UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





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





For the fiscal year ended December 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








Securities registered pursuant to Section 12(b) of the Act:





Title of each class

Name of exchange on which registeredCommon Stock without par value

NASDAQ:GMS





Securities registered pursuant to Section 12(g) of the Act:  NONE





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                     Yeso     No þ.





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange ActYeso     No þ.





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  YesþNoo.





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


YesoNoo.


Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K.o





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


Large accelerated filer  o.
Accelerated filer  o.
Non-accelerated filer  o.
Smaller reporting company  þ





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





As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $35,770,197 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.





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





Title of each class

Outstanding at March 15, 2010Common Stock without par value

7,937,143








DOCUMENTS INCORPORATED BY REFERENCE





Document

Parts Into Which IncorporatedProxy Statement for the Annual Meeting of Shareholders to be held on June 16, 2010.

Part III











Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








TABLE OF CONTENTSPART IItem 1.
Description of Business


4Item 1A.
Risk Factors


20Item 1B.
Unresolved Staff Comments


35Item 2.
Properties


35Item 3.
Legal Proceedings


35Item 4.
Submissions of Matters to a Vote of Security Holders


35PART IIItem 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities


36Item 6.
Selected Financial Data


39Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


40Item 7A.
Quantitative and Qualitative Disclosures About Market Risk


73Item 8.
Financial Statements and Supplementary Data


91Report of Independent Registered Public Accounting Firm


93Consolidated Balance Sheets


94Consolidated Statements of Income


95Consolidated Statements of Comprehensive Income


96Consolidated Statements of Changes in Stockholders’ Equity


97Consolidated Statements of Cash Flows


98Notes to Consolidated Financial Statements


100Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


149Item 9A(T).
Controls and Procedures


149Item 9B.
Other Information


150PART IIIItem 10.
Directors, Executive Officers and Corporate Governance


151Item 11.
Executive Compensation


151Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


151Item 13.
Certain Relationships and Related Transactions, and Director Independence


151Item 14.
Principal Accountant Fees and Services


151PART IVItem 15.
Exhibits and Financial Statement Schedules


152Signatures


156





3
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








PART I





Item 1.  Description of Business





THE COMPANY




Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a multi-bank holding company that, as of March 15, 2010 operates nine banking offices in Kentucky, three banking offices in Ohio, thirteen banking offices in West Virginia, five banking offices in Washington,
DC, one banking office in Maryland and two banking offices in Virginia. At December 31, 2009, Premier had total consolidated assets of $1,101.8 million, total consolidated deposits of $913.8 million and total consolidated shareholders' equity of $128.6 million. The banking subsidiaries (the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Farmers Deposit Bank, Eminence, Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc., Philippi, West Virginia;
Boone County Bank, Inc., Madison, West Virginia; Traders Bank, Inc., Ravenswood, West Virginia; Adams National Bank, Washington, DC; and Consolidated Bank & Trust Company, Richmond, Virginia.




Premier was incorporated as a Kentucky corporation in 1991 and has functioned as a bank holding company since its formation. During 2002, Premier moved its principal executive offices from Georgetown, Kentucky to its present location at 2883 5th Avenue, Huntington,
West Virginia, 25702. The purpose of the move was to be more centrally located among Premier's Affiliate Banks and its directorship. Premier's telephone number is (304) 525-1600.




Premier is a legal entity separate and distinct from its Affiliate Banks and non-bank subsidiaries. Accordingly, the right of Premier, and thus the right of Premier's creditors and shareholders, to participate in any distribution of the assets or earnings of any
of the Affiliate Banks or non-bank subsidiaries is necessarily subject to the prior claims of creditors of such subsidiaries, except to the extent that claims of Premier, in its capacity as a creditor, may be recognized. The principal source of Premier's revenue is dividends from its Affiliate Banks and non-bank subsidiary.  See "REGULATORY MATTERS -- Dividend Restrictions" for discussion of the restrictions on the Affiliate Banks' ability to pay dividends to Premier.




In late 2007 Premier resumed a strategy of franchise expansion by acquiring and owning community banks.  This decision follows a five –year period whereby Premier suspended its acquisition strategy in order to focus on improving operations, strengthening
capital and management oversight and improving the profitability of the banks previously acquired. On October 24, 2007, the Company entered into a material definitive agreement with Citizens First Bank, Inc. (“Citizens First”), a bank with $60 million of total assets located in Ravenswood, West Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Citizens First for up to $11,700,000 in stock and cash.  Each share of Citizens First common stock was entitled
to merger consideration of cash and stock that generally totaled $29.25, subject to certain limitations.  Premier issued 480,000 shares of its common stock plus Premier paid $5.3 million in cash to the shareholders of Citizens First.


4
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








On November 27, 2007, the Company entered into a material definitive agreement with Traders Bankshares, Inc. (Traders), a single bank holding company with $105 million of total assets located in Spencer, West Virginia.  Under terms of the definitive agreement,
Premier agreed to purchase Traders for approximately $18,140,000 in stock and cash.  Each share of Traders common stock was entitled to merger consideration of $50.00 cash and 3.75 shares of Premier common stock.  Premier issued approximately 675,000 shares of its common stock plus Premier paid $9.0 million in cash to the shareholders of Traders.




On April 30, 2008, Premier closed the acquisitions of Citizens First and Traders.  On October 25, 2008, Premier merged these two new subsidiary banks together to form Traders Bank, Inc. headquartered in Ravenswood, West Virginia.  The merger was
designed to consolidate management and operations of two subsidiaries in overlapping or contiguous markets.  Similarly, effective January 3, 2005, Premier merged two of its subsidiary banks, Citizens Deposit Bank & Trust in Vanceburg, Kentucky and Bank of Germantown, in Germantown, Kentucky. Bank of Germantown was merged into Citizens Deposit Bank, with its facilities continuing to operate as branches of Citizens Deposit Bank.





Recent Corporate Developments




On December 31, 2008, the Company entered into a material definitive agreement with Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a two bank holding company (Adams National Bank and Consolidated Bank & Trust Company) with $436 million of
total assets at December 31, 2008 with locations in and around Washington, DC and Richmond, Virginia.  Under terms of the definitive agreement, Premier agreed to purchase Abigail Adams for approximately $10.8 million in stock.  The acquisition closed on October 1, 2009.  Each share of Abigail Adams common stock was entitled to merger consideration of 0.4461 shares of Premier common stock.  Premier issued approximately 1,545,000 shares of its common stock to the shareholders
of Abigail Adams.




At the time Premier entered into the definitive agreement with Abigail Adams, its subsidiary, Adams National Bank (“Adams National”) had recently entered into a written agreement with its primary regulatory authority, the Office of the Comptroller of
the Currency (“OCC”).  See “Regulatory Matters” below.  Premier’s prior experience in successfully working through regulatory agreements with some of its own subsidiary banks was an attractive component for Abigail Adams to merge with the Company.   Likewise, while Adams National did not necessarily fit the community bank model of Premier’s other subsidiary banks (see the “General” subsection of the Company’s “Business”
section below), Premier’s perceived advantages in purchasing and rehabilitating a poorly performing bank while simultaneously changing the bank’s business culture to more closely mirror that of its rural community “sister” banks.   As part of this strategy, Premier sought to participate in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) to help fund the rehabilitation of Adams National and provide the additional capital needed to maintain the
Company’s healthy capital ratios after consummating the merger with Abigail Adams.


5
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








TARP was established under the authority granted by the Emergency Economic Stabilization Act of 2008 (the “EESA”), which appropriated $700 billion for the purpose of restoring liquidity and stability in the U.S. financial system.  EESA was amended
by The American Recovery and Reinvestment Act of 2009 (the “ARRA”) signed into law on February 17, 2009.  Under the TARP Capital Purchase Program, the U.S. Treasury made $250 billion of capital available to U.S. financial institutions in the form of senior preferred stock investments and a warrant entitling the U.S. Treasury to buy the participating institution’s common stock with a market price equal to 15% of the senior preferred stock.




On October 2, 2009, Premier issued and sold to the U.S. Treasury (i) 22,252 of Premier’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share (the “Series A Preferred
Shares”), and (ii) a ten-year warrant (the “Warrant”) to purchase 628,588 Premier common shares, each without par value (the “Common Shares”), at an exercise price of $5.31 per share (subject to certain anti-dilution and other adjustments), for an aggregate purchase price of $22,252,000 in cash.  This issuance and sale was a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.  Additional
information regarding the Series A Preferred Shares and the Warrant can be found in Note 25of the Notes to the Consolidated Financial Statements.




To finalize Premier’s participation in the TARP Capital Purchase Program, Premier and the U.S. Treasury entered into a Letter Agreement, dated October 2, 2009 (the “Letter Agreement”), including a Securities Purchase Agreement – Standard Terms
which is attached thereto (the “Securities Purchase Agreement” and together with the Letter Agreement, the “UST Agreement”).  Additional information regarding the TARP Capital Purchase Program and the restrictions imposed on Premier can be found under the “TARP Capital Purchase Program” heading in the “Regulatory Matters” section included later in this item.




While Premier remains committed to its core strategy of rural banking with community oriented and locally named institutions, the Company may, as it has in the past, dispose of additional corporate assets that no longer meet Premier's geographic or operational performance
goals.  For example, in the fourth quarter of 2003, the Company adopted and began to implement a plan to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had signed a definitive agreement to sell Citizens Bank in a cash transaction valued at approximately $14,500,000, and on July 1, 2004 the sale transaction closed. In accordance with Financial Accounting Standard 144, "Accounting for the Impairment
or Disposal of Long-lived Assets", which became effective for the Company on January 1, 2002, the financial position and results of operations of Citizens Bank are removed from the detail line items in the Company's financial statements and presented separately as "discontinued operations."


6
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Beginning in April 2005 and concluding in July 2005, the Company converted each of its Affiliate Banks from an in-house system administered by a wholly-owned subsidiary to an outsourced system administered by FiServ for their data and item processing functions.  Subsequent
to the conversion, the operations of the Company’s data processing subsidiary, Premier Data Services, Inc. were suspended and the subsidiary was merged into the Company on June 27, 2006.








7
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








BUSINESS


General




Through the Banks the Company focuses on providing quality, community banking services to individuals and small-to-medium sized businesses primarily in non-urban areas. By seeking to provide such banking services in non-urban areas, the Company believes that it can
minimize the competitive effect of larger financial institutions that typically are focused on large metropolitan areas. Each Bank retains its local management structure which offers customers direct access to the Bank's president and other officers in an environment conducive to friendly, informed and courteous service. This approach also enables each Bank to offer local and timely decision-making, and flexible and reasonable operating procedures and credit policies limited only by a framework of centralized
risk controls provided by the Company to promote prudent banking practices. See additional discussion under "Regulatory Matters" below.




Each Bank maintains its community orientation by, among other things, having selected members of its community as members of its board of directors, who assist in the introduction of prospective customers to the Bank and in the development or modification of products
and services to meet customer needs. As a result of the development of personal banking relationships with its customers and the convenience and service offered by the Banks, the Banks' lending and investing activities are funded primarily by core deposits.




When appropriate and economically advantageous, the Company centralizes certain of the Banks' back office, support and investment functions in order to achieve consistency and cost efficiency in the delivery of products and services. The Company centrally provides
services such as accounting, loan review, operations and network support, human resources, compliance and internal auditing to the Banks to enhance their ability to compete effectively. The Company also provides overall direction in the areas of credit policy and administration, strategic planning, marketing, investment portfolio management and other financial and administrative services. Each Bank participates in product development by advising management of new products and services needed by its customers
and desirable changes to existing products and services.




Prior to the conversions in mid 2005, the Company's data processing subsidiary, Premier Data Services, Inc., provided centralized data processing services to four of the Banks. Beginning in late 2004 and continuing through the middle of 2005, the Company converted
its data processing system to an external third-party provider. Through the conversion process, Company senior management along with each Bank's management reviewed and standardized their offering of products and services, although pricing decisions remain at the local Bank level. Furthermore, as a result of conversion, the Company through the Banks is able offer more modern products, such as internet banking and check imaging, and is able to take advantage of emerging technologies such as image exchange to remit
and clear items with its exchange agents.


8
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Each of the Banks provides a wide range of retail and commercial banking services, including commercial, real estate, agricultural and consumer lending; depository and funds transfer services; collections; safe deposit boxes; cash management services; and other services
tailored for both individuals and businesses.




The Banks' residential mortgage lending activities consist primarily of loans for purchasing personal residences or loans for commercial or consumer purposes secured by residential mortgages.  The Banks also originate residential mortgage loans that are
sold in the secondary mortgage market.  The Banks’ mortgage originators are salaried employees who do not receive a commission or other incentive compensation for the number or type of mortgages they originate.  Consumer lending activities consist of traditional forms of financing for automobile and personal loans including unsecured lines of credit. Commercial lending activities include loans to small businesses located primarily in the communities in which the Banks are located and
surrounding areas. Commercial loans are secured by business assets including real estate, equipment, inventory, and accounts receivable. Some commercial loans are unsecured.  Through the acquisition of Abigail Adams, the Company inherited a concentration in commercial real estate development loans.  Many of these loans are for the revitalization of apartment buildings in and around the Washington, DC metro area, some of which will result in the apartment complex converting into individually
owned condominiums.   Premier plans to reduce these concentrations by providing funding only during the construction phase.




The Banks' range of deposit services includes checking accounts, NOW accounts, savings accounts, money market accounts, club accounts, individual retirement accounts, certificates of deposit and overdraft protection. Customers can access their accounts via traditional
bank branch locations as well as Automated Teller Machines (ATM’s) and the internet.  The Banks also offer bill payment and telephone banking services.  Deposits of the Banks are insured by the Bank Insurance Fund administered by the FDIC to the maximum amounts offered by the FDIC.





Competition




The Banks encounter strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate
banking have created a highly competitive environment for financial services providers. In one or more aspects of its business, each Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies and other financial intermediaries operating in its market and elsewhere, many of which have substantially greater financial and managerial resources. While the Banks are smaller financial institutions,
each of the Banks' competitors include large bank holding companies having substantially greater resources and offering


9
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








certain services that Premier Banks may not currently provide. Each Bank seeks to minimize the competitive effect of larger financial institutions through a community banking approach that emphasizes direct customer access to the Bank's president and other officers in an environment conducive to friendly, informed
and courteous service.  Furthermore, via the Company’s credit administration department, the Banks can also minimize the competitive effects of larger institutions by tailoring their lending criteria to the individual circumstances of the small-to-medium sized business owner.




Management believes that each Bank is positioned to compete successfully in its respective primary market area, although no assurances as to ongoing competitiveness can be given. Competition among financial institutions is based upon interest rates offered on deposit
accounts, service charges on deposit accounts for various services related to customer convenience, interest rates charged on loans and other credit, the quality and scope of the services rendered, the convenience of the banking facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of its Banks to personal service, innovation and involvement in their respective communities and primary market areas, as well as their commitment to quality
community banking service, are factors that contribute to their competitiveness.





Regulatory Matters




The following discussion sets forth certain elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to Premier. This regulatory framework is intended primarily for the protection
of depositors and the federal deposit insurance funds and not for the protection of the holders of securities, including Premier common shares. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to Premier or its subsidiaries may have a material effect on the business of Premier.




General - As a bank holding company, Premier is subject to regulation under the Bank Holding Company Act ("BHC Act"), and to inspection, examination and supervision by the Board
of Governors of the Federal Reserve System ("Federal Reserve"). Under the BHC Act, bank holding companies generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve's prior approval. Similarly, bank holding companies generally may not acquire ownership or control of a savings association without the prior approval of the Federal Reserve. Further, branching by the Affiliate Banks is subject to
the jurisdiction, and requires the approval of each Affiliate Bank's primary federal banking regulator and, if the Affiliate Bank is a state-chartered bank, the appropriate state banking regulator.





10
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Under the BHC Act, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of the nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity
or control constitutes a risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Premier and the Affiliate Banks are subject to the Federal Reserve Act, which limits borrowings by Premier and its nonbank subsidiaries from the Affiliate Banks and also limits various other transactions between Premier and its nonbank subsidiaries with the Affiliate Banks.




The two Affiliate Banks chartered in Kentucky are supervised, regulated and examined by the Kentucky Department of Financial Institutions, the Affiliate Bank chartered in Ohio is supervised, regulated and examined by the Ohio Division of Financial Institutions, the
three Affiliate Banks chartered in West Virginia are supervised, regulated and examined by the West Virginia Division of Banking, and the Affiliate Bank chartered in Virginia is supervised, regulated and examined by the Bureau of Financial Institutions of the Commonwealth of Virginia.  The Washington DC Affiliate Bank is a national bank and therefore is supervised, regulated and examined by the OCC.  In addition, those Affiliate Banks that are members of the Federal Reserve System are supervised
and regulated by the Federal Reserve, and those banks that are not members of the Federal Reserve System are supervised and regulated by the Federal Deposit Insurance Corporation ("FDIC"). Each banking regulator has the authority to issue cease-and-desist orders if it determines that the activities of a bank regularly represent an unsafe and unsound banking practice or a violation of law.




Both federal and state law extensively regulates various aspects of the banking business, such as reserve and capital requirements, truth-in-lending and truth-in-savings disclosure, equal credit opportunity, fair credit reporting, trading in securities and other
aspects of banking operations. Premier, the Affiliate Banks and Premier's nonbank subsidiary are also affected by the fiscal and monetary policies of the federal government and the Federal Reserve and by various other governmental laws, regulations and requirements. Further, the earnings of Premier and Affiliate Banks are affected by general economic conditions and prevailing interest rates. Legislation and administrative actions affecting the banking industry are frequently considered by the United States Congress,
state legislatures and various regulatory agencies. It is not possible to predict with certainty whether such legislation or administrative actions will be enacted or the extent to which the banking industry, in general, or Premier and the Affiliate Banks, in particular, would be affected.




Liability for Bank Subsidiaries - The Federal Reserve has a policy to the effect that a bank holding company is expected to act as a source of financial and managerial strength to
each of its subsidiary banks and to maintain resources adequate to support each such subsidiary bank. This support may be required at times when Premier may not have the resources to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment.





11
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Any depository institution insured by the FDIC may be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In the event that such a default occurred with respect to a bank, any loans to the bank from its parent holding company will be subordinate in right of payment of the
bank's depositors and certain of its other obligations.




Capital Requirements - Premier is subject to capital ratios, requirements and guidelines imposed by the Federal Reserve, which are substantially similar to the ratios, requirements
and guidelines imposed by the Federal Reserve, the OCC and the FDIC on the Banks within their respective jurisdictions. These capital requirements establish higher capital standards for banks and bank holding companies that assume greater credit risks. For this purpose, a bank's or holding company's assets and certain specified off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the level of credit risk that is ascribed to such assets or commitments. A bank's
or holding company's capital is divided into two tiers: "Tier I" capital and "Tier II" capital. "Tier I" capital includes common shareholders' equity, non-cumulative perpetual preferred stock, and related surplus (excluding auction rate issues), minority interests in equity accounts of consolidated subsidiaries plus cumulative perpetual preferred stock and Trust Preferred Securities both of which are subject to certain limitations. Goodwill, certain identifiable intangible assets and certain other assets are
subtracted from these sources of capital to calculate Tier I capital. "Tier II" capital includes, among other items, perpetual preferred stock not meeting the Tier I definition, mandatory convertible securities, subordinated debt and allowances for loan and lease losses, subject to certain limitations, less certain required deductions.




Bank holding companies currently are required to maintain Tier I and total capital (the sum of Tier I and Tier II capital) equal to at least 4% and 8% of total risk-weighted assets, respectively. At December 31, 2009, Premier met both requirements, with Tier I and
total capital equal to 13.6% and 14.6% of its total risk-weighted assets, respectively.




In addition to the risk-based capital guidelines, the Federal Reserve requires bank holding companies to maintain a minimum "leverage ratio" (Tier I capital to adjusted total assets) of 3%, if the holding company has the highest regulatory ratings for risk-based
capital purposes. All other bank holding companies are required to maintain a leverage ratio of 3% plus at least 100 to 200 basis points. At December 31, 2009, Premier's leverage ratio was 8.9%.




The foregoing capital requirements are minimum requirements. The Federal Reserve may set capital requirements higher than the minimums described above for holding companies whose circumstances warrant it. For example, holding companies experiencing or anticipating
significant growth may be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.


12
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Additionally, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized
and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital
raising requirements.





An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee the bank's compliance with the plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of 5% of the Bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and executive compensation and permits regulatory action against a financial
institution that does not meet such standards.




Regulatory Agreements - As previously disclosed in earlier reports, the Company and some of the subsidiary Banks have, in the past, been subject to regulatory agreements.  On
January 29, 2003, the Company entered into a written agreement with the Federal Reserve Bank of Cleveland (“FRB”).  In, 2006, the FRB determined that Premier had fully satisfied all of the provisions of the written agreement and, accordingly, the FRB terminated the agreement effective April 18, 2006.




Before they were merged together into one entity, two of the Company's subsidiaries, Citizens Deposit Bank & Trust and the Bank of Germantown, entered into similar agreements with their respective primary regulators which, among other things, prohibited the payment
of dividends without prior written approval and required significant changes in their credit administration policies. The banks fully complied with the terms of the agreements in 2004 and the agreements were accordingly rescinded by their regulators.




As a result of a 2003 investigation into the conduct of the former president of Farmers Deposit Bank by Premier and the FDIC, on December 24, 2003, Premier announced that Farmers Deposit Bank had reached an agreement with the FDIC and the Kentucky Department of Financial
Institutions ("KDFI") [collectively referred to as "Supervisory Authorities"] to consent to the issuance of a cease & desist order ("Order") from its Supervisory Authorities.  The Order also outlined a number of steps to be taken by Farmers Deposit Bank which were designed to remedy and/or prevent the reoccurrence of events that gave rise to the investigation during the latter half of 2003.  Having found that Farmers Deposit Bank had fully complied with the Order, the Supervisory
Authorities rescinded the Order on December 13, 2005.


13
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








On October 1, 2008, the Company’s newly acquired subsidiary Adams National, entered into a written agreement with its primary regulator, the OCC.  The written agreement outlined a number of steps to be taken by Adams National to remedy unsafe and
unsound banking practices relating to the level of credit risk and the administration of the loan portfolio, and violations of credit-related laws and regulations at the bank.  These include 1) ensuring that Adams National has competent management and that senior management can perform the duties required under the Bank’s policies and procedures and the requirements of the Written Agreement; 2) maintaining a 12% total risk-based capital to total risk-weighted assets ratio; an 11% Tier 1 capital
to risk-weighted assets ratio; and a 9% Tier 1 capital to adjusted total assets ratio, which are greater than the regulatory requirements to be “well capitalized” under bank regulatory requirements; 3) developing and implementing a three-year capital program; 4) adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the Written Agreement; 5) requiring the Board to review the adequacy of the allowance for loan losses at least quarterly;
6) implementing an asset diversification program consistent with OCC guidelines on concentrations in commercial real estate lending and sound risk management practices and reducing Adam’s exposure to concentrations of credit risk accordingly; 7) taking all necessary actions to protect the Adam’s interest in its criticized assets and implementing a program to eliminate regulatory criticism of these assets; 8) engaging in an ongoing review of the bank’s criticized assets and implementing procedures
for the effective monitoring of the loan portfolio; 9) implementing a program to improve the management of the loan portfolio and to provide the Board with monthly written reports on credit quality; 10) employing a loan review consultant acceptable to the OCC to perform quarterly quality reviews of the bank’s assets; 11) revising the bank’s lending policy in accordance with OCC requirements; and 12) maintaining acceptable liquidity levels.




