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EX-23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - PREMIER FINANCIAL BANCORP INCexhibit23.htm
EX-21 - SUBSIDIARIES OF REGISTRANT - PREMIER FINANCIAL BANCORP INCexhibit21.htm
EX-32 - CEO & 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-K

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

For the fiscal year ended December 31, 2015

or

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

For the transition period from ___________ to ___________

Commission file number 000-20908

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

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


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 þ     No o.    
 
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015
 
 
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  þ.
Non-accelerated filer  o.
Smaller reporting company  o

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, 2015 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $107,503,139 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 5, 2016
Common Stock without par value
 
9,587,292


DOCUMENTS INCORPORATED BY REFERENCE

Document
 
Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held on June 15, 2016.
 
Part III



PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015

 
TABLE OF CONTENTS
 
PART I
     
Item 1.
   
4
 
Item 1A.
   
21
 
Item 1B.
   
30
 
Item 2.
   
31
 
Item 3.
   
32
 
Item 4.
   
32
 
           
PART II
         
Item 5.
   
33
 
Item 6.
   
36
 
Item 7.
   
37
 
Item 7A.
   
72
 
Item 8.
   
92
 
 
   
93
 
 
   
96
 
   
98
 
 
   
99
 
 
Consolidated Statements of Comprehensive Income    
100
 
 
Consolidated Statements of Changes in Stockholders’ Equity    
101
 
 
Consolidated Statements of Cash Flows
102
 
 
Notes to Consolidated Financial Statements    
104
 
Item 9.
   
166
 
Item 9A.
   
166
 
Item 9B.
   
166
 
           
PART III
         
Item 10.
   
167
 
Item 11.
   
167
 
Item 12.
   
167
 
Item 13.
   
167
 
Item 14.
   
167
 
           
PART IV
         
Item 15.
   
168
 
 
   
173
 
           

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


PART I

Item 1. Description of Business

THE COMPANY

Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a multi-bank holding company that, as of March 5, 2016 operates nine banking offices in Kentucky, three banking offices in Ohio, twenty-six banking offices in West Virginia, four banking offices in Washington, DC, one banking office in Maryland and four banking offices in Virginia. At December 31, 2015, Premier had total consolidated assets of $1,244.7 million, total consolidated deposits of $1,060.2 million and total consolidated shareholders' equity of $147.2 million. The banking subsidiaries (the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank and Trust, Inc., Vanceburg, Kentucky and Premier Bank, Inc., Huntington, West 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. 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 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. 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.  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, 2015


On November 27, 2007, the Company entered into a material definitive agreement with Traders Bankshares, Inc. (Traders), a single bank holding company with $108 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.

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”).  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 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 participated 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. For additional information on Premier’s participation in the TARP program see “Troubled Asset Relief Program Participation” below.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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

On September 10, 2010 Citizens Deposit Bank and Trust, Inc. (“Citizens”) completed its purchase of four banking offices from Integra Bank located in Maysville and Mt. 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 $2.0 million in core deposit intangible.

On September 1, 2010, Premier filed applications with state and federal banking regulatory authorities to merge five of its subsidiary banks together, including Adams National and CB&T, to form Premier Bank, Inc. (“Premier Bank”). On February 28, 2011, Premier received final regulatory approval to move forward with its plans to merge Boone County Bank, headquartered in Madison, West Virginia; First Central Bank, headquartered in Philippi, West Virginia; Traders Bank, Inc., headquartered in Ravenswood, West Virginia; Adams National Bank, headquartered in Washington, DC and Consolidated Bank & Trust, headquartered in Richmond, Virginia. The merger was completed on April 9, 2011. The resulting bank is headquartered in Huntington, West Virginia.

One of the goals achieved by merging the bank charters together was to alleviate the restrictions placed on the Company’s operations by the Written Agreements entered into by Adams National with the OCC and CB&T with the FRB.  With the surrender of the Adams National charter upon consummation of the merger to form Premier Bank, Inc., the Written Agreement with the OCC was terminated.  Similarly, with the merger of CB&T into Premier Bank, Inc., the provisions of the Written Agreement with the FRB that applied to CB&T were concluded.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


On April 19, 2011, Premier submitted a request to the FRB for written approval from the Written Agreement Regulatory Oversight Authorities to declare and pay its quarterly dividend on the 22,252 Series A Preferred Shares to the U.S. Treasury due on May 15, 2011 and the two dividends in arrears due on November 15, 2010 and February 15, 2011, respectively.  On May 13, 2011, Premier received notice of approval from the Written Agreement Regulatory Oversight Authorities to pay all current and deferred cash dividends on its Series A, Fixed Rate Cumulative Perpetual Preferred Stock as Premier had requested.  The dividends were paid as scheduled on May 16, 2011.  All subsequent quarterly dividends on Premier’s Series A Preferred Shares were as scheduled.  See Note 24 for additional details on Premier's Series A, Fixed Rate Cumulative Perpetual Preferred Stock.

On July 24, 2012 the FRB announced that it had terminated the July 29, 2010 Written Agreement with Premier.

With the merger of Adams National and CB&T into Boone County Bank in the formation of Premier Bank, Abigail Adams as a corporate entity was no longer needed. As such, it was merged into Premier on May 16, 2011. Likewise, Premier’s other non-banking subsidiary, Mt. Vernon Financial Holdings, Inc. (“Mt. Vernon”), had completed its purpose by liquidating substantially all of a pool of loans remaining from the sale of the Bank of Mt. Vernon in 2001. In September 2011, any remaining loans owned by Mt. Vernon were contributed as capital to Premier’s subsidiary bank, Citizens Deposit Bank & Trust, and then on September 27, 2011, Mt. Vernon was also merged into Premier.

On May 13, 2010, Premier executed a six-year data processing agreement with Fidelity Information Services, Inc. and its affiliates (“FIS”) located in Jacksonville, Florida. The agreement covers Premier’s core data processing, item processing, internet banking services, network services, customer authentication services and electronic funds transfer services. Planning for the conversion began late in 2010 and continued through the first half of 2011. Beginning in May 2011 and concluding in September 2011, Premier and FIS converted each of the subsidiary (or former subsidiary) bank’s systems to the FIS “Horizon” platform. It was during this process that the data systems of the five subsidiary banks that merged to form Premier Bank, converted and combined into one system. The data processing agreement shall remain in effect until September 30, 2017 and provides for automatic three-year extensions after that date.

On February 16, 2012, Premier filed applications with state and federal banking regulatory authorities to merge three of its subsidiary banks. The application requested permission to merge Ohio River Bank, headquartered in Ironton, Ohio and Farmers Deposit Bank, headquartered in Eminence, Kentucky with and into Premier’s wholly owned subsidiary Citizens Deposit Bank & Trust, headquartered in Vanceburg, Kentucky. In the second quarter of 2012, Premier received the required approvals from all federal and state banking regulatory authorities to go ahead with its plans and as of the close of business on Friday, August 17, 2012, the three banks have been merged together. The combined bank is headquartered in Vanceburg, Kentucky.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


On November 19, 2013, Premier and Gassaway Bancshares, Inc. (“Bancshares”), a single bank holding company headquartered in Gassaway, West Virginia jointly announced that they had entered into a definitive agreement whereby Premier Bank would acquire the Bank of Gassaway, the wholly owned subsidiary of Bancshares, in a cash purchase valued at approximately $20.25 million.  Effective with the close of business on April 4, 2014, Premier completed its purchase of the Bank of Gassaway, a $201.52 million bank headquartered in Gassaway, West Virginia.  Under terms of an amended and restated agreement of merger dated January 3, 2014, Premier Bank, Inc., a wholly owned subsidiary of Premier, paid $20.25 million in cash for the Bank of Gassaway and merged Gassaway’s five branch locations into its operating systems.  The resulting merger expanded Premier Bank’s footprint into central West Virginia along the I-79 corridor.

Recent Corporate Developments

Consummation of Acquisition of First National Bankshares Corporation – Effective with the close of business on January 15, 2016, Premier completed its purchase of First National Bankshares Corporation (“First National”), a $245 million single bank holding company (as of December 31, 2015) headquartered in Ronceverte, West Virginia.  Under terms of the definitive agreement of merger dated July 6, 2015, each share of First National common stock is entitled to merger consideration of 1.69 shares of Premier common stock.  Premier issued approximately 1.4 million shares of its common stock to the shareholders of First National.  In addition to the shares of Premier common stock, First National shareholders also received a regulatorily approved special dividend of $5.08 per share from the equity of First National as part of the acquisition transaction.  The value of the transaction, including the special dividend, is estimated at $26.3 million.  As of December 31, 2015, First National had total assets of $245 million, total loans of $137 million and total deposits of $205 million.  Management has not yet completed all of the analyses needed to estimate the fair value of the assets and liabilities acquired, both tangible and intangible.

Consummation of Internal Corporate Reorganization – Effective with the close of business on March 4, 2016, Premier merged its newly acquired wholly owned subsidiary First National Bank (a wholly owned subsidiary of First National) with and into its wholly owned subsidiary Premier Bank, Inc.  The resulting merger expands Premier Bank’s footprint into the Greenbrier Valley of West Virginia and into Covington, Virginia along Interstate 64 with six branch locations.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


BUSINESS
General

Through the Banks the Company focuses on providing quality community banking services to individuals and small-to-medium sized businesses. 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. Where the Company owns branches in urban areas, such as the Washington, DC Metro Area, the Company believes the nimble nature of its operations and local decision making process allows it to compete effectively with larger financial institution. Each Bank retains its local management structure which offers customers direct access to the Bank's president or regional 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.  Company senior management along with each Bank's management periodically review and standardize their offering of products and services, although pricing decisions remain at the local level.

The Company utilizes an external third party provider for its core data processing systems. As a result, 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. With the conversion to FIS in 2011, all of these benefits remain plus the Company has integrated its automated teller machine network, improved its management reporting systems, adopted an integrated image-based document storage system, and offers mobile banking via smart phones and other hand held computing devices.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015
 
 
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 typically only retain mortgage loans with variable interest rate terms due to the longer amortization periods associated with mortgage lending. For customers who desire fixed rate mortgage terms, the Banks assist customers in originating 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 to medium-sized businesses located primarily in the communities in which the Banks have branch locations 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 were for the revitalization of apartment buildings in and around the Washington, DC metro area, some of which would result in the apartment complex converting into individually owned condominiums. Since the acquisition of Abigail Adams, Premier has worked to reduce these concentrations by providing funding only during the construction phase. The Washington, DC metro area also offers opportunities for larger commercial and commercial real estate loans. These opportunities are subject to Premier’s strict credit underwriting policies and procedures.

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 either via personal computers or mobile computing devices such as smart phones. The Banks also offer bill payment, remote deposits via image capture devices and telephone banking services. Deposits of the Banks are insured by the Deposit Insurance Fund administered by the FDIC to the maximum amounts offered by the FDIC.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Competition

The Banks encounter strong competition both in making loans and attracting deposits. The widespread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking and internet 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 by comparison, each of the Banks' competitors include large bank holding companies having substantially greater resources and offering certain services that the Affiliate 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 regional presidents 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.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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.

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 any nonbank subsidiaries) from the Affiliate Banks and also limits various other transactions between Premier (and any nonbank subsidiaries) and the Affiliate Banks.

Citizens Deposit Bank and Trust, Inc. is chartered in Kentucky and supervised, regulated and examined by the Kentucky Department of Financial Institutions. Premier Bank, Inc. is chartered in West Virginia and supervised, regulated and examined by the West Virginia Division of Financial Institutions. In addition, the Affiliate Banks 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 loan loss 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 and the Affiliate Banks 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.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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.

