
Due after one year through five years
   
17,073
     
17,070
 
Due after five years through ten years
   
5,375
     
5,430
 
Due after ten years
   
555
     
555
 
Mortgage-backed securities of government sponsored agencies
   
255,813
     
256,447
 
Total available for sale
 
$
288,503
   
$
289,203
 

Securities with unrealized losses at September 30, 2017 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S government sponsored agency securities
 
$
17,242
   
$
(74
)
 
$
-
   
$
-
   
$
17,242
   
$
(74
)
U.S government sponsored agency MBS – residential
   
56,820
     
(429
)
   
5,234
     
(149
)
   
62,054
     
(578
)
U.S government sponsored agency CMO’s – residential
   
11,256
     
(129
)
   
11,184
     
(240
)
   
22,440
     
(369
)
Obligations of states and political subdivisions
   
619
     
(4
)
   
775
     
(1
)
   
1,394
     
(5
)
Total temporarily impaired
 
$
85,937
   
$
(636
)
 
$
17,193
   
$
(390
)
 
$
103,130
   
$
(1,026
)

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, 2016 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
 
$
17,207
   
$
(174
)
 
$
-
   
$
-
   
$
17,207
   
$
(174
)
U.S government sponsored agency MBS – residential
   
157,022
     
(3,173
)
   
-
     
-
     
157,022
     
(3,173
)
U.S government sponsored agency CMO’s – residential
   
18,374
     
(373
)
   
8,750
     
(284
)
   
27,124
     
(657
)
Obligations of states and political subdivisions
   
7,961
     
(94
)
   
-
     
-
     
7,961
     
(94
)
Total temporarily impaired
 
$
200,564
   
$
(3,814
)
 
$
8,750
   
$
(284
)
 
$
209,314
   
$
(4,098
)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at September 30, 2017 and December 31, 2016 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities.  Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.


NOTE  3 - LOANS

Major classifications of loans at September 30, 2017 and December 31, 2016 are summarized as follows:

   
2017
   
2016
 
Residential real estate
 
$
337,502
   
$
342,294
 
Multifamily real estate
   
70,698
     
74,165
 
Commercial real estate:
               
Owner occupied
   
134,773
     
129,370
 
Non owner occupied
   
237,655
     
220,836
 
Commercial and industrial
   
82,332
     
76,736
 
Consumer
   
29,675
     
30,916
 
All other
   
162,689
     
150,506
 
   
$
1,055,324
   
$
1,024,823
 

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


NOTE  3–LOANS - continued

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

Loan Class
 
Balance
Dec 31, 2016
   
Provision (credit) for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
Sept 30, 2017
 
                               
Residential real estate
 
$
2,948
   
$
363
   
$
(362
)
 
$
52
   
$
3,001
 
Multifamily real estate
   
785
     
475
     
-
     
-
     
1,260
 
Commercial real estate:
                                       
Owner occupied
   
1,543
     
(161
)
   
(7
)
   
242
     
1,617
 
Non owner occupied
   
2,350
     
265
     
(8
)
   
-
     
2,607
 
Commercial and industrial
   
1,140
     
3
     
(138
)
   
95
     
1,100
 
Consumer
   
347
     
148
     
(214
)
   
86
     
367
 
All other
   
1,723
     
940
     
(373
)
   
117
     
2,407
 
Total
 
$
10,836
   
$
2,033
   
$
(1,102
)
 
$
592
   
$
12,359
 

Activity in the allowance for loan losses by portfolio segment for the nine months ending September 30, 2016 was as follows:

Loan Class
 
Balance
Dec 31, 2015
   
Provision (credit) for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
Sept 30, 2016
 
                               
Residential real estate
 
$
2,501
   
$
377
   
$
(107
)
 
$
19
   
$
2,790
 
Multifamily real estate
   
821
     
92
     
-
     
-
     
913
 
Commercial real estate:
                                       
Owner occupied
   
1,509
     
(140
)
   
-
     
2
     
1,371
 
Non owner occupied
   
2,070
     
645
     
-
     
-
     
2,715
 
Commercial and industrial
   
1,033
     
83
     
(29
)
   
42
     
1,129
 
Consumer
   
307
     
172
     
(232
)
   
71
     
318
 
All other
   
1,406
     
207
     
(207
)
   
221
     
1,627
 
Total
 
$
9,647
   
$
1,436
   
$
(575
)
 
$
355
   
$
10,863
 



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


NOTE  3–LOANS - continued

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

Loan Class
 
Balance
June 30, 2017
   
Provision (credit) for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
Sept 30, 2017
 
                               
Residential real estate
 
$
2,973
   
$
170
   
$
(163
)
 
$
21
   
$
3,001
 
Multifamily real estate
   
1,337
     
(77
)
   
-
     
-
     
1,260
 
Commercial real estate:
                                       
Owner occupied
   
1,618
     
5
     
(7
)
   
1
     
1,617
 
Non owner occupied
   
2,334
     
276
     
(3
)
   
-
     
2,607
 
Commercial and industrial
   
1,093
     
(6
)
   
(4
)
   
17
     
1,100
 
Consumer
   
373
     
10
     
(49
)
   
33
     
367
 
All other
   
1,967
     
513
     
(110
)
   
37
     
2,407
 
Total
 
$
11,695
   
$
891
   
$
(336
)
 
$
109
   
$
12,359
 

Activity in the allowance for loan losses by portfolio segment for the three months ending September 30, 2016 was as follows:

Loan Class
 
Balance
June 30, 2016
   
Provision (credit) for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
Sept 30, 2016
 
                               
Residential real estate
 
$
2,747
   
$
91
   
$
(51
)
 
$
3
   
$
2,790
 
Multifamily real estate
   
822
     
91
     
-
     
-
     
913
 
Commercial real estate:
                                       
Owner occupied
   
1,442
     
(72
)
   
-
     
1
     
1,371
 
Non owner occupied
   
2,708
     
7
     
-
     
-
     
2,715
 
Commercial and industrial
   
1,111
     
43
     
(29
)
   
4
     
1,129
 
Consumer
   
306
     
139
     
(142
)
   
15
     
318
 
All other
   
1,668
     
13
     
(81
)
   
27
     
1,627
 
Total
 
$
10,804
   
$
312
   
$
(303
)
 
$
50
   
$
10,863
 

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


NOTE  3–LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at September 30, 2017 and December 31, 2016.

   
2017
   
2016
 
Residential real estate
 
$
1,515
   
$
1,619
 
Commercial real estate
               
Owner occupied
   
1,564
     
2,013
 
Non owner occupied
   
-
     
5,396
 
Commercial and industrial
   
214
     
232
 
All other
   
1,828
     
2,061
 
Total carrying amount
 
$
5,121
   
$
11,321
 
Contractual principal balance
 
$
7,116
   
$
14,784
 
                 
Carrying amount, net of allowance
 
$
5,071
   
$
11,311
 

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $50,000 for the nine-months ended September 30, 2017, but did not increase the allowance for loan losses for purchased impaired loans during the nine-months ended September 30, 2016.

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

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

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


NOTE  3–LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at September 30, 2017 and September 30, 2016.

   
2017
   
2016
 
Balance at January 1
 
$
1,208
   
$
185
 
New loans purchased
   
-
     
1,151
 
Accretion of income
   
(398
)
   
(64
)
Reclassification to non-accretable
   
-
     
-
 
Disposals
   
-
     
-
 
Balance at September 30
 
$
810
   
$
1,272
 


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


NOTE  3–LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2017 and December 31, 2016.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

September 30, 2017
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential  real estate
 
$
3,248
   
$
2,846
   
$
585
 
Multifamily real estate
   
11,101
     
11,095
     
334
 
Commercial real estate
                       
Owner occupied
   
2,052
     
1,974
     
63
 
Non owner occupied
   
310
     
209
     
86
 
Commercial and industrial
   
2,062
     
1,054
     
648
 
Consumer
   
331
     
304
     
-
 
All other
   
6,984
     
6,863
     
-
 
Total
 
$
26,088
   
$
24,345
   
$
1,716
 

December 31, 2016
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential  real estate
 
$
3,467
   
$
2,794
   
$
606
 
Multifamily real estate
   
11,157
     
11,106
     
334
 
Commercial real estate
                       
Owner occupied
   
1,769
     
1,704
     
15
 
Non owner occupied
   
294
     
196
     
36
 
Commercial and industrial
   
2,537
     
1,209
     
1,008
 
Consumer
   
366
     
347
     
-
 
All other
   
8,408
     
8,391
     
-
 
Total
 
$
27,998
   
$
25,747
   
$
1,999
 

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


NOTE  3–LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of September 30, 2017 by class of loans:
 
