pfbi10q03312009.htm


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

FORM 10-Q

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

 
For the quarterly period ended March 31, 2009

 
or

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

 
For the transition period from ___________ to ___________

 
Commission file number 0-20908

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

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

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

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

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

Large accelerated filer  o.
Accelerated filer  o.
   Non-accelerated filer  o
(Do not check if smaller reporting company)
Smaller reporting company  þ
 
       Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).  Yeso     No þ.
 
       Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
 
       Common stock, no par value, – 6,392,772 shares outstanding at May 1, 2009

 
 

PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2009
INDEX TO REPORT


 
3
21
29
29
31
31
31
31
31
31
31
31
32



 
2
 
PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2009


PART I  - FINANCIAL INFORMATION

Item 1.  Financial Statements

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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2008 for further information in this regard.

Index to consolidated financial statements:

Consolidated Balance Sheets                                                                                                                              
4
5
6
7
9









3
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2009 AND DECEMBER 31, 2008
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
(UNAUDITED)
      
   
2009
    
2008
  
ASSETS
            
Cash and due from banks
   $ 29,933     $ 22,148  
Federal funds sold
     40,152       15,899  
Securities available for sale
     155,581       175,741  
Loans held for sale
     342       1,193  
Loans
     466,874       467,111  
Allowance for loan losses
     (8,587 )     (8,544 )
Net loans
     458,287       458,567  
Federal Home Loan Bank and Federal Reserve Bank stock
     3,788       3,931  
Premises and equipment, net
     11,596       11,367  
Real estate and other property acquired through foreclosure
     981       1,056  
Interest receivable
     2,843       3,720  
Goodwill
     28,724       28,543  
Other intangible assets
     1,354       1,431  
Other assets
     560       869  
Total assets
   $ 734,141     $ 724,465  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Deposits
                
Non-interest bearing
   $ 106,092     $ 101,588  
Time deposits, $100,000 and over
     77,472       71,145  
Other interest bearing
     421,328       416,449  
Total deposits
     604,892       589,182  
Federal funds purchased
     77       -  
Securities sold under agreements to repurchase
     13,250       18,351  
Federal Home Loan Bank advances
     6,563       7,607  
Other borrowed funds
     15,078       15,560  
Interest payable
     984       1,054  
Other liabilities
     3,267       3,289  
Total liabilities
     644,111       635,043  
                 
Stockholders' equity
                
Preferred stock, no par value; 1,000,000 shares authorized;
                
none issued or outstanding
     -       -  
Common stock, no par value; 10,000,000 shares authorized;
                
6,392,772 shares issued and outstanding
     2,264       2,264  
Additional paid in capital
     58,279       58,265  
Retained earnings
     27,872       27,346  
Accumulated other comprehensive income
     1,615       1,547  
Total stockholders' equity
     90,030       89,422  
Total liabilities and stockholders' equity
   $ 734,141     $ 724,465  



4
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

   
Three Months Ended
March 31,
  
   
2009
    
2008
  
Interest income
            
Loans, including fees
   $ 7,425     $ 6,553  
Securities available for sale
                
Taxable
     1,636       1,530  
Tax-exempt
     57       36  
Federal funds sold and other
     18       308  
Total interest income
     9,136       8,427  
                 
Interest expense
                
Deposits
     2,353       2,588  
Repurchase agreements and other
     33       53  
FHLB advances and other borrowings
     192       192  
Total interest expense
     2,578       2,833  
                 
Net interest income
     6,558       5,594  
Provision for loan losses
     102       (135 )
Net interest income after provision for loan losses
     6,456       5,729  
                 
Non-interest income
                
Service charges on deposit accounts
     725       638  
Electronic banking income
     236       163  
Secondary market mortgage income
     83       161  
Other
     126       104  
      1,170       1,066  
Non-interest expenses
                
Salaries and employee benefits
     2,794       2,225  
Occupancy and equipment expenses
     712       500  
Outside data processing
     755       584  
Professional fees
     341       179  
Taxes, other than payroll, property and income
     178       154  
Write-downs, expenses, sales of
other real estate owned, net
     77       10  
Amortization of intangibles
     77       -  
Supplies
     108       82  
Other expenses
     722       388  
      5,764       4,122  
Income before income taxes
     1,862       2,673  
Provision for income taxes
     633       899  
                 
Net income
   $ 1,229     $ 1,774  
                 
Weighted average shares outstanding:
                
Basic
     6,393       5,238  
Diluted
     6,393       5,253  
                 
Net income per share:
                
Basic
   $ 0.19     $ 0.34  
Diluted
     0.19       0.34  

5
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
Three Months Ended
March 31,
  
   
2009
    
2008
  
Net income
   $ 1,229     $ 1,774  
                 
Other comprehensive income:
                
Unrealized gains arising during the period
     103       1,703  
Reclassification of realized amount
     -       -  
Net change in unrealized gain (loss) on securities
     103       1,703  
Less tax impact
     35       579  
Other comprehensive income:
     68       1,124  
                 
Comprehensive income
   $ 1,297     $ 2,898  
                 

6
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
2009
    
2008
  
Cash flows from operating activities
            
Net income
   $ 1,229     $ 1,774  
Adjustments to reconcile net income to net cash from
operating activities
                