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 FDIC on the Banks. 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 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 1" capital and "Tier 2" capital. "Tier 1" 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 1 capital. "Tier 2" capital includes, among other items, perpetual preferred stock not meeting the Tier 1 definition, mandatory convertible securities, subordinated debt and allowances for loan and lease losses, subject to certain limitations, less certain required deductions.  Effective January 1 2015, bank and bank holding company regulatory agencies adopted rules defining a subset of Tier 1 capital referred to as “Common Equity Tier 1” capital, or “CET1” capital, in accordance with the Basil III accord.  CET1 capital includes only the common shareholders’ equity of the entity before deducting elements such as goodwill, certain identifiable intangible assets and certain other assets.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Bank holding companies currently are required to maintain CET1 capital, Tier I capital and total capital (the sum of Tier I and Tier II capital) equal to at least 4.5%, 6.0% and 8% of total risk-weighted assets, respectively. At December 31, 2015, Premier met all requirements, with CET1 capital equal to 13.6% of its total risk-weighted assets, Tier I capital equal to 13.6% of its total risk-weighted assets and total capital equal to 14.7% of its total risk-weighted assets.  Prior to 2015, the minimum Tier I capital to total risk-weighted assets ratio was 4.0%.

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, 2015, Premier's leverage ratio was 9.4%.

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.

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.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


New Capital Requirements and Phase-in of Capital Buffer – Beginning on January 1, 2015, the standard for minimum regulatory Tier I risk-based capital ratio the Banks must maintain in order to be considered well capitalized under the regulatory framework for prompt corrective action increased from 6.00% to 8.00%.  As shown in the table in Note 20 to the consolidated financial statements regarding stockholders’ equity, the Tier I risk-based capital ratios of the banks at December 31, 2015 and December 31, 2014 exceed the new standard.  Also beginning on January 1, 2015, a new measure of capital adequacy has been added for the Banks to be considered well capitalized.  The Common Equity Tier 1 Risk-based Capital Ratio, or CET1 Ratio, restricts the capital to be included in the ratio to common shareholders’ equity and requires a minimum ratio of 6.50% of risk-weighted assets for a bank to be considered well capitalized under the regulatory framework for prompt corrective action.  The equity of both of Premier’s subsidiary banks are already 100% common shareholders’ equity and therefore there was no adverse impact from the implementation of the new capital ratio.

Beginning on January 1, 2016 an additional capital conservation buffer will be added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over a four year period from 2016 thru 2019.  When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company. As shown in the table in Note 20 to the consolidated financial statements regarding stockholders’ equity, the capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%.  At this time since the Company and the Affiliate Banks have no other sources of Tier 1 Capital than their common shareholders’ equity, their CET1 Capital to risk weighted asset ratio is equal to the Tier 1 Capital to risk weighted asset ratio which has a higher minimum plus capital buffer threshold than the CET1 Capital to risk weighted asset ratio.

Troubled Asset Relief Program (“TARP”)

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 value equal to 15% of the senior preferred stock at the time of participation.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


In conjunction with the acquisition of Abigail Adams, Premier elected to participate in the TARP Capital Purchase Program and received $22,252,000 of new equity capital from the U.S. Treasury.  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.

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 subjected the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”). In this connection, as a condition to the closing of the transaction, the Company’s Senior Executive Officers (as defined in the Securities Purchase Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the U.S. Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the TARP Capital Purchase Program and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the period the U.S. Treasury owned the Preferred Stock of the Company; and (ii) entered into a letter with the Company amending the Benefit Plans with respect to such Senior Executive Officers as may be necessary, during the period that the Treasury owned the Preferred Stock of the Company, as necessary to comply with Section 111(b) of the EESA as long as any obligation arising from the financial assistance provided to the recipient under the TARP Capital Purchase Program remained outstanding, excluding any period during which the U.S. Treasury holds only warrants to purchase common stock of a TARP participant (the “Covered Period”). These limitations terminated upon completion of the U.S. Treasury’s auction of the Series A Preferred Stock on August 10, 2012.

On July 9, 2012, the U.S. Treasury announced its intent to sell its investment in Premier’s Series A Preferred Stock along with similar investments the U.S. Treasury had made in 11 other financial institutions, principally to qualified institutional buyers.  Using a modified Dutch auction methodology, the U.S. Treasury auctioned all of Premier’s 22,252 Series A Preferred Stock.  Premier sought and obtained regulatory permission to participate in the auction and successfully bid to repurchase 10,252 shares of the 22,252 outstanding shares.  At the auction’s closing price of $901.03 per share, Premier was able to preserve approximately $1.0 million of capital versus redeeming the Series A Preferred Stock at the liquidation preference of $1,000 per share.  The auction concluded on August 10, 2012 with the remaining 12,000 shares of Premier’s Series A Preferred Stock purchased by private investors.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


During 2014 Premier sought and obtained regulatory permission on two separate occasions to redeem the remaining Series A Preferred Stock.  On September 26, 2014, Premier redeemed 7,000 of the 12,000 outstanding shares at the $1,000.00 per share face value.  On November 14, 2014, Premier redeemed the final 5,000 outstanding shares at the $1,000.00 per share face value. Each redemption also included payment for any accrued dividends due through the redemption date.

Under terms of the Warrant, the exercise price and the number of shares that could be purchased were adjusted based upon certain events including common stock dividends paid to shareholders that exceeded the $0.11 per share regular quarterly dividend paid by Premier at the time the Warrant was issued.  Due to dividends paid in 2015 and 2014 that were either special cash dividends or dividends that exceeded the $0.11 regular quarterly cash dividend per share defined in the terms of the Warrant, the Warrant was adjusted to permit the purchase of 636,378 shares of the Company’s common stock at an exercise price of $5.25 per share.  On May 6, 2015, Premier purchased the Warrant from the U.S. Treasury for $5,675,000.  Premier borrowed $4,000,000 on its line of credit with the Bankers Bank of Kentucky and used $1,675,000 of its cash and cash equivalents to complete the purchase.  The purchase reduced shareholders’ equity and regulatory capital by the $5,675,000 purchase price but also reduced the dilutive effect of potential additional common shares.  Additional information regarding the Series A Preferred Shares and the Warrant can be found in Note 23 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, 2015, approximately $1.1 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 20 of the accompanying audited consolidated financial statements.

Prior to the final full redemption on November 15, 2014 of Premier’s Series A Preferred Shares, the dividend rights of holders of Premier’s common shares were also qualified and subject to the dividend rights of holders of Premier’s Series A Preferred Shares. As long as the Series A Preferred Shares remained outstanding, unless all accrued and unpaid dividends for all past dividend periods on the Series A Preferred Shares were fully paid, Premier was 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 was Premier permitted to repurchase or redeem any Common Shares or preferred shares other than the Series A Preferred Shares. As of November 15, 2014, all of the Series A Preferred Shares have been redeemed by Premier.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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.

Dodd-Frank Act - On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law, which implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things,:
 
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


created a new agency to centralize responsibility for consumer financial protection, the Consumer Financial Protection Bureau, which will be responsible for implementing, examining and enforcing compliance with federal consumer financial laws;
 
apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies;

require bank holding companies and banks to be both well capitalized and well managed in order to acquire banks located outside their home state;

change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund and increase the floor of the size for the Deposit Insurance Fund;

impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses within the institution itself;

require large, publicly-traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management;

implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions;

made permanent the $250,000 limit for federal deposit insurance, increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provided unlimited federal deposit insurance for non-interest-bearing demand transaction accounts at all insured depository institutions until December 31, 2012;

repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

amended the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer; and

increased the authority of the Federal Reserve Board to examine financial holding companies and their non-bank subsidiaries.

Some aspects of the Dodd-Frank Act are still subject to future rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on Premier, its customers or the financial services industry as a whole.  In many cases, regulatory or other governmental agencies already have taken action to comply with the Dodd-Frank Act’s mandates.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Number of Employees

The Company and its subsidiaries collectively had approximately 344 full-time equivalent employees as of December 31, 2015. 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, 2015


Item 1A. Risk Factors

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 rising interest rate environment would have a positive impact on Premier’s results of operations, because the Company has more interest bearing assets than interest bearing liabilities and the interest bearing assets will likely reprice at higher rates more quickly than interest-bearing liabilities.

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. Adjustable rate loans that have an interest rate floor feature will exhibit the same characteristics as a fixed rate loan during the period market interest rates are below the floor. During this time and until the time market interest rates rise above the floor, Premier’s exposure to interest rate risk in a rising rate environment is increased because interest-bearing liabilities would be subject to repricing without a change in the interest rate on adjustable rate loans.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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.

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, western 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, Braxton, Calhoun, Clay, Doddridge, Gilmer, Greenbrier, Harrison, Jackson, Kanawha, Lewis, Lincoln, Logan, Monongalia, Roane, Taylor, Upshur, Webster, Wirt and Wood, the southern Ohio counties of Adams, Brown, Gallia, Lawrence and Scioto, the northern Kentucky counties of Boone, Bracken, Campbell, Fleming, Greenup, Henry, Kenton, Lewis, Mason, Robertson and Shelby, the metro Washington DC area including the surrounding portions of northern Virginia and Maryland, the Richmond and Hampton metro areas of south central Virginia, and the Covington and Hot Springs areas of western 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 decline in the general economic conditions caused by inflation or deflation, recession, government intervention or regulation, changes in energy and natural resource markets, international events, 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.

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, 2015


Extensive regulation and supervision

Premier, primarily through the Affiliate 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, maintain comprehensive programs relating to anti-money laundering and customer identification, maintain customer education programs to avoid excessive overdrafting, and establish and maintain comprehensive programs related to cybersecurity. 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 its Affiliate 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”.

Changes in energy and natural resource markets may increase credit risk in the loan portfolio

Premier’s success and growth in lending in the central West Virginia market area depend primarily on the local general economy which has been driven in the past by Federal Government programs to develop technology infrastructure and more recently by the drilling for natural gas in the newly discovered Marcellus and Utica shale formations.  Furthermore, Premier’s success in the southern West Virginia market depends, in large part, on the local general economy which has been driven by significant employment by coal and other natural resource based businesses. While Premier’s direct credit risk exposure to such industries is minimal, the success or failure of these industries may have an indirect effect on the local economic conditions in the central and southern West Virginia market areas, either individually or collectively, thus having a significant impact on Premier’s loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans and could negatively affect the financial results of its banking operations.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Concentration of commercial real estate and commercial business loans may increase credit risk in the loan portfolio

Commercial real estate and commercial business 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 business operations and the income stream of the commercial 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. A significant decline in general economic conditions caused by inflation or deflation, 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 success in the metro Washington, D.C. market area depends primarily on the local general economic conditions in the area and lending to commercial customers. While the sources of economic activity in the metro Washington, D.C. market are diverse, commercial loans in the market area are generally larger in size than in Premier’s other markets due to various factors such as higher real estate values and larger business operations. Also, many of the local borrowers have more than one commercial real estate or commercial business loan outstanding with Premier. Consequently, an adverse development with respect to one loan or one credit relationship can expose Premier to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. 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 and could negatively affect the financial results of Premier’s banking operations.

Allowance for loan losses may be insufficient

Premier, through the Affiliate 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 incurred 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, 2015


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 20 to the consolidated financial statements. During 2016 the Banks could, without prior approval, declare dividends of approximately $1.1 million plus any 2016 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 and preferred shares. The inability of Premier’s subsidiary banks to pay sufficient dividends to Premier could have a material, adverse effect on its business. Further discussion of Premier’s ability to pay dividends can be found under the caption “Regulatory Matters – Dividend Restrictions” in Item 1 of this Form 10-K and Note 20 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, facilities and access to the worldwide web via the internet. 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, denial of service attacks, 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.

