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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2019
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 .
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valuePFBIThe Nasdaq Stock Market LLC

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

Common stock, no par value, – 10,668,58914,636,402 shares outstanding at November 1, 2017April 29, 2019


PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017MARCH 31, 2019
INDEX TO REPORT


Part I - Financial Information
 
Item 1 – Financial Statements
3
Item 2 – Management'sManagement’s Discussion and Analysis 
40
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
5349
Item 4 – Controls and Procedures
5349
Part II - Other Information
5450
Item 1 – Legal Proceedings
5450
Item 1A – Risk Factors
5450
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
5450
Item 3 – Defaults Upon Senior Securities
5450
Item 4 – Mine Safety Disclosures
5450
Item 5 – Other Information
5450
Item 6 – Exhibits
5450
Signatures
5551


PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017MARCH 31, 2019


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, 20162018 for further information in this regard.

Index to consolidated financial statements:


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2017MARCH 31, 2019 AND DECEMBER 31, 20162018
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


  (UNAUDITED)    
  September 30,  December 31, 
  2017  2016 
ASSETS      
Cash and due from banks $41,831  $41,443 
Interest bearing bank balances  21,681   55,720 
Federal funds sold  11,632   7,555 
Cash and cash equivalents  75,144   104,718 
Time deposits with other banks  2,582   2,332 
Securities available for sale  289,203   288,607 
Loans  1,055,324   1,024,823 
Allowance for loan losses  (12,359)  (10,836)
Net loans  1,042,965   1,013,987 
Federal Home Loan Bank stock, at cost  3,185   3,200 
Premises and equipment, net  23,504   24,224 
Real estate and other property acquired through foreclosure  11,458   12,665 
Interest receivable  4,060   3,862 
Goodwill  35,371   35,371 
Other intangible assets  3,581   4,349 
Other assets  1,622   2,878 
Total assets $1,492,675  $1,496,193 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Deposits        
Non-interest bearing $327,965  $319,618 
Time deposits, $250,000 and over  64,919   66,378 
Other interest bearing  876,500   893,390 
Total deposits  1,269,384   1,279,386 
Securities sold under agreements to repurchase  25,116   23,820 
Other borrowed funds  6,000   8,859 
Subordinated debt  5,368   5,343 
Interest payable  358   364 
Other liabilities  3,192   4,237 
Total liabilities  1,309,418   1,322,009 
         
Stockholders' equity        
Common stock, no par value; 20,000,000 shares authorized; 10,668,589 shares issued and outstanding at September 30, 2017, and 10,640,735 shares issued and outstanding at December 31, 2016  110,353   109,911 
Retained earnings  72,449   66,195 
Accumulated other comprehensive income (loss)  455   (1,922)
Total stockholders' equity  183,257   174,184 
Total liabilities and stockholders' equity $1,492,675  $1,496,193 
         
  (UNAUDITED)    
  
March 31,
2019
  
December 31,
2018
 
ASSETS      
Cash and due from banks $24,542  $22,992 
Interest bearing bank balances  52,857   39,911 
Federal funds sold  24,722   17,872 
Cash and cash equivalents  102,121   80,775 
Time deposits with other banks  1,094   1,094 
Securities available for sale  369,082   365,731 
Loans  1,155,874   1,149,301 
Allowance for loan losses  (13,479)  (13,738)
Net loans  1,142,395   1,135,563 
Federal Home Loan Bank stock, at cost  3,568   3,628 
Premises and equipment, net  36,745   29,385 
Real estate acquired through foreclosure  14,378   14,024 
Interest receivable  4,638   4,295 
Goodwill  47,640   47,640 
Other intangible assets  5,040   5,268 
Other assets  1,764   2,712 
Total assets $1,728,465  $1,690,115 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Deposits        
Non-interest bearing $394,130  $391,763 
Time deposits, $250,000 and over  90,490   74,161 
Other interest bearing  969,199   964,203 
Total deposits  1,453,819   1,430,127 
Securities sold under agreements to repurchase  22,025   22,062 
Other borrowed funds  1,450   2,500 
FHLB advances  7,335   8,819 
Subordinated debt  5,413   5,406 
Interest payable  860   733 
Other liabilities  12,336   3,739 
Total liabilities  1,503,238   1,473,386 
         
Stockholders' equity        
Common stock, no par value; 30,000,000 shares authorized; 14,628,902 shares issued and outstanding at March 31, 2019, and 14,624,193 shares issued and outstanding at December 31, 2018  133,338   133,248 
Retained earnings  91,314   87,333 
Accumulated other comprehensive income (loss)  575   (3,852)
Total stockholders' equity  225,227   216,729 
Total liabilities and stockholders' equity $1,728,465  $1,690,115 

See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2019 AND 20162018
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Interest income            
Loans, including fees $13,469  $13,375  $41,667  $39,084 
Securities available for sale                
Taxable  1,427   1,285   4,236   4,075 
Tax-exempt  62   82   198   254 
Federal funds sold and other  176   123   515   328 
Total interest income  15,134   14,865   46,616   43,741 
                 
Interest expense                
Deposits  954   965   2,854   2,917 
Repurchase agreements and other  7   10   21   28 
FHLB advances  -   10   -   32 
Other borrowings  68   101   234   321 
Subordinated debt  74   63   218   181 
Total interest expense  1,103   1,149   3,327   3,479 
                 
Net interest income  14,031   13,716   43,289   40,262 
Provision for loan losses  891   312   2,033   1,436 
Net interest income after provision for loan losses  13,140   13,404   41,256   38,826 
                 
Non-interest income                
Service charges on deposit accounts  1,136   1,031   3,201   2,975 
Electronic banking income  811   791   2,424   2,355 
Secondary market mortgage income  67   64   173   163 
Other  163   176   530   571 
   2,177   2,062   6,328   6,064 
Non-interest expenses                
Salaries and employee benefits  4,760   4,817   14,703   15,025 
Occupancy and equipment expenses  1,511   1,635   4,481   4,697 
Outside data processing  1,344   1,300   4,019   3,935 
Professional fees  196   167   721   500 
Taxes, other than payroll, property and income  189   156   589   473 
Write-downs, expenses, sales of other real estate owned, net  346   765   1,139   1,402 
Amortization of intangibles  252   278   768   862 
FDIC insurance  159   278   506   752 
Other expenses  1,168   1,212   3,401   3,674 
   9,925   10,608   30,327   31,320 
Income before income taxes  5,392   4,858   17,257   13,570 
Provision for income taxes  1,925   1,694   6,207   4,803 
                 
Net income $3,467  $3,164  $11,050  $8,767 
                 
Net income per share:                
Basic $0.33  $0.30  $1.04  $0.83 
Diluted  0.32   0.30   1.03   0.83 
  
Three Months Ended
March 31,
 
  2019  2018 
Interest income      
Loans, including fees $16,289  $14,034 
Securities available for sale        
Taxable  2,338   1,408 
Tax-exempt  92   59 
Federal funds sold and other  345   298 
Total interest income  19,064   15,799 
         
Interest expense        
Deposits  2,050   1,031 
Repurchase agreements and other  9   8 
Other borrowings  21   47 
FHLB advances  55   - 
Subordinated debt  94   78 
Total interest expense  2,229   1,164 
         
Net interest income  16,835   14,635 
Provision for loan losses  560   1,115 
Net interest income after provision for loan losses  16,275   13,520 
         
Non-interest income        
Service charges on deposit accounts  1,094   1,094 
Electronic banking income  822   817 
Secondary market mortgage income  24   32 
Other  236   123 
   2,176   2,066 
Non-interest expenses        
Salaries and employee benefits  5,199   4,778 
Occupancy and equipment expenses  1,664   1,610 
Outside data processing  1,384   1,249 
Professional fees  365   336 
Taxes, other than payroll, property and income  238   240 
Write-downs, expenses, sales of other real estate owned, net  249   (886)
Amortization of intangibles  227   195 
FDIC insurance  124   148 
Other expenses  1,143   1,319 
   10,593   8,989 
Income before income taxes  7,858   6,597 
Provision for income taxes  1,682   1,464 
         
Net income $6,176  $5,133 
         
Net income per share:        
Basic $0.42  $0.38 
Diluted  0.42   0.38 

See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2019 AND 20162018
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Net income $3,467  $3,164  $11,050  $8,767 
                 
Other comprehensive income (loss):
                
Unrealized gains (losses) arising during the period  (68)  15   3,658   4,504 
Reclassification of realized amount  -   -   -   (4)
Net change in unrealized gain on securities  (68)  15   3,658   4,500 
Less tax impact  24   (5)  (1,281)  (1,576)
Other comprehensive income (loss)  (44)  10   2,377   2,924 
                 
Comprehensive income $3,423  $3,174  $13,427  $11,691 
  
Three Months Ended
March 31,
 
  2019  2018 
Net income $6,176  $5,133 
         
Other comprehensive income (loss):
        
Unrealized gains (losses) arising during the period  5,604   (3,862)
Reclassification of realized amount  -   - 
Net change in unrealized gain (loss) on securities  5,604   (3,862)
Less tax impact  (1,177)  811 
Other comprehensive income (loss)  4,427   (3,051)
         
Comprehensive income $10,603  $2,082 



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



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

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016MARCH 31, 2019
(UNAUDITED, DOLLARS IN THOUSANDS)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 ($0.12 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 


  2017  2016 
Cash flows from operating activities      
Net income $11,050  $8,767 
Adjustments to reconcile net income to net cash from operating activities        
Depreciation  1,303   1,461 
Provision for loan losses  2,033   1,436 
Amortization (accretion), net  1,166   2,010 
OREO writedowns, net  434   508 
Stock compensation expense  194   160 
Changes in :        
Interest receivable  (198)  (259)
Other assets  (24)  (140)
Interest payable  (6)  (76)
Other liabilities  (1,045)  (2,071)
Net cash from operating activities  14,907   11,796 
         
Cash flows from investing activities        
Net change in time deposits with other banks  (250)  - 
Purchases of securities available for sale  (49,210)  (22,512)
Proceeds from maturities and calls of securities available for sale  50,787   62,011 
Redemption of FRB and FHLB stock  15   190 
Net change in loans  (30,865)  (51,417)
Acquisition of subsidiary, net of cash received  -   16,385 
Purchases of premises and equipment, net  (654)  (413)
Proceeds from sales of other real estate acquired through foreclosure  1,827   870 
Net cash from (used in) investing activities  (28,350)  5,114 
         
Cash flows from financing activities        
Net change in deposits  (10,020)  8,246 
Net change in agreements to repurchase securities  1,296   3,282 
Repayment of other borrowed funds  (2,859)  (1,824)
Proceeds from stock option exercises  248   645 
Repayment of FHLB advances, net  -   (772)
Common stock dividends paid  (4,796)  (4,338)
Net cash from (used in) financing activities  (16,131)  5,239 
         
