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EX-21 - SCHEDULE OF SUBSIDIARIES - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit21.htm
EX-32 - CEO/CFO SECTION 906 CERTIFICATION - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit32.htm
EX-23 - CONSENT OF INDEPENDENT ACCOUNTING FIRM - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit23.htm
EX-99.2 - CFO EESA CERTIFICATION - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit99-2.htm
EX-99.1 - CEO EESA CERTIFICATION - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit99-1.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit31-1.htm
EX-3.1(E) - PFBI ARTICLES OF INCORPORATION - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit3-1e.htm
EX-31.2 - CFO SECTION 302 CERTIFICATION - PREMIER FINANCIAL BANCORP INCpfbi2009exhibit31-2.htm

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

FORM 10-K

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

 
For the fiscal year ended December 31, 2009

 
or

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

 
For the transition period from ___________ to ___________

Commission file number 0-20908

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

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


Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of exchange on which registered
Common Stock without par value
 
NASDAQ:GMS
 
Securities registered pursuant to Section 12(g) of the Act:  NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                     Yes o     No þ.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes o     No þ.

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 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 o     No o.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K. o

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

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

As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $35,770,197 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.

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

Title of each class
 
Outstanding at March 15, 2010
Common Stock without par value
 
7,937,143


DOCUMENTS INCORPORATED BY REFERENCE

Document
 
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held on June 16, 2010.
 
Part III





PREMIER FINANCIAL BANCORP, INC.
December 31, 2009


TABLE OF CONTENTS
 
   
PART I
       
    4  
    20  
    35  
    35  
    35  
    35  
           
PART II
         
    36  
    39  
    40  
    73  
    91  
      93  
      94  
      95  
      96  
      97  
      98  
      100  
    149  
    149  
    150  
           
PART III
         
    151  
    151  
    151  
    151  
    151  
           
PART IV
         
    152  
      156  
           



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


PART I


THE COMPANY
 
Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a multi-bank holding company that, as of March 15, 2010 operates nine banking offices in Kentucky, three banking offices in Ohio, thirteen banking offices in West Virginia, five banking offices in Washington, DC, one banking office in Maryland and two banking offices in Virginia. At December 31, 2009, Premier had total consolidated assets of $1,101.8 million, total consolidated deposits of $913.8 million and total consolidated shareholders' equity of $128.6 million. The banking subsidiaries (the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Farmers Deposit Bank, Eminence, Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc., Philippi, West Virginia; Boone County Bank, Inc., Madison, West Virginia; Traders Bank, Inc., Ravenswood, West Virginia; Adams National Bank, Washington, DC; and Consolidated Bank & Trust Company, Richmond, Virginia.
 
Premier was incorporated as a Kentucky corporation in 1991 and has functioned as a bank holding company since its formation. During 2002, Premier moved its principal executive offices from Georgetown, Kentucky to its present location at 2883 5th Avenue, Huntington, West Virginia, 25702. The purpose of the move was to be more centrally located among Premier's Affiliate Banks and its directorship. Premier's telephone number is (304) 525-1600.
 
Premier is a legal entity separate and distinct from its Affiliate Banks and non-bank subsidiaries. Accordingly, the right of Premier, and thus the right of Premier's creditors and shareholders, to participate in any distribution of the assets or earnings of any of the Affiliate Banks or non-bank subsidiaries is necessarily subject to the prior claims of creditors of such subsidiaries, except to the extent that claims of Premier, in its capacity as a creditor, may be recognized. The principal source of Premier's revenue is dividends from its Affiliate Banks and non-bank subsidiary.  See "REGULATORY MATTERS -- Dividend Restrictions" for discussion of the restrictions on the Affiliate Banks' ability to pay dividends to Premier.
 
In late 2007 Premier resumed a strategy of franchise expansion by acquiring and owning community banks.  This decision follows a five –year period whereby Premier suspended its acquisition strategy in order to focus on improving operations, strengthening capital and management oversight and improving the profitability of the banks previously acquired. On October 24, 2007, the Company entered into a material definitive agreement with Citizens First Bank, Inc. (“Citizens First”), a bank with $60 million of total assets located in Ravenswood, West Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Citizens First for up to $11,700,000 in stock and cash.  Each share of Citizens First common stock was entitled to merger consideration of cash and stock that generally totaled $29.25, subject to certain limitations.  Premier issued 480,000 shares of its common stock plus Premier paid $5.3 million in cash to the shareholders of Citizens First.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
On November 27, 2007, the Company entered into a material definitive agreement with Traders Bankshares, Inc. (Traders), a single bank holding company with $105 million of total assets located in Spencer, West Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Traders for approximately $18,140,000 in stock and cash.  Each share of Traders common stock was entitled to merger consideration of $50.00 cash and 3.75 shares of Premier common stock.  Premier issued approximately 675,000 shares of its common stock plus Premier paid $9.0 million in cash to the shareholders of Traders.
 
On April 30, 2008, Premier closed the acquisitions of Citizens First and Traders.  On October 25, 2008, Premier merged these two new subsidiary banks together to form Traders Bank, Inc. headquartered in Ravenswood, West Virginia.  The merger was designed to consolidate management and operations of two subsidiaries in overlapping or contiguous markets.  Similarly, effective January 3, 2005, Premier merged two of its subsidiary banks, Citizens Deposit Bank & Trust in Vanceburg, Kentucky and Bank of Germantown, in Germantown, Kentucky. Bank of Germantown was merged into Citizens Deposit Bank, with its facilities continuing to operate as branches of Citizens Deposit Bank.

Recent Corporate Developments
 
On December 31, 2008, the Company entered into a material definitive agreement with Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a two bank holding company (Adams National Bank and Consolidated Bank & Trust Company) with $436 million of total assets at December 31, 2008 with locations in and around Washington, DC and Richmond, Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Abigail Adams for approximately $10.8 million in stock.  The acquisition closed on October 1, 2009.  Each share of Abigail Adams common stock was entitled to merger consideration of 0.4461 shares of Premier common stock.  Premier issued approximately 1,545,000 shares of its common stock to the shareholders of Abigail Adams.
 
At the time Premier entered into the definitive agreement with Abigail Adams, its subsidiary, Adams National Bank (“Adams National”) had recently entered into a written agreement with its primary regulatory authority, the Office of the Comptroller of the Currency (“OCC”).  See “Regulatory Matters” below.  Premier’s prior experience in successfully working through regulatory agreements with some of its own subsidiary banks was an attractive component for Abigail Adams to merge with the Company.   Likewise, while Adams National did not necessarily fit the community bank model of Premier’s other subsidiary banks (see the “General” subsection of the Company’s “Business” section below), Premier’s perceived advantages in purchasing and rehabilitating a poorly performing bank while simultaneously changing the bank’s business culture to more closely mirror that of its rural community “sister” banks.   As part of this strategy, Premier sought to participate in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) to help fund the rehabilitation of Adams National and provide the additional capital needed to maintain the Company’s healthy capital ratios after consummating the merger with Abigail Adams.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
TARP was established under the authority granted by the Emergency Economic Stabilization Act of 2008 (the “EESA”), which appropriated $700 billion for the purpose of restoring liquidity and stability in the U.S. financial system.  EESA was amended by The American Recovery and Reinvestment Act of 2009 (the “ARRA”) signed into law on February 17, 2009.  Under the TARP Capital Purchase Program, the U.S. Treasury made $250 billion of capital available to U.S. financial institutions in the form of senior preferred stock investments and a warrant entitling the U.S. Treasury to buy the participating institution’s common stock with a market price equal to 15% of the senior preferred stock.
 
On October 2, 2009, Premier issued and sold to the U.S. Treasury (i) 22,252 of Premier’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share (the “Series A Preferred Shares”), and (ii) a ten-year warrant (the “Warrant”) to purchase 628,588 Premier common shares, each without par value (the “Common Shares”), at an exercise price of $5.31 per share (subject to certain anti-dilution and other adjustments), for an aggregate purchase price of $22,252,000 in cash.  This issuance and sale was a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.  Additional information regarding the Series A Preferred Shares and the Warrant can be found in Note 25 of the Notes to the Consolidated Financial Statements.
 
To finalize Premier’s participation in the TARP Capital Purchase Program, Premier and the U.S. Treasury entered into a Letter Agreement, dated October 2, 2009 (the “Letter Agreement”), including a Securities Purchase Agreement – Standard Terms which is attached thereto (the “Securities Purchase Agreement” and together with the Letter Agreement, the “UST Agreement”).  Additional information regarding the TARP Capital Purchase Program and the restrictions imposed on Premier can be found under the “TARP Capital Purchase Program” heading in the “Regulatory Matters” section included later in this item.
 
While Premier remains committed to its core strategy of rural banking with community oriented and locally named institutions, the Company may, as it has in the past, dispose of additional corporate assets that no longer meet Premier's geographic or operational performance goals.  For example, in the fourth quarter of 2003, the Company adopted and began to implement a plan to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had signed a definitive agreement to sell Citizens Bank in a cash transaction valued at approximately $14,500,000, and on July 1, 2004 the sale transaction closed. In accordance with Financial Accounting Standard 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which became effective for the Company on January 1, 2002, the financial position and results of operations of Citizens Bank are removed from the detail line items in the Company's financial statements and presented separately as "discontinued operations."


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
Beginning in April 2005 and concluding in July 2005, the Company converted each of its Affiliate Banks from an in-house system administered by a wholly-owned subsidiary to an outsourced system administered by FiServ for their data and item processing functions.  Subsequent to the conversion, the operations of the Company’s data processing subsidiary, Premier Data Services, Inc. were suspended and the subsidiary was merged into the Company on June 27, 2006.




PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


BUSINESS
General
 
Through the Banks the Company focuses on providing quality, community banking services to individuals and small-to-medium sized businesses primarily in non-urban areas. By seeking to provide such banking services in non-urban areas, the Company believes that it can minimize the competitive effect of larger financial institutions that typically are focused on large metropolitan areas. Each Bank retains its local management structure which offers customers direct access to the Bank's president and other officers in an environment conducive to friendly, informed and courteous service. This approach also enables each Bank to offer local and timely decision-making, and flexible and reasonable operating procedures and credit policies limited only by a framework of centralized risk controls provided by the Company to promote prudent banking practices. See additional discussion under "Regulatory Matters" below.
 
Each Bank maintains its community orientation by, among other things, having selected members of its community as members of its board of directors, who assist in the introduction of prospective customers to the Bank and in the development or modification of products and services to meet customer needs. As a result of the development of personal banking relationships with its customers and the convenience and service offered by the Banks, the Banks' lending and investing activities are funded primarily by core deposits.
 
When appropriate and economically advantageous, the Company centralizes certain of the Banks' back office, support and investment functions in order to achieve consistency and cost efficiency in the delivery of products and services. The Company centrally provides services such as accounting, loan review, operations and network support, human resources, compliance and internal auditing to the Banks to enhance their ability to compete effectively. The Company also provides overall direction in the areas of credit policy and administration, strategic planning, marketing, investment portfolio management and other financial and administrative services. Each Bank participates in product development by advising management of new products and services needed by its customers and desirable changes to existing products and services.
 
Prior to the conversions in mid 2005, the Company's data processing subsidiary, Premier Data Services, Inc., provided centralized data processing services to four of the Banks. Beginning in late 2004 and continuing through the middle of 2005, the Company converted its data processing system to an external third-party provider. Through the conversion process, Company senior management along with each Bank's management reviewed and standardized their offering of products and services, although pricing decisions remain at the local Bank level. Furthermore, as a result of conversion, the Company through the Banks is able offer more modern products, such as internet banking and check imaging, and is able to take advantage of emerging technologies such as image exchange to remit and clear items with its exchange agents.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
Each of the Banks provides a wide range of retail and commercial banking services, including commercial, real estate, agricultural and consumer lending; depository and funds transfer services; collections; safe deposit boxes; cash management services; and other services tailored for both individuals and businesses.
 