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.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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 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, regulations, rules or standards; changes in existing laws, regulations, rules or standards; or repeal of existing laws, regulations, rules or standards 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.

Additional capital may not be available when needed or required by regulatory authorities

Premier and the Affiliate 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.

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 Affiliate 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 borrowing advances. If these depositors were to withdraw these funds and the Affiliate 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, 2015


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 the Affiliate Banks, have historically provided most of the competition for the Affiliate Banks for deposits; however, each Affiliate 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 Affiliate 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 its Affiliate 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 Affiliate 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.

Market volatility may adversely affect market price of common stock or investment security values

The capital and credit markets have experienced volatility and disruption in the past and for periods lasting 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 the decline in the market value of certain security investments and other assets of Premier. If market disruption and volatility should occur, continue or worsen, Premier may experience an adverse effect, which may be material, on results of operations, capital or financial position.

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 FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Integration of current and future acquisitions may be more difficult than anticipated

The success of Premier’s acquisition of the Bank of Gassaway, First National Bankshares Corporation or any future acquisitions 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.

The Company’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 2.5 to 45 basis points of the institution’s assessment base. The assessment base for banks similar to those owned by Premier is defined as the most recent quarterly average total assets of the bank less the quarterly average tangible equity of the bank. Federal law requires that the designated reserve ratio for the deposit insurance fund be established at a minimum of 1.35% of estimated insured deposits. If this reserve ratio drops below 1.35% or if the FDIC expects that it will do so within six months, the FDIC must establish and implement a plan to restore the designated reserve ratio to 1.35% of estimated insured deposits by no later than September 30, 2020.

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 the Affiliate 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 Affiliate Banks they may result in financial liability and/or adversely affect the market perception of the Affiliate 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

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Issuance of Preferred shares would impact net income available to common shareholders

Additional capital Premier may raise through the issuance of Preferred Stock may decrease net income available to common shareholders.  Dividends declared and the accretion of any discount on the issuance of preferred shares reduces the net income available to Premier’s common shareholders and earnings per common share.  Preferred shares also receive preferential treatment in the event of Premier’s liquidation, dissolution or winding up of its operations.

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 shares under Premier’s stock option plans and shares of Premier’s 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.

Unauthorized disclosure of sensitive or confidential customer information could severely harm the Company’s reputation and have a negative effect on results of operations.

In the normal course of business, the Affiliate 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, denial of service attacks, 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.


PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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 not 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 may 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.

Item 1B. Unresolved Staff Comments

None.

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Item 2. Properties

The Company leases its principal executive offices located in Huntington, West Virginia. Except as noted, each of the Banks owns the real property and improvements on which their banking activities are conducted.

Premier Bank, in addition to its main office at 2883 5th Avenue in Huntington, West Virginia has branches at the following locations (including those added via the First National Bank merger):

Branch
Address
Location and Zip Code
Leased/
Owned
                 
Madison
300 State Street
Madison, WV 25130
Owned
Van
Route 85
Van, WV 25206
Owned
West Hamlin
40 Lincoln Plaza
Branchland, WV 25506
Leased
Logan
307 Hudgins Street
Logan, WV 25601
Owned
Buckhannon
14 North Locust Street
Buckhannon, WV 26201
Owned
Bridgeport
25 Oakmont Lane
Bridgeport, WV 26330
Owned
Philippi
2 South Main Street
Philippi, WV 26416
Owned
Gassaway
700 Elk Street
Gassaway, WV 26624
Owned
Flatwoods
3802 Sutton Land
Sutton, WV 26601
Owned
Sutton
373 West Main Street
Sutton, WV 26601
Owned
Clay
2043 Main Street
Clay, WV 25043
Owned
Rock Cave
State Routes 4 & 20
Rock Cave, WV 26234
Leased
Burnsville
316 Walbash Avenue
Burnsville, WV 26335
Leased
Ravenswood
601 Washington Street
Ravenswood, WV 26164
Owned
Ripley South
606 South Church Street
Ripley, WV 25271
Owned
Ripley East
103 Miller Drive
Ripley, WV 25271
Owned
Spencer Main
303 Main Street
Spencer, WV 25276
Owned
Spencer Drive Thru
406 Main Street
Spencer, WV 25276
Owned
Mineral Wells
1397 Elizabeth Pike
Mineral Wells, WV 26150
Owned
Connecticut Avenue
1130 Connecticut Avenue
Washington, DC 20036
Leased
DuPont Circle
1604 17th Street, N.W.
Washington, DC 20009
Leased
K Street
1501 K Street, N.W.
Washington, DC 20006
Leased
NoMa
1160 First Street, NE
Washington, DC 20002
Leased
Chevy Chase
5530 Wisconsin Avenue
Chevy Chase, MD 20815
Leased
Richmond
320 North First Street
Richmond, VA 23219
Owned
Hampton
101 N. Armistead Avenue
Hampton, VA 23669
Owned
Ronceverte
One Cedar Street
Ronceverte, WV
Owned
Lewisburg
799 North Jefferson Street
Lewisburg, WV 24901
Owned
Downtown Lewisburg
1125 East Washington St.
Lewisburg, WV 24901
Owned
White Sulphur Springs
901 East Main Street
White Sulphur Springs, WV
Owned
Covington
151 North Court Avenue
Covington, VA 24426
Owned
Hot Springs
2812 Main Street
Hot Springs, VA 24445
Leased
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Item 2.  Properties – (continued)

Citizens Deposit Bank & Trust, in addition to its main office at 10 Second Street in Vanceburg, Kentucky, has branches at the following locations:

Branch
Address
Location and Zip Code
Leased/
Owned
             
AA Branch
67 Commercial Drive, Suite 3
Vanceburg, KY 41179
Leased
Brooksville
111 Powell Street
Brooksville, KY 41004
Owned
Eminence
5230 South Main Street
Eminence, KY 40019
Owned
Florence
8542 US 42 Highway
Florence KY 41042
Owned
Ft.Wright
3425 Valley Plaza Pkway
Ft. Wright, KY 41017
Owned
Garrison
9234 East KY 8
Garrison, KY 41141
Owned
Maysville
1201 US 68
Maysville, KY 41056
Owned
Mt. Olivet
103-107 South Main Street
Mt. Olivet, KY 41064
Owned
Tollesboro
2954 West KY 10
Tollesboro, KY 41189
Owned
Ironton
221 Railroad Street
Ironton, OH 45638
Owned
Proctorville
7604 County Road 107 Unit A
Proctorville, OH 45669
Leased
Ripley
104 Main Street
Ripley, OH 45167
Owned


Item 3. Legal Proceedings

The Banks are 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.

Item 4. Mine Safety Disclosures

Not Applicable
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
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, 2015, the Company had approximately 1,407 shareholders of record 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
 
2014
           
January 31 Special Dividend
 
$
0.11
         
First Quarter
   
0.12
   
$
14.78
   
$
13.70
 
Second Quarter
   
0.12
     
16.79
     
13.82
 
Third Quarter
   
0.12
     
16.99
     
14.06
 
Fourth Quarter
   
0.13
     
16.75
     
14.25
 
     
0.60
                 
2015
                       
First Quarter
   
0.13
   
$
15.86
   
$
14.46
 
Second Quarter
   
0.13
     
15.76
     
14.51
 
Third Quarter
   
0.15
     
16.46
     
13.80
 
Fourth Quarter
   
0.15
     
16.88
     
14.01
 
     
0.56
                 
                         
2016
                       
First Quarter (through March 5, 2016)
 
$
0.00
   
$
16.72
   
$
14.45
 

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, 2015 approximately $1.1 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, 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, 2015


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, 2010 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.




   
Period Ending
 
Index
 
12/31/10
   
12/31/11
   
12/31/12
   
12/31/13
   
12/31/14
   
12/31/15
 
Premier Financial Bancorp, Inc.
   
100.00
     
68.75
     
172.84
     
234.10
     
268.30
     
293.84
 
Russell 3000
   
100.00
     
101.03
     
117.61
     
157.07
     
176.79
     
177.64
 
SNL $500M-$1B Bank Index
   
100.00
     
91.20
     
112.45
     
163.52
     
170.98
     
191.39
 
*Source: SNL Financial LC, Charlottesville, VA
 
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


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 plans: the 2002 Stock Option Plan and the 2012 Long-term Incentive Plan, as of December 31, 2015.

 
 
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
   
139,468
   
$
10.08
     
0
 
2012 Long-term Incentive Plan
   
109,650
     
13.59
     
359,300
 
Equity compensation plans not approved by shareholders
                       
None
                       
Total
   
249,118
   
$
11.62
     
359,300
 

PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2015


Item 6. Selected Financial Data

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.

(Dollars in thousands, except per share amounts)
 
At or for the Year Ended December 31
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
Earnings
                   
Net interest income
 
$
48,380
   
$
48,414
   
$
43,695
   
$
43,999
   
$
44,208
 
Provision for loan losses
   
326
     
534
     
(375
)
   