The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including quarterly progress reports to the OCC. The written agreement also requires the bank to establish a committee of the Board of Directors
which will be responsible for overseeing compliance with the written agreement. The Bank has taken steps to comply with the requirements of the written agreement, including hiring a new chief executive officer. At December 31, 2009, Adams National’s capital ratio levels met the regulatory capital levels required in the written agreement.




TARP Capital Purchase Program - As discussed above under the caption “Recent Corporate Developments,” Premier elected to participate in the TARP Capital Purchase Program
and received $22.25 million of new equity capital from the U.S. Treasury on October 2, 2009.  As part of its participation in the TARP Capital Purchase Program, Premier agreed to various requirements and restrictions imposed on all participants in the TARP Capital Purchase Program.  Those restrictions include certain executive compensation and corporate expenditure limits on all current and future recipients of funds under the TARP Capital Purchase Program, including Premier, as long as any
obligation arising from the financial assistance provided to the recipient under the TARP Capital Purchase Program remains outstanding, excluding any period during which the U.S. Treasury holds only warrants to purchase common stock of a


14
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








TARP participant (the “Covered Period”).  On June 10, 2009, the U.S. Treasury issued an interim final rule describing how participating institutions are to comply with the executive compensation and corporate governance standards imposed by the EESA, as amended by the ARRA.  On December
7, 2009, the U.S. Treasury published technical amendments to the interim final rule (collectively, the interim final rule published on June 15, 2009 and the amendments published on December 7, 2009 are referred to as the “Interim Final Rule”).





The current terms of participation in the TARP Capital Purchase Program include the following:





As soon as it is eligible to do so, Premier must file with the SEC a registration statement on Form S-3 under the Securities Act registering for resale the Series A Preferred Shares or, in the event the Series A Preferred Shares are deposited with a depository at the request of the U.S. Treasury, depository shares
evidencing fractional interests in the Series A Preferred Shares; the Warrant to purchase 628,588 Common Shares; and any Common Shares issued from time to time upon exercise of the Warrant.  Premier is not currently eligible to file a Form S-3, but could become eligible in the future.





As long as the Series A Preferred Shares remain outstanding, unless all accrued and unpaid dividends for all past dividend periods on the Series A Preferred Shares are fully paid, Premier will not be permitted to declare or pay dividends on any Common Shares, any junior preferred shares or, generally, any preferred
shares ranking pari passu with the Series A Preferred Shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Series A Preferred Shares), nor will Premier be permitted to repurchase or redeem any Common Shares or preferred shares other than the Series A Preferred Shares.





Unless the Series A Preferred Shares have been transferred to unaffiliated third parties or redeemed in whole, until October 2, 2012, the U.S. Treasury’s approval is required for any increase in Common Share dividends from $0.11 per share or any share repurchases other than repurchases of the Series A Preferred
Shares, repurchases of junior preferred shares, or repurchases of Common Shares in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice and purchases under certain other limited circumstances specified in the Securities Purchase Agreement with the U.S. Treasury.





15
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Premier must comply with the U.S. Treasury’s standards for executive compensation and corporate governance during the Covered Period.  The current standards include the following:





compensation plans and arrangements for Senior Executive Officers (as defined in the Interim Final Rule, to include the Principal Executive Officer, the Principal Financial Officer and the next 3 most highly compensated named executive officers in Premier’s annual meeting proxy statement) must not encourage
unnecessary and excessive risks that threaten the value of the financial institution;





any bonus, retention award or incentive compensation paid (or under a legally binding obligation to pay) to a Senior Executive Officer or any of Premier’s next 20 most highly-compensated employees based on materially inaccurate financial statements or other materially inaccurate performance metric criteria
must be subject to recovery, or “clawback”, by Premier;





Premier is prohibited from paying or accruing any bonus, retention award or incentive compensation (including stock options) with respect to its most highly compensated employee (currently its President and Chief Executive Officer), except for grants of long-term restricted stock that do not fully vest during
the Covered Period and do not have a value which exceeds one-third of such employee’s total annual compensation;





severance payments to a Senior Executive Officer and the next five most highly-compensated employees, generally referred to as “golden parachute” payments are prohibited, except for payments for services performed or benefits accrued;





compensation plans that encourage manipulation of reported earnings to enhance the compensation of any employees are prohibited;




The U.S. Treasury may retroactively review bonuses, retention awards and other compensation previously paid to a Senior Executive Officer or any of Premier’s next 20 most highly-compensated employees to determine whether such payments were inconsistent with the purposes of TARP or otherwise contrary to the
public interest;




Premier’s compensation committee consisting of independent directors must engage in risk analysis of Senior Executive Officer and all other employee compensation plans;




Premier’s Board of Directors must establish a company-wide policy regarding excessive or luxury expenditures (which was adopted on December 16, 2009) and post this policy on Premier’s subsidiary bank websites;





16
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Premier’s proxy statements for annual shareholder meetings must permit a non-binding “say on pay” shareholder vote on the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the SEC;





executive compensation in excess of $500,000 for each Senior Executive Officer must not be deducted for federal income tax purposes;




Premier must disclose to the U.S. Treasury and Premier’s primary regulator whether Premier’s Board of Directors or the Compensation Committee engaged a compensation consultant and the service performed by that compensation consult and any of its affiliates;




Premier must disclose to the U.S. Treasury the identify of Premier’s Senior Executive Officers and next 20 most highly-compensated employees, identified by name and title and ranked in descending order of annual compensation;




Premier must limit any Employee Compensation Plan (as defined in the Interim Final Rule) that unnecessarily exposes Premier to risk; and




Premier must comply with the executive compensation reporting and recordkeeping requirements established by the U.S. Treasury.




The ARRA permits TARP recipients, subject to consultation with the appropriate federal banking agency, to repay to the U.S. Treasury any financial assistance received under the TARP Capital Purchase Program without penalty, delay or the need to raise additional replacement
capital.




Detailed information regarding the Series A Preferred Shares and the Warrant can be found in Note 25 of the Notes to the Consolidated Financial Statements.




Dividend Restrictions - Premier is dependent on dividends from its Affiliate Banks for its revenues. Various federal and state regulatory provisions limit the amount of dividends
the Affiliate Banks can pay to Premier without regulatory approval. At December 31, 2009, approximately $2.5 million of the total shareholders' equity of the Affiliate Banks was available for payment of dividends to Premier without approval by the applicable regulatory authority.




In addition, federal bank regulatory authorities have authority to prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending upon the financial condition of the bank in question,
could be deemed to constitute such an unsafe or unsound practice. The ability of the Affiliate Banks to pay dividends in the future is presently, and could be further, influenced by bank regulatory policies and capital guidelines as well as each Affiliate Bank's earnings and financial condition.  Additional information regarding dividend limitations can be found in Note 21 of the accompanying audited consolidated financial statements.


17
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








The dividend rights of holders of Premier’s common shares are also qualified and subject to the dividend rights of holders of Premier’s Series A Preferred Shares described above under the caption “Regulatory Matters – TARP Capital Purchase
Program.”




Interstate Banking - Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration limits, (i) bank holding
companies, such as Premier, are permitted to acquire banks and bank holding companies located in any state of the United States, subject to certain restrictions, and (ii) banks are permitted to acquire branch offices outside their home state by merging with out-of-state banks, purchasing branches in other states or establishing de novo branch offices in other states; provided that, in the case of any such purchase or opening of individual branches, the host state has adopted legislation "opting in" to the relevant
provisions of the Riegle-Neal Act; and provided further, that, in the case of a merger with a bank located in another state, the host state has not adopted legislation "opting out" of the relevant provisions of the Riegle-Neal Act.




Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") was signed into law, eliminating many of the remaining barriers to full convergence of the banking,
securities, and insurance industries. The major provisions of the Act took effect March 12, 2000.




The Act enables a broad-scale consolidation among banks, securities firms, and insurance companies by creating a new type of financial services company called a "financial holding company," a bank holding company with dramatically expanded powers. Financial holding
companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. In addition, the Act permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies, but only if they jointly determine that such activities are "financial in nature" or "complementary to financial activities." Premier does not presently qualify to elect financial holding company status.




The Federal Reserve serves as the primary "umbrella" regulator of financial holding companies, with jurisdiction over the parent company and more limited oversight over its subsidiaries. The primary regulator of each subsidiary of a financial holding company depends
on the activities conducted by the subsidiary. A financial holding company need not obtain Federal Reserve approval prior to engaging, either de novo or through acquisitions, in financial activities previously determined to be permissible by the Federal Reserve. Instead, a financial holding company need only provide notice to the Federal Reserve within 30 days after commencing the new activity or consummating the acquisition.








18
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Number of Employees




The Company and its subsidiaries collectively had approximately 369 full-time equivalent employees as of December 31, 2009 Its executive offices are located at 2883 5th Avenue, Huntington, West Virginia 25702, telephone number (304) 525-1600 (facsimile number (304)
525-9701).





19
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Item 1A.  Risk Factors




Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control.  In addition to the other information in this report, readers should carefully
consider that the following important factors, among others, could materially impact the Company’s business and future results of operations.





Changes in Interest Rates Could Negatively Impact the Company’s Results of Operations




The earnings of Premier are primarily dependent on net interest income, which is the difference between interest earned on loans and investments, and interest paid on interest-bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive
to many factors, including government monetary and fiscal policies; domestic and international economic and political conditions; and, in particular, changes in the discount rate by the Board of Governors of the Federal Reserve System. Conditions such as inflation, recession, unemployment, money supply, government borrowing and other factors beyond management’s control may also affect interest rates. If Premier’s interest-earning assets mature, reprice or prepay more quickly than interest-bearing
liabilities in a given period, a decrease in market interest rates could adversely affect net interest income. Likewise, if interest-bearing liabilities mature or reprice, or, in the case of deposits, are withdrawn by the accountholder more quickly than interest-earning assets in a given period, an increase in market interest rates could adversely affect net interest income. Given Premier’s current mix of assets and liabilities, a declining interest rate environment would negatively impact Premier’s
results of operations.




Fixed rate loans increase Premier’s exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to repricing before assets become subject to repricing. Adjustable rate loans decrease the risks to a lender
associated with changes in interest rates but involve other risks. As interest rates rise, the periodic payment by the borrower rises to the extent permitted by the terms of the loan, and the increased periodic payment increases the potential for default. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there is likely to be an increase in prepayment activity on loans as the borrowers
refinance their loans at lower interest rates. Under these circumstances, Premier’s results of operations could be negatively impacted.




Changes in interest rates also can affect the value of loans, investments and other interest-rate sensitive assets and Premier’s ability to realize gains on the sale or resolution of assets. This type of income can vary significantly from quarter to quarter
and year to year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and increased loan loss reserve requirements that could have a material adverse effect on Premier’s results of operations.


20
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Regional Economic Changes in the Company’s Markets Could Adversely Impact Results From Operations




Like all banks, Premier is subject to the effects of any economic downturn, and in particular a significant decline in home values or reduced commercial development in Premier’s markets could have a negative effect on results of operations. Premier’s
success depends primarily on the general economic conditions in the counties in which Premier conducts business, and in the West Virginia, southern Ohio, northern Kentucky, northern and south central Virginia and the metro Washington DC and Richmond Virginia areas in general. Unlike larger banks that are more geographically diversified, Premier provides banking and financial services to customers primarily in the West Virginia counties of Barbour, Boone, Harrison, Lewis, Lincoln, Logan, Kanawha, Upshur, Roane,
Jackson and Wood, the southern Ohio counties of Gallia, Lawrence and Scioto, the northern Kentucky counties of Bracken, Fleming, Greenup, Henry, Lewis, Mason, Robertson and Shelby, the metro Washington DC area including the surrounding portions of Virginia and Maryland and the Richmond and Hampton metro areas of Virginia. The local economic conditions in these market areas have a significant impact on Premier’s ability to originate loans, the ability of the borrowers to repay these loans and the value of
the collateral securing these loans. A significant decline in the general economic conditions caused by inflation, recession, unemployment or other factors beyond Premier’s control would affect these local economic conditions and could adversely affect Premier’s financial condition and results of operations. Additionally, a significant decline in home values would likely lead to increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and
result in increased losses in these portfolios.




There has been a decline in the housing market and real estate markets and in the general economy, both nationally and locally, due to the recession that began in December 2007. Housing markets have deteriorated as evidenced by reduced levels of sale, increasing
inventories of houses and condominiums on the market, declining house prices and an increase in the length of time houses remain on the market. It is possible that these conditions will not improve or will worsen or that such conditions will result in a decrease in Premier’s interest income, an increase in Premier’s non-performing loans, and an increase in Premier’s provision for loan losses.




Premier targets its business lending and marketing strategy for loans to serve primarily the banking and financial services needs of small to medium size businesses.  These small to medium size businesses generally have fewer financial resources in terms
of capital or borrowing capacity than larger entities.  If general economic conditions negatively impact these businesses, Premier’s results of operations and financial condition may be adversely affected.


21
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Extensive Regulation and Supervision




Premier, primarily through the Premier Banks, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect Premier’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Premier is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. Congress and federal regulatory agencies continually review banking laws, regulations and
policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Premier in substantial and unpredictable ways. Such changes could subject Premier to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations
or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, along with corrective action plans required by regulatory agencies, any of which could have a material adverse effect on Premier’s business, financial condition and results of operations.  Premier and certain of the Premier Banks have in the past been subject to such corrective action plans, and therefore there may be some residual reputation damage within the regulatory agencies.  While
Premier has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.  See the “Regulatory Matters” section in Item 1, “Business”.





Dividend payments by subsidiaries to Premier and by Premier to its shareholders can be restricted.





The Company’s principal source of funds for dividend payments and its debt service obligations is dividends received from the subsidiary Banks.  Banking regulations limit
the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed in Note 21 to the consolidated financial statements.  During 2010 the Banks could, without
prior approval, declare dividends of approximately $2.5 million plus any 2010 net profits retained to the date of the dividend declaration.





Premier is a separate and distinct legal entity from Premier’s subsidiaries.  Premier receives nearly all of its revenue from dividends from is subsidiary banks, which are
limited by federal banking laws and regulations.  These dividends also serve as the primary source of funds to pay dividends on Premier’s common shares.  The inability of Premier’s subsidiary banks to pay sufficient dividends to Premier could have a material, adverse effect on its business.  In addition, Premier’s participation in the U.S. Treasury’s TARP Capital Purchase Program


22
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








currently restricts the ability to increase the dividend payable to holders of common shares above $0.11 per share without prior approval of the U.S. Treasury.  Further discussion of Premier’s ability to pay dividends can be found under the captions “Regulatory Matters – TARP Capital
Purchase Program” and “Regulatory Matters – Dividend Restrictions” in Item 1 of this Form 10-K and Note 21 of the Notes to the Consolidated Financial Statements.





The Extended Disruption of Vital Infrastructure Could Negatively Impact the Company’s Results of Operations and Financial Condition




Premier’s operations depend upon, among other things, its technological and physical infrastructure, including its equipment and facilities.  While disaster recovery procedures are in place, an extended disruption of its vital infrastructure by fire,
power loss, natural disaster, telecommunications failure, computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of Premier’s control, could have a material adverse impact either on the financial services industry as a whole, or on Premier’s business, results of operations, and financial condition.





New or Revised Tax, Accounting and Other Laws, Regulations, Rules and Standards Could Significantly Impact Strategic Initiatives, Results of Operations and Financial Condition




The financial services industry is highly regulated and laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described under the
heading “Business — Regulatory Matters” above.  These regulations, along with the currently existing tax and accounting laws, regulations, rules and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. The nature, extent, and
timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on Premier’s results of operations and financial condition, the effects of which are impossible to predict at this time.





Market Volatility May Adversely Affect Market Price of Common Stock or Investment Security Values




The capital and credit markets have been experiencing volatility and disruption for more than a year.  In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those
issuers’ underlying financial strength.  Market volatility could contribute to a further decline in the market value of certain security investments and other assets of Premier.  If market disruption and volatility continue or worsen, Premier may experience an adverse effect, which may be material, on results of operations, capital or financial position.


23
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








There Can Be No Assurance That Recent Legislative And Regulatory Initiatives To Address Difficult Market And Economic Conditions Will Stabilize The U.S. Banking System.




EESA, which established TARP, was signed into law on October 3, 2008.  The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.  As
part of TARP, the U.S. Treasury established the Capital Purchase Program to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets.  Under the Capital Purchase Program, the U.S. Treasury is purchasing equity securities from participating institutions.  On October 2, 2009, we entered into the UST Agreement with the U.S.
Treasury providing for our issuance of the Series A Preferred Shares and the Warrant, pursuant to the Capital Purchase Program.  The EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000.  This increase is in place until the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.




On February 17, 2009, President Obama signed ARRA, as a sweeping economic recovery package intended to stimulate the economy and provide for broad infrastructure, energy, health, and education needs.  There can be no assurance as to the actual impact that
EESA or its programs, including the CPP, and ARRA or its programs, will have on the national economy or financial markets.  The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our Common Shares.




There have been numerous actions undertaken in connection with or following EESA and ARRA by the Federal Reserve Board, the U.S. Congress, the U.S. Treasury, the FDIC, the SEC and others in efforts to address the current liquidity and credit crisis in the financial
industry that followed the sub-prime mortgage market meltdown that began in late 2007.  These measures include: (i) homeowner relief that encourages loan restructuring and modification; (ii) the establishment of significant liquidity and credit facilities for financial institutions and investment banks; (iii) the lowering of the federal funds rate; (iv) emergency action against short selling practices; (v) a temporary guaranty program for money market funds; (vi) the establishment of a commercial paper
funding facility to provide back-stop liquidity to commercial paper issuers; and (vii) coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system.  EESA, ARRA and the other regulatory initiatives described above may not have their desired effects.  If the volatility in the markets continues and economic conditions fail to improve or worsen, our business,
financial condition and results of operations could be materially and adversely affected.


24
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Because Of Our Participation In The Capital Purchase Program, We Are Subject To Several Restrictions Including Restrictions On Our Ability To Declare Or Pay Dividends And Repurchase Our Shares As Well As Restrictions On Compensation Paid To Our Executive Officers.




Pursuant to the terms of the UST Agreement, our ability to declare or pay dividends on any of our shares is limited.  Specifically, we are unable to declare dividend payments on Common Shares, junior preferred shares or pari passu preferred shares if we
are in arrears on the payment of dividends on the Series A Preferred Shares.  Further, we are not permitted to increase dividends on our Common Shares above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 ($0.11 per share) without the U.S. Treasury’s approval until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties.  In addition, our ability to repurchase
our shares is restricted.  The consent of the U.S. Treasury generally is required for us to make any stock repurchase (other than in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice) until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties.  Further, Common Shares, junior preferred shares or pari passu preferred shares
may not be repurchased if we are in arrears on the payment of Series A Preferred Share dividends.  Finally, the terms of the UST Agreement allow the U.S. Treasury to impose additional restrictions, including those on dividends and including unilateral amendments required to comply with changes in applicable federal law.




Pursuant to the terms of the UST Agreement, we adopted the U.S. Treasury’s current standards for executive compensation and corporate governance for the period during
which the Treasury holds the equity securities issued pursuant to the UST Agreement, including the Common Shares that may be issued upon exercise of the Warrant.  These standards generally apply to our Chief Executive Officer, Chief Financial Officer, the three next most highly compensated senior executive officers and, with respect to certain aspects of executive compensation, the next 5 most highly compensated employees.  The standards include: (i) ensuring that incentive compensation plans
and arrangements for senior executive officers do not encourage unnecessary and excessive risks that threaten our value; (ii) required clawback of any bonus or incentive compensation paid (or under a legally binding obligation to be paid) to a senior executive officer based on materially inaccurate financial statements or other materially inaccurate performance metric criteria; (iii) prohibition on making “golden parachute payments” to senior executive officers and the next 5 most highly compensated
employees; and (iv) agreement not to claim a deduction, for federal income tax purposes, for compensation paid to any of the senior executive officers in excess of $500,000 per year.








25
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








The adoption of ARRA on February 17, 2009 imposed certain new executive compensation and corporate expenditure limits on all TARP recipients, including the Company, until the institution has repaid the U.S. Treasury.  The executive compensation standards
are more stringent than those previously in effect under the Capital Purchase Program.  On June 10, 2009, the U.S. Treasury issued Interim Final Rules on TARP compensation standards pursuant to ARRA:  (1) prohibiting (in the case of Premier, which is receiving less than $25,000,000 in assistance) the most highly compensated employee from receiving any bonus or incentive compensation while TARP funds are outstanding that has a value greater than one-third of the total amount of such employee’s
compensation, which may only be made by long-term restricted stock awards that cannot vest until TARP assistance is repaid; (2) excluding incentives for senior executive officers that would cause them to take unnecessary and excessive risks that threaten the value of the TARP recipient; (3) requiring recovery of any bonus or incentive compensation paid based on statements of earnings that are later found to be materially inaccurate; (4) requiring the TARP recipient’s board compensation committee to meet
at least semiannually to evaluate employee compensation plans in light of any risk posed to the recipient by such plans; (5) requiring the board of directors to adopt a company-wide policy regarding excessive or luxury expenditures (including entertainment, office renovations, aviation services, or other activities that are not reasonable expenditures); (6) requiring a separate proxy vote by the shareholders at the annual shareholders meeting (on a non-binding basis) to approve executive compensation of the TARP
recipient; and (7) requiring the TARP recipient’s chief executive officer and chief financial officer to annually certify the recipient’s compliance with these requirements.





Strong Competition Within the Company’s Market Area May Limit Profitability




Premier faces significant competition both in attracting deposits and in the origination of loans. Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the market areas of Premier Banks, have historically provided
most of the competition for the Premier Banks for deposits; however, each Premier Bank also competes with financial institutions that operate through Internet banking operations throughout the continental United States. In addition, and particularly in times of high interest rates, each Premier Bank faces additional and significant competition for funds from money market and mutual funds, securities firms, commercial banks, credit unions and other savings institutions located in the same communities and those
that operate through Internet banking operations throughout the continental United States. Many competitors have substantially greater financial and other resources than Premier and the Premier Banks. Moreover, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than community banks and as a result, they may enjoy a competitive advantage over Premier. The Premier Banks compete for loans principally on the basis of the interest rates and loan fees they charge,
the types of loans they originate and the quality of services they provide to borrowers. This advantage places significant competitive pressure on the prices of loans and deposits.


26
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Defaults by Another Larger Financial Institution Could Adversely Affect Financial Markets Generally.




The commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity
and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk”.  Premier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.





Additional Capital May Not Be Available When Needed or Required by Regulatory Authorities.




Premier and the Premier Banks are required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. In addition, Premier may elect to raise additional capital to support its business or to finance acquisitions,
if any, or it may otherwise elect or be required to raise additional capital.  Premier’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside Premier’s control and its financial performance. Accordingly, Premier may not be able to raise additional capital if needed or on acceptable terms. If Premier cannot raise additional capital when needed, it may have a material adverse
effect on its financial condition, results of operations and prospects.





Allowance for Loan Losses May Be Insufficient




Premier, through the Premier Banks, maintains an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience, evaluations of potential losses on identified problem loans and delinquency trends.  Premier
believes that its allowance for loan losses is maintained at a level adequate to absorb any probable losses in its loan portfolio given the current information known to management.  These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events.  Therefore, Premier cannot predict loan losses with certainty and ultimate losses may differ from current estimates.  Depending on changes in economic, operating and
other conditions, including changes in interest rates, which are generally beyond its control, Premier’s actual losses could exceed its current allowance estimates.  Premier’s allowance may not be sufficient to cover all charge-offs in future periods.  If charge-offs exceed Premier’s allowance, its earnings would decrease.  In addition, regulatory agencies review Premier’s allowance for loan losses and may require additions to the allowance based upon their
judgment about information available to them at the time of their examination.  A required increase in Premier’s allowance for loan losses could reduce its earnings.