Net change in cash and cash equivalents  (29,574)  22,149 
         
Cash and cash equivalents at beginning of period  104,718   72,539 
         
Cash and cash equivalents at end of period $75,144  $94,688 
  
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (loss)
  Total 
Balances, January 1, 2019 $133,248  $87,333  $(3,852) $216,729 
Net income  -   6,176   -   6,176 
Other comprehensive income  -   -   4,427   4,427 
Cash dividends paid ($0.15 per share)  -   (2,195)  -   (2,195)
Stock options exercised  51   -   -   51 
Stock based compensation expense  39   -   -   39 
Balances, March 31, 2019 $133,338  $91,314  $575  $225,227 

See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2019 AND 20162018
(UNAUDITED, DOLLARS IN THOUSANDS)


  2017  2016 
Supplemental disclosures of cash flow information:      
Cash paid during period for interest $3,333  $3,555 
         
Cash paid during period for income taxes  6,395   5,122 
         
Loans transferred to real estate acquired through foreclosure  983   631 
         
Stock issued to acquire subsidiary  -   22,041 
         
Premises transferred to other real estate owned  71   - 
  2019  2018 
Cash flows from operating activities      
Net income $6,176  $5,133 
Adjustments to reconcile net income to net cash from operating activities        
Depreciation  467   433 
Provision for loan losses  560   1,115 
Amortization (accretion), net  (47)  386 
Writedowns (gains on the sale) of other real estate owned, net  (15)  (1,080)
Stock compensation expense  39   27 
Changes in:        
Interest receivable  (343)  342 
Other assets  (228)  1,137 
Interest payable  127   14 
Other liabilities  1,131   (495)
Net cash from operating activities  7,867   7,012 
         
Cash flows from investing activities        
Net change on time deposits with other banks  -   - 
Purchases of securities available for sale  (13,854)  (15,527)
Proceeds from maturities and calls of securities available for sale  15,869   13,717 
Redemption of FHLB stock  60   - 
Net change in loans  (7,555)  19,838 
Purchases of premises and equipment, net  (361)  (346)
Proceeds from sales of other real estate acquired through foreclosure  414   7,145 
Net cash from (used in) investing activities  (5,427)  24,827 
         
Cash flows from financing activities        
Net change in deposits  23,637   30,514 
Net change in agreements to repurchase securities  (37)  (2,517)
Repayment of other borrowed funds  (1,050)  (750)
Repayment of FHLB advances  (1,500)  - 
Proceeds from stock option exercises  51   13 
Common stock dividends paid  (2,195)  (1,601)
Net cash from financing activities  18,906   25,659 
         
Net change in cash and cash equivalents  21,346   57,498 
         
Cash and cash equivalents at beginning of period  80,775   82,663 
         
Cash and cash equivalents at end of period $102,121  $140,161 

Supplemental disclosures of cash flow information:      
Cash paid during period for interest $2,102  $1,150 
Loans transferred to real estate acquired through foreclosure  753   284 
Securities purchased not yet settled  -
   5,059
 
Operating right-of-use asset resulting from lease liability  7,453
   -
 

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


NOTE  1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the Company) and its wholly owned subsidiaries (the “Banks”):
       September 30, 2017         March 31, 2018 
   Year Total Net Income    Year
 Total
  Net Income 
Subsidiary
 
Location 
 Acquired Assets Qtr YTD  Location Acquired Assets  Qtr 
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $425,115  $1,209  $3,509  Vanceburg, Kentucky 1991 $459,409  $1,379 
Premier Bank, Inc. Huntington, West Virginia 1998  1,060,991   2,734   9,007  Huntington, West Virginia 1998  1,261,402   5,374 
Parent and Intercompany Eliminations      6,569   (476)  (1,466)      7,654   (577)
Consolidated Total      $1,492,675  $3,467  $11,050       $1,728,465  $6,176 

All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In May 2014,February 2016, the FASB issued Accounting Standards Update 2014-09,ASU No. 2016-02, Revenue from Contracts with CustomersLeases (Topic 606)842). The ASU createsThis standard requires organizations that are lessees to recognize a new topic, Topic 606,lease liability, which is the lessee’s obligation to provide guidancemake lease payments arising from a lease, measured on revenue recognition for entitiesa discounted basis; and a right-of-use asset, which is an asset that enter into contracts with customersrepresents the lessee’s right to transfer goodsuse, or services or enter into contractscontrol the use of, a specified property for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.lease term.  The new guidance was originallyalso requires lessees to disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU became effective for annual reporting periods,Premier for interim and interim reporting periods within those annual periods beginning after December 15, 2016. However,2018.  The Company leases some of its branch locations.  The Company adopted Topic 842 on January 1, 2019.  The Company applied a modified retrospective transition approach for the applicable leases. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease.  Upon adoption of this standard, the Company recorded a $7.6 million right of use asset, included in April 2015,premises and equipment, determined by calculating an estimated present value of future lease payments over the FASB voted to defer the effective date of ASU 2014-09 by one year, making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.  Companies have the option to apply ASU 2014-09 asextended lives of the original effective date. Early adoption is not permitted.Company’s leases.  The Company plans to adopt the guidance during the first quarter of 2018.  Management continues to evaluate the impact ASU 2014-09 will have on the Company’s consolidated financial statements as well as the most appropriate transition method of application.  Based on this evaluation to date, management has determined that the majority of the revenues earned by the Company are not within the scope of ASU 2014-09 because they are already governed by other accounting standards.  For those revenue streams management has determined to be within the scope of ASU 2014-09, namely elements of non-interest income such as service charges on deposit accounts that are governed by deposit account agreements with customers and the timing of revenue from the sale of real estate acquired through foreclosure, the guidance or any of its amendments is not anticipated to result in any material change in the timing of when the revenue is recognized.  Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on the consolidated financial statements as new interpretations and guidance are issued, such as the applicability of Topic 606 to interchange revenuesalso recorded a $7.6 million finance lease liability, included in the Company’s electronic banking income, focusing on the new disclosures required by the adoption of ASU 2014-09.other liabilities.


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


NOTE  1 - BASIS OF PRESENTATION –- continued

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

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

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.  This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss” or “CECL”.  The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts.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.  ManagementAlthough early adoption is permitted the Company did not elect early adoption.  The company has formed a steering committee thatto 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 data gathering requirements, available economic forecasting and loss estimation models and potential software that would be employed by the Company to facilitateimpact of the adoption of this guidance and its required disclosures on the Company’s financial statements.  Upon adoption, management anticipates an initial one-timecumulative increase in the allowance for loan losses which will be offsetis currently anticipated by management along with a corresponding decrease in capital as permitted by the standard.  However, due to the complexity of the calculation and evolving guidance on adoption management has not yet determined the one-time adjustment.

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


NOTE  2 –SECURITIES- SECURITIES

Amortized cost and fair value of investment securities, by category, at September 30, 2017March 31, 2019 are summarized as follows:

2017 Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 
2019 Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 
Available for sale                        
Mortgage-backed securities                        
U. S. sponsored agency MBS - residential $199,483  $1,028  $(578) $199,933  $257,523  $1,635  $(1,719) $257,439 
U. S. sponsored agency CMO’s - residential  56,330   553   (369)  56,514   71,470   552   (386)  71,636 
Total mortgage-backed securities of government sponsored agencies  255,813   1,581   (947)  256,447   328,993   2,187   (2,105)  329,075 
U. S. government sponsored agency securities  19,344   5   (74)  19,275   22,328   379   (89)  22,618 
Obligations of states and political subdivisions  13,346   140   (5)  13,481   13,581   296   (10)  13,867 
Other securities  3,452   70   -   3,522 
Total available for sale $288,503  $1,726  $(1,026) $289,203  $368,354  $2,932  $(2,204) $369,082 

Amortized cost and fair value of investment securities, by category, at December 31, 20162018 are summarized as follows:

2016 Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 
2018 Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 
Available for sale                        
Mortgage-backed securities                        
U. S. sponsored agency MBS - residential $177,105  $245  $(3,173) $174,177  $259,575  $513  $(4,846) $255,242 
U. S. sponsored agency CMO’s - residential  73,163   761   (657)  73,267   69,231   94   (782)  68,543 
Total mortgage-backed securities of government sponsored agencies  250,268   1,006   (3,830)  247,444   328,806   607   (5,628)  323,785 
U. S. government sponsored agency securities  24,652   23   (174)  24,501   24,154   196   (180)  24,170 
Obligations of states and political subdivisions  16,645   111   (94)  16,662   14,194   176   (43)  14,327 
Other securities  3,453   6   (10)  3,449 
Total available for sale $291,565  $1,140  $(4,098) $288,607  $370,607  $985  $(5,861) $365,731 

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


NOTE  2–2 - SECURITIES - continued

The amortized cost and fair value of securities at September 30, 2017March 31, 2019 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
  
Amortized
Cost
  
Fair
Value
 
Available for sale            
Due in one year or less $9,687  $9,701  $6,795  $6,762 
Due after one year through five years  17,073   17,070   19,152   19,352 
Due after five years through ten years  5,375   5,430   8,490   8,751 
Due after ten years  555   555   4,424   4,642 
Corporate preferred securities  500   500 
Mortgage-backed securities of government sponsored agencies  255,813   256,447   328,993   329,075 
Total available for sale $288,503  $289,203  $368,354  $369,082 

There were no sales of securities during the first three months of 2019 and 2018.

Securities with unrealized losses at September 30, 2017March 31, 2019 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  Less than 12 Months  12 Months or More  Total 
Description of Securities Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 
                                    
U.S government sponsored agency securities $17,242  $(74) $-  $-  $17,242  $(74) $-  $-  $10,288  $(89) $10,288  $(89)
U.S government sponsored agency MBS – residential  56,820   (429)  5,234   (149)  62,054   (578)  10,718   (35)  145,531   (1,684)  156,249   (1,719)
U.S government sponsored agency CMO’s – residential  11,256   (129)  11,184   (240)  22,440   (369)
U.S government sponsored agency CMO – residential  -   -   18,953   (386)  18,953   (386)
Obligations of states and political subdivisions  619   (4)  775   (1)  1,394   (5)  -   -   1,847   (10)  1,847   (10)
Total temporarily impaired $85,937  $(636) $17,193  $(390) $103,130  $(1,026) $10,718  $(35) $176,619  $(2,169) $187,337  $(2,204)

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


NOTE  2–2 - SECURITIES - continued

Securities with unrealized losses at December 31, 20162018 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  Less than 12 Months  12 Months or More  Total 
Description of Securities Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss  Fair Value  Unrealized Loss 
                                    
U.S government sponsored agency securities $17,207  $(174) $-  $-  $17,207  $(174) $999  $-  $11,057  $(180) $12,056  $(180)
U.S government sponsored agency MBS – residential  157,022   (3,173)  -   -   157,022   (3,173)  50,923   (243)  158,791   (4,603)  209,714   (4,846)
U.S government sponsored agency CMO’s – residential  18,374   (373)  8,750   (284)  27,124   (657)  16,359   (41)  26,386   (741)  42,745   (782)
Obligations of states and political subdivisions  7,961   (94)  -   -   7,961   (94)  679   (6)  3,454   (37)  4,133   (43)
Other securities  1,712   (10)  -   -   1,712   (10)
Total temporarily impaired $200,564  $(3,814) $8,750  $(284) $209,314  $(4,098) $70,672  $(300) $199,688  $(5,561) $270,360  $(5,861)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at September 30, 2017March 31, 2019 and December 31, 20162018 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities.  Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.


