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



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

FORM 10-Q

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

 
For the quarterly period ended September 30, 2010

 
or

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

 
For the transition period from ___________ to ___________

 
Commission file number 0-20908

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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.

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

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

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

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

Common stock, no par value, – 7,937,143 shares outstanding at November 1, 2010

 
 

 

SEPTEMBER 30, 2010
INDEX TO REPORT





 
 
- 2 -


PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2010


PART I  - FINANCIAL INFORMATION


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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2009 for further information in this regard.

Index to consolidated financial statements:










 
 
- 3 -


CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
(DOLLARS IN THOUSANDS)


   
(UNAUDITED)
     
   
2010
   
2009
 
ASSETS
           
Cash and due from banks
  $ 89,879     $ 61,611  
Federal funds sold
    20,143       22,985  
    240,972       240,970  
Loans held for sale
    1,307       897  
    742,721       699,133  
    (9,540 )     (7,569 )
Net loans
    733,181       691,564  
Federal Home Loan Bank and Federal Reserve Bank stock
    7,247       7,005  
Premises and equipment, net
    16,683       15,200  
Real estate and other property acquired through foreclosure
    11,083       9,251  
Interest receivable
    4,299       4,250  
Goodwill
    29,806       28,724  
Other intangible assets
    4,543       2,795  
Prepaid FDIC insurance premiums
    2,307       2,900  
Deferred taxes
    8,553       10,713  
Other assets
    2,660       2,885  
Total assets
  $ 1,172,663     $ 1,101,750  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Non-interest bearing
  $ 187,847     $ 172,182  
Time deposits, $100k and over
    145,920       149,890  
Other interest bearing
    642,433       591,712  
Total deposits
    976,200       913,784  
Securities sold under agreements to repurchase
    26,715       24,600  
    10,605       14,937  
Other borrowed funds
    20,684       16,027  
Interest payable
    1,029       1,037  
Other liabilities
    3,068       2,809  
Total liabilities
    1,038,301       973,194  
                 
               
               
1,000,000 shares authorized, 22,252 shares issued and outstanding
    21,813       21,705  
Common stock, no par value; 20,000,000 shares authorized;
               
7,937,143 shares issued and outstanding
    71,450       71,412  
Retained earnings
    37,297       33,349  
    3,802       2,090  
Total stockholders' equity
    134,362       128,556  
Total liabilities and stockholders' equity
  $ 1,172,663     $ 1,101,750  
                 
                 




CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Interest income
                       
Loans, including fees
  $ 10,964     $ 7,496     $ 33,534     $ 22,374  
Securities available for sale
                               
Taxable
    1,976       1,541       5,997       4,764  
Tax-exempt
    63       60       193       178  
Federal funds sold and other
    49       17       110       54  
Total interest income
    13,052       9,114       39,834       27,370  
                                 
Interest expense
                               
Deposits
    2,125       2,126       6,538       6,715  
Repurchase agreements and other
    42       32       124       94  
FHLB advances and other borrowings
    215       188       726       573  
Total interest expense
    2,382       2,346       7,388       7,382  
                                 
Net interest income
    10,670       6,768       32,446       19,988  
Provision for loan losses
    761       127       2,741       339  
Net interest income after provision for loan losses
    9,909       6,641       29,705       19,649  
                                 
Non-interest income
                               
Service charges on deposit accounts
    1,025       886       3,016       2,439  
Electronic banking income
    383       257       1,095       749  
Secondary market mortgage income
    128       115       312       327  
Other
    199       116       523       355  
      1,735       1,374       4,946       3,870  
Non-interest expenses
                               
Salaries and employee benefits
    3,978       2,873       11,965       8,323  
Occupancy and equipment expenses
    1,166       638       3,498       2,001  
Outside data processing
    1,029       771       3,059       2,305  
Professional fees
    249       212       740       794  
Taxes, other than payroll, property and income
    254       194       767       547  
Write-downs, expenses, sales of other real estate owned, net of gains
    (48 )     14       419       145  
Supplies
    124       91       362       299  
FDIC insurance
    473       207       1,345       813  
Other expenses
    1,245       723       3,380       2,145  
      8,470       5,723       25,535       17,372  
Income before income taxes
    3,174       2,292       9,116       6,147  
Provision for income taxes
    1,069       790       2,479       2,061  
                                 