Loan Class
 
Total Loans
   
30-89 Days Past Due
   
Greater than 90 days past due
   
Total Past Due
   
Loans Not
Past Due
 
                               
Residential real estate
 
$
337,502
   
$
6,460
   
$
1,717
   
$
8,177
   
$
329,325
 
Multifamily real estate
   
70,698
     
-
     
11,429
     
11,429
     
59,269
 
Commercial real estate:
                                       
Owner occupied
   
134,773
     
172
     
1,979
     
2,151
     
132,622
 
Non owner occupied
   
237,655
     
374
     
227
     
601
     
237,054
 
Commercial and industrial
   
82,332
     
179
     
1,628
     
1,807
     
80,525
 
Consumer
   
29,675
     
365
     
121
     
486
     
29,189
 
All other
   
162,689
     
1,370
     
6,861
     
8,231
     
154,458
 
Total
 
$
1,055,324
   
$
8,920
   
$
23,962
   
$
32,882
   
$
1,022,442
 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 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
 
$
342,294
   
$
6,113
   
$
1,596
   
$
7,709
   
$
334,585
 
Multifamily real estate
   
74,165
     
-
     
11,440
     
11,440
     
62,725
 
Commercial real estate:
                                       
Owner occupied
   
129,370
     
1,746
     
1,474
     
3,220
     
126,150
 
Non owner occupied
   
220,836
     
1,803
     
159
     
1,962
     
218,874
 
Commercial and industrial
   
76,736
     
330
     
2,120
     
2,450
     
74,286
 
Consumer
   
30,916
     
403
     
223
     
626
     
30,290
 
All other
   
150,506
     
577
     
8,187
     
8,764
     
141,742
 
Total
 
$
1,024,823
   
$
10,972
   
$
25,199
   
$
36,171
   
$
988,652
 


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


NOTE  3–LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2017:
 
   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
 
$
-
   
$
3,001
   
$
-
   
$
3,001
   
$
320
   
$
335,667
   
$
1,515
   
$
337,502
 
Multifamily real estate
   
517
     
743
     
-
     
1,260
     
13,588
     
57,110
     
-
     
70,698
 
Commercial real estate:
                                                               
Owner occupied
   
301
     
1,316
     
-
     
1,617
     
3,725
     
129,484
     
1,564
     
134,773
 
Non-owner occupied
   
88
     
2,519
     
-
     
2,607
     
5,583
     
232,072
     
-
     
237,655
 
Commercial and industrial
   
105
     
945
     
50
     
1,100
     
1,129
     
80,989
     
214
     
82,332
 
Consumer
   
19
     
348
     
-
     
367
     
19
     
29,656
     
-
     
29,675
 
All other
   
518
     
1,889
     
-
     
2,407
     
7,177
     
153,684
     
1,828
     
162,689
 
Total
 
$
1,548
   
$
10,761
   
$
50
   
$
12,359
   
$
31,541
   
$
1,018,662
   
$
5,121
   
$
1,055,324
 

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, 2016:
 
   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
 
$
-
   
$
2,948
   
$
-
   
$
2,948
   
$
379
   
$
340,296
   
$
1,619
   
$
342,294
 
Multifamily real estate
   
-
     
785
     
-
     
785
     
13,641
     
60,524
     
-
     
74,165
 
Commercial real estate:
                                                               
Owner occupied
   
244
     
1,299
     
-
     
1,543
     
2,801
     
124,556
     
2,013
     
129,370
 
Non-owner occupied
   
-
     
2,350
     
-
     
2,350
     
2,373
     
213,067
     
5,396
     
220,836
 
Commercial and industrial
   
266
     
864
     
10
     
1,140
     
1,418
     
75,086
     
232
     
76,736
 
Consumer
   
-
     
347
     
-
     
347
     
-
     
30,916
     
-
     
30,916
 
All other
   
86
     
1,637
     
-
     
1,723
     
12,976
     
135,469
     
2,061
     
150,506
 
Total
 
$
596
   
$
10,230
   
$
10
   
$
10,836
   
$
33,588
   
$
979,914
   
$
11,321
   
$
1,024,823
 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2017.  The table includes $199,000 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
 
$
360
   
$
320
   
$
-
 
Multifamily real estate
   
2,492
     
2,492
     
-
 
Commercial real estate
                       
Owner occupied
   
2,916
     
2,855
     
-
 
Non owner occupied
   
3,604
     
3,512
     
-
 
Commercial and industrial
   
1,767
     
1,012
     
-
 
All other
   
3,186
     
3,066
     
-
 
     
14,325
     
13,257
     
-
 
With an allowance recorded:
                       
Multifamily real estate
 
$
11,102
   
$
11,095
   
$
517
 
Commercial real estate
                       
Owner occupied
   
888
     
870
     
301
 
Non owner occupied
   
2,072
     
2,072
     
88
 
Commercial and industrial
   
468
     
316
     
155
 
Consumer
   
19
     
19
     
19
 
All other
   
4,116
     
4,111
     
518
 
     
18,665
     
18,483
     
1,598
 
Total
 
$
32,990
   
$
31,740
   
$
1,598
 
                         


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, 2016.  The table includes $208,000 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
 
$
743
   
$
379
   
$
-
 
Multifamily real estate
   
13,692
     
13,641
     
-
 
Commercial real estate
                       
Owner occupied
   
1,803
     
1,766
     
-
 
Non owner occupied
   
2,465
     
2,373
     
-
 
Commercial and industrial
   
2,429
     
1,338
     
-
 
All other
   
9,868
     
9,853
     
-
 
     
31,000
     
29,350
     
-
 
With an allowance recorded:
                       
Commercial real estate
                       
Owner occupied
 
$
1,055
   
$
1,035
   
$
244
 
Commercial and industrial
   
431
     
288
     
276
 
All other
   
3,124
     
3,123
     
86
 
     
4,610
     
4,446
     
606
 
Total
 
$
35,610
   
$
33,796
   
$
606
 
 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the nine months ended September 30, 2017 and September 30, 2016.   The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

   
Nine months ended Sept 30, 2017
   
Nine months ended Sept 30, 2016
 
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
 
$
339
   
$
1
   
$
1
   
$
612
   
$
16
   
$
14
 
Multifamily real estate
   
13,605
     
196
     
181
     
1,580
     
121
     
121
 
Commercial real estate:
                                               
Owner occupied
   
3,340
     
49
     
49
     
1,144
     
3
     
3
 
Non-owner occupied
   
2,955
     
124
     
124
     
5,066
     
275
     
273
 
Commercial and industrial
   
1,474
     
114
     
114
     
1,155
     
26
     
26
 
Consumer
   
5
     
-
     
-
     
-
     
-
     
-
 
All other
   
8,641
     
342
     
341
     
3,011
     
40
     
6
 
Total
 
$
30,359
   
$
826
   
$
810
   
$
12,568
   
$
481
   
$
443
 

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended September 30, 2017 and September 30, 2016  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

   
Three months ended Sept 30, 2017
   
Three months ended Sept 30, 2016
 
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
 
$
323
   
$
-
   
$
-
   
$
667
   
$
5
   
$
5
 
Multifamily real estate
   
13,590
     
66
     
60
     
2,594
     
63
     
63
 
Commercial real estate:
                                               
Owner occupied
   
3,910
     
27
     
27
     
1,847
     
3
     
3
 
Non-owner occupied
   
3,749
     
63
     
63
     
4,240
     
175
     
175
 
Commercial and industrial
   
1,390
     
13
     
13
     
1,809
     
10
     
10
 
Consumer
   
9
     
-
     
-
     
-
     
-
     
-
 
All other
   
7,183
     
53
     
53
     
5,243
     
33
     
-
 
Total
 
$
30,154
   
$
222
   
$
216
   
$
16,400
   
$
289
   
$
256
 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR’s as of September 30, 2017 and December 31, 2016:

September 30, 2017
 
TDR’s on Non-accrual
   
Other TDR’s
   
Total TDR’s
 
                   
Residential  real estate
 
$
317
   
$
110
   
$
427
 
Multifamily  real estate
   
-
     
2,159
     
2,159
 
Commercial real estate
                       
    Owner occupied
   
602
     
1,766
     
2,368
 
Non owner occupied
   
-
     
3,875
     
3,875
 
Commercial and industrial
   
57
     
508
     
565
 
Consumer
   
-
     
-
     
-
 
All other
   
4,783
     
297
     
5,080
 
Total
 
$
5,759
   
$
8,715
   
$
14,474
 
                         

December 31, 2016
 
TDR’s on Non-accrual
   
Other TDR’s
   
Total TDR’s
 
                   
Residential  real estate
 
$
129
   
$
464
   
$
593
 
Multifamily  real estate
   
-
     
2,201
     
2,201
 
Commercial real estate
                       
Owner occupied
   
-
     
856
     
856
 
Commercial and industrial
   
62
     
352
     
414
 
All other
   
751
     
4,395
     
5,146
 
Total
 
$
942
   
$
8,268
   
$
9,210
 
                         

At September 30, 2017 $640,000 in specific reserves were allocated to loans that had restructured terms.  At December 31, 2016 $43,000 in specific reserves were allocated to loans that had restructured terms.  As of September 30, 2017 and December 31, 2016, there were no commitments to lend additional amounts to these borrowers.