NOTE  3 - LOANS

Major classifications of loans at September 30, 2017March 31, 2019 and December 31, 20162018 are summarized as follows:

 2017  2016  2019  2018 
Residential real estate $337,502  $342,294  $375,905  $381,027 
Multifamily real estate  70,698   74,165   52,929   54,016 
Commercial real estate:                
Owner occupied  134,773   129,370   138,366   138,209 
Non owner occupied  237,655   220,836 
Non-owner occupied  291,124   282,608 
Commercial and industrial  82,332   76,736   106,383   103,624 
Consumer  29,675   30,916   26,004   27,688 
Construction and land  131,680   128,926 
All other  162,689   
150,506
   33,483   33,203 
 $1,055,324  $1,024,823  $1,155,874  $1,149,301 

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


NOTE  3–LOANS3 - continued

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

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

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

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



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


NOTE  3–LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2017March 31, 2019 was as follows:

Loan Class 
Balance
June 30, 2017
  Provision (credit) for loan losses  
Loans
charged-off
  Recoveries  
Balance
Sept 30, 2017
  
Balance
Dec 31, 2018
  Provision (credit) for loan losses  Loans charged-off  Recoveries  
Balance
March 31, 2019
 
                              
Residential real estate $2,973  $170  $(163) $21  $3,001  $1,808  $42  $(32) $5  $1,823 
Multifamily real estate  1,337   (77)  -   -   1,260   1,649   (61)  -   2   1,590 
Commercial real estate:                                        
Owner occupied  1,618   5   (7)  1   1,617   2,120   236   (533)  1   1,824 
Non owner occupied  2,334   276   (3)  -   2,607 
Non-owner occupied  3,058   400   (57)  -   3,401 
Commercial and industrial  1,093   (6)  (4)  17   1,100   1,897   (97)  (110)  31   1,721 
Consumer  373   10   (49)  33   367   351   110   (107)  11   365 
Construction and land  2,255   (93)  (13)  -   2,149 
All other  1,967   513   (110)  37   2,407   600   23   (51)  34   606 
Total $11,695  $891  $(336) $109  $12,359  $13,738  $560  $(903) $84  $13,479 

Activity in the allowance for loan losses by portfolio segment for the three months ending September 30, 2016ended March 31, 2018 was as follows:

Loan Class 
Balance
June 30, 2016
  Provision (credit) for loan losses  
Loans
charged-off
  Recoveries  
Balance
Sept 30, 2016
  
Balance
Dec 31, 2017
  Provision (credit) for loan losses  Loans charged-off  Recoveries  
Balance
March 31, 2018
 
                              
Residential real estate $2,747  $91  $(51) $3  $2,790  $2,986  $(691) $(49) $16  $2,262 
Multifamily real estate  822   91   -   -   913   978   (320)  (11)  -   647 
Commercial real estate:                                        
Owner occupied  1,442   (72)  -   1   1,371   1,653   164   (2)  1   1,816 
Non owner occupied  2,708   7   -   -   2,715 
Non-owner occupied  2,313   (110)  (16)  -   2,187 
Commercial and industrial  1,111   43   (29)  4   1,129   1,101   813   (267)  4   1,651 
Consumer  306   139   (142)  15   318   328   49   (33)  25   369 
Construction and land  2,408   913   (19)  -   3,302 
All other  1,668   13   (81)  27   1,627   337   297   (67)  39   606 
Total $10,804  $312  $(303) $50  $10,863  $12,104  $1,115  $(464) $85  $12,840 

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


NOTE  3–3 - LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at September 30, 2017March 31, 2019 and December 31, 2016.2018.

 2017  2016  2019  2018 
Residential real estate $1,515  $1,619  $2,655  $2,665 
Commercial real estate                
Owner occupied  1,564   2,013   1,979   2,040 
Non owner occupied  -   5,396 
Non-owner occupied  3,142   3,434 
Commercial and industrial  214   232   358   1,720 
Construction and land  629   1,212 
All other  1,828   2,061   229   225 
Total carrying amount $5,121  $11,321  $8,992  $11,296 
Contractual principal balance $7,116  $14,784  $12,859  $15,436 
                
Carrying amount, net of allowance $5,071  $11,311  $8,992  $11,296 

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $50,000 for the nine-months ended September 30, 2017, but did not increase the allowance for loan losses for purchased impaired loans during the nine-monthsthree-months ended September 30, 2016.March 31, 2019 and March 31, 2018.

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

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

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


NOTE  3–LOANS - continued

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

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


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


NOTE  3–3 - LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at March 31, 2019 and March 31, 2018.

  2019  2018 
Balance at January 1 $642  $754 
New loans purchased  -   - 
Accretion of income  (53)  (69)
Loans placed on non-accrual  (14)  (41)
Income recognized upon full repayment  (42)  - 
Reclassifications from non-accretable difference  -   - 
Disposals  -   - 
Balance at March 31 $533  $644 

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


NOTE  3 - LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2017March 31, 2019 and December 31, 2016.2018.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

September 30, 2017 
Principal Owed on Non-accrual Loans
  
Recorded Investment in Non-accrual Loans
  
Loans Past Due Over 90 Days, still accruing
 
March 31, 2019 Principal Owed on Non-accrual Loans  Recorded Investment in Non-accrual Loans  Loans Past Due Over 90 Days, still accruing 
                  
Residential real estate $3,248  $2,846  $585  $4,568  $3,311  $692 
Multifamily real estate  11,101   11,095   334   4,127   3,849   - 
Commercial real estate                        
Owner occupied  2,052   1,974   63   4,332   4,050   118 
Non owner occupied  310   209   86 
Non-owner occupied  5,890   4,726   362 
Commercial and industrial  2,062   1,054   648   1,128   524   24 
Consumer  331   304   -   225   187   - 
Construction and land  1,346   1,345   13 
All other  6,984   6,863   -   75   73   - 
Total $26,088  $24,345  $1,716  $21,691  $18,065  $1,209 

December 31, 2016 
Principal Owed on Non-accrual Loans
  
Recorded Investment in Non-accrual Loans
  
Loans Past Due Over 90 Days, still accruing
 
December 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 $3,467  $2,794  $606  $4,966  $3,708  $954 
Multifamily real estate  11,157   11,106   334   4,127   3,905   - 
Commercial real estate                        
Owner occupied  1,769   1,704   15   3,692   3,436   56 
Non owner occupied  294   196   36 
Non-owner occupied  5,761   4,592   76 
Commercial and industrial  2,537   1,209   1,008   1,303   625   - 
Consumer  366   347   -   292   253   - 
Construction and land  857   856   - 
All other  8,408   8,391   -   75   73   - 
Total $27,998  $25,747  $1,999  $21,073  $17,448  $1,086 

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

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


NOTE  3 - LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of        March 31, 2019 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 $375,905  $7,503  $1,719  $9,222  $366,683 
Multifamily real estate  52,929   -   111   111   52,818 
Commercial real estate:                    
Owner occupied  138,366   1,609   1,747   3,356   135,010 
Non-owner occupied  291,124   461   3,674   4,135   286,989 
Commercial and industrial  106,383   142   361   503   105,880 
Consumer  26,004   149   52   201   25,803 
Construction and land  131,680   288   833   1,121   130,559 
All other  33,483   2   73   75   33,408 
Total $1,155,874  $10,154  $8,570  $18,724  $1,137,150 

The following table presents the aging of the recorded investment in past due loans as of December 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 $381,027  $7,078  $2,594  $9,672  $371,355 
Multifamily real estate  54,016   -   110   110   53,906 
Commercial real estate:                    
Owner occupied  138,209   124   2,601   2,725   135,484 
Non-owner occupied  282,608   172   3,301   3,473   279,135 
Commercial and industrial  103,624   2,235   262   2,497   101,127 
Consumer  27,688   247   112   359   27,329 
Construction and land  128,926   388   810   1,198   127,728 
All other  33,203   546   73   619   32,584 
Total $1,149,301  $10,790  $9,863  $20,653  $1,128,648 


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


NOTE  3–3 - LOANS - continued

The following table presents the aging ofbalance in the allowance for loan losses and the recorded investment in past due loans by portfolio segment and based on impairment method as of September 30, 2017 by class of loans:March 31, 2019:
 Allowance for Loan Losses  Loan Balances 
Loan Class Total Loans  30-89 Days Past Due  Greater than 90 days past due  Total Past Due  
Loans Not
Past Due
  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 $337,502  $6,460  $1,717  $8,177  $329,325  $-  $1,823  $-  $1,823  $68  $373,182  $2,655  $375,905 
Multifamily real estate  70,698   -   11,429   11,429   59,269   1,231   359   -   1,590   3,849   49,080   -   52,929 
Commercial real estate:                                                    
Owner occupied  134,773   172   1,979   2,151   132,622   140   1,684   -   1,824   3,274   133,113   1,979   138,366 
Non owner occupied  237,655   374   227   601   237,054 
Non-owner occupied  299   3,102   -   3,401   10,174   277,808   3,142   291,124 
Commercial and industrial  82,332   179   1,628   1,807   80,525   203   1,518   -   1,721   440   105,585   358   106,383 
Consumer  29,675   365   121   486   29,189   -   365   -   365   -   26,004   -   26,004 
Construction and land  106   2,043       2,149   1,332   129,719   629   131,680 
All other  162,689   1,370   6,861   8,231   154,458   -   606   -   606   -   33,254   229   33,483 
Total $1,055,324  $8,920  $23,962  $32,882  $1,022,442  $1,979  $11,500  $-  $13,479  $19,137  $1,127,745  $8,992  $1,155,874 

The following table presents the aging ofbalance in the allowance for loan losses and the recorded investment in past due loans by portfolio segment and based on impairment method as of December 31, 2016 by class of loans:2018:
Loan Class Total Loans  30-89 Days Past Due  Greater than 90 days past due  Total Past Due  
Loans Not
Past Due
 
                
Residential real estate $342,294  $6,113  $1,596  $7,709  $334,585 
Multifamily real estate  74,165   -   11,440   11,440   62,725 
Commercial real estate:                    
Owner occupied  129,370   1,746   1,474   3,220   126,150 
Non owner occupied  220,836   1,803   159   1,962   218,874 
Commercial and industrial  76,736   330   2,120   2,450   74,286 
Consumer  30,916   403   223   626   30,290 
All other  150,506   577   8,187   8,764   141,742 
Total $1,024,823  $10,972  $25,199  $36,171  $988,652 