27
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Acquired subsidiary Adams National has entered into a written agreement with the OCC which may cause adverse results to Adams National’s operations




On October 1, 2008, Adams National entered into a written agreement with its primary regulator, the Office of the Comptroller of the Currency (“OCC”).  Under the terms of the written agreement, Adams National agreed to take certain actions relating to its lending operations and capital compliance.  Specifically,
the OCC is requiring Adams National to take the following actions:





a)
conduct a review of senior management to ensure that these individuals can perform the duties required under the bank’s policies and procedures and the requirements of the written agreement, and where necessary, provide a written program to address the training of its senior officers;





b)
achieve certain regulatory capital levels, which are greater than the regulatory requirements to be “well capitalized” under bank regulatory requirements.  In particular, Adams National must achieve a: 12% total risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital to risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total assets ratio;








d)
make additions to the allowance for loan and lease losses and adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the written agreement;





e)
adopt and implement an asset diversification program consistent with OCC guidelines and to perform an analysis of the bank’s concentrations of credit;





f)
take all necessary actions to protect the bank’s interest in criticized assets, adopt and implement a program to eliminate regulatory criticism of these assets, engage in an ongoing review of its criticized assets and develop and implement procedures for the effective monitoring of the loan portfolio;





g)
hire an independent appraiser to provide a written or updated appraisal of certain assets;





h)
develop and implement a program to improve the management of the loan portfolio and to provide the Adams National Board with monthly written reports on credit quality;





i)
employ a loan review consultant acceptable to the OCC to perform a quarterly quality review of Adams National’s assets;





28
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009







j)
revise the bank's lending policy in accordance with OCC requirements; and
 
 k)
maintain acceptable liquidity levels.


The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including requirements to report to the OCC.  The written agreement also requires Adams National to establish a committee of the Board of Directors which will be responsible
for overseeing compliance with the written agreement.




Adams National has taken steps to comply with the requirements of the written agreement and expects that it will address all areas of concern.




Following the public announcement of the written agreement, Adams National became restricted in the bank’s ability to renew or access deposits through brokers.  Moreover, a number of Adams National’s depositors sought to reduce their deposits at the bank.  The impact of the written
Agreement on Adams National’s operations as well as a deterioration in credit markets may have an adverse impact on the financial condition and operations of Premier including maintaining acceptable liquidity levels at the bank.





Adams National is no longer considered “well capitalized” for regulatory capital purposes, which will cause the bank to incur increased premiums for deposit insurance and require FDIC approval to gather brokered deposits including CDARS reciprocal deposits




As of the date of the Written Agreement with the OCC, October 1, 2008, Adams National was not considered “well capitalized” for regulatory purposes. As a result, the FDIC will assess higher deposit insurance premiums on the bank, which will negatively
impact earnings. In addition, Adams National will be required to obtain FDIC approval to gather or renew brokered deposits including CDARS reciprocal deposits, during such time as the bank remains “adequately capitalized” for regulatory purposes. This status requires Adams National to obtain regulatory approval prior to accepting or renewing brokered deposits which will affect the bank’s ability to improve and maintain its liquidity position.





Loss of Large Checking and Money Market Deposit Customers Could Increase Cost of Funds and Have a Negative Effect on Results of Operations




Premier has a number of large deposit customers that maintain balances in checking, money market and repurchase agreement accounts at the Premier Banks. The ability to attract these types of deposits has a positive effect on Premier’s net interest margin as
they provide a relatively low cost of funds to Premier compared to certificates of deposits or advances. If these depositors were to withdraw these funds and the Premier Banks were not able to replace them with similar types of deposits, the cost of funds would increase and Premier’s results of operation would be negatively impacted.





29
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Integration of Recent and Pending Acquisitions May Be More Difficult Than Anticipated




The success of Premier’s recent acquisitions of Citizens First Bank, Inc., Traders Bankshares, Inc. and Abigail Adams will depend on a number of factors, including (but not limited to) Premier’s ability to:





•
timely and successfully integrate the operations of Premier and each of the acquisitions;•
maintain the existing relationships with the depositors of each acquisition to minimize the withdrawal of deposits subsequent to the merger(s);•
maintain and enhance the existing relationships with the borrowers of each acquisition to limit potential losses from loans made by the them;;•
control the incremental non-interest expense of the integrated operations to maintain overall operating efficiencies;•
retain and attract qualified personnel at each acquisition; and•
compete effectively in the communities served by each acquisition and in nearby communities.





Adams National Commercial Real Estate and Commercial Business Loans Expose it to Increased Lending Risks




These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operations and the income stream of the borrowers.  Such
loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans.  Adams National’s financial condition may be affected by a decline in the value of the real estate securing Adams National’s loans. Real estate values have suffered from declines in Adams National’s market, which may affect the bank’s financial condition. If Adams National continues to receive updated appraisals revealing
significant additional weakness in its collateral, it will likely result in further losses. Also, many of Adams National’s borrowers have more than one commercial real estate or commercial business loan outstanding with the bank.  Consequently, an adverse development with respect to one loan or one credit relationship can expose the bank to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.  Any impact
on Adams National’s financial condition may affect the performance and results of operations of Premier.








30
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Adams National’s Current Concentration of Loans in its Primary Market Area May Increase its Risk




Adams National’s success depends primarily on the general economic conditions in the metro Washington, D.C. market area.  Unlike larger banks that are more geographically diversified, Adams National provides banking and financial services to customers
primarily in Washington, D.C.  The local economic conditions in the Washington, D.C. metropolitan area have a significant impact on its loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans.  A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond Premier’s control would impact these local economic conditions and could negatively affect the financial results of its
banking operations.





Premier’s expenses will increase as a result of increases in FDIC insurance premiums.




The Federal Deposit Insurance Corporation imposes an assessment against institutions for deposit insurance.  This assessment is based on the risk category of the institution and ranges from 5 to 43 basis points of the institution’s deposits.  Federal
law requires that the designated reserve ratio for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of estimated insured deposits.  If this reserve ratio drops below 1.15% or the FDIC expects that it will do so within six months, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.15% of estimated insured deposits within five years (absent extraordinary circumstances).




Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund’s reserve ratio. On May 22, 2009, the FDIC issued a final rule imposing a special assessment of 5 basis points on total assets less tier
1 capital on June 30, 2009, which was collected on September 30, 2009.  For Premier this assessment was booked as a second quarter 2009 expense.  The rule also provides the FDIC with authority to impose up to two additional assessments of up to 5 basis points each on total assets less tier 1 capital.




In addition, EESA temporarily increased the limit on FDIC insurance coverage for deposits to $250,000 through December 31, 2009, and the FDIC took action to provide coverage for newly-issued senior unsecured debt and non-interest bearing transaction and for unsecured
debt and non-interest bearing transaction and certain NOW accounts in excess of the $250,000 limit, for which institutions will be assessed additional premiums.  In 2009, the temporary increase in FDIC insurance coverage was extended through December 31, 2013.  These actions will increase Premier’s combined non-interest expense in 2009 and in future years as long as the increased premiums and coverages are in place.





31
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Claims and Litigation Pertaining to Fiduciary Responsibility




From time to time, shareholders or customers may make claims and take legal action pertaining to Premier’s and Premier Banks’ performance of their fiduciary responsibilities. Defending such claims can impose a material expense on Premier.  If
such claims and legal actions are not resolved in a manner favorable to the Premier Banks they may result in financial liability and/or adversely affect the market perception of the Premier Banks and their products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on Premier’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations





Unauthorized Disclosure of Sensitive or Confidential Customer Information Could Severely Harm Our Business.




In the normal course of business, the Premier Banks collect, process and retain sensitive and confidential customer information to both open deposit accounts and determine whether to approve a customer’s request for a loan. Premier also relies upon a variety
of computing platforms and networks over the internet for the purposes of data processing, communication and information exchange, including a variety of services provided by third-party vendors.  Despite the security measures in place, Premier’s facilities and systems, and those of Premier’s third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. If information
security is breached, information can be lost or misappropriated, resulting in financial loss or costs to Premier or damages to others. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by Premier or by its vendors, could severely damage Premier’s reputation, expose it to the risks of litigation and liability or disrupt the business operations of Premier which in turn, could have a material adverse effect on its financial
condition and results of operations.





Inability to Hire and Retain Qualified Employees




Premier’s performance is largely dependent on the talents and efforts of highly skilled individuals and their ability to attract and retain customer relationships in a community bank environment. There is intense competition in the financial services industry
for qualified employees. In addition, Premier faces increasing competition with businesses outside the financial services industry for the most highly skilled individuals. Premier’s business could be adversely affected if it were unable to retain and motivate its existing key employees and management team.  Furthermore, Premier’s success may be impacted if it were unable to recruit replacement management and key employees in a reasonable amount of time.




Premier is subject to several restrictions on compensation paid to Premier’s executive officers because of its participation in the TARP Capital Purchase Program.  As a recipient of government funding under the TARP Capital Purchase Program, Premier
must comply with


32
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








the executive compensation and corporate governance standards imposed by the ARRA and the standards established by the Secretary of the Treasury under the ARRA.  The restrictions on executive compensation under these standards are more fully described in Item 1 of this Form 10-K under the caption “Regulatory
Matters – TARP Capital Purchase Program”.  These standards could impact Premier’s ability to hire or retain key executives or cause Premier to make material changes to its current compensation plans and philosophy that could result in higher compensation costs in future periods.





Future Issuances of Common Shares or Other Securities May Dilute the Value of Outstanding Common Shares, Which May Also Adversely Affect their Market Price




In many situations, Premier’s Board of Directors has the authority, without any vote of its shareholders, to issue shares of authorized but unissued securities, including common shares authorized and unissued under Premier’s stock option plans and shares
of Premier preferred stock. In the future, Premier may issue additional securities, through public or private offerings, in order to raise additional capital, complete acquisitions, or compensate key employees. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share value of the common stock.





The Series A Preferred Shares Impact Net Income Available to Common Shareholders, and the Warrant May Be Dilutive to Premier’s Common Shareholders.




The additional capital Premier raised through its participation in the TARP Capital Purchase Program has increased Premier’s equity and the number of dilutive outstanding common shares.  In addition, the dividends declared and the accretion of discount
on the Series A Preferred Shares reduces the net income available to Premier’s common shareholders and earning per common share.  The Series A Preferred Shares will also receive preferential treatment in the event of Premier’s liquidation, dissolution or winding up.  Additionally, the ownership interest of Premier’s existing common shareholders will be diluted to the extent the Warrant Premier issued to the U.S. Treasury is exercised.  Although the U.S. Treasury
has agreed not to vote any of the common shares it receives upon exercise of the Warrant, a transferee of any portion of the Warrant or of any common shares acquired upon exercise of the Warrant is not bound by this agreement.





If Premier is Unable to Redeem the Series A Preferred Shares After Five Years, the Cost of This Capital Will Increase Substantially.




If Premier is unable to redeem the Series A Preferred Shares prior to November 15, 2014, the cost of this capital will increase substantially on that date, from 5.0% per annum to 9.0% per annum.  Depending on Premier’s financial condition at the time,
this increase in the annual dividend rate on the Series A Preferred Shares could have a material negative effect on Premier’s liquidity.





33
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








If a Subsidiary Bank’s Current Capital Ratios Decline Below the Regulatory Threshold for an “Adequately Capitalized” Institution, the Bank Will Be Considered “Undercapitalized” Which May Have a Material and Adverse Effect on Premier.




The Federal Deposit Insurance Act (FDIA) requires each federal banking agency to take prompt corrective action with respect to banks that do no meet the minimum capital requirements. Once a bank becomes undercapitalized, it is subject to various requirements and
restrictions, including a prohibition of the payment of capital distributions and management fees, restrictions on growth of the bank’s assets, and a requirement for prior regulatory approval of certain expansion proposals. In addition, an undercapitalized bank must file a capital restoration plan with its principal federal regulator.




If an undercapitalized bank fails in any material aspect to implement a plan approved by its regulator, the agency may impose additional restrictions on the bank. These include, among others, requiring the recapitalization or sale of the bank, restrictions with affiliates,
and limiting the interest rates the bank my pay on deposits. Further, even after the bank has attained adequately capitalized status, the appropriate federal agency may, if it determines, after notice and hearing, that the bank is in an unsafe or unsound condition or has not corrected a deficiency from its most recent examination, treat the bank as if it were undercapitalized and subject the bank to the regulatory restrictions of such lower classification.




In addition to measures taken under the prompt corrective action provisions with respect to undercapitalized institutions, insured banks and their holding companies may be subject to potential enforcement actions by their regulators for unsafe and unsound practices
in conducting their business or the violations of law or regulation, including the filing of false or misleading regulatory reports. Enforcement actions under this authority may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or the removal and prohibition orders against “institution-affiliates parties”. Further, the Federal Reserve may bring an enforcement action against the bank
holding company either to address the undercapitalization in the holding company or to require the holding company to implement measures to remediate undercapitalization in a subsidiary.





34
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Item 1B.  Unresolved Staff Comments





None.





Item 2.  Properties




The Company leases its principal executive offices located in Huntington, West Virginia. The Company also owns property located at 104 Jefferson Street, Brooksville, Kentucky, which serves as a branch for Citizen's Deposit Bank. Except as noted, each of the Banks
owns the real property and improvements on which their banking activities are conducted.




Citizens Deposit Bank & Trust, in addition to its main office at 400 Second Street in Vanceburg, Kentucky, has four branch offices in Lewis County, Kentucky, (including one leased facility), one leased branch office in Mason County, Kentucky, one branch located
on Highway 10 in Germantown, Kentucky, and one branch located in Bracken County, Kentucky. Farmers Deposit Bank, in addition to its main office at 5230 South Main Street in Eminence, Kentucky, has one other branch in Henry County, Kentucky.  Ohio River Bank, in addition to its main office at 221 Railroad Street in Ironton, Ohio, has two branches, one leased facility in Lawrence County, Ohio and one in Scioto County, Ohio. First Central Bank, in addition to its main office at 2 South Main Street in Philippi,
West Virginia, has a branch located in Buckhannon, West Virginia and a leased branch office located in Upshur County, West Virginia. Boone County Bank, in addition to its main office at 300 State Street, Madison, West Virginia, has one leased branch located in Lincoln County, West Virginia and two other branches, one each located in Boone and Logan Counties, West Virginia.  Traders Bank, Inc., in addition to its main office at 601 Washington Street, Ravenswood, West Virginia, has two other branch locations
in Jackson County, two branch locations in Roane County, and one location in Wood County, West Virginia.  Adams National, leases its main office location at 1130 Connecticut Avenue, N.W., Washington, DC, and leases five other branch offices located at Washington, DC and one branch office located in Silver Springs Maryland.  Adams National also leases space for its deposit operations in Washington, DC.  Consolidated Bank & Trust, in addition to its main office at 320 North First
Street, Richmond, Virginia, has one branch located in Hampton, Virginia.





Item 3.  Legal Proceedings




The Banks are respectively parties to legal actions that are ordinary routine litigation incidental to a commercial banking business. In management's opinion, the outcome of these matters, individually or in the aggregate, will not have a material adverse impact
on the results of operations or financial position of the Company.





Item 4.  Submission of Matters to a Vote of Security Holders




There were no matters submitted to a vote of security holders, through solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.


35
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








PART II





Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and


Issuer Purchase of Equity Securities




The Company's common stock is listed on the NASDAQ Global Market System under the symbol PFBI. At December 31, 2009, the Company had approximately 4,993 shareholders  of its common shares.


The following table sets forth on a quarterly basis cash dividends paid and the range of high and low sales prices on a per share basis during the quarters indicated.





Cash


Sales PriceDividends Paid


High


Low2008First Quarter

$
0.10


$
13.59


$
11.01Second Quarter


0.11



13.15



10.05Third Quarter


0.11



11.63



8.50Fourth Quarter


0.11



9.80



5.980.432009First Quarter

$
0.11


$
9.00


$
4.00Second Quarter


0.11



7.19



4.82Third Quarter


0.11



7.50



5.78Fourth Quarter


0.11



6.92



4.000.442010First Quarter (through March 15, 2010)

$
0.11


$
8.90


$
6.32







The payment of dividends by the Company depends upon the ability of the Banks to declare and pay dividends to the Company because the principal source of the Company's revenue will be dividends paid by the Banks.  At December 31, 2009 approximately $2.5
million was available for payment as dividends from the Banks to the Company without the need for regulatory approval. In considering the payment of dividends, the Board of Directors will take into account the Company's financial condition, the cumulative provisions of the Series A Preferred Shares, results of operations, tax considerations, costs of expansion, industry standards, economic conditions and need for funds, as well as governmental policies and regulations applicable to the Company and the Banks.
See "REGULATORY MATTERS - Capital Requirements" for discussion on capital guidelines.





36
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Stock Performance Graph




The following Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing
under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Premier specifically incorporates it by reference into such filing.




The following graph shows a comparison of cumulative total stockholder return on the Common Stock since December 31, 2004 with the cumulative total returns of both a broad equity market index and a published industry index.  The broad equity market index
chosen was the Russell 3000 and the published industry index chosen was the SNL ($500M-$1B) Bank Asset-Size Index.  The graph reflects historical performance only, which is not indicative of possible future performance of the Common Stock.





Premier Financial Bancorp, Inc.








Period EndingIndex

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09Premier Financial Bancorp, Inc.

100.00

129.39

114.72

107.11

61.61

63.16Russell 3000

100.00

106.12

122.80

129.11

80.94

103.88SNL $500M-$1B Bank Index

100.00

104.29

118.61

95.04

60.90

58.00*Source: SNL Financial LC, Charlottesville, VA


37
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Equity Compensation Plan Information




The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under its equity compensation plan, the 2002 Stock Option Plan, as of December 31, 2009.





Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)


Weighted-average exercise price of outstanding options, warrants and rights
(b)


Number of securities remaining available for future issuance under equity compensation plans (Excluding securities reflected in column (a))
(c)Equity compensation plans approved by shareholders2002 Stock Option Plan


212,449


$
11.18



281,882Equity compensation plans not approved by shareholdersNoneTotal


212,449


$
11.18



281,882





38
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Item 6.  Selected Financial Data




The following table presents consolidated selected financial data for the Company. It does not purport to be complete and is qualified in its entirety by more detailed financial information and the audited consolidated financial statements contained elsewhere in
this annual report. The data presented below reflects separately the impact of discontinued operations as more fully described in Item 1 – “The Company”.


(Dollars in thousands, except per share amounts)

At or for the Year Ended December 312009


2008


2007


2006


2005EarningsNet interest income

$
31,083


$
26,035


$
22,296


$
21,395


$
19,852Provision for loan losses


1,052



147



(78
)


(1,161
)


4Non-interest income


9,136



5,291



4,623



4,165



3,920Non-interest expense


27,115



19,894



16,408



16,937



17,305Income taxes


2,934



3,749



3,470



3,283



2,029Net income


9,118



7,536



7,119



6,501



4,434Preferred stock dividends


133



-



-



-



-Net income available tocommon shareholders

$
8,985


$
7,536


$
7,119


$
6,501


$
4,434Financial PositionTotal assets

$
1,101,750


$
724,465


$
549,255


$
535,452


$
528,324Loans


699,133



467,111



346,570



343,797



328,717Allowance for loan losses


7,569



8,544



6,497



6,661



7,892Goodwill and other intangibles


31,595



29,974



15,816



15,816



15,816Securities


240,970



175,741



124,242



121,367



137,419Deposits


913,784



589,182



449,033



438,950



435,843Other borrowings


55,564



41,518



26,124



33,091



19,053Subordinated debentures


-



-



-



-



15,722Preferred equity


21,705



-



-



-



-Common equity


106,851



89,422



67,389



61,002



54,287Per Common Share DataNet income – basic


1.32



1.25



1.36



1.24



0.85Net income - diluted


1.32



1.25



1.35



1.24



0.84Book value


13.46



13.99



12.87



11.65



10.37Tangible book value


9.41



9.30



9.85



8.63



7.35Cash dividends


0.44



0.43



0.40



0.10



0.00Financial RatiosReturn on average assets


1.09
%


1.12
%


1.31
%


1.21
%


0.82
%Return on averagecommon equity


9.47
%


9.38
%


11.13
%


11.31
%


8.42
%Dividend payout


33.33
%


34.40
%


29.41
%


8.06
%


0.00
%Stockholders’ equity to totalassets at period-end


11.67
%


12.34
%


12.27
%


11.39
%


10.28
%Average stockholders’ equityto average total assets


12.19
%


11.94
%


11.74
%


10.74
%


9.77
%




39
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








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


of Operations.





INTRODUCTION




Premier Financial Bancorp, Inc. ("Premier”) is a multi-bank holding company headquartered in Huntington, West Virginia.  It operates eight community bank subsidiaries ranging in size from $63 million to $290 million, each with a local community name
and orientation. The banks operate in twenty-six communities within the states of West Virginia, Virginia, Ohio, Maryland and Kentucky plus the cities of Washington, DC and Richmond, Virginia.  Through these locations the banks provide their customers with a full range of banking services.  At the open of business on October 1, 2009, Premier completed its acquisition of Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a $363 million two bank holding company.  The
two banks now owned by Premier as a result of the acquisition of Abigail Adams were Adams National Bank (“Adams National”) with six locations in and around Washington, DC and Consolidated Bank & Trust Company (“CB&T”) headquartered in Richmond, Virginia with one branch location in Hampton, Virginia.  At the close of business on April 30, 2008, Premier completed its acquisitions of Traders Bankshares, Inc. (“Traders”), a $108 million single bank holding company
headquartered in Spencer, West Virginia, and Citizens First Bank, Inc. (“Citizens First”), a $62 million bank headquartered in Ravenswood, West Virginia.  The results of operations of Abigail Adams, Citizens First and Traders are included in Premier’s consolidated statements of income beginning only from their respective acquisition dates.   On October 25, 2008, Premier merged Citizens First and Traders, named the resulting bank Traders Bank, Inc. and moved its headquarters
to Ravenswood, West Virginia.  As of December 31, 2009, Premier had approximately $1.1 billion in total assets, $699 million in total loans, $914 million in total deposits and $25 million in customer repurchase agreements.




The accompanying consolidated financial statements have been prepared by the management of Premier in conformity with accounting principles generally accepted in the United States of America. The audit committee of the Board of Directors engaged Crowe Horwath LLP
("Crowe") as independent auditors to audit the consolidated financial statements, and their report is included elsewhere herein. Financial information appearing throughout this annual report is consistent with that reported in the consolidated financial statements. The following discussion is designed to assist readers of the consolidated financial statements in understanding significant changes in Premier's financial condition and results of operations.




Management's objective of a fair presentation of financial information is achieved through a system of internal accounting controls. The financial control system of Premier is designed to provide reasonable assurance that assets are safeguarded from loss and that
transactions are properly authorized and recorded in the financial records. As an integral part of that financial control system, the holding company employs a staff of internal auditors and contracts with professional accounting firms to perform internal audits of the financial records of each of the subsidiaries on a periodic basis.  The internal audit manager reports the findings and recommendations highlighted by the internal audits to Premier’s audit committee as well


40
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








as the audit committees of the subsidiaries.  Also, on a regular periodic basis, the subsidiary banks are examined by Federal and State banking authorities for safety and soundness as well as compliance with applicable banking laws and regulations. The activities of both the internal and external audit
functions are reviewed by the audit committee of the Board of Directors.