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


NOTE  3–LOANS - continued

The following tables present TDR’s that occurred during the nine months ended September 30, 2017 and September 30, 2016, and three months ended September 30, 2017 and September 30, 2016.

   
Nine months ended Sept 30, 2017
   
Nine months ended Sept 30, 2016
 
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
 
                                     
Residential  real estate
   
-
   
$
-
   
$
-
     
8
   
$
483
   
$
483
 
Commercial real estate
                                               
Owner occupied
   
2
     
1,525
     
1,525
     
3
     
865
     
865
 
Non owner occupied
   
2
     
3,875
     
3,875
     
1
     
100
     
100
 
Commercial and industrial
   
1
     
191
     
191
     
1
     
20
     
20
 
All other
   
-
     
-
     
-
     
1
     
4,106
     
4,106
 
Total
   
5
   
$
5,591
   
$
5,591
     
14
   
$
5,574
   
$
5,574
 

   
Three months ended Sept 30, 2017
   
Three months ended Sept 30, 2016
 
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
 
                                     
Residential  real estate
   
-
   
$
-
   
$
-
     
6
   
$
184
   
$
184
 
Commercial real estate
                                               
Owner occupied
   
-
     
-
     
-
     
1
     
255
     
255
 
Non owner occupied
   
2
     
3,875
     
3,875
     
-
     
-
     
-
 
All other
   
-
     
-
     
-
     
1
     
4,106
     
4,106
 
Total
   
2
   
$
3,875
   
$
3,875
     
8
   
$
4,545
   
$
4,545
 

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

The modifications reported above for the three and nine months ended September 30, 2016 involve reducing the borrowers’ required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS - continued

The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans.  The Company increased the allowance for loan losses related to these loans by $35,000 during the three months ended September 30, 2016, and by $181,000 during the nine months ended September 30, 2016.

During the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, there were no TDR’s for which there was a payment default within twelve months following the modification.

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

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis.  For consumer loans, including consumer loans secured by residential real estate, 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.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS - continued

As of September 30, 2017 and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total Loans
 
                               
Residential real estate
 
$
324,121
   
$
3,502
   
$
9,878
   
$
1
   
$
337,502
 
Multifamily real estate
   
52,472
     
3,590
     
12,024
     
2,612
     
70,698
 
Commercial real estate:
                                       
Owner occupied
   
122,983
     
4,305
     
7,485
     
-
     
134,773
 
Non-owner occupied
   
220,173
     
11,243
     
6,239
     
-
     
237,655
 
Commercial and industrial
   
71,850
     
7,400
     
3,082
     
-
     
82,332
 
Consumer
   
29,145
     
136
     
375
     
19
     
29,675
 
All other
   
148,216
     
5,479
     
8,994
     
-
     
162,689
 
Total
 
$
968,960
   
$
35,655
   
$
48,077
   
$
2,632
   
$
1,055,324
 

As of December 31, 2016, 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
 
$
328,905
   
$
4,880
   
$
8,507
   
$
2
   
$
342,294
 
Multifamily real estate
   
59,375
     
78
     
14,712
     
-
     
74,165
 
Commercial real estate:
                                       
Owner occupied
   
118,134
     
6,720
     
4,516
     
-
     
129,370
 
Non-owner occupied
   
213,641
     
4,391
     
2,804
     
-
     
220,836
 
Commercial and industrial
   
72,094
     
2,337
     
2,275
     
30
     
76,736
 
Consumer
   
30,369
     
242
     
305
     
-
     
30,916
 
All other
   
134,945
     
1,958
     
13,603
     
-
     
150,506
 
Total
 
$
957,463
   
$
20,606
   
$
46,722
   
$
32
   
$
1,024,823
 

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


NOTE  4- STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

The Company’s principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below.  During 2017 the Banks could, without prior approval, declare dividends to the Company of approximately $4.1 million plus any 2017 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).  The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule by     January 1, 2019.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes, as of September 30, 2017, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.


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


NOTE  4- STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS - continued

Shown below is a summary of regulatory capital ratios for the Company:
   
September 30,
2017
   
December 31,
2016
   
Regulatory
Minimum
Requirements
   
To Be Considered
Well Capitalized
 
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
   
13.8
%
   
13.4
%
   
4.5
%
   
6.5
%
Tier 1 Capital (to Risk-Weighted Assets)
   
14.4
%
   
13.9
%
   
6.0
%
   
8.0
%
Total Capital (to Risk-Weighted Assets)
   
15.5
%
   
15.0
%
   
8.0
%
   
10.0
%
Tier 1 Capital (to Average Assets)
   
10.7
%
   
10.1
%
   
4.0
%
   
5.0
%

Beginning on January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over a four year period from 2016 thru 2019, resulting in a required capital conservation buffer of 0.625% in 2016 and 1.25% in 2017.  When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk-weighted assets, Tier 1 Capital to risk-weighted assets, and Total Capital to risk-weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company.  The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk-weighted assets ratio of at least 8.50% and a Total Capital to risk-weighted assets ratio of at least 10.50%.  The Company’s capital conservation buffer was 7.50% at September 30, 2017 and 6.95% at December 31, 2016, well in excess of the fully phased-in 2.50% required by December 31, 2019.

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


NOTE  5 – STOCK COMPENSATION EXPENSE

From time to time the Company grants stock options to its employees.  The Company estimates the fair value of the options at the time they are granted to employees and expenses that fair value over the vesting period of the option grant.  From time to time the Company also grants shares of stock to its employees.  The Company uses the closing price of the stock on the date of grant to determine the amount of compensation expense to record as a result of the stock grant.

On March 15, 2017, 55,500 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $19.01, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 15, 2020.  On March 16, 2016, 55,990 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $13.55, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 16, 2019.

On April 19, 2017, 6,000 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $20.70 per share based upon the closing price of Premier’s stock on the date of grant and $124,000 of stock-based compensation was recorded as a result.  On March 16, 2016, 7,700 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $13.55 per share based upon the closing price of Premier’s stock on the date of grant and $104,000 of stock-based compensation was recorded as a result.

Compensation expense of $194,000 was recorded for the first nine months of 2017 while $160,000 was recorded for the first nine months of 2016, including the compensation expense related to the stock grants to Mr. Walker.  Stock-based compensation expense related to incentive stock option grants is recognized ratably over the requisite vesting period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $92,000 at September 30, 2017. This unrecognized expense is expected to be recognized over the next 29 months based on the vesting periods of the options.

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


NOTE  6 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and nine months ended September 30, 2017 and 2016 is presented below:

   
Three Months Ended
Sept 30,
   
Nine Months Ended
Sept 30,
 
   
2017
   
2016
   
2017
   
2016
 
Basic earnings per share
                       
Income available to common stockholders
 
$
3,467
   
$
3,164
   
$
11,050
   
$
8,767
 
Weighted average common shares outstanding
   
10,661,157
     
10,626,185
     
10,653,594
     
10,508,809
 
Earnings per share
 
$
0.33
   
$
0.30
   
$
1.04
   
$
0.83
 
                                 
Diluted earnings per share
                               
Income available to common stockholders
 
$
3,467
   
$
3,164
   
$
11,050
   
$
8,767
 
Weighted average common shares outstanding
   
10,661,157
     
10,626,185
     
10,653,594
     
10,508,809
 
Add dilutive effects of potential additional
common stock
   
77,794
     
60,742
     
80,418
     
60,372
 
Weighted average common and dilutive potential
common shares outstanding
   
10,738,951
     
10,686,927
     
10,734,012
     
10,569,181
 
Earnings per share assuming dilution
 
$
0.32
   
$
0.30
   
$
1.03
   
$
0.83
 

There were no stock options considered antidilutive for the three or nine months ended September 30, 2017 and 2016.