  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 $-  $1,808  $-  $1,808  $298  $378,064  $2,665  $381,027 
Multifamily real estate  1,281   368   -   1,649   3,905   50,111   -   54,016 
Commercial real estate:                                
Owner occupied  692   1,428   -   2,120   2,820   133,349   2,040   138,209 
Non-owner occupied  267   2,791   -   3,058   10,111   269,063   3,434   282,608 
Commercial and industrial  414   1,483   -   1,897   558   101,346   1,720   103,624 
Consumer  -   351   -   351   -   27,688   -   27,688 
Construction and land  142   2,113   -   2,255   1,351   126,363   1,212   128,926 
All other  -   600   -   600   -   32,978   225   33,203 
Total $2,796  $10,942  $-  $13,738  $19,043  $1,118,962  $11,296  $1,149,301 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS3 - continued

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

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016:
  Allowance for Loan Losses  Loan Balances 
Loan Class Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Acquired with Deteriorated Credit Quality  Total  Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Acquired with Deteriorated Credit Quality  Total 
                         
Residential real estate $-  $2,948  $-  $2,948  $379  $340,296  $1,619  $342,294 
Multifamily real estate  -   785   -   785   13,641   60,524   -   74,165 
Commercial real estate:                                
Owner occupied  244   1,299   -   1,543   2,801   124,556   2,013   129,370 
Non-owner occupied  -   2,350   -   2,350   2,373   213,067   5,396   220,836 
Commercial and industrial  266   864   10   1,140   1,418   75,086   232   76,736 
Consumer  -   347   -   347   -   30,916   -   30,916 
All other  86   1,637   -   1,723   12,976   135,469   2,061   150,506 
Total $596  $10,230  $10  $10,836  $33,588  $979,914  $11,321  $1,024,823 
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  3–LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2017.March 31, 2019.  The table includes $199,000$1,531,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

 
Unpaid Principal Balance
  
Recorded Investment
  
Allowance for Loan Losses Allocated
  Unpaid Principal Balance  Recorded Investment  Allowance for Loan Losses Allocated 
With no related allowance recorded:                  
Residential real estate $360  $320  $-  $442  $230  $- 
Multifamily real estate  2,492   2,492   -   110   110   - 
Commercial real estate                        
Owner occupied  2,916   2,855   -   2,916   2,639   - 
Non owner occupied  3,604   3,512   - 
Non-owner occupied  8,552   7,830   - 
Commercial and industrial  1,767   1,012   -   552   42   - 
All other  3,186   3,066   - 
Construction and Land  821   821   - 
  14,325   13,257   -   13,393   11,672   - 
With an allowance recorded:                        
Multifamily real estate $11,102  $11,095  $517   4,017   3,739   1,231 
Commercial real estate                        
Owner occupied  888   870   301   1,548   1,540   140 
Non owner occupied  2,072   2,072   88 
Non-owner occupied  2,886   2,808   299 
Commercial and industrial  468   316   155   403   398   203 
Consumer  19   19   19 
All other  4,116   4,111   518 
Construction and land  511   511   106 
  18,665   18,483   1,598   9,365   8,996   1,979 
Total $32,990  $31,740  $1,598  $22,758  $20,668  $1,979 
            


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


NOTE  3–3 - LOANS - continued

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016.2018.  The table includes $208,000$1,160,000 of loans acquired with deteriorated credit quality thatfor 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
  Unpaid Principal Balance  Recorded Investment  Allowance for Loan Losses Allocated 
With no related allowance recorded:                  
Residential real estate $743  $379  $-  $426  $298  $- 
Multifamily real estate  13,692   13,641   -   110   110   - 
Commercial real estate                        
Owner occupied  1,803   1,766   -   1,305   1,092   - 
Non owner occupied  2,465   2,373   - 
Non-owner occupied  8,458   7,740   - 
Commercial and industrial  2,429   1,338   -   531   -   - 
All other  9,868   9,853   - 
Construction and land  786   786   - 
  31,000   29,350   -   11,616   10,026   - 
With an allowance recorded:                        
Multifamily real estate $4,016  $3,795  $1,281 
Commercial real estate                        
Owner occupied $1,055  $1,035  $244   2,523   2,478   692 
Non-owner occupied  2,852   2,781   267 
Commercial and industrial  431   288   276   562   558   414 
All other  3,124   3,123   86 
Construction and land  565   565   142 
  4,610   4,446   606   10,518   10,177   2,796 
Total $35,610  $33,796  $606  $22,134  $20,203  $2,796 

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, 2019 and March 31, 2018.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

  Three months ended March 31, 2019  Three months ended March 31, 2018 
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 $264  $-  $-  $303  $-  $- 
Multifamily real estate  3,877   -   -   2,444   9   - 
Commercial real estate:                        
Owner occupied  3,874   3   3   3,284   25   25 
Non-owner occupied  10,580   94   91   10,521   136   136 
Commercial and industrial  500   1   1   1,448   8   8 
Construction and land  1,341   8   8   4,799   -   - 
All other  -   -   -   291   4   4 
Total $20,436  $106  $103  $23,090  $182  $173 

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


NOTE  3–LOANS3 - continued

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

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

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

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


NOTE  3–LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR’s as of September 30, 2017March 31, 2019 and December 31, 2016:2018:

September 30, 2017 TDR’s on Non-accrual  Other TDR’s  Total TDR’s 
          
Residential  real estate $317  $110  $427 
Multifamily  real estate  -   2,159   2,159 
Commercial real estate            
    Owner occupied  602   1,766   2,368 
Non owner occupied  -   3,875   3,875 
Commercial and industrial  57   508   565 
Consumer  -   -   - 
All other  4,783   297   5,080 
Total $5,759  $8,715  $14,474 
             
March 31, 2019 
TDR’s on
Non-accrual
  Other TDR’s  Total TDR’s 
          
Residential real estate $126  $93  $219 
Multifamily real estate  3,739   -   3,739 
Commercial real estate            
Owner occupied  1,540   218   1,758 
Non-owner occupied  -   5,946   5,946 
Commercial and industrial  191   -   191 
Total $5,596  $6,257  $11,853 

December 31, 2016 TDR’s on Non-accrual  Other TDR’s  Total TDR’s 
December 31, 2018 
TDR’s on
Non-accrual
  Other TDR’s  Total TDR’s 
                  
Residential real estate $129  $464  $593  $347  $97  $444 
Multifamily real estate  -   2,201   2,201   3,795   -   3,795 
Commercial real estate                        
Owner occupied  -   856   856   1,647   222   1,869 
Non-owner occupied  -   5,964   5,964 
Commercial and industrial  62   352   414   191   -   191 
All other  751   4,395   5,146 
Total $942  $8,268  $9,210  $5,980  $6,283  $12,263 
            

At September 30, 2017 $640,000March 31, 2019, $1,477,000 in specific reserves werewas allocated to loans that had restructured terms resulting in a negative provision for loan losses of $65,000 for the three months ended March 31, 2019, compared to $379,000 in provision for loan losses on restructured loans during the three months ended March 31, 2018.  At December 31, 2018, $1,630,000 in specific reserves was allocated to loans that had restructured terms.  At December 31, 2016 $43,000 in specific reserves were allocated to loans that had restructured terms.  As of September 30, 2017 and December 31, 2016, thereThere were no commitments to lend additional amounts to these borrowers.

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


NOTE  3–3 - LOANS - continued

The following tables presentThere were no TDR’s that occurred during the nine months ended September 30, 2017 and September 30, 2016, and three months ended September 30, 2017 and September 30, 2016.

  Nine months ended Sept 30, 2017  Nine months ended Sept 30, 2016 
Loan Class Number of Loans  Pre-Modification Outstanding Recorded Investment  Post-Modification Outstanding Recorded Investment  Number of Loans  Pre-Modification Outstanding Recorded Investment  Post-Modification Outstanding Recorded Investment 
                   
Residential  real estate  -  $-  $-   8  $483  $483 
Commercial real estate                        
Owner occupied  2   1,525   1,525   3   865   865 
Non owner occupied  2   3,875   3,875   1   100   100 
Commercial and industrial  1   191   191   1   20   20 
All other  -   -   -   1   4,106   4,106 
Total  5  $5,591  $5,591   14  $5,574  $5,574 

  Three months ended Sept 30, 2017  Three months ended Sept 30, 2016 
Loan Class Number of Loans  Pre-Modification Outstanding Recorded Investment  Post-Modification Outstanding Recorded Investment  Number of Loans  Pre-Modification Outstanding Recorded Investment  Post-Modification Outstanding Recorded Investment 
                   
Residential  real estate  -  $-  $-   6  $184  $184 
Commercial real estate                        
Owner occupied  -   -   -   1   255   255 
Non owner occupied  2   3,875   3,875   -   -   - 
All other  -   -   -   1   4,106   4,106 
Total  2  $3,875  $3,875   8  $4,545  $4,545 

The modifications reported above for the three and nine months ended September 30, 2017 involve reducing the borrowers’ required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/March 31, 2019 or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current.  The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans.   The Company increased the allowance for loan losses related to these loans by $88,000 during the three and nine months ended September 30, 2017.

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


NOTE  3–LOANS - continued

The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans.  The Company increased the allowance for loan losses related to these loans by $35,000 during the three months ended September 30, 2016, and by $181,000 during the nine months ended September 30, 2016.March 31, 2018.

During the three and nine months ended September 30, 2017March 31, 2019 and the three and nine months ended September 30, 2016,March 31, 2018, there were no TDR’s for which there was a payment default within twelve months following the modification.

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

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 3090 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

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

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

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

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

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


NOTE  3 - LOANS - continued

As of March 31, 2019, 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 $364,956  $1,624  $9,163  $162  $375,905 
Multifamily real estate  44,251   4,829   3,849   -   52,929 
Commercial real estate:                    
Owner occupied  126,681   4,391   7,294   -   138,366 
Non-owner occupied  274,620   3,567   12,937   -   291,124 
Commercial and industrial  102,187   3,111   1,085   -   106,383 
Consumer  25,693   37   274   -   26,004 
Construction and land  114,764   14,996   1,920   -   131,680 
All other  33,163   247   73   -   33,483 
Total $1,086,315  $32,802  $36,595  $162  $1,155,874 

As of December 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 $369,808  $1,376  $9,681  $162  $381,027 
Multifamily real estate  45,187   4,924   3,905   -   54,016 
Commercial real estate:                    
Owner occupied  126,422   4,840   6,947   -   138,209 
Non-owner occupied  262,149   7,647   12,812   -   282,608 
Commercial and industrial  96,066   5,280   2,278   -   103,624 
Consumer  27,344   31   313   -   27,688 
Construction and land  107,196   19,728   2,002       128,926 
All other  32,749   381   73   -   33,203 
Total $1,066,921  $44,207  $38,011  $162  $1,149,301 

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


NOTE  3–LOANS4 - continuedSTOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

AsThe Company’s principal source of September 30, 2017funds 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 basedadditional restrictions as discussed below.  During 2019 the Banks could, without prior approval, declare dividends to the Company of approximately $8.4 million plus any 2019 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 most recent analysis performed,Company’s financial statements. Under capital adequacy guidelines and the risk categoryregulatory framework for prompt corrective action, the Banks must meet specific guidelines that involve quantitative measures of loans by class of loans istheir assets, liabilities, and certain off-balance sheet items as follows:calculated under regulatory accounting practices.

