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


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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission file number 000-20908

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

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

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

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

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

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

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

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

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

Common stock, no par value, – 10,683,528 shares outstanding at April 28, 2018


PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2018
INDEX TO REPORT


     
   
3
 
   
42
 
   
51
 
   
51
 
   
52
 
   
52
 
   
52
 
   
52
 
   
52
 
   
52
 
   
52
 
   
52
 
   
53
 


- 2 -


PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2018


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant's annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant's Form 10-K for the year ended December 31, 2017 for further information in this regard.

Index to consolidated financial statements:

   
4
 
   
5
 
   
6
 
   
6
 
   
7
 
   
8
 


 
- 3 -


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2018 AND DECEMBER 31, 2017
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
(UNAUDITED)
       
   
Mar 31,
2018
   
Dec 31,
2017
 
ASSETS
           
Cash and due from banks
 
$
19,845
   
$
40,814
 
Interest bearing bank balances
   
104,968
     
37,191
 
Federal funds sold
   
15,348
     
4,658
 
Cash and cash equivalents
   
140,161
     
82,663
 
Time deposits with other banks
   
2,582
     
2,582
 
Securities available for sale
   
281,088
     
278,466
 
Loans
   
1,028,758
     
1,049,052
 
Allowance for loan losses
   
(12,840
)
   
(12,104
)
Net loans
   
1,015,918
     
1,036,948
 
Federal Home Loan Bank stock, at cost
   
3,185
     
3,185
 
Premises and equipment, net
   
23,728
     
23,815
 
Real estate acquired through foreclosure
   
14,185
     
19,966
 
Interest receivable
   
3,701
     
4,043
 
Goodwill
   
35,371
     
35,371
 
Other intangible assets
   
3,180
     
3,375
 
Other assets
   
2,684
     
3,010
 
Total assets
 
$
1,525,783
   
$
1,493,424
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Non-interest bearing
 
$
353,008
   
$
332,588
 
Time deposits, $250,000 and over
   
62,773
     
63,905
 
Other interest bearing
   
887,414
     
876,182
 
Total deposits
   
1,303,195
     
1,272,675
 
Securities sold under agreements to repurchase
   
20,793
     
23,310
 
Other borrowed funds
   
4,250
     
5,000
 
Subordinated debt
   
5,383
     
5,376
 
Interest payable
   
407
     
393
 
Other liabilities
   
7,879
     
3,315
 
Total liabilities
   
1,341,907
     
1,310,069
 
                 
Stockholders' equity
               
Common stock, no par value; 20,000,000 shares authorized; 10,677,528 shares issued and outstanding at March 31, 2018, and 10,676,428 shares issued and outstanding at December 31, 2017
   
110,485
     
110,445
 
Retained earnings
   
78,515
     
74,983
 
Accumulated other comprehensive income (loss)
   
(5,124
)
   
(2,073
)
Total stockholders' equity
   
183,876
     
183,355
 
Total liabilities and stockholders' equity
 
$
1,525,783
   
$
1,493,424
 

- 4 -


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
March 31,
 
   
2018
   
2017
 
Interest income
           
Loans, including fees
 
$
14,034
   
$
13,535
 
Securities available for sale
               
Taxable
   
1,408
     
1,345
 
Tax-exempt
   
59
     
72
 
Federal funds sold and other
   
298
     
157
 
Total interest income
   
15,799
     
15,109
 
                 
Interest expense
               
Deposits
   
1,031
     
949
 
Repurchase agreements and other
   
8
     
7
 
Other borrowings
   
47
     
87
 
Subordinated debt
   
78
     
70
 
Total interest expense
   
1,164
     
1,113
 
                 
Net interest income
   
14,635
     
13,996
 
Provision for loan losses
   
1,115
     
366
 
Net interest income after provision for loan losses
   
13,520
     
13,630
 
                 
Non-interest income
               
Service charges on deposit accounts
   
1,094
     
976
 
Electronic banking income
   
817
     
780
 
Secondary market mortgage income
   
32
     
67
 
Other
   
123
     
194
 
     
2,066
     
2,017
 
Non-interest expenses
               
Salaries and employee benefits
   
4,778
     
4,970
 
Occupancy and equipment expenses
   
1,610
     
1,521
 
Outside data processing
   
1,249
     
1,320
 
Professional fees
   
336
     
248
 
Taxes, other than payroll, property and income
   
240
     
189
 
Write-downs, expenses, sales of other real estate owned, net
   
(886
)
   
240
 
Amortization of intangibles
   
195
     
265
 
FDIC insurance
   
148
     
193
 
Loan collection expense
   
360
     
99
 
Other expenses
   
959
     
953
 
     
8,989
     
9,998
 
Income before income taxes
   
6,597
     
5,649
 
Provision for income taxes
   
1,464
     
1,985
 
                 
Net income
 
$
5,133
   
$
3,664
 
                 
Net income per share:
               