On December 9, 2016, Premier paid a 10% stock dividend (1 share for every 10 shares owned on record date) to shareholders of record on December 2, 2016.  Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a result of the stock dividend to aid in the comparison to current period results.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


 
NOTE 7 – FAIR VALUE

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

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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

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

Carrying amount is the estimated fair value for cash and due from banks, Federal funds sold, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.  Fair values of time deposits with other banks are based on current rates for similar time deposits using the remaining time to maturity.  It is 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).

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


NOTE  7 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at September 30, 2017 were as follows:

         
Fair Value Measurements at September 30, 2017 Using
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
 
$
63,512
   
$
63,512
   
$
-
   
$
-
   
$
63,512
 
Time deposits with other banks
   
2,582
     
-
     
2,589
     
-
     
2,589
 
Federal funds sold
   
11,632
     
11,632
     
-
     
-
     
11,632
 
Securities available for sale
   
289,203
     
-
     
289,203
     
-
     
289,203
 
Loans, net
   
1,042,965
     
-
     
-
     
1,029,145
     
1,029,145
 
Federal Home Loan Bank stock
   
3,185
     
n/a
     
n/a
     
n/a
     
n/a
 
Interest receivable
   
4,060
     
-
     
829
     
3,231
     
4,060
 
                                         
Financial liabilities
                                       
Deposits
 
$
(1,269,384
)
 
$
(925,328
)
 
$
(340,134
)
 
$
-
   
$
(1,265,462
)
Securities sold under agreements to repurchase
   
(25,116
)
   
-
     
(25,116
)
   
-
     
(25,116
)
Other borrowed funds
   
(6,000
)
   
-
     
(5,966
)
   
-
     
(5,966
)
Subordinated Debt
   
(5,368
)
   
-
     
(5,381
)
   
-
     
(5,381
)
Interest payable
   
(358
)
   
(7
)
   
(351
)
   
-
     
(358
)

The carrying amounts and estimated fair values of financial instruments at December 31, 2016 were as follows:

         
Fair Value Measurements at December 31, 2016 Using
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
 
$
97,163
   
$
97,163
   
$
-
   
$
-
   
$
97,163
 
Time deposits with other banks
   
2,332
     
-
     
2,352
     
-
     
2,352
 
Federal funds sold
   
7,555
     
7,555
     
-
     
-
     
7,555
 
Securities available for sale
   
288,607
     
-
     
288,607
     
-
     
288,607
 
Loans, net
   
1,013,987
     
-
     
-
     
1,004,388
     
1,004,388
 
Federal Home Loan Bank stock
   
3,200
     
n/a
     
n/a
     
n/a
     
n/a
 
Interest receivable
   
3,862
     
-
     
771
     
3,091
     
3,862
 
                                         
Financial liabilities
                                       
Deposits
 
$
(1,279,386
)
 
$
(920,745
)
 
$
(354,885
)
 
$
-
   
$
(1,275,630
)
Securities sold under agreements to repurchase
   
(23,820
)
   
-
     
(23,820
)
   
-
     
(23,820
)
Other borrowed funds
   
(8,859
)
   
-
     
(8,906
)
   
-
     
(8,906
)
Subordinated debt
   
(5,343
)
   
-
     
(5,341
)
   
-
     
(5,341
)
Interest payable
   
(364
)
   
(7
)
   
(357
)
   
-
     
(364
)

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


NOTE  7 – FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

         
Fair Value Measurements at
September 30, 2017 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
 
$
199,933
   
$
-
   
$
199,933
   
$
-
 
U. S. agency CMO’s - residential
   
56,514
     
-
     
56,514
     
-
 
Total mortgage-backed securities of government sponsored agencies
   
256,447
     
-
     
256,447
     
-
 
U. S. government sponsored agency securities
   
19,275
     
-
     
19,275
     
-
 
Obligations of states and political subdivisions
   
13,481
     
-
     
13,481
     
-
 
Total available for sale
 
$
289,203
   
$
-
   
$
289,203
   
$
-
 

         
Fair Value Measurements at
December 31, 2016 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
 
$
174,177
   
$
-
   
$
174,177
   
$
-
 
U. S. agency CMO’s - residential
   
73,267
     
-
     
73,267
     
-
 
Total mortgage-backed securities of government sponsored agencies
   
247,444
     
-
     
247,444
     
-
 
U. S. government sponsored agency securities
   
24,501
     
-
     
24,501
     
-
 
Obligations of states and political subdivisions
   
16,662
     
-
     
16,662
     
-
 
Total securities available for sale
 
$
288,607
   
$
-
   
$
288,607
   
$
-
 

There were no transfers between Level 1 and Level 2 during 2017 or 2016.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – FAIR VALUE - continued

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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

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


NOTE  7 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2017 are summarized below:

         
Fair Value Measurements at
September 30, 2017 Using
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans:
                       
Multifamily real estate
 
$
10,578
   
$
-
   
$
-
   
$
10,578
 
Commercial real estate:
                               
Owner occupied
   
569
     
-
     
-
     
569
 
Non-owner occupied
   
1,984
     
-
     
-
     
1,984
 
Commercial and industrial
   
161
     
-
     
-
     
161
 
All other
   
3,593
     
-
     
-
     
3,593
 
Total impaired loans
 
$
16,885
   
$
-
   
$
-
   
$
16,885
 
                                 
Other real estate owned:
                               
Residential real estate
 
$
370
   
$
-
   
$
-
   
$
370
 
Commercial real estate:
                               
Owner occupied
   
175
     
-
     
-
     
175
 
Non-owner occupied
   
1,853
     
-
     
-
     
1,853
 
All other
   
2,855
     
-
     
-
     
2,855
 
Total OREO
 
$
5,253
   
$
-
   
$
-
   
$
5,253
 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $18,483,000 at September 30, 2017 with a valuation allowance of $1,598,000 and a carrying amount of $4,446,000 at December 31, 2016 with a valuation allowance of $606,000.  The change resulted in a provision for loan losses of $1,165,000 for the nine months ended September 30, 2017, compared to an $215,000 provision for loan losses for the nine months ended September 30, 2016 and a $423,000 provision for loan losses for the three months ended September 30, 2017, compared to a $24,000 provision for loan losses for the three months ended September 30, 2016.  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 $5,253,000 which is made up of the outstanding balance of $8,642,000 net of a valuation allowance of $3,389,000 at September 30, 2017.  There were $474,000 of additional write downs during the nine months ended September 30, 2017, compared to $478,000 of additional write downs during the nine months ended September 30, 2016.  For the three months ended September 30, 2017 there were $111,000 of additional write downs compared to $478,000 of additional write downs during the three months ended September 30, 2016.  At December 31, 2016, other real estate owned had a net carrying amount of $6,624,000, made up of the outstanding balance of $9,900,000, net of a valuation allowance of $3,276,000.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at September 30, 2017 are summarized below:

   
September 30, 2017
 
Valuation Techniques
 
Unobservable Inputs
 
Range
(Weighted Avg)
Impaired loans:
                
Multifamily real estate:
 
$
10,578
 
sales comparison
 
adjustment for differences between the comparable sales
  4.0%-4.0% (4.0%)
Commercial real estate:
                   
Owner occupied
   
569
 
sales comparison
 
adjustment for estimated realizable value
  23.1%-23.1% (23.1%)
Non-owner occupied
   
1,984
 
income approach
 
adjustment for differences in net operating income expectations
  67.4%-67.4% (67.4%)
Commercial and industrial
   
161
 
sales comparison
 
adjustment for estimated realizable value
  8.0%-56.5% (52.8%)
All other
3,593
sales comparison
adjustment for percentage of completion of construction
8.0%-23.0% (22.7%)
Total impaired loans
 
$
16,885
             
                     
Other real estate owned:
                   
Residential real estate
 
$
370
 
sales comparison
 
adjustment for differences between the comparable sales
  0.0%-50.2% (16.4%)
Commercial real estate:
                   
Owner occupied
   
175
 
sales comparison
 
adjustment for estimated realizable value
  21.8%-21.8% (21.8%)
Non-owner occupied
   
1,853
 
sales comparison
 
adjustment for estimated realizable value
  31.8%-58.9% (34.7%)
All other
   
2,855
 
sales comparison
 
adjustment for estimated realizable value
  15.1%-69.0% (18.8%)
Total OREO
 
$
5,253
             
 

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


NOTE  7 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2016 are summarized below:

         
Fair Value Measurements at
December 31, 2016 Using
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans:
                       
Commercial real estate:
                       