Depreciation
     270       189  
Provision for loan losses
     102       (135 )
Amortization (accretion), net
     98       (7 )
FHLB stock dividends
     -       (33 )
OREO writedowns (gains on sales), net
     94       5  
Stock compensation expense
     14       26  
Loans originated for sale
     (4,213 )     (7,020 )
Secondary market loans sold
     5,147       5,654  
Secondary market income
     (83 )     (161 )
Changes in :
                
Interest receivable
     877       (83 )
Other assets
     93       (61 )
Interest payable
     (70 )     (23 )
Other liabilities
     (22 )     370  
Net cash from operating activities
     3,536       495  
                 
Cash flows from investing activities
                
Purchases of securities available for sale
     (34,215 )     (44,059 )
Proceeds from maturities and calls of securities available for sale
     54,428       21,970  
Redemption of FRB and FHLB  stock, (net of purchases)
     143       9  
Net change in federal funds sold
     (24,253 )     (5,270 )
Net change in loans
     15       10,483  
Purchases of premises and equipment, net
     (499 )     (401 )
Proceeds from sales of other real estate acquired through foreclosure
     144       -  
Net cash from investing activities
     (4,237 )     (17,268 )
                 
Cash flows from financing activities
                
Net change in deposits
     15,739       15,246  
Cash dividends paid
     (703 )     (524 )
Net change in short-term Federal Home Loan Bank advances
     (1,000 )     -  
Repayment of Federal Home Loan Bank advances
     (44 )     (45 )
Repayment of other borrowed funds
     (482 )     (371 )
Net change in federal funds purchased
     77       (392 )
Net change in agreements to repurchase securities
     (5,101 )     249  
Net cash from financing activities
     8,486       14,163  
                 
Net change in cash and cash equivalents
     7,785       (2,610 )
                 
Cash and cash equivalents at beginning of period
     22,148       22,365  
                 
Cash and cash equivalents at end of period
   $ 29,933     $ 19,755  


(continued)
7
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
THREE MONTHS ENDED MARCH 31, 2009AND 2008
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
2009
    
2008
  
Supplemental disclosures of cash flow information:
            
Cash paid during period for interest
   $ 2,648     $ 2,856  
                 
Loans transferred to real estate acquired through foreclosure
     163       185  
                 

 
 
 
 
 
 
 
 
 
 

 

8
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  1 - BASIS OF PRESENTATION

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

             
March 31, 2009
  
   
Year
  
Total
    
Net Income
  
Subsidiary                               
Location                      
Acquired
  
Assets
    
Quarter
  
Citizens Deposit Bank & Trust
Vanceburg, Kentucky
1991
   $ 125,069     $ 399  
Farmers Deposit Bank
Eminence, Kentucky
1996
     65,023       153  
Ohio River Bank
Ironton, Ohio
1998
     87,653       321  
First Central Bank, Inc.
Philippi, West Virginia
1998
     114,900       155  
Boone County Bank, Inc.
Madison, West Virginia
1998
     172,164       473  
Traders Bank, Inc.
Ravenswood, West Virginia
2008
     168,645       141  
Mt. Vernon Financial Holdings, Inc.
Huntington, West Virginia
1999
     300       (8 )
Parent and Intercompany Eliminations
         387       (405 )
  Consolidated Total
       $ 734,141     $ 1,229  

All significant intercompany transactions and balances have been eliminated.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination.  FAS 141(R) is effective for fiscal years beginning on or after December 15, 2008.  Earlier adoption is prohibited.  There was no impact to the Company upon adoption of this standard, but the accounting for future business combinations will be different from prior practice.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51”  (“FAS 160”), which changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. FAS 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.  Earlier adoption is prohibited. The Company currently does not have any noncontrolling interests in its subsidiaries and therefore the adoption of FAS 160 did not have a significant impact on its results of operations or financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133” (“FAS 161”).  FAS 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. FAS 161 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company currently does not engage in hedging activities and therefore the adoption of this standard did not have a material effect on the Corporation’s financial statements or disclosure requirements.

 
9
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  1 - BASIS OF PRESENTATION – continued

In February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2, “Effective Date of FASB Statement No. 157.”  The Corporation adopted this FSP for non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements, effective January 1, 2009.  The adoption of this FSP did not have a material impact on the Corporation’s financial statements or disclosure requirements.

In April 2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  FSP SFAS No. 157-4 provides factors to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability and circumstances that may indicate that a transaction is not orderly.  In those instances, adjustments to the transactions or quoted prices may be necessary to estimate fair value with SFAS No. 157.  This FSP does not apply to Level 1 inputs.  FSP SFAS No. 157-4 also requires additional disclosures, including inputs and valuation techniques used, and changes thereof, to measure the fair value.  FSP SFAS No. 157-4 is effective for interim and annual reporting periods ending after June 15, 2009.  Early adoption is permitted for periods ending after March 15, 2009.  This FSP amends SFAS No. 157 and supersedes FSP SFAS No. 157-3.  FSP SFAS No. 157-4 is not expected to have a material impact on the Corporation’s financial position or results of operation.