Net income
  $ 2,105     $ 1,502     $ 6,637     $ 4,086  
                                 
Preferred stock dividends and accretion
    305       -       943       -  
Net income available to common stockholders
  $ 1,800     $ 1,502     $ 5,694     $ 4,086  
                                 
                               
Basic
  $ 0.23     $ 0.23     $ 0.72     $ 0.64  
Diluted
    0.22       0.23       0.70       0.64  
Dividends per common share
    -       0.11       0.22       0.33  


PREMIER FINANCIAL BANCORP, INC.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income
  $ 2,105     $ 1,502     $ 6,637     $ 4,086  
                                 
Other comprehensive income:
                               
Unrealized gains (losses) arising during the period
    719       1,858       2,598       1,073  
Reclassification of realized amount
    -       -       -       -  
Net change in unrealized gain (loss) on securities
    719       1,858       2,598       1,073  
Less tax impact
    247       632       886       365  
Other comprehensive income (loss):
    472       1,226       1,712       708  
                                 
Comprehensive income
  $ 2,577     $ 2,728     $ 8,349     $ 4,794  
                                 
 
 
 
 
 
 
 
 
 
 
 

 

PREMIER FINANCIAL BANCORP, INC.
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
2010
   
2009
 
Cash flows from operating activities
           
Net income
  $ 6,637     $ 4,086  
Adjustments to reconcile net income to net cash from operating activities
               
Depreciation
    1,093       758  
Provision for loan losses
    2,741       339  
Amortization (accretion), net
    (2,310 )     398  
OREO writedowns (gains on sales), net
    (264 )     130  
    38       41  
Loans originated for sale
    (15,265 )     (23,708 )
Secondary market loans sold
    15,167       22,505  
Secondary market income
    (312 )     (327 )
Gain on sale of building
    (81 )     -  
Changes in :
               
Interest receivable
    170       575  
Other assets
    2,022       (260 )
Interest payable
    (107 )     (171 )
Other liabilities
    238       (135 )
Net cash from operating activities
    9,767       4,231  
                 
Cash flows from investing activities
               
Purchases of securities available for sale
    (228,715 )     (90,555 )
Proceeds from maturities and calls of securities available for sale
    231,033       99,558  
Purchase of FRB and FHLB stock, (net of redemptions)
    (242 )     93  
Purchase of branches, net of cash received
    8,936       -  
Net change in federal funds sold
    2,842       (5,898 )
Net change in loans
    14,048       (845 )
Purchases of premises and equipment, net
    (934 )     (684 )
Proceeds from sale of other real estate acquired through foreclosure
    2,597       628  
Net cash from investing activities
    29,565       2,297  
                 
Cash flows from financing activities
               
Net change in deposits
    (11,111 )     15,095  
Common stock dividends paid
    (1,746 )     (2,109 )
Preferred stock dividends paid
    (835 )     -  
Net change in short-term Federal Home Loan Bank advances
    -       (3,000 )
Repayment of Federal Home Loan Bank advances
    (4,144 )     (159 )
Repayment of other borrowed funds
    (6,643 )     (1,444 )
Proceeds from other borrowings
    11,300       -  
Net change in agreements to repurchase securities
    2,115       (6,048 )
Net cash from financing activities
    (11,064 )     2,335  
                 
Net change in cash and cash equivalents
    28,268       8,863  
                 
Cash and cash equivalents at beginning of period
    61,611       22,148  
                 
Cash and cash equivalents at end of period
  $ 89,879     $ 31,011  

(continued)
 
- 7 -


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
2010
   
2009
 
Supplemental disclosures of cash flow information:
           
Cash paid during period for interest
  $ 7,396     $ 7,553  
                 
Cash paid during period for income taxes
    930       1,125  
                 
Non-cash transactions
               
Loans transferred to real estate acquired through foreclosure
  $ 7,396     $ 909  
Branches acquired:
               