The Banks' residential mortgage lending activities consist primarily of loans for purchasing personal residences or loans for commercial or consumer purposes secured by residential mortgages.  The Banks also originate residential mortgage loans that are sold in the secondary mortgage market.  The Banks’ mortgage originators are salaried employees who do not receive a commission or other incentive compensation for the number or type of mortgages they originate.  Consumer lending activities consist of traditional forms of financing for automobile and personal loans including unsecured lines of credit. Commercial lending activities include loans to small businesses located primarily in the communities in which the Banks are located and surrounding areas. Commercial loans are secured by business assets including real estate, equipment, inventory, and accounts receivable. Some commercial loans are unsecured.  Through the acquisition of Abigail Adams, the Company inherited a concentration in commercial real estate development loans.  Many of these loans are for the revitalization of apartment buildings in and around the Washington, DC metro area, some of which will result in the apartment complex converting into individually owned condominiums.   Premier plans to reduce these concentrations by providing funding only during the construction phase.
 
The Banks' range of deposit services includes checking accounts, NOW accounts, savings accounts, money market accounts, club accounts, individual retirement accounts, certificates of deposit and overdraft protection. Customers can access their accounts via traditional bank branch locations as well as Automated Teller Machines (ATM’s) and the internet.  The Banks also offer bill payment and telephone banking services.  Deposits of the Banks are insured by the Bank Insurance Fund administered by the FDIC to the maximum amounts offered by the FDIC.

Competition
 
The Banks encounter strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking have created a highly competitive environment for financial services providers. In one or more aspects of its business, each Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies and other financial intermediaries operating in its market and elsewhere, many of which have substantially greater financial and managerial resources. While the Banks are smaller financial institutions, each of the Banks' competitors include large bank holding companies having substantially greater resources and offering


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


certain services that Premier Banks may not currently provide. Each Bank seeks to minimize the competitive effect of larger financial institutions through a community banking approach that emphasizes direct customer access to the Bank's president and other officers in an environment conducive to friendly, informed and courteous service.  Furthermore, via the Company’s credit administration department, the Banks can also minimize the competitive effects of larger institutions by tailoring their lending criteria to the individual circumstances of the small-to-medium sized business owner.
 
Management believes that each Bank is positioned to compete successfully in its respective primary market area, although no assurances as to ongoing competitiveness can be given. Competition among financial institutions is based upon interest rates offered on deposit accounts, service charges on deposit accounts for various services related to customer convenience, interest rates charged on loans and other credit, the quality and scope of the services rendered, the convenience of the banking facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of its Banks to personal service, innovation and involvement in their respective communities and primary market areas, as well as their commitment to quality community banking service, are factors that contribute to their competitiveness.

Regulatory Matters
 
The following discussion sets forth certain elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to Premier. This regulatory framework is intended primarily for the protection of depositors and the federal deposit insurance funds and not for the protection of the holders of securities, including Premier common shares. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to Premier or its subsidiaries may have a material effect on the business of Premier.
 
General - As a bank holding company, Premier is subject to regulation under the Bank Holding Company Act ("BHC Act"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve"). Under the BHC Act, bank holding companies generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve's prior approval. Similarly, bank holding companies generally may not acquire ownership or control of a savings association without the prior approval of the Federal Reserve. Further, branching by the Affiliate Banks is subject to the jurisdiction, and requires the approval of each Affiliate Bank's primary federal banking regulator and, if the Affiliate Bank is a state-chartered bank, the appropriate state banking regulator.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
Under the BHC Act, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of the nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Premier and the Affiliate Banks are subject to the Federal Reserve Act, which limits borrowings by Premier and its nonbank subsidiaries from the Affiliate Banks and also limits various other transactions between Premier and its nonbank subsidiaries with the Affiliate Banks.
 
The two Affiliate Banks chartered in Kentucky are supervised, regulated and examined by the Kentucky Department of Financial Institutions, the Affiliate Bank chartered in Ohio is supervised, regulated and examined by the Ohio Division of Financial Institutions, the three Affiliate Banks chartered in West Virginia are supervised, regulated and examined by the West Virginia Division of Banking, and the Affiliate Bank chartered in Virginia is supervised, regulated and examined by the Bureau of Financial Institutions of the Commonwealth of Virginia.  The Washington DC Affiliate Bank is a national bank and therefore is supervised, regulated and examined by the OCC.  In addition, those Affiliate Banks that are members of the Federal Reserve System are supervised and regulated by the Federal Reserve, and those banks that are not members of the Federal Reserve System are supervised and regulated by the Federal Deposit Insurance Corporation ("FDIC"). Each banking regulator has the authority to issue cease-and-desist orders if it determines that the activities of a bank regularly represent an unsafe and unsound banking practice or a violation of law.
 
Both federal and state law extensively regulates various aspects of the banking business, such as reserve and capital requirements, truth-in-lending and truth-in-savings disclosure, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Premier, the Affiliate Banks and Premier's nonbank subsidiary are also affected by the fiscal and monetary policies of the federal government and the Federal Reserve and by various other governmental laws, regulations and requirements. Further, the earnings of Premier and Affiliate Banks are affected by general economic conditions and prevailing interest rates. Legislation and administrative actions affecting the banking industry are frequently considered by the United States Congress, state legislatures and various regulatory agencies. It is not possible to predict with certainty whether such legislation or administrative actions will be enacted or the extent to which the banking industry, in general, or Premier and the Affiliate Banks, in particular, would be affected.
 
Liability for Bank Subsidiaries - The Federal Reserve has a policy to the effect that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to maintain resources adequate to support each such subsidiary bank. This support may be required at times when Premier may not have the resources to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
Any depository institution insured by the FDIC may be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In the event that such a default occurred with respect to a bank, any loans to the bank from its parent holding company will be subordinate in right of payment of the bank's depositors and certain of its other obligations.
 
Capital Requirements - Premier is subject to capital ratios, requirements and guidelines imposed by the Federal Reserve, which are substantially similar to the ratios, requirements and guidelines imposed by the Federal Reserve, the OCC and the FDIC on the Banks within their respective jurisdictions. These capital requirements establish higher capital standards for banks and bank holding companies that assume greater credit risks. For this purpose, a bank's or holding company's assets and certain specified off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the level of credit risk that is ascribed to such assets or commitments. A bank's or holding company's capital is divided into two tiers: "Tier I" capital and "Tier II" capital. "Tier I" capital includes common shareholders' equity, non-cumulative perpetual preferred stock, and related surplus (excluding auction rate issues), minority interests in equity accounts of consolidated subsidiaries plus cumulative perpetual preferred stock and Trust Preferred Securities both of which are subject to certain limitations. Goodwill, certain identifiable intangible assets and certain other assets are subtracted from these sources of capital to calculate Tier I capital. "Tier II" capital includes, among other items, perpetual preferred stock not meeting the Tier I definition, mandatory convertible securities, subordinated debt and allowances for loan and lease losses, subject to certain limitations, less certain required deductions.
 
Bank holding companies currently are required to maintain Tier I and total capital (the sum of Tier I and Tier II capital) equal to at least 4% and 8% of total risk-weighted assets, respectively. At December 31, 2009, Premier met both requirements, with Tier I and total capital equal to 13.6% and 14.6% of its total risk-weighted assets, respectively.
 
In addition to the risk-based capital guidelines, the Federal Reserve requires bank holding companies to maintain a minimum "leverage ratio" (Tier I capital to adjusted total assets) of 3%, if the holding company has the highest regulatory ratings for risk-based capital purposes. All other bank holding companies are required to maintain a leverage ratio of 3% plus at least 100 to 200 basis points. At December 31, 2009, Premier's leverage ratio was 8.9%.
 
The foregoing capital requirements are minimum requirements. The Federal Reserve may set capital requirements higher than the minimums described above for holding companies whose circumstances warrant it. For example, holding companies experiencing or anticipating significant growth may be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
Additionally, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements.

    An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee the bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the Bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
 
Regulatory Agreements - As previously disclosed in earlier reports, the Company and some of the subsidiary Banks have, in the past, been subject to regulatory agreements.  On January 29, 2003, the Company entered into a written agreement with the Federal Reserve Bank of Cleveland (“FRB”).  In, 2006, the FRB determined that Premier had fully satisfied all of the provisions of the written agreement and, accordingly, the FRB terminated the agreement effective April 18, 2006.
 
Before they were merged together into one entity, two of the Company's subsidiaries, Citizens Deposit Bank & Trust and the Bank of Germantown, entered into similar agreements with their respective primary regulators which, among other things, prohibited the payment of dividends without prior written approval and required significant changes in their credit administration policies. The banks fully complied with the terms of the agreements in 2004 and the agreements were accordingly rescinded by their regulators.
 
As a result of a 2003 investigation into the conduct of the former president of Farmers Deposit Bank by Premier and the FDIC, on December 24, 2003, Premier announced that Farmers Deposit Bank had reached an agreement with the FDIC and the Kentucky Department of Financial Institutions ("KDFI") [collectively referred to as "Supervisory Authorities"] to consent to the issuance of a cease & desist order ("Order") from its Supervisory Authorities.  The Order also outlined a number of steps to be taken by Farmers Deposit Bank which were designed to remedy and/or prevent the reoccurrence of events that gave rise to the investigation during the latter half of 2003.  Having found that Farmers Deposit Bank had fully complied with the Order, the Supervisory Authorities rescinded the Order on December 13, 2005.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
On October 1, 2008, the Company’s newly acquired subsidiary Adams National, entered into a written agreement with its primary regulator, the OCC.  The written agreement outlined a number of steps to be taken by Adams National to remedy unsafe and unsound banking practices relating to the level of credit risk and the administration of the loan portfolio, and violations of credit-related laws and regulations at the bank.  These include 1) ensuring that Adams National has competent management and that senior management can perform the duties required under the Bank’s policies and procedures and the requirements of the Written Agreement; 2) maintaining a 12% total risk-based capital to total risk-weighted assets ratio; an 11% Tier 1 capital to risk-weighted assets ratio; and a 9% Tier 1 capital to adjusted total assets ratio, which are greater than the regulatory requirements to be “well capitalized” under bank regulatory requirements; 3) developing and implementing a three-year capital program; 4) adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the Written Agreement; 5) requiring the Board to review the adequacy of the allowance for loan losses at least quarterly; 6) implementing an asset diversification program consistent with OCC guidelines on concentrations in commercial real estate lending and sound risk management practices and reducing Adam’s exposure to concentrations of credit risk accordingly; 7) taking all necessary actions to protect the Adam’s interest in its criticized assets and implementing a program to eliminate regulatory criticism of these assets; 8) engaging in an ongoing review of the bank’s criticized assets and implementing procedures for the effective monitoring of the loan portfolio; 9) implementing a program to improve the management of the loan portfolio and to provide the Board with monthly written reports on credit quality; 10) employing a loan review consultant acceptable to the OCC to perform quarterly quality reviews of the bank’s assets; 11) revising the bank’s lending policy in accordance with OCC requirements; and 12) maintaining acceptable liquidity levels.
 
The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including quarterly progress reports to the OCC. The written agreement also requires the bank to establish a committee of the Board of Directors which will be responsible for overseeing compliance with the written agreement. The Bank has taken steps to comply with the requirements of the written agreement, including hiring a new chief executive officer. At December 31, 2009, Adams National’s capital ratio levels met the regulatory capital levels required in the written agreement.
 
TARP Capital Purchase Program - As discussed above under the caption “Recent Corporate Developments,” Premier elected to participate in the TARP Capital Purchase Program and received $22.25 million of new equity capital from the U.S. Treasury on October 2, 2009.  As part of its participation in the TARP Capital Purchase Program, Premier agreed to various requirements and restrictions imposed on all participants in the TARP Capital Purchase Program.  Those restrictions include certain executive compensation and corporate expenditure limits on all current and future recipients of funds under the TARP Capital Purchase Program, including Premier, as long as any obligation arising from the financial assistance provided to the recipient under the TARP Capital Purchase Program remains outstanding, excluding any period during which the U.S. Treasury holds only warrants to purchase common stock of a


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


TARP participant (the “Covered Period”).  On June 10, 2009, the U.S. Treasury issued an interim final rule describing how participating institutions are to comply with the executive compensation and corporate governance standards imposed by the EESA, as amended by the ARRA.  On December 7, 2009, the U.S. Treasury published technical amendments to the interim final rule (collectively, the interim final rule published on June 15, 2009 and the amendments published on December 7, 2009 are referred to as the “Interim Final Rule”).