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

AsThese 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 Decemberthe 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, 2016,2019, that the Company and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:Banks meet all quantitative capital adequacy requirements to which they are subject.

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

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


NOTE  4- STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

The Company’s principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below.  During 2017 the Banks could, without prior approval, declare dividends to the Company of approximately $4.1 million plus any 2017 net profits retained to the date of the dividend declaration.

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

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table).  The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule by     January 1, 2019.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes, as of September 30, 2017, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.


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


NOTE  4-4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS - continued

Shown below is a summary of regulatory capital ratios, exclusive of the capital conservation buffer, for the Company:
 
September 30,
2017
  
December 31,
2016
  
Regulatory
Minimum
Requirements
  
To Be Considered
Well Capitalized
  
Mar 31,
2019
  
December 31,
2018
  
Regulatory
Minimum
Requirements
  
To Be Considered
Well Capitalized
 
Common Equity Tier 1 Capital (to Risk-Weighted Assets)  13.8%  13.4%  4.5%  6.5%  14.4%  14.2%  4.5%  6.5%
Tier 1 Capital (to Risk-Weighted Assets)  14.4%  13.9%  6.0%  8.0%  14.9%  14.7%  6.0%  8.0%
Total Capital (to Risk-Weighted Assets)  15.5%  15.0%  8.0%  10.0%  16.0%  15.9%  8.0%  10.0%
Tier 1 Capital (to Average Assets)  10.7%  10.1%  4.0%  5.0%  11.0%  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 beis measured as a percentage of risk weighted assets and will bewas phased-in over a four year period from 2016 thru 2019, resulting in a required capital conservation buffer2019.  As of 0.625% in 2016 and 1.25% in 2017.  When fully implemented,January 1 2019, the capital conservation buffer will beis 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk-weightedrisk weighted assets, Tier 1 Capital to risk-weightedrisk weighted assets, and Total Capital to risk-weightedrisk 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-weightedrisk weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk-weightedrisk weighted assets ratio of at least 8.50%, and a Total Capital to risk-weightedrisk weighted assets ratio of at least 10.50%.  The Company’s capital conservation buffer was 7.50%8.01% at September 30, 2017March 31, 2019 and 6.95%7.88% at December 31, 2016,2018, well in excess of the fully phased-in 2.50% required by December 31,January 1, 2019.


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


NOTE  5 – PREMISES AND EQUIPMENT

The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options.  Certain leases contain renewal options and rent escalation clauses calling for rent increases of the term of the lease.  Short-term leases of equipment are recognized on a straight-line basis over the lease term.  As of March 31, 2019, the weighted average remaining lease term for operating leases was 10.1 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.92%.

Total lease expense for the three months ended March 31, 2019, which is included in net occupancy and equipment expense, was $312,000, consisting of $28,000 short-term lease expense and $284,000 of operating lease expense.

The following table summarizes the future minimum rental commitments under operating leases:

2019 $750 
2020  987 
2021  995 
2022  995 
2023  799 
2024 and thereafter  4,172 
Total undiscounted cash flows  8,698
 
Discounted cash flows  (1,245
)
Total lease liability
 $7,453 


NOTE  6 - 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 20, 2019, 72,075 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $15.57, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 20, 2022.  On March 21, 2018, 67,875 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $15.12, the closing market price of Premier’s common stock on the grant date adjusted for the 5 for 4 stock split issued by the Company on June 8, 2018.  These options vest in three equal annual installments ending on March 21, 2021.

Compensation expense of $39,000 was recorded for the first three months of 2019 while $27,000 was recorded for the first three months of 2018.  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 $267,000 at March 31, 2019. This unrecognized expense is expected to be recognized over the next 35 months based on the vesting periods of the options.

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


NOTE  5 – STOCK COMPENSATION EXPENSE

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

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

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

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

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


NOTE  6 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 is presented below:

 
Three Months Ended
Sept 30,
  
Nine Months Ended
Sept 30,
  
Three Months Ended
March 31,
 
 2017  2016  2017  2016  2019  2018 
Basic earnings per share                  
Income available to common stockholders $3,467  $3,164  $11,050  $8,767  $6,176  $5,133 
Weighted average common shares outstanding  10,661,157   10,626,185   10,653,594   10,508,809   14,626,234   13,346,375 
Earnings per share $0.33  $0.30  $1.04  $0.83  $0.42  $0.38 
                        
Diluted earnings per share                        
Income available to common stockholders $3,467  $3,164  $11,050  $8,767  $6,176  $5,133 
Weighted average common shares outstanding  10,661,157   10,626,185   10,653,594   10,508,809   14,626,234   13,346,375 
Add dilutive effects of potential additional
common stock
  77,794   60,742   80,418   60,372   72,865   77,825 
Weighted average common and dilutive potential
common shares outstanding
  10,738,951   10,686,927   10,734,012   10,569,181   14,699,099   13,424,200 
Earnings per share assuming dilution $0.32  $0.30  $1.03  $0.83  $0.42  $0.38 

ThereStock options for 72,075 shares of common stock were no stock optionsnot considered antidilutivein computing diluted earnings per share for the three or nine months ended September 30, 2017 and 2016.

On December 9, 2016, Premier paid a 10%March 31, 2019 because they were antidilutive.  Stock options for 132,563 shares of common stock dividend (1were not considered in computing diluted earnings per share for every 10 shares owned on record date) to shareholders of record on December 2, 2016.  Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a result of the stock dividend to aid in the comparison to current period results.three months ended March 31, 2018 because they were antidilutive.

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


NOTE  7 –8 - FAIR VALUE

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

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

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

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

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

Carrying amount is the estimated fair value for cash and due from banks, Federal funds sold, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.  Fair values of time deposits with other banks are based on current rates for similar time deposits using the remaining time to maturity.  It iswas not practicable to determine the fair value of Federal Home Loan Bank stock due to the restrictions placed on its transferability.  For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing, or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated lifelife.  Fair values for loans is measured at the exit price notion by using the discounted cash flow or collateral value but also incorporates additional factors such as using economic factors, credit risk, and credit risk.market rates and conditions.  Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values.  Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not material.

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

Investment Securities:  The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  8 - FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at March 31, 2019 were as follows:

     Fair Value Measurements at March 31, 2019 Using 
  
Carrying
Amount
  Level 1  Level 2  Level 3  Total 
Financial assets               
Cash and due from banks $77,399  $77,399  $-  $-  $77,399 
Time deposits with other banks  1,094   -   1,089   -   1,089 
Federal funds sold  24,722   24,722   -   -   24,722 
Securities available for sale  369,082   -   368,582   500   369,082 
Loans, net  1,142,395   -   -   1,127,961   1,127,961 
Federal Home Loan Bank stock  3,568   n/a   n/a   n/a   n/a 
Interest receivable  4,638   -   1,100   3,538   4,638 
                     
Financial liabilities                    
Deposits $(1,453,819) $(1,047,126) $(403,128) $-  $(1,450,254)
Securities sold under agreements to repurchase  (22,025)  -   (22,025)  -   (22,025)
FHLB advance  (7,335)  -   (7,308)  -   (7,308)
Other borrowed funds  (1,450)  -   (1,444)  -   (1,444)
Subordinated debt  (5,413)  -   (5,484)  -   (5,484)
Interest payable  (860)  (23)  (837)  -   (860)

The carrying amounts and estimated fair values of financial instruments at December 31, 2018 were as follows:

     Fair Value Measurements at December 31, 2018 Using 
  
Carrying
Amount
  Level 1  Level 2  Level 3  Total 
Financial assets               
Cash and due from banks $62,903  $62,903  $-  $-  $62,903 
Time deposits with other banks  1,094   -   1,085   -   1,085 
Federal funds sold  17,872   17,872   -   -   17,872 
Securities available for sale  365,731   -   365,231   500   365,731 
Loans, net  1,135,563   -   -   1,121,517   1,121,517 
Federal Home Loan Bank stock  3,628   n/a   n/a   n/a   n/a 
Interest receivable  4,295   -   1,032   3,263   4,295 
                     
Financial liabilities                    
Deposits $(1,430,127) $(1,039,430) $(384,496) $-  $(1,423,926)
Securities sold under agreements to repurchase  (22,062)  -   (22,062)  -   (22,062)
FHLB advance  (8,819)  -   (8,688)  -   (8,688)
Other borrowed funds  (2,500)  -   (2,478)  -   (2,478)
Subordinated debt  (5,406)  -   (5,509)  -   (5,509)
Interest payable  (733)  (22)  (711)  -   (733)

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


NOTE  8 - FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

     
Fair Value Measurements at
March 31, 2019 Using:
 
  Carrying Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Available for sale            
Mortgage-backed securities            
U. S. agency MBS - residential $257,439  $-  $257,439  $- 
U. S. agency CMO’s - residential  71,636   -   71,636   - 
Total mortgage-backed securities of government sponsored agencies  329,075   -   329,075   - 
U. S. government sponsored agency securities  22,618   -   22,618   - 
Obligations of states and political subdivisions  13,867   -   13,867   - 
Other securities  3,522   -   3,022   500 
Total securities available for sale $369,082  $-  $368,582  $500 

     
Fair Value Measurements at
December 31, 2018 Using:
 
  Carrying Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Available for sale            
Mortgage-backed securities            
U. S. agency MBS - residential $255,242  $-  $255,242  $- 
U. S. agency CMO’s  68,543   -   68,543   - 
Total mortgage-backed securities of government sponsored agencies  323,785   -   323,785   - 
U. S. government sponsored agency securities  24,170   -   24,170   - 
Obligations of states and political subdivisions  14,327   -   14,327   - 
Other securities  3,449   -   2,949   500 
Total securities available for sale $365,731  $-  $365,231  $500 

There were no transfers between Level 1 and Level 2 during 2019 or 2018.