Fair value of assets acquired from via branch purchase
  $ 71,825          
Cash paid for branches
    2,432          
Liabilities assumed of Abigail Adams
  $ 74,257          




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


NOTE  1 - BASIS OF PRESENTATION

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

             
September 30, 2010
 
   
Year
 
Total
   
Net Income
 
Subsidiary                               
Location                      
Acquired
 
Assets
   
QTD
   
YTD
 
Citizens Deposit Bank & Trust
Vanceburg, Kentucky
1991
  $ 200,710     $ 439     $ 1,174  
Farmers Deposit Bank
Eminence, Kentucky
1996
    61,053       182       508  
Ohio River Bank
Ironton, Ohio
1998
    92,381       359       991  
First Central Bank, Inc.
Philippi, West Virginia
1998
    130,377       375       1,131  
Boone County Bank, Inc.
Madison, West Virginia
1998
    175,868       477       1,138  
Traders Bank
Spencer, West Virginia
2008
    155,846       229       1,239  
Adams National Bank
Washington, DC
2009
    275,968       269       753  
Consolidated Bank & Trust
Richmond, Virginia
2009
    72,051       194       653  
Mt. Vernon Financial Holdings, Inc.
Huntington, West Virginia
1999
    226       5       (2 )
Parent and Intercompany Eliminations
        8,183       (424 )     (948 )
  Consolidated Total
      $ 1,172,663     $ 2,105     $ 6,637  

All significant intercompany transactions and balances have been eliminated.

New Accounting Standards:
In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminates the concept of a qualifying special purpose entity.  This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance.  The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations or financial position.

In June 2009, the FASB amended guidance for consolidation of  variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations or financial position.

 
 
- 9 -


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


NOTE  1–BASIS OF PRESENTATION - continued

 
In January 2010, the FASB issued Accounting Standards Update No. 2010-4, “Accounting for Various Topics, Technical Corrections to SEC Paragraphs.”  In addition, in February 2010, the FASB issued Accounting Standards Update No. 2010-8, “Technical Corrections to Various Topics.”  These updates covered a wide variety of accounting matters, including subsequent events, goodwill, derivative financial instruments, and investments in limited partnerships.  The most significant provisions of these updates were effective upon issuance and did not have a material effect on the Company’s results of operations or financial position.
 
In January 2010, the FASB amended previous guidance related to fair value measurements and disclosures, which requires new disclosures for transfers in and out of Levels 1 and 2 and requires a reconciliation to be provided for the activity in Level 3 fair value measurements.  A reporting entity should disclose separately the amounts of significant transfers in and out of Levels 1 and 2 and provide an explanation for the transfers. This guidance is effective for interim periods beginning after December 15, 2009, and did not have a material effect on the Company’s results of operations or financial position.
 
In the reconciliation for fair value measurements using unobservable inputs (Level 3) a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis rather than a net basis. Disclosures relating to purchases, sales, issuances, and settlements  in  the  roll  forward  of  activity  in  Level  3  fair value measurement  will  become  effective beginning after December 15, 2010, and for  interim  periods  within  those  fiscal  years.  The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position but it will require expansion of the Company’s future disclosures about fair value measurements.
 
In July 2010, the FASB issued ASU No. 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  The ASU expands the disclosures about the credit quality of financing receivables and the related allowance for credit losses.  The ASU also requires disaggregation of existing disclosures by portfolio segment.  The amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010.  The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  The adoption of this guidance will expand the Company’s disclosures surrounding credit quality of financing receivables and the related allowance for credit losses.