FORWARD-LOOKING STATEMENTS




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








CRITICAL ACCOUNTING POLICIES





General




The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements and management's
discussion and analysisare, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change.




Presented below is a discussion of those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations. These critical accounting policies require management's most difficult,
subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the accompanying consolidated financial statements presented elsewhere in this annual report.


41
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Allowance for Loan Losses




The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable incurred losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of control over the following areas of maintenance
of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance that the allowance for loan losses is maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.




The Company evaluates various loans individually for impairment using accounting guidance issued by Financial Accounting Standards Board (“FASB”). Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual,
loans past due 90 days or more, restructured loans and other loans selected by management including loans graded as substandard or doubtful by the internal credit review process. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment with a group of loans that
have similar characteristics.




For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by accounting guidance. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral
type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards
and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.




The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of probable incurred loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation
date and, if the estimate of losses exceeds the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses were below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses. The Company recognizes the inherent imprecision in
estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not


42
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








adequate to absorb the new estimate of probable incurred losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.








Business Acquisitions and Impairment of Goodwill




For acquisitions, Premier is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other
valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.





The loans acquired via the purchase of Abigail Adams were recorded on the books of Premier at their estimated fair value.  The estimate of fair value included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous
market for the loans in an orderly transaction between market participants.  These estimates required management's most difficult, subjective and complex judgments and are inherently uncertain.  Since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, consistent with new accounting guidance for acquisitions after 2008, no allowance for loan losses for these loans was recorded by Premier at the date of acquisition.  However,
in the event that different assumptions or conditions were to prevail due to uncertainties in the economy, the borrower’s ability to repay or other factors, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.


Under accounting guidance issued by the FASB related to accounting for goodwill and other intangible assets, goodwill is evaluated at least annually to determine if the amount recorded on the Company's balance sheet is impaired. If goodwill is determined to be impaired,
the recorded amount would be reduced to estimated fair value by a charge to expense in the period in which impairment is determined. Impairment is evaluated in the aggregate for all of the Company's banking operations. Operating characteristics of the aggregate banking operations are derived and compared to a database of peer group banks that have been sold. Pricing valuation factors that are considered in estimating the fair value of the Company's aggregate banking operations include price-to-total assets, price-to-total
book value, price-to-deposits and price-to-earnings. Unusual events that have impacted the operating characteristics of the Company's aggregate banking operations are considered to assess the likelihood of recurrence and adjustments to historical performance may be made. Changes in assumptions regarding the likelihood of unusual historical events recurring or the use of different pricing valuation factors could have a material impact on management's impairment analysis.





43
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








SUMMARY FINANCIAL RESULTS




Premier had net income available to common shareholders of $8.985 million in 2009 compared to $7.536 million of net income reported for the year 2008 and $7.119 reported for 2007.  Net income increased in 2009 largely due to acquisition activity in 2008
and 2009.  In 2009, higher interest income and non-interest income as well as lower interest expense were partially offset by higher non-interest expense.  The increases in each of these categories was primarily the result of the increase in operations from the acquisitions of Abigail Adams on October 1, 2009, and Citizens First and Traders, both of which occurred at the close of business on April 30, 2008.   The operating results of Abigail Adams, Citizens First and Traders
are included in the consolidated financial statements of Premier only from the date of their respective acquisition.  When comparing 2009 operating results to 2008 operating results, the operations of Abigail Adams are included only for the last three months of 2009 and none at all in 2008.  Similarly, the operations of Citizens First and Traders are included for the full twelve months of 2009 but only for the last eight months of 2008.   The increase in 2008 net income available
to shareholders over 2007 was again a result of higher interest income and non-interest income as well as lower interest expense all of which was partially offset by higher non-interest expense.  These results were largely due to the acquisitions of Citizens First and Traders.  When comparing 2008 operating results to 2007 operating results, the operations of Citizens First and Traders are included only for the last eight months of 2008 and none at all in 2007.   Basic earnings
per share were $1.32 in 2009 compared to $1.25 in 2008 and to $1.36 in 2007.  The increase in earnings per share in 2009 resulted from a proportionately greater increase in net income available to common shareholders from the acquisition of Abigail Adams versus the increase in average shares outstanding issued to acquire the entity.  The decrease in earnings per share in 2008 resulted from the increase in the average shares outstanding related to the common stock issued as part of the merger
consideration of Citizens First and Traders.  The terms of the acquisitions are more fully described in Note 24 to the consolidated financial statements.




The following table comparatively illustrates the components of ROA and ROE over the previous five years. Return on average assets (“ROA”) measures how effectively Premier utilizes its assets to produce net income.  It also facilitates the analysis
of earnings performance of different sized organizations.  In 2007, 2008 and 2009, Premier increased the size its balance sheet from $549.3 million in total assets at the end of 2007 to $724.5 million at the end of 2008 to $1,101.8 million at the end of 2009 largely due to acquisitions.  The increase in asset size will generally result in higher dollars of income earned and expenses incurred.  A detailed review of the components of ROA will help analyze Premier’s performance
without regard to changes in its size.




Premier’s net income in 2009 resulted in an ROA of 1.09%, a decrease from the 1.12% ROA in 2008 and the 1.31% in 2007.  As shown in the table, fully taxable equivalent net interest income (as a percent of average earnings assets) reached its highest
level during the last five years in 2007 at 4.42%.  In 2008, this percentage decreased to 4.21% and decreased again in 2009 to 4.12%, as the yields on earning assets have been declining as a result of a lower overall interest rate environment due to Federal Reserve policies designed to stimulate national


44
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








economic growth.  In 2005, net credit income was 4.00% of average earning assets and increased to its highest level in the last five years in 2006.  In 2005, minimal provisions for loan losses were recorded and thus there was little reduction from net interest income.  In 2006, negative
provisions for loan losses were recorded which served to help increase net credit income to 4.55%.  This increase in net credit income (as a percent of average earning assets) was complemented by an increase in non-interest income (as a percent of average earning assets) and a reduction in non-interest expenses (as a percent of average earning assets) when compared to the previous year. In 2007, while net interest income increased to its highest level, net credit income was lower than 2006 as a result
of minimal negative provisions for loan losses recorded in 2007.  However, in 2007, non-interest income (as a percent of average earning assets) also reached its highest level in the past five years while non-interest expense (as a percent of average earning assets) continued to decline.  In 2008, minimal provisions for loan losses reduced an already lower net interest income (as a percent of average earning assets), resulting in net credit income of 4.19% of average earning assets.  In
2008, non-interest income (as a percent of average earning assets) declined somewhat, returning to the level achieved in 2006.  However, non-interest expense (as a percent of average earning assets) continued to decline in 2008 resulting in the lowest ratio over in the last five years.  In 2009, net credit income (as a percent of average earning assets) declined to 3.98%, the lowest level in the last five years, as the lower net interest income (described above) was lowered even further by
the highest provision for loan losses (as a percent of average earning assets) over the past five-year period.  Further lowering Premier’s return on average assets in 2009 was the lowest non-interest income and highest non-interest expense (as a percent of average earning assets) in the last five years largely due to acquisition related expenses, a special FDIC insurance assessment, write downs on the value of other real estate owned (“OREO”) and lower deposit customer fee income in
relation to the total deposits outstanding.  Adding to Premier’s return on average assets in 2009 was a gain recognized on the acquisition of Abigail Adams and lower income tax expense.  As illustrated in the table, the overall result was to decrease Premier's 2009 return on average earning assets to 1.18% and decrease its return on average total assets (ROA) to 1.09%.








45
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








ANALYSIS of RETURN ON ASSETS and EQUITY2009


2008


2007


2006


2005As a percent of average earning assetsFully taxable-equivalent net interest income


4.12
%


4.21
%


4.42
%


4.32
%


4.00
%Provision for loan losses


(0.14
)


(0.02
)


0.02



0.23



(0.00
)Net credit income


3.98



4.19



4.44



4.55



4.00Gains on acquisition of subsidiary and sales of assets


0.47



0.01



0.00



0.00



0.00Non-interest income


0.74



0.84



0.91



0.84



0.78Non-interest expense


(3.57
)


(3.20
)


(3.23
)


(3.40
)


(3.46
)Tax equivalent adjustment


(0.03
)


(0.03
)


(0.04
)


(0.03
)


(0.03
)Applicable income taxes


(0.39
)


(0.60
)


(0.68
)


(0.66
)


(0.41
)Preferred stock dividends


(0.02
)


(0.00
)


(0.00
)


(0.00
)


(0.00
)Return on average earning assets


1.18



1.21



1.40



1.30



0.88Multiplied by average earning assets to
average total assets


92.20



92.48



93.34



93.07



92.84Return on average assets


1.09
%


1.12
%


1.31
%


1.21
%


0.82
%Multiplied by average assets to
average common stockholders’ equity


8.68
X


8.37
X


8.52
X


9.31
X


10.23
XReturn on average common equity


9.47
%


9.38
%


11.13
%


11.31
%


8.42
%




The net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) increased significantly in 2009 to 2.83%.  This ratio compares to 2.36% in 2008, 2.32% in 2007, the lowest ratio reported in the last five years,
2.56% in 2006 and 2.68% in 2005.  The increases in 2009 net overhead was largely the result of a higher ratio of non-interest expense to average earning assets due to acquisition related expenses, significantly higher FDIC insurance costs, higher OREO costs and generally less efficient operations of the acquired Abigail Adams’ subsidiary banks.  Also negatively affecting the 2009 net overhead ratio was a lower ratio of non-interest income to average earning assets largely due to the
0.41% non-interest income ratio of the acquired Abigail Adams’ banks and a slight decrease in secondary market mortgage commissions despite the increase in the size of the Company.  The increase in 2008 net overhead when compared to 2007 was largely the result of a lower ratio of non-interest income to average earning assets due to lower secondary market mortgage commissions overall and the 0.66% non-interest income ratio of the acquired banks.  The decrease in the 2007 net overhead
ratio when compared to 2006 was the result of increases in Premier’s non-interest income related to electronic banking income and secondary market mortgage commissions, plus decreases in non-interest expenses related to staff costs and the accelerated amortization of trust preferred issuance costs recorded in 2006 but not 2007.





46
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Return on average common equity (“ROE”), another measure of earnings performance, indicates the amount of net income earned in relation to the total equity invested by holders of common stock. Premier’s 2009 ROE was 9.47% compared to 9.38% in 2008
and 11.13% realized in 2007.  ROE increased in 2009 due to a higher ratio of average assets to average equity resulting from the Abigail Adams acquisition.  ROE decreased in 2008 compared to 2007 due to an increase in average equity as a result of the common stock issued to acquire Traders and Citizens First.




A breakdown of Premier's financial results by quarter for the years ended December 31, 2009 and 2008 is summarized below.





QUARTERLY FINANCIAL INFORMATION(Dollars in thousands, except per share amounts)First


Second


Third


Fourth


Full Year2009Interest income

$
9,136


$
9,120


$
9,114


$
13,857


$
41,227Interest expense


2,578



2,458



2,346



2,762



10,144Net interest income


6,558



6,662



6,768



11,095



31,083Provision for loan losses


102



110



127



713



1,052Gain on acquisition of subsidiary


0



0



0



3,552



3,552Net overhead


4,594



4,559



4,349



8,029



21,531Income before income taxes


1,862



1,993



2,292



5,905



12,052Net income


1,229



1,355



1,502



5,032



9,118Dividends on preferred stock


0



0



0



133



133Net income available to common stockholders


1,229



1,355



1,502



4,899



8,985Basic net income per share


0.19



0.21



0.23



0.62



1.32Diluted net income per share


0.19



0.21



0.23



0.61



1.32Dividends paid per share


0.11



0.11



0.11



0.11



0.442008Interest income

$
8,427


$
9,433


$
10,276


$
9,708


$
37,844Interest expense


2,833



2,984



3,099



2,893



11,809Net interest income


5,594



6,449



7,177



6,815



26,035Provision for loan losses


(135
)


91



85



106



147Securities gains


0



93



0



0



93Net overhead


3,056



3,545



4,197



3,898



14,696Income before income taxes


2,673



2,906



2,895



2,811



11,285Net income


1,774



1,930



1,930



1,902



7,536Basic net income per share


0.34



0.32



0.30



0.30



1.25Diluted net income per share


0.34



0.32



0.30



0.30



1.25Dividends paid per share


0.10



0.11



0.11



0.11



0.43





47
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








BALANCE SHEET ANALYSIS





Summary




A financial institution's primary sources of revenue are generated by its earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential
in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk. Information on rate-related sources and uses of funds for each of the three years in the period ended December 31, 2009, is provided in the table below.








48
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS(Dollars in thousands)2009


2008


2007Average
Balance


Interest


Yield/
Rate (2)


Average
Balance


Interest


Yield/
Rate (2)


Average
Balance


Interest


Yield/
Rate (2)Assets:Interest earning assetsU.S. Treasury and federalagency securities

$
102,904


$
3,393



3.30
%

$
102,758


$
4,457



4.34
%

$
82,177


$
3,496



4.25
%States and municipalobligations (1)


8,210



398



4.85



6,098



320



5.25



4,067



241



5.93Mortgage backed securities


72,121



3,069



4.26



53,069



2,517



4.74



37,017



1,799



4.86Other securities


6,012



250



4.16



3,723



180



4.83



3,307



212



6.41Total investment securities


189,247



7,110



3.76



165,648



7,474



4.51



126,568



5,748



4.54Federal funds sold


28,912



24



0.08



37,885



748



1.97



36,088



1,829



5.07Interest-bearing depositswith banks


14,815



57



0.38



1,614



39



2.42



1,273



56



4.40Loans, net of unearnedincome (3)(4)Commercial


303,514



18,467



6.08



207,939



14,044



6.75



169,217



13,591



8.03Real estate mortgage


168,643



11,434



6.78



155,324



11,074



7.13



129,072



9,474



7.34Installment


54,316



4,337



7.98



53,802



4,626



8.60



46,399



4,244



9.15Total loans


526,473



34,238



6.50



417,065



29,744



7.13



344,688



27,309



7.92Total interest earning assets


759,447



41,429



5.46



622,212



38,005



6.11



508,617



34,942



6.87Allowance for loan losses


(8,218
)










(8,020
)










(6,615
)Cash and due from banks


18,095











17,025











13,853Premises and equipment


12,439











9,759











6,378Other assets


41,922











31,802











22,653Total assets

$
823,685










$
672,778










$
544,886Liabilities and Equity:Interest bearing liabilitiesNOW and money market

$
162,870



637



0.39
%

$
136,878



1,136



0.83
%

$
119,849



1,780



1.49
%Savings deposits


78,240



250



0.32



66,978



381



0.57



53,000



384



0.72Certificates of deposit andother time deposits


316,016



8,234



2.61



254,802



9,159



3.59



202,183



8,855



4.38Total interest bearingdeposits


557,126



9,121



1.64



458,658



10,676



2.33



375,032



11,019



2.94Short-term borrowings


16,730



139



0.83



17,325



251



1.45



13,200



321



2.43Other borrowings


16,626



581



3.49



12,658



590



4.66



10,047



769



7.65FHLB advances


7,179



303



4.22



4,723



292



6.18



5,363



347



6.47Total interest-bearingliabilities


597,661



10,144



1.70
%


493,364



11,809



2.39
%


403,642



12,456



3.09
%Non-interest bearing deposits


121,029











94,155











74,522Other liabilities


4,593











4,903











2,743Preferred equity


5,548











-











-Common equity


94,854











80,356











63,979Total liabilities and equity

$
823,685










$
672,778










$
544,886Net interest earnings (1)





$
31,285










$
26,196










$
22,486Net interest spread (1)










3.76
%










3.72
%










3.78
%Net interest margin (1)










4.12
%










4.21
%










4.42
%(1) Taxable – equivalent yields are calculated assuming a 34% federal income tax rate
(2) Yields are calculated on historical cost except for yields on marketable equity securities that are calculated used fair value
(3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans
(4) Includes loans on non-accrual status


49
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








In 2009, average earning assets increased by 22.1% or $137.2 million from 2008, following a 22.3% or $113.6 million increase in 2008 from 2007.  Average interest-bearing liabilities, the primary source of funds supporting the earning assets, increased by
21.1% or $104.3 million in 2009 from 2008, which follows a 22.2% or $89.7 million increase in 2008 over 2007.  The 2009 increase in average earning assets was primarily the result of acquisition activity.  The acquisition of Abigail Adams in October 2009 added $83.7 million in average earning assets and $69.7 million in average interest bearing liabilities in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 added $41.4
million to 2009 average earning assets and $29.6 million to 2009 interest bearing liabilities.  Excluding the impact of acquisition activity, the remaining $12.2 million increase in average earning assets in 2009 was primarily the result of a $12.2 million increase in average total loans as a $10.0 million increase in average interest bearing bank balances was offset by a $2.6 million decrease in average investment securities outstanding and a $7.4 million decrease in average federal funds sold.  Excluding
the impact of acquisition activity, average interest bearing liabilities increased by $5.0 million or 1.0% in 2009 from 2008.  This increase in average interest bearing liabilities in 2009 was the result of a $7.1 million increase in average interest bearing deposits and a $1.7 million increase in average other long-term borrowings partially offset by a $3.8 million decrease in average short-term borrowings, primarily customer repurchase agreements.  Furthermore, the increase in average interest
bearing deposits was complemented by a $26.9 million or 28.5% increase in average non-interest bearing deposits, $23.2 million resulting from acquisition activity and $3.7 million from internal growth.




In 2008, average earning assets increased by 22.3% or $113.6 million from 2007, following a 2.1% or $10.3 million increase in 2007 from 2006.  Average interest bearing liabilities, the primary source of funds supporting the earning assets, increased by
22.2% or $89.7 million in 2008 from 2007, which follows a 0.3% or $1.2 million increase in 2007 over 2006.  The 2008 increase in average earning assets was primarily the result of adding Traders and Citizens First to the organization at the end of April, 2008.  The acquisition of these two banks added $102.3 million in average earnings assets at $80.6 in average interest bearing liabilities in 2008.  Excluding the acquisitions of Traders and Citizens First, the remaining $11.3 million
increase in average earning assets in 2008 was primarily the result of a $7.5 million increase in average total loans and an $11.1 million increase in average total investment securities outstanding.  These increases more than offset the $6.9 million decrease in average federal funds sold, as surplus liquid funds were used to fund loans and invest in higher yielding investment securities.  Excluding the acquisitions of Traders and Citizens First, average interest bearing liabilities increased
by $9.1 million or 2.3% in 2008 from 2007.  This increase in average interest bearing liabilities in 2008 was the result of a $3.0 million increase in average interest bearing deposits, a $4.1 million increase in average short-term borrowings, primarily customer repurchase agreements, and a $2.0 million increase in other long-term borrowings and Federal Home Loan Bank (FHLB) advances.  Furthermore, the increase in average interest bearing deposits was complemented by a $19.6 or 26.3% increase
in average non-interest bearing deposits, $17.3 million from the acquisitions of Traders and Citizens First and $2.3 million from internal growth.  Additional information on each of the components of earning assets and interest bearing liabilities is contained in the following sections of this report.


50
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Loan Portfolio




Premier's loan portfolio is its largest and highest yielding component of average earning assets, totaling 69.3% of average earning assets during 2009.  Average loans increased in 2009 by $109.4 million or 26.2% over 2008 following a $72.4 million or 21.0%
increase in 2008 over 2007.  The 2009 increase is largely attributable to the acquisition activity in 2008 and 2009 which added $97.2 million in average total loans during the year.  Excluding the acquisitions, average total loans increased by $12.2 million or 2.9% in 2009 from 2008.  This increase is the result of growth in Premier’s Ohio and West Virginia loan markets.  In 2009, Premier realized a $4.3 million or 8.1% increase in average outstanding loans in its
Ohio markets, and a $7.9 million or 3.3% increase in its West Virginia markets (excluding Traders and Citizens First).  Average total loans in Premier’s Kentucky markets were relatively the same from 2008 to 2009.  The 2008 increase is largely attributable to the acquisitions of Traders and Citizens First, which added $64.9 million in average total loans during the year.  Excluding the acquisitions, average total loans increased by $7.5 million or 2.2% in 2008 from 2007.  This
increase is the result of growth in Premier’s Ohio and West Virginia loan markets.  In 2008, Premier realized a $1.9 million or 3.7% increase in average outstanding loans in its Ohio markets, and a $5.8 million or 3.5% increase in its West Virginia market (excluding Traders and Citizens First).  These increases more than offset the slight $212,000 or 0.2% decrease in average total loans in Premier’s Kentucky markets.




Total loans at December 31, 2009 increased by $232.0 million or 49.7% from the total at December 31, 2008.  This increase follows a $120.5 million or 34.8% from the total at December 31, 2007.  The significant increase in 2009 is due to the $235.6
million of period end loans from the acquisition of Abigail Adams.  The remaining banks collectively had a $3.5 million or 0.7% decrease in their total period end loans as increases in total loans at the West Virginia and Ohio banks were more than offset by decreases at the Kentucky banks.  The significant increase in 2008 is primarily due to the $102.8 million of period end loans from the acquisitions of Traders and Citizens First.  The remaining $17.8 million or 5.1% increase in
2008 was the result of significant increase in loan demand in Premier’s markets.




Loans secured by real estate in total increased from 74.0% of Premier’s loan portfolio at December 31, 2008 to approximately 81.3% of Premier's loan portfolio at December 31, 2009 due to the loans acquired from Abigail Adams.  The mix of loans acquired
from Abigail Adams was significantly different from Premier’s other affiliate bank loan portfolios, which consist of a diverse portfolio of predominantly single family residential loans and loans for commercial purposes where real estate is part of the collateral, not the primary source of repayment. The December 31, 2009 balances of the loans acquired from Adams National were predominantly (84.1%) commercial real estate loans and real estate construction loans, including $67.0 million of loans secured
by non-owner occupied commercial property, $39.1 million of loans secured by owner occupied commercial property, $29.5 million of multi-family residential real estate loans and $19.6 million of commercial real estate construction and land development loans.  The concentrations in these kinds of loans was one of the factors motivating the OCC to require Adams National to enter into a formal written agreement to reduce these concentrations.  The mix of December 31, 2009 balances of the loans
acquired from CB&T were closer to the ratios of


51
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Premier’s other affiliate banks but were still predominantly (61.5%) commercial real estate loans and real estate construction loans due in part to loan participations with Adams National.  While there are generally additional risks of loss associated with commercial real estate lending, such as
the potential for adverse changes in economic conditions, the borrowers' inability to successfully execute their business plan and/or deterioration in the value of the commercial real estate collateral; the loans acquired from Adams National and CB&T were recorded at fair value as of the acquisition date taking into account credit risks in the loans acquired.  See additional discussion below on the impaired loans acquired from Adams National and CB&T.




Premier’s residential real estate mortgage loans generally do not exceed 80% of the value of the real property securing the loan at the time of origination. The residential real estate mortgage loan portfolio primarily consists of adjustable rate residential
mortgage loans. The origination of these mortgage loans can be more difficult in a low interest rate environment where there is a significant demand for fixed rate mortgages. Premier also originates mortgage loans to be sold in the secondary market and recognizes non-interest income upon the sale of those mortgages in the form of commissions and servicing release fees.  Premier has not engaged in the solicitation of so-called “sub-prime” or “interest only” mortgages.  Premier
uses an experienced staff underwriter to ensure the completeness of the borrowers’ loan application and documentation and to ensure that the loans meet the standards required by prospective loan purchasers.  Additional information regarding the volume of mortgage loans originated and sold is contained in Premier’s consolidated statements of cash flows presented elsewhere in this annual report.