4,260
     
3,630
 
Non-interest income
   
7,099
     
6,930
     
7,732
     
9,529
     
6,911
 
Non-interest expense
   
35,804
     
34,490
     
31,169
     
33,272
     
36,521
 
Income taxes
   
6,903
     
7,170
     
7,404
     
5,673
     
3,800
 
Net income
   
12,446
     
13,150
     
13,229
     
10,323
     
7,168
 
Preferred stock dividends, net of redemption discount
   
-
     
598
     
659
     
168
     
1,221
 
Net income available to common shareholders
 
$
12,446
   
$
12,552
   
$
12,570
   
$
10,155
   
$
5,947
 
                                         
Financial Position
                                       
Total assets
 
$
1,244,693
   
$
1,252,824
   
$
1,100,179
   
$
1,120,787
   
$
1,124,087
 
Loans
   
849,746
     
879,711
     
740,770
     
704,625
     
690,923
 
Allowance for loan losses
   
9,647
     
10,347
     
11,027
     
11,488
     
9,795
 
Goodwill and other intangibles
   
35,976
     
36,829
     
31,996
     
32,596
     
33,268
 
Securities
   
255,466
     
229,750
     
218,066
     
283,975
     
278,479
 
Deposits
   
1,060,196
     
1,075,243
     
924,023
     
930,583
     
925,078
 
Other borrowings
   
32,986
     
27,302
     
25,119
     
42,151
     
51,418
 
Preferred equity
   
-
     
-
     
11,955
     
11,896
     
21,949
 
Common equity
   
147,232
     
145,782
     
134,985
     
132,400
     
122,058
 
                                         
Per Common Share Data
                                       
Net income – basic
   
1.52
     
1.55
     
1.57
     
1.28
     
0.75
 
Net income - diluted
   
1.49
     
1.46
     
1.49
     
1.24
     
0.74
 
Book value
   
18.00
     
17.90
     
16.79
     
16.63
     
15.38
 
Tangible book value
   
13.60
     
13.38
     
12.81
     
12.53
     
11.19
 
Cash dividends
   
0.56
     
0.60
     
0.44
     
0.22
     
0.00
 
                                         
Financial Ratios
                                       
Return on average assets
   
0.98
%
   
1.01
%
   
1.13
%
   
0.90
%
   
0.51
%
Return on average common equity
   
8.41
%
   
8.80
%
   
9.29
%
   
7.89
%
   
5.08
%
Dividend payout
   
36.84
%
   
38.71
%
   
28.03
%
   
17.19
%
   
0.00
%
Stockholders’ equity to total assets at period-end
   
11.83
%
   
11.64
%
   
13.36
%
   
12.87
%
   
12.81
%
Average stockholders’ equity to average total assets
   
11.67
%
   
12.29
%
   
13.21
%
   
12.94
%
   
11.98
%
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

INTRODUCTION

Premier Financial Bancorp, Inc. ("Premier” or the “Company”) is a multi-bank holding company headquartered in Huntington, West Virginia.  It operates two community bank subsidiaries, Premier Bank, Inc. (“Premier Bank”), an $849 million bank headquartered in Huntington, West Virginia, and Citizens Deposit Bank and Trust (“Citizens”), a $390 million bank headquartered in Vanceburg, Kentucky, each with a local orientation. The banks operate in thirty-three 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.  On September 10, 2010 Citizens completed its purchase of four banking offices (“Branch Purchase”) from Integra Bank N.A. (“Integra Bank”).  The banking offices are located in Maysville and Mount Olivet, Kentucky and Ripley and Aberdeen, Ohio.   On April 9, 2011, Premier merged five of its subsidiary banks together.  Adams National, CB&T, First Central Bank and Traders Bank, Inc. were merged into Boone County Bank.  The resulting bank moved its headquarters to Huntington, West Virginia and changed its name to Premier Bank, Inc.  On August 17, 2012, Premier merged its three other subsidiary banks together.  Ohio River Bank and Farmers Deposit Bank were merged into Citizens.  On April 4, 2014, Premier completed its purchase of the Bank of Gassaway (“Gassaway”), a $201.5 million bank headquartered in Gassaway, West Virginia with branch offices located in Sutton, Burnsville, Clay and Flatwoods, West Virginia.  As of December 31, 2015, Premier had approximately $1.24 billion in total assets, $850 million in total loans, $1.1 billion in total deposits and $22 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 consulting 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 as the audit committees of the subsidiaries.  In addition, the audit committee of the Board of Directors engages Crowe as independent auditors to render an opinion on management’s assessment
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


of the internal controls of the company. The activities of both the internal and external audit functions are reviewed by the audit committee of the Board of Directors.

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. Their reports are issued to the Board of Directors of the bank under examination.


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, 2015


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. Note 5 to the Consolidated Financial Statements contains a significant level of analysis of the allowance for loan losses.  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 Company’s 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.

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 also known as a negative 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 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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015

 
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 National Bancorp on October 1, 2009, the four branches purchased by Citizens on September 10, 2010, and the purchase of Gassaway on April 4, 2014 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, 2015


SUMMARY FINANCIAL RESULTS

Premier had net income available to common shareholders of $12.446 million in 2015 compared to $12.552 million of net income available to common shareholders in 2014 and $12.570 million of net income available to common shareholders reported for 2013. Net income available to common shareholders remained relatively consistent in 2015 when compared to 2014 results, as a slight decrease in net interest income was more than offset by a decrease in the provision for loan losses while an increase in non-interest income was more than offset by an increase in non-interest expense.  Net income available to common shareholders remained relatively consistent in 2014 when compared to 2013 results as decreases in 2014 pretax income from a lower level of gains on securities transactions, a higher provision for loan losses in 2014 (versus a negative provision for loan losses in 2013) and higher employee benefit costs were substantially offset by the pretax income from the operations of the newly acquired Gassaway locations, overall lower interest expense in 2014 and net gains on the sale of other real estate owned (“OREO”) in 2014 versus net writedowns of OREO in 2013.  Basic earnings per share were $1.52 in 2015 compared to $1.55 in 2014 and $1.57 in 2013.  The slight decrease in basic earnings per share in 2015 is largely due to the decrease in net income and an increase in the average number of shares outstanding in 2015 due to the exercise of employee stock options throughout the year.  The decrease in basic earnings per share in 2014 is also largely due to an increase in average number of shares outstanding in 2014 due to the exercise of employee stock options throughout 2014.  However, as a result of the Company’s 2015 purchase of the common stock Warrant issued to the U.S. Treasury under the TARP program, dilutive effects of potential additional common stock issuances decreased significantly in 2015 and resulted in an increase in diluted earnings per share in 2015.  Diluted earnings per share were $1.49 in 2015 compared to $1.46 in 2014.

The Analysis of Return on Assets and Equity table below comparatively illustrates the components of return on average assets (“ROA”) and return on average common equity (“ROE”) over the previous five years. ROA measures how effectively Premier utilizes its assets to produce net income. It also facilitates the analysis of earnings performance of different sized organizations. Such analysis is particularly useful as Premier increases its operations via acquisition such as the purchase of Gassaway on April 4, 2014. In years 2011, 2012 and 2013, total assets declined slightly from $1,124 million at December 31, 2011 to $1,100 million at December 31, 2013. In 2014, with the acquisition of Gassaway on April 4, 2104, total assets increased to a total of $1,253 million and by the end of 2015 total assets declined slightly to $1,245 million. An 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 available to common shareholders in 2015 resulted in ROA of 0.98%, a decrease from the 1.01% ROA in 2014 and the 1.13% ROA in 2013.  As shown in the following table, fully tax equivalent net interest income (as a percent of average earning assets) reached its highest level during the last five years in 2014 at 4.27%, slightly above the 4.26% net interest income earned in 2013 and the 4.25% net interest income earned in 2012.  In 2015, net interest income decreased to 4.15% of average earning assets as the yield on earning assets decreased by
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


more than the decrease in the rate paid on interest bearing liabilities.  Going back to 2012, net interest income increased to 4.25% of average earnings assets up from the 4.18% earned in 2011, largely due to a continuing decrease in rates paid on deposits while the overall yield on loans held steady at 6.33%. In 2013, the low interest rate environment had a diminishing effect on both the yield on earning assets and the cost of interest bearing liabilities but resulted in a slightly higher net interest margin at 4.26%. In 2014 the continuing low interest rate environment decreased the cost of interest bearing liabilities slightly more than the decrease in the yield on earning assets resulting in a slightly higher net interest margin at 4.27%. Finally, in 2015 the continuing low interest rate environment and the strong competition for good quality loans resulted in a decrease in the yield on earning assets. With only a minor decrease in the cost of interest bearing liabilities, the net interest margin in 2015 decreased to 4.15%.

While net interest income (as a percent of average earning assets) decreased by 12 basis points in 2015 from its highest level during the last five years in 2014 at 4.27%, net credit income (as a percentage of average earning assets) decreased only 10 basis points in 2015 when compared to 2014 due to a lower provision for loan losses recorded during the year.  Net credit income reduces the net interest income earned by the provision for loan losses recorded during the year.  In 2015, the provision for loan losses reduced the net interest margin by 0.03%, decreasing net credit income to 4.12%.  In 2014, the provision for loan losses reduced the net interest margin by 0.05%, decreasing net credit income to 4.22%.  Due to a negative provision for loan losses in 2013, net credit income was higher than the net interest margin by 0.04%, increasing net credit income to 4.30%, the highest level over the five year period presented in the table.

To summarize the Company’s earnings results over the past five years beginning in 2011, net credit income (as a percent of average earning assets) was 3.84%, as the 4.18% net interest income as a percent of average earning assets was reduced by the provision for loan losses. And while Premier’s non-interest income in 2011 (as a percent of average earning assets) was at its highest level over the past five years at 0.65%, the level of non-interest expense (as a percent of average earning assets) was also the highest in the five year comparison at 3.43%, lowering Premier’s return on average assets in 2011. Premier’s applicable income taxes and tax equivalent adjustment also serve to reduce net credit income. Lastly, dividends and accretion accrued on Premier’s Series A Preferred Stock also served to reduce net income available to common shareholders and thus reduce Premier’s ROA. In 2011, preferred stock dividends and accretion totaled 0.11% as a percent of average earning assets. As illustrated in the table, the overall result was a 2011 return on average earning assets of 0.56% and a return on average total assets (ROA) of 0.51%.

In 2012, net interest income (as a percent of average earning assets) increased to 4.25% but an increase in the provision for loan losses (as a percent of average earning assets) reduced net credit income to 3.84% of average earning assets, repeating 2011 as the lowest percentage in the five-year period presented.  Non-interest income (as a percent of average earning assets) dropped slightly in 2012 compared to 2011, but non-interest expenses (as a percent of average earning assets) decreased to 3.19%.  The decrease in non-interest expenses (as a percent of average earning assets) is largely due to lower staff costs, data processing costs, and the elimination of conversioncharges incurred in 2011, partially offset by an increase in expenses related to other real estate owned (“OREO”). 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


Income tax expense (as a percentage of average earning assets) returned to a more normal level in 2012, due to tax benefits realized in 2009, 2010 and 2011 related to deferred tax assets.  Similar to 2011, preferred stock dividends and accretion in 2012 totaled 0.10% as a percent of average earning assets. Dividends and accretion accrued on Premier’s Series A Preferred Stock reduced net income available to common shareholders and thus reduced Premier’s ROA.  Substantially offsetting the reduction in net income available to common shareholders from preferred stock dividends was a discount realized on the redemption of 10,252 shares of Series Preferred Stock purchased during an auction conducted by the U.S. Treasury in July 2012.  Adding to Premier’s net income available to common shareholders in 2012 was 0.29% (as a percentage of average earning assets) of income realized on the early call of two securities during the year plus a gain on the sale of a note on non-accrual status.  As illustrated in the table, the overall result was to increase Premier's 2012 return on average earning assets to 0.97% and increase its return on average total assets (ROA) to 0.90%.

In 2013, net interest income (as a percent of average earnings assets) remained near its highest level, reaching 4.26%. However, in 2013, Premier’s negative provision for loan losses added to net credit income. The negative provision for loan losses increased net credit income as percent of average earning assets to 4.30%, the highest level in the five year period presented. Non-interest income (as a percent of average earning assets) again dropped slightly from the 0.63% reported in 2012 to 0.61% in 2013, the lowest level of the five years presented. More than offsetting this decrease in revenue, non-interest expense (as a percent of average earning assets) decreased from 3.19% in 2012 to 3.02% in 2013, also the lowest level of the five years presented in the table. The decrease in non-interest expenses in 2013 was largely the result of decreases in professional fees, OREO expenses and write-downs, and collection expenses when compared to 2012. Adding to Premier’s net income available to common shareholders in 2013 was 0.14% (as a percentage of average earning assets) of income realized on the call and sale of corporate issued securities held in the Company’s investment portfolio during the year. Income tax expense (as a percentage of average earning assets) increased in 2013 as Premier’s increased earnings performance subjected it to a higher marginal federal income tax rate and a higher amount of state based income taxes. Finally, due to the partial redemption of Premier’s Series A Preferred Stock in 2012, the preferred stock dividends and accretion on the remaining 12,000 shares in 2013 totaled only 0.06% as a percent of average earning assets, compared to 0.10% in 2012 and 0.11% in 2011. Dividends and accretion accrued on Premier’s Series A Preferred Stock reduce net income available to common shareholders and thus reduce Premier’s ROA. As illustrated in the table, the overall result was to increase Premier's 2013 return on average earning assets to 1.22% and increase its return on average total assets (ROA) to 1.13%, the highest level for both ratios over the five year period presented in the table.