 
 
- 10 -


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



Amortized cost and fair value of investment securities, by category, at September 30, 2010 are summarized as follows:

   
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 40,779     $ 2,195     $ -     $ 42,974  
U. S. agency CMO’s
    92,831       1,331       -       94,162  
Total mortgage-backed securities of government sponsored entities
    133,610       3,526       -       137,136  
U. S. government sponsored entity securities
    85,931       573       (79 )     86,425  
Obligations of states and political subdivisions
    10,337       389       (1 )     10,725  
Other securities
    5,329       1,357       -       6,686  
Total available for sale
  $ 235,207     $ 5,845     $ (80 )   $ 240,972  

Amortized cost and fair value of investment securities, by category, at December 31, 2009 are summarized as follows:

   
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 52,563     $ 1,934     $ (15 )   $ 54,482  
U. S. agency CMO’s
    18,771       789       -       19,560  
Total mortgage-backed securities of government sponsored entities
    71,334       2,723       (15 )     74,042  
U. S. Treasury securities
    1,000       5       -       1,005  
U. S. government sponsored entity securities
    149,951       407       (291 )     150,067  
Obligations of states and political subdivisions
    10,195       175       (123 )     10,247  
Other securities
    5,323       322       (36 )     5,609  
Total available for sale
  $ 237,803     $ 3,632     $ (465 )   $ 240,970  



 
 
- 11 -


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


NOTE  2–SECURITIES - continued

The amortized cost and fair value of securities at September 30, 2010 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Fair
Value
 
Available for sale
           
Due in one year or less
  $ 656     $ 664  
Due after one year through five years
    21,666       22,059  
Due after five years through ten years
    74,498       75,120  
Due after ten years
    3,685       4,531  
Corporate preferred securities
    1,092       1,462  
Mortgage-backed securities of government sponsored entities
    133,610       137,136  
Total available for sale
  $ 235,207     $ 240,972  

Securities with unrealized losses at September 30, 2010 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S. government sponsored entity securities
  $ 7,492     $ (8 )   $ 2,016     $ (71 )   $ 9,508     $ (79 )
Obligations of states and political subdivisions
    969       (1 )     -       -       969       (1 )
Other securities
    -       -       -       -       -       -  
                                                 
Total temporarily impaired
  $ 8,461     $ (9 )   $ 2,016     $ (71 )   $ 10,477     $ (80 )



.
 
- 12 -


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


NOTE  2–SECURITIES - continued

Securities with unrealized losses at December 31, 2009 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S. government sponsored entity securities
  $ 52,300     $ (291 )   $ -     $ -     $ 52,300     $ (291 )
Obligations of states and political subdivisions
    3,439       (123 )     -       -       3,439       (123 )
U.S. agency MBS-residential
    5,197       (15 )                     5,197       (15 )
Other securities
    964       (36 )     -       -       964       (36 )
                                                 
Total temporarily impaired
  $ 61,900     $ (465 )   $ -     $ -     $ 61,900     $ (465 )

The investment portfolio is predominately high quality interest-bearing debt securities with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at September 30, 2010 and December 31, 2009 are price changes resulting from changes in the interest rate environment and it is more likely than not that the Company will not be required to sell the securities before their anticipated recovery.  Therefore, the Company does not consider the securities to be other-than-temporarily impaired.  Their fair value is expected to recover as the securities approach their maturity date and/or market conditions improve.


 
 
- 13 -


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



Major classifications of loans at September 30, 2010 and December 31, 2009 are summarized as follows:
   
2010
   
2009
 
Commercial, secured by real estate
  $ 334,490     $ 304,607  
Commercial, other
    80,331       76,140  
Real estate construction
    45,369       51,637  
Residential real estate
    212,334       211,552  
Agricultural
    3,131       2,710  
Consumer and home equity
    58,800       49,312  
Other
    8,266       3,175  
    $ 742,721     $ 699,133  

The following table sets forth information with respect to the Company’s impaired loans at September 30, 2010 and December 31, 2009.
   
2010
   
2009
 
Impaired loans at period end with an allowance
  $ 24,816     $ 14,494  
Impaired loans at period end with no allowance
    46,889       49,370  
Amount of allowance for loan losses allocated
    2,180       1,279  

The following table sets forth information with respect to the Company’s nonperforming loans at September 30, 2010 and December 31, 2009.
   