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


NOTE  8 - FAIR VALUE - continued

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2019:

  Securities Available-for-sale 
  
Three Months Ended
March 31, 2019
 
Balance of recurring Level 3 assets at beginning of period $500 
Total gains or losses (realized/unrealized):    
Included in earnings – realized  - 
Included in earnings – unrealized  - 
Included in other comprehensive income  - 
Purchases, sales, issuances and settlements, net  - 
Transfers in and/or out of Level 3  - 
Balance of recurring Level 3 assets at period-end $500 

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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


NOTE  8 - FAIR VALUE - continued

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

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


NOTE  8 - FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at March 31, 2019 are summarized below:

     Fair Value Measurements at March 31, 2019 Using 
  Carrying Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
Impaired loans:            
Multifamily real estate $2,508  $-  $-  $2,508 
Commercial real estate                
Owner occupied  1,400   -   -   1,400 
Non-owner occupied  2,510   -   -   2,510 
Commercial and industrial  194   -   -   194 
Construction and land  405   -   -   405 
Total impaired loans $7,017  $-  $-  $7,017 
                 
Other real estate owned:                
Residential real estate $925  $-  $-  $925 
Multifamily real estate  10,307   -   -   10,307 
Commercial real estate                
Non-owner occupied  200   -   -   200 
Construction and land  150   -   -   150 
Total OREO $11,582  $-  $-  $11,582 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $8,996,000 at March 31, 2019 with a valuation allowance of $1,979,000 and a carrying amount of $10,177,000 at December 31, 2018 with a valuation allowance of $2,796,000 resulting in a negative provision for loan losses of $189,000 for the three months ended March 31, 2019, compared to a $707,000 provision for loan losses for the three months ended March 31, 2018.  The detail of impaired loans by loan class is contained in Note 3 above.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $11,582,000 which is made up of the outstanding balance of $12,423,000 net of a valuation allowance of $841,000 at March 31, 2019.  There were no write downs during the three months ended March 31, 2019 and March 31, 2018.  At December 31, 2018, other real estate owned had a net carrying amount of $11,766,000, made up of the outstanding balance of $12,769,000, net of a valuation allowance of $1,003,000.

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


NOTE  8 - FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at March 31, 2019 are summarized below:

  
March 31,
2019
 Valuation Techniques Unobservable Inputs Range (Weighted Avg)
Impaired loans:         
Multifamily real estate $2,508 sales comparison adjustment for estimated realizable value 45.4%-45.4% (45.4%)
Commercial real estate           
Owner occupied  1,400 sales comparison adjustment for estimated realizable value 31.5%-31.5% (31.5%)
Non-owner occupied  2,510 income approach adjustment for differences in net operating income expectations 16.1%-67.4% (54.2%)
Commercial and industrial  194 sales comparison adjustment for estimated realizable value 0.0%-0.0% (0.0%)
Construction and land  405 sales comparison adjustment for estimated realizable value 53.2%-53.2% (53.2%)
Total impaired loans $7,017     
            
Other real estate owned:           
Residential real estate $925 sales comparison adjustment for estimated realizable value 21.0%-59.8% (22.0%)
Multifamily real estate  10,307 income approach adjustment for differences in net operating income expectations 20.0%-20.0% (20.0%)
Commercial real estate           
Non-owner occupied  200 sales comparison adjustment for estimated realizable value 57.9%-57.9% (57.9%)
Construction and land  150 sales comparison adjustment for estimated realizable value 50.3%-50.3% (50.3%)
Total OREO $11,582        


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


NOTE  8 - FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below:

     Fair Value Measurements at December 31, 2018 Using 
  Carrying Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  Significant Other Observable Inputs (Level 2)  
Significant Unobservable Inputs
(Level 3)
 
Assets:            
Impaired loans:            
Multifamily real estate $2,514  $-  $-  $2,514 
Commercial real estate                
Owner occupied  1,786   -   -   1,786 
Non-owner occupied  2,514   -   -   2,514 
Commercial and industrial  144   -   -   144 
Construction and land  423   -   -   423 
Total impaired loans $7,381  $-  $-  $7,381 
                 
Other real estate owned:                
Residential real estate $984  $-  $-  $984 
Multifamily real estate  10,307   -   -   10,307 
Commercial real estate                
Owner occupied  125   -   -   125 
Non-owner occupied  200   -   -   200 
Construction and land  150   -   -   150 
Total OREO $11,766  $-  $-  $11,766 

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


NOTE  8 - FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below:

  
December 31,
2018
 Valuation Techniques Unobservable Inputs Range (Weighted Avg)
Impaired loans:         
Multifamily real estate $2,514 sales comparison adjustment for estimated realizable value 45.3%-45.3% (45.3%)
Commercial real estate           
Owner occupied  1,786 sales comparison adjustment for estimated realizable value 31.5%-50.6% (35.5%)
Non-owner occupied  2,514 income approach adjustment for differences in net operating income expectations 16.1%-67.2% (54.1%)
Commercial and industrial  144 sales comparison adjustment for estimated realizable value 0.0%-0.0% (0.0%)
Construction and land  423 sales comparison adjustment for estimated realizable value 53.2%-83.6% (54.5%)
Total impaired loans $7,381        
            
Other real estate owned:           
Residential real estate $984 sales comparison adjustment for estimated realizable value 19.2%-59.8% (21.9%)
Multifamily real estate  10,307 income approach adjustment for differences in net operating income expectations 20.0%-20.0% (20.0%)
Commercial real estate           
Owner occupied  125 sales comparison adjustment for estimated realizable value 42.4%-42.4% (42.4%)
Non-owner occupied  200 sales comparison adjustment for estimated realizable value 57.9%-57.9% (57.9%)
Construction and land  150 sales comparison adjustment for estimated realizable value 50.3%-50.3% (50.3%)
Total OREO $11,766        

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

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

FORWARD-LOOKING STATEMENTS

Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, economic conditions (both generally and more specifically in the markets in which Premier operates), competition for Premier's customers from other providers of financial services, government legislation and regulation (which changes from time to time), changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth 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.

A.Results of Operations

A financial institution’s primary sources of revenue are generated by interest income on loans, investments and other earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities.  Effective management of these sources and uses of funds is essential in attaining a financial institution’s optimal profitability while maintaining a minimum amount of interest rate risk and credit risk.

Net income for the three months ended March 31, 2019 was $6,176,000, or $0.42 per diluted share, compared to net income of $5,133,000, or $0.38 per diluted share for the three months ended March 31, 2018.  The increase in income in the first three months of 2019 is largely due to an increase in interest income on loans, an increase in non-interest income, and a decrease in provision for loan losses, all of which more than offset increases in interest expense and non-interest expense.  The comparative increases in interest income and expense as well as non-interest income and expense is, in large part, attributable to the operations of the newly acquired First Bank of Charleston, which were not included in the first quarter 2018 income statement results.  The provision for loan losses was $560,000 during the first three months of 2019, which compares to $1,115,000 of provision expense recorded during the first three months of 2018.  The increase in non-interest expense was partially due an increase in OREO expense resulting from $1,080,000 of net gains on the sale of OREO properties in the first three months of 2018.  OREO expenses and writedowns are traditionally included in Premier’s total non-interest expenses, so the net gains from these sales reduced non-interest expense in the first quarter of 2018.  The annualized returns on average common shareholders’ equity and average assets were approximately 11.14% and 1.46% for the three months ended March 31, 2019 compared to 11.08% and 1.37% for the same period in 2018.

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

Net interest income for the quarter ended March 31, 2019 totaled $16.835 million, up $2,200,000, or 15.0%, from the $14.635 million of net interest income earned in the first quarter of 2018.  Interest income in 2019 increased by $3,265,000, a 20.7% increase, largely due to a $2,255,000, or 16.1%, increase in interest income on loans.  Interest income on loans in the first quarter of 2019 included approximately $719,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter compared to approximately $533,000 of interest income of this kind recognized during the first quarter of 2018.  Otherwise, interest income on loans increased by $2,069,000, or 15.3%, in the first quarter of 2019, largely due to a higher average balance of loans outstanding with a higher average yield during the quarter when compared to the first quarter of 2018.  Interest income on investment securities in the first quarter of 2019 increased by $963,000, or 65.6%, largely due to a higher average balance of investments outstanding with higher average yields when compared to the first quarter of 2018.  Interest income from interest-bearing bank balances and federal funds sold increased by $47,000, or 15.8%, largely due to an increase in the yield on these balances in 2019 resulting from increases in the short-term interest rate policy of the Federal Reserve Board of Governors on a lower average balance outstanding during the first quarter of 2019.
Partially offsetting some of the increase in interest income in the first quarter of 2019 was a $1,065,000, or 91.5%, increase in interest expense.  Interest expense on deposits increased by $1,019,000, or 98.8%, in the first quarter of 2019, largely due to a higher average of interest-bearing deposit balances outstanding in 2019 as well as overall higher rates paid on these deposits. Average interest-bearing deposit balances were up $99.5 million, or 10.5%, in the first quarter of 2019 compared to the first quarter of 2018, largely due to the acquisition of First Bank of Charleston in the fourth quarter of 2018, and the average interest rates paid on interest-bearing deposits increased by 36 basis points from 0.44% in the first quarter of 2018 to 0.80% in the first quarter of 2019.  Adding to the interest expense increase in 2019, was $55,000 of interest expense on the remaining Federal Home Loan Bank borrowings of First Bank of Charleston assumed by Premier as part of the acquisition, while there was no such interest in the first quarter of 2018. Partially offsetting the increase in interest expense from FHLB borrowings, interest expense on other borrowings in the first quarter of 2019 decreased by $26,000, or 55.3%, largely due to a decrease in outstanding borrowings from scheduled and accelerated principal payments on long-term borrowings at the parent company.  Also adding to the overall increase in interest expense during the first quarter of 2019 was a $16,000, or 20.5%, increase in interest expense on Premier’s subordinated debt due to an increase in the variable interest rate paid in 2019.  The variable interest rate is indexed to the short-term three-month LIBOR interest rate, which has increased over the past twelve months in conjunction with increases in short-term interest rate policy by the Federal Reserve Board of Governors.
Premier’s net interest margin during the first three months of 2019 was 4.35% compared to 4.29% for the same period in 2018.  A portion of the interest income on loans is the result of recognizing deferred interest income on loans that paid-off during the period.  Excluding this income, Premier’s net interest margin during the first three months of 2019 would have been 4.17% compared to 4.13% for the same period in 2018.  As shown in the table below, Premier’s yield earned on federal funds sold and interest-bearing bank balances increased to 2.74% in the first three months of 2019, from the 1.93% earned in the first quarter of 2018.  The average yield earned on securities available for sale increased to 2.68% in the first three months of 2019, from the 2.15% earned in the first quarter of 2018.  Similarly, the average yield earned on total loans outstanding increased to 5.73% from the 5.45% average yield earned in the first three months of 2018.  Earning asset yields have increased generally in response to increases in short-term interest rate policy as new loans have been made with higher interest rates and new investment purchases have been at higher market yields.  Similar to the increase in earning asset yields, the average rate paid on interest bearing liabilities increased in the first three months of 2019. 
PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

The average rates paid on interest-bearing deposits increased from 0.44% in the first three months to 2018 to 0.80% during the first three months of 2019, largely due to higher rates paid on certificates of deposit.  The average rate paid on short-term borrowings and other borrowings increased slightly although on lower average balances outstanding.  Furthermore, the average rate paid on Premier’s variable rate subordinated debentures increased from 5.88% in the first three months of 2018 to 7.05% in the first three months of 2019 due to increases in short-term interest rate policy.  These increases in average rates paid, plus the average interest rate on the FHLB borrowings assumed in the acquisition of First Bank of Charleston, resulted in an increase in the average rate paid on total interest-bearing liabilities to 0.84% in the first three months of 2019 compared to 0.48% in the first three months of 2018.  The overall effect was to decrease Premier’s net interest spread by 7 basis points to 4.08%.  However, due to the $48.9 million, or 14.9%, increase in non-interest bearing deposits, Premier’s net interest margin did not decrease but increased by 6 basis points to 4.35% in the first three months of 2019 when compared to the first three months of 2018.