Basic
 
$
0.48
   
$
0.34
 
Diluted
   
0.48
     
0.34
 
- 5 -


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


   
Three Months Ended
March 31,
 
   
2018
   
2017
 
Net income
 
$
5,133
   
$
3,664
 
                 
Other comprehensive income (loss):
               
Unrealized gains (losses) arising during the period
   
(3,862
)
   
2,276
 
Reclassification of realized amount
   
-
     
-
 
Net change in unrealized gain (loss) on securities
   
(3,862
)
   
2,276
 
Less tax impact
   
811
     
(798
)
Other comprehensive income (loss)
   
(3,051
)
   
1,478
 
                 
Comprehensive income
 
$
2,082
   
$
5,142
 



PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2018
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (loss)
   
Total
 
Balances, January 1, 2018
 
$
110,445
   
$
74,983
   
$
(2,073
)
 
$
183,355
 
     Net income
   
-
     
5,133
     
-
     
5,133
 
     Other comprehensive income
   
-
     
-
     
(3,051
)
   
(3,051
)
     Cash dividends paid ($0.15 per share)
   
-
     
(1,601
)
   
-
     
(1,601
)
     Stock options exercised
   
13
     
-
     
-
     
13
 
     Stock based compensation expense
   
27
     
-
     
-
     
27
 
Balances, March 31, 2018
 
$
110,485
   
$
78,515
   
$
(5,124
)
 
$
183,876
 

- 6 -


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(UNAUDITED, DOLLARS IN THOUSANDS)


   
2018
   
2017
 
Cash flows from operating activities
           
Net income
 
$
5,133
   
$
3,664
 
Adjustments to reconcile net income to net cash from operating activities
               
Depreciation
   
433
     
445
 
Provision for loan losses
   
1,115
     
366
 
Amortization (accretion), net
   
386
     
388
 
Writedowns (gains on the sale) of other real estate owned, net
   
(1,080
)
   
19
 
Stock compensation expense
   
27
     
20
 
Changes in:
               
Interest receivable
   
342
     
24
 
Other assets
   
1,137
     
849
 
Interest payable
   
14
     
(12
)
Other liabilities
   
(495
)
   
4
 
Net cash from operating activities
   
7,012
     
5,767
 
                 
Cash flows from investing activities
               
Net change on time deposits with other banks
   
-
     
(250
)
Purchases of securities available for sale
   
(15,527
)
   
(31,087
)
Proceeds from maturities and calls of securities available for sale
   
13,717
     
15,573
 
Net change in loans
   
19,838
     
(14,936
)
Purchases of premises and equipment, net
   
(346
)
   
(76
)
Proceeds from sales of other real estate acquired through foreclosure
   
7,145
     
544
 
Net cash from (used in) investing activities
   
24,827
     
(30,232
)
                 
Cash flows from financing activities
               
Net change in deposits
   
30,514
     
18,917
 
Net change in agreements to repurchase securities
   
(2,517
)
   
(956
)
Repayment of other borrowed funds
   
(750
)
   
(608
)
Proceeds from stock option exercises
   
13
     
101
 
Common stock dividends paid
   
(1,601
)
   
(1,597
)
Net cash from financing activities
   
25,659
     
15,857
 
                 
Net change in cash and cash equivalents
   
57,498
     
(8,608
)
                 
Cash and cash equivalents at beginning of period
   
82,663
     
104,718
 
                 
Cash and cash equivalents at end of period
 
$
140,161
   
$
96,110
 

Supplemental disclosures of cash flow information:
           
Cash paid during period for interest
 
$
1,150
   
$
1,125
 
                 
Loans transferred to real estate acquired through foreclosure
   
284
     
353
 
                 
Securities purchased not yet settled
   
5,059
     
-
 


- 7 -


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


NOTE  1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the Company) and its wholly owned subsidiaries (the "Banks"):
 
                  March 31, 2018  
        Year   Total     Net Income  
Subsidiary
 
Location
 
Acquired
 
Assets
   
Qtr
 
Citizens Deposit Bank & Trust
 
Vanceburg, Kentucky
 
1991
 
$
427,514
   
$
1,290
 
Premier Bank, Inc.
 
Huntington, West Virginia
 
1998
   
1,091,144
     
4,486
 
Parent and Intercompany Eliminations
           
7,125
     
(643
)
  Consolidated Total
          
$
1,525,783
   
$
5,133
 

All significant intercompany transactions and balances have been eliminated.

During the first quarter of 2018, management updated its policies regarding estimation of probable incurred losses.  The updates included incorporating a common estimated loss ratio for all pass credits within a given loan classification, adding an additional qualitative factor for document exceptions on collectively impaired loans, and reallocating the qualitative portion of the allowance to align more closely to the inputs used to determine the qualitative portion.  The previous methodology allocated a higher loss ratio to loans graded "Watch" to estimate a higher credit risk on these loans due to risk downgrades resulting from document exceptions.  Loans graded "Watch" are considered pass credits.  These changes did not have a material impact on the overall allowance for loan losses or the provision for loan losses in the first three months of 2018.