The current terms of participation in the TARP Capital Purchase Program include the following:

As soon as it is eligible to do so, Premier must file with the SEC a registration statement on Form S-3 under the Securities Act registering for resale the Series A Preferred Shares or, in the event the Series A Preferred Shares are deposited with a depository at the request of the U.S. Treasury, depository shares evidencing fractional interests in the Series A Preferred Shares; the Warrant to purchase 628,588 Common Shares; and any Common Shares issued from time to time upon exercise of the Warrant.  Premier is not currently eligible to file a Form S-3, but could become eligible in the future.

As long as the Series A Preferred Shares remain outstanding, unless all accrued and unpaid dividends for all past dividend periods on the Series A Preferred Shares are fully paid, Premier will not be permitted to declare or pay dividends on any Common Shares, any junior preferred shares or, generally, any preferred shares ranking pari passu with the Series A Preferred Shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Series A Preferred Shares), nor will Premier be permitted to repurchase or redeem any Common Shares or preferred shares other than the Series A Preferred Shares.

Unless the Series A Preferred Shares have been transferred to unaffiliated third parties or redeemed in whole, until October 2, 2012, the U.S. Treasury’s approval is required for any increase in Common Share dividends from $0.11 per share or any share repurchases other than repurchases of the Series A Preferred Shares, repurchases of junior preferred shares, or repurchases of Common Shares in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice and purchases under certain other limited circumstances specified in the Securities Purchase Agreement with the U.S. Treasury.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
Premier must comply with the U.S. Treasury’s standards for executive compensation and corporate governance during the Covered Period.  The current standards include the following:

compensation plans and arrangements for Senior Executive Officers (as defined in the Interim Final Rule, to include the Principal Executive Officer, the Principal Financial Officer and the next 3 most highly compensated named executive officers in Premier’s annual meeting proxy statement) must not encourage unnecessary and excessive risks that threaten the value of the financial institution;

any bonus, retention award or incentive compensation paid (or under a legally binding obligation to pay) to a Senior Executive Officer or any of Premier’s next 20 most highly-compensated employees based on materially inaccurate financial statements or other materially inaccurate performance metric criteria must be subject to recovery, or “clawback”, by Premier;

Premier is prohibited from paying or accruing any bonus, retention award or incentive compensation (including stock options) with respect to its most highly compensated employee (currently its President and Chief Executive Officer), except for grants of long-term restricted stock that do not fully vest during the Covered Period and do not have a value which exceeds one-third of such employee’s total annual compensation;

severance payments to a Senior Executive Officer and the next five most highly-compensated employees, generally referred to as “golden parachute” payments are prohibited, except for payments for services performed or benefits accrued;

compensation plans that encourage manipulation of reported earnings to enhance the compensation of any employees are prohibited;
 
The U.S. Treasury may retroactively review bonuses, retention awards and other compensation previously paid to a Senior Executive Officer or any of Premier’s next 20 most highly-compensated employees to determine whether such payments were inconsistent with the purposes of TARP or otherwise contrary to the public interest;
 
Premier’s compensation committee consisting of independent directors must engage in risk analysis of Senior Executive Officer and all other employee compensation plans;
 
Premier’s Board of Directors must establish a company-wide policy regarding excessive or luxury expenditures (which was adopted on December 16, 2009) and post this policy on Premier’s subsidiary bank websites;



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Premier’s proxy statements for annual shareholder meetings must permit a non-binding “say on pay” shareholder vote on the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the SEC;

executive compensation in excess of $500,000 for each Senior Executive Officer must not be deducted for federal income tax purposes;
 
Premier must disclose to the U.S. Treasury and Premier’s primary regulator whether Premier’s Board of Directors or the Compensation Committee engaged a compensation consultant and the service performed by that compensation consult and any of its affiliates;
 
Premier must disclose to the U.S. Treasury the identify of Premier’s Senior Executive Officers and next 20 most highly-compensated employees, identified by name and title and ranked in descending order of annual compensation;
 
Premier must limit any Employee Compensation Plan (as defined in the Interim Final Rule) that unnecessarily exposes Premier to risk; and
 
Premier must comply with the executive compensation reporting and recordkeeping requirements established by the U.S. Treasury.
 
The ARRA permits TARP recipients, subject to consultation with the appropriate federal banking agency, to repay to the U.S. Treasury any financial assistance received under the TARP Capital Purchase Program without penalty, delay or the need to raise additional replacement capital.
 
Detailed information regarding the Series A Preferred Shares and the Warrant can be found in Note 25 of the Notes to the Consolidated Financial Statements.
 
Dividend Restrictions - Premier is dependent on dividends from its Affiliate Banks for its revenues. Various federal and state regulatory provisions limit the amount of dividends the Affiliate Banks can pay to Premier without regulatory approval. At December 31, 2009, approximately $2.5 million of the total shareholders' equity of the Affiliate Banks was available for payment of dividends to Premier without approval by the applicable regulatory authority.
 
In addition, federal bank regulatory authorities have authority to prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending upon the financial condition of the bank in question, could be deemed to constitute such an unsafe or unsound practice. The ability of the Affiliate Banks to pay dividends in the future is presently, and could be further, influenced by bank regulatory policies and capital guidelines as well as each Affiliate Bank's earnings and financial condition.  Additional information regarding dividend limitations can be found in Note 21 of the accompanying audited consolidated financial statements.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
The dividend rights of holders of Premier’s common shares are also qualified and subject to the dividend rights of holders of Premier’s Series A Preferred Shares described above under the caption “Regulatory Matters – TARP Capital Purchase Program.”
 
Interstate Banking - Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration limits, (i) bank holding companies, such as Premier, are permitted to acquire banks and bank holding companies located in any state of the United States, subject to certain restrictions, and (ii) banks are permitted to acquire branch offices outside their home state by merging with out-of-state banks, purchasing branches in other states or establishing de novo branch offices in other states; provided that, in the case of any such purchase or opening of individual branches, the host state has adopted legislation "opting in" to the relevant provisions of the Riegle-Neal Act; and provided further, that, in the case of a merger with a bank located in another state, the host state has not adopted legislation "opting out" of the relevant provisions of the Riegle-Neal Act.
 
Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") was signed into law, eliminating many of the remaining barriers to full convergence of the banking, securities, and insurance industries. The major provisions of the Act took effect March 12, 2000.
 
The Act enables a broad-scale consolidation among banks, securities firms, and insurance companies by creating a new type of financial services company called a "financial holding company," a bank holding company with dramatically expanded powers. Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. In addition, the Act permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies, but only if they jointly determine that such activities are "financial in nature" or "complementary to financial activities." Premier does not presently qualify to elect financial holding company status.
 
The Federal Reserve serves as the primary "umbrella" regulator of financial holding companies, with jurisdiction over the parent company and more limited oversight over its subsidiaries. The primary regulator of each subsidiary of a financial holding company depends on the activities conducted by the subsidiary. A financial holding company need not obtain Federal Reserve approval prior to engaging, either de novo or through acquisitions, in financial activities previously determined to be permissible by the Federal Reserve. Instead, a financial holding company need only provide notice to the Federal Reserve within 30 days after commencing the new activity or consummating the acquisition.




PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Number of Employees
 
The Company and its subsidiaries collectively had approximately 369 full-time equivalent employees as of December 31, 2009 Its executive offices are located at 2883 5th Avenue, Huntington, West Virginia 25702, telephone number (304) 525-1600 (facsimile number (304) 525-9701).



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


 
Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control.  In addition to the other information in this report, readers should carefully consider that the following important factors, among others, could materially impact the Company’s business and future results of operations.

Changes in Interest Rates Could Negatively Impact the Company’s Results of Operations
 
The earnings of Premier are primarily dependent on net interest income, which is the difference between interest earned on loans and investments, and interest paid on interest-bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors, including government monetary and fiscal policies; domestic and international economic and political conditions; and, in particular, changes in the discount rate by the Board of Governors of the Federal Reserve System. Conditions such as inflation, recession, unemployment, money supply, government borrowing and other factors beyond management’s control may also affect interest rates. If Premier’s interest-earning assets mature, reprice or prepay more quickly than interest-bearing liabilities in a given period, a decrease in market interest rates could adversely affect net interest income. Likewise, if interest-bearing liabilities mature or reprice, or, in the case of deposits, are withdrawn by the accountholder more quickly than interest-earning assets in a given period, an increase in market interest rates could adversely affect net interest income. Given Premier’s current mix of assets and liabilities, a declining interest rate environment would negatively impact Premier’s results of operations.
 
Fixed rate loans increase Premier’s exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to repricing before assets become subject to repricing. Adjustable rate loans decrease the risks to a lender associated with changes in interest rates but involve other risks. As interest rates rise, the periodic payment by the borrower rises to the extent permitted by the terms of the loan, and the increased periodic payment increases the potential for default. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there is likely to be an increase in prepayment activity on loans as the borrowers refinance their loans at lower interest rates. Under these circumstances, Premier’s results of operations could be negatively impacted.
 
Changes in interest rates also can affect the value of loans, investments and other interest-rate sensitive assets and Premier’s ability to realize gains on the sale or resolution of assets. This type of income can vary significantly from quarter to quarter and year to year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and increased loan loss reserve requirements that could have a material adverse effect on Premier’s results of operations.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Regional Economic Changes in the Company’s Markets Could Adversely Impact Results From Operations
 
Like all banks, Premier is subject to the effects of any economic downturn, and in particular a significant decline in home values or reduced commercial development in Premier’s markets could have a negative effect on results of operations. Premier’s success depends primarily on the general economic conditions in the counties in which Premier conducts business, and in the West Virginia, southern Ohio, northern Kentucky, northern and south central Virginia and the metro Washington DC and Richmond Virginia areas in general. Unlike larger banks that are more geographically diversified, Premier provides banking and financial services to customers primarily in the West Virginia counties of Barbour, Boone, Harrison, Lewis, Lincoln, Logan, Kanawha, Upshur, Roane, Jackson and Wood, the southern Ohio counties of Gallia, Lawrence and Scioto, the northern Kentucky counties of Bracken, Fleming, Greenup, Henry, Lewis, Mason, Robertson and Shelby, the metro Washington DC area including the surrounding portions of Virginia and Maryland and the Richmond and Hampton metro areas of Virginia. The local economic conditions in these market areas have a significant impact on Premier’s ability to originate loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in the general economic conditions caused by inflation, recession, unemployment or other factors beyond Premier’s control would affect these local economic conditions and could adversely affect Premier’s financial condition and results of operations. Additionally, a significant decline in home values would likely lead to increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios.
 
There has been a decline in the housing market and real estate markets and in the general economy, both nationally and locally, due to the recession that began in December 2007. Housing markets have deteriorated as evidenced by reduced levels of sale, increasing inventories of houses and condominiums on the market, declining house prices and an increase in the length of time houses remain on the market. It is possible that these conditions will not improve or will worsen or that such conditions will result in a decrease in Premier’s interest income, an increase in Premier’s non-performing loans, and an increase in Premier’s provision for loan losses.
 
Premier targets its business lending and marketing strategy for loans to serve primarily the banking and financial services needs of small to medium size businesses.  These small to medium size businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities.  If general economic conditions negatively impact these businesses, Premier’s results of operations and financial condition may be adversely affected.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Extensive Regulation and Supervision
 
Premier, primarily through the Premier Banks, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect Premier’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Premier is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Premier in substantial and unpredictable ways. Such changes could subject Premier to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, along with corrective action plans required by regulatory agencies, any of which could have a material adverse effect on Premier’s business, financial condition and results of operations.  Premier and certain of the Premier Banks have in the past been subject to such corrective action plans, and therefore there may be some residual reputation damage within the regulatory agencies.  While Premier has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.  See the “Regulatory Matters” section in Item 1, “Business”.