Commercial loans are generally made to small-to-medium size businesses located within a defined market area and typically are secured by business assets and guarantees of the principal owners. Additional risks of loss are associated with commercial lending, such
as the potential for adverse changes in economic conditions or the borrowers' ability to successfully execute their business plan. Consumer loans generally are made to individuals living in Premier's defined market area who are known to the local bank's staff.  Consumer loans are generally made for terms of up to seven years on a secured or unsecured basis; however longer terms may be approved in certain circumstances and for revolving credit lines. While consumer loans generally provide the Company
with increased interest income, consumer loans may involve a greater risk of default.








52
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








The following table presents a five year comparison of loans by type. With the exception of those categories included in the comparison, there are no loan concentrations which exceed 10% of total loans. Additionally, Premier's loan portfolio contains no loans to
foreign borrowers nor does it have a material volume of highly leveraged transaction lending.





LOAN SUMMARY(Dollars in thousands)As of December 31,2009

%


2008

%


2007

%


2006

%


2005

%Summary of Loans by TypeCommercial, secured by real estate

$
304,607

43.6
%

$
133,742

28.7
%

$
100,278

28.9
%

$
101,786

29.6
%

$
85,989

26.2
%Commercial, other


76,140

10.9



61,655

13.2



40,438

11.7



43,981

12.8



49,362

15.0Real estate construction


51,637

7.4



26,182

5.6



24,035

6.9



11,303

3.3



11,070

3.4Real estate mortgage


211,552

30.3



185,536

39.7



133,776

38.6



138,795

40.4



134,570

40.9Agricultural


2,710

0.4



2,446

0.5



1,845

0.5



1,930

0.5



1,670

0.5Consumer


49,312

7.0



51,793

11.1



41,893

12.1



42,188

12.3



42,096

12.8Other


3,175

0.4



5,757

1.2



4,305

1.3



3,814

1.1



3,960

1.2Total loans

$
699,133

100.0
%

$
467,111

100.0
%

$
346,570

100.0
%

$
343,797

100.0
%

$
328,717

100.0
%Non-performing AssetsNon-accrual loans

$
46,299




$
6,943




$
3,157




$
4,698




$
3,751Accruing loans which are contractually past due 90 days or more


489





625





987





992





853Troubled debt restucturings


11,974





1,203





1,489





1,268





1,540Total non-performing and restructured loans


58,762





8,771





5,633





6,958





6,144Other real estate acquired through foreclosures


9,251





1,056





174





495





2,049Total non-performing and restructured loans and other real estate

$
68,013




$
9,827




$
5,807




$
7,453




$
8,193Non-performing and restructured loans as a % of total loans


8.40
%




1.88
%




1.63
%




2.02
%




1.87
%Non-performing and restructured loans and other real estate as a % of total assets


6.17
%




1.36
%




1.06
%




1.39
%




1.55
%Allocation of Allowance for Loan LossesCommercial, other

$
810

11.7
%

$
1,197

14.9
%

$
689

13.5
%

$
839

14.4
%

$
1,071

16.7
%Real estate, construction


261

7.4



283

5.6



237

6.9



117

3.3



134

3.4Real estate, other


3,998

73.9



4,564

68.4



3,092

67.5



3,395

70.0



3,810

67.1Consumer installment


363

7.0



345

11.1



259

12.1



521

12.3



772

12.8Unallocated


2,137





2,155





2,220





1,789





2,105Total

$
7,569

100.0
%

$
8,544

100.0
%

$
6,497

100.0
%

$
6,661

100.0
%

$
7,892

100.0
%





53
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








In addition to the loans presented in the loan summary table, Premier also offers certain off-balance sheet products such as letters of credit, revolving credit agreements, and other loan commitments. These products are offered under the same credit standards as
the loan portfolio and are included in the risk-based capital ratios used by the Federal Reserve to evaluate capital adequacy. Additional information on off-balance sheet commitments is contained in Note 19to the consolidated financial statements.





Total non-performing assets, which consist of past-due loans on which interest is not being accrued ("non accrual loans"), foreclosed properties in the process of liquidation ("OREO"), loans with restructured terms to enable a delinquent borrower to repay and accruing
loans past due 90 days or more, were $68.0 million or 6.17% of total assets at year-end 2009.  These amounts compare to $9.8 million of total non-performing assets or 1.36% of total assets at year-end 2008 and $5.8 million of total non-performing assets or 1.06% of total assets at year-end 2007, the lowest levels over the past five years.  The significant increase in 2009 from year-end 2008 is largely due to the non-performing assets that came with the acquisition of Abigail Adams and its
two subsidiary banks.  At December 31, 2009, these two banks accounted for $48.0 million or 70.5% of Premier’s non-performing assets.  However, since these assets were recorded at an estimated fair value on the date of acquisition, the amount of credit risk assumed by Premier is not nearly as great as the volume of non-performing assets suggests taken at face value.  The estimate of fair value on all loans, but particularly on non-performing assets, included factors for the
measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants.  These estimates included significant discounts on the non-accrual loans.  Since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, consistent with new accounting guidance for acquisitions after 2008, no allowance for loan losses for these loans was recorded
at the date of acquisition.  Under previous accounting standards, the loan loss allowance of acquired banks would have carried over to Premier’s books and records, as was the case for Traders and Citizens First.  The following table illustrates the December 31, 2009 face value of the non-performing assets of the two subsidiary banks from the acquisition of Abigail Adams and the discounted net carrying value of those non-performing assets.


NON-PERFORMING ASSETS AT ACQUIRED SUBSIDIARY BANKS(Dollars in thousands)December 31, 2009Face Value


Discounted Net Carrying
ValueNon-performing AssetsNon-accrual loans

$
48,430


$
39,306Loans 90+ days past due


119



115Other real estate owned


9,830



8,535Total non-performing assets

$
58,379


$
47,956(1) Face value includes reductions for interest payments received on loans while on non-accrual status in accordance with the cost recovery method of accounting for non-accrual loans.





54
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








The remaining $10.2 million increase in non-performing assets in 2009 is largely due to a $10.8 million increase in restructured loans.  These loans were performing in accordance with their modified terms at December 31, 2009, but because the loan terms
were modified to assist the borrower to repay the loan, the loans are included with total non-performing assets.  Most of Premier’s restructured loans are loans that have been modified to allow the borrower to pay interest only for a limited amount of time.  Also included in the remaining $10.2 million increase in non-performing assets in 2009 is a $50,000 increase in non-accrual loans offset by a $251,000 decrease in loans 90+ days past due and a $340,000 decrease in other real estate
owned (OREO).  The increase in total non-performing assets in 2008 was largely due to the $4.2 million of non-performing assets at December 31, 2008 at the acquired Traders Bank.  In addition to the non-accrual loans at Traders Bank, in 2008 a $0.7 million increase in non-accrual loans was largely offset by decreases in loans past due 90 days or more and restructured loans.  While the ratio of non-performing assets to total assets at the end of 2008 was higher than the end of 2007,
it was still lower than either of the previous two years presented in the table above.  The decrease in total non-performing assets in 2007 was largely due a $1.5 million decrease in non-accrual loans and a continued decrease in OREO property.  These decreases offset the increase in restructured loans, while loans past due 90 days or more and still accruing remained virtually unchanged.  In 2007, the level of non-accrual loans declined primarily as a result of loan payoffs as well
as partial or complete loan charge-offs.




Management believes the estimated potential losses related to delinquent loans to be adequately provided for in the allowance for loan losses.  These non-performing assets were included in the analyses that supported the recording of provisions for loan
loss during 2009 and 2008.  As management's efforts to collect on all of the Company’s non-performing assets continue, matured loans are only renewed using Premier's strengthened credit policies. Otherwise, loans may be placed on non-accrual status and foreclosure proceedings begun to obtain and liquidate any collateral securing the past due or matured loans. As previously demonstrated by Premier’s history, management is committed to continuing to reduce its level of non-performing assets
and maintaining strong underwriting standards to help maintain a lower level of non-performing assets in the future. This effort is revealed in the decline in non-performing assets from the end of 2005 to the end of 2007, primarily related to the sale of OREO properties and the decline in non-accrual loans and loans 90+ days past due. Premier's efforts at its other affiliate banks in 2003 and 2004 were masked by the high level of non-performing assets at Farmers Deposit Bank, which alone totaled $12.5 million
at December 31, 2003. At December 31, 2004, the non-performing assets at Farmers Deposit Bank had declined to $6.8 million, leaving $3.3 million of total non-performing assets at the other Affiliate Banks combined.  By December 31, 2008, total non-performing assets at Farmers Deposit Bank had declined to $1.1 million.  This experience and performance in pursuing the collection of non-performing assets was a factor in management’s decision to pursue the acquisition of Abigail Adams and
its high level of non-performing assets.  While the circumstances related to the collection of every non-performing loan is different, with the benefit of the additional capital provided by Premier’s participation in the TARP Capital Purchase Program and the requirement to record the non-performing assets at their estimated fair value at acquisition date, management believes it will be successful in resolving a majority of the non-performing assets acquired from Abigail Adams.


55
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








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




It is Premier's policy to place loans that are past due over 90 days on non-accrual status, unless the loans are adequately secured and in the process of collection. Through its acquisition of Abigail Adams, Premier now has $13.9 million of construction loans on
non-accrual status at December 31, 2009 whereby additional funds may be needed by the borrower to complete the project.  For real estate loans, upon repossession, the balance of the loan is transferred to "Other Real Estate Owned" (OREO) and carried at the lower of the outstanding loan balance or the fair value of the property based on current appraisals and other current market trends, less estimated disposal costs. If a writedown of the OREO property is necessary at the time of foreclosure, the amount
is charged against the allowance for loan losses. A periodic review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair market value less estimated disposal costs, additional writedowns of the property value are charged directly to operations.




During 2009, Premier recorded $561,000 of writedowns and losses on the disposition of OREO properties, net of gains, compared to $21,000 of such writedowns and losses in 2008.  In 2007 Premier recognized a $20,000 net profit on the disposition of OREO properties.  The
significant increase in OREO writedowns and losses in 2009 primarily relates to properties held at the newly acquired Traders Bank.  Carrying values of OREO properties were compared to updated appraisals and additional writedowns of the property value were charged directly to operations based upon the updated net realizable value.  The properties were primarily undeveloped vacant land.  Although loans may be classified as non-performing, some continue to pay interest irregularly
or at less than originally contracted terms. During 2009, approximately $587,000 of interest was recognized on non-accrual and restructured loans, while approximately $1.2 million would have been recognized in accordance with their original terms.




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


56
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








of allowance. Loans that are assigned marginally passing grades are grouped together and allocated slightly higher percentages to determine the estimated amount of potential losses due to the identification of increased risk(s). Loans that are assigned a grade of "substandard" or "doubtful" are usually determined
to be impaired.




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




The sum of the calculations and estimations of the risk of loss in the loan portfolio is compared to the recorded balance of the allowance for loan losses. If the total allowance is deemed to be inadequate a charge to earnings is recorded to increase the allowance.
In 2009, Premier recorded $1,052,000 of additional provisions for loan losses, while in 2008, Premier recorded $147,000 of additional provisions for loan losses.  Conversely, should an evaluation of the allowance result in a lower estimate of the risk of loss in the loan portfolio and the allowance is deemed to be more than adequate, a reversal of previous charges to earnings ("a negative provision") may be warranted in the current period. Events that may lead to negative provisions include greater
than anticipated recoveries, a reduction in the historical loss ratios, securing more collateral on an impaired loan during the collection process, or receiving payment in full on an impaired loan.  All of these events occurred in varying degrees during 2007 and resulted in $78,000 of negative provisions during the year.





At December 31, 2009, the allowance for loan losses was $7.6 million, or 1.08% of total year-end loans, compared to an allowance for loan losses of $8.5 million, or 1.83% of total loans
at December 31, 2008.  The significant decrease in the ratio of allowance to total loans was directly the result of adding the $235.6 million of loans from the acquisition of Abigail Adams without adding any allowance for loan losses.  New accounting guidance adopted by Premier at the beginning of 2009 does not permit an acquirer to carryover the purchased entity’s allowance for loan losses.  Instead, under the new accounting guidance, all acquired loans are to be recorded
at their net estimated fair value.  The estimate of fair value included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants.  These estimates required


57
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








management's most difficult, subjective and complex judgments and are inherently uncertain.  However, since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, no allowance for loan losses for these loans was recorded at the date
of acquisition.  At September 30, 2009, just prior to Premier’s acquisition, Abigail Adams reported a collective allowance for loan losses of approximately $12.8 million.  In contrast, Premier recorded the estimated fair value of the combined loan portfolios at an estimated $25.5 million discount to the contractual amounts receivable on the loans at acquisition.  These discounts, allocated per loan, will be used to offset any charge-offs of the uncollectible portion of the
contractual amount due on non-performing assets, or accreted into interest income using a level yield method on performing loans.  Should Premier collect the full contractual amount due, any fair value discount would be recognized as interest income.  Excluding the loans acquired from Abigail Adams, the remaining allowance for loan losses was 1.60% of total year-end loans.  The 2009 decrease in the ratio is largely due to the charge-off of loans to one borrower that had been identified
and carried as an impaired loan for more than three years.  Premier finally received permission from the bankruptcy court to foreclose upon and liquidate the collateral.  The actual charge-off was approximately the amount of allowance allocated to the loan during its classification as an impaired loan.  The allowance for loan losses was also reduced by the $2.0 million of net charge-offs in 2009 which was only partially offset by the $1.1 million of additional provisions for loan
losses during the year.




At December 31, 2008, the allowance for loan losses was $8.5 million, or 1.83% of total year-end loans.  While the total allowance increased by $2.0 million from the $6.5 million allowance at the end of 2007, the ratio to total loans decreased slightly
from the 1.87% of total year-end loans at December 31, 2007.  The increase in the allowance in 2008 is largely due to the $2.3 million allowance for loan losses acquired via the purchase of Traders and Citizens First Banks, as permitted by the accounting guidance in-place in 2008.  The slight decrease in the ratio to total year-end loans is largely the result of lower estimates of required allocations of the allowance to impaired loans due to a combination of collections of previously impaired
loans and improved loan to collateral values on existing impaired loans.  The allowance for loan losses was also reduced by the $400,000 of net charge-offs in 2008 which was only partially offset by the $147,000 of additional provisions for loan losses during the year.  The decrease in the allowance in 2007 compared to 2006 was primarily the result of the $78,000 of negative provisions for loan losses coupled with $86,000 of net charge-offs recorded during the year.  In management's
opinion, the allowance for loan losses is adequate to absorb the current estimated risk of loss in the existing loan portfolio. The summary of the allowance for loan losses allocated by loan type is presented in the Loan Summary Table above.




The following table provides a more detailed history of the allowance for loan losses, illustrating charge-offs and recoveries by loan type, and the annual provision for loan losses over the past five years.  In 2008, due to the deterioration in the national
economy and its impact on the local economy in its markets, Premier experienced increases in past due loans and non-performing assets.  As such, management’s estimate of the current estimated risk of loss in the existing loan portfolio began to increase in the second quarter of 2008 and provisions for loan losses were charged to earnings in the second, third and fourth quarters which more than


58
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








offset a negative provision for losses in the first quarter.  As the deterioration in the national economy and its impact on Premier’s local economies continued in 2009, some of the increases in past due loans and non-performing assets in 2008 became charged-off loans in 2009.  Additional
provisions for loan losses were recorded in 2009 as the estimated credit risk in the remaining loan portfolio was evaluated.  As noted in the non-performing asset discussion above, excluding the impact of the acquisition of the non-performing loans of Abigail Adams, Premier’s remaining banks experienced only a slight increase in non-accrual loans and decreases in the loans carried as 90+ days past due or in OREO indicating similar credit risk in the portfolio at the end of 2009 as compared to
the end of 2008.  Premier aggressively pursues past due loans in an effort to bring those loans back to current status.  If these efforts fail and a past due loan becomes a non-performing loan, Premier’s policies for determining the adequacy of the allowance for loan losses are used to determine the estimated potential loss on the loan.


59
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








SUMMARY OF LOAN LOSS EXPERIENCE(Dollars in thousands)For the Year Ended December 312009


2008


2007


2006


2005Allowance for loan losses,beginning of period

$
8,544


$
6,497


$
6,661


$
7,892


$
9,384Amounts charged off:Commercial, financial and agricultural loans


777



547



83



154



736Real estate construction loans


37



0



0



0



0Real estate loans – other


1,171



369



239



863



549Consumer installment loans


452



316



436



393



930Total charge-offs


2,437



1,232



758



1,410



2,215Recoveries on amounts previously charged-off:Commercial, financial and agricultural loans


82



113



66



266



91Real estate construction loans


-



33



14



8



1Real estate loans – other


208



459



302



340



84Consumer installment loans


120



227



290



726



543Total recoveries


410



832



672



1,340



719Net charge-offs


2,027



400



86



70



1,496Balance of acquired subsidiaries


0



2,300



0



0



0Provision for loan losses


1,052



147



(78
)


(1,161
)


4Allowance for loan losses, end of period

$
7,569


$
8,544


$
6,497


$
6,661


$
7,892Average total loans

$
526,473


$
417,065


$
344,688


$
338,336


$
326,615Total loans at year-end


699,133



467,111



346,570



343,797



328,717As a percent of average loansNet charge-offs


0.39
%


0.10
%


0.02
%


0.02
%


0.46
%Provision for loan losses


0.20
%


0.04
%


(0.02
)%


(0.34
)%


0.00
%Allowance for loan losses


1.44
%


2.05
%


1.88
%


1.97
%


2.42
%As a percent of total loans at year-endAllowance for loan losses


1.08
%


1.83
%


1.87
%


1.94
%


2.40
%As a multiple of net charge-offsAllowance for loan losses


3.73
X


21.36
X


75.55
X


95.16
X


5.28
XIncome before tax and provision for loan losses


6.46
X


28.66
X


122.22
X


123.19
X


4.32
X


60
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








In 2009, provisions for loan losses totaled $1.1 million compared to $147,000 of provision expense in 2008.  In 2007, a negative provision was recorded during the second quarter which exceeded the quarterly provisions recorded during the other three quarters
of the year.  The negative provision was recorded primarily as result of realized collections of previously impaired loans whereby estimated losses were not realized as previously estimated and assigned to the loan.  In addition, Premier has been successful in recovering some of its previously charged-off loans.  These positive events as well as the ongoing reduction in Premier’s historical loss ratios resulted in a lower estimate of the risk of loss in the loan portfolio during
the second quarter of 2007, and a negative provision was warranted.  The negative provision for loan losses totaled $78,000 in 2007.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  Premier continually evaluates the adequacy of its allowance for loan losses, and changes
in the provision are based on the estimated probable incurred losses in the loan portfolio.




Net charge-offs in 2009 totaled $2,027,000, as $2,437,000 of loans charged-off were partially offset by $410,000 of recoveries of loans previously charged-off.  Net charge-offs in 2008 totaled $400,000, as $1,232,000 of loans charged–off were partially
offset by $832,000 of recoveries of loans previously charged-off.  Net charge-offs in 2007 totaled only $86,000, as $758,000 of loans charged-off were nearly offset by $672,000 of recoveries of loans previously charged-off.  In 2008, Farmers Deposit Bank recorded $42,000 of net recoveries and provided over 32% of the Company’s total recoveries for 2008.  In 2007, Farmers Deposit Bank recorded $296,000 of net recoveries and provided over 70% of the Company’s total recoveries
for 2007.  However, in 2009, while Farmers Deposit Bank still accounted for approximately 37% of Premier’s total recoveries, most of the opportunities for recoveries have been exhausted and the bank once again recorded net charge-offs in 2009.  The recoveries at Farmers Deposit Bank are primarily the result of continued collection efforts of the significant number and amount of loans charged-off at Farmers Deposit Bank in 2003 through 2005.  Approximately $641,000, or 43% of
the 2005 net charge-offs and $4.8 million, or 81% of the Premier’s 2004 net charge-offs were at Farmers Deposit Bank.  The level of future recoveries is likely to decrease as the level of past charge-offs has decreased.




In 2009, total charge-offs increased to $2.4 million as the national economic downturn has negatively affected some commercial borrowers’ ability to service their loans from Premier.  Charge-offs of commercial loans and loans secured by commercial
real estate totaled $1.3 million or approximately 53% of the total charge-offs recorded in 2009, the highest level recorded over the past five years.  Consumer charge-offs increased by $136,000. Even with the increases, 2009 net charge-offs were still only 0.39% of average outstanding loans in 2009.  In 2008, total charge-offs increased for the first time in the previous four years.  However, net charge-offs still constituted a relatively low 0.10% of average total loans.  In
2008, charge-offs on commercial and real estate loans increased while consumer loan charge-offs decreased to their lowest dollar volume over the past five years.  In 2007, charge-offs on consumer installment loans increased by $43,000 or 10.9%.  However, the increase was more than offset by decreases


61
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








in the level of charge-offs of commercial loans and loans secured by real estate.  Although management believes it has identified the significant remaining credit risk in the loan portfolio, additional charge-offs may be recorded in the coming months due to the level of non-performing loans and the resolution
of collection efforts on those loans. 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 continues to monitor and evaluate the impact that national housing market price declines may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses.  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 in West Virginia, Ohio and Kentucky. With the concentrations of commercial real estate loans acquired in the Washington, DC and Richmond, Virginia markets, fluctuations in commercial real estate value will also be monitored.  These factors are considered in determining the adequacy of the
allowance for loan losses.




The following table presents the maturity distribution and interest sensitivity of selected loan categories at December 31, 2009. Maturities are based upon contractual terms.





LOAN MATURITIES and INTEREST SENSITIVITYDecember 31, 2009(Dollars in thousands)Projected Maturities*One Year or Less


One Through Five Years


Over
Five Years


TotalCommercial, secured by real estate

$
64,629


$
116,652


$
123,326


$
304,607Commercial, other


33,274



25,999



16,867



76,140Real estate construction


35,100



5,533



11,004



51,637Agricultural


280



1,863



567



2,710Total

$
133,283


$
150,047


$
151,764


$
435,094Fixed rate loans

$
60,481


$
107,980


$
30,391


$
198,852Floating rate loans


72,802



42,067



121,373



236,242Total

$
133,283


$
150,047


$
151,764


$
435,094Fixed rate loans projected to mature after one year













$
138,371Floating rate loans projected to mature after one year














163,440Total













$
301,811(*) Based on scheduled or approximate repayments


62
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Investment Portfolio and


Other Earning Assets




Investment securities averaged $189.3 million in 2009, up $23.6 million or 14.2% from the $165.6 million averaged in 2008.  This increase follows a $39.1 million or 30.9% increase in 2008 from the $126.6 million averaged in 2007.  The increase
in 2009 is largely the result of acquisition activity.  The acquisition of Abigail Adams in October 2009 added $17.1 million in average investment securities in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 added $9.1 million to 2009 average investment securities.  Excluding the acquisitions, average investment securities decreased by $2.6 million or 1.6% in 2009 from 2008.  Due to the low interest rate environment
during 2009, issuers were routinely invoking call features within their securities and reissuing new bonds at lower coupon rates.  During 2009, $149.2 million of Premier’s investment securities were either called or matured compared to $80.3 million during 2008 and only $43.6 million during 2007.  During 2009, not all maturing funds were reinvested in securities as a result of funding average loan growth.  The significant increase in 2008 is largely due to the $27.9 million
of average investment securities from the acquisitions of Traders and Citizens First.  The remaining $11.1 million or 8.8% increase is largely due the declining interest rate environment during the 2008 year.  As rates began falling, investable funds held in federal funds sold were used to purchase high quality investment securities to achieve a greater yield over a longer period of maturity.  Yields on federal funds sold rise and fall in direct correlation with interest rate changes
made by the Federal Reserve Board in establishing national economic policy.  Investment security yields are based on a number of pricing factors including but not limited to coupon rate, time to maturity and issuer credit quality.  Generally, in 2008 investment security yields were higher than the yield that could be earned on federal funds sold.  At December 31, 2009, the amount of investments totaled $241.0 million, up $65.2 million or 37.1% from December 31, 2008.  The
significant increase in investments is largely due to the $64.7 million of investments at December 31, 2009 from the acquisition of Abigail Adams, leaving only $485,000 of the increase from internal growth.  This increase follows a $51.5 million or 41.5% increase in 2008 from the balance at December 31, 2007.  The significant increase in investments is largely due to the $39.0 million of investments at December 31, 2008 from the acquisitions of Traders and Citizens First, leaving $12.5 million
of the increase from internal growth.  As the Federal Reserve Board began lowering the federal funds rate in the latter portion of 2007 and continued to do so at various times throughout 2008, bond yields became more attractive than the yield on federal funds sold.  Thus, to optimize interest income, Premier began increasing the amount of funds it invested in high-quality debt securities.