Recently Issued Accounting Pronouncements

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance provides the following steps to achieve the core principle (1) Identify the contract(s) with the customer, (2) Identify the performance obligations in the contract, (3) Determine the transaction price, (4) Allocate the transaction price to the performance obligations in the contract, and (5) Recognize revenue when (or as) the entity satisfies a performance obligation.   Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance, as amended, is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, including interim periods within those reporting periods.  Management's assessment on revenue recognition by following the five steps resulted in no material changes from the current revenue recognition because the majority of revenues earned by the Company are not within the scope of ASU 2014-09.  Interest income on loans and securities are both excluded from Topic 606, the majority of revenue earned are not subject to the new
- 8 -


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


NOTE  1 - BASIS OF PRESENTATION - continued

guidance.  Service charges on deposit accounts, debit card interchange fees, and ATM fees are services provided that fall within the scope of Topic 606 and are presented within non-interest income as revenue when the obligation to the customer is satisfied.  Gains on the sale of OREO fall with scope of Topic 606 and are recognized as a credit to non-interest expense as an offset to writedowns of carrying value and losses on the of OREO as permitted.  The Company adopted Topic 606 as of January 1, 2018 with no material change in how revenues are recognized in the Company's financial statements.  Significant items of non-interest income are described below.

Service charges on deposit accounts – Fees are earned from our deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which we satisfy our performance obligation.

Debit card interchange fees - Revenue earned from a portion of the fee charged to merchants for the immediate approval of credit for funds (whether debit or credit card usage) is recognized on a daily cash basis and the commission is paid through Premier's third-party processor.  The revenue is earned on a transaction basis determined by customer activity.  Premier records this revenue on a gross revenue basis and expenses the processing charges incurred as a non-interest expense.

Non-customer ATM fees – Fees charged to non-deposit customers for using bank owned automated teller machines is charged on a transaction basis and withdrawn from the users' deposit account at another financial institution upon completion of the transaction.

Gain on sale of OREO – A gain is recognized upon the sale of OREO when a contract exists between the seller and purchaser and the control of the asset is transferred to the buyer.  The gain is then reported as a reduction of non-interest expense under the heading "Write-downs, expenses, sales of other real estate owned, net."

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU makes several targeted improvement modifications to Subtopic 825-10 (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and when an impairment exists, an entity is required to measure the investment at fair value, (3) Eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is
- 9 -


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


NOTE  1 - BASIS OF PRESENTATION - continued

required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) Use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) Present separately in other comprehensive income the portion of the total changes in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option of financial instruments, (6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial instruments, and (7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.  The Company adopted subtopic 825-10 on January 1, 2018 and resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis.  See footnote 7 for additional information on fair value.

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.  This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the "current expected credit loss" or "CECL".  The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts, in which organizations will now use forward-looking information to enhance their credit loss estimates on these assets.  The largest impact will be on the allowance for loan and lease losses.  This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2019, although early adoption is permitted beginning after December 15, 2018. The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method.  The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company's financial statements.  Upon adoption, an initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard but cannot yet determine the one-time adjustment.

- 10 -


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


NOTE  1 - BASIS OF PRESENTATION - continued

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This ASU amends Topic 220, Income Statement – Reporting Comprehensive Income to permit the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and any future change in corporate income tax rates.  The update does not affect the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations.  The Company adopted ASU 2018-02 retroactively to December 31, 2017 as permitted by the guidance.
 
- 11 -



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


NOTE  2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at March 31, 2018 are summarized as follows:

2018
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
205,671
   
$
67
   
$
(5,414
)
 
$
200,324
 
U. S. sponsored agency CMO's - residential
   
52,720
     
87
     
(969
)
   
51,838
 
Total mortgage-backed securities of government sponsored agencies
   
258,391
     
154
     
(6,383
)
   
252,162
 
U. S. government sponsored agency securities
   
17,780
     
-
     
(229
)
   
17,551
 
Obligations of states and political subdivisions
   
11,403
     
37
     
(65
)
   
11,375
 
Total available for sale
 
$
287,574
   
$
191
   
$
(6,677
)
 
$
281,088
 

 
Amortized cost and fair value of investment securities, by category, at December 31, 2017 are summarized as follows:

2017
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
198,631
   
$
175
   
$
(2,216
)
 
$
196,590
 
U. S. sponsored agency CMO's - residential
   
51,548
     
241
     
(681
)
   
51,108
 
Total mortgage-backed securities of government sponsored agencies
   
250,179
     
416
     
(2,897
)
   