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  FSP SFAS No. 115-2 and SFAS No. 124-2 applies to debt securities classified as available-for-sale and held-to-maturity and makes other-than-temporary impairment guidance more operational and improves related presentation and disclosure requirements.  This FSP requires that impairment losses related to credit losses will be included in earnings. Impairments related to other factors will be included in other comprehensive income, when management asserts it does not have the intent to sell the security and it is not more likely than not that it will have to sell the security before its recovery.

For debt securities held at the beginning of the interim period of adoption for which an other-than-temporary impairment was previously recognized, if the entity does not intend to sell and it is not more likely than not that it will be required to sell the security before recovery of its amortized cost basis, the entity will recognize the cumulative-effect adjustment, including related tax effects, to the beginning balance of retained earnings and corresponding adjustment to accumulated other comprehensive income.  FSP SFAS No. 115-2 and SFAS No. 124-2 is effective for interim and annual periods ending after June 15, 2009.  This FSP amends SFAS No. 115 and other related guidance.  Early adoption is permitted for periods ending after March 15, 2009.  This FSP amends SFAS No. 157 and supersedes FSP SFAS No. 157-3.   The adoption of these FSP’s is not expected to have a material impact on the Corporation’s financial statements.


 
10
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at March 31, 2009 are summarized as follows:
   
Amortized Cost
    
Unrealized Gains
    
Unrealized Losses
    
Fair Value
  
Available for sale
                        
U. S. Treasury securities
   $ 1,495     $ 34     $ -     $ 1,529  
U. S. agency securities
     72,882       581       (75 )     73,388  
Obligations of states and political subdivisions
     7,563       96       (70 )     7,589  
Mortgage-backed securities of government sponsored agencies
     71,062       2,019       (6 )     73,075  
Total available for sale
   $ 153,002     $ 2,730     $ (151 )   $ 155,581  

Amortized cost and fair value of investment securities, by category, at December 31, 2008 are summarized as follows:
   
Amortized Cost
    
Unrealized Gains
    
Unrealized Losses
    
Fair Value
  
Available for sale
                        
U. S. Treasury securities
   $ 1,494     $ 50     $ -     $ 1,544  
U. S. agency securities
     96,154       1,018       (67 )     97,105  
Obligations of states and political subdivisions
     7,065       75       (10 )     7,130  
Mortgage-backed securities of government sponsored agencies
     68,553       1,479       (70 )     69,962  
Total available for sale
   $ 173,266     $ 2,622     $ (147 )   $ 175,741  

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

   
Less than 12 Months
    
12 Months or More
    
Total
  
Description of Securities
  
Fair Value
    
Unrealized Loss
    
Fair Value
    
Unrealized Loss
    
Fair Value
    
Unrealized Loss
  
                                     
U.S. agency securities
   $ 18,539     $ (75 )   $ -     $ -     $ 18,539     $ (75 )
Obligations of states and
political subdivisions
     1,415       (70 )     -       -       1,415       (70 )
Mortgage-backed securities
of government sponsored
agencies
     932       (6 )     -       -       932       (6 )
                                                 
Total temporarily impaired
   $ 20,886     $ (151 )   $ -     $ -     $ 20,886     $ (151 )


 
11
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  2–SECURITIES - continued

Securities with unrealized losses at December 31, 2008 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

   
Less than 12 Months
    
12 Months or More
    
Total
  
Description of Securities
  
Fair Value
    
Unrealized Loss
    
Fair Value
    
Unrealized Loss
    
Fair Value
    
Unrealized Loss
  
                                     
U.S. agency securities
   $ 12,475     $ (67 )   $ -     $ -     $ 12,475     $ (67 )
Obligations of states and
political subdivisions
     871       (10 )     -       -       871       (10 )
Mortgage-backed securities
of government sponsored
agencies
     5,714       (70 )     -       -       5,714       (70 )
                                                 
Total temporarily impaired
   $ 19,060     $ (147 )   $ -     $ -     $ 19,060     $ (147 )

The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored agencies.  The unrealized losses at March 31, 2009 and December 31, 2008 are price changes resulting from changes in the interest rate environment and are not considered to be other than temporary declines in the value of the securities.  Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.


NOTE  3 – LOANS

Major classifications of loans at March 31, 2009 and December 31, 2008 are summarized as follows:
   
2009
    
2008
  
Commercial, secured by real estate
   $ 133,966     $ 133,742  
Commercial, other
     64,660       61,655  
Real estate construction
     25,690       26,182  
Residential real estate
     185,899       185,536  
Agricultural
     2,217       2,446  
Consumer and home equity
     49,001       51,793  
Other
     5,441       5,757  
    $ 466,874     $ 467,111  




 
12
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 sets forth information with respect to the Company’s impaired loans at March 31, 2009 and December 31, 2008.
   
2009
    
2008
  
Impaired loans at period end with an allowance
   $ 10,981     $ 11,610  
Impaired loan at period end with no allowance
     -       -  
Amount of allowance for loan losses allocated
     1,989       2,208  

The following table sets forth information with respect to the Company’s nonperforming loans at March 31, 2009 and December 31, 2008.
   