63
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








The following table presents the carrying values of investment securities.





FAIR VALUE OF SECURITIES AVAILABLE FOR SALE(Dollars in thousands)As of December 312009


2008


2007U.S. Treasury securities

$
1,005


$
1,544


$
5,574U.S. government sponsored entity securities


150,067



97,105



74,859States and political subdivisions


10,247



7,130



3,816Mortgage-backed securities issued by government sponsored entities


74,042



69,962



39,993Corporate securities


5,609



-



-Total securities

$
240,970


$
175,741


$
124,242




As sources of funds (deposits, federal funds purchased, and repurchase agreements with corporate customers) fluctuate, excess funds are initially invested in federal funds sold and other short-term investments. Based upon analyses of asset/liability repricing, interest
rate forecasts, and liquidity requirements, funds are periodically reinvested in high-quality debt securities, which typically mature over a longer period of time. At the time of purchase, management determines whether the securities will be classified as trading, available-for-sale, or held-to-maturity. At December 31, 2009 all of Premier's investments were classified as available-for-sale and carried on the books at fair value.




As shown in the following Securities Maturity and Yield Analysis table, the average maturity period of the securities available-for-sale at December 31, 2009 was 4 years 4 months. The table uses a weighted estimated average life method to report the average maturity
of mortgage-backed securities, which includes the estimated effect of monthly payments and prepayments. The average maturity of the investment portfolio is managed at a level to maintain a proper matching with interest rate risk guidelines. Premier does not have any securities classified as trading or held-to-maturity and it has no plans to establish such classifications at the present time. Other information regarding investment securities may be found in the following table and in Note 4 to
the consolidated financial statements.





64
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








SECURITIES MATURITY AND YIELD ANALYSISDecember 31, 2009(Dollars in thousands)Market Value


Average Maturity (yrs/mos)


Taxable Equivalent Yield*U.S. Treasury securitiesWithin one year

$
1,005





3.97
%Total U.S. Treasury Securities


1,005


0/2


3.97U.S. government sponsored entity securitiesWithin one year


2,031





3.83After one but within five years


114,090





2.72After five but within ten years


33,946





3.15Total U.S. government sponsored entity securities

$
150,067


4/4


2.83States and political subdivisionsWithin one year


110





8.31After one but within five years


3,785





4.39After five but within ten years


6,352





4.72Total states and political subdivisions securities

$
10,247


5/9


4.64Mortgage-backed securities**Within one year


2,737





4.97After one but within five years


71,257





4.37After five but within ten years


45





3.09Over ten years


3





4.43Total mortgage-backed securities

$
74,042


2/5


4.40Other securities**After one but within five years


631





38.63Over ten years


3,791





8.57Total other securities

$
4,422


33/6


12.86Corporate preferred securities


1,188


n/a


9.76Total securities available-for-sale

$
240,970


4/4


3.61(*)  Fully tax-equivalent using the rate of 34%(**)  Maturities for mortgage-backed securities are based on expected average life


65
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Premier’s average investment in federal funds sold and interest-bearing bank balances increased by 10.8% in 2009.  This follows a 5.6% increase in 2008.  Averaging $43.7 million in 2009, federal funds sold and interest-bearing balances increased
$4.3 million from the $39.5 million averaged in 2008.  The increase in 2009 is largely the result of acquisition activity.  The acquisition of Abigail Adams in October 2009 added $4.1 million in average federal funds sold and interest-bearing bank balances in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 reduced the 2009 average by $2.5 million.  Excluding the acquisitions, average federal funds sold and interest
bearing bank balances increased by $2.6 million or 6.7% in 2009 from 2008.  As shown in the Consolidated Average Balance Sheets and Net Interest Income Analysis above, on average, the yield on federal funds sold dropped to 0.08% in 2009 in accordance with the Federal Reserve’s Board of Governors’ policy to maintain the federal funds rate between 0.00% and 0.25%.  To obtain higher yields on its most highly liquid funds, Premier began shifting some of its federal funds sold to certificates
of deposits with other banks and other interest-bearing bank balances, primarily with the Federal Reserve Bank, which yielded, on average, 0.38% in 2009.  The average balance of federal funds sold decreased by $8.9 million in 2009 to $28.9 million, while average interest-bearing bank balances increased by $13.2 million in 2009 to $14.8 million.  In 2008, Premier’s federal funds sold and interest-bearing bank balances averaged $39.5 million, a 5.6% increase from the $37.4 million averaged
in 2007.  The increase in average federal funds sold and interest-bearing bank balances in 2008 was largely due to the acquisitions of Traders and Citizens First which added $9.4 million in average balances during the year.  This increase more than offset the $7.3 million or 19.6% decrease in average federal funds sold and interest-bearing bank balances of Premier’s other affiliate banks.  This decrease was the result of using some of the available federal funds sold to fund
loans and purchase higher yielding investment securities.  As shown in the Consolidated Average Balance Sheets and Net Interest Income Analysis above, on average, the yield on federal funds sold dropped to 1.97% in 2008, significantly less than the 4.51% average yield on total investment securities in 2008.  In contrast, during the latter part of 2006 and first part of 2007, bond yields were not as attractive as the yield on highly liquid federal funds sold and funds from maturing investments
were less likely to be invested in bonds.  Fluctuations in federal funds sold and other short-term investments reflect management's goal to maximize asset yields while maintaining proper asset/liability structure, as discussed in greater detail above and in other sections of this report.





Funding Sources




In response to the Federal Reserve policy to reduce market interest rates by lowering the target federal funds rate, in 2008 Premier began cutting its rates paid on its interest bearing deposits.  This change follows a three-year period during which Premier
was raising the rates paid on its interest bearing deposits in response to the increase in market interest rates.  As a result, the average rate paid on interest bearing liabilities decreased to 1.70% in 2009, down from 2.39% paid in 2008, and the 3.09% paid in 2007.  The 69 basis point decrease in 2009 was primarily the result of a 98 basis point decrease in the average rate paid on certificates of deposit and other time deposits, which made up 52.9% of the total average interest bearing
liabilities in 2009.  Other rate decreases on deposits in 2009 include a 44 basis point decrease on NOW and


66
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








money market accounts and a 25 basis point decrease in savings deposits.  Likewise, in 2009 Premier decreased the rate paid on its short-term borrowings, primarily repurchase agreements with deposits customers, by 62 basis points.  Also in response to the decrease in market interest rates initiated
by the Federal Reserve, the rate paid on Premier’s long-term borrowings decreased as a result of the floating rate terms of the borrowings.  In 2009, the average rate paid on other borrowings decreased 117 basis points to 3.49%.  At the end of 2009, Premier converted its largest dollar borrowing, the $10.0 million owed to First Guaranty Bank, to a fixed rate of interest of 3.96% through its remaining maturity date on April 30, 2013.  The Company’s FHLB advances are fixed
rate debt and thus decrease usually as a result of payments and maturities of higher rate advances.  However, as part of the Abigail Adams acquisition, Premier assumed $10.6 million of long-term FHLB advances with a market interest rate of 1.81%.  This addition caused the average rate paid in 2009 on the FHLB advances to decrease 196 basis points to 4.22%.  Furthermore, in the first half of 2010, $4.0 million of Premier’s highest rate FHLB advances, averaging 6.45%, will mature
further reducing the future rate paid on its long-term FHLB advances.




The 70 basis point decrease in the average rate paid on interest bearing liabilities in 2008 was primarily the result of a 79 basis point decrease in the average rate paid on certificates of deposit and other time deposits, which made up 51.6% of the total average
interest bearing liabilities in 2008.  Other rate decreases on deposits in 2008 include a 66 basis point decrease on NOW and money market accounts and a 15 basis point decrease in savings deposits.  Likewise, in 2008 Premier decreased the rate paid on its short-term borrowings, primarily repurchase agreements with deposit customers, 98 basis points.  Also in response to the decrease in market interest rates, the rate paid on Premier’s long-term borrowings decreased as a result
of the floating rate terms of the borrowings.  In 2008, the average rate paid on other borrowings decreased 299 basis points to 4.66%.  The Company’s FHLB advances in 2008 were fixed rate debt and thus decreased as a result of payments and maturities of higher rate advances.




Due to alternative sources of investment and an ever increasing sophistication of customers in funds management techniques to maximize return on their money, competition for funds has become more intense.  Other financial institutions that compete in local
markets with Premier that have a need to increase liquidity offer special above market rate deposit products to attract additional funds.  Premier's banks periodically offer special rate products to retain their deposit base or attract additional deposits.




Premier’s deposits, on average, increased by $125.3 million or 22.7% in 2009 following a $103.3 million or 23.0% increase in 2008 from 2007 average deposits.  The increase in 2009 average deposits is largely the result of acquisition activity.  The
acquisition of Abigail Adams in October 2009 added $76.4 million in average deposits in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 added another $37.9 million to 2009 average deposits.  The remaining $11.1 million or 2.0% increase in average deposits was largely due to a $7.3 million or 2.9% increase in average certificates of deposit and other time deposits, a $2.2 million or 3.3% increase in average savings deposits and
a $3.7 million or 3.9% increase in average non-interest bearing deposits.  These increases more


67
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








than offset the $2.1 million or 1.5% decrease in average money market and other interest bearing transaction oriented deposits.  Even as Premier reduced the rates paid on its deposit products, the West Virginia and Ohio banks were successful in marketing their services to local customers and increased
their average deposits outstanding.  The increase in 2008 average deposits was largely due to the $97.9 million of average deposits from the acquisitions of Traders and Citizens First.  The remaining $5.3 million or 1.2% increase in average deposits was largely due to a $2.3 million or 3.1% increase in non-interest bearing deposits, a $1.5 million or 2.9% increase in savings deposits and a $1.2 million increase in money market and other interest bearing transaction oriented deposits.




In 2009, average non-interest bearing deposits increased largely due to acquisition activity.  In 2009, average non-interest bearing deposits totaled $121.0 million, a $26.9 million or 28.5% increase from the average in 2008.  This follows a $19.6
million or 26.3% increase in average non-interest bearing deposits in 2008 when compared to 2007.  The increase in 2009 includes $14.9 million of average non-interest bearing deposits from the acquisition of Abigail Adams and an additional $8.3 million increase from the full year impact of including Traders and Citizens First.  Excluding the acquisitions, average non-interest bearing deposits increased by $3.7 million or 3.9% in 2009 as increases were recorded at each of the affiliate banks
except Farmers Deposit Bank.  The increase in 2008 includes the $17.3 million of average non-interest bearing deposits from the acquisitions of Traders and Citizens First.  Excluding these deposits, average non-interest bearing deposits still increased by $2.3 million or 3.1% in 2008.  Since no interest is paid on these deposits, an increase in non-interest bearing deposits helps to increase Premier's net interest margin and its profitability. Non-interest bearing deposits are more
susceptible to withdrawal and therefore may provide challenges to maintaining adequate liquidity. (See the additional discussion on liquidity below.)  However, Premier’s approach to community banking and friendly customer service has resulted in increases in average non-interest bearing deposits in each of the past seven years.




In 2009, average interest bearing deposits increased by $98.5 million or 21.5%.  The increase was largely due to the $61.5 million of average interest bearing deposits from the acquisition of Abigail Adams, and an additional $29.6 million increase from
the full year impact of including Traders and Citizens First.  Excluding the acquisitions, average interest bearing deposits increased by $7.4 million or 1.6% in 2009, as increases in average savings deposits and average certificates of deposit and other time deposits more than offset a decrease in average money market and other transaction oriented deposits.  In 2008, average interest bearing deposits increased by $83.6 million or 22.3%.  The increase was largely due to the $80.6
million of average interest bearing deposits from the acquisitions of Traders and Citizens First.  The remaining $3.0 million increase in average interest-bearing deposits in 2008 was primarily from an increase in average savings deposits and average money market and other transaction oriented deposits.  Due to the significant decrease in rates paid on certificates of deposit during 2008, customers seemed to take a “wait-and-see” approach and were not willing to commit their funds
for a longer-term low-yielding certificate of deposit.  Instead, the trend in 2008 was to keep their deposits readily accessible by placing the funds in savings accounts and transaction oriented interest-bearing accounts.  During 2009, customers seemed to resign themselves to the


68
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








long-term nature of the low interest rate environment resulting from the Federal Reserve’s national monetary policy and moved funds back into certificates of deposit to gain some yield over other deposit products.  Most customers are still keeping their maturity choices short in order to take advantage
of possible higher interest rates in the future.  While offering some “special” certificate of deposit rates in 2009 to remain competitive, Premier continued to focus on building its base of customer relationships by offering more convenient electronic banking products to its non-interest bearing deposit customers.




In order to help maintain their liquidity and reduce their reliance on short-term borrowings, prior to their acquisition by Premier the two subsidiary banks of Abigail Adams participated in a network of approved banks that exchange customer certificates of deposit
called the Certificate of Deposit Account Registry Service program, also known as CDARS.  This program allows local customers to open certificates of deposit in amounts greater than the standard FDIC insurance coverage limits at their local bank and still maintain FDIC insurance coverage on the deposits as the local bank enters the certificates of deposit into a national exchange network which provides FDIC insurance coverage by opening accounts in the customer’s name at other participating banks
in the network in increments less than the standard FDIC coverage limits. Other network members do the same thing with their customers’ funds, and a sophisticated matching system enables network members to exchange funds with each other on a dollar-for-dollar basis.  To participate in the program, banks subject to a written agreement with their primary regulator, such as Adams National, are required to get permission from the FDIC.  While Adams National was a participant in the network
and currently has deposits from the CDARS network, the bank has been denied permission by the FDIC to continue to open new or renew existing CDARS deposits while it is subject to its written agreement with the OCC, its primary regulator.  As the CDARS deposits mature, local customers may or may not renew their certificates of deposit with Adams National.  Under long existing FDIC rules for banks owned by the same holding company (under “common control”), such as each of Premier’s
Affiliate Banks, each bank under common control is obligated to guarantee the liquidity of deposit funds over and above the FDIC coverage limits at each of the other banks under the same common control.  In other words, each of Premier’s Affiliate Banks are obligated to provide liquidity for each of the other Premier Affiliate Banks to the extent it may be needed for deposit withdrawals.  Premier believes that knowledge of this guarantee may result in some of the maturing CDARS related
deposits at Adams National to renew their certificate of deposit outside of the CDARS program until Adams National once again obtains permission to actively participate in the CDARS network.





69
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








The following table provides information on the maturities of time deposits of $100,000 or more at December 31, 2009.





MATURITY OF TIME DEPOSITS $100,000 OR MOREDecember 31, 2009(Dollars in thousands)Maturing 3 months or less

$
33,225Maturing over 3 months


31,604Maturing over 6 months


53,154Maturing over 12 months


31,907Total

$
149,890




Other funding sources for Premier include short and long-term borrowings. Premier's short-term borrowings primarily consist of securities sold under agreements to repurchase with commercial, public entity and tax exempt organization customers.  These are
short-term non-FDIC insured deposit-like products that are secured by the pledging of investment securities in Premier’s investment portfolio or by purchasing insurance through the Federal Home Loan Bank (FHLB).  Also included in short-term borrowings are federal funds purchased from other banks and overnight borrowings from the FHLB or the Federal Reserve Bank (FRB) discount window. These short-term borrowings fluctuate depending on near term funding needs and as part of Premier's management
of its asset/liability mix.  In 2009, average short-term borrowings decreased by $595,000 or 3.4%, even as the acquisition of Abigail Adams added $3.2 million of short-term borrowings in the form of repurchase agreements.  Excluding the acquisition of Abigail Adams, average short-term borrowings decreased by $3.8 million or 21.9% in 2009 as public entity customers withdrew a portion of their funds in repurchase agreements to spend them on designated public projects.  In 2008, short-term
borrowings averaged $17.3 million, up $4.1 million or 31.3% from the average in 2007.  The increase in 2008 is largely due to an increase in repurchase agreements which were newly offered by two of Premier’s subsidiary banks late in 2006.




Long-term borrowings consist of FHLB borrowings by Premier's banks and other borrowings by the parent holding company.  FHLB advances, on average, increased by $2.5 million or 52.0% in 2009 as the acquisition of Abigail Adams added $2.7 million of average
FHLB advances.  Excluding that acquisition, FHLB advances declined by $226,000 or 4.8% in 2009, largely due to regularly scheduled principal payments plus additional penalty free prepayments as permitted to be made by the FHLB.  In 2008, average FHLB advances declined by 11.9% or $640,000 compared to 2007.  The decrease in 2008 is again largely due to regularly scheduled principal payments plus additional penalty free prepayments as permitted to be made by the FHLB.  Premier
uses fixed rate FHLB advances from time-to-time to fund certain residential and commercial loans as well to maximize investment opportunities as part of its interest rate risk management.  At December 31, 2009, FHLB advances totaled $14.9 million which included $10.5 million of long-term FHLB borrowing acquired from the purchase of Abigail Adams.  This borrowing matures in the first quarter of 2012.  The remaining $4.4 million of amortizing FHLB advances had repayment schedules from
five to thirty-one months with $4.0 million maturing in May 2010.


70
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








In 2006, Premier refinanced the remaining $15.7 million of its 9.75% Junior Subordinated Deferrable Interest Debentures ("Subordinated Debentures") that were due in 2027. The refinancing was accomplished using two separate bank borrowings at the parent company and
$2.2 million of cash held by the parent in its subsidiary banks.




On January 31, 2006, Premier borrowed $7.0 million from First Guaranty Bank in Hammond, Louisiana.  On April 30, 2008, Premier refinanced the remaining $2.6 million of this note and borrowed an additional $9.0 million which was used to fund the cash needed
to purchase Traders.  The $11.6 million note, dated April 30, 2008, bore interest floating daily at the “Wall Street Journal” prime rate (the “Index”) minus 1.00% and requiring 59 monthly principal payments of $50,000 and one final payment of $8.6 million due at maturity on April 30, 2013.  If the Index fell between 5.00% and 6.00%, the interest on the note was 5.00%.  If the Index fell below 5.00%, then the interest on the note would float with the Index.  On
December 31, 2009, Premier converted the borrowing to a fixed rate of interest of 3.96% per annum through its remaining maturity date on April 30, 2013.  The note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a wholly owned subsidiary) under Commercial Pledge Agreement dated April 30, 2008.




On November 10, 2006, Premier borrowed $6.5 million from The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) under a term note bearing interest floating daily at the JP Morgan Chase Co. prime rate minus 1.00% and requiring
83 monthly principal and interest payments of $100,000 and a final payment of any balance due at maturity on November 9, 2013. The note is secured by a pledge of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. and Premier’s 100% interest in Farmers-Deposit Bank, Eminence, Kentucky ("Farmers Deposit Bank").  On December 22, 2008, the Company executed and delivered to Bankers’ Bank a modification agreement whereby the interest rate would not fall below 3.00% or exceed
6.00% for the remaining term of the Note.  The current interest rate on the Term Note is 3.00%.





On October 30, 2009, Premier received $2.4 million from the Bankers’ Bank as a draw on the Company’s $4.5 million line of credit under a Promissory Note whereby Premier may request and receive monies from Bankers’ Bank from time to time.  The
proceeds were used to refinance a portion of the long-term debt assumed from the Abigail Adams holding company.  The right to request and receive monies from Bankers’ Bank under the Promissory Note terminates on December 11, 2010.  Any outstanding principal balance under this Promissory Note bears an annual interest rate floating daily at the JP Morgan Chase Co. prime rate, with an interest rate floor of 4.00%.  Interest on the Promissory Note is payable quarterly and at maturity.  Any
outstanding principal amount loaned to Premier under this Promissory Note, and not previously repaid, is due on December 11, 2010.  The Promissory Note is secured by the same collateral as the $6.5 million Term Note. At December 31, 2009, the $2.4 million was still outstanding on the Promissory Note.  In 2009 and 2008, Premier made all scheduled principal and interest payments on both notes as well as limited prepayments on the borrowing from First Guaranty Bank. For more information on other
borrowings, see Note 11to the consolidated financial statements.


71
 Table of Contents
  PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009





On December 20, 2004, Premier entered into a sixty-three month contract with Fiserv Solutions, Inc. (Fiserv) whereby Fiserv will provide data processing and item processing services to Premier. Conversions by Traders and Citizens First bank to Fiserv systems began
in early August, 2008 and were completed by the end of October, 2008. The contract is scheduled to end in October 2010.  The two subsidiary banks acquired with Abigail Adams have contracts with Fiserv for data processing and item processing services through mid-2012.  Based upon the average billings of the last three months of 2009, the estimated payments to Fiserv for these services under existing contracts will be approximately $2.4 million per year beginning in 2010. Actual results may
vary depending upon the number and type of accounts actually processed and future customer activity.
  The main office and branch locations of Adams National in and around the Washington DC metro area are all leased under various noncancelable operating leases. These noncancelable operating leases are subject to renewal options under various terms. Some leases provide
for periodic rate adjustments based on cost-of-living index changes.  The leases have terms ranging from 2012 through 2016.  Future minimum payments under the operating leases are included in the table below.


PAYMENTS DUE ON CONTRACTUAL OBLIGATIONSDecember 31, 2009(Dollars in thousands)Total


Less than one year


1-3
years


3-5
years


More than five yearsFederal Home Loan Bank advances

$
14,937


$
4,422


$
10,515


$
0


$
0Other borrowed funds


16,027



4,107



3,515



8,405



0Operating lease obligations


4,051



1,265



2,284



415



87Data and item processing contracts*


3,860



2,556



1,304



0



0Total

$
38,875


$
12,350


$
17,618


$
8,820


$
87* Data and item processing contractual obligations are estimated using the average billing for the last three months of 2009.








72
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Asset/Liability Management and Market Risk




Asset/liability management is a means of maximizing net interest income while minimizing interest rate risk by planning and controlling the mix and maturities of interest related assets and liabilities. Premier has established an Asset/Liability Management Committee
(ALCO) for the purpose of monitoring and managing interest rate risk and to evaluate investment portfolio strategies. Interest rate risk is the earnings variation that could occur due to changes in market interest rates. The Board of Directors has established policies to monitor and limit exposure to interest rate risk. Premier monitors its interest rate risk through the use of an earnings simulation model developed by an independent third party to analyze net interest income sensitivity.