247,698
 
U. S. government sponsored agency securities
   
19,312
     
1
     
(179
)
   
19,134
 
Obligations of states and political subdivisions
   
11,599
     
61
     
(26
)
   
11,634
 
Total available for sale
 
$
281,090
   
$
478
   
$
(3,102
)
 
$
278,466
 

- 12 -


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


NOTE  2–SECURITIES - continued

The amortized cost and fair value of securities at March 31, 2018 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Fair
Value
 
Available for sale
           
Due in one year or less
 
$
9,558
   
$
9,536
 
Due after one year through five years
   
13,954
     
13,798
 
Due after five years through ten years
   
5,340
     
5,261
 
Due after ten years
   
331
     
331
 
Mortgage-backed securities of government sponsored agencies
   
258,391
     
252,162
 
Total available for sale
 
$
287,574
   
$
281,088
 

There were no sales of securities during the first three months of 2018 and 2017.

Securities with unrealized losses at March 31, 2018 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S government sponsored agency securities
 
$
7,264
   
$
(42
)
 
$
10,287
   
$
(187
)
 
$
17,551
   
$
(229
)
U.S government sponsored agency MBS – residential
   
147,730
     
(3,461
)
   
45,086
     
(1,953
)
   
192,816
     
(5,414
)
U.S government sponsored agency CMO's – residential
   
17,519
     
(184
)
   
16,720
     
(785
)
   
34,239
     
(969
)
Obligations of states and political subdivisions
   
4,547
     
(55
)
   
471
     
(10
)
   
5,018
     
(65
)
Total temporarily impaired
 
$
177,060
   
$
(3,742
)
 
$
72,564
   
$
(2,935
)
 
$
249,624
   
$
(6,677
)

- 13 -


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


NOTE  2–SECURITIES - continued

Securities with unrealized losses at December 31, 2017 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
   
Fair Value
   
Unrealized Loss
 
                                     
U.S government sponsored agency securities
 
$
6,780
   
$
(41
)
 
$
10,335
   
$
(138
)
 
$
17,115
   
$
(179
)
U.S government sponsored agency MBS – residential
   
134,211
     
(1,076
)
   
47,682
     
(1,140
)
   
181,893
     
(2,216
)
U.S government sponsored agency CMO's – residential
   
8,306
     
(64
)
   
17,868
     
(617
)
   
26,174
     
(681
)
Obligations of states and political subdivisions
   
3,512
     
(20
)
   
474
     
(6
)
   
3,986
     
(26
)
Total temporarily impaired
 
$
152,809
   
$
(1,201
)
 
$
76,359
   
$
(1,901
)
 
$
229,168
   
$
(3,102
)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at March 31, 2018 and December 31, 2017 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities.  Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.


NOTE  3 - LOANS

Major classifications of loans at March 31, 2018 and December 31, 2017 are summarized as follows:

   
2018
   
2017
 
Residential real estate
 
$
342,258
   
$
338,829
 
Multifamily real estate
   
62,500
     
62,151
 
Commercial real estate:
               
Owner occupied
   
137,215
     
136,048
 
Non-owner occupied
   
217,603
     
230,702
 
Commercial and industrial
   
76,659
     
78,259
 
Consumer
   
27,924
     
28,293
 
Construction and land
   
129,083
     
139,012
 
All other
   
35,516
     
35,758
 
   
$
1,028,758
   
$
1,049,052
 

- 14 -


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


NOTE  3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 was as follows:

Loan Class
 
Balance
Dec 31, 2017
   
Provision (credit) for loan losses
   
Loans charged-off
   
Recoveries
   
Balance
March 31, 2018
 
                               
Residential real estate
 
$
2,986
   
$
(691
)
 
$
(49
)
 
$
16
   
$
2,262
 
Multifamily real estate
   
978
     
(320
)
   
(11
)
   
-
     
647
 
Commercial real estate:
                                       
Owner occupied
   
1,653
     
164
     
(2
)
   
1
     
1,816
 
Non-owner occupied
   
2,313
     
(110
)
   
(16
)
   
-
     
2,187
 
Commercial and industrial
   
1,101
     
813
     
(267
)
   
4
     
1,651
 
Consumer
   
328
     
49
     
(33
)
   
25
     
369
 
Construction and land
   
2,408
     
913
     
(19
)
   
-
     
3,302
 
All other
   
337
     
297
     
(67
)
   
39
     
606
 
Total
 
$
12,104
   
$
1,115
   
$
(464
)
 
$
85
   
$
12,840
 

Activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 was as follows:

Loan Class
 
Balance
Dec 31, 2016
   
Provision (credit) for loan losses
   
Loans charged-off
   
Recoveries
   
Balance
March 31, 2017
 
                               
Residential real estate
 
$
2,948
   
$
129
   
$
(105
)
 
$
5
   
$
2,977
 
Multifamily real estate
   
785
     
(15
)
   