Dividend payments by subsidiaries to Premier and by Premier to its shareholders can be restricted.

    The Company’s principal source of funds for dividend payments and its debt service obligations 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 in Note 21 to the consolidated financial statements.  During 2010 the Banks could, without prior approval, declare dividends of approximately $2.5 million plus any 2010 net profits retained to the date of the dividend declaration.

    Premier is a separate and distinct legal entity from Premier’s subsidiaries.  Premier receives nearly all of its revenue from dividends from is subsidiary banks, which are limited by federal banking laws and regulations.  These dividends also serve as the primary source of funds to pay dividends on Premier’s common shares.  The inability of Premier’s subsidiary banks to pay sufficient dividends to Premier could have a material, adverse effect on its business.  In addition, Premier’s participation in the U.S. Treasury’s TARP Capital Purchase Program


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


currently restricts the ability to increase the dividend payable to holders of common shares above $0.11 per share without prior approval of the U.S. Treasury.  Further discussion of Premier’s ability to pay dividends can be found under the captions “Regulatory Matters – TARP Capital Purchase Program” and “Regulatory Matters – Dividend Restrictions” in Item 1 of this Form 10-K and Note 21 of the Notes to the Consolidated Financial Statements.

The Extended Disruption of Vital Infrastructure Could Negatively Impact the Company’s Results of Operations and Financial Condition
 
Premier’s operations depend upon, among other things, its technological and physical infrastructure, including its equipment and facilities.  While disaster recovery procedures are in place, an extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of Premier’s control, could have a material adverse impact either on the financial services industry as a whole, or on Premier’s business, results of operations, and financial condition.

New or Revised Tax, Accounting and Other Laws, Regulations, Rules and Standards Could Significantly Impact Strategic Initiatives, Results of Operations and Financial Condition
 
The financial services industry is highly regulated and laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described under the heading “Business — Regulatory Matters” above.  These regulations, along with the currently existing tax and accounting laws, regulations, rules and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on Premier’s results of operations and financial condition, the effects of which are impossible to predict at this time.

Market Volatility May Adversely Affect Market Price of Common Stock or Investment Security Values
 
The capital and credit markets have been experiencing volatility and disruption for more than a year.  In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength.  Market volatility could contribute to a further decline in the market value of certain security investments and other assets of Premier.  If market disruption and volatility continue or worsen, Premier may experience an adverse effect, which may be material, on results of operations, capital or financial position.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


There Can Be No Assurance That Recent Legislative And Regulatory Initiatives To Address Difficult Market And Economic Conditions Will Stabilize The U.S. Banking System.
 
EESA, which established TARP, was signed into law on October 3, 2008.  The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.  As part of TARP, the U.S. Treasury established the Capital Purchase Program to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets.  Under the Capital Purchase Program, the U.S. Treasury is purchasing equity securities from participating institutions.  On October 2, 2009, we entered into the UST Agreement with the U.S. Treasury providing for our issuance of the Series A Preferred Shares and the Warrant, pursuant to the Capital Purchase Program.  The EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000.  This increase is in place until the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.
 
On February 17, 2009, President Obama signed ARRA, as a sweeping economic recovery package intended to stimulate the economy and provide for broad infrastructure, energy, health, and education needs.  There can be no assurance as to the actual impact that EESA or its programs, including the CPP, and ARRA or its programs, will have on the national economy or financial markets.  The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our Common Shares.
 
There have been numerous actions undertaken in connection with or following EESA and ARRA by the Federal Reserve Board, the U.S. Congress, the U.S. Treasury, the FDIC, the SEC and others in efforts to address the current liquidity and credit crisis in the financial industry that followed the sub-prime mortgage market meltdown that began in late 2007.  These measures include: (i) homeowner relief that encourages loan restructuring and modification; (ii) the establishment of significant liquidity and credit facilities for financial institutions and investment banks; (iii) the lowering of the federal funds rate; (iv) emergency action against short selling practices; (v) a temporary guaranty program for money market funds; (vi) the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and (vii) coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system.  EESA, ARRA and the other regulatory initiatives described above may not have their desired effects.  If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition and results of operations could be materially and adversely affected.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Because Of Our Participation In The Capital Purchase Program, We Are Subject To Several Restrictions Including Restrictions On Our Ability To Declare Or Pay Dividends And Repurchase Our Shares As Well As Restrictions On Compensation Paid To Our Executive Officers.
 
Pursuant to the terms of the UST Agreement, our ability to declare or pay dividends on any of our shares is limited.  Specifically, we are unable to declare dividend payments on Common Shares, junior preferred shares or pari passu preferred shares if we are in arrears on the payment of dividends on the Series A Preferred Shares.  Further, we are not permitted to increase dividends on our Common Shares above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 ($0.11 per share) without the U.S. Treasury’s approval until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties.  In addition, our ability to repurchase our shares is restricted.  The consent of the U.S. Treasury generally is required for us to make any stock repurchase (other than in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice) until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties.  Further, Common Shares, junior preferred shares or pari passu preferred shares may not be repurchased if we are in arrears on the payment of Series A Preferred Share dividends.  Finally, the terms of the UST Agreement allow the U.S. Treasury to impose additional restrictions, including those on dividends and including unilateral amendments required to comply with changes in applicable federal law.
 
Pursuant to the terms of the UST Agreement, we adopted the U.S. Treasury’s current standards for executive compensation and corporate governance for the period during which the Treasury holds the equity securities issued pursuant to the UST Agreement, including the Common Shares that may be issued upon exercise of the Warrant.  These standards generally apply to our Chief Executive Officer, Chief Financial Officer, the three next most highly compensated senior executive officers and, with respect to certain aspects of executive compensation, the next 5 most highly compensated employees.  The standards include: (i) ensuring that incentive compensation plans and arrangements for senior executive officers do not encourage unnecessary and excessive risks that threaten our value; (ii) required clawback of any bonus or incentive compensation paid (or under a legally binding obligation to be paid) to a senior executive officer based on materially inaccurate financial statements or other materially inaccurate performance metric criteria; (iii) prohibition on making “golden parachute payments” to senior executive officers and the next 5 most highly compensated employees; and (iv) agreement not to claim a deduction, for federal income tax purposes, for compensation paid to any of the senior executive officers in excess of $500,000 per year.




PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009

 
The adoption of ARRA on February 17, 2009 imposed certain new executive compensation and corporate expenditure limits on all TARP recipients, including the Company, until the institution has repaid the U.S. Treasury.  The executive compensation standards are more stringent than those previously in effect under the Capital Purchase Program.  On June 10, 2009, the U.S. Treasury issued Interim Final Rules on TARP compensation standards pursuant to ARRA:  (1) prohibiting (in the case of Premier, which is receiving less than $25,000,000 in assistance) the most highly compensated employee from receiving any bonus or incentive compensation while TARP funds are outstanding that has a value greater than one-third of the total amount of such employee’s compensation, which may only be made by long-term restricted stock awards that cannot vest until TARP assistance is repaid; (2) excluding incentives for senior executive officers that would cause them to take unnecessary and excessive risks that threaten the value of the TARP recipient; (3) requiring recovery of any bonus or incentive compensation paid based on statements of earnings that are later found to be materially inaccurate; (4) requiring the TARP recipient’s board compensation committee to meet at least semiannually to evaluate employee compensation plans in light of any risk posed to the recipient by such plans; (5) requiring the board of directors to adopt a company-wide policy regarding excessive or luxury expenditures (including entertainment, office renovations, aviation services, or other activities that are not reasonable expenditures); (6) requiring a separate proxy vote by the shareholders at the annual shareholders meeting (on a non-binding basis) to approve executive compensation of the TARP recipient; and (7) requiring the TARP recipient’s chief executive officer and chief financial officer to annually certify the recipient’s compliance with these requirements.

Strong Competition Within the Company’s Market Area May Limit Profitability
 
Premier faces significant competition both in attracting deposits and in the origination of loans. Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the market areas of Premier Banks, have historically provided most of the competition for the Premier Banks for deposits; however, each Premier Bank also competes with financial institutions that operate through Internet banking operations throughout the continental United States. In addition, and particularly in times of high interest rates, each Premier Bank faces additional and significant competition for funds from money market and mutual funds, securities firms, commercial banks, credit unions and other savings institutions located in the same communities and those that operate through Internet banking operations throughout the continental United States. Many competitors have substantially greater financial and other resources than Premier and the Premier Banks. Moreover, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than community banks and as a result, they may enjoy a competitive advantage over Premier. The Premier Banks compete for loans principally on the basis of the interest rates and loan fees they charge, the types of loans they originate and the quality of services they provide to borrowers. This advantage places significant competitive pressure on the prices of loans and deposits.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Defaults by Another Larger Financial Institution Could Adversely Affect Financial Markets Generally.
 
The commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk”.  Premier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.

Additional Capital May Not Be Available When Needed or Required by Regulatory Authorities.
 
Premier and the Premier Banks are required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. In addition, Premier may elect to raise additional capital to support its business or to finance acquisitions, if any, or it may otherwise elect or be required to raise additional capital.  Premier’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside Premier’s control and its financial performance. Accordingly, Premier may not be able to raise additional capital if needed or on acceptable terms. If Premier cannot raise additional capital when needed, it may have a material adverse effect on its financial condition, results of operations and prospects.

Allowance for Loan Losses May Be Insufficient
 
Premier, through the Premier Banks, maintains an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience, evaluations of potential losses on identified problem loans and delinquency trends.  Premier believes that its allowance for loan losses is maintained at a level adequate to absorb any probable losses in its loan portfolio given the current information known to management.  These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events.  Therefore, Premier cannot predict loan losses with certainty and ultimate losses may differ from current estimates.  Depending on changes in economic, operating and other conditions, including changes in interest rates, which are generally beyond its control, Premier’s actual losses could exceed its current allowance estimates.  Premier’s allowance may not be sufficient to cover all charge-offs in future periods.  If charge-offs exceed Premier’s allowance, its earnings would decrease.  In addition, regulatory agencies review Premier’s allowance for loan losses and may require additions to the allowance based upon their judgment about information available to them at the time of their examination.  A required increase in Premier’s allowance for loan losses could reduce its earnings.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Acquired subsidiary Adams National has entered into a written agreement with the OCC which may cause adverse results to Adams National’s operations
 
On October 1, 2008, Adams National entered into a written agreement with its primary regulator, the Office of the Comptroller of the Currency (“OCC”).  Under the terms of the written agreement, Adams National agreed to take certain actions relating to its lending operations and capital compliance.  Specifically, the OCC is requiring Adams National to take the following actions:

 
a)
conduct a review of senior management to ensure that these individuals can perform the duties required under the bank’s policies and procedures and the requirements of the written agreement, and where necessary, provide a written program to address the training of its senior officers;

 
b)
achieve certain regulatory capital levels, which are greater than the regulatory requirements to be “well capitalized” under bank regulatory requirements.  In particular, Adams National must achieve a: 12% total risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital to risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total assets ratio;

 
 
d)
make additions to the allowance for loan and lease losses and adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the written agreement;

 
e)
adopt and implement an asset diversification program consistent with OCC guidelines and to perform an analysis of the bank’s concentrations of credit;

 
f)
take all necessary actions to protect the bank’s interest in criticized assets, adopt and implement a program to eliminate regulatory criticism of these assets, engage in an ongoing review of its criticized assets and develop and implement procedures for the effective monitoring of the loan portfolio;

 
g)
hire an independent appraiser to provide a written or updated appraisal of certain assets;

 
h)
develop and implement a program to improve the management of the loan portfolio and to provide the Adams National Board with monthly written reports on credit quality;

 
i)
employ a loan review consultant acceptable to the OCC to perform a quarterly quality review of Adams National’s assets;



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
 

 
 
j)
revise the bank's lending policy in accordance with OCC requirements; and
 
 
k)
maintain acceptable liquidity levels.
 