The earnings simulation model uses assumptions, maturity patterns, and reinvestment rates provided by Premier and forecasts the effect of instantaneous movements in interest rates of both 100 (1.00%) and 200 (2.00%) basis points, but never below zero.  The
most recent earnings simulation model projects that net interest income would increase by approximately 1.9% over the projected stable rate net interest income if interest rates rise by 100 basis points over the next year. Conversely, the simulation projects an approximate 0.1% decrease in net interest income if interest rates fall by 100 basis points over the next year. Within the same time frame, but assuming a 200 basis point movement in interest rates, the simulation projects that net interest income would
increase by 3.1% over the projected stable rate net interest income in a rising rate scenario and would decrease by 0.8% in a falling rate scenario. Under both the 100 and 200 basis point simulations, the percentage changes in net interest income are within Premier's ALCO guidelines.




The model simulation calculations of present value have certain acceptable shortcomings. The discount rates and prepayment assumptions utilized are based on estimated market interest rate levels for similar loans and securities nationwide. The unique characteristics
of Premier's loans and securities may not necessarily parallel those assumed in the model simulations, and therefore, actual results could likely result in different discount rates, prepayment experiences and present values. The discount rates used for deposits and borrowings are based upon available alternative types and sources of funds which may not necessarily be indicative of the present value of Premier's deposits and borrowings. Premier's deposits have customer relationship advantages that are difficult
to simulate. A higher or lower interest rate environment will most likely result in different investment and borrowing strategies by Premier which would be designed to further mitigate any negative effects on the value of, and the net interest earnings generated on Premier's net assets.





73
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








The following table presents summary information about the simulation model's interest rate risk measures and results.





Year-end
2009


Year-end
2008


ALCO GuidelinesProjected 1-year net interest income-100 bp change vs. base rate


-0.1
%


-1.7
%


5
%+100 bp change vs. base rate


1.9
%


1.3
%


5
%Projected 1-year net interest income-200 bp change vs. base rate


-0.8
%


-3.8
%


10
%+200 bp change vs. base rate


3.1
%


2.5
%


10
%





Liquidity




Liquidity is the ability to satisfy demands for deposit withdrawals, lending commitments, and other corporate needs. Premier's liquidity is based on the stable nature of consumer core deposits held by the banking subsidiaries. Likewise, additional liquidity is available
from holdings of investment securities and short-term investments which can be readily converted into cash. Furthermore, Premier's banks continue to have the ability to attract short-term sources of funds such as federal funds and repurchase agreements.




Premier generated $5.1 million of cash from operations in 2009, which compares to $10.0 million in 2008 and $9.4 million in 2007.  As illustrated in the Consolidated Statement of Cash Flows, the decrease in 2009 cash from operations was primarily the result
of non-cash generating income from the gain on the acquisition of subsidiary and changes in other assets and liabilities.  The increase in 2008 over 2007 was primarily the result of an increase in net income and a higher amount of cash received from the sale of mortgage loans in the secondary market.  Total cash from operations along with proceeds from the sale and maturity of securities and the repayment of loans were used to purchase securities, satisfy deposit withdrawals, fund new loans
and reduce outstanding debt during those years.  In 2007, $5.0 million of cash was used in investing activities, to fund loan growth but to also increase federal funds sold.  In 2008, $15.0 million of cash was used in investing activities, again funding loan growth, and purchasing the Traders and Citizens First subsidiaries.  In 2009, $23.1 million of additional cash was generated from investing activities largely from the cash acquired via the acquisition of Abigail Adams and the
net repayment of loans during the year.  In addition to the $5.1 million of cash from operations in 2009, Premier generated $11.3 million in additional cash from financing activities, primarily due the net increase in deposits, the sale of Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program and from additional borrowings.  Some of these funds were used to repay short- and long-term borrowings, pay dividends to shareholders, and satisfy withdrawals of repurchase
agreements with customers.  In addition to the $10.0 million of cash from operations in 2008, Premier generated $4.7 million in additional cash from financing activities, primarily due to new long-term borrowings and increases in short-term borrowings and repurchase agreements with customers.  Some of these funds were used to satisfy deposit withdrawals, pay dividends to shareholders and make


74
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








principal payments on borrowings.  In addition to the $9.4 million of cash from operations in 2007, Premier generated $1.0 million in additional cash from financing activities, primarily due to the increase in deposits.  The increase in cash from deposits was also used to satisfy the repayment
of FHLB advances and other borrowed funds as well as pay dividends to shareholders.  Details on the sources and uses of cash can be found in the Consolidated Statements of Cash Flows in the consolidated financial statements.




At December 31, 2009, the parent company had $6.8 million in cash held with its subsidiary banks.  This balance, along with cash dividends expected to be received from its subsidiaries, is sufficient to cover the operating costs of the parent, service its
existing debt and pay dividends to common and preferred shareholders.  During 2009, the parent company generated $5.5 million of cash from operations and borrowed an additional $2.4 million.  The parent company also generated $22.3 million by selling its Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program.  The proceeds were used to make additional capital investments in Premier’s subsidiaries to strengthen the subsidiary’s balance sheet
and capital ratios and/or reduce the subsidiary’s debt.  Operating cash was also used to pay $3.1 million in dividends to shareholders and to make $1.9 million in principal payments on its outstanding debt.  During 2008, the parent company generated $6.3 million of cash from operations and borrowed an additional $11.6 million.  The proceeds were used to fund the $14.3 million of cash paid to acquire Citizens First and Traders, to make $4.1 million in principal payments on its
outstanding debt and pay $2.6 million in dividends to shareholders.  During 2007, the parent company generated $10.3 million of cash from operations and used $5.9 million to make principal payments on its outstanding debt and pay dividends to shareholders.  Additional information on parent company cash flows and financial statements is contained in Note 22 to the consolidated financial statements.





Capital Resources




Premier’s consolidated average equity-to-asset ratio increased to 12.19% during 2009, up from 11.94% in 2008 and 11.74% in 2006.  The ratios for all three years are considered adequate for a company of Premier’s size.  The increase
in 2009 was largely due to the additional equity added from the sale of Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program.  Without this additional equity, Premier’s average equity-to-asset ratio would have still have been 11.52%, down from prior years due to the acquisition of Abigail Adams, but strengthened by additional capital from the $6.0 million retained net income generated in 2009.  Also adding to capital in 2009 was a general rise in the
market value of investments from a $1.5 million net unrealized gain at the end of 2008 to a $2.1 million net unrealized gain at the end of 2009.  The increase in 2008 was largely due to the increase in equity from net income plus a general rise in the market value of investments from a $73,000 net unrealized gain at the end of 2007 to a $1.5 million net unrealized gain at the end of 2008.  Also supporting the average equity-to-assets ratio were the combined acquisitions of Traders and Citizens
First.  The equity issued to acquire these two banks amounted to 11.62% of the total assets acquired, which approximates Premier’s average equity-to-asset ratio over the past three years.


75
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








The Federal Reserve's risk-based capital guidelines and leverage ratio measure the capital adequacy of banking institutions. The risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments by prescribed factors relative to credit risk,
thus eliminating disincentives for holding low risk assets and requiring more capital for holding higher risk assets.  At year-end 2009, Premier’s risk adjusted capital-to-assets ratio was 14.6%, compared to 15.3% at December 31, 2008.  Both of these ratios are well above the minimum level of 8.0% prescribed for bank holding companies of Premier’s size.  The leverage ratio is a measure of total tangible equity to total tangible assets, net of any related deferred taxes
as permitted.  Premier’s leverage ratio at December 31, 2009 was 8.9%, compared to 8.7% at December 31, 2008.  Both of these ratios are above the 4.0% to 5.0% ratios recommended by the Federal Reserve.  The increase in the 2009 leverage ratio was largely the result of the additional regulatory capital obtained via the sale of Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program.  The decrease in the risk adjusted capital-to-assets
ratio is largely the result of a higher level of risk adjusted assets to total assets acquired from Abigail Adams versus Premier’s historical risk-adjusted assets to total assets.  The decrease in the 2008 ratios from the prior year was primarily the result of the acquisitions of Traders and Citizens First.  Their individual bank risk adjusted capital-to-asset ratios and leverage ratios were lower than Premier’s prior to the acquisition date.  Furthermore, the goodwill
and core deposit intangible assets recorded as part of the purchases, net of any related deferred taxes as permitted, are subtracted from Premier’s total capital to calculate these ratios.  Premier's capital ratios are the direct result of management's desire to maintain a strong capital position. Additional information on Premier's capital ratios and the capital ratios of its banks may be found in Note 21 to the consolidated financial statements.





Additional information on the capital position of Premier is included in the following table.





SELECTED CAPITAL INFORMATION(Dollars in thousands)As of December 312009


2008


ChangeStockholders’ Equity

$
128,556


$
89,422


$
39,134Disallowed amounts of goodwill and other intangibles


(31,595
)


(26,805
)


(4,790
)Other comprehensive loss related to pension plan


-



87



(87
)Unrealized (gain) loss on securities available for sale


(2,090
)


(1,634
)


(456
)Tier I capital

$
94,871


$
61,070


$
33,801Tier II capital adjustmentsAllowable amount of the allowance for loan losses


7,569



5,486Total capital

$
102,440


$
66,556Total risk-weighted assets

$
699,622


$
436,023RatiosTier I capital to risk-weighted assets


13.56
%


14.01
%Total capital to risk-weighted assets


14.64
%


15.26
%Leverage at year-end


8.90
%


8.69
%





76
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








The primary source of funds for dividends paid by Premier is the dividends received from its subsidiary banks. Banking regulations limit the amount of dividends that may be paid without prior approval of the regulatory agencies. Under these regulations, the amount
of dividends that may be paid without prior approval 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 regulatory capital requirements and additional restrictions more fully described in Note 21 to the consolidated financial statements. During 2010, Premier's banks could, without prior approval, declare and pay to Premier dividends of approximately $2.5 million plus any 2010 net profits
retained through the date of declaration by Ohio River Bank, Boone County Bank, First Central Bank, Consolidated Bank & Trust and Citizens Deposit Bank.  In 2009, Farmers Deposit Bank requested and received approval from its primary regulators to pay a $2.5 million dividend in March 2009.  This amount was substantially higher than the bank’s prior two years of reported net income.  As such, Farmers Deposit Bank must continue to request approval for up to two years beyond
March 31, 2009 to pay any future dividends to the parent company out of its current earnings.  Similarly, Traders will be required to request approval to pay any dividends for up to two years depending upon its future net income performance.  Adams National is required to obtain regulatory approval to pay dividends to Premier as part of its written agreement with the OCC.




Pursuant to the terms of Premier’s participation in the TARP Capital Purchase Program, Premier’s ability to declare or pay dividends on any of its common shares is limited.  Specifically, Premier is unable to declare dividend payments on common
shares if we are in arrears on the payment of dividends on the Series A Preferred Shares.  Further, Premier is not permitted to increase dividends on its common shares above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 ($0.11 per share) without the U.S. Treasury’s approval until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties.


77
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








INCOME STATEMENT ANALYSIS


Net Interest Income




Net interest income, the amount by which interest generated from earning assets exceeds the expense associated with funding those assets, is Premier's most significant component of earnings.  Net interest income on a fully tax-equivalent basis was $31.3
million in 2009, up 19.4% from the $26.2 million earned in 2008 which follows a 16.5% increase in 2008 from 2007.  When net interest income is presented on a fully tax-equivalent basis, interest income from tax-exempt earning assets is increased by the amount equivalent to the federal income taxes which would have been paid if this income were taxable at the statutory federal tax rate of 34% for companies of Premier's size.  The increase in net interest income in 2009 is largely due to the
$4.4 million of fully tax-equivalent net interest income from the acquisition of Abigail Adams and the $1.8 million of additional fully tax-equivalent net interest income from the inclusion of Traders and Citizens First during the first four months in 2009 versus only since April 30, in 2008.  The remaining Premier affiliate banks realized a $1.1 million or 4.4% decrease in net interest income in 2009, largely due to decreases in interest income from loans, investments and federal funds sold.  The
decrease in interest income was partially offset by decreases in interest expense on deposits, short-term borrowings and long-term debt.




As shown in the Rate Volume Analysis table below, increases in the volume of earning assets such as loans, investments and federal funds sold primarily due to the acquisitions of Abigail Adams, Traders and Citizens First increased Premier’s interest income
by $8.7 million.  This increase was offset by a $5.3 million decrease in interest income on those earning assets, largely due to the decline in yields earned on the loan portfolio, investment securities and federal fund sold.  Also shown in the table below, interest expense on deposits increased by $6.7 million in 2009, due to a higher volume of certificates of deposit, as well as NOW and money market deposit accounts plus savings accounts.  This increase in the volume of interest
bearing deposits is largely due to deposits from the acquisitions of Abigail Adams, Traders and Citizens First.  Interest expense in 2009 decreased slightly due to lower average volumes of short-term borrowings and other borrowings.  The $6.7 million of additional interest expense in 2009 from the increase in the volume of average interest bearing liabilities was more than offset by the $8.4 million decrease in interest expense due to decreases in the rates paid on deposits, and short-term
borrowings and long-term borrowings.  The combined effect was to increase net interest income by $5.1 million for the year.




The increase in net interest income in 2008 is largely due to the $4.2 million of fully tax-equivalent net interest income from the acquisitions of Traders and Citizens First.  The remaining Premier affiliate banks realized a $513,000, or 2.3% decrease
in net interest income in 2008.  This decrease in net interest income in 2008 is largely due to a decrease in interest income from loans and federal funds sold partially offset by an increase in interest income on investments.  The decrease in interest income was significantly offset, however, by decreases in interest expense on deposits, short-term debt and long-term debt.  As shown in the Rate


78
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Volume Analysis table below, increases in the volume of earning assets such as loans, investments and federal funds sold primarily due to the acquisitions of Traders and Citizens First increased Premier’s interest income by $6.5 million.  This increase was offset by a $3.5 million decrease in interest
income on those earning assets largely due to the decline in yields earned on the loan portfolio and federal fund sold.  Also shown in the table below, interest expense on deposits increased by $1.3 million in 2008 due to a higher volume of NOW and money market deposit accounts plus certificates of deposit.  This increase in volume interest bearing deposits is largely due to deposits from the acquisitions of Traders and Citizens First.  Interest expense in 2008 increased further
still due to higher average volumes of short-term borrowings and other borrowings.  The $1.8 million of additional interest expense in 2008 from the increase in the volume of average interest bearing liabilities was more than offset by the $2.5 million decrease in interest expense due to decreases in the rates paid on deposits, short-term borrowings and long-term borrowings.  The combined effect was to increase net interest income by $3,710,000 for the year.





RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME(Dollars in thousands on a tax equivalent basis)2009 vs 2008


2008 vs 2007Increase (decrease) due to change in


Increase (decrease) due to change inVolume


Rate


Net Change


Volume


Rate


Net ChangeInterest income*:Loans

$
6,767


$
(2,273
)

$
4,494


$
4,643


$
(2,208
)

$
2,435Investment securities


2,086



(2,450
)


(364
)


1,763



(37
)


1,726Federal funds sold


(144
)


(580
)


(724
)


96



(1,177
)


(1,081
)Deposits with banks


20



(2
)


18



25



(42
)


(17
)Total interest income

$
8,729


$
(5,305
)

$
3,424


$
6,527


$
(3,464
)

$
3,063Interest expense:DepositsNOW and money market

$
280


$
(779
)

$
(499
)

$
306


$
(950
)

$
(644
)Savings


82



(213
)


(131
)


(16
)


13



(3
)Certificates of deposit


6,368



(7,293
)


(925
)


977



(673
)


304Short-term borrowings


(8
)


(104
)


(112
)


238



(308
)


(70
)Other borrowings


(45
)


36



(9
)


355



(534
)


(179
)FHLB borrowings


28



(17
)


11



(40
)


(15
)


(55
)Total interest expense

$
6,705


$
(8,370
)

$
(1,665
)

$
1,820


$
(2,467
)

$
(647
)Net interest income*

$
2,025


$
3,064


$
5,089


$
4,707


$
(997
)

$
3,710(*) Fully taxable equivalent using the rate of 34%
Note – Changes to rate/volume are allocated to both rate and volume on a proportional dollar basis




Although net interest income dollars increased in 2009, Premier’s net interest margin decreased as the yield on earning assets decreased more than the decrease in rates paid on interest bearing liabilities.  In 2009, the yield earning on Premier’s
loan portfolio decreased 63 basis points to 6.50% while the yield on federal funds sold decreased 189 basis points to 0.08% and the yield earned on the investment portfolio decreased by 75 basis points to 3.76%.  The net


79
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009


result on all earning assets was to decrease the yield by 65 basis points to 5.46% in 2009, down from the 6.11% earned in 2008 and the 6.87% earned in 2007.  Similarly, in 2009 Premier decreased the average rate paid on its deposits by 69 basis points as market deposit rates continued to fall throughout the year.  The
average rate paid on certificates of deposit decreased the most, at 98 basis points, while interest bearing transaction accounts decreased on average by 44 basis points and savings accounts decreased by 25 basis points.  Just as deposits rates fell during 2009, the rates Premier paid on its short- and long-term borrowings also fell.  Premier was able to lower the rates paid on its short-term borrowings, primarily customer based repurchase agreements, by 62 basis points to 0.83%.  Due
to the relatively low 3.25% “prime” lending rate during 2009, the rate Premier paid on its long-term borrowings from other banks decreased 117 basis points to 3.49%, while the rates paid on the long-term FHLB borrowings at the banks decreased by 196 basis points due to the significantly lower rate on the FHLB borrowings assumed via the acquisition of Abigail Adams.  The overall result of decreasing rates paid on deposits and rate decreases on short- and long-term borrowings was to decrease
the overall cost of funds by 69 basis points to 1.70%, down from 2.39% in 2008 and 3.09% in 2007.  As a result, Premier’s net interest spread increased by 4 basis points.  However, due to the larger volume of Premier’s interest earning assets when compared to its volume of interest bearing liabilities, the net interest margin decreased by 9 basis points to 4.12% in 2009, down from 4.21% in 2008 and 4.42% in 2007.




Similarly, while net interest income dollars increased in 2008, Premier’s net interest margin decreased as the yield on earning assets decreased more than the decrease in rates paid on interest bearing liabilities.  In 2008, the yield earned on Premier’s
loan portfolio decreased 79 basis points to 7.13% while the yield on federal funds sold decreased 310 basis points to 1.97%.  In 2008, the yield earning on the investment portfolio only decreased by 3 basis points to 4.51%.  The net result on all earnings assets was to decrease the yield by 76 basis points to 6.11% in 2008, down from the 6.87% earned in 2007 and the 6.53% earned in 2006.  Similarly, in 2008 Premier decreased the average rate paid on its deposits by 61 basis points
as market deposit rates fell during the year.  The average rate paid on certificates of deposit decreased the most, by 79 basis points, while interest bearing transaction accounts decreased on average by 66 basis points and savings accounts decreased by 15 basis points.  Just as deposit rates fell during 2008, the rates Premier paid on its short- and long-term borrowings also fell.  Premier was able to lower the rates paid on its short-term borrowings, primarily customer based repurchase
agreements, by 98 basis points to 1.45%.  Due to declines in the “prime” lending rate during 2008, the rate Premier paid on its long-term borrowings from other banks decreased 299 basis points to 4.66%.  The overall result of decreasing rates paid on deposits and rate decreases on short- and long-term borrowings was to decrease the overall cost of funds by 70 basis points to 2.39%, down from 3.09% in 2007.  As a result, Premier’s net interest spread decreased by
6 basis points.  However, due to the larger volume of Premier’s interest earning assets compared to its volume of interest bearing liabilities, the net interest margin decreased by 21 basis points, to 4.21% in 2008, down from 4.42% in 2007. Further discussion of interest income is included in the section of this report entitled "Balance Sheet Analysis."





80
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Non-interest Income and Expense




Non-interest income has been and will continue to be an important factor for improving profitability. Recognizing this importance, management continues to evaluate areas where non-interest income can be enhanced.  As shown in the table of Non-interest Income
and Expense below, total fees and other income increased by $386,000 or 7.4% in 2009.  The increase in 2009 was largely due to increases in service charges on deposit accounts and electronic banking income resulting from the acquisition of Abigail Adams and the inclusion of Traders and Citizens First for an additional first four months in 2009 versus only the eight months since their April 30, 2008 acquisition.  In 2009, service charges on deposit accounts increased by $272,000 or 8.4% to
$3,521,000.  Approximately $191,000 of this increase was the result of adding the operations of Abigail Adams while another $185,000 was added from the inclusion of Traders and Citizens First for an additional four months in 2009.  The remaining $104,000, or 3.2% decrease at the remaining affiliate banks was largely due to customers’ lower propensity to overdraft their deposit accounts.  Management believes that the downturn in the economy has caused customers to more closely
manage their deposit funds to find ways to save money and thus reduce their number of overdrafts.  Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, increased $260,000, or 31.6% to $1,084,000 in 2009.  Approximately $73,000 of this increase was the result of adding the operations of Abigail Adams while another $75,000 was added from the inclusion of Traders and Citizens First for an additional four months in 2009.  The
remaining $112,000, or 13.6% increase is due to an increasing number of customers who conduct their banking and purchasing electronically, primarily via the use of debit and ATM cards.  In 2009, secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) decreased by $15,000, or 3.3% to $443,000.  The acquisitions of Abigail Adams, Traders and Citizens First added virtually no revenue of this type in 2009.  The
decrease in secondary market mortgage income in 2009 reflects an industry in extreme change through-out the year.  Many mortgage loan purchasers ceased buying new mortgages in 2009 or went out of business completely.  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.  The federal government, via government sponsored
agencies, began buying the surplus in available secondary market mortgages but significantly increased the required documentation from the home buyers, thus complicating the process in comparison to years past.  The perceived difficultly from the home buyer’s perspective had a negative impact on Premier’s secondary market business during 2009.  Other non-interest income decreased by $131,000, or 19.6%, in 2009.  The operations of Abigail Adams added approximately $65,000
of other non-interest income, while another $42,000 was added from the inclusion of Traders and Citizens First for an additional four months in 2009.  The remaining $238,000 decrease is largely due to $150,000 of income received in 2008 for extending Premier’s ATM processing contract and lower sources of other income, such as commissions on selling credit life insurance, check cashing fees and extension and other miscellaneous loan fees.








81
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








In 2008, total fees and other income increased by $575,000 or 12.4%.  The increase in 2008 was largely due to increases in service charges on deposit accounts, electronic banking income and other income resulting from the acquisitions of Traders and Citizens
First.  In 2008, service charges on deposit accounts increased by $511,000 or 18.7% to $3,249,000.  Approximately $427,000 of this increase was the result of adding the operations of Traders and Citizens First.  The remaining $84,000 or 3.1% increase was largely due to incremental increases in fee rates and growth in the number of deposit customers.  Electronic banking income increased $216,000 or 35.5% to $824,000 in 2008.  Approximately $99,000 of this increase
was the result of adding the operations of Traders and Citizens First.  The remaining $117,000 or 19.2% increase was largely due to Premier’s conversion to a more modern banking software system in 2005.  This banking software system has allowed Premier to offer more electronic banking services and made it easier for customers to conduct their banking electronically.  In 2008, secondary market mortgage income decreased by $192,000 or 29.5% to $458,000.  Traders and
Citizens First had virtually no revenue of this type in 2008.  The decrease in secondary market mortgage income in 2008 is primarily due to a significant decrease in the appetite of secondary market mortgage loan purchasers as brokers have either tightened their credit standards or have ceased buying new mortgages in an effort to avoid further exposure to sub-prime lending.  Premier concentrates its efforts on selling high quality mortgage loans, but still experienced some of the negative
effects from the decrease in the interest in buying mortgages as an investment.  Other non-interest income increased by $40,000, or 6.4%, in 2008.  Included in this increase is $142,000 of other non-interest income from the operations of Traders and Citizens First.  The remaining $102,000 decrease is largely due to $212,000 of life insurance benefits on the death of a former officer of a subsidiary that was recognized in 2007.  Excluding this benefit, other non-interest
income increased $110,000 in 2008, which includes $150,000 of income received for extending Premier’s ATM processing contract.