2009
    
2008
  
Non-accrual loans
   $ 7,377     $ 6,943  
Accruing loans which are contractually past due 90 days or more
     702       625  
Restructured loans
     1,410       1,203  
Total
   $ 9,489     $ 8,771  

NOTE  4 – ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the three months ended March 31, 2009 and 2008 are as follows:
   
Three Months Ended
  
   
March 31,
  
   
2009
    
2008
  
Balance, beginning of period
   $ 8,544     $ 6,497  
Gross charge-offs
     (165 )     (79 )
Recoveries
     106       124  
Provision for loan losses
     102       (135 )
Balance, end of period
   $ 8,587     $ 6,407  



 
13
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  5 – FEDERAL HOME LOAN BANK ADVANCES

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

Advances from the FHLB at March 31, 2009 and December 31, 2008 were as follows:

   
2009
    
2008
  
Payments due at maturity in May 2010, fixed rate  at rates from 6.25% to 6.64%, averaging 6.45%
   $ 4,000     $ 4,000  
Payments due monthly with maturities from November 2011 to July 2012, fixed rates from 4.10% to 4.40%, averaging 4.26%
     563       607  
Overnight borrowed funds
     2,000       3,000  
    $ 6,563     $ 7,607  
                 

Advances are secured by the FHLB stock, certain pledged investment securities and substantially all single family first mortgage loans of the participating Banks.  Scheduled principal payments due on advances during the five years subsequent to March 31, 2009 are as follows:

2009 (remaining nine months)
   $ 2,134  
2010
     4,186  
2011
     186  
2012
     57  
2013
     -  
Thereafter
     -  
    $ 6,563  
         



 
14
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  6 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

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 2009 the Banks could, without prior approval, declare dividends of approximately $2.4 million plus any 2009 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) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2009, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

Shown below is a summary of regulatory capital ratios for the Company:
   
Mar 31,
2009
    
December 31,
2008
    
Regulatory
Minimum
Requirements
    
To Be Considered
Well Capitalized
  
Tier I Capital (to Risk-Weighted Assets)
    
14.0%
       14.0%       4.0%         6.0%  
Total Capital (to Risk-Weighted Assets)
     15.3%       15.3%       8.0%       10.0%  
Tier I Capital (to Average Assets)
       8.7%         8.7%       4.0%         5.0%  

As of March 31, 2009, the most recent notification from the FRB categorized the Company and its subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the preceding table.  There are no conditions or events since that notification that management believes have changed the Company’s category.


 
15
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – STOCK COMPENSATION EXPENSE

From time to time the Company grants stock options to its employees.  The Company accounts for these option grants using SFAS No. 123R, “Share-Based Payments,” which establishes accounting requirements for share-based compensation to employees.  Under SFAS 123R, 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 February 18, 2009, 47,100 incentive stock options were granted out of the 2002 Plan at an exercise price of $6.55.  These options vest in three equal annual installments ending on February 18, 2012.   February 20, 2008, 45,300 incentive stock options were granted out of the 2002 Plan at an exercise price of $12.92, the closing market price of Premier on the grant date.  These options vest in three equal annual installments ending on February 20, 2011.  On January 17, 2007, 37,000 incentive stock options were granted out of the 2002 Plan at an exercise price of $14.22.  These options vest in three equal annual installments ending on January 17, 2010.  On February 15, 2006, 35,250 incentive stock options were granted out of the 2002 Plan at an exercise price of $16.00.  These options vested in three equal annual installments and were fully vested on February 15, 2009.

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

   
2009
    
2008
    
2007
  
Risk-free interest rate
     2.74 %     3.50 %     4.78 %
Expected option life (yrs)
     10.00       7.00       5.00  
Expected stock price volatility
     19.26 %     23.00 %     25.00 %
Dividend yield
     6.72 %     3.10 %     1.41 %
Weighted average fair value of
    options granted during the year
   $ 0.37     $ 2.55     $ 3.81  

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

 
16
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  7 – STOCK COMPENSATION EXPENSE - continued

Compensation expense of $14,000 was recorded for the first three months of 2009 while $26,000 was recorded for the first three months of 2008.  Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $63,000 at March 31, 2009. This unrecognized expense is expected to be recognized over the next 34 months based on the vesting periods of the options.

A summary of the Company’s stock option activity and related information is presented below for the three months ended March 31:

   
 - - - - - - - 2009 - - - - - - - -
    
 - - - - - - - 2008 - - - - - - - -
  
         
Weighted
Average
Exercise
          
Weighted
Average
Exercise
  
   
Options
    
Price
    
Options
    
Price
  
Outstanding at beginning of year
     181,916     $ 12.47       150,249     $ 12.65  
Grants
     47,100       6.55       45,300       12.92  
Exercises
     -       -       -       -  
Forfeitures or expired
     (11,567 )     12.01       -       -  
Outstanding at March 31,
     217,449     $ 8.68       195,549     $ 12.71  
                                 
Exercisable at March 31,
     131,631               117,433          
Weighted average remaining life of options outstanding
     5.7               7.4          
Weighted average fair value of options granted during the year
   $ 0.37             $ 2.55          

Additional information regarding stock options outstanding and exercisable at March 31, 2009, is provided in the following table:

     
- - - - - - - - Outstanding - - - - - - - -
    
- - - - - - - - Currently Exercisable - - - - - - - -
  
Range of Exercise Prices
    
Number
    
Weighted Average Exercise Price
    
Aggregate Intrinsic Value
    
Number
    
Weighted Average Remaining Contractual Life
    
Weighted Average Exercise Price
    
Aggregate Intrinsic Value
  
                                             
$6.50 to $10.00       85,516     $ 7.52     $ -       38,416       4.4     $ 8.70     $ -  
$10.01 to $12.50
       29,333       11.62       -       29,333       5.8       11.62       -  
$12.51 to $15.00
       73,600       13.47       -       34,882       8.2       13.69       -  
$15.01 to $17.50
       29,000       16.00       -       29,000       6.9       16.00       -  
Outstanding - Mar 31, 2009
       214,449       11.22     $ -       131,631       6.3       12.28     $ -  
                                                             


 
17
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  8 – FAIR VALUE

Financial Accounting Standards Board (FASB) Statement 157 defines fair value as 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. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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.