2010
   
2009
 
Non-accrual loans
  $ 49,103     $ 46,299  
Accruing loans which are contractually past due 90 days or more
    648       489  
Restructured loans
    11,596       11,974  
Total
  $ 61,347     $ 58,762  


Changes in the allowance for loan losses for the three and nine months ended September 30, 2010 and 2009 are as follows:
   
Three Months Ended
   
Nine Months Ended
 
   
September 30
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Balance, beginning of period
  $ 9,201     $ 8,450     $ 7,569     $ 8,544  
Gross charge-offs
    (526 )     (800 )     (1,109 )     (1,276 )
Recoveries
    104       85       339       255  
Provision for loan losses
    761       127       2,741       339  
Balance, end of period
  $ 9,540     $ 7,862     $ 9,540     $ 7,862  



 
 
- 14 -


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



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

Advances from the FHLB at September 30, 2010 and December 31, 2009 were as follows:

   
2010
   
2009
 
Payment due at maturity in March 2012, fixed rate at 1.81%
  $ 10,354     $ 10,542  
Payments due at maturity in May 2010, fixed rate at rates from 6.25% to 6.64%, averaging 6.45%
    -       4,000  
Payments due monthly with maturities from November 2011 to July 2012, fixed rates from 4.10% to 4.40%, averaging 4.26%
    251       395  
Overnight borrowed funds
    -       -  
    $ 10,605     $ 14,937  
                 

Advances are secured by the FHLB stock, certain pledged investment securities and substantially all single family first mortgage loans of the participating Banks.  Scheduled principal payments due on advances during the five years subsequent to September 30, 2010 are as follows:

2010 (remaining three months)
  $ 104  
2011
    413  
2012
    10,088  
2013
    -  
2014
    -  
Thereafter
    -  
    $ 10,605  
         



 
 
- 15 -


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



The Company’s principal source of funds for dividend payments to stockholders is dividends received from the subsidiary Banks.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below.  Except for restrictions discussed below, 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.

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

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of September 30, 2010, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

Shown below is a summary of regulatory capital ratios for the Company:
   
Sept 30,
2010
   
December 31,
2009
   
Regulatory
Minimum
Requirements
   
To Be Considered
Well Capitalized
 
Tier I Capital (to Risk-Weighted Assets)
    13.2 %     13.6 %     4.0 %     6.0 %
Total Capital (to Risk-Weighted Assets)
    14.5 %     14.6 %     8.0 %     10.0 %
Tier I Capital (to Average Assets)
    8.9 %     8.9 %     4.0 %     5.0 %

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

As of September 30, 2010, the most recent notification from each of the Banks’ primary Federal regulators categorized the subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action, except Adams National Bank.  To be categorized as well capitalized,

 
 
- 16 -


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


NOTE  6 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS - continued

the Banks must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the preceding table.  There are no conditions or events since that notification that management believes have changed the Banks’ categories.  Adams National Bank is subject to a written agreement with the OCC and is required to maintain minimum capital ratios in excess of the ratios required to be defined as well capitalized under the framework for prompt corrective action.  This requirement means that the bank will not be deemed to be well capitalized while the written agreement is in effect.  At September 30, 2010, Adams National Bank’s capital ratios met or exceeded the minimum capital ratios required by its written agreement with the OCC.

As more fully discussed in Note 12 – Regulatory Agreements, Premier and Consolidated Bank and Trust Company (“CB&T”) are parties to a Written Agreement with the Federal Reserve Bank of Richmond (“FRB”) and the State Corporation Commission Bureau of Financial Institutions (“Virginia Bureau”) which requires prior written approval of the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System for declaring or paying any dividends from Premier and also the Virginia Bureau’s approval for declaring or paying any dividends from CB&T.

On August 3, 2010, Premier submitted a request to the FRB for written approval from the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors to pay a $0.11 per share cash dividend to Premier’s common shareholders on September 30, 2010.  On August 19, 2010, Premier was notified in writing that the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors did not approve Premier’s request to pay the cash dividend on its common stock as Premier had requested.