In 2014, net interest income (as a percent of average earnings assets) reached its highest level over the past five years at 4.27%.  However, in 2014, Premier’s provision for loan losses (as a percent of average earning assets) reduced net credit income to 4.22% of average earning assets.  Non-interest income (as a percent of average earning assets) remained unchanged at 0.61% in 2014, as Premier’s non-interest income grew in proportion to the increase in average earning assets largely as a result of the purchase of Gassaway in April 2014. Similarly, non-interest expense (as a percent of average earning assets) remained relatively unchanged in 2014 when compared to 2013, increasing only slightly to 3.03% of average earning assets.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


Again, the increase in non-interest expense was proportional to the increase in average earning assets, both of which were largely the result of the purchase of Gassaway, but also as a result of a decrease in OREO expenses and write-downs, loan collection expenses and professional fees, only partially offset by an increase in employee benefit costs.  Unlike 2012 and 2013, there was no measurable amount (as a percent of average earning assets) of income realized on the call and sale of corporate issued securities held in the Company’s investment portfolio during 2014.  Income tax expense (as a percentage of average earning assets) decreased in 2014 to 0.63% as Premier’s slight decrease in earnings performance, higher realization of deferred tax benefits and higher level of tax exempt investment income reduced the marginal federal income tax rate and amount of state based income taxes.  Finally, due to the partial redemption of Premier’s Series A Preferred Stock in 2012, as well as the full redemption of the final 12,000 shares by November 14, 2014 and the increase in average earning assets from the purchase of Gassaway, the preferred stock dividends and accretion on the outstanding shares in 2014 totaled only 0.05% as a percent of average earning assets, compared to 0.06% in 2013 and 0.10% in 2012.  Dividends and accretion accrued on Premier’s Series A Preferred Stock reduce net income available to common shareholders and thus reduce Premier’s ROA.  As illustrated in the table below, the overall result was to decrease Premier's 2014 return on average earning assets to 1.10% and decrease its return on average total assets (ROA) to 1.01%.

In 2015, net interest income (as a percent of average earnings assets) decreased to 4.15%, largely due to a decrease in yields earned on the loan portfolio.  The provision for loan losses in 2015 (as a percent of average earning assets) reduced net credit income to 4.12% of average earning assets.  Non-interest income (as a percent of average earning assets) remained unchanged at 0.61% in 2015, as Premier’s non-interest income remained the same in proportion to its total average earning assets in 2015.  Similarly, non-interest expense (as a percent of average earning assets) remained relatively unchanged in 2015 when compared to 2014, increasing only slightly to 3.05% of average earning assets.  Again, the amount of non-interest expenses in 2015 was proportional to total average earning assets in 2015.  Similar to 2014, but unlike 2012 and 2013, there was no measurable amount (as a percent of average earning assets) of income realized on the call and sale of corporate issued securities held in the Company’s investment portfolio during 2015.  Income tax expense (as a percentage of average earning assets) decreased in 2015 to 0.59% as Premier’s slight decrease in earnings performance and higher level of tax exempt investment income reduced the level of income tax expense relative to average earning assets.  Finally, due to the full redemption of the final 12,000 of Premier’s Series A Preferred shares by November 14, 2014, there was no reduction in net income available to common shareholders related to preferred stock dividends and accretion. As illustrated in the table below, the overall result was to decrease Premier's 2015 return on average earning assets slightly to 1.06%, compared to 1.10% in 2014, and decrease its return on average total assets (ROA) to 0.98% compared to 1.01% in 2014.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


ANALYSIS of RETURN ON ASSETS and EQUITY
 
                     
   
2015
   
2014
   
2013
   
2012
   
2011
 
As a percent of average earning assets
                   
Fully taxable-equivalent net interest income
   
4.15
%
   
4.27
%
   
4.26
%
   
4.25
%
   
4.18
%
Provision for loan losses
   
(0.03
)
   
(0.05
)
   
0.04
     
(0.41
)
   
(0.34
)
Net credit income
   
4.12
     
4.22
     
4.30
     
3.84
     
3.84
 
Gains on sales of assets
   
0.00
     
0.00
     
0.14
     
0.29
     
0.00
 
Non-interest income
   
0.61
     
0.61
     
0.61
     
0.63
     
0.65
 
Non-interest expense
   
(3.05
)
   
(3.03
)
   
(3.02
)
   
(3.19
)
   
(3.43
)
Tax equivalent adjustment
   
(0.03
)
   
(0.02
)
   
(0.02
)
   
(0.02
)
   
(0.03
)
Applicable income taxes
   
(0.59
)
   
(0.63
)
   
(0.72
)
   
(0.54
)
   
(0.36
)
Discount on redemption of preferred stock
   
0.00
     
0.00
     
0.00
     
0.09
     
0.00
 
Preferred stock dividends
   
0.00
     
(0.05
)
   
(0.06
)
   
(0.10
)
   
(0.11
)
Return on average earning assets
   
1.06
%
   
1.10
%
   
1.22
%
   
0.97
%
   
0.56
%
Multiplied by average earning assets to average total assets
   
92.45
     
92.02
     
92.43
     
91.91
     
91.89
 
Return on average assets
   
0.98
%
   
1.01
%
   
1.13
%
   
0.90
%
   
0.51
%
Multiplied by average assets to average common stockholders’ equity
   
8.57
X
   
8.67
X
   
8.24
X
   
8.81
X
   
9.91
X
Return on average common equity
   
8.41
%
   
8.80
%
   
9.29
%
   
7.89
%
   
5.08
%

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 2015 ROE was 8.41% compared to 8.80% in 2014 and 9.29% in 2013.  ROE decreased in 2015 due to lower ROA in 2015 compared to 2014, and an increase in common stockholder’s equity as a percentage of total assets which reduced the multiple of average assets to average common equity in 2015.  Similarly, ROE decreased in 2014 due to lower ROA in 2014 compared to 2013.  However, ROE was improved by a higher multiple of average assets to average common equity in 2014 as Premier purchased Gassaway with existing liquid assets on hand and did not issue any additional equity in the transaction.  ROE increased in 2013 largely due to the higher ROA reported in 2013 but was tempered by the lower multiple of average assets to average common equity in 2013 when compared to 2012.

As a result of the proportional increase in total non-interest income and total non-interest expense relative to the increase in average earning assets resulting from the purchase of Gassaway in 2014, Premier’s net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) remained relatively unchanged in 2014 when compared to 2013.  Premier’s net overhead ratio was 2.42% in 2014, compared to 2.41% in 2013 (the lowest level reported in the last five years).  Similarly in 2015, total non-interest income and total non-interest expense remained relatively proportional to average earning assets.  As a result, Premier’s net overhead ratio was 2.44% in 2015, compared to 2.42% in 2014 and 2.41% in 2013.  These ratios compare favorably to the 2.56% net overhead ratio in 2012 and the 2.78% ratio reported in 2011.  The decrease in the 2012 net overhead ratio from that reported in 2011 was largely the result of lower operating expenses, primarily staff costs, data processing costs and the costs incurred in 2011 related to converting to a different data processing provider.  These expense reductions were partially offset by an increase in OREO expenses in 2012.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


The decrease in the 2013 net overhead ratio was largely the result of lower operating expenses, primarily occupancy and equipment expenses, professional fees, OREO expenses and write-downs, and collection expenses in 2013 when compared to 2012. In 2014, while both non-interest expenses and non-interest income increased largely due to the addition of the Gassaway operations beginning in April 2014, the net amount of overhead expenses increased in relative proportion to the increase in the average earning assets of the Company in 2014, resulting in a similar net overhead ratio when compared to 2013. In 2015, while total non-interest income increased by 2.9%, total non-interest expense increased by 3.8% resulting in a slightly higher net overhead ratio in 2015.

A breakdown of Premier's financial results by quarter for the years ended December 31, 2015 and 2014 is summarized below.

QUARTERLY FINANCIAL INFORMATION
 
(Dollars in thousands, except per share amounts)
 
   
First
   
Second
   
Third
   
Fourth
   
Full Year
 
2015
                   
Interest income
 
$
13,013
   
$
12,955
   
$
13,782
   
$
12,661
   
$
52,411
 
Interest expense
   
1,049
     
1,032
     
999
     
951
     
4,031
 
Net interest income
   
11,964
     
11,923
     
12,783
     
11,710
     
48,380
 
Provision for loan losses
   
69
     
(146
)
   
309
     
94
     
326
 
Gain on investment securities
   
-
     
-
     
-
     
-
     
-
 
Net overhead
   
7,087
     
7,202
     
7,284
     
7,132
     
28,705
 
Income before income taxes
   
4,808
     
4,867
     
5,190
     
4,484
     
19,349
 
Net income
   
3,142
     
3,092
     
3,325
     
2,887
     
12,446
 
Dividends and accretion on preferred stock
   
-
     
-
     
-
     
-
     
-
 
Net income available to common stockholders
   
3,142
     
3,092
     
3,325
     
2,887
     
12,446
 
Basic net income per share
   
0.39
     
0.38
     
0.41
     
0.35
     
1.52
 
Diluted net income per share
   
0.36
     
0.37
     
0.40
     
0.35
     
1.49
 
Dividends paid per share
   
*0.13
     
0.13
     
0.15
     
0.15
     
0.56
 
                                         
2014
                                       
Interest income
 
$
13,045
   
$
12,789
   
$
13,526
   
$
13,390
   
$
52,750
 
Interest expense
   
1,038
     
1,113
     
1,100
     
1,085
     
4,336
 
Net interest income
   
12,007
     
11,676
     
12,426
     
12,305
     
48,414
 
Provision for loan losses
   
(310
)
   
(79
)
   
536
     
387
     
534
 
Gain on investment securities
   
-
     
-
     
28
     
1
     
29
 
Net overhead
   
6,648
     
6,931
     
6,998
     
7,012
     
27,589
 
Income before income taxes
   
5,669
     
4,824
     
4,920
     
4,907
     
20,320
 
Net income
   
3,670
     
3,100
     
3,151
     
3,229
     
13,150
 
Dividends and accretion on preferred stock
   
165
     
165
     
205
     
63
     
598
 
Net income available to common stockholders
   
3,505
     
2,935
     
2,946
     
3,166
     
12,552
 
Basic net income per share
   
0.44
     
0.36
     
0.36
     
0.39
     
1.55
 
Diluted net income per share
   
0.41
     
0.34
     
0.34
     
0.37
     
1.46
 
Dividends paid per share
   
*0.23
     
0.12
     
0.12
     
0.13
     
0.60
 
                                         
* First quarter 2014 dividends paid per share include a special $0.11 per share dividend paid in January 2014 in addition to the $0.12 per share regular quarterly dividend paid in March 2014.
 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


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, 2015, is provided in the table below.

In 2015, average earning assets increased by 3.0% or $34.0 million from 2014, following a 10.5% or $108.2 million increase in 2014 from 2013. Average interest-bearing liabilities, the primary source of funds supporting the earning assets, increased by 1.7%, or $13.8 million, in 2015 from 2014, which follows a 9.2%, or $70.5 million, increase in 2014 from 2013.  Although there was an increase in average earning assets and an increase in average interest-bearing liabilities, 2015 net interest income was less than in 2014.  The decrease was due in part to a higher amount of deferred interest income and loan purchase discounts recognized on loans paid off during 2014 versus 2015.  Net interest income (as a percentage of average earning assets) in 2015 was 4.15% compared to 4.27% in 2014.   In 2015, the increase in average earning assets, average interest-bearing liabilities and average non-interest bearing deposits was largely the result of the full year inclusion of the assets and liabilities acquired from purchase of Gassaway on April 4, 2014.  The assets, liabilities and operations of Gassaway are only included in the financial results of Premier from the date of acquisition.  In 2014, the Gassaway operations were included only during nine months of the year.  Additional information on the purchase of Gassaway is contained throughout this discussion and in Note 2 to the Consolidated Financial Statements.