Premier’s reported fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).  The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values (Level 3 inputs).

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, 2009 Using
  
   
March 31, 2009
    
Quoted Prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs
(Level 2)
    
Significant Unobservable Inputs
(Level 3)
  
Assets:
                        
Available for sale securities
   $ 155,581     $ -     $ 155,581     $ -  


 
18
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  8 – FAIR VALUE - continued

         
Fair Value Measurements at December 31, 2008 Using
  
   
Dec. 31, 2008
    
Quoted Prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs (Level 2)
    
Significant Unobservable Inputs
(Level 3)
  
Assets:
                        
Available for sale securities
   $ 175,741     $ -     $ 175,741     $ -  


Assets and Liabilities Measured on a Non-Recurring Basis

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

         
Fair Value Measurements at March 31, 2009 Using
  
   
March 31, 2009
    
Quoted Prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs (Level 2)
    
Significant Unobservable Inputs
(Level 3)
  
Assets:
                        
Impaired Loans
   $ 8,992     $ -     $ -     $ 8,992  

         
Fair Value Measurements at December 31, 2008 Using
  
   
Dec 31, 2008
    
Quoted Prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs (Level 2)
    
Significant Unobservable Inputs
(Level 3)
  
Assets:
                        
Impaired Loans
   $ 9,402     $ -     $ -     $ 9,402  

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $10,981,000 at March 31, 2009 with a valuation allowance of $1,989,000 and a carrying amount of $11,610,000 at December 31, 2008 with a valuation allowance of $2,208,000, resulting in a negative provision for loan losses of $219,000 for the period.

 
19
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)


NOTE  9 – SUBSEQUENT EVENTS

On April 21, 2009, Premier received preliminary approval for the sale of up to $24.1 million of preferred stock and related common warrants under the U.S. Treasury Department’s Capital Purchase Program.  This approval is subject to satisfaction of standard closing conditions and the execution of definitive agreements and closing documents.  The amount is subject to change based upon confirmation by the U.S. Treasury Department of Premier’s eligible risk-weighted assets as of the latest calendar quarter prior to closing.  Issuance of Premier Preferred Stock Pursuant the U.S. Treasury Department’s Capital Purchase Program is a condition precedent to completing the acquisition of Abigail Adams National Bancorp announced on December 31, 2008.

Under the Capital Purchase Program, which is part of the Emergency Economic Stabilization Act, the Treasury Department has agreed to buy preferred stock and related common warrants in qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities.



 
20
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2009

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 three months ended March 31, 2009 was $1,229,000, or $0.19 per share, compared to net income of $1,774,000, or $0.34 per share for the three months ended March 31, 2008. The decrease in income in 2009 is largely due to decreasing yields on earning assets, particularly federal funds sold, and increases in non-interest expenses as well as the existence of benefits to 2008 net income, such as negative provisions for loan losses and reimbursed collection expenses, which did not reoccur in 2009.   The annualized returns on shareholders’ equity and average assets were approximately 5.44% and 0.68% for the three months ended March 31, 2009 compared to 10.20% and 1.28% for the same period in 2008.

Net interest income for the three months ending March 31, 2009 totaled $6.56 million, up $964,000 or 17.2% from the $5.59 million of net interest income earned in the first three months of 2008, as the $1.349 million of additional net interest income of the combined Traders Bank more than offset the 6.9% decrease in net interest income of Premier’s other five banks.  The operations from the acquisitions of Citizens First Bank (“Citizens First) and Traders Bankshares, Inc. (“Traders”), (now merged together as Traders Bank), both of which occurred at the close of business on April 30, 2008 are included in the consolidated financial statements of Premier only from the date of acquisition and thus are not included in the comparison first quarter of 2008 results.  Interest income in 2009 increased by $709,000 or 8.4%, as a result of the $1.95 million of interest income added by the operations of Traders Bank.  Excluding the operations of Traders Bank, interest income decreased by $1.24 million or 14.7% in 2009.  Interest income on loans decreased by $798,000, due to lower loan yields even though on a higher average volume of loans outstanding.  Interest earned on investments decreased $151,000, due to lower average yields on a lower average volume of investments.  Interest earned on federal funds sold decreased by $288,000, largely due lower yields earned resulting from the Federal Reserve Board of Governors’ policy to stimulate the economy by maintaining the federal funds sold rate near 0.25%.
 