The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including requirements to report to the OCC.  The written agreement also requires Adams National to establish a committee of the Board of Directors which will be responsible for overseeing compliance with the written agreement.
 
Adams National has taken steps to comply with the requirements of the written agreement and expects that it will address all areas of concern.
 
Following the public announcement of the written agreement, Adams National became restricted in the bank’s ability to renew or access deposits through brokers.  Moreover, a number of Adams National’s depositors sought to reduce their deposits at the bank.  The impact of the written Agreement on Adams National’s operations as well as a deterioration in credit markets may have an adverse impact on the financial condition and operations of Premier including maintaining acceptable liquidity levels at the bank.

Adams National is no longer considered “well capitalized” for regulatory capital purposes, which will cause the bank to incur increased premiums for deposit insurance and require FDIC approval to gather brokered deposits including CDARS reciprocal deposits
 
As of the date of the Written Agreement with the OCC, October 1, 2008, Adams National was not considered “well capitalized” for regulatory purposes. As a result, the FDIC will assess higher deposit insurance premiums on the bank, which will negatively impact earnings. In addition, Adams National will be required to obtain FDIC approval to gather or renew brokered deposits including CDARS reciprocal deposits, during such time as the bank remains “adequately capitalized” for regulatory purposes. This status requires Adams National to obtain regulatory approval prior to accepting or renewing brokered deposits which will affect the bank’s ability to improve and maintain its liquidity position.

Loss of Large Checking and Money Market Deposit Customers Could Increase Cost of Funds and Have a Negative Effect on Results of Operations
 
Premier has a number of large deposit customers that maintain balances in checking, money market and repurchase agreement accounts at the Premier Banks. The ability to attract these types of deposits has a positive effect on Premier’s net interest margin as they provide a relatively low cost of funds to Premier compared to certificates of deposits or advances. If these depositors were to withdraw these funds and the Premier Banks were not able to replace them with similar types of deposits, the cost of funds would increase and Premier’s results of operation would be negatively impacted.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Integration of Recent and Pending Acquisitions May Be More Difficult Than Anticipated
 
The success of Premier’s recent acquisitions of Citizens First Bank, Inc., Traders Bankshares, Inc. and Abigail Adams will depend on a number of factors, including (but not limited to) Premier’s ability to:

timely and successfully integrate the operations of Premier and each of the acquisitions;
maintain the existing relationships with the depositors of each acquisition to minimize the withdrawal of deposits subsequent to the merger(s);
maintain and enhance the existing relationships with the borrowers of each acquisition to limit potential losses from loans made by the them;;
control the incremental non-interest expense of the integrated operations to maintain overall operating efficiencies;
retain and attract qualified personnel at each acquisition; and
compete effectively in the communities served by each acquisition and in nearby communities.

Adams National Commercial Real Estate and Commercial Business Loans Expose it to Increased Lending Risks
 
These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operations and the income stream of the borrowers.  Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans.  Adams National’s financial condition may be affected by a decline in the value of the real estate securing Adams National’s loans. Real estate values have suffered from declines in Adams National’s market, which may affect the bank’s financial condition. If Adams National continues to receive updated appraisals revealing significant additional weakness in its collateral, it will likely result in further losses. Also, many of Adams National’s borrowers have more than one commercial real estate or commercial business loan outstanding with the bank.  Consequently, an adverse development with respect to one loan or one credit relationship can expose the bank to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.  Any impact on Adams National’s financial condition may affect the performance and results of operations of Premier.




PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Adams National’s Current Concentration of Loans in its Primary Market Area May Increase its Risk
 
Adams National’s success depends primarily on the general economic conditions in the metro Washington, D.C. market area.  Unlike larger banks that are more geographically diversified, Adams National provides banking and financial services to customers primarily in Washington, D.C.  The local economic conditions in the Washington, D.C. metropolitan area have a significant impact on its loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans.  A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond Premier’s control would impact these local economic conditions and could negatively affect the financial results of its banking operations.

Premier’s expenses will increase as a result of increases in FDIC insurance premiums.
 
The Federal Deposit Insurance Corporation imposes an assessment against institutions for deposit insurance.  This assessment is based on the risk category of the institution and ranges from 5 to 43 basis points of the institution’s deposits.  Federal law requires that the designated reserve ratio for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of estimated insured deposits.  If this reserve ratio drops below 1.15% or the FDIC expects that it will do so within six months, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.15% of estimated insured deposits within five years (absent extraordinary circumstances).
 
Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund’s reserve ratio. On May 22, 2009, the FDIC issued a final rule imposing a special assessment of 5 basis points on total assets less tier 1 capital on June 30, 2009, which was collected on September 30, 2009.  For Premier this assessment was booked as a second quarter 2009 expense.  The rule also provides the FDIC with authority to impose up to two additional assessments of up to 5 basis points each on total assets less tier 1 capital.
 
In addition, EESA temporarily increased the limit on FDIC insurance coverage for deposits to $250,000 through December 31, 2009, and the FDIC took action to provide coverage for newly-issued senior unsecured debt and non-interest bearing transaction and for unsecured debt and non-interest bearing transaction and certain NOW accounts in excess of the $250,000 limit, for which institutions will be assessed additional premiums.  In 2009, the temporary increase in FDIC insurance coverage was extended through December 31, 2013.  These actions will increase Premier’s combined non-interest expense in 2009 and in future years as long as the increased premiums and coverages are in place.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Claims and Litigation Pertaining to Fiduciary Responsibility
 
From time to time, shareholders or customers may make claims and take legal action pertaining to Premier’s and Premier Banks’ performance of their fiduciary responsibilities. Defending such claims can impose a material expense on Premier.  If such claims and legal actions are not resolved in a manner favorable to the Premier Banks they may result in financial liability and/or adversely affect the market perception of the Premier Banks and their products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on Premier’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations

Unauthorized Disclosure of Sensitive or Confidential Customer Information Could Severely Harm Our Business.
 
In the normal course of business, the Premier Banks collect, process and retain sensitive and confidential customer information to both open deposit accounts and determine whether to approve a customer’s request for a loan. Premier also relies upon a variety of computing platforms and networks over the internet for the purposes of data processing, communication and information exchange, including a variety of services provided by third-party vendors.  Despite the security measures in place, Premier’s facilities and systems, and those of Premier’s third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to Premier or damages to others. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by Premier or by its vendors, could severely damage Premier’s reputation, expose it to the risks of litigation and liability or disrupt the business operations of Premier which in turn, could have a material adverse effect on its financial condition and results of operations.

Inability to Hire and Retain Qualified Employees
 
Premier’s performance is largely dependent on the talents and efforts of highly skilled individuals and their ability to attract and retain customer relationships in a community bank environment. There is intense competition in the financial services industry for qualified employees. In addition, Premier faces increasing competition with businesses outside the financial services industry for the most highly skilled individuals. Premier’s business could be adversely affected if it were unable to retain and motivate its existing key employees and management team.  Furthermore, Premier’s success may be impacted if it were unable to recruit replacement management and key employees in a reasonable amount of time.
 
Premier is subject to several restrictions on compensation paid to Premier’s executive officers because of its participation in the TARP Capital Purchase Program.  As a recipient of government funding under the TARP Capital Purchase Program, Premier must comply with


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


the executive compensation and corporate governance standards imposed by the ARRA and the standards established by the Secretary of the Treasury under the ARRA.  The restrictions on executive compensation under these standards are more fully described in Item 1 of this Form 10-K under the caption “Regulatory Matters – TARP Capital Purchase Program”.  These standards could impact Premier’s ability to hire or retain key executives or cause Premier to make material changes to its current compensation plans and philosophy that could result in higher compensation costs in future periods.

Future Issuances of Common Shares or Other Securities May Dilute the Value of Outstanding Common Shares, Which May Also Adversely Affect their Market Price
 
In many situations, Premier’s Board of Directors has the authority, without any vote of its shareholders, to issue shares of authorized but unissued securities, including common shares authorized and unissued under Premier’s stock option plans and shares of Premier preferred stock. In the future, Premier may issue additional securities, through public or private offerings, in order to raise additional capital, complete acquisitions, or compensate key employees. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share value of the common stock.

The Series A Preferred Shares Impact Net Income Available to Common Shareholders, and the Warrant May Be Dilutive to Premier’s Common Shareholders.
 
The additional capital Premier raised through its participation in the TARP Capital Purchase Program has increased Premier’s equity and the number of dilutive outstanding common shares.  In addition, the dividends declared and the accretion of discount on the Series A Preferred Shares reduces the net income available to Premier’s common shareholders and earning per common share.  The Series A Preferred Shares will also receive preferential treatment in the event of Premier’s liquidation, dissolution or winding up.  Additionally, the ownership interest of Premier’s existing common shareholders will be diluted to the extent the Warrant Premier issued to the U.S. Treasury is exercised.  Although the U.S. Treasury has agreed not to vote any of the common shares it receives upon exercise of the Warrant, a transferee of any portion of the Warrant or of any common shares acquired upon exercise of the Warrant is not bound by this agreement.

If Premier is Unable to Redeem the Series A Preferred Shares After Five Years, the Cost of This Capital Will Increase Substantially.
 
If Premier is unable to redeem the Series A Preferred Shares prior to November 15, 2014, the cost of this capital will increase substantially on that date, from 5.0% per annum to 9.0% per annum.  Depending on Premier’s financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Shares could have a material negative effect on Premier’s liquidity.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


If a Subsidiary Bank’s Current Capital Ratios Decline Below the Regulatory Threshold for an “Adequately Capitalized” Institution, the Bank Will Be Considered “Undercapitalized” Which May Have a Material and Adverse Effect on Premier.
 
The Federal Deposit Insurance Act (FDIA) requires each federal banking agency to take prompt corrective action with respect to banks that do no meet the minimum capital requirements. Once a bank becomes undercapitalized, it is subject to various requirements and restrictions, including a prohibition of the payment of capital distributions and management fees, restrictions on growth of the bank’s assets, and a requirement for prior regulatory approval of certain expansion proposals. In addition, an undercapitalized bank must file a capital restoration plan with its principal federal regulator.
 
If an undercapitalized bank fails in any material aspect to implement a plan approved by its regulator, the agency may impose additional restrictions on the bank. These include, among others, requiring the recapitalization or sale of the bank, restrictions with affiliates, and limiting the interest rates the bank my pay on deposits. Further, even after the bank has attained adequately capitalized status, the appropriate federal agency may, if it determines, after notice and hearing, that the bank is in an unsafe or unsound condition or has not corrected a deficiency from its most recent examination, treat the bank as if it were undercapitalized and subject the bank to the regulatory restrictions of such lower classification.
 
In addition to measures taken under the prompt corrective action provisions with respect to undercapitalized institutions, insured banks and their holding companies may be subject to potential enforcement actions by their regulators for unsafe and unsound practices in conducting their business or the violations of law or regulation, including the filing of false or misleading regulatory reports. Enforcement actions under this authority may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or the removal and prohibition orders against “institution-affiliates parties”. Further, the Federal Reserve may bring an enforcement action against the bank holding company either to address the undercapitalization in the holding company or to require the holding company to implement measures to remediate undercapitalization in a subsidiary.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009



None.

 
The Company leases its principal executive offices located in Huntington, West Virginia. The Company also owns property located at 104 Jefferson Street, Brooksville, Kentucky, which serves as a branch for Citizen's Deposit Bank. Except as noted, each of the Banks owns the real property and improvements on which their banking activities are conducted.
 