Owner occupied
 
$
793
   
$
-
   
$
-
   
$
793
 
Commercial and Industrial
   
12
     
-
     
-
     
12
 
All Other
   
3,036
     
-
     
-
     
3,036
 
Total impaired loans
 
$
3,841
   
$
-
   
$
-
   
$
3,841
 
                                 
Other real estate owned:
                               
Residential real estate:
 
$
613
   
$
-
   
$
-
   
$
613
 
Commercial real estate:
                               
Owner occupied
   
175
     
-
     
-
     
175
 
Non-owner occupied
   
2,153
     
-
     
-
     
2,153
 
All other
   
3,683
     
-
     
-
     
3,683
 
Total OREO
 
$
6,624
   
$
-
   
$
-
   
$
6,624
 
 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2016 are summarized below:

   
December 31, 2016
 
Valuation Techniques
 
Unobservable Inputs
 
Range
(Weighted Avg)
Impaired loans:
                
Commercial Real Estate
                
Owner Occupied
 
$
793
 
sales comparison
 
adjustment for limited salability of specialized property
  9.3%-76.4% (19.3%)
Commercial and Industrial
   
12
 
sales comparison
 
adjustment for differences between the comparable sales
  8.0%-8.0% (8.0%)
All Other
   
3,036
 
sales comparison
 
adjustment for differences between the comparable sales
  5.7%-9.0% (8.0%)
Total impaired loans
 
$
3,841
             
                     
Other real estate owned:
                   
Residential Real Estate
 
$
613
 
sales comparison
 
adjustment for differences between the comparable sales
  0.7%-86.8% (25.2%)
Commercial Real Estate
                   
Owner Occupied
   
175
 
sales comparison
 
adjustment for differences between the comparable sales
  21.8%-21.8% (21.8%)
Non-owner Occupied
   
2,153
 
sales comparison
 
adjustment for differences between the comparable sales
  17.2%-27.6% (25.7%)
All Other
   
3,683
sales comparison
 
adjustment for estimated realizable value
  15.1%-45.4% (21.8%)
Total OREO
 
$
6,624
             
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


Item 2.  Management’s Discussion and Analysis
   of Financial Condition and Results of Operations

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

A. Results of Operations
 
A financial institution’s primary sources of revenue are generated by interest income on loans, investments and other earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities.  Effective management of these sources and uses of funds is essential in attaining a financial institution’s optimal profitability while maintaining a minimum amount of interest rate risk and credit risk.
Net income for the nine months ended September 30, 2017 was $11,050,000, or $1.03 per diluted share, compared to net income of $8,767,000, or $0.83 per diluted share, for the nine months ended September 30, 2016.  The increase in income in 2017 is largely due to an increase in net interest income, an increase in other operating income, and a decrease in other operating expense.  The annualized returns on average common stockholders’ equity and average assets were approximately 8.13% and 0.99% for the nine months ended September 30, 2017 compared to 6.71% and 0.79%% for the same period in 2016.
Net income for the three months ended September 30, 2017 was $3,467,000, or $0.32 per diluted share, compared to net income of $3,164,000, or $0.30 per diluted share for the three months ended September 30, 2016.  The increase in net income during the three months ended September 30, 2017 is largely due to an increase in interest income and non-interest income as well as a decrease in interest expense and non-interest expense.  The annualized returns on average common stockholders’ equity and average assets were approximately 7.53% and 0.93% for the three months ended September 30, 2017 compared to 7.10% and 0.84% for the same period in 2016.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


Net interest income for the nine months ended September 30, 2017 totaled $43.289 million, up $3.027 million, or 7.5%, from the $40.262 million of net interest income earned in the first nine months of 2016.  Interest income in 2017 increased by $2.875 million, or 6.6%, largely due to a $2.583 million increase in interest income on loans.  Interest income on loans in the first nine months of 2017 included approximately $1.607 million of deferred interest and discounts recognized on loans that paid off during the first nine months of 2017, compared to $212,000 of loan interest income of this kind recognized during the first nine months of 2016.  The loan payoffs in 2017 included both non-accrual loans and performing loans that were once on non-accrual status.  Otherwise, interest income on loans increased by $1.188 million, or 3.0%, largely due to a higher average balance of loans outstanding during the period.  Interest income on investment securities in the first nine months of 2017 increased by $105,000, or 2.4%, largely due to a higher yielding investment portfolio, although on a lower average balance of investments outstanding, as surplus funds and maturing investments have been used to fund the higher yielding loan portfolio.  Interest income from interest-bearing bank balances and federal funds sold increased by $187,000, or 57.0%, largely due to an increase in the yield on these balances in 2017 resulting from the Federal Reserve Board of Governors’ decisions to increase the federal funds target rate by a total of 75 basis points in the last twelve months, on a lower average balance outstanding during the first nine months of 2017.
Interest expense decreased in total during the first nine months of 2017 by $152,000, or 4.4%, when compared to the same nine months of 2016.  Interest expense on deposits decreased by $63,000, or 2.2%, in the first nine months of 2017, primarily due to a lower average balance of higher rate certificates of deposit in the first nine months of 2017 compared to the same nine months of 2016.  The decrease in the average of these deposit balances was partially replaced by an increase in average transaction based interest-bearing deposits and savings deposits, which typically pay a lower interest rate than certificates of deposit.  Interest expense on borrowings in the first nine months of 2017 decreased by $119,000, or 33.7%, largely due to a decrease in outstanding borrowings from principal payments, including the full repayment of bank based FHLB borrowings during 2016.  Partially offsetting the decrease in interest expense on borrowings was a $37,000, or 20.4%, increase in interest expense on Premier’s subordinated debt due to an increase in the variable rate interest rate paid in 2017.  The variable interest rate is indexed to the three month London Interbank Offered Rate, which is sensitive to moves in the short-term interest rate market.
Premier’s net interest margin during the first nine months of 2017 was 4.19%, compared to 3.92% for the same period in 2016.  A portion of the interest income on loans is the result of recognizing deferred interest income and discounts on loans that paid-off during the period.  Excluding this income, Premier’s net interest margin during the first nine months of 2017 would have been 4.03%, compared to 3.90% for the same period in 2016.  As shown in the table below, Premier’s yield earned on federal funds sold and interest bearing bank balances increased to 1.47% in the first nine months of 2017, from the 0.66% earned in the first nine months of 2016.  The average yield earned on securities available for sale and total loans outstanding also increased when compared to the first nine months of 2016.  Further improving Premier’s net interest margin, the average rate paid on interest-bearing liabilities decreased in the first nine months of 2017, as decreases in the average rates paid on interest-bearing deposits and short-term borrowings were partially offset by a higher average rate paid on Premier’s variable rate subordinated debentures.  The overall effect was to increase Premier’s net interest spread by 26 basis points to 4.06% and its net interest margin by 27 basis points to 4.19% in the first nine months of 2017 when compared to the first nine months of 2016.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017

Additional information on Premier’s net interest income for the first nine months of 2017 and first nine months of 2016 is contained in the following table.
 
PREMIER FINANCIAL BANCORP, INC.
 
AVERAGE CONSOLIDATED BALANCE SHEETS
 
AND NET INTEREST INCOME ANALYSIS
 
   
   
Nine Months Ended Sept 30, 2017
   
Nine Months Ended Sept 30, 2016
 
   
Balance
   
Interest
   
Yield/Rate
   
Balance
   
Interest
   
Yield/Rate
 
Assets
                                   
Interest earning assets
                                   
Federal funds sold and other
 
$
46,851
   
$
515
     
1.47
%
 
$
66,518
   
$
328
     
0.66
%
Securities available for sale
                                               
Taxable
   
286,602
     
4,236
     
1.97
     
294,926
     
4,075
     
1.84
 
Tax-exempt
   
12,523
     
198
     
3.24
     
18,048
     
254
     
2.89
 
Total investment securities
   
299,125
     
4,434
     
2.02
     
312,974
     
4,329
     
1.90
 
Total loans
   
1,038,719
     
41,667
     
5.36
     
995,517
     
39,084
     
5.24
 
Total interest-earning assets
   
1,384,695
     
46,616
     
4.51
%
   
1,375,009
     
43,741
     
4.26
%
Allowance for loan losses
   
(11,231
)
                   
(10,235
)
               
Cash and due from banks
   
40,700
                     
38,291
                 
Other assets
   
80,857
                     
81,678
                 
Total assets
 
$
1,495,021
                   
$
1,484,743
                 
                                                 
Liabilities and Equity
                                               
Interest-bearing liabilities
                                               
Interest-bearing deposits
 
$
959,489
     
2,854
     
0.40
   
$
960,668
     
2,917
     
0.41
 
Short-term borrowings
   
22,512
     
21
     
0.12
     
25,068
     
28
     
0.15
 
FHLB advances
   
-
     
-
     
-
     
2,904
     
32
     
1.47
 
Other borrowings
   
7,586
     
234
     
4.12
     
10,396
     
321
     
4.12
 
Subordinated debentures
   
5,355
     
218
     
5.44
     
5,027
     
181
     
4.81
 
Total interest-bearing liabilities
   
994,942
     
3,327
     
0.45
%
   
1,004,063
     
3,479
     
0.46
%
Non-interest bearing deposits
   
314,344
                     
302,558
                 
Other liabilities
   
4,582
                     
3,918
                 
Stockholders’ equity
   
181,153
                     
174,204
                 
Total liabilities and equity
 
$
1,495,021
                   
$
1,484,743
                 
                                                 
Net interest earnings
         
$
43,289
                   
$
40,262
         
Net interest spread
                   
4.06
%
                   
3.80
%
Net interest margin
                   
4.19
%
                   
3.92
%

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017

Additional information on Premier’s net interest income for the third quarter of 2017 and third quarter of 2016 is contained in the following table.
 