21
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2009
 
Partially offsetting the decrease in interest income, interest expense decreased in total by $255,000 or 9.0% in 2009 compared to 2008, which includes the $602,000 of increase in interest expense in 2009 from the Traders Bank operations.  Excluding the Traders Bank operations, interest expense decreased by $857,000 or 30.3% in 2009 compared to the first quarter of 2008.  Interest expense on deposits decreased by $837,000 or 32.3%, largely due to lower rates paid, although on a slightly higher average balance outstanding.  Interest expense on repurchase agreements and other short-term borrowings decreased $20,000, largely due to lower rates paid even though on a larger average balance.  Interest expense on FHLB advances and other borrowings remained unchanged as the increase in interest expense from higher average balance of these borrowings was offset by the lower rates paid on the variable rate portion of the other borrowings.  The decreases in all sources of interest income and expense (excluding the operations of Traders Bank) in 2009 are largely the result of the decrease in market interest rates following the Federal Reserve Bank Board of Governors’ monetary policy changes in 2008.  The Board of Governors’ policy to reduce the federal funds rate to nearly zero coupled with the U.S. Treasury actively buying investment securities has significantly reduced the yield on much of Premier’s earning assets including investments, federal funds sold and variable rate loans.  Premier has tried to offset some of the lower interest income by lowering the rates paid on its deposits and repurchase agreements with customers.  The overall result has been a decrease in Premier’s net interest margin in the first three months of 2009 to 4.01% compared to 4.38% for the same period in 2008.


 
22
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2009

 
Additional information on Premier’s net interest income for the first quarter of 2009 and first quarter of 2008 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
  
AVERAGE CONSOLIDATED BALANCE SHEETS
  
AND NET INTEREST INCOME ANALYSIS
  
   
   
Three Months Ended March 31, 2009
    
Three Months Ended March 31, 2008
  
   
Balance
    
Interest
    
Yield/Rate
    
Balance
    
Interest
    
Yield/Rate
  
Assets
                                    
Interest Earning Assets
                                    
Federal funds sold and other
   $ 41,113     $ 18       0.18 %   $ 39,118     $ 308       3.16 %
Securities available for sale
                                                
Taxable
     151,572       1,636       4.32       132,485       1,530       4.62  
Tax-exempt
     7,241       57       4.77       3,809       36       5.73  
Total investment securities
     158,813       1,693       4.34       136,294       1,566       4.65  
Total loans
     464,705       7,425       6.48       338,610       6,553       7.76  
Total interest-earning assets
     664,631       9,136       5.58 %     514,022       8,427       6.59 %
Allowance for loan losses
     (8,569 )                     (6,560 )                
Cash and due from banks
     24,380                       14,222                  
Other assets
     47,084                       27,234                  
Total assets
   $ 727,526                     $ 548,918                  
                                                 
Liabilities and Equity
                                                
Interest-bearing liabilities
                                                
Interest-bearing deposits
   $ 493,293       2,353       1.93     $ 377,448       2,588       2.75  
Short-term borrowings
     15,690       33       0.85       12,768       53       1.66  
FHLB advances
     5,658       72       5.16       4,814       74       6.17  
Other borrowings
     15,300       120       3.18       8,208       118       5.77  
Total interest-bearing liabilities
     529,941       2,578       1.97 %     403,238       2,833       2.82 %
Non-interest bearing deposits
     103,380                       74,141                  
Other liabilities
     3,762                       2,735                  
Shareholders’ equity
     90,443                       68,804                  
Total liabilities and equity
   $ 727,526                     $ 548,918                  
                                                 
Net interest earnings
           $ 6,558                     $ 5,594          
Net interest spread
                     3.61 %                     3.77 %
Net interest margin
                     4.01 %                     4.38 %
                                                 


 
23
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2009
 
Non-interest income increased $104,000 to $1,170,000 for the first three months of 2009.  Included in this increase is $228,000 of non-interest income from the operations of Traders Bank. Excluding their operations, service charges on deposit accounts decreased by $58,000 or 9.1%, secondary market mortgage income decreased by $78,000 or 48.4%, while electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $18,000 or 11.0%.  The decrease in service charges on deposit accounts is largely due to lower total NSF fees as Premier believes that deposit customers seem to keep a closer watch on their available deposit balances as economic conditions tighten.  Secondary market mortgage income decreased significantly as the number of mortgage buyers in the private sector has decreased substantially and government agency buyers have increased their requirements to approve the purchase of mortgage loans.  Premier concentrates its efforts on selling high quality mortgage loans and routinely searches for new buyers for these loans; however, the volume of future sales may depend on factors beyond the control of the Company.  Electronic banking income increased largely due to continued increases in Premier’s deposit customer base and customers’ greater propensity to use electronic means to conduct their banking business.  Premier’s conversion to a more modern banking software system in 2005 has allowed Premier to offer more electronic banking services and made it easier for customers to conduct their banking electronically.
 