-
     
-
     
770
 
Commercial real estate:
                                       
Owner occupied
   
1,543
     
32
     
-
     
1
     
1,576
 
Non-owner occupied
   
2,350
     
77
     
(5
)
   
-
     
2,422
 
Commercial and industrial
   
1,140
     
(34
)
   
-
     
23
     
1,129
 
Consumer
   
347
     
116
     
(117
)
   
24
     
370
 
Construction and land
   
1,397
     
34
     
(123
)
   
10
     
1,318
 
All other
   
326
     
27
     
(59
)
   
38
     
332
 
Total
 
$
10,836
   
$
366
   
$
(409
)
 
$
101
   
$
10,894
 
- 15 -


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


NOTE  3–LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at March 31, 2018 and December 31, 2017.

   
2018
   
2017
 
Residential real estate
 
$
1,292
   
$
1,321
 
Commercial real estate
               
Owner occupied
   
1,459
     
1,508
 
Commercial and industrial
   
9
     
211
 
Construction and land
   
1,426
     
1,450
 
All other
   
292
     
286
 
Total carrying amount
 
$
4,478
   
$
4,776
 
Contractual principal balance
 
$
6,234
   
$
6,728
 
                 
Carrying amount, net of allowance
 
$
4,478
   
$
4,676
 

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three-months ended March 31, 2018 and March 31, 2017.

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

Where the Company cannot reasonably estimate the cash flows expected to be collected on the loans, it has continued to account for those loans using the cost recovery method of income recognition.  As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method.  If, in the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan.  Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero.  Any loan accounted for under the cost recovery method is also still included as a non-accrual loan in the amounts presented in the tables below.
- 16 -


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


NOTE  3–LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at March 31, 2018 and March 31, 2017.

   
2018
   
2017
 
Balance at January 1
 
$
754
   
$
1,208
 
New loans purchased
   
-
     
-
 
Accretion of income
   
(69
)
   
(123
)
Loans placed on non-accrual
   
(41
)
   
-
 
Reclassifications from non-accretable difference
   
-
     
-
 
Disposals
   
-
     
-
 
Balance at March 31
 
$
644
   
$
1,085
 

- 17 -


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


NOTE  3–LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2018 and December 31, 2017.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

March 31, 2018
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential real estate
 
$
3,638
   
$
2,981
   
$
285
 
Multifamily real estate
   
2,074
     
2,061
     
366
 
Commercial real estate
                       
Owner occupied
   
2,732
     
2,579
     
-
 
Non-owner occupied
   
1,685
     
1,643
     
-
 
Commercial and industrial
   
1,544
     
930
     
2
 
Consumer
   
251
     
223
     
-
 
Construction and land
   
4,805
     
4,712
     
25
 
All other
   
185
     
185
     
-
 
Total
 
$
16,914
   
$
15,314
   
$
678
 

December 31, 2017
 
Principal Owed on Non-accrual Loans
   
Recorded Investment in Non-accrual Loans
   
Loans Past Due Over 90 Days, still accruing
 
                   
Residential real estate
 
$
2,944
   
$
2,422
   
$
869
 
Multifamily real estate
   
2,128
     
2,128
     
334
 
Commercial real estate
                       
Owner occupied
   
2,623
     
2,483
     
134
 
Non-owner occupied
   
1,862
     
1,755
     
85
 
Commercial and industrial
   
1,313
     
544
     
1,139
 
Consumer
   
268
     
241
     
-
 
Construction and land
   
5,824
     
5,673
     
830
 
Total
 
$
16,962
   
$
15,246
   
$
3,391
 

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category.  Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
- 18 -


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


NOTE  3–LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of March 31, 2018 by class of loans:

Loan Class
 
Total Loans
   
30-89 Days
Past Due
   
Greater than 90 days past due
   
Total Past Due
   
Loans Not
Past Due
 
                               
Residential real estate
 
$
342,258
   
$
4,919
   
$
1,657
   
$
6,576
   
$
335,682
 
Multifamily real estate
   
62,500
     
2,061
     
366
     
2,427
     
60,073
 
Commercial real estate:
                                       
Owner occupied
   
137,215
     
83
     
1,778
     
1,861
     
135,354
 
Non-owner occupied
   
217,603
     
78
     
-
     
78
     
217,525
 
Commercial and industrial
   
76,659
     
1,583
     
865
     
2,448
     
74,211
 
Consumer
   
27,924
     
234
     
79
     
313
     
27,611
 
Construction and land
   
129,083
     
634
     
812
     
1,446
     
127,637
 
All other
   
35,516
     
6
     
185
     
191
     
35,325
 
Total
 
$
1,028,758
   
$
9,598
   
$
5,742
   
$
15,340
   
$
1,013,418
 

 
The following table presents the aging of the recorded investment in past due loans as of December 31, 2017 by class of loans:

Loan Class
 
Total Loans
   
30-89 Days
Past Due
   
Greater than 90 days past due
   
Total Past Due
   
Loans Not
Past Due
 
                               
Residential real estate
 
$
338,829
   
$
5,242
   
$
1,835
   
$
7,077
   
$
331,752
 
Multifamily real estate
   
62,151
     
-
     
334
     
334
     
61,817
 
Commercial real estate:
                                       
Owner occupied
   
136,048
     
311
     
1,784
     
2,095
     
133,953
 
Non-owner occupied
   
230,702
     
12
     
225
     
237
     
230,465
 
Commercial and industrial
   
78,259
     
123
     
1,611
     
1,734
     
76,525
 
Consumer
   
28,293
     
492
     
87
     
579
     
27,714
 
Construction and land
   
139,012
     
144
     
2,508
     
2,652
     
136,360
 
All other
   
35,758
     
-
     
-
     
-
     
35,758
 
Total
 
$
1,049,052
   
$
6,324
   
$
8,384
   
$
14,708
   
$
1,034,344
 


- 19 -


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


NOTE  3–LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2018:
 
   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
 
$
-
   
$
2,262
   
$
-
   
$
2,262
   
$
299
   
$
340,667
   
$
1,292
   
$
342,258
 
Multifamily real estate
   
151
     
496
     
-
     
647
     
2,427
     
60,073
     
-
     
62,500
 
Commercial real estate:
                                                               
Owner occupied
   
407
     
1,409
     
-
     
1,816
     
3,255
     
132,501
     
1,459
     
137,215
 
Non-owner occupied
   
86
     
2,101
     
-
     
2,187
     
9,463
     
208,140
     
-
     
217,603
 
Commercial and industrial
   
282
     
1,369
     
-
     
1,651
     
1,393
     
75,257
     
9
     
76,659
 
Consumer
   
-
     
369
     
-
     
369
     
-
     
27,924
     
-
     
27,924
 
Construction and land
   
1,084
     
2,218
             
3,302
     
3,925
     
123,732
     
1,426
     
129,083
 
All other
   
-
     
606
     
-
     
606
     
288
     
34,936
     
292
     
35,516
 
Total
 
$
2,010
   
$
10,830
   
$
-
   
$
12,840
   
$
21,050
   
$
1,003,230
   
$
4,478
   
$
1,028,758
 

 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2017:
 
   
Allowance for Loan Losses
   
Loan Balances
 
Loan Class
 
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
   
Individually Evaluated for Impairment
   
Collectively Evaluated for Impairment
   
Acquired with Deteriorated Credit Quality
   
Total
 
                                                 
Residential real estate
 
$
-
   
$
2,986
   
$
-
   
$
2,986
   
$
308
   
$
337,200
   
$
1,321
   
$
338,829
 
Multifamily real estate
   
218
     
760
     
-
     
978
     
2,462
     
59,689
     
-
     
62,151
 
Commercial real estate:
                                                               
Owner occupied
   
307
     
1,346
     
-
     
1,653
     
3,314
     
131,226
     
1,508
     
136,048
 
Non-owner occupied
   
88
     
2,225
     
-
     
2,313
     
11,578
     
219,124
     
-
     
230,702
 
Commercial and industrial
   
104
     
897
     
100
     
1,101
     
1,304
     
76,744
     
211
     
78,259
 
Consumer
   
-
     
328
     
-
     
328
     
-
     
28,293
     
-
     
28,293
 
Construction and land
   
685
     
1,723
     
-
     
2,408
     
5,672
     
131,890
     
1,450
     
139,012
 
All other
   
-
     
337
     
-
     
337
     
293
     
35,179
     
286
     
35,758
 
Total
 
$
1,402
   
$
10,602
   
$
100
   
$
12,104
   
$
24,931
   
$
1,019,345
   
$
4,776
   
$
1,049,052
 
- 20 -


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


NOTE  3–LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2018.  The table does not include any loans acquired with deteriorated credit quality.

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Residential real estate
 
$
435
   
$
299
   
$
-
 
Multifamily real estate
   
366
     
366
     
-
 
Commercial real estate
                       
Owner occupied
   
2,381
     
2,379
     
-
 
Non-owner occupied
   
7,445
     
7,408
     
-
 
Commercial and industrial
   
1,654
     
1,099
     
-
 
All other
   
288
     
288
     
-
 
     
12,569
     
11,839
     
-
 
With an allowance recorded:
                       
Multifamily real estate
   
2,073
     
2,061
     
151
 
Commercial real estate
                       
Owner occupied
   
895
     
876
     
407
 
Non-owner occupied
   
2,055
     
2,055
     
86
 
Commercial and industrial
   
306
     
294
     
282
 
Construction and land
   
4,016
     
3,925
     
1,084
 
     
9,345
     
9,211
     
2,010
 
Total
 
$
21,914
   
$
21,050
   
$
2,010
 

- 21 -



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


NOTE  3–LOANS - continued

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2017.  The table includes $199,000 of loans acquired with deteriorated credit quality for which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