PREMIER FINANCIAL BANCORP, INC.
 
AVERAGE CONSOLIDATED BALANCE SHEETS
 
AND NET INTEREST INCOME ANALYSIS
 
   
   
Three Months Ended Sept 30, 2017
   
Three Months Ended Sept 30, 2016
 
   
Balance
   
Interest
   
Yield/Rate
   
Balance
   
Interest
   
Yield/Rate
 
Assets
                                   
Interest earning assets
                                   
Federal funds sold and other
 
$
32,288
   
$
176
     
2.16
%
 
$
69,396
   
$
123
     
0.71
%
Securities available for sale
                                               
Taxable
   
288,241
     
1,427
     
1.98
     
288,582
     
1,285
     
1.78
 
Tax-exempt
   
11,579
     
62
     
3.30
     
16,796
     
82
     
3.00
 
Total investment securities
   
299,820
     
1,489
     
2.03
     
305,378
     
1,367
     
1.85
 
Total loans
   
1,047,202
     
13,469
     
5.10
     
1,027,011
     
13,375
     
5.18
 
Total interest-earning assets
   
1,379,310
     
15,134
     
4.37
%
   
1,401,785
     
14,865
     
4.23
%
Allowance for loan losses
   
(11,760
)
                   
(10,840
)
               
Cash and due from banks
   
41,253
                     
42,224
                 
Other assets
   
79,702
                     
81,240
                 
Total assets
 
$
1,488,505
                   
$
1,514,409
                 
                                                 
Liabilities and Equity
                                               
Interest-bearing liabilities
                                               
Interest-bearing deposits
 
$
946,258
     
954
     
0.40
   
$
970,005
     
965
     
0.40
 
Short-term borrowings
   
22,784
     
7
     
0.12
     
29,571
     
10
     
0.13
 
FHLB advances
   
-
     
-
     
-
     
5,104
     
10
     
0.78
 
Other borrowings
   
6,553
     
68
     
4.12
     
9,779
     
101
     
4.11
 
Subordinated debentures
   
5,365
     
74
     
5.47
     
5,328
     
63
     
4.70
 
Total interest-bearing liabilities
   
980,960
     
1,103
     
0.45
%
   
1,019,787
     
1,149
     
0.45
%
Non-interest bearing deposits
   
318,894
                     
312,898
                 
Other liabilities
   
4,539
                     
3,536
                 
Stockholders’ equity
   
184,112
                     
178,188
                 
Total liabilities and equity
 
$
1,488,505
                   
$
1,514,409
                 
                                                 
Net interest earnings
         
$
14,031
                   
$
13,716
         
Net interest spread
                   
3.92
%
                   
3.78
%
Net interest margin
                   
4.05
%
                   
3.91
%
 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


Net interest income for the quarter ended September 30, 2017 totaled $14.031 million, up $315,000, or 2.3%, from the $13.716 million of net interest income earned in the third quarter of 2016.  Interest income in 2017 increased by $269,000, or 1.8%, largely due to a $122,000, or 8.9%, increase in interest income on investment securities.  Interest income on loans in the third quarter of 2017 increased $94,000, or 0.7%, compared to the interest income on loans earned during the same quarter of 2016.  Interest income on loans in the third quarter of the prior year included approximately $142,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter, compared to no interest income of this kind recognized during the third quarter of 2017.  Otherwise, interest income on loans increased by $236,000, or 1.8%, in the third quarter of 2017, largely due to a higher average balance of loans outstanding during the quarter.  Interest income on investment securities in the third quarter of 2017 increased by $122,000, or 8.9%, largely due to a higher average yield on the investment portfolio, although on a lower average balance of investments outstanding during the quarter.  Interest income from interest-bearing bank balances and federal funds sold increased by $53,000, or 43.1%, largely due to an increase in the yield on these balances in 2017 although on a lower average balance outstanding during the quarter.
Complementing the increase in interest income in the third quarter of 2017 was a $46,000, or 4.0%, decrease in interest expense.  Interest expense on deposits decreased by $11,000, or 1.1%, in the third quarter of 2017, primarily due to a lower average of interest-bearing deposits outstanding during the quarter.  Interest expense on repurchase agreements in the third quarter of 2017 decreased by $3,000, or 30.0%, primarily due to a lower average balance outstanding during the quarter.  Interest expense on borrowings in the third quarter of 2017 decreased by $43,000, or 38.7%, largely due to a decrease in outstanding borrowings, including the full repayment of bank based FHLB borrowings during 2016.  Partially offsetting the decrease in interest expense on borrowings was an $11,000, or 17.5%, increase in interest expense on Premier’s subordinated debt, largely due to an increase in the variable interest rate paid in 2017.
Premier’s net interest margin during the third quarter of 2017 was 4.05% compared to 3.91% for the same period in 2016.  As shown in the table above, Premier’s yield earned on federal funds sold and interest bearing bank balances increased to 2.16% in the third quarter of 2017, from the 0.71% earned in the third quarter of 2016.  The average yield earned on securities available for sale also increased when compared to the third quarter of 2016.  The average yield earned on total loans outstanding decreased to 5.10% in the third quarter of 2017, from the 5.18% earned in the third quarter of 2016, partially due to the $142,000 of income recognized from deferred interest and discounts in the third quarter of 2016.  The average rate paid on interest-bearing liabilities remained unchanged in the third quarter of 2017, as a decrease in interest expense on bank based FHLB advances was offset by a higher average rate paid on Premier’s variable rate subordinated debentures.  The overall effect was to increase Premier’s net interest spread by 14 basis points to 3.92% and its net interest margin by 14 basis points to 4.05% in the third quarter of 2017 when compared to the same quarter of 2016.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


Non-interest income increased by $264,000, or 4.4%, to $6,328,000 for the first nine months of 2017 compared to the same period of 2016.  Service charges on deposit accounts increased by $226,000, or 7.6%, and electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $69,000, or 2.9%.  Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, particularly in the third quarter of 2017, as Premier Bank introduced updated courtesy overdraft protection features on its consumer checking accounts.  Electronic banking income increased primarily due to an increase in income from debit card transaction activity.  Partially offsetting these increases was a $37,000, or 6.5%, decrease in other non- interest income, largely due to lower revenue on checkbook sales and wire transfer fees as well as a lower level of loan extension and other fees on loans.
For the quarter ending September 30, 2017, non-interest income increased by $115,000, or 5.6%, to $2,177,000 compared to $2,062,000 recognized during the same quarter of 2016.  Service charges on deposit accounts increased by $105,000, or 10.2% and electronic banking income increased by $20,000, or 2.5%.  Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, particularly in the third quarter of 2017, while electronic banking income increased primarily due to an increase in revenue from non-customer use of bank owned automated teller machines.  Partially offsetting these increases was a $13,000, or 7.4%, decrease in other non-interest income, largely due to a lower  amount of loan extension and other fees on loans.
Non-interest expenses for the first nine months of 2017 totaled $30.33 million, or 2.71% of average assets on an annualized basis, compared to $31.32 million, or 2.82% of average assets for the same period of 2016.  The $993,000, or 3.2%, decrease in non-interest expenses in 2017 when compared to the first nine months of 2016 is largely due to a $322,000, or 2.1%, decrease in staff costs, a $263,000, or 18.8%, decrease in expenses and write-downs of OREO, a $246,000, or 32.7%, decrease in FDIC insurance expense, a $216,000, or 4.6%, decrease in occupancy and equipment expenses, and a $273,000, or 7.4%, decrease in other non-interest expenses.  Staff costs decreased largely due to reductions in salary expense, payroll taxes, medical benefit costs, and retirement benefit costs related to reductions in personnel and changes to benefit plans at the acquired First National Bankshares locations.  These savings were partially offset by normal salary increases at Premier’s other operations.  OREO expenses decreased in 2017, largely due to lower cost to maintain properties held while being marketed for sale when compared to the first nine months of 2016.  In addition to lower maintenance costs, Premier recorded $41,000 of net gains on the sale of OREO compared to $30,000 of net losses on the sale of OREO properties in the first nine months of 2016.   Occupancy and equipment expense decreased largely due to lower building repairs and lower deprecation on information technology equipment.  FDIC insurance decreased, largely due to lower rates charged on the assessment base.  Other non-interest expenses decreased due in large part to $196,000 of conversion related expenses incurred in 2016 related to the acquisition and data systems conversion of First National Bankshares versus only $17,000 of conversion costs incurred in 2017.  These decreases in non-interest expense were partially offset by a $221,000, or 44.2%, increase in professional fees, a $116,000, or 24.5%, increase in taxes not on income, and a $84,000, or 2.1%, increase in data processing costs when compared to the first nine months of 2016.   Professional fees increased largely due to increases in legal fees, audit costs, and expenditures on third party consultants.  Taxes not on income increased largely due to increases in equity and deposit based taxes in Kentucky and Ohio due to growth in those markets from Premier’s expanding branch network into the metro Cincinnati, Ohio area.  Outside data processing costs increased in 2017 largely due to the costs of expanding electronic access products such as internet banking and mobile banking.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