Non-interest expenses for the first quarter of 2009 totaled $5,764,000 or 3.21% of average assets on an annualized basis compared to $4,122,000 or 3.01% of average assets for the same period of 2008.  The $1,642,000 increase in non-interest expenses in 2009 when compared to the first quarter of 2008 is largely due to the $1,371,000 of additional non-interest expenses from the operations of Traders Bank.  Excluding their operations, non-interest expense in the first quarter of 2009 increased by $271,000 or 6.6%.  Excluding the operations of Traders Bank, staff costs increased by $70,000 or 3.1%, in 2009, professional fees increased by $109,000 or 60.9%, and other operating expenses increased by $129,000 or 33.2%.  These increases were partially offset by a $39,000 decrease in write-downs, expenses and sales of other real estate owned (OREO) and a $10,000 decrease in taxes other than payroll, property and income.  The increase in staff costs in 2009 was largely due to normal salary and benefit increases.  Occupancy and equipment expenses increased by only $3,000, or 0.6% in the first quarter of 2009, while outside data processing costs remained unchanged from the first quarter of 2008.  Professional fees increased largely due to legal expenses incurred in connection with the proposed acquisition of Abigail Adams National Bancorp and other legal fees incurred to settle outstanding lawsuits. Other operating expenses were higher in the first quarter of 2009 largely due to $125,000 of collections expenses that were reimbursed to the Company in the first quarter 2008 reducing the amount of reported expenses in 2008.  Other operating expense also includes a $23,000 or 47.9% increase in FDIC insurance premiums in the first quarter of 2009 compared to the same quarter in 2008.
 
Income tax expense was $633,000 for the first three months of 2009 compared to $899,000 for the first three months of 2008.  The effective tax rate for the three months ended March 31, 2009 increased slightly to 34.0% compared to the 33.6% effective tax rate for the same period in 2008.  The decrease in income tax expense can be primarily attributed to the decrease in pre-tax income detailed above.  The increase in the effective tax rate is largely due to certain expenses incurred in connection with the planned acquisition of Abigail Adams that are not deductible for income tax purposes.

 
24
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2009

B.         Financial Position
 
Total assets at March 31, 2009 increased $9.6 million to $734.1 million from the $724.5 million at December 31, 2008.  Earning assets increased to $667.7 million at March 31, 2009 from the $664.1 million at December 31, 2008, an increase of $3.6 million, or 0.5%.  The increase in earnings assets was largely due to an increase in federal funds sold and cash and due from banks, with a partially offsetting decrease in securities available-for-sale (see below).
 
Cash and due from banks at March 31, 2009 was $29.9 million, a $7.8 million increase from the $22.1 million at December 31, 2008.  Federal funds sold increased $24.3 million from the $15.9 million reported at December 31, 2008.  Changes in these two highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans and are part of Premier’s management of its liquidity and interest rate risks.  The increase in federal funds sold during the first three months of 2009 is in response to proceeds from increases in total deposits plus funds from the early redemption of investment securities by the issuers.  Premier has been reluctant to reinvest these funds as investment yields on seasoned securities have been suppressed by the U.S. Treasury’s program to purchase investment securities in the open market.  Similarly, yields on newly issued high quality securities are also very low due to the low interest rate environment resulting from the U.S. Treasury’s program and the Federal Reserve’s policy on interest rates.  The increase in cash and due from banks is a result of keeping additional funds on deposit with the Federal Reserve which is paying a higher rate of interest than most yields on Federal Funds Sold.
 
Securities available for sale totaled $155.6 million at March 31, 2009, a $20.2 million decrease from the $175.7 million at December 31, 2008.  The decrease was largely due to $54.4 million of investment calls at maturities that occurred during the first three months of 2009 versus the $34.2 million of new investment purchases during the same period.  The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored agencies.  The unrealized gains at March 31, 2009 and December 31, 2008 are price changes resulting from changes in the interest rate environment.  Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.
 
Total loans at March 31, 2009 were $466.9 million compared to $467.1 million at December 31, 2008, a decrease of approximately $237,000.  The slight decrease in loans is largely due to new loan production which substantially offset loan payoffs and principal payments during the first quarter of 2009.
 
Deposits totaled $604.9 million as of March 31, 2009, a $15.7 million increase from the $589.2 million in deposits at December 31, 2008.  The overall increase in deposits is due an across the board increase in deposit balances at Premier’s subsidiary banks.  Non-interest bearing deposits increased by $4.5 million or 4.4%, from December 31, 2008 to March 31, 2009.  Likewise, other interest bearing deposits (CD’s under $100,000, savings accounts and interest bearing transaction accounts) increased by $4.9 million or 1.2% during the same time frame.  Time deposits $100,000 and over increased by $6.3 million or 8.9%, from December 31, 2008 to March 31, 2009.  Contrary to the trend in total deposits, repurchase agreements with corporate and public entity customers decreased during the first quarter of 2009, declining by $5.0 million to $13.3 million as of March 31, 2009.

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2009
 
Long-term Federal Home Loan Bank (FHLB) advances declined by $44,000 in the first three months of 2009, and other borrowed funds decreased by $482,000 during that time due to regularly scheduled principal payments.  FHLB advances also decreased by $1.0 million as the $3.0 million of overnight borrowings from the FHLB at December 31, 2008 was reduced to $2.0 million at March 31, 2009.  See Note 5 to the consolidated financial statements for additional information on the Company’s outstanding FHLB advances.

The following table sets forth information with respect to the Company’s nonperforming assets at March 31, 2009 and December 31, 2008.