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

Under standardized TARP Capital Purchase Program terms, cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum until November 14, 2014, and at a rate of 9% per annum thereafter.  These dividends will be paid only if, as and when declared by Premier’s Board of Directors.  The Series A Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of Premier.  Subject to the approval of the Appropriate Federal Banking Agency (as defined in the Securities Purchase Agreement, which for Premier is the Board of Governors of the Federal
 
 
- 17 -

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


NOTE  7 – PREFERRED STOCK - continued

Reserve System), the Series A Preferred Stock is redeemable at the option of Premier at 100% of its liquidation preference plus accrued and unpaid dividends, without penalty, delay or the need to raise additional replacement capital.

The Series A Preferred Stock is non-voting, but has class voting rights on (i) any authorization or issuance of shares ranking senior to the Series A Preferred Stock; (ii) any amendment to the rights of the Series A Preferred Stock; or (iii) any merger, consolidation, share exchange, reclassification or similar transaction which would adversely affect the rights of the Series A Preferred Stock.  In the event that the cumulative dividends described above are not paid in full for an aggregate of six dividend periods or more, whether or not consecutive, the authorized number of directors of Premier would automatically be increased by two and the holders of the Series A Preferred Stock would have the right to elect two directors.  The right to elect directors would end when dividends have been paid in full for four consecutive dividend periods.

The U.S. Treasury has agreed not to exercise voting power with respect to any common stock issued to it upon exercise of the Warrant.  The common stock will be issued from authorized but unissued common stock and thus will dilute the interests of existing Premier common shareholders.  As of December 31, 2009, the Warrant has not yet been exercised.

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

On September 20, 2010, Premier submitted a request to the FRB for written approval from the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors to declare and pay its quarterly dividend obligation to the U.S. Treasury due on November 15, 2010.  On October 4, 2010, Premier received a notice in writing that the FRB and the Director of the Division of Banking Supervision and Regulation of the Board of Governors did not approve Premier’s request to pay the cash dividend on its Series A, Fixed Rate Cumulative Perpetual Preferred Stock as Premier had requested.  Subsequent to receipt of the notice from the FRB, Premier has held telephone conversations with the FRB to appeal the Board of Governors’ decision.  On October 13, 2010, Premier received telephonic notice that its appeal had been denied.

 
 
- 18 -


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



From time to time the Company grants stock options to its employees.  The Company estimates the fair value of the options at the time they are granted to employees and expenses that fair value over the vesting period of the option grant.

On March 17, 2010, 47,700 incentive stock options were granted out of the 2002 Plan at an exercise price of $8.90, the closing market price of Premier on the grant date.  These options vest in three equal annual installments ending on March 17, 2013.  On February 18, 2009, 47,100 incentive stock options were granted out of the 2002 Plan at an exercise price of $6.55.  These options vest in three equal annual installments ending on February 18, 2012.  On February 20, 2008, 45,300 incentive stock options were granted out of the 2002 Plan at an exercise price of $12.92.  These options vest in three equal annual installments ending on February 20, 2011.  On January 17, 2007, 37,000 incentive stock options were granted out of the 2002 Plan at an exercise price of $14.22.  These options vested in three equal annual installments and were fully vested on January 17, 2010.

The fair value of the Company's employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. The assumptions used in the Black-Scholes option-pricing model are as follows:

 
 
- 19 -


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


NOTE  8– STOCK COMPENSATION EXPENSE - continued

   
2010
   
2009
   
2008
 
Risk-free interest rate
    3.65 %     2.74 %     3.50 %
Expected option life (yrs)
    10.00       10.00       7.00  
Expected stock price volatility
    24.67 %     19.26 %     23.00 %
Dividend yield
    4.94 %     6.72 %     3.10 %
Weighted average fair value of options granted during the year
  $ 1.41     $ 0.37     $ 2.55  

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

Compensation expense of $38,000 was recorded for the first nine months of 2010 compared to $41,000 for the first nine months of 2009.  For the three months ended September 30, $14,000 was recorded for 2010 while $14,000 was recorded for 2009.  Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $51,000 at September 30, 2010. This unrecognized expense is expected to be recognized over the next 29 months based on the vesting periods of the options.