The increase in average earning assets in 2015 was primarily the result of a $45.4 increase in average loans outstanding, a $4.5 million increase in average interest-bearing bank balances, and a $2.4 million increase in average federal funds sold.  These increases in earning assets were partially offset by an $18.3 million decrease in average investment securities. The increase in average interest-bearing liabilities in 2015 was largely due to an $11.5 million increase in average interest-bearing deposits and a $3.3 million increase in average short-term borrowings (primarily customer repurchase agreements) partially offset by a $1.0 million decrease in average long-term borrowings. In 2014, the increase in average earning assets was primarily the result of a $105.1 increase in average loans outstanding, a $9.3 million increase in average interest-bearing bank balances, and a $1.9 million increase in average federal funds sold.  These increases in earning assets were partially offset by an $8.2 million decrease in average investment securities.  The increase in average interest-bearing liabilities in 2014 was largely due to a $73.7 million increase in average interest-bearing deposits partially offset by a $1.1 million decrease in average short-term borrowings (primarily customer repurchase agreements), and a $2.0 million decrease in average long-term borrowings.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
 
(Dollars in thousands)
 
   
2015
   
2014
   
2013
 
   
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
$
15,345
$
221
1.44
%
$
27,031
$
269
1.00
%
$
9,463
$
167
1.76
%
States and municipal obligations (1)
   
7,879
   
314
   
3.99
     
8,053
   
324
   
4.02
     
5,222
   
235
   
4.50
 
Mortgage backed securities
   
205,423
   
4,438
   
2.16
     
211,032
   
4,889
   
2.32
     
237,079
   
5,481
   
2.31
 
Other securities
   
4,828
   
207
   
4.29
     
5,661
   
219
   
3.87
     
8,233
   
324
   
3.94
 
Total investment securities
   
233,475
   
5,180
   
2.22
     
251,777
   
5,701
   
2.26
     
259,997
   
6,207
   
2.39
 
Federal funds sold
   
13,216
   
17
   
0.13
     
10,818
   
13
   
0.12
     
8,918
   
9
   
0.10
 
Interest-bearing deposits with banks
   
59,586
   
186
   
0.31
     
55,074
   
172
   
0.31
     
45,746
   
148
   
0.32
 
Loans, net of unearned income (3)(4)
                                                           
Commercial
   
593,986
   
31,637
   
5.33
     
566,785
   
32,199
   
5.68
     
511,764
   
30,006
   
5.86
 
Real estate mortgage
   
237,889
   
12,886
   
5.42
     
219,616
   
12,136
   
5.53
     
174,710
   
10,008
   
5.73
 
Installment
   
34,681
   
2,785
   
8.03
     
34,759
   
2,788
   
8.02
     
29,542
   
2,310
   
7.82
 
Total loans
   
866,556
   
47,308
   
5.46
     
821,160
   
47,123
   
5.74
     
716,016
   
42,324
   
5.91
 
Total interest earning assets
   
1,172,833
   
52,691
   
4.49
     
1,138,829
   
53,009
   
4.65
     
1,030,677
   
48,688
   
4.72
 
Allowance for loan losses
   
(10,309
)
               
(10,269
)
               
(12,211
)
           
Cash and due from banks
   
32,446
                 
32,085
                 
26,839
             
Premises and equipment
   
20,278
                 
20,403
                 
16,117
             
Other assets
   
53,342
                 
56,490
                 
53,697
             
Total assets
 
$
1,268,590
               
$
1,237,538
               
$
1,115,119
             
                                                             
Liabilities and Equity:
                                                           
Interest bearing liabilities
                                                           
NOW and money market
 
$
300,378
   
527
   
0.18
%
 
$
290,551
   
516
   
0.18
%
 
$
262,320
   
470
   
0.18
%
Savings deposits
   
168,374
   
178
   
0.11
     
156,572
   
176
   
0.11
     
128,005
   
138
   
0.11
 
Certificates of deposit and other time deposits
   
350,829
   
2,777
   
0.79
     
360,922
   
3,046
   
0.84
     
344,070
   
3,480
   
1.01
 
Total interest bearing deposits
   
819,581
   
3,482
   
0.42
     
808,045
   
3,738
   
0.46
     
734,395
   
4,088
   
0.56
 
Short-term borrowings
   
16,958
   
38
   
0.22
     
13,686
   
34
   
0.25
     
14,832
   
37
   
0.25
 
Other borrowings
   
11,919
   
511
   
4.29
     
12,908
   
564
   
4.37
     
14,935
   
650
   
4.35
 
Total interest-bearing liabilities
   
848,458
   
4,031
   
0.48
%
   
834,639
   
4,336
   
0.52
%
   
764,162
   
4,775
   
0.62
%
Non-interest bearing deposits
   
267,318
                 
245,075
                 
199,574
             
Other liabilities
   
4,805
                 
5,704
                 
4,092
             
Preferred equity
   
-
                 
9,432
                 
11,924
             
Common equity
   
148,009
                 
142,688
                 
135,367
             
Total liabilities and equity
 
$
1,268,590
               
$
1,237,538
               
$
1,115,119
             
                                                             
Net interest earnings (1)
       
$
48,660
               
$
48,673
               
$
43,913
       
Net interest spread (1)
               
4.01
%
               
4.13
%
               
4.10
%
Net interest margin (1)
               
4.15
%
               
4.27
%
               
4.26
%
                                                             
(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, 2015


Loan Portfolio

Premier’s loan portfolio is its largest and highest yielding component of average earning assets, totaling 73.9% of average earning assets during 2015. Average loans increased in 2015 by $45.4 million, or 5.5%, over 2014 following a $105.1 million, or 14.7%, increase in 2014 over 2013.  The increase in 2015 is due in part to the full year inclusion of the loans added from the purchase of Gassaway.  Otherwise, average loans increased largely due to a pick-up in loan demand in the latter part 2014 and first part of 2015 which elevated the average in 2015, even though total loans outstanding decreased at December 31, 2015 compared to December 31, 2014.  Average loans outstanding increased by $36.1 million, or 10.4%, in Premier’s West Virginia market due in part to the full year inclusion of the loans added from the purchase of Gassaway.   Otherwise, average loans increased largely due to continued loan demand primarily in central West Virginia fueled by economic activity related to the natural gas industry. Average loans outstanding decreased by $3.2 million, or 1.6%, in Premier’s DC Metro market but increased by $2.5 million, or 5.2%, in Premier’s Virginia market. Average loans outstanding also increased by $1.5 million, or 2.5%, in Premier’s Ohio market and increased by $8.6 million, or 5.0%, in Premier’s Kentucky market. The $105.1 million increase in average loans during 2014 is largely due to the purchase of Gassaway, which added approximately $70.6 million in average loans outstanding during 2014.  Otherwise, average loans increased by $34.5 million, or 4.8%, largely due to a pick-up in loan demand which more than offset loan principal payments, payoffs from borrowers accelerating their payments to reduce their outstanding debt, and also payoffs due to the workout of problem loans. Average loans outstanding increased by $69.0 million, or 24.9%, in Premier’s West Virginia market due to the purchase of Gassaway which added approximately $70.6 million in average total loans in 2014. Without the purchase of Gassaway, average loans outstanding in Premier’s West Virginia markets decreased by $1.6 million, or 0.6%. Average loans outstanding increased by $19.7 million, or 11.2%, in Premier’s DC Metro market and increased by $6.1 million, or 14.6%, in Premier’s Virginia market. Average loans outstanding also increased by $2.5 million, or 4.3%, in Premier’s Ohio market and increased by $7.9 million, or 4.8%, in Premier’s Kentucky market.

Total loans at December 31, 2015 decreased by $30.0 million, or 3.4%, from the total at December 31, 2014.  This decrease follows a $138.9 million, or 18.8%, increase from the total at December 31, 2013.  The decrease in 2015 is largely due to an increased level of loan payoffs in Premier’s DC Metro market and central West Virginia market primarily during the third quarter. A portion of Premier’s lending includes commercial construction projects whereby, once the construction is complete the borrower seeks permanent mortgage financing elsewhere, usually for longer fixed rate terms at lower interest rates than Premier offers.  Outstanding loans decreased in Premier’s West Virginia markets by $3.1 million, or 0.8%, decreased in Premier’s Washington DC Metro market by $17.0 million, or 8.3%, decreased in Premier’s Kentucky markets by $3.3 million, or 1.8%, decreased in Premier’s Virginia markets by $6.6 million, or 13.0%, and decreased in Premier’s Ohio market by $433,000, or 0.7%, since year-end 2014.  The increase in 2014 is largely due to increases in outstanding loans in Premier’s DC Metro market, up $6.5 million, or 32.7%, its Virginia market, up $6.5 million, or 14.7%, its Kentucky market, up $13.0 million, or 7.7%, its Ohio market, up $2.9 million, or 5.0%, and its West Virginia market, up $110.0 million, or 40.5% mainly due to the acquired loans via the purchase of Gassaway.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


Loans secured by real estate totaled 87.0% of Premier’s loan portfolio at December 31, 2015, up from 85.2% of total loans at December 31, 2014.  The increase is largely due to an increase in residential real estate loans and real estate construction and land development loans.  These increases more than offset a decrease in commercial real estate loans as a percentage of the total loan portfolio. While outstanding commercial real estate secured loans decreased $29.9 million in 2015, their percentage of the total loan portfolio decreased slightly from 46.0% at the end of 2014 to 44.1% at the end of 2015. In 2014, loans secured by real estate increased from 83.9% of Premier’s total loan portfolio at December 31, 2013 to 85.2% at December 31, 2014, largely due to an increase in residential real estate loans and real estate construction and land development as a percentage of the total loan portfolio.  The increase in the percentage of residential real estate and real estate construction and land development loans at December 31, 2014 more than offset a decrease in commercial real estate secured loans as a percentage of the total loan portfolio.

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.  The loan portfolio acquired via the purchase of Gassaway consisted of approximately $63.2 million of residential real estate mortgage loans, or 65.6% of the Gassaway’s total loan portfolio, which consisted primarily of fixed rate residential mortgages with maturity periods ranging from two to fifteen years.  In the past, Premier has originated mortgage loans for sale 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 used 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.   Significantly increased required documentation from home buyers, has complicated the process in comparison to years past.  The perceived difficultly from the home buyer’s perspective has had a negative impact on Premier’s secondary market business.  Beginning in April 2015, as a cost saving measure, management exited the underwriting process but still facilitates fixed rate mortgages sold in the secondary market via third party vendors whereby Premier receives a portion of the commission.  Premier has not engaged in the solicitation of so-called “sub-prime” or “interest only” mortgages. 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.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


Commercial loans, including commercial real estate secured 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 plans. 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.

In addition to the loans presented in the loan summary table, Premier also offers certain off-balance sheet products such as letters of credit, revolving credit agreements, and other loan commitments. These products are offered under the same credit standards as the loan portfolio and are included in the risk-based capital ratios used by the Federal Reserve to evaluate capital adequacy. Additional information on off-balance sheet commitments is contained in Note 18 to the consolidated financial statements.