   
Unpaid Principal Balance
   
Recorded Investment
   
Allowance for Loan Losses Allocated
 
With no related allowance recorded:
                 
Residential real estate
 
$
446
   
$
308
   
$
-
 
Multifamily real estate
   
334
     
334
     
-
 
Commercial real estate
                       
Owner occupied
   
2,451
     
2,439
     
-
 
Non-owner occupied
   
9,602
     
9,506
     
-
 
Commercial and industrial
   
1,719
     
1,188
     
-
 
Construction and land
   
1,798
     
1,678
     
-
 
All other
   
293
     
293
     
-
 
     
16,643
     
15,746
     
-
 
With an allowance recorded:
                       
Multifamily real estate
 
$
2,128
   
$
2,128
   
$
218
 
Commercial real estate
                       
Owner occupied
   
895
     
875
     
307
 
Non-owner occupied
   
2,072
     
2,072
     
88
 
Commercial and industrial
   
466
     
315
     
204
 
Construction and land
   
4,024
     
3,994
     
685
 
     
9,585
     
9,384
     
1,502
 
Total
 
$
26,228
   
$
25,130
   
$
1,502
 


- 22 -


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


NOTE  3–LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended March 31, 2018 and March 31, 2017.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

   
Three months ended March 31, 2018
   
Three months ended March 31, 2017
 
Loan Class
 
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
   
Average Recorded Investment
   
Interest Income Recognized
   
Cash Basis Interest Recognized
 
                                     
Residential real estate
 
$
303
   
$
-
   
$
-
   
$
356
   
$
1
   
$
1
 
Multifamily real estate
   
2,444
     
9
     
-
     
13,620
     
65
     
61
 
Commercial real estate:
                                               
Owner occupied
   
3,284
     
25
     
25
     
2,770
     
6
     
6
 
Non-owner occupied
   
10,521
     
136
     
136
     
2,161
     
32
     
32
 
Commercial and industrial
   
1,448
     
8
     
8
     
1,558
     
7
     
7
 
Construction and land
   
4,799
     
-
     
-
     
9,789
     
54
     
54
 
All other
   
291
     
4
     
4
     
309
     
-
     
-
 
Total
 
$
23,090
   
$
182
   
$
173
   
$
30,563
   
$
165
   
$
161
 
- 23 -


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


NOTE  3–LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR's as of March 31, 2018 and December 31, 2017:

March 31, 2018
 
TDR's on
Non-accrual
   
Other TDR's
   
Total TDR's
 
                   
Residential real estate
 
$
385
   
$
103
   
$
488
 
Multifamily real estate
   
2,061
     
-
     
2,061
 
Commercial real estate
                       
Owner occupied
   
601
     
1,778
     
2,379
 
Non-owner occupied
   
-
     
7,861
     
7,861
 
Commercial and industrial
   
50
     
486
     
536
 
Construction and land
   
3,925
     
-
     
3,925
 
All other
   
-
     
288
     
288
 
Total
 
$
7,022
   
$
10,516
   
$
17,538
 

December 31, 2017
 
TDR's on
Non-accrual
   
Other TDR's
   
Total TDR's
 
                   
Residential real estate
 
$
393
   
$
107
   
$
500
 
Multifamily real estate
   
2,128
     
-
     
2,128
 
Commercial real estate
                       
Owner occupied
   
601
     
1,783
     
2,384
 
Non-owner occupied
   
-
     
9,904
     
9,904
 
Commercial and industrial
   
56
     
497
     
553
 
Construction and land
   
3,994
     
-
     
3,994
 
All other
   
-
     
293
     
293
 
Total
 
$
7,172
   
$
12,584
   
$
19,756
 

At March 31, 2018, $1,408,000 in specific reserves was allocated to loans that had restructured terms resulting in a provision for loan losses $379,000 for the three months ended March 31, 2018, compared to no provision for loan losses on restructured loans during the three months ended March 31, 2017.  At December 31, 2017, $1,029,000 in specific reserves was allocated to loans that had restructured terms.  There were no commitments to lend additional amounts to these borrowers.
- 24 -


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


NOTE  3–LOANS - continued

There were no TDR's that occurred during the three months ended March 31, 2018 and March 31, 2017.