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

   
2010
    2009  
           
Weighted
Average
Exercise
         
Weighted
Average
Exercise
 
   
Options
   
Price
   
Options
   
Price
 
Outstanding at beginning of year
    212,449     $ 11.18       181,916     $ 12.47  
Grants
    47,700       8.90       47,100       6.55  
Exercises
    -       -       -       -  
Forfeitures or expired
    (2,000 )     12.42       (16,567 )     12.25  
Outstanding at September 30,
    258,149     $ 10.75       212,449     $ 8.65  
                                 
Exercisable at September 30,
    165,699               127,630          
Weighted average remaining life of options outstanding
    6.6               7.0          
Weighted average fair value of options granted during the year
  $ 1.41             $ 0.37          

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


 
 
- 20 -


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


NOTE  8– STOCK COMPENSATION EXPENSE - continued

Additional information regarding stock options outstanding and exercisable at September 30, 2010, is provided in the following table:

     
- - - - - - - - Outstanding - - - - - - - -
   
- - - - - - - - Currently Exercisable - - - - - - - -
 
Range of Exercise Prices
   
Number
   
Weighted Average Exercise Price
   
Aggregate Intrinsic Value
   
Number
   
Weighted Average Remaining Contractual Life
   
Weighted Average Exercise Price
   
Aggregate Intrinsic Value
 
                                             
$6.50 to $10.00       131,716     $ 8.00     $ -       52,959       4.5     $ 8.06     $ -  
$10.01 to $12.50       28,333       11.62       -       28,333       4.3       11.62       -  
$12.51 to $15.00       70,600       13.46       -       56,907       6.8       13.59       -  
$15.01 to $17.50       27,500       16.00       -       27,500       5.4       16.00       -  
Outstanding - Sept 30, 2010
      258,149       10.75     $ -       165,699       5.4       11.89     $ -  
                                                           


A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and nine months ended September 30, 2010 and 2009 is presented below:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Basic earnings per share
                       
Income available to common stockholders
  $ 1,800     $ 1,502     $ 5,694     $ 4,086  
Weighted average common shares outstanding
    7,937       6,393       7,937       6,393  
Earnings per share
  $ 0.23     $ 0.23     $ 0.72     $ 0.64  
                                 
Diluted earnings per shares
                               
Income available to common stockholders
  $ 1,800     $ 1,502     $ 5,694     $ 4,086  
Weighted average common shares outstanding
    7,937       6,393       7,937       6,393  
Add dilutive effects of potential additional common stock
    156       -       210       -  
Weighted average common and dilutive potential
         common shares outstanding
    8,093       6,393       8,147       6,393  
Earnings per share assuming dilution
  $ 0.22     $ 0.23     $ 0.70     $ 0.64  
                                 

Stock options for 211,049 and 212,449 shares of common stock were not considered in computing diluted earnings per share for the periods ended September 30, 2010 and 2009 because they were antidilutive.


 
 
- 21 -


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



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

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

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

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

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

Investment Securities:  The fair values for securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using estimates of current market rates for each type of security. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.


.
 
- 22 -


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


NOTE  10 – FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

         
Fair Value Measurements at
 September 30, 2010 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
 (Level 1)
   
Significant Other Observable Inputs
 (Level 2)
   
Significant Unobservable Inputs
 (Level 3)
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 42,974     $ -     $ 42,974     $ -  
U. S. agency CMO’s
    94,162       -       94,162       -  
Total mortgage-backed securities of
   government sponsored entities
    137,136       -       137,136       -  
U. S. government sponsored entity securities
    86,425       -       86,425       -  
Obligations of states and political subdivisions
    10,725       -       10,585       140  
Other securities
    6,686       -       6,686       -  
Total available for sale
  $ 240,972     $ -     $ 240,832     $ 140  


         
Fair Value Measurements at
 December 31, 2009 Using:
 
   
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets
 (Level 1)
   
Significant Other Observable Inputs
 (Level 2)
   