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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


LOAN SUMMARY
 
(Dollars in thousands)
 
   
As of December 31
 
   
2015
 
%
   
2014
 
%
   
2013
 
%
   
2012
 
%
   
2011
 
%
 
Summary of Loans by Type
                             
Commercial, secured by real estate
 
$
374,558
 
44.1
%
 
$
404,430
 
46.0
%
 
$
358,114
 
48.3
%
 
$
314,198
 
44.6
%
 
$
317,559
 
46.0
%
Commercial, other
   
68,339
 
8.0
     
85,943
 
9.8
     
85,301
 
11.5
     
84,430
 
12.0
     
76,960
 
11.1
 
Real estate construction and land development
   
78,695
 
9.3
     
66,689
 
7.6
     
47,123
 
6.4
     
52,706
 
7.5
     
34,730
 
5.0
 
Real estate mortgage
   
285,826
 
33.6
     
278,212
 
31.6
     
216,081
 
29.2
     
214,743
 
30.5
     
221,756
 
32.1
 
Agricultural
   
1,728
 
0.2
     
1,987
 
0.2
     
2,052
 
0.3
     
2,566
 
0.4
     
2,729
 
0.4
 
Consumer
   
31,445
 
3.7
     
32,745
 
3.7
     
25,113
 
3.4
     
28,128
 
4.0
     
30,090
 
4.4
 
Other
   
9,155
 
1.1
     
9,705
 
1.1
     
6,986
 
0.9
     
7,854
 
1.0
     
7,099
 
1.0
 
Total loans
 
$
849,746
 
100.0
%
 
$
879,711
 
100.0
%
 
$
740,770
 
100.0
%
 
$
704,625
 
100.0
%
 
$
690,923
 
100.0
%
                                                             
Non-performing Assets
                                                           
Non-accrual loans
 
$
7,141
       
$
12,712
       
$
16,641
       
$
25,806
       
$
42,354
     
Accruing loans which are contractually past due 90 days or more
   
3,032
         
1,266
         
8,478
         
3,890
         
4,527
     
Accruing troubled debt restructurings
   
4,003
         
2,502
         
3,655
         
14,106
         
5,951
     
Total non-performing and restructured loans
   
14,176
         
16,480
         
28,774
         
43,802
         
52,832
     
Other real estate acquired through foreclosures
   
13,040
         
12,208
         
13,524
         
13,366
         
14,642
     
Total non-performing and restructured loans and other real estate
 
$
27,216
       
$
28,688
       
$
42,298
       
$
57,168
       
$
67,474
     
                                                             
Non-performing and restructured loans as a % of total loans
   
1.67
%
       
1.87
%
       
3.88
%
       
6.22
%
       
7.65
%
   
Non-performing and restructured loans and other real estate as a % of total  assets
   
2.19
%
       
2.29
%
       
3.84
%
       
5.10
%
       
6.00
%
   
                                                             
Allocation of Allowance for Loan Losses
                                                           
Commercial, other
 
$
1,178
 
9.3
%
 
$
1,727
 
11.1
%
 
$
2,420
 
12.7
%
 
$
3,918
 
13.4
%
 
$
2,669
 
12.5
%
Real estate, construction
   
1,049
 
9.3
     
1,617
 
7.6
     
1,226
 
6.4
     
1,826
 
7.5
     
1,111
 
5.0
 
Real estate, other
   
7,113
 
77.7
     
6,760
 
77.6
     
7,084
 
77.5
     
5,499
 
75.1
     
5,717
 
78.1
 
Consumer installment
   
307
 
3.7
     
243
 
3.7
     
297
 
3.4
     
245
 
4.0
     
298
 
4.4
 
Total
 
$
9,647
 
100.0
%
 
$
10,347
 
100.0
%
 
$
11,027
 
100.0
%
 
$
11,488
 
100.0
%
 
$
9,795
 
100.0
%
                                                             
 
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


Total non-performing assets, which consist of past-due loans on which interest is not being accrued (“non-accrual loans”), foreclosed properties in the process of liquidation ("OREO"), loans with restructured terms offering a concession to enable a delinquent borrower to repay (‘troubled debt restructurings”) and accruing loans past due 90 days or more, were $27.2 million, or 2.19% of total assets at year-end 2015. These amounts compare to $28.7 million of total non-performing assets, or 2.29% of total assets at year-end 2014 and $42.3 million of total non-performing assets, or 3.84% of total assets at year-end 2013. The $1.5 million, or 5.1%, decrease in non-performing assets in 2015 from year-end 2014 was largely due to a $5.6 million decrease in non-accrual loans.  The decrease in non-accrual loans was largely due to payments and payoffs received on non-accrual loans during the year and approximately $5.8 million of loans foreclosed upon and added to OREO.  The decrease in non-accrual loans was partially offset by an increase of $1.8 million in loans past due 90 days or more, an increase of $1.5 million in accruing trouble debt restructured loans and an increase of $832,000 in other real estate acquired through foreclosure.  The increase in loans past due 90 days or more was largely due to efforts by management to bring these well-collateralized borrowers to a current status prior to the commencement of collection efforts via foreclosure or other means, with the result of many borrowers returning to a current status. The increase in accruing troubled debt restructured loans in 2015 was the result of one loan for which the Bank granted a forbearance agreement.  The 2015 increase in other real estate acquired through foreclosure was mainly due to foreclosing on non-accrual loans that no longer could perform to their loan agreement. The increase in OREO was largely due the $5.8 million of foreclosed loans and a $760,000 branch property marketed for sale and sold during the year.  These additions during the year were partially offset by sales of approximately $4.6 million and writedowns of carrying values of another $1.1 million.  Although loans may be classified as non-performing, some continue to pay interest irregularly or at less than originally contracted terms.  During 2015, approximately $686,000 of interest income was recognized on non-accrual and restructured loans, including approximately $328,000 of accelerated purchase discount recognized as income, largely due to full payoffs received on non-accrual loans during the year.  This amount compares to approximately $0.8 million that would have been recognized in accordance with the original terms of the loans, which also includes the approximately $328,000 of accelerated purchase discount from full loan payoffs.

The decrease in total non-performing assets in 2014 from year-end 2013 was largely due to a $3.9 million decrease in non-accrual loans and a $7.2 million decrease in loans past due 90 days or more.  The decrease in non-accrual loans was largely due to payments and payoffs received on non-accrual loans during the year with approximately $1.7 million of loans foreclosed upon and added to OREO.  The decrease in loans past due 90 days or more was due to a concerted effort to either bring these borrowers to a current status or begin collection efforts via foreclosure or other means, with the result of most borrowers returning to a current status.  Also contributing to the reduction in non-performing assets at year-end 2014 was a $1.3 million decrease in OREO and a $1.1 million decrease in troubled debt restructurings.  The decrease in troubled debt restructurings in 2014 was largely due to payments and payoffs received on the loans as no additional loans were classified as troubled debt restructurings in 2014.  The decrease in OREO was largely due to sales of approximately $2.6 million of properties during the year yielding approximately $3.9 million of sale proceeds and writedowns of carrying values of another $588,000.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


With the acquisition of Abigail Adams and its two subsidiary banks in 2009, Premier experienced a significant increase in nonperforming assets.  As shown in the table above, Premier has worked over the past six years to reduce its level of non-performing assets, primarily those from the Abigail Adams acquisition.  However, since these assets were recorded at an estimated fair value on the date of acquisition, the amount of credit risk assumed by Premier was not as great as the volume of non-performing assets suggests taken at face value.  New (at the time) accounting guidance adopted by Premier at the beginning of 2009 does not permit an acquirer to carry over the purchased entity’s allowance for loan losses.  Instead, under the accounting guidance, all acquired loans are to be recorded at their net estimated fair value.  The estimate of fair value on all loans, but particularly on non-performing assets, included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants.  These estimates included significant discounts on the non-accrual loans.  These estimates required management's most difficult, subjective and complex judgments and are inherently uncertain.  However, since the estimated fair value of these loans was believed to have been accounted for in the reasonably estimable credit risk in the loans, no allowance for loan losses for these loans was recorded at the date of acquisition.  At September 30, 2009, just prior to Premier’s acquisition, Abigail Adams reported a collective allowance for loan losses of approximately $12.8 million.  In contrast, Premier recorded the estimated fair value of the combined loan portfolios at an estimated $25.5 million discount to the contractual amounts receivable on the loans at acquisition.

Similarly, with the purchase of Gassaway on April 4, 2014, no allowance for loan losses recorded on the bank’s balance sheet prior to that date was carried over to Premier’s allowance for loan losses.  Instead, under current accounting guidance, all acquired loans were recorded at their net estimated fair value.  At March 31, 2014, just prior to Premier’s purchase, Gassaway reported a collective allowance for loan losses of approximately $1.3 million.  In contrast, Premier recorded the estimated fair value of the acquired loan portfolio at an estimated $2.5 million discount to the contractual amounts receivable on the loans at acquisition.  These discounts, as with the discounts assigned to the Abigail Adams acquired loan portfolio, are allocated per loan and are used to offset any charge-offs of the uncollectible portion of the contractual amount due on non-performing assets, or accreted into interest income using a level yield method on performing loans.  Should Premier collect the full contractual amount due, any fair value discount is recognized as interest income at the time of payoff.  In its evaluation of the acquired Gassaway loan portfolio, management determined that most of the loan portfolio was comprised of homogenous consumer based or residential real estate loans and none of the loans acquired would meet the definition of a purchased credit impaired loan.  Therefore all loans acquired have been initially evaluated as collectively impaired.  Additional information on loans purchased with evidence of deteriorated credit quality is contained in Note 5 to the consolidated financial statements.

Management believes the estimated potential losses related to delinquent loans to be adequately provided for in the allowance for loan losses. These non-performing assets were included in the analyses that supported the recording of provisions for loan loss during 2011 and 2012.  In 2014, a negative provision for loan losses was recorded early in the year as a result of the full payoff of impaired loans with specific allocations of the allowance for loan losses.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


The negative provision expense, however, was more than offset by additional provisions for loan losses in the second half of 2014. Similarly in 2015, a negative provision for loans losses was recorded in the second quarter due primarily to a large recovery on a single commercial real estate loan.  The negative provision was more than offset by additional provisions for loan losses in the second half of 2015.  As management's efforts to collect on all of the Company’s non-performing assets continue, matured loans are only renewed using Premier's strengthened credit policies. Otherwise, loans may be carried as accruing loans that are greater than 90 days past due or placed on non-accrual status and foreclosure proceedings begun to obtain and liquidate any collateral securing the past due or matured loans. As previously demonstrated by Premier’s history, management is committed to continuing to reduce its level of non-performing assets and maintaining strong underwriting standards to help maintain a lower level of non-performing assets in the future.

The Loan Summary table presents five years of comparative non-performing asset information. Other than these loans and the impaired loans discussed in Note 5 to the consolidated financial statements, Premier does not have a significant volume of loans where management has serious doubts about the borrowers’ ability to comply with the present repayment terms of the loan.

It is Premier's policy to place loans that are past due over 90 days on non-accrual status, unless the loans are adequately secured and in the process of collection.  For real estate loans, upon repossession, the property is transferred to "Other Real Estate Owned" (OREO) and carried at the lower of the outstanding loan balance or the fair value of the property based on current appraisals and other current market trends, less estimated disposal costs. If a writedown of the OREO property is necessary at the time of foreclosure, the amount is charged against the allowance for loan losses. A periodic review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair market value less estimated disposal costs, additional writedowns of the property value are charged directly to operations.