   
(In Thousands)
  
   
2009
    
2008
  
Non-accrual loans
   $ 7,377     $ 6,943  
Accruing loans which are contractually past due 90 days or more
     702       625  
Restructured
     1,410       1,203  
Total non-performing loans
     9,489       8,771  
Other real estate acquired through foreclosure (OREO)
     981       1,056  
Total non-performing assets
   $ 10,470     $ 9,827  
                 
Non-performing loans as a percentage of total loans
     2.03 %     1.88 %
                 
Non-performing assets as a percentage of total assets
     1.43 %     1.36 %
 
Total non-performing loans have increased since year-end, due to increases on non-accrual loans, loans past due 90 days or more and loans restructured in an effort help borrowers meet their obligation to repay their loans.  These increases were partially offset by a decrease in other real estate acquired through foreclosure.  The increase in non-accrual loans was largely due to three commercial credits going past due at the newly acquired Traders Bank.  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.
 
During the first quarter of 2009, the Company recorded $102,000 of additional provisions for loan losses.  This compares to the reversal $135,000 of previously recorded provisions for loan losses, commonly referred to as “negative provisions”, during the first quarter of 2008.  Any increases or decreases in the provision for loan losses are 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.  The additional provisions recorded during the first quarter of 2009 were in response to Premier’s estimation of increased credit risk in the loan portfolio due to uncertainties related to the ability of borrowers’ to repay loans in a declining economy, the Company’s increase in non-accrual and loans past due more than 90 days and the level of charge-offs recorded during the first three months of 2009.  The negative provisions in the first quarter of 2008 were the combined result of continued improvement in the estimated credit risk at banks formerly

PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
MARCH 31, 2009
 
subject to regulatory agreements, payments on loans previously identified as having significant credit risk, net recoveries recorded during the quarter and the $10.6 million decline in loans outstanding.  In the coming months, as management evaluates the adequacy of the allowance for loan losses, Premier will continue to monitor the impact that national housing market price declines may have on its local markets and local collateral valuations and also the impact that the downturn in the national economy will have on local businesses and individual borrowers, potentially affecting their repayment patterns.  While some price deterioration is expected, it is not currently anticipated that Premier’s markets will be impacted as severely as other areas of the country due to the historically modest increases in real estate values in the Company’s markets.  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.
 
Gross charge-offs totaled $165,000 during the first three months of 2009.  Any collections on these 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 2009 totaled $106,000, resulting in net charge-offs for the first quarter of 2009 of $59,000.  This compares to $45,000 of net recoveries recorded in the first quarter of 2008.  The allowance for loan losses at March 31, 2009 was 1.84% of total loans as compared to 1.83% at December 31, 2008.  The slightly increasing percentage of allowance for loan losses to total loans is largely due to $102,000 of additional provisions for loan losses exceeding the $59,000 of net charge-offs recorded in the first quarter of 2009 as there was very little change in total loans outstanding during that time.

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, 2008.  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 impairment of goodwill.  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, 2008.  There have been no significant changes in the application of these accounting policies since December 31, 2008.

           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.

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

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 $100,000 or more.  Management believes that the majority of its $100,000 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 $155.6 million of securities at fair value as of March 31, 2009.
 
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, 2009, total shareholders’ equity of $90.0 million was 12.3% of total assets.  This compares to total shareholders’ equity of $89.4 million or 12.3% of total assets on December 31, 2008.
 
Tier I capital totaled $61.1 million at March 31, 2009, which represents a Tier I leverage ratio of 8.7%.  This ratio is unchanged from the 8.7% at December 31, 2008 as the growth in Tier I capital kept pace with the growth in total assets during the first quarter of 2009.
 
Book value per share was $14.08 at March 31, 2009, and $13.99 at December 31, 2008.  The increase in book value per share was the result of the $0.19 per share earned during the quarter less the $0.11 per share common dividend.  Also increasing the book value per share was $68,000 of other comprehensive income for the first three months of 2009 related to the after tax increase in the market value of investment securities available for sale.


PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2009

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 2008 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 2008 10-K.


Item 4(T). 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.         Management’s Report on Internal Control Over Financial Reporting
 
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, we believe that, as of March 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s 2008 annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

     
/s/ Robert W. Walker
  
/s/ Brien M. Chase
Robert W. Walker, President and
  
Brien M. Chase, Senior Vice President
Chief Executive Officer
  
and Chief Financial Officer
     
Date:  May 14, 2009
  
Date:  May 14, 2009
     


 
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PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2009
 
C.         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.

D.         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.


 
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PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2009

PART II - OTHER INFORMATION

Item 1.        Legal Proceedings                                                                        None

Item 1A.     Risk Factors

Please refer to Premier’s Annual Report on Form 10-K for the year ended December 31, 2008 for disclosures with respect to Premier’s risk factors at December 31, 2008. There have been no material changes since year-end 2008 in the specified risk factors disclosed in the Annual Report on Form 10-K.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds  None
 
Item 3.       Defaults Upon Senior Securities                                                   None

Item 4.       Submission of Matters to a vote of Security Holders       None
 
Item 5.       Other Information                                                                         None

Item 6.       Exhibits

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

       31.1     Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       31.2     Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       32        Certification Pursuant to 18 U.S.C §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
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PREMIER FINANCIAL BANCORP, INC.
MARCH 31, 2009


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: May 14, 2009                                         /s/ Robert W. Walker                                                          
Robert W. Walker
President & Chief Executive Officer


Date: May 14, 2009                                         /s/ Brien M. Chase                                                          
Brien M. Chase
Senior Vice President & Chief Financial Officer


 
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