Significant Unobservable Inputs
 (Level 3)
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
  $ 54,482     $ -     $ 54,482     $ -  
U. S. agency CMO’s
    19,560       -       19,560       -  
Total mortgage-backed securities of
   government sponsored entities
    74,042       -       74,042       -  
U. S. Treasury securities
    1,005       -       1,005       -  
U. S. government sponsored entity securities
    150,067       -       150,067       -  
Obligations of states and political subdivisions
    10,247       -       10,107       140  
Other securities
    5,609       -       5,609       -  
Total available for sale
  $ 240,970     $ -     $ 240,830     $ 140  

 
 
- 23 -


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


NOTE  10 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at September 30, 2010 and December 31, 2009 were as follows:

   
September 30, 2010
   
December 31, 2009
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial assets
                       
Cash and due from banks
  $ 89,879     $ 89,879     $ 61,611     $ 61,611  
Federal funds sold
    20,143       20,143       22,985       22,985  
Securities available for sale
    240,972       240,972       240,970       240,970  
Loans held for sale
    1,307       1,307       897       897  
Loans, net
    733,181       735,154       691,564       691,708  
Federal Home Loan Bank and Federal Reserve Bank stock
    7,247       n/a       7,005       n/a  
Interest receivable
    4,299       4,299       4,250       4,250  
                                 
Financial liabilities
                               
Deposits
  $ (976,200 )   $ (978,142 )   $ (913,784 )   $ (917,859 )
Securities sold under agreements to repurchase
    (26,715 )     (26,715 )     (24,600 )     (24,600 )
Federal Home Loan Bank advances
    (10,605 )     (10,765 )     (14,937 )     (15,028 )
Other borrowed funds
    (20,684 )     (22,468 )     (16,027 )     (15,984 )
Interest payable
    (1,029 )     (1,029 )     (1,037 )     (1,037 )
                                 

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

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

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

 
 
- 24 -


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


NOTE  10 – FAIR VALUE - continued

Other real estate owned (OREO):  The fair value of OREO is based on third-party appraisals less cost to sell at the date of foreclosure.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.  Valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell.

Assets and Liabilities Measured on a Non-Recurring Basis

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

         
Fair Value Measurements at September 30, 2010 Using
 
   
Sept 30, 2010
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans
  $ 22,636     $ -     $ -     $ 22,636  
Other real estate owned
    11,083       -       -       11,083  

         
Fair Value Measurements at December 31, 2009 Using
 
   
Dec 31, 2009
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired Loans
  $ 13,215     $ -     $ -     $ 13,215  
Other real estate owned
    9,251       -       -       9,251  

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $24,816,000 at September 30, 2010 with a valuation allowance of $2,180,000 and a carrying amount of $14,494,000 at December 31, 2009 with a valuation allowance of $1,279,000, resulting in a provision for loan losses of $901,000 for the nine months ended September 30, 2010 and a negative provision for loan losses of $41,000 for the three months ended September 30, 2010.

 
 
- 25 -


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


 
On September 10, 2010 Citizens Deposit Bank and Trust (“Citizens”), a wholly-owned subsidiary of Premier completed its purchase of four banking offices from Integra Bank N.A. (“Integra Bank”).  The banking offices are located in Maysville and Mount Olivet, Kentucky and Ripley and Aberdeen, Ohio.  The purchase of the branches was a strategic move to increase Citizens’ presence in its current market area without a significant increase in its operating costs. Citizens paid a $2.4 million deposit premium for the deposit liabilities it assumed and also acquired $17.8 million of branch related loans as well as $34.0 million of additional commercial real estate loans and $10.0 million of other commercial loans selected by Citizens originated from other Integra offices.  The four banking offices were also included in the branch purchase.  The purchase resulted in approximately $1.1 million of goodwill and $2.1 million in core deposit intangible.  The core deposit intangible will be amortized using an accelerated method.

Net assets acquired via the branch purchase is shown in the table below:

Cash and due from banks
  $ 8,936  
Loans, net
    60,372  
Goodwill and other intangible assets
    3,162  
Other assets
    1,787  
Total assets acquired
    74,257  
         
Deposits
    (74,137 )
Other liabilities
    (120 )
Total liabilities assumed