Non-interest expenses for the third quarter of 2017 totaled $9.93 million, or 2.65% of average assets on an annualized basis, compared to $10.61 million, or 2.79% of average assets for the same period of 2016.  The $683,000, or 6.4%, decrease in non-interest expenses in the third quarter of 2017 when compared to the third quarter of 2016 is largely due to a $419,000, or 54.8% decrease in OREO expenses and write-downs, a $57,000, or 1.2%, decrease in staff costs, a $124,000, or 7.6%, decrease in occupancy and equipment expense, and a $119,000, or 42.8%, decrease in FDIC insurance expense.  Staff costs decreased largely due to a reduction in the number of participants in the medical benefit plan and in medical benefit costs related to changes to benefit plans at the acquired First National Bankshares locations.  Occupancy and equipment expense decreased largely due to lower building repairs, utility costs, and property insurance costs as well as lower deprecation related to information technology equipment.  FDIC insurance decreased largely due to lower rates charged on the assessment base.  OREO expenses decreased in the third quarter of 2017 largely due to a $367,000 decrease in the amount of OREO value writedowns, when compared to the same quarter of 2016, as well as $26,000 of net gains on the sale of OREO in the third quarter of 2017 when compared to $45,000 of net losses on the sale of OREO in the same quarter of 2016.  These decreases were partially offset by a $29,000, or 17.4%, increase in professional fees, a $33,000, or 21.2%, increase in taxes not on income, and a $44,000, or 3.4%, increase in data processing costs.  Professional fees increased largely due to increases in legal fees and audit costs.  Taxes not on income increased largely due to increases in equity and deposit based taxes in Kentucky and Ohio due to growth in those markets from Premier’s expanding branch network into the metro Cincinnati, Ohio area.  Outside data processing costs increased in the third quarter of 2017 largely due to the costs of expanding electronic access products such as internet banking and mobile banking.
Income tax expense was $6.207 million for the first nine months of 2017 compared to $4.803 million for the first nine months of 2016.  The effective tax rate for the nine months ended September 30, 2017 was 36.0% compared to 35.4% for the same period in 2016.  For the quarter ended September 30, 2017, income tax expense was $1.925 million, a 35.7% effective tax rate, compared to $1.694 million (a 34.9% effective tax rate) for the same period in 2016.  The increase in income tax expense during the first nine months of 2017 can be primarily attributed to the increase in pre-tax income detailed above.  The increase in the effective tax rate in 2017 is largely due to higher levels of state taxable income.  Similarly, the increase in income tax expense during the third quarter of 2017 when compared to the same quarter of 2016, can be primarily attributed to the increase in pre-tax income for the quarter as detailed above.  The increase in the third quarter effective tax rate in 2017 is also largely due to higher levels of state taxable income.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017

B. Financial Position
Total assets at September 30, 2017 decreased by $3.5 million to $1.493 billion from the $1.496 billion at December 31, 2016.  The decrease in total assets since year-end is largely due a $33.8 million decrease in interest bearing bank balances, a $1.3 million decrease in other assets and a $1.2 million decrease in OREO.  These decreases were partially offset by a $30.5 million increase in total loans outstanding and a $4.1 million increase in federal funds sold.  Contrary to the decrease in total assets, earning assets increased by $1.4 million from the $1.382 billion at year-end 2016 to end the third quarter at $1.384 billion.
Cash and due from banks at September 30, 2017 was $41.8 million, a $388,000 increase from the $41.4 million at December 31, 2016.  Interest-bearing bank balances decreased by $34.0 million from the $55.7 million reported at December 31, 2016.  Federal funds sold increased by $4.1 million to $11.6 million at September 30, 2017.  Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases and are part of Premier’s management of its liquidity and interest rate risks.  The decrease in interest-bearing bank balances during the first nine months of 2017 was largely in response to an increase in total loans outstanding.
Securities available for sale totaled $289.2 million at September 30, 2017, a $596,000 increase from the $288.6 million at December 31, 2016.  The increase was largely due to the purchase of $49.2 million of investment securities and a $3.7 million increase in the market value of the securities available for sale, which more than offset $50.8 million of proceeds from monthly principal payments on Premier’s mortgage backed securities portfolio and securities that matured or were called during the year.  The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies.  Any unrealized losses on securities within the portfolio at September 30, 2017 and December 31, 2016 are believed to be price changes resulting from increases in the long-term interest rate environment since acquiring the investment security and management anticipates receiving all principal and interest on these investments as they come due.  Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.
Total loans at September 30, 2017 were $1.055 billion compared to $1.025 billion at December 31, 2016, an increase of approximately $30.5 million, or 3.0%.  The increase in loans was largely due to internal loan growth which more than offset regular principal payments, loan payoffs, and transfers of loans to OREO upon foreclosure.  Loan payoffs during the first nine months of 2017 included payoffs on $5.6 million of non-accrual loans and $5.4 million of performing loans which resulted in recognizing approximately $1,407,000 of interest income deferred while the loans were on non-accrual status and $199,000 of remaining purchase discounts associated with the loans.  The increase in total loans since year-end resulted from increases in commercial real estate loans, commercial and industrial loans, and all other loans.  These increases more than offset decreases in residential real estate loans, multifamily real estate loans, and retail consumer loans.
Premises and equipment decreased by $720,000 largely due to normal depreciation of fixed assets.  Other real estate owned acquired through foreclosure (“OREO”) decreased by $1.2 million largely due to $1.8 million of sales and $474,000 of OREO write-downs on existing OREO, partially offset by $1.1 million of new additions.  Goodwill and other intangible assets decreased by $768,000, due to the year-to-date amortization of core deposit intangibles.  Other assets decreased by $1.3 million primarily due to a decrease in deferred tax assets.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


Deposits totaled $1.269 billion as of September 30, 2017, a $10.0 million, or 0.8%, decrease from the $1.279 billion in deposits at December 31, 2016.  The overall decrease in deposits is largely due to a $14.5 million, or 4.0% decrease in savings and money market accounts, and a $14.6, or 4.1%, decrease in certificates of deposit.  These decreases were partially offset by an $8.3 million, or 2.6%, increase in non interest-bearing demand deposits and a $10.8 million, or 4.5%, increase in interest-bearing transaction accounts.  Repurchase agreements with corporate and public entity customers increased in the first nine months of 2017 by $1.3 million, or 5.4%.  Other borrowings decreased by $2.9 million since year-end 2016 due to the $248,000 payment at maturity of a subsidiary bank borrowing as well as scheduled principal payments and additional principal payments on Premier’s existing parent company borrowings.  Subordinated debentures increased $25,000, due to the continuing monthly accretion of the fair value adjustment recorded in 2016 as part of the acquisition of First National Bankshares.
The following table sets forth information with respect to the Company’s nonperforming assets at September 30, 2017 and December 31, 2016.