Citizens Deposit Bank & Trust, in addition to its main office at 400 Second Street in Vanceburg, Kentucky, has four branch offices in Lewis County, Kentucky, (including one leased facility), one leased branch office in Mason County, Kentucky, one branch located on Highway 10 in Germantown, Kentucky, and one branch located in Bracken County, Kentucky. Farmers Deposit Bank, in addition to its main office at 5230 South Main Street in Eminence, Kentucky, has one other branch in Henry County, Kentucky.  Ohio River Bank, in addition to its main office at 221 Railroad Street in Ironton, Ohio, has two branches, one leased facility in Lawrence County, Ohio and one in Scioto County, Ohio. First Central Bank, in addition to its main office at 2 South Main Street in Philippi, West Virginia, has a branch located in Buckhannon, West Virginia and a leased branch office located in Upshur County, West Virginia. Boone County Bank, in addition to its main office at 300 State Street, Madison, West Virginia, has one leased branch located in Lincoln County, West Virginia and two other branches, one each located in Boone and Logan Counties, West Virginia.  Traders Bank, Inc., in addition to its main office at 601 Washington Street, Ravenswood, West Virginia, has two other branch locations in Jackson County, two branch locations in Roane County, and one location in Wood County, West Virginia.  Adams National, leases its main office location at 1130 Connecticut Avenue, N.W., Washington, DC, and leases five other branch offices located at Washington, DC and one branch office located in Silver Springs Maryland.  Adams National also leases space for its deposit operations in Washington, DC.  Consolidated Bank & Trust, in addition to its main office at 320 North First Street, Richmond, Virginia, has one branch located in Hampton, Virginia.

 
The Banks are respectively parties to legal actions that are ordinary routine litigation incidental to a commercial banking business. In management's opinion, the outcome of these matters, individually or in the aggregate, will not have a material adverse impact on the results of operations or financial position of the Company.

 
There were no matters submitted to a vote of security holders, through solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


PART II

Issuer Purchase of Equity Securities
 
The Company's common stock is listed on the NASDAQ Global Market System under the symbol PFBI. At December 31, 2009, the Company had approximately 4,993 shareholders  of its common shares.
The following table sets forth on a quarterly basis cash dividends paid and the range of high and low sales prices on a per share basis during the quarters indicated.

   
Cash
   
Sales Price
 
   
Dividends Paid
   
High
   
Low
 
2008
                 
First Quarter
  $ 0.10     $ 13.59     $ 11.01  
Second Quarter
    0.11       13.15       10.05  
Third Quarter
    0.11       11.63       8.50  
Fourth Quarter
    0.11       9.80       5.98  
      0.43                  
                         
2009
                       
First Quarter
  $ 0.11     $ 9.00     $ 4.00  
Second Quarter
    0.11       7.19       4.82  
Third Quarter
    0.11       7.50       5.78  
Fourth Quarter
    0.11       6.92       4.00  
      0.44                  
                         
2010
                       
First Quarter (through March 15, 2010)
  $ 0.11     $ 8.90     $ 6.32  

 
The payment of dividends by the Company depends upon the ability of the Banks to declare and pay dividends to the Company because the principal source of the Company's revenue will be dividends paid by the Banks.  At December 31, 2009 approximately $2.5 million was available for payment as dividends from the Banks to the Company without the need for regulatory approval. In considering the payment of dividends, the Board of Directors will take into account the Company's financial condition, the cumulative provisions of the Series A Preferred Shares, results of operations, tax considerations, costs of expansion, industry standards, economic conditions and need for funds, as well as governmental policies and regulations applicable to the Company and the Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital guidelines.



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Stock Performance Graph
 
The following Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Premier specifically incorporates it by reference into such filing.
 
The following graph shows a comparison of cumulative total stockholder return on the Common Stock since December 31, 2004 with the cumulative total returns of both a broad equity market index and a published industry index.  The broad equity market index chosen was the Russell 3000 and the published industry index chosen was the SNL ($500M-$1B) Bank Asset-Size Index.  The graph reflects historical performance only, which is not indicative of possible future performance of the Common Stock.
 
Premier Financial Bancorp, Inc.
 2009 Stock Performance Graph

   
Period Ending
Index
 
12/31/04
 
12/31/05
 
12/31/06
 
12/31/07
 
12/31/08
 
12/31/09
Premier Financial Bancorp, Inc.
 
100.00
 
129.39
 
114.72
 
107.11
 
61.61
 
63.16
Russell 3000
 
100.00
 
106.12
 
122.80
 
129.11
 
80.94
 
103.88
SNL $500M-$1B Bank Index
 
100.00
 
104.29
 
118.61
 
95.04
 
60.90
 
58.00
*Source: SNL Financial LC, Charlottesville, VA


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


Equity Compensation Plan Information
 
The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under its equity compensation plan, the 2002 Stock Option Plan, as of December 31, 2009.

 
 
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
   
Weighted-average exercise price of outstanding options, warrants and rights
(b)
   
Number of securities remaining available for future issuance under equity compensation plans (Excluding securities reflected in column (a))
(c)
 
Equity compensation plans approved by shareholders
                 
2002 Stock Option Plan
    212,449     $ 11.18       281,882  
Equity compensation plans not approved by shareholders
                       
None
                       
Total
    212,449     $ 11.18       281,882  



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009


 
The following table presents consolidated selected financial data for the Company. It does not purport to be complete and is qualified in its entirety by more detailed financial information and the audited consolidated financial statements contained elsewhere in this annual report. The data presented below reflects separately the impact of discontinued operations as more fully described in Item 1 – “The Company”.

(Dollars in thousands, except per share amounts)
 
At or for the Year Ended December 31
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Earnings
                             
Net interest income
  $ 31,083     $ 26,035     $ 22,296     $ 21,395     $ 19,852  
Provision for loan losses
    1,052       147       (78 )     (1,161 )     4  
Non-interest income
    9,136       5,291       4,623       4,165       3,920  
Non-interest expense
    27,115       19,894       16,408       16,937       17,305  
Income taxes
    2,934       3,749       3,470       3,283       2,029  
Net income
    9,118       7,536       7,119       6,501       4,434  
Preferred stock dividends
    133       -       -       -       -  
Net income available to common shareholders
  $ 8,985     $ 7,536     $ 7,119     $ 6,501     $ 4,434  
                                         
Financial Position
                                       
Total assets
  $ 1,101,750     $ 724,465     $ 549,255     $ 535,452     $ 528,324  
Loans
    699,133       467,111       346,570       343,797       328,717  
Allowance for loan losses
    7,569       8,544       6,497       6,661       7,892  
Goodwill and other intangibles
    31,595       29,974       15,816       15,816       15,816  
Securities
    240,970       175,741       124,242       121,367       137,419  
Deposits
    913,784       589,182       449,033       438,950       435,843  
Other borrowings
    55,564       41,518       26,124       33,091       19,053  
Subordinated debentures
    -       -       -       -       15,722  
Preferred equity
    21,705       -       -       -       -  
Common equity
    106,851       89,422       67,389       61,002       54,287  
                                         
Per Common Share Data
                                       
Net income – basic
    1.32       1.25       1.36       1.24       0.85  
Net income - diluted
    1.32       1.25       1.35       1.24       0.84  
Book value
    13.46       13.99       12.87       11.65       10.37  
Tangible book value
    9.41       9.30       9.85       8.63       7.35  
Cash dividends
    0.44       0.43       0.40       0.10       0.00  
                                         
Financial Ratios
                                       
Return on average assets
    1.09 %     1.12 %     1.31 %     1.21 %     0.82 %
Return on average common equity
    9.47 %     9.38 %     11.13 %     11.31 %     8.42 %
Dividend payout
    33.33 %     34.40 %     29.41 %     8.06 %     0.00 %
Stockholders’ equity to total assets at period-end
    11.67 %     12.34 %     12.27 %     11.39 %     10.28 %
Average stockholders’ equity to average total assets
    12.19 %     11.94 %     11.74 %     10.74 %     9.77 %
 

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


of Operations.

INTRODUCTION
 
Premier Financial Bancorp, Inc. ("Premier”) is a multi-bank holding company headquartered in Huntington, West Virginia.  It operates eight community bank subsidiaries ranging in size from $63 million to $290 million, each with a local community name and orientation. The banks operate in twenty-six communities within the states of West Virginia, Virginia, Ohio, Maryland and Kentucky plus the cities of Washington, DC and Richmond, Virginia.  Through these locations the banks provide their customers with a full range of banking services.  At the open of business on October 1, 2009, Premier completed its acquisition of Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a $363 million two bank holding company.  The two banks now owned by Premier as a result of the acquisition of Abigail Adams were Adams National Bank (“Adams National”) with six locations in and around Washington, DC and Consolidated Bank & Trust Company (“CB&T”) headquartered in Richmond, Virginia with one branch location in Hampton, Virginia.  At the close of business on April 30, 2008, Premier completed its acquisitions of Traders Bankshares, Inc. (“Traders”), a $108 million single bank holding company headquartered in Spencer, West Virginia, and Citizens First Bank, Inc. (“Citizens First”), a $62 million bank headquartered in Ravenswood, West Virginia.  The results of operations of Abigail Adams, Citizens First and Traders are included in Premier’s consolidated statements of income beginning only from their respective acquisition dates.   On October 25, 2008, Premier merged Citizens First and Traders, named the resulting bank Traders Bank, Inc. and moved its headquarters to Ravenswood, West Virginia.  As of December 31, 2009, Premier had approximately $1.1 billion in total assets, $699 million in total loans, $914 million in total deposits and $25 million in customer repurchase agreements.
 
The accompanying consolidated financial statements have been prepared by the management of Premier in conformity with accounting principles generally accepted in the United States of America. The audit committee of the Board of Directors engaged Crowe Horwath LLP ("Crowe") as independent auditors to audit the consolidated financial statements, and their report is included elsewhere herein. Financial information appearing throughout this annual report is consistent with that reported in the consolidated financial statements. The following discussion is designed to assist readers of the consolidated financial statements in understanding significant changes in Premier's financial condition and results of operations.
 
Management's objective of a fair presentation of financial information is achieved through a system of internal accounting controls. The financial control system of Premier is designed to provide reasonable assurance that assets are safeguarded from loss and that transactions are properly authorized and recorded in the financial records. As an integral part of that financial control system, the holding company employs a staff of internal auditors and contracts with professional accounting firms to perform internal audits of the financial records of each of the subsidiaries on a periodic basis.  The internal audit manager reports the findings and recommendations highlighted by the internal audits to Premier’s audit committee as well


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


as the audit committees of the subsidiaries.  Also, on a regular periodic basis, the subsidiary banks are examined by Federal and State banking authorities for safety and soundness as well as compliance with applicable banking laws and regulations. The activities of both the internal and external audit functions are reviewed by the audit committee of the Board of Directors.

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 or lack thereof, 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.


CRITICAL ACCOUNTING POLICIES

General
 
The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements and management's discussion and analysis are, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.
 
Presented below is a discussion of those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the accompanying consolidated financial statements presented elsewhere in this annual report.


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


Allowance for Loan Losses
 
The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable incurred losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of control over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance that the allowance for loan losses is maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.
 
The Company evaluates various loans individually for impairment using accounting guidance issued by Financial Accounting Standards Board (“FASB”). Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due 90 days or more, restructured loans and other loans selected by management including loans graded as substandard or doubtful by the internal credit review process. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment with a group of loans that have similar characteristics.
 
For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by accounting guidance. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.
 
The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of probable incurred loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses exceeds the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses were below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


adequate to absorb the new estimate of probable incurred losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.


Business Acquisitions and Impairment of Goodwill
 
For acquisitions, Premier is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.
 
The loans acquired via the purchase of Abigail Adams were recorded on the books of Premier at their estimated fair value.  The estimate of fair value included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants.  These estimates required management's most difficult, subjective and complex judgments and are inherently uncertain.  Since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, consistent with new accounting guidance for acquisitions after 2008, no allowance for loan losses for these loans was recorded by Premier at the date of acquisition.  However, in the event that different assumptions or conditions were to prevail due to uncertainties in the economy, the borrower’s ability to repay or other factors, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.
 