During the three months ended March 31, 2018 and the three months ended March 31, 2017, there were no TDR's for which there as a payment default within twelve months following the modification.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
- 25 -


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


NOTE  3–LOANS - continued

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis.  For consumer loans, including consumer loans secured by residential real estate, and smaller balance non-homogeneous loans, the analysis involves monitoring the performing status of the loan.  At the time such loans become past due by 90 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
- 26 -


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


NOTE  3–LOANS - continued

As of March 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total Loans
 
                               
Residential real estate
 
$
331,733
   
$
1,043
   
$
9,481
   
$
1
   
$
342,258
 
Multifamily real estate
   
56,527
     
3,546
     
2,427
     
-
     
62,500
 
Commercial real estate:
                                       
Owner occupied
   
125,500
     
5,121
     
6,594
     
-
     
137,215
 
Non-owner occupied
   
205,528
     
1,943
     
10,132
     
-
     
217,603
 
Commercial and industrial
   
68,237
     
4,598
     
3,824
     
-
     
76,659
 
Consumer
   
27,563
     
-
     
361
     
-
     
27,924
 
Construction and land
   
117,514
     
5,310
     
6,259
     
-
     
129,083
 
All other
   
34,170
     
872
     
474
     
-
     
35,516
 
Total
 
$
966,772
   
$
22,433
   
$
39,552
   
$
1
   
$
1,028,758
 

As of December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Total Loans
 
                               
Residential real estate
 
$
327,185
   
$
667
   
$
10,976
   
$
1
   
$
338,829
 
Multifamily real estate
   
55,084
     
4,605
     
2,462
     
-
     
62,151
 
Commercial real estate:
                                       
Owner occupied
   
124,244
     
4,937
     
6,867
     
-
     
136,048
 
Non-owner occupied
   
216,079
     
2,428
     
12,195
     
-
     
230,702
 
Commercial and industrial
   
70,078
     
5,851
     
2,330
     
-
     
78,259
 
Consumer
   
27,889
     
-
     
404
     
-
     
28,293
 
Construction and land
   
126,323
     
5,460
     
7,229
             
139,012
 
All other
   
34,468
     
795
     
495
     
-
     
35,758
 
Total
 
$
981,350
   
$
24,743
   
$
42,958
   
$
1
   
$
1,049,052
 


- 27 -


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


NOTE  4- STOCKHOLDERS' EQUITY AND REGULATORY MATTERS

The Company's principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below.  During 2018 the Banks could, without prior approval, declare dividends to the Company of approximately $7.7 million plus any 2018 net profits retained to the date of the dividend declaration.

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

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following tables).  The final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule by     January 1, 2019.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes, as of March 31, 2018, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.


- 28 -


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


NOTE  4- STOCKHOLDERS' EQUITY AND REGULATORY MATTERS - continued

Shown below is a summary of regulatory capital ratios, exclusive of the capital conservation buffer, for the Company:

   
Mar 31,
2018
   
December 31,
2017
   
Regulatory
Minimum
Requirements
   
To Be Considered
Well Capitalized
 
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
   
14.6
%
   
13.9
%
   
4.5
%
   
6.5
%
Tier 1 Capital (to Risk-Weighted Assets)
   
15.2
%
   
14.4
%
   
6.0
%
   
8.0
%
Total Capital (to Risk-Weighted Assets)
   
16.4
%
   
15.6
%
   
8.0
%
   
10.0
%
Tier 1 Capital (to Average Assets)
   
10.9
%
   
10.7
%
   
4.0
%
   
5.0
%

Beginning on January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over a four year period from 2016 thru 2019. The required capital conservation buffer was 1.25% in 2017, and is 1.875% in 2018.  When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company.  The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50%, and a Total Capital to risk weighted assets ratio of at least 10.50%.  The Company's capital conservation buffer was 8.44% at March 31, 2018 and 7.56% at December 31, 2017, well in excess of the fully phased-in 2.50% required by March 31, 2019.
- 29 -



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


NOTE  5 – STOCK COMPENSATION EXPENSE

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

On March 21, 2018, 54,300 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $18.90, the closing market price of Premier's common stock on the grant date.  These options vest in three equal annual installments ending on March 21, 2021.  On March 15, 2017, 55,500 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $19.01, the closing market price of Premier's common stock on the grant date.  These options vest in three equal annual installments ending on March 15, 2020.

Compensation expense of $27,000 was recorded for the first three months of 2018 while $20,000 was recorded for the first three months of 2017.  Stock-based compensation expense related to incentive stock option grants is recognized ratably over the requisite vesting period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $210,000 at March 31, 2018. This unrecognized expense is expected to be recognized over the next 35 months based on the vesting periods of the options.

- 30 -


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


NOTE  6 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three months ended March 31, 2018 and 2017 is presented below:

   
Three Months Ended
March 31,
 
   
2018
   
2017
 
Basic earnings per share
           
Income available to common stockholders
 
$
5,133
   
$
3,664
 
Weighted average common shares outstanding
   
10,677,100
     
10,643,0787
 
Earnings per share
 
$
0.48
   
$
0.34
 
                 
Diluted earnings per share
               
Income available to common stockholders
 
$
5,133
   
$
3,664