Additional information on Premier’s net interest income for the first quarter of 2019 and first quarter of 2018 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC. 
AVERAGE CONSOLIDATED BALANCE SHEETS 
AND NET INTEREST INCOME ANALYSIS 
  
  Three Months Ended March 31, 2019  Three Months Ended March 31, 2018 
  Balance  Interest  Yield/Rate  Balance  Interest  Yield/Rate 
Assets                  
Interest Earning Assets                  
Federal funds sold and other $51,145  $345   2.74% $62,579  $298   1.93%
Securities available for sale                        
Taxable  352,106   2,338   2.66   265,697   1,408   2.12 
Tax-exempt  13,569   92   3.43   10,186   59   2.93 
Total investment securities  365,675   2,430   2.68   275,883   1,467   2.15 
Total loans  1,153,448   16,288   5.73   1,045,044   14,034   5.45 
Total interest-earning assets  1,570,268   19,063   4.92%  1,383,506   15,799   4.63%
Allowance for loan losses  (13,817)          (12,309)        
Cash and due from banks  24,078           33,797         
Other assets  110,478           88,743         
Total assets $1,691,007          $1,493,737         
                         
Liabilities and Equity                        
Interest-bearing liabilities                        
Interest-bearing deposits $1,042,947   2,050   0.80  $943,475   1,031   0.44 
Short-term borrowings  22,171   9   0.16   22,551   8   0.14 
FHLB Advances  7,675   55   2.91   -   -     
Other borrowings  1,991   21   4.28   4,620   47   4.13 
Subordinated debt  5,408   94   7.05   5,379   78   5.88 
Total interest-bearing liabilities  1,080,192   2,229   0.84%  976,025   1,164   0.48%
Non-interest bearing deposits  377,442           328,527         
Other liabilities  11,690           3,802         
Stockholders’ equity  221,683           185,383         
Total liabilities and equity $1,691,007          $1,493,737         
                         
Net interest earnings     $16,834          $14,635     
Net interest spread          4.08%          4.15%
Net interest margin          4.35%          4.29%
PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

Non-interest income increased by $110,000, or 5.3%, to $2,176,000 for the first three months of 2019 compared to the same three months of 2018, largely due to an $119,000 increase in income from Premier’s partial ownership in a start-up insurance agency, included in other non-interest income.  In the first quarter of 2018, Premier incurred $50,000 of proportional start-up costs from the insurance agency, compared to $69,000 of proportional income from the agency in the first quarter of 2019.  Otherwise, non-interest income decreased by $9,000 in the first quarter of 2019 compared to the same quarter of 2018.   Service charges on deposit accounts remained unchanged in the first quarter of 2019 while electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $5,000, or 0.6%.  These increases were partially offset by an $8,000 decrease in secondary market mortgage income and a $6,000 decrease in other non-interest income.

Non-interest expenses for the first quarter of 2019 totaled $10,593,000, or 2.54% of average assets on an annualized basis, compared to $8,989,000, or 2.44% of average assets for the same period of 2018.  The $1,604,000 increase in non-interest expenses in 2019 when compared to the first quarter of 2018 is due in part to the $1,080,000 of net gains on the sale of OREO during the first quarter of 2018 discussed above.  Otherwise, non-interest expense increased by $524,000, or 5.2% in the first quarter of 2019 compared to the first quarter of 2018, largely due to the operations of the newly acquired First Bank of Charleston location.   Increases in operating costs include a $421,000, or 8.8%, increase in staff costs, a $135,000, or 10.8% increase in data processing expense, a $54,000, or 3.4%, increase in net occupancy and equipment expense, a $32,000, or 30.2%, increase in supplies, and a $32,000, or 16.4%, increase in the amortization of intangible assets.  Other increases include a $29,000 increase in professional fees and a $55,000 increase in expenses and writedowns on OREO properties (after excluding the $1,080,000 of net gains on sales in 2018 discussed above).  These increases were partially offset by a $231,000, or 64.2%, decrease in collection costs and a $24,000, or 16.2% decrease in FDIC insurance.  The unusually high decrease in collection costs is primarily due to loan collection expenses in the first quarter of 2018 related to foreclosure on a large multifamily housing unit.  FDIC insurance expense decreased, largely due to an overall average lower assessment rate on the combined organization.

Income tax expense was $1,682,000 for the first three months of 2019 compared to $1,464,000 for the first three months of 2018.  The increase in income tax expense is largely due to the increase in pretax income described above, as the effective tax rate for the three months ended March 31, 2019 was 21.4% which compares similarly to the 22.2% effective tax rate for the same period in 2018.

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

B.Financial Position

Total assets at March 31, 2019 increased by $38.4 million to $1.728 billion from the $1.690 billion at December 31, 2018.  The increase in total assets since year-end is largely due to a $12.9 million increase in interest bearing bank balances, a $6.9 million increase in federal funds sold, and a $6.6 million increase in total loans.  Earning assets increased by $29.7 million from the $1.578 billion at year-end 2018 to end the quarter at $1.607 billion.

Cash and due from banks at March 31, 2019 was $24.5 million, a $1.5 million increase from the $23.0 million at December 31, 2018.  Interest bearing bank balances increased by $12.9 million from the $41.0 million reported at December 31, 2018 and federal funds sold increased by $6.9 million to $24.7 million at March 31, 2019.  Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases, and are part of Premier’s management of its liquidity and interest rate risks.

Securities available for sale totaled $369.1 million at March 31, 2019, a $3.4 million increase from the $365.7 million at December 31, 2018.  The increase was largely due to the purchase of $13.9 million of investment securities and a $5.6 million increase in market value of securities available for sale, which more than offset $15.9 million of proceeds from monthly principal payments on Premier’s mortgage backed securities portfolio and securities that matured or were called during the quarter. The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies.  Any unrealized losses on securities within the portfolio at March 31, 2019 and December 31, 2018 are believed to be price changes resulting from changes in the long-term interest rate environment and management anticipates receiving all principal and interest on these investments as they come due.  Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

Total loans at March 31, 2019 were $1.156 billion compared to $1.149 billion at December 31, 2018, an increase of approximately $6.6 million, or 0.6%. The increase is largely due to internal loan growth partially offset by regular principal payments, loan payoffs and transfers of loans to OREO upon foreclosure.  Loan payoffs during the first quarter of 2019 resulted in recognizing approximately $316,000 of interest income deferred while the loans were on non-accrual status and $403,000 of remaining fair value discounts associated with the loans.

Premises and equipment increased by $7.4 million, largely due to the recording of a $7.5 million Finance Lease Right to Use Asset in accordance with the adoption of Accounting Standards Update (“ASU”) 2016-02 on January 1, 2019.  Goodwill and other intangible assets decreased by $228,000, due to the amortization of core deposit intangibles.

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

Deposits totaled $1.454 billion as of March 31, 2019, a $23.7 million, or 1.7%, increase from the $1.430 billion in deposits at December 31, 2018.  The overall increase in deposits is largely due to a $16.0 million, or 4.1%, increase in certificates of deposits, partially due to interest rate specials designed to attract and retain time deposits.  Non-interest bearing deposits increased by $2.4 million, or 0.6%, during the first three months of 2019, while savings and money market deposits increased by $5.3 million, or 0.8%.  Repurchase agreements with corporate and public entity customers remained relatively unchanged in the first quarter of 2019, decreasing by $37,000, or 0.2%.  FHLB borrowings decreased by $1.5 million since year-end 2018 due to repayment of borrowings upon maturity.  Other borrowings decreased by $1,050,000 since year-end 2018 due to scheduled principal payments plus additional principal payments on Premier’s existing borrowings.  Subordinated debentures increased by $7,000, due to amortization of the fair value adjustment.  Other liabilities increased by $8.6 million, largely due to the recording of a $7.5 million Finance Lease Liability also in accordance with the adoption of ASU 2016-02 on January 1, 2019.

The following table sets forth information with respect to the Company’s nonperforming assets at March 31, 2019 and December 31, 2018.

  (In Thousands) 
  2019  2018 
Non-accrual loans $18,065  $17,448 
Accruing loans which are contractually past due 90 days or more  1,209   1,086 
Accruing restructured loans  6,257   6,283 
Total non-performing loans  25,531   24,817 
Other real estate acquired through foreclosure (OREO)  14,378   14,024 
Total non-performing assets $39,909  $38,841 
         
Non-performing loans as a percentage of total loans  2.21%  2.16%
         
Non-performing assets as a percentage of total assets  2.31%  2.30%

Total non-performing loans have increased since year-end, largely due to a $617,000 increase in non-accrual loans and a $123,000 increase in accruing loans past due 90 days or more.  These increases in non-performing loans were partially offset by a $26,000 decrease in accruing restructured loans.  Total non-performing assets have increased since year-end, largely due to the increase in non-performing loans plus a $354,000 increase in other real estate acquired through foreclosure (“OREO”).  Other real estate owned increased by $354,000, or 2.5%, largely due to the foreclosure on one commercial real estate property that also resulted in a $450,000 loan charge-off.

Premier continues to make a significant effort to reduce its past due and non-performing loans by reviewing loan files, using the courts to bring borrowers current with the terms of their loan agreements and/or the foreclosure and sale of OREO properties.  As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets.  Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income.  Also, as these plans are executed, other loans may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses.

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

Gross charge-offs totaled $903,000 during the first three months of 2019, largely due to the foreclosure on one commercial real estate property from a previously identified impaired loan relationship that also resulted in a $450,000 loan charge-off.  Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance.  Recoveries recorded during the first three months of 2019 totaled $84,000, resulting in net charge-offs for the first quarter of 2019 of $819,000.  This compares to $379,000 of net charge-offs recorded in the first quarter of 2018.  The allowance for loan losses at March 31, 2019 was 1.17% of total loans compared to 1.20% at December 31, 2018.  The decrease in the ratio is largely due to an increase in total loans outstanding and a decrease in the amount of allowance allocated to loans individually evaluated for impairment.