During 2015, Premier recorded $1.1 million of write-downs of OREO properties which were slightly offset by $44,000 of gains on the disposition of OREO properties, resulting in a net increase in 2015 operating expenses of approximately $1.0 million.  This net operating expense increase compares to $588,000 of write-downs of OREO properties in 2014 that were more than offset by $1.3 million of gains on the disposition of OREO properties resulting in a net expense reduction of $714,000. During 2013, Premier recorded $782,000 of write-downs of OREO properties that were partially offset by $66,000 of gains on the disposition of OREO properties, resulting in a net expense of $716,000.  The write-downs on OREO that were recorded in 2015 were largely due to adjustments to the carrying value, as Premier lowered its expectations of net realizable value on certain properties in an effort to liquidate the property.  The gains realized in 2014 are largely due to sales of OREO properties acquired via the Abigail Adams acquisition.  Real estate values in and around Washington, DC have improved compared to 2009 when Abigail
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


Adams was acquired. Furthermore, some of the properties sold in 2014 and 2013 were condominium renovation or construction projects that needed to be completed after foreclosure by Premier in order to be marketed in a salable condition. These gains more than offset losses on the sale of other OREO properties during 2014. The write-downs on OREO that were recorded in 2014 were largely due to adjustments to the carrying value, as Premier lowered its expectations of net realizable value on certain properties in an effort to liquidate the property. The gains realized in 2013 are largely due to sales of OREO properties acquired via the Abigail Adams acquisition.  Again, real estate values in and around Washington, DC were improved in 2013 compared to 2009 when Abigail Adams was acquired.  These gains more than offset losses on the sale of other OREO properties during 2013.  The write-downs on OREO that were recorded in 2013 were largely due to repossessed construction projects where either the costs incurred to complete the projects have exceeded original estimates and the property was adjusted to net realizable value or sales of properties have not materialized and Premier has lowered its expectations of net realizable value.

The allowance for loan losses is maintained to absorb probable incurred losses associated with lending activities. Actual losses are charged against the allowance ("charge-offs") while collections on loans previously charged off ("recoveries") are added back to the allowance.  Since actual losses within a given loan portfolio are difficult to predict, management uses a significant amount of estimation and judgment to determine the adequacy of the allowance for loan losses. Factors considered in determining the adequacy of the allowance include an individual assessment of risk on certain loans and total creditor relationships, historical charge-off experience, the type of loan, levels of non-performing and past due loans, and an evaluation of current economic conditions. Loans are evaluated for credit risk and assigned a risk grade. Premier's risk grading criteria are based upon Federal Reserve guidelines and definitions. In evaluating the adequacy of the allowance for loan losses, loans that are assigned passing grades are grouped together and multiplied by historical charge-off percentages to determine an estimated amount of potential losses and a corresponding amount of allowance. Loans that are assigned marginally passing grades are grouped together and allocated slightly higher percentages to determine the estimated amount of potential losses due to the identification of increased risk(s). Loans that are assigned a grade of "substandard" or "doubtful" are more likely to be classified as impaired.  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.


PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


A loan is categorized and reported as impaired when it is probable that the borrower will be unable to pay all of the principal and interest amounts according to the contractual terms of the loan agreement. In determining whether a loan is impaired, management considers such factors as past payment history, recent economic events, current and projected financial conditions and other relevant information that is available at the time. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual basis for other loans. If a loan is deemed to be impaired, an evaluation of the amount of estimated loss is performed, assessing the present value of estimated future cash flows using the loan's existing rate or assessing the fair and realizable value of the loan collateral if repayment is expected solely from the collateral. The estimation of loss is assigned to the impaired loan and is used in determining the adequacy of the allowance for loan losses. For impaired loans, this estimation of loss is reevaluated quarterly and, if necessary, adjusted based upon the then current known facts and circumstances related to the loan and the borrower. Additional information on Premier's impaired loans is contained in Note 5 to the consolidated financial statements.

The sum of the calculations and estimations of the risk of loss in the loan portfolio is compared to the recorded balance of the allowance for loan losses. If the total allowance is deemed to be inadequate, a charge to earnings is recorded to increase the allowance.  Conversely, should an evaluation of the allowance result in a lower estimate of the risk of loss in the loan portfolio and the allowance is deemed to be more than adequate, a reversal of previous charges to earnings ("a negative provision") may be warranted in the current period. Events that may lead to negative provisions include greater than anticipated recoveries, a reduction in the historical loss ratios, securing more collateral on an impaired loan during the collection process, or receiving a substantial principal payment or payment in full on an impaired loan.  In 2015, Premier recorded a provision for loan losses of $326,000 compared to $534,000 of provision for loan losses recorded in 2014 and a $375,000 negative provision expense in 2013.

At December 31, 2015, the allowance for loan losses was $9.6 million, or 1.14% of total year-end loans, compared to an allowance for loan losses of $10.3 million, or 1.18% of total loans at December 31, 2014.  The decrease in the percentage of allowance to total loans at year-end is a result of the smaller allowance partially offset by a decrease in outstanding total loans.  The amount of allowance allocated to individually impaired loans decreased by approximately $1.1 million in 2015 largely due to moving an impaired loan to OREO during the year and recording a loan charge-off in the process.  Also, the amount of allowance allocated to collectively evaluated loans increased by approximately $401,000 from additional risk identified on the core loan portfolio.  As a result, although loans outstanding at December 31, 2015 have decreased by $30.0 million, the decrease in the allowance for loan losses allocated to impaired loans resulted in a lower ratio to total loans outstanding at December 31, 2015.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


At December 31, 2014, the allowance for loan losses was $10.3 million, or 1.18% of total year-end loans, compared to an allowance for loan losses of $11.0 million, or 1.49% of total loans at December 31, 2013.  The substantial decrease in the percentage of allowance to total loans at year-end is a result of the loans acquired via the purchase of Gassaway.  These loans were recorded at their estimated fair value on the date of acquisition including an estimate of credit risk within the loan portfolio and thus no significant amount of allowance for loan losses was deemed necessary for these loans at December 31, 2014.  Furthermore, the amount of allowance allocated to individually impaired loans decreased by approximately $1.1 million in 2014 largely due to payments and payoffs received on these loans during the year.  However, the amount of allowance allocated to collectively evaluate loans did increase by approximately $594,000 from additional provisions for loan losses largely due to the $43.8 million increase in loans outstanding from expanded lending opportunities in 2014.  As a result, although loans outstanding at December 31, 2014 have increased by $138.9 million, $95.1 million from the purchase of Gassaway and $43.8 million from internal loan growth, the allowance for loan losses did not increase proportionately, resulting in a lower ratio to total loans outstanding at December 31, 2014.

At December 31, 2013, the allowance for loan losses was $11.0 million, or 1.49% of total year-end loans, compared to an allowance for loan losses of $11.5 million, or 1.63% of total loans at December 31, 2012. Although total loans outstanding increased by $36.1 million in 2013, the ratio of the allowance to total loans outstanding decreased due to a reduction in specific allocations of the allowance related to impaired loans. During 2013, Premier received substantial principal payments and payoffs on loans classified as impaired which resulted in the reduction of the estimated required allowance via negative provisions for loan losses. These negative provisions for loan losses exceeded the estimated provision expense needed to provide for the loan growth in 2013, resulting in a net $375,000 negative provision for loan losses for the 2013 calendar year. The negative provision for loan losses and the $86,000 of net charge-offs recorded during 2013 reduced the overall allowance by $461,000 to $11.0 million at December 31, 2013. The decrease in the estimated required allowance for loan losses combined with the growth in total loans outstanding in 2013 resulted in a lower ratio at December 31, 2013 at 1.49% of total year-end loans.

The “Summary of Loan Loss Experience” table below provides a more detailed history of the allowance for loan losses, illustrating charge-offs and recoveries by loan type, and the annual provision for loan losses over the past five years. From 2009 through 2012, the deterioration in the national economy and its impact on the local economy in Premier’s markets resulted in increases in past due loans and non-performing assets. As the deterioration in the national economy and its impact on Premier’s local economies continued, some of the increases in past due loans and non-performing assets in prior years became charged-off loans.  In 2013, Premier recovered some of its prior year charge-offs, which helped to substantially offset the reduced level of charge-offs recorded during the year.  In 2014, net charge-offs increased from the very low level recorded in 2013, but remained relatively low at 0.15% of average loans outstanding partially due to the larger balance of average total loans from the acquisition of Gassaway.  In 2015, the amount of net charge-offs was slightly less when compared to 2014 due to a significant increase in recoveries on real estate secured loans reducing the ratio of net charge-offs to average loans outstanding to 0.12%.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015
 
 
The level of provision expense during 2011 was largely to provide for a calculated increase in exposure to credit risk related to one borrowing relationship in Premier’s Kentucky market identified during the second quarter.  In 2012, the increase in the level of provision expense was largely due to increases in specific reserves on loans already identified as impaired and also due to specific reserves on loans newly identified as impaired during 2012.  During 2013, Premier received substantial principal payments and payoffs on loans classified as impaired which resulted in the reduction of the estimated required allowance via negative provisions for loan losses.  These negative provisions for loan losses exceeded the estimated provision expense needed to provide for the loan growth in 2013, resulting in a net $375,000 negative provision for loan losses.  Similarly, during 2014 Premier received principal payments and payoffs on loans classified as impaired which resulted in the reduction of the estimated required allowance via negative provisions for loan losses.  These negative provisions for loan losses, however, were exceeded by the estimated provision expense needed to provide for the loan growth in 2014, resulting in a net $534,000 provision for loan losses.  In 2015, Premier reduced its allowance allocated to impaired loans via payments and payoffs of loans as well as foreclosure.  In the second quarter of 2015, a significant recovery on a real estate secured loan resulted in a negative provision for loan losses for the quarter.  The negative provision was more than offset by increases in the allowance estimated for collectively impaired loans resulting in $326,000 of provision for loan losses.  Additional details on the activity in the allowance for loan losses as well as past due and non-performing loans, including loans individually evaluated for impairment, is contained in Note 5 to the consolidated financial statements.

Premier aggressively pursues past due loans in an effort to bring those loans back to current status.  If these efforts fail and a past due loan becomes a non-performing loan, Premier’s policies for determining the adequacy of the allowance for loan losses are used to determine the estimated potential loss on the loan.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  Premier continually evaluates the adequacy of its allowance for loan losses, and changes in the provision are based on the estimated probable incurred losses in the loan portfolio.

Net charge-offs in 2015 totaled $1.0 million, as $2.1 million of loans charged-off were partially offset by $1.1 million of recoveries of loans previously charged-off. Net charge-offs in 2014 totaled $1.2 million, as $1.6 million of loans charged-off were partially offset by $387,000 of recoveries of loans previously charged-off. Net charge-offs in 2013 totaled $86,000, as $909,000 of loans charged-off were substantially offset by $823,000 of recoveries of loans previously charged-off.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


In 2015, total charge-offs increased by $495,000 to $2.1 million, or just 0.24% of average total loans.  Charge-offs increased in all categories of loans except for other real estate loans.  A portion of the increase in the construction real estate loan charge-offs was a result of the foreclosure of a real estate secured loan previously identified as individually impaired and resulted in a charge-off upon foreclosure.  Otherwise, charge-off activity decreased due to the higher level of other real estate charge-offs recorded in 2014.  In 2014, total charge-offs increased by $692,000 to $1.6 million, or just 0.19% of average total loans.  Charge-offs increased in all categories of loans except for consumer loans.  A portion of the increase in the real estate loan charge-offs was a result of the foreclosure of real estate secured loans and recognizing the previously identified loan impairment as a charge-off upon foreclosure.  Otherwise, charge-off activity increased due to the comparatively low level of charge-offs recorded in 2013.  In 2013, total charge-offs decreased by $2.2 million to $909,000, or just 0.13% of average total loans. Charge-offs in all four categories of loans decreased in 2013, reflecting management’s efforts to successfully resolve delinquent loans.  Furthermore, management reached agreements with two loan relationships that had been charged-off in previous years whereby the borrowers agreed to a repayment schedule that included a substantial down payment in 2013 and monthly payments thereafter.  These payments resulted in the increase in recoveries recorded in 2013 and also account for most of the decrease in recoveries in 2014.



PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2015


SUMMARY OF LOAN LOSS EXPERIENCE
 
(Dollars in thousands)
 
   
For the Year Ended December 31
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
Allowance for loan losses beginning of period
 
$
10,347
   
$
11,027
   
$
11,488