   
(In Thousands)
 
   
2017
   
2016
 
Non-accrual loans
 
$
24,345
   
$
25,747
 
Accruing loans which are contractually past due 90 days or more
   
1,716
     
1,999
 
Accruing restructured loans
   
8,715
     
8,268
 
Total non-performing and restructured loans
   
34,776
     
36,014
 
Other real estate acquired through foreclosure (OREO)
   
11,458
     
12,665
 
Total non-performing assets
 
$
46,234
   
$
48,679
 
                 
Non-performing loans as a percentage of total loans
   
3.30
%
   
3.51
%
                 
Non-performing assets as a percentage of total assets
   
3.10
%
   
3.25
%
Total non-performing and restructured loans have decreased since year-end, largely due to a $1.4 million decrease in non-accrual loans and a $238,000 decrease in loans past due 90 days or more.  These decreases in non-performing loans were partially offset by a $447,000 increase in accruing restructured loans.  Total non-performing assets have decreased since year-end, largely due to the reduction in non-performing loans plus a $1.2 million decrease in other real estate acquired through foreclosure (“OREO”).  Other real estate owned decreased as sales of OREO and additional write-downs on existing properties in the first nine months of 2017 exceeded new foreclosures.
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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


Gross charge-offs totaled $1.1 million during the first nine months of 2017, largely due to consumer lending based charge-offs, including residential real estate loans and the partial charge-off of loans upon foreclosure and placement 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 nine months of 2017 totaled $592,000, resulting in net charge-offs for the first nine months of 2017 of $510,000.  This compares to $220,000 of net charge-offs recorded in the first nine months of 2016.  During the three months ending on September 30, 2017, Premier recorded net charge-offs of $227,000 compared to $253,000 of net charge-offs recorded in the same three months ending on September 30, 2016.  The allowance for loan losses at September 30, 2017 was 1.17% of total loans compared to 1.06% at December 31, 2016.  The increase in the ratio is largely due to an increase in the amount of allowance allocated to loans individually evaluated for impairment. At December 31, 2016, specific allocations of the allowance for loan losses related to loans individually evaluated for impairment totaled $606,000.  This amount increased to $1,598,000 at September 30, 2017, largely due to a $517,000 increase in estimated credit loss on an impaired multifamily real estate loan and a $514,000 increase in estimated credit loss on an impaired construction loan.
During the first nine months of 2017, Premier recorded a $2,033,000 provision for loan losses.  This provision compares to a $1,436,000 provision for loan losses recorded during the same nine months of 2016.  The provision for loan losses recorded during the third quarter of 2017 was $891,000 compared to an $312,000 provision for loan losses in the third quarter of 2016.  The 2017 provision for loan losses was due in large part to increases in specific allocations of the allowance for loan losses related to loans individually evaluated for impairment as well as a $38.7 million, or 4.0%, increase in loans collectively evaluated for impairment.  The 2016 provision for loan losses was due in large part to the $51.2 million of growth in outstanding loans in 2016, exclusive of the loans acquired from the January 2016 acquisition of First National Bankshares, and an estimate for the potential loan losses related to the flash flooding that occurred in some of Premier’s West Virginia markets during the last week of June 2016.  Management’s initial estimate of loan losses related to unreimbursed damage to borrowers’ collateral or the lasting economic impact to business customers in areas that rely on vacation season tourism resulted in adding $500,000 to the provision for loan losses during the second quarter of 2016.  Due to substantial assistance from both public and private sources to the regions of West Virginia affected by the flooding, Premier’s actual loan loss experience related to the flooding was minor, and management now believes the affected geographic areas demonstrate no more additional credit risk than that of the other general economic areas served by Premier’s branch network.  As a result, much of the initial provision for loan losses has been reversed and helped offset additional provisions for loan losses related to individually impaired loans and increases in estimates of potential losses from declining economic activity in southern and central West Virginia.  Premier also continues to monitor the impact of the decline in coal mining that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry which may have a larger impact in the central area of West Virginia.  A resulting decline in employment and local economic activity could increase non-performing assets from loans originated in these areas.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


The provisions for loan losses recorded in 2016 and 2017 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.  These methodologies are subject to change in the adoption of ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments issued by the FASB in June 2016 which will become effective for the Company for interim and annual periods beginning after December 15, 2019.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  With the concentrations of commercial real estate loans in the Washington, DC, Richmond, Virginia, and Cincinnati, Ohio markets, fluctuations in commercial real estate values continue to be monitored. In each of the last five years, Premier sold some OREO properties at a gain while other OREO properties have required subsequent write-downs to net realizable values. These factors are considered in determining the adequacy of the allowance for loan losses. For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans and restructured loans, see Note 3 to the consolidated financial statements.


C. Critical Accounting Policies
The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America.  These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2016.  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, 2016.  There have been no significant changes in the application of these accounting policies since December 31, 2016.
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.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


D. Liquidity

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

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

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

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

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

5.
Maintenance of an adequate available-for-sale security portfolio.  The Company owns $289.2 million of securities at fair value as of September 30, 2017.

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


E. Capital
At September 30, 2017, total stockholders’ equity of $183.3 million was 12.3% of total assets.  This compares to total stockholders’ equity of $174.2 million, or 11.6% of total assets on December 31, 2016.  The increase in stockholders’ equity was largely due to $11.1 million of net income in the first nine months of 2017 as well as a $2.4 million, net of tax, increase in the market value of the investment portfolio available for sale.  These increases were partially offset by $4.8 million, or $0.45 per share, in cash dividends declared and paid to stockholders.
Tier 1 capital totaled $155.2 million at September 30, 2017, which represents a Tier 1 leverage ratio of 10.7%.  This ratio is up from the 10.1% Tier 1 leverage ratio and $147.6 million of Tier 1 capital at December 31, 2016.  The slight increase in the Tier 1 leverage ratio is largely due to the growth in Tier 1 capital exceeding the proportional growth in average total assets at September 30, 2017.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


The regulatory authorities introduced a new capital measure in the first quarter of 2015 for financial institutions of Premier’s size, Common Equity Tier 1 Capital.  The Common Equity Tier 1 capital measure seeks to determine how much of the traditional Tier 1 capital is attributable to equity contributed by common shareholders by excluding Tier 1 capital from other sources such as preferred stockholders’ equity and subordinated debt.  As of September 30, 2017, Premier’s Common Equity Tier 1 capital is $6.0 million lower than its total Tier 1 capital due to the additional Tier 1 capital included from the subordinated debentures.  Since the subordinated debentures are held by the parent company, the Common Equity Tier 1 capital of the subsidiary banks is identical to their total Tier 1 capital, as none of the subsidiary banks have issued any preferred stock or subordinated debentures.  Beginning January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over the four year period from 2016 thru 2019.  When fully implemented, the capital conservation buffer requirement will be 2.50% of risk-weighted assets over and above the regulatory minimum capital ratios for Tier 1 Capital to risk-weighted assets, Total Capital to risk-weighted assets and Common Equity Tier 1 Capital (CET1) to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company.  The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted asset ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%.  At September 30, 2017, the Company’s capital conservation buffer was 7.50%, well in excess of the 1.250% required.
Book value per common share was $17.18 at September 30, 2017 compared to $16.37 at December 31, 2016.  Adding to Premier’s book value per share in the first nine months of 2017 was the $1.04 per share earned during the period partially offset by $0.45 per share in total quarterly cash dividends to common shareholders declared and paid during the first three quarters of 2017.  Also adding to Premier’s book value per share at September 30, 2017 was the $2,377,000 of other comprehensive income for the first nine months of 2017 related to the after tax increase in the market value of investment securities available for sale, which increased book value at September 30, 2017 by approximately $0.22 per share.
PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017
 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company currently does not engage in any derivative or hedging activity.  Refer to the Company’s 2016 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 2016 10-K.


Item 4. Controls and Procedures

A. Disclosure Controls & Procedures

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

B. Changes in Internal Controls over Financial Reporting

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

C. Inherent Limitations on Internal Control

"Internal controls" are procedures, which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all so as to permit the preparation of reports and financial statements in conformity with generally accepted accounting principles. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Finally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017
 
 
PART II - OTHER INFORMATION

Item 1.
Legal Proceedings
None
     
Item 1A.
Risk Factors
 
     
Please refer to Premier's Annual Report on Form 10-K for the year ended December 31, 2016 for disclosures with respect to Premier's risk factors at December 31, 2016. There have been no material changes since year-end 2016 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.



PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017
 

SIGNATURES


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

PREMIER FINANCIAL BANCORP, INC.


 
Date: November 9, 2017           /s/ Robert W. Walker                     
Robert W. Walker
President & Chief Executive Officer


Date: November 9, 2017            /s/ Brien M. Chase                         
Brien M. Chase
Senior Vice President & Chief Financial Officer
 
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