During the first quarter of 2019, Premier recorded $560,000 of provision for loan losses.  This provision compares to $1,115,000 of provision for loan losses recorded during the same quarter of 2018.  The provision for loan losses recorded during the first quarter of 2019 was primarily to provide for new loans recorded and additional identified credit risk in Premier’s owner occupied and non-owner occupied real estate loan portfolios.  The provision for loan losses recorded during the first quarter of 2018 was primarily to provide for additional identified credit risk in Premier’s commercial and industrial loan, commercial real estate loan and construction loan portfolios.  The level of provision expense is determined under Premier’s internal analyses of evaluating credit risk.  The provisions for loan losses recorded in 2018 and 2019 were made in accordance with Premier’s policies regarding management’s estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America.  Management updated its policies regarding estimation of probable incurred losses in the first quarter of 2018.  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 result was a reduction in the amount of the allowance attributed to collectively impaired residential real estate and multifamily real estate loans and an increase in the amount of allowance attributed to collectively impaired commercial and industrial loans, consumer, construction and all other loans. Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  With the concentrations of commercial real estate loans in the Washington, DC, Richmond, Virginia, and Cincinnati, Ohio markets, fluctuations in commercial real estate values will be monitored. Premier also continues to monitor the impact of declines in the coal mining industry that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry, which may have a larger impact in the central area of West Virginia.  A resulting decline in employment could increase non-performing assets from loans originated in these areas.  In each of the last five years, Premier sold some OREO properties at a gain while other OREO properties have required subsequent write-downs to net realizable values. These factors are considered in determining the adequacy of the allowance for loan losses.  For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans and restructured loans, see Note 3 to the consolidated financial statements.

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

C.Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America.  These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2018.  Some of these accounting policies, as discussed below, are considered to be critical accounting policies.  Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company has identified two accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements.  These policies relate to determining the adequacy of the allowance for loan losses and the identification and evaluation of impaired loans.  A detailed description of these accounting policies is contained in the Company’s annual report on Form 10-K for the year ended December 31, 2018.  There have been no significant changes in the application of these accounting policies since December 31, 2018.

Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time.


D.Liquidity

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


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


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


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


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


5.Maintenance of an adequate available-for-sale security portfolio.  The Company owns $369.1 million of securities at fair value as of March 31, 2019.

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

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


E.Capital

At March 31, 2019, total stockholders’ equity of $225.2 million was 13.0% of total assets.  This compares to total stockholders’ equity of $216.7 million, or 12.8% of total assets on December 31, 2018.  The increase in stockholders’ equity was largely due to the $6.2 million of first quarter net income and a $4.4 million, net of tax, increase in the market value of the investment portfolio available for sale.   This increase in stockholders’ equity was partially offset by a $0.15 per share cash dividend declared and paid during the first quarter of 2019.

Tier 1 capital totaled $181.4 million at March 31, 2019, which represents a Tier 1 leverage ratio of 11.0%.  This ratio is up from the 10.7% Tier 1 leverage ratio and $177.0 million of Tier 1 capital at December 31, 2018.  The slight increase in the Tier 1 leverage ratio is largely due to the growth in Tier 1 capital exceeding the proportional growth in average total assets at March 31, 2019.

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 is measured as a percentage of risk weighted assets and was phased-in over a four year period from 2016 thru 2019.  As of January 1 2019, the capital conservation buffer is 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 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%.  At March 31, 2019, the Company’s capital conservation buffer was 8.01%, well in excess of the fully phased-in 2.50% required by January 1, 2019.

Book value per common share was $15.40 at March 31, 2019 and $14.82 at December 31, 2018.  The increase in book value per share was largely due to the $0.42 per share earned during the first quarter, partially offset by the $0.15 per share quarterly cash dividend to common shareholders declared and paid during the first quarter of 2019.  Also increasing Premier’s book value per share at March 31, 2019 was the $4.4 million of other comprehensive income for the first three months of 2019 related to the increase in the market value of investment securities available for sale, which increased book value by approximately $0.30 per share.

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2019

NOTE  7 – FAIR VALUE - continued

The carrying amountsItem 3.  Quantitative and estimated fair values of financial instruments at September 30, 2017 were as follows:

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

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

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

- 33 -Qualitative Disclosures About Market Risk
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

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

     
Fair Value Measurements at
December 31, 2016 Using:
 
  Carrying Value  
Quoted Prices in Active Markets for Identical Assets
(Level 1)
  
Significant Other Observable Inputs
(Level 2)
  
Significant Unobservable Inputs
(Level 3)
 
Available for sale            
Mortgage-backed securities            
U. S. agency MBS - residential $174,177  $-  $174,177  $- 
U. S. agency CMO’s - residential  73,267   -   73,267   - 
Total mortgage-backed securities of government sponsored agencies  247,444   -   247,444   - 
U. S. government sponsored agency securities  24,501   -   24,501   - 
Obligations of states and political subdivisions  16,662   -   16,662   - 
Total securities available for sale $288,607  $-  $288,607  $- 

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


NOTE  7 – FAIR VALUE - continued

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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

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


NOTE  7 – FAIR VALUE - continued

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

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

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $18,483,000 at September 30, 2017 with a valuation allowance of $1,598,000 and a carrying amount of $4,446,000 at December 31, 2016 with a valuation allowance of $606,000.  The change resulted in a provision for loan losses of $1,165,000 for the nine months ended September 30, 2017, compared to an $215,000 provision for loan losses for the nine months ended September 30, 2016 and a $423,000 provision for loan losses for the three months ended September 30, 2017, compared to a $24,000 provision for loan losses for the three months ended September 30, 2016.  The detail of impaired loans by loan class is contained in Note 3 above.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $5,253,000 which is made up of the outstanding balance of $8,642,000 net of a valuation allowance of $3,389,000 at September 30, 2017.  There were $474,000 of additional write downs during the nine months ended September 30, 2017, compared to $478,000 of additional write downs during the nine months ended September 30, 2016.  For the three months ended September 30, 2017 there were $111,000 of additional write downs compared to $478,000 of additional write downs during the three months ended September 30, 2016.  At December 31, 2016, other real estate owned had a net carrying amount of $6,624,000, made up of the outstanding balance of $9,900,000, net of a valuation allowance of $3,276,000.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – FAIR VALUE - continued

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

  September 30, 2017 Valuation Techniques Unobservable Inputs 
Range
(Weighted Avg)
Impaired loans:         
Multifamily real estate: $10,578 sales comparison adjustment for differences between the comparable sales 4.0%-4.0% (4.0%)
Commercial real estate:           
Owner occupied  569 sales comparison adjustment for estimated realizable value 23.1%-23.1% (23.1%)
Non-owner occupied  1,984 income approach adjustment for differences in net operating income expectations 67.4%-67.4% (67.4%)
Commercial and industrial  161 sales comparison adjustment for estimated realizable value 8.0%-56.5% (52.8%)
All other3,593sales comparisonadjustment for percentage of completion of construction8.0%-23.0% (22.7%)
Total impaired loans $16,885        
            
Other real estate owned:           
Residential real estate $370 sales comparison adjustment for differences between the comparable sales 0.0%-50.2% (16.4%)
Commercial real estate:           
Owner occupied  175 sales comparison adjustment for estimated realizable value 21.8%-21.8% (21.8%)
Non-owner occupied  1,853 sales comparison adjustment for estimated realizable value 31.8%-58.9% (34.7%)
All other  2,855 sales comparison adjustment for estimated realizable value 15.1%-69.0% (18.8%)
Total OREO $5,253        

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


NOTE  7 – FAIR VALUE - continued

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

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


NOTE  7 – FAIR VALUE - continued

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

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


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

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

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


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

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

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

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


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


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


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

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

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


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

  (In Thousands) 
  2017  2016 
Non-accrual loans $24,345  $25,747 
Accruing loans which are contractually past due 90 days or more  1,716   1,999 
Accruing restructured loans  8,715   8,268 
Total non-performing and restructured loans  34,776   36,014 
Other real estate acquired through foreclosure (OREO)  11,458   12,665 
Total non-performing assets $46,234  $48,679 
         
Non-performing loans as a percentage of total loans  3.30%  3.51%
         
Non-performing assets as a percentage of total assets  3.10%  3.25%
Total non-performing and restructured loans have decreased since year-end, largely due to a $1.4 million decrease in non-accrual loans and a $238,000 decrease in loans past due 90 days or more.  These decreases in non-performing loans were partially offset by a $447,000 increase in accruing restructured loans.  Total non-performing assets have decreased since year-end, largely due to the reduction in non-performing loans plus a $1.2 million decrease in other real estate acquired through foreclosure (“OREO”).  Other real estate owned decreased as sales of OREO and additional write-downs on existing properties in the first nine months of 2017 exceeded new foreclosures.
Premier continues to make a significant effort to reduce its past due and non-performing loans by reviewing loan files, using the courts to bring borrowers current with the terms of their loan agreements and/or the foreclosure and sale of OREO properties.  As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets.  Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income.  Also, as these plans are executed, other loans may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2017


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


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


C.Critical Accounting Policies
sensitivity.  The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America.  These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2016.  Some of these accounting policies, as discussed below, are considered to be critical accounting policies.  Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company has identified four accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements.  These policies relate to determining the adequacy of the allowance for loan losses, the identification and evaluation of impaired loans, the impairment of goodwill and the realization of deferred tax assets.  A detailed description of these accounting policies is contained in the Company’s annual report on Form 10-K for the year ended December 31, 2016.  Therebelieves there have been no significant changes in the application of these accounting policiesinterest rate sensitivity since December 31, 2016.
Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time.

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


D.Liquidity

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

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

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

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

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

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

The cash flow statements for the periods presented in the financial statements provide an indication of the Company’s sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity.2018 10-K.


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


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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company currently does not engage in any derivative or hedging activity.  Refer to the Company’s 2016 10-K for analysis of the interest rate sensitivity.  The Company believes there have been no significant changes in the interest rate sensitivity since previously reported on the Company’s 2016 10-K.


Item 4. Controls and Procedures

A. Disclosure Controls & Procedures

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

B. Changes in Internal Controls over Financial Reporting

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

C. Inherent Limitations on Internal Control

"Internal controls" are procedures, which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all so as to permit the preparation of reports and financial statements in conformity with generally accepted accounting principles. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Finally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017MARCH 31, 2019

PART II - OTHER INFORMATION

Item 1.Legal ProceedingsNone
   
Item 1A.Risk Factors 
   
Please refer to Premier's Annual Report on Form 10-K for the year ended December 31, 20162018 for disclosures with respect to Premier's risk factors at December 31, 2016.2018. There have been no material changes since year-end 20162018 in the specified risk factors disclosed in the Annual Report on Form 10-K.
   
Item 2.Unregistered Sales of Equity Securities and Use of ProceedsNone
   
Item 3.Defaults Upon Senior SecuritiesNone
   
Item 4.Mine Safety DisclosuresNot Applicable
   
Item 5.Other InformationNone
   
Item 6.Exhibits 

 (a) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K.

PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2017MARCH 31, 2019


SIGNATURES


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

PREMIER FINANCIAL BANCORP, INC.



Date: NovemberMay 9, 20172019 /s/ Robert W. Walker                                             
Robert W. Walker
President & Chief Executive Officer


Date: NovemberMay 9, 20172019 /s/ Brien M. Chase                                                  
Brien M. Chase
Senior Vice President & Chief Financial Officer




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