Under accounting guidance issued by the FASB related to accounting for goodwill and other intangible assets, goodwill is evaluated at least annually to determine if the amount recorded on the Company's balance sheet is impaired. If goodwill is determined to be impaired, the recorded amount would be reduced to estimated fair value by a charge to expense in the period in which impairment is determined. Impairment is evaluated in the aggregate for all of the Company's banking operations. Operating characteristics of the aggregate banking operations are derived and compared to a database of peer group banks that have been sold. Pricing valuation factors that are considered in estimating the fair value of the Company's aggregate banking operations include price-to-total assets, price-to-total book value, price-to-deposits and price-to-earnings. Unusual events that have impacted the operating characteristics of the Company's aggregate banking operations are considered to assess the likelihood of recurrence and adjustments to historical performance may be made. Changes in assumptions regarding the likelihood of unusual historical events recurring or the use of different pricing valuation factors could have a material impact on management's impairment analysis.



PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


SUMMARY FINANCIAL RESULTS
 
Premier had net income available to common shareholders of $8.985 million in 2009 compared to $7.536 million of net income reported for the year 2008 and $7.119 reported for 2007.  Net income increased in 2009 largely due to acquisition activity in 2008 and 2009.  In 2009, higher interest income and non-interest income as well as lower interest expense were partially offset by higher non-interest expense.  The increases in each of these categories was primarily the result of the increase in operations from the acquisitions of Abigail Adams on October 1, 2009, and Citizens First and Traders, both of which occurred at the close of business on April 30, 2008.   The operating results of Abigail Adams, Citizens First and Traders are included in the consolidated financial statements of Premier only from the date of their respective acquisition.  When comparing 2009 operating results to 2008 operating results, the operations of Abigail Adams are included only for the last three months of 2009 and none at all in 2008.  Similarly, the operations of Citizens First and Traders are included for the full twelve months of 2009 but only for the last eight months of 2008.   The increase in 2008 net income available to shareholders over 2007 was again a result of higher interest income and non-interest income as well as lower interest expense all of which was partially offset by higher non-interest expense.  These results were largely due to the acquisitions of Citizens First and Traders.  When comparing 2008 operating results to 2007 operating results, the operations of Citizens First and Traders are included only for the last eight months of 2008 and none at all in 2007.   Basic earnings per share were $1.32 in 2009 compared to $1.25 in 2008 and to $1.36 in 2007.  The increase in earnings per share in 2009 resulted from a proportionately greater increase in net income available to common shareholders from the acquisition of Abigail Adams versus the increase in average shares outstanding issued to acquire the entity.  The decrease in earnings per share in 2008 resulted from the increase in the average shares outstanding related to the common stock issued as part of the merger consideration of Citizens First and Traders.  The terms of the acquisitions are more fully described in Note 24 to the consolidated financial statements.
 
The following table comparatively illustrates the components of ROA and ROE over the previous five years. Return on average assets (“ROA”) measures how effectively Premier utilizes its assets to produce net income.  It also facilitates the analysis of earnings performance of different sized organizations.  In 2007, 2008 and 2009, Premier increased the size its balance sheet from $549.3 million in total assets at the end of 2007 to $724.5 million at the end of 2008 to $1,101.8 million at the end of 2009 largely due to acquisitions.  The increase in asset size will generally result in higher dollars of income earned and expenses incurred.  A detailed review of the components of ROA will help analyze Premier’s performance without regard to changes in its size.
 
Premier’s net income in 2009 resulted in an ROA of 1.09%, a decrease from the 1.12% ROA in 2008 and the 1.31% in 2007.  As shown in the table, fully taxable equivalent net interest income (as a percent of average earnings assets) reached its highest level during the last five years in 2007 at 4.42%.  In 2008, this percentage decreased to 4.21% and decreased again in 2009 to 4.12%, as the yields on earning assets have been declining as a result of a lower overall interest rate environment due to Federal Reserve policies designed to stimulate national


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


economic growth.  In 2005, net credit income was 4.00% of average earning assets and increased to its highest level in the last five years in 2006.  In 2005, minimal provisions for loan losses were recorded and thus there was little reduction from net interest income.  In 2006, negative provisions for loan losses were recorded which served to help increase net credit income to 4.55%.  This increase in net credit income (as a percent of average earning assets) was complemented by an increase in non-interest income (as a percent of average earning assets) and a reduction in non-interest expenses (as a percent of average earning assets) when compared to the previous year. In 2007, while net interest income increased to its highest level, net credit income was lower than 2006 as a result of minimal negative provisions for loan losses recorded in 2007.  However, in 2007, non-interest income (as a percent of average earning assets) also reached its highest level in the past five years while non-interest expense (as a percent of average earning assets) continued to decline.  In 2008, minimal provisions for loan losses reduced an already lower net interest income (as a percent of average earning assets), resulting in net credit income of 4.19% of average earning assets.  In 2008, non-interest income (as a percent of average earning assets) declined somewhat, returning to the level achieved in 2006.  However, non-interest expense (as a percent of average earning assets) continued to decline in 2008 resulting in the lowest ratio over in the last five years.  In 2009, net credit income (as a percent of average earning assets) declined to 3.98%, the lowest level in the last five years, as the lower net interest income (described above) was lowered even further by the highest provision for loan losses (as a percent of average earning assets) over the past five-year period.  Further lowering Premier’s return on average assets in 2009 was the lowest non-interest income and highest non-interest expense (as a percent of average earning assets) in the last five years largely due to acquisition related expenses, a special FDIC insurance assessment, write downs on the value of other real estate owned (“OREO”) and lower deposit customer fee income in relation to the total deposits outstanding.  Adding to Premier’s return on average assets in 2009 was a gain recognized on the acquisition of Abigail Adams and lower income tax expense.  As illustrated in the table, the overall result was to decrease Premier's 2009 return on average earning assets to 1.18% and decrease its return on average total assets (ROA) to 1.09%.




PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


ANALYSIS of RETURN ON ASSETS and EQUITY
 
                               
   
2009
   
2008
   
2007
   
2006
   
2005
 
As a percent of average earning assets
                             
Fully taxable-equivalent net interest income
    4.12 %     4.21 %     4.42 %     4.32 %     4.00 %
Provision for loan losses
    (0.14 )     (0.02 )     0.02       0.23       (0.00 )
Net credit income
    3.98       4.19       4.44       4.55       4.00  
Gains on acquisition of subsidiary and sales of assets
    0.47       0.01       0.00       0.00       0.00  
Non-interest income
    0.74       0.84       0.91       0.84       0.78  
Non-interest expense
    (3.57 )     (3.20 )     (3.23 )     (3.40 )     (3.46 )
Tax equivalent adjustment
    (0.03 )     (0.03 )     (0.04 )     (0.03 )     (0.03 )
Applicable income taxes
    (0.39 )     (0.60 )     (0.68 )     (0.66 )     (0.41 )
Preferred stock dividends
    (0.02 )     (0.00 )     (0.00 )     (0.00 )     (0.00 )
Return on average earning assets
    1.18       1.21       1.40       1.30       0.88  
Multiplied by average earning assets to
average total assets
    92.20       92.48       93.34       93.07       92.84  
Return on average assets
    1.09 %     1.12 %     1.31 %     1.21 %     0.82 %
Multiplied by average assets to
average common stockholders’ equity
    8.68 X     8.37 X     8.52 X     9.31 X     10.23 X
Return on average common equity
    9.47 %     9.38 %     11.13 %     11.31 %     8.42 %
                                         
 
The net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) increased significantly in 2009 to 2.83%.  This ratio compares to 2.36% in 2008, 2.32% in 2007, the lowest ratio reported in the last five years, 2.56% in 2006 and 2.68% in 2005.  The increases in 2009 net overhead was largely the result of a higher ratio of non-interest expense to average earning assets due to acquisition related expenses, significantly higher FDIC insurance costs, higher OREO costs and generally less efficient operations of the acquired Abigail Adams’ subsidiary banks.  Also negatively affecting the 2009 net overhead ratio was a lower ratio of non-interest income to average earning assets largely due to the 0.41% non-interest income ratio of the acquired Abigail Adams’ banks and a slight decrease in secondary market mortgage commissions despite the increase in the size of the Company.  The increase in 2008 net overhead when compared to 2007 was largely the result of a lower ratio of non-interest income to average earning assets due to lower secondary market mortgage commissions overall and the 0.66% non-interest income ratio of the acquired banks.  The decrease in the 2007 net overhead ratio when compared to 2006 was the result of increases in Premier’s non-interest income related to electronic banking income and secondary market mortgage commissions, plus decreases in non-interest expenses related to staff costs and the accelerated amortization of trust preferred issuance costs recorded in 2006 but not 2007.



PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009

 
Return on average common equity (“ROE”), another measure of earnings performance, indicates the amount of net income earned in relation to the total equity invested by holders of common stock. Premier’s 2009 ROE was 9.47% compared to 9.38% in 2008 and 11.13% realized in 2007.  ROE increased in 2009 due to a higher ratio of average assets to average equity resulting from the Abigail Adams acquisition.  ROE decreased in 2008 compared to 2007 due to an increase in average equity as a result of the common stock issued to acquire Traders and Citizens First.
 
A breakdown of Premier's financial results by quarter for the years ended December 31, 2009 and 2008 is summarized below.

QUARTERLY FINANCIAL INFORMATION
 
(Dollars in thousands, except per share amounts)
 
   
First
   
Second
   
Third
   
Fourth
   
Full Year
 
2009
                             
Interest income
  $ 9,136     $ 9,120     $ 9,114     $ 13,857     $ 41,227  
Interest expense
    2,578       2,458       2,346       2,762       10,144  
Net interest income
    6,558       6,662       6,768       11,095       31,083  
Provision for loan losses
    102       110       127       713       1,052  
Gain on acquisition of subsidiary
    0       0       0       3,552       3,552  
Net overhead
    4,594       4,559       4,349       8,029       21,531  
Income before income taxes
    1,862       1,993       2,292       5,905       12,052  
Net income
    1,229       1,355       1,502       5,032       9,118  
Dividends on preferred stock
    0       0       0       133       133  
Net income available to common stockholders
    1,229       1,355       1,502       4,899       8,985  
Basic net income per share
    0.19       0.21       0.23       0.62       1.32  
Diluted net income per share
    0.19       0.21       0.23       0.61       1.32  
Dividends paid per share
    0.11       0.11       0.11       0.11       0.44  
                                         
2008
                                       
Interest income
  $ 8,427     $ 9,433     $ 10,276     $ 9,708     $ 37,844  
Interest expense
    2,833       2,984       3,099       2,893       11,809  
Net interest income
    5,594       6,449       7,177       6,815       26,035  
Provision for loan losses
    (135 )     91       85       106       147  
Securities gains
    0       93       0       0       93  
Net overhead
    3,056       3,545       4,197       3,898       14,696  
Income before income taxes
    2,673       2,906       2,895       2,811       11,285  
Net income
    1,774       1,930       1,930       1,902       7,536  
Basic net income per share
    0.34       0.32       0.30       0.30       1.25  
Diluted net income per share
    0.34       0.32       0.30       0.30       1.25  
Dividends paid per share
    0.10       0.11       0.11       0.11       0.43  



PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


BALANCE SHEET ANALYSIS

Summary
 
A financial institution's primary sources of revenue are generated by its 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. Information on rate-related sources and uses of funds for each of the three years in the period ended December 31, 2009, is provided in the table below.




PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
 
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
   
Average
Balance
   
Interest
   
Yield/
Rate (2)
   
Average
Balance
   
Interest
   
Yield/
Rate (2)
   
Average
Balance
   
Interest
   
Yield/
Rate (2)
 
Assets:
                                                     
Interest earning assets
                                                     
U.S. Treasury and federal agency securities
  $ 102,904     $ 3,393       3.30 %   $ 102,758     $ 4,457       4.34 %   $ 82,177     $ 3,496       4.25 %
States and municipal obligations (1)
    8,210       398       4.85       6,098       320       5.25       4,067       241       5.93  
Mortgage backed securities
    72,121       3,069       4.26       53,069       2,517       4.74       37,017       1,799       4.86  
Other securities
    6,012       250       4.16       3,723       180       4.83       3,307       212       6.41  
Total investment securities
    189,247       7,110       3.76       165,648       7,474       4.51       126,568       5,748       4.54  
Federal funds sold
    28,912       24       0.08       37,885       748       1.97       36,088       1,829       5.07  
Interest-bearing deposits with banks
    14,815       57       0.38       1,614       39       2.42       1,273       56       4.40  
Loans, net of unearned income (3)(4)
                                                                       
Commercial
    303,514       18,467       6.08       207,939       14,044       6.75       169,217       13,591       8.03  
Real estate mortgage
    168,643       11,434       6.78       155,324       11,074       7.13       129,072       9,474       7.34  
Installment
    54,316       4,337       7.98       53,802       4,626       8.60       46,399       4,244       9.15  
Total loans
    526,473       34,238       6.50       417,065       29,744       7.13       344,688       27,309       7.92  
Total interest earning assets
    759,447       41,429       5.46       622,212       38,005       6.11       508,617       34,942       6.87  
Allowance for loan losses
    (8,218 )                     (8,020 )                     (6,615 )                
Cash and due from banks
    18,095                       17,025                       13,853                  
Premises and equipment
    12,439                       9,759                       6,378                  
Other assets
    41,922                       31,802                       22,653                  
Total assets
  $ 823,685                     $ 672,778                     $ 544,886                  
                                                                         
Liabilities and Equity:
                                                                       
Interest bearing liabilities
                                                                       
NOW and money market
  $ 162,870       637       0.39 %   $ 136,878       1,136       0.83 %   $ 119,849       1,780       1.49 %
Savings deposits
    78,240       250       0.32       66,978       381       0.57       53,000       384       0.72  
Certificates of deposit and other time deposits
    316,016       8,234       2.61       254,802       9,159       3.59       202,183       8,855       4.38  
Total interest bearing deposits
    557,126       9,121       1.64       458,658       10,676       2.33       375,032       11,019       2.94  
Short-term borrowings
    16,730       139       0.83       17,325       251       1.45       13,200       321       2.43  
Other borrowings
    16,626       581       3.49       12,658       590       4.66       10,047       769       7.65  
FHLB advances
    7,179       303       4.22       4,723       292       6.18       5,363       347       6.47  
Total interest-bearing liabilities
    597,661       10,144       1.70 %     493,364       11,809       2.39 %     403,642       12,456       3.09 %
Non-interest bearing deposits
    121,029                       94,155                       74,522                  
Other liabilities
    4,593                       4,903                       2,743                  
Preferred equity
    5,548                       -                       -                  
Common equity
    94,854                       80,356                       63,979                  
Total liabilities and equity
  $ 823,685                     $ 672,778                     $ 544,886                  
                                                                         
Net interest earnings (1)
          $ 31,285                     $ 26,196                     $ 22,486          
Net interest spread (1)
                    3.76 %                     3.72 %                     3.78 %
Net interest margin (1)
                    4.12 %                     4.21 %                     4.42 %
                                                                         
(1) Taxable – equivalent yields are calculated assuming a 34% federal income tax rate
(2) Yields are calculated on historical cost except for yields on marketable equity securities that are calculated used fair value
(3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans
(4) Includes loans on non-accrual status
 


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009

 
In 2009, average earning assets increased by 22.1% or $137.2 million from 2008, following a 22.3% or $113.6 million increase in 2008 from 2007.  Average interest-bearing liabilities, the primary source of funds supporting the earning assets, increased by 21.1% or $104.3 million in 2009 from 2008, which follows a 22.2% or $89.7 million increase in 2008 over 2007.  The 2009 increase in average earning assets was primarily the result of acquisition activity.  The acquisition of Abigail Adams in October 2009 added $83.7 million in average earning assets and $69.7 million in average interest bearing liabilities in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 added $41.4 million to 2009 average earning assets and $29.6 million to 2009 interest bearing liabilities.  Excluding the impact of acquisition activity, the remaining $12.2 million increase in average earning assets in 2009 was primarily the result of a $12.2 million increase in average total loans as a $10.0 million increase in average interest bearing bank balances was offset by a $2.6 million decrease in average investment securities outstanding and a $7.4 million decrease in average federal funds sold.  Excluding the impact of acquisition activity, average interest bearing liabilities increased by $5.0 million or 1.0% in 2009 from 2008.  This increase in average interest bearing liabilities in 2009 was the result of a $7.1 million increase in average interest bearing deposits and a $1.7 million increase in average other long-term borrowings partially offset by a $3.8 million decrease in average short-term borrowings, primarily customer repurchase agreements.  Furthermore, the increase in average interest bearing deposits was complemented by a $26.9 million or 28.5% increase in average non-interest bearing deposits, $23.2 million resulting from acquisition activity and $3.7 million from internal growth.
 
In 2008, average earning assets increased by 22.3% or $113.6 million from 2007, following a 2.1% or $10.3 million increase in 2007 from 2006.  Average interest bearing liabilities, the primary source of funds supporting the earning assets, increased by 22.2% or $89.7 million in 2008 from 2007, which follows a 0.3% or $1.2 million increase in 2007 over 2006.  The 2008 increase in average earning assets was primarily the result of adding Traders and Citizens First to the organization at the end of April, 2008.  The acquisition of these two banks added $102.3 million in average earnings assets at $80.6 in average interest bearing liabilities in 2008.  Excluding the acquisitions of Traders and Citizens First, the remaining $11.3 million increase in average earning assets in 2008 was primarily the result of a $7.5 million increase in average total loans and an $11.1 million increase in average total investment securities outstanding.  These increases more than offset the $6.9 million decrease in average federal funds sold, as surplus liquid funds were used to fund loans and invest in higher yielding investment securities.  Excluding the acquisitions of Traders and Citizens First, average interest bearing liabilities increased by $9.1 million or 2.3% in 2008 from 2007.  This increase in average interest bearing liabilities in 2008 was the result of a $3.0 million increase in average interest bearing deposits, a $4.1 million increase in average short-term borrowings, primarily customer repurchase agreements, and a $2.0 million increase in other long-term borrowings and Federal Home Loan Bank (FHLB) advances.  Furthermore, the increase in average interest bearing deposits was complemented by a $19.6 or 26.3% increase in average non-interest bearing deposits, $17.3 million from the acquisitions of Traders and Citizens First and $2.3 million from internal growth.  Additional information on each of the components of earning assets and interest bearing liabilities is contained in the following sections of this report.


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


Loan Portfolio
 
Premier's loan portfolio is its largest and highest yielding component of average earning assets, totaling 69.3% of average earning assets during 2009.  Average loans increased in 2009 by $109.4 million or 26.2% over 2008 following a $72.4 million or 21.0% increase in 2008 over 2007.  The 2009 increase is largely attributable to the acquisition activity in 2008 and 2009 which added $97.2 million in average total loans during the year.  Excluding the acquisitions, average total loans increased by $12.2 million or 2.9% in 2009 from 2008.  This increase is the result of growth in Premier’s Ohio and West Virginia loan markets.  In 2009, Premier realized a $4.3 million or 8.1% increase in average outstanding loans in its Ohio markets, and a $7.9 million or 3.3% increase in its West Virginia markets (excluding Traders and Citizens First).  Average total loans in Premier’s Kentucky markets were relatively the same from 2008 to 2009.  The 2008 increase is largely attributable to the acquisitions of Traders and Citizens First, which added $64.9 million in average total loans during the year.  Excluding the acquisitions, average total loans increased by $7.5 million or 2.2% in 2008 from 2007.  This increase is the result of growth in Premier’s Ohio and West Virginia loan markets.  In 2008, Premier realized a $1.9 million or 3.7% increase in average outstanding loans in its Ohio markets, and a $5.8 million or 3.5% increase in its West Virginia market (excluding Traders and Citizens First).  These increases more than offset the slight $212,000 or 0.2% decrease in average total loans in Premier’s Kentucky markets.
 
Total loans at December 31, 2009 increased by $232.0 million or 49.7% from the total at December 31, 2008.  This increase follows a $120.5 million or 34.8% from the total at December 31, 2007.  The significant increase in 2009 is due to the $235.6 million of period end loans from the acquisition of Abigail Adams.  The remaining banks collectively had a $3.5 million or 0.7% decrease in their total period end loans as increases in total loans at the West Virginia and Ohio banks were more than offset by decreases at the Kentucky banks.  The significant increase in 2008 is primarily due to the $102.8 million of period end loans from the acquisitions of Traders and Citizens First.  The remaining $17.8 million or 5.1% increase in 2008 was the result of significant increase in loan demand in Premier’s markets.
 
Loans secured by real estate in total increased from 74.0% of Premier’s loan portfolio at December 31, 2008 to approximately 81.3% of Premier's loan portfolio at December 31, 2009 due to the loans acquired from Abigail Adams.  The mix of loans acquired from Abigail Adams was significantly different from Premier’s other affiliate bank loan portfolios, which consist of a diverse portfolio of predominantly single family residential loans and loans for commercial purposes where real estate is part of the collateral, not the primary source of repayment. The December 31, 2009 balances of the loans acquired from Adams National were predominantly (84.1%) commercial real estate loans and real estate construction loans, including $67.0 million of loans secured by non-owner occupied commercial property, $39.1 million of loans secured by owner occupied commercial property, $29.5 million of multi-family residential real estate loans and $19.6 million of commercial real estate construction and land development loans.  The concentrations in these kinds of loans was one of the factors motivating the OCC to require Adams National to enter into a formal written agreement to reduce these concentrations.  The mix of December 31, 2009 balances of the loans acquired from CB&T were closer to the ratios of


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009


Premier’s other affiliate banks but were still predominantly (61.5%) commercial real estate loans and real estate construction loans due in part to loan participations with Adams National.  While there are generally additional risks of loss associated with commercial real estate lending, such as the potential for adverse changes in economic conditions, the borrowers' inability to successfully execute their business plan and/or deterioration in the value of the commercial real estate collateral; the loans acquired from Adams National and CB&T were recorded at fair value as of the acquisition date taking into account credit risks in the loans acquired.  See additional discussion below on the impaired loans acquired from Adams National and CB&T.
 
Premier’s residential real estate mortgage loans generally do not exceed 80% of the value of the real property securing the loan at the time of origination. The residential real estate mortgage loan portfolio primarily consists of adjustable rate residential mortgage loans. The origination of these mortgage loans can be more difficult in a low interest rate environment where there is a significant demand for fixed rate mortgages. Premier also originates mortgage loans to be sold in the secondary market and recognizes non-interest income upon the sale of those mortgages in the form of commissions and servicing release fees.  Premier has not engaged in the solicitation of so-called “sub-prime” or “interest only” mortgages.  Premier uses an experienced staff underwriter to ensure the completeness of the borrowers’ loan application and documentation and to ensure that the loans meet the standards required by prospective loan purchasers.  Additional information regarding the volume of mortgage loans originated and sold is contained in Premier’s consolidated statements of cash flows presented elsewhere in this annual report.
 
Commercial loans are generally made to small-to-medium size businesses located within a defined market area and typically are secured by business assets and guarantees of the principal owners. Additional risks of loss are associated with commercial lending, such as the potential for adverse changes in economic conditions or the borrowers' ability to successfully execute their business plan. Consumer loans generally are made to individuals living in Premier's defined market area who are known to the local bank's staff.  Consumer loans are generally made for terms of up to seven years on a secured or unsecured basis; however longer terms may be approved in certain circumstances and for revolving credit lines. While consumer loans generally provide the Company with increased interest income, consumer loans may involve a greater risk of default.




PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009

 
The following table presents a five year comparison of loans by type. With the exception of those categories included in the comparison, there are no loan concentrations which exceed 10% of total loans. Additionally, Premier's loan portfolio contains no loans to foreign borrowers nor does it have a material volume of highly leveraged transaction lending.

LOAN SUMMARY
 
(Dollars in thousands)
 
   
As of December 31,
 
   
2009
 
%
   
2008
 
%
   
2007
 
%
   
2006
 
%
   
2005
 
%
 
Summary of Loans by Type
                                                 
Commercial, secured by real estate
  $ 304,607   43.6 %   $ 133,742   28.7 %   $ 100,278   28.9 %   $ 101,786   29.6 %   $ 85,989