In 2008, Premier realized $93,000 in gains on the sale of investment securities.  In 2009 and 2007, Premier did not execute any sales of investment securities.  In 2009, Premier recorded a $3,552,000 gain on the acquisition of Abigail Adams.  New
accounting guidance adopted by Premier at the beginning of 2009, changed the way negative goodwill is calculated and recorded on the books of an acquiring organization.  Prior to 2009, negative goodwill resulted when the fair value of the net assets acquired exceeded the purchase price paid for a subsidiary.  This negative goodwill was recorded on the balance sheet and accreted into income over a designated period of time.  Under current accounting guidance, negative goodwill is
no longer recorded on the balance sheet and any negative difference in fair value of the net assets acquired versus the purchase price paid for those net assets is immediately recognized in non-interest income.  Also, prior to 2009, the purchase price paid for a subsidiary involving an exchange of the Company’s stock was determined using the Company’s stock price on the day prior to public announcement of the acquisition agreement.  Under current accounting guidance, the purchase
price paid is determined using the stock price on the day prior to the effective date of the acquisition.  Since the consideration paid by Premier to the shareholders of Abigail Adams was a fixed exchange ratio of its common stock, several factors contributed to Premier realizing a gain on the acquisition, including but not limited to a decrease in the calculation of the purchase price paid by Premier due to a decline in Premier’s stock price from the date the fixed exchange ratio was agreed upon
to the day before the effective date of the


82
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








acquisition, increases in the fair value of the investment portfolio acquired, improvements in the credit quality of some of the loans acquired, and a decrease in the fair value of fixed rate certificates of deposit acquired due to declining market interest rates.





The following table is a summary of non-interest income and expense for each of the years in the three-year period ending December 31, 2009.





NON-INTEREST INCOME AND EXPENSE(Dollars in thousands)Increase (Decrease) Over Prior Year2009


20082009


2008


2007


Amount


Percent


Amount


PercentNon-interest income:Service charges on depositaccounts

$
3,521


$
3,249


$
2,738


$
272



8.37


$
511



18.66Electronic banking income


1,084



824



608



260



31.55



216



35.53Secondary market mortgage income


443



458



650



(15
)


(3.28
)


(192
)


(29.54
)Other


536



667



627



(131
)


(19.64
)


40



6.38Total fees and other income

$
5,584


$
5,198


$
4,623



386



7.43



575



12.44Gain on acquisition of subsidiary


3,552



0



0



3,552







0Investment securities gains


0



93



0



(93
)






93Total non-interest income

$
9,136


$
5,291


$
4,623


$
3,845



72.67


$
668



14.45Non-interest expense:Salaries and wages

$
9,987


$
8,389


$
7,211


$
1,598



19.05


$
1,178



16.34Employee benefits


2,522



1,840



1,560



682



37.07



280



17.95Total staff costs


12,509



10,229



8,771



2,280



22.29



1,458



16.62Occupancy and equipment


3,261



2,546



2,017



715



28.08



529



26.23Outside data processing


3,312



2,587



2,132



725



28.02



455



21.34Professional fees


1,492



840



461



652



77.62



379



82.21Taxes, other than payroll,property and income


766



603



580



163



27.03



23



3.97Amortization of intangibles


348



204



0



144



70.59



204



100.00OREO (gains) losses and expenses, net


758



59



(50
)


699



1184.75



109



218.00Supplies


406



406



315



0



0.00



91



28.89FDIC insurance


1,292



273



182



1,019



373.26



91



50.00Other expenses


2,971



2,147



2,000



824



38.38



147



7.35Total non-interest expenses

$
27,115


$
19,894


$
16,408


$
7,221



36.30


$
3,486



21.25





83
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Just as management continues to evaluate areas where non-interest income can be enhanced, it strives to find ways to improve the efficiency of its operations and utilize the economies of scale of the consolidated entity to reduce its operating costs.  Sometimes
the expenses associated with acquisitions, as well as the inefficiency of the operations of acquired organizations, cloud these goals.  Premier’s 2009 net overhead ratio, or non-interest expense less non-interest income excluding securities transactions and other similar non-operating transactions to average earning assets was 2.84%, an increase from the 2.39% realized in 2008 and the 2.36% realized in 2007.  The actual dollars of net overhead increased by 45.0% or $6,685,000 in 2009;
however, average earning assets increased by only 22.1% in 2009 resulting in a higher overhead ratio in 2009.  The increases in actual dollars of net overhead and average earning assets were largely the result of the acquisition of Abigail Adams in 2009 and the inclusion of Traders and Citizens First for an additional four months in 2009 which added $4,428,000 or two-thirds of the increase in net overhead expense in 2009.  In 2008, the actual dollars of net overhead increased by 23.7% or $2,849,000
in 2008, however, average earning assets increased by a similar 22.3% in 2008, resulting in only a slight increase in the net overhead ratio when compared to 2007.  Both of these increases were largely the result of the acquisitions of Traders and Citizens First.  In fact, the net overhead of Traders and Citizens First comprise all but $57,000 or 0.5% of Premier’s increase in net overhead expense in 2008.  The 2009 net overhead ratio and actual dollars of net overhead expense
excludes the $3,552,000 gain on the subsidiary acquisition.  The 2008 net overhead ratio and actual dollars of net overhead expense excludes the $93,000 of gains on the sales of securities and the $150,000 of income received for extending Premier’s ATM processing contract, while the 2007 net overhead ratio and actual dollars of net overhead expense excludes the $212,000 of life insurance benefits as a non-operating income transaction.  For the year 2009, net overhead was $21.5 million
compared to $14.8 million in 2008 and $12.0 million in 2007.




Total non-interest expense in 2009 increased by $7,221,000, or 36.3% from 2008 largely due to the increase in all categories of costs from adding the operations of Abigail Adams and including the operations of Traders and Citizens First for a full twelve months in
2009 compared to only eight months in 2008.  The 2009 operations of Abigail Adams added approximately $3,275,000 of total non-interest expense ,while the first four months of operations of Traders and Citizens First added another $1,784,000 to total non-interest expense, leaving a $2,162,000 or 10.9% increase resulting from Premier’s other operations.  Total non-interest expense in 2008 increased by $3,486,000, or 21.2% from 2007 largely due to the increase in all categories of costs
from adding the operations of Traders and Citizens First.  The 2008 operations of Traders and Citizens First added $3,463,000 of total non-interest expenses leaving only a $23,000 or 0.1% increase resulting from Premier’s other operations.








84
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Staff costs increased by $2,280,000 or 22.3% in 2009 versus 2008, as $1,977,000 of the increase was due to the operations of Abigail Adams plus including the additional four months of Traders and Citizens First.  The remaining $303,000 or 3.0% increase
was largely the result of expenses related to funding of the Traders defined benefit pension plan payout upon plan termination and higher payroll taxes.  In 2008, staff costs increased by $1,458,000 or 16.6% versus 2007 as $1,407,000 of the increase was due to the operations of Traders and Citizens First.  The remaining $51,000 or 0.6% increase was largely the result of increased employer payroll taxes and normal salary and wage increases partially offset by decreases related to staff turnover
and greater deferred loan originations costs.




Occupancy and equipment expenses increased by $715,000 or 28.1% in 2009.  The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $878,000 of occupancy and equipment expenses in 2009 leaving a $163,000
or 6.4% decrease in these expense from Premier’s other operations.  The $163,000 decrease in 2009 is largely due to lower equipment maintenance costs and lower depreciation expense on furniture and fixtures as well as information technology equipment as these fixed assets become fully depreciated partially offset by increases in real estate taxes, building depreciation and electricity costs.  In 2008, occupancy and equipment expenses increased by $529,000 or 26.2%.  The operations
of Traders and Citizens First added approximately $629,000 of occupancy and equipment expenses in 2008, leaving a $100,000 or 5.0% decrease in these expenses from Premier’s other operations.  The $100,000 decrease in 2008 is largely due to a $70,000 writedown of branch property in 2007 that was scheduled to be closed at the end of January 2008.  The decision to close the branch was made in 2007, and in accordance with FAS 144, the branch property was written down to its estimated realizable
value.  Furthermore, occupancy and equipment expenses were less in 2008 due to lower real estate taxes, building repairs, equipment maintenance and equipment depreciation partially offset by increase in utility costs, and other building cleaning and maintenance costs.




Outside data processing expense increased by $725,000 or 28.0% in 2009.  The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $463,000 of outside processing expenses in 2009 leaving a $262,000
or 10.1% increase in these expenses from Premier’s other operations.  The $262,000 increase in 2009 is largely due to increases in ATM processing costs, new costs related to outsourcing the data and item processing functions of the newly acquired Traders and Citizens First banks, and costs related to outsourcing the statement rendering function of all the banks.  In 2008, outside data processing expense increased by $455,000 or 21.3%.  The operations of Traders and Citizens
First added approximately $294,000 of outside data processing expenses in 2008 leaving a $161,000 or 7.6% increase in these expenses from Premier’s other operations.  The $161,000 increase in 2008 is largely due to increases in item processing charges due to Premier’s conversion to exchange electronic images instead of processing paper checks to settle customer deposit account activity plus higher communication costs and contractual inflationary fee adjustments for data processing and internet
banking expenses.





85
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








Professional fees increased by $652,000 or 77.6% in 2009.  The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $347,000 of professional fees in 2009 leaving a $305,000 or 36.3% increase in these
expenses from Premier’s other operations.  The $305,000 increase in 2009 is largely due to legal and investment banker fees incurred during the year to acquire Abigail Adams, higher external audit fees related to the expanding size of the organization and an increase in other various consulting fees.  These increases were partially offset by lower internal audit costs due to the hiring of outside internal auditors in the fourth quarter of 2008 to help complete the Company’s internal
audit schedule.  In 2008, professional fees increased by $379,000 or 82.2%. The operations of Traders and Citizens First added approximately $81,000 of professional fees in 2008 leaving a $298,000 or 64.6% increase in these expenses from Premier’s other operations.  The $298,000 increase in 2008 is largely due to additional legal and other professional fees incurred during the early part of the year to help in the completion of the acquisitions Traders and Citizens First and also due
to fees associated with hiring outside internal auditors in the fourth quarter to help complete the Company’s internal audit schedule.




Taxes not on income increased by $163,000, or 27.0% in 2009.  The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $64,000 of taxes non on income in 2009 leaving a $99,000 or 16.4% increase in
these expenses from Premier’s other operations.  The $99,000 increase in 2009 is largely due to an increase in equity based franchised taxes due to the additional capital added from the acquisitions of Traders, Citizens First and Abigail Adams plus the addition of preferred equity from the TARP funds.  In 2008, taxes not on income increased by $23,000, or 4.0%.  The operations of Traders and Citizens First added approximately $83,000 of taxes not on income in 2008 leaving a
$60,000 or 10.3% decrease in these expenses from Premier’s other operations.  The $60,000 decrease in 2008 is largely due to decreases in the tax rate on equity based franchised taxes.




Amortization of intangibles increased by $144,000 or 70.1% in 2009.  The increase in 2009 is a result of the amortization of the core deposit intangible from the acquisition of Abigail Adams plus the additional four months of core deposit intangible amortization
from the acquisitions of Traders and Citizens First.  Amortization of intangibles began in 2008 as a result of the core deposit intangible asset from the acquisitions of Traders and Citizens First.




OREO gains, losses and expenses resulted in net expenses of $758,000 in 2009 versus $59,000 of net expenses in 2008, a $700,000 increase in non-interest expense.  OREO expense represents the costs to operate, maintain and liquidate Other Real Estate acquired
through foreclosure in satisfaction of unpaid loans.  The operations of Abigail Adams added approximately $110,000 of OREO expenses in 2009 leaving a $590,000 increase in these expenses from Premier’s other operations (including a full year of Traders and Citizens First).  The $590,000 increase in 2009 is largely due to $471,000 of expenses recorded to writedown the value of OREO properties to estimated realizable values and another $90,000 of losses on the sales of OREO in 2009 recorded
mostly at Traders.  These amounts compare to $21,000 of net losses recorded in 2008.  OREO gains, losses and expenses resulted in net expenses of $59,000 in 2008 versus $50,000 of net gains in 2007, a $109,000 increase in non-interest expense.  The operations


86
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








of Traders and Citizens First added approximately $13,000 of OREO expenses in 2008 leaving a $96,000 increase in these expenses from Premier’s other operations.  The $96,000 increase in 2008 is largely due to $20,000 of net gains realized on the disposition or OREO in 2007 compared to $21,000 of
net losses in 2008 as well as $30,000 of expense recoveries in 2007 that were not repeated in 2008.




Supplies expense remained unchanged in 2009 at $406,000.  The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $62,000 of supplies expense in 2009 leaving a $62,000 or 15.3% decrease in these
expenses from Premier’s other operations.  In 2008, supplies expense increased by $91,000 or 28.9% largely due to the additional operations of Traders and Citizens First.




FDIC insurance expense increased by $1,019,000 or 373.3% in 2009.  The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $298,000 of FDIC insurance expense in 2009 leaving a $721,000 or 264.1%
increase in this expense from Premier’s other operations.  The $721,000 increase in 2009 is largely due to the FDIC’s special assessment on all banks in the United States during the second quarter of 2009.  The special assessment, designed to shore-up the FDIC’s Bank Insurance Fund, cost Premier approximately $319,000 during the second quarter of 2009.  The additional $402,000 of FDIC insurance expense is due to the expiration of FDIC insurance credits that had
previously been used to offset normal FDIC premiums in 2008.  In 2008, FDIC insurance expense increased by $91,000 or 50.0%. The operations of Traders and Citizens First added approximately $44,000 of FDIC insurance in 2008 leaving a $47,000 or 25.8% increase in these expenses from Premier’s other operations.  The $47,000 increase in 2008 is largely due to an increase in FDIC insurance rates substantially offset by FDIC insurance credits offered to banks organized before 1998.




Other expenses totaled $2,971,000 in 2009, an $824,000 or 38.4% increase from the $2,147,000 recorded in 2008.  The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $606,000 of other expenses
in 2009 leaving a $218,000 or 10.2% increase in this expense from Premier’s other operations.  The $218,000 increase in 2009 is largely due to $120,000 of collection expense reimbursements received in the first quarter of 2008 and a $285,000 restitution payment made in 2008 to Farmers Deposit Bank by the bank’s former president who plead guilty to bank fraud partially offset by $133,000 of conversion expenses incurred in 2008.  Other expenses that increased in 2009 include a $65,000
increase in fraud and other losses plus higher correspondent bank charges.  Lower expenses in 2009 include travel costs, appraisal fees, and teller outages.  In 2008, other expenses totaled $2,147,000, a $147,000, or 7.4% increase from the $2,000,000 recorded in 2007.  The operations of Traders and Citizens First added approximately $413,000 of other expenses in 2008 leaving a $266,000, or 13.3% decrease in these expenses from Premier’s other operations.  The $266,000
decrease in 2008 is primarily the result of a $439,000 reduction in collection expenses due to a $285,000 restitution payment made to Farmers Deposit Bank by the bank’s former president who plead guilty to bank fraud and to $32,000 of net reimbursements from settlements with customers compared to $120,000 of collection expenses in 2007.  Other expense savings include a $74,000 reduction in courier costs in 2008 due to Premier’s conversion to exchange electronic


87
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








images instead of transporting and processing paper checks to settle customer deposit account activity, as well as reductions in advertising expenditures, postage, correspondent bank charges and insurance costs.  These expense reductions were partially offset by increases in state examination costs, shareholder
expenses such as NASDAQ expenses and stock transfer fees, losses due to forged checks and fictitious electronic payment transactions, as well as increases in bank director fees and employee travel costs.




An analysis of the allowance for loan losses and related provision for loan losses is included in the Loan Portfolio section of the Balance Sheet Analysis of this report.





Applicable Income Taxes




Premier recognized $2.9 million of income tax expense in 2009.  This amount compares to $3.7 million of income tax expense recorded in 2008 and $3.5 million of income tax expense recorded in 2007.  Premier’s effective tax rate was 24.3%
in 2009, down substantially from the 33.2% in 2008 and the 32.8% in 2007.  Premier’s effective tax rate was substantially lower in 2009 primarily because the acquisition of Abigail Adams was a tax free reorganization under the Internal Revenue Code and therefore the accounting gain on the acquisition was a non-taxable event.  Excluding the gain from pretax income in 2009 would result in an effective tax rate of approximately 34.5%.  The increase in this effective tax rate when
compared to the 33.2% realized in 2008 is largely due to non-deductible expenses associated with the acquisition of Abigail Adams.  Premier’s effective tax rate in 2007 was lower than 2008 due to death benefits received from a former officer’s life insurance policy which were not subject to income tax.  Premier realizes the tax saving benefits of holding tax-exempt investments and other tax savings instruments as well as making tax-exempt loans.  These activities help
to reduce Premier’s tax rate from the 34.0% statutory rate.  Additional information regarding income taxes is contained in Note 12to the consolidated financial statements.





Effects of Changing Prices




The results of operations and financial condition presented in this report are based on historical cost, unadjusted for the effects of inflation. Inflation affects Premier in two ways. One effect is that inflation can result in increased operating costs which must
be absorbed or recovered through increased prices for services. The second effect is on the purchasing power of the corporation. Virtually all of a bank's assets and liabilities are monetary in nature. Regardless of changes in prices, most assets and liabilities of the banking subsidiaries will be converted into a fixed number of dollars. Non-earning assets, such as premises and equipment, do not comprise a major portion of Premier's assets; therefore, most assets are subject to repricing on a more frequent basis
than in other industries.




Premier's ability to offset the effects of inflation and potential reductions in future purchasing power depends primarily on its ability to maintain capital levels by adjusting prices for its services and to improve net interest income by maintaining an effective
asset/liability mix.  Management's efforts to meet these goals are described in other sections of this report.


88
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








SUMMARY RESULTS OF OPERATIONS


FOURTH QUARTER 2009




Net income available to common shareholders for the three months ended December 31, 2009 totaled $4,899,000, a $2,997,000 or 157.6% increase from the $1,902,000 of net income available to common shareholders reported for the fourth quarter of 2008.  On
a per share basis, Premier’s net income available to common shareholders for the fourth quarter of 2009 was 62 cents per share compared to 30 per share for the same quarter last year.  The increase in net income and earnings per share is largely due to a $3,552,000 gain on the subsidiary acquisition.   Excluding this gain, net income available to common shareholders totaled $1,347,000 or 17 cents per share.




Net interest income totaled $11,095,000 for the fourth quarter of 2009, and increase of $4,280,000 or 62.8% from the net interest income earned in the same quarter of 2008.  Approximately $4,350,000 of net interest income was earned by via the acquisition
of Abigail Adams in the fourth quarter of 2009.  The remaining $70,000 decrease in net interest income when compared to the same quarter of 2008 is the result of lower interest on loans, investment securities and federal funds sold primarily due to lower yields earned on those assets.  This $651,000 decrease in interest income was substantially offset by a $581,000 decrease in interest expense primarily due to lower rates paid on deposits and short-term borrowings and a reduction in long-term
debt outstanding.  During the fourth quarter of 2009, Premier recorded a $713,000 provision for loan losses compared to a $106,000 provision for loan losses in the fourth quarter of 2008.  The increase in provision expense was the result of a higher estimation of the credit risk in the loan portfolio.




Non-interest income, excluding the gain on subsidiary acquisition, totaled $1,714,000 in the fourth quarter of 2009, an increase of $425,000 or 33.0% from the $1,289,000 reported in the fourth quarter of 2008.  Approximately $329,000 of non-interest income
was generated by the operations of Abigail Adams in the fourth quarter of 2009.  The remaining $96,000 increase in non-interest income when compared to the same quarter of 2008 is primarily the result of a $55,000 or 26.6% increase in electronic banking income and a $44,000 or 61.1% increase in secondary market mortgage income.  Non-interest expense totaled $9,743,000 in the fourth quarter of 2009, a $4,556,000 or 87.8% increase from the $5,187,000 reported for the fourth quarter of 2008.  The
operations of Abigail Adams generated approximately $3,275,000 of non-interest expense in the fourth quarter of 2009.  The remaining $1,281,000 increase in non-interest expense when compared to the same quarter of 2008 is primarily due to a $484,000 increase in OREO writedowns and expenses, a $149,000 increase in FDIC insurance costs, a $152,000 increase in professional fees and a $156,000 increase in staff costs.  Other increases in non-interest expenses include higher taxes not on income
and outside data processing costs. These increases were offset by savings in occupancy and equipment costs and supplies expense.  Additional quarterly financial data is provided in Note 23to the consolidated financial statements.





89
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


MANAGEMENT’S DISCUSSION AND ANALYSIS


December 31, 2009








ADOPTION OF NEW ACCOUNTING STANDARDS





Recently Issued Accounting Standards Not Yet Adopted




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




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





90
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Item 8.  Financial Statements and Supplementary Data





The Company's Financial Statements and related Independent Auditors' Report are presented in the following pages. The financial statements filed in this Item 8 are as follows:





Report of Independent Registered Public Accounting Firm





Financial Statements:


Consolidated Balance Sheets - December 31, 2009 and 2008


Consolidated Statements of Income - Years Ended December 31, 2009, 2008, and 2007


Consolidated Statements of Comprehensive Income - Years Ended December 31, 2009, 2008, and 2007


Consolidated Statements of Changes in Stockholders' Equity – Years ended December 31, 2009, 2008 and 2007





Consolidated Statements of Cash Flows - Years ended December 31, 2009, 2008, and 2007


Notes to Consolidated Financial Statements














91
 Table of Contents















































PREMIER FINANCIAL BANCORP, INC.








CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007













































92
 Table of Contents













REPORT OF INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM








Board of Directors and Stockholders


Premier Financial Bancorp, Inc.


Huntington, West Virginia








We have audited the accompanying consolidated balance sheets of Premier Financial Bancorp, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009.  These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is
not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Premier Financial Bancorp, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2009, in conformity with U.S. generally accepted accounting principles.








Crowe Horwath LLP








Brentwood, Tennessee


March 30, 2010





93
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(Dollars in Thousands, Except Per Share Data)

2009


2008ASSETSCash and due from banks

$
61,611


$
22,148Federal funds sold


22,985



15,899Securities available for sale


240,970



175,741Loans held for sale


897



1,193Loans


699,133



467,111Allowance for loan losses


(7,569
)


(8,544
)Net loans


691,564



458,567Federal Home Loan Bank and Federal Reserve Bank stock


7,005



3,931Premises and equipment, net


15,200



11,367Real estate and other property acquired through foreclosure


9,251



1,056Interest receivable


4,250



3,720Goodwill


28,724



28,543Other intangible assets


2,795



1,431Prepaid FDIC insurance premiums


2,900



-Deferred taxes


10,713



-Other assets


2,885



869Total assets

$
1,101,750


$
724,465LIABILITIES AND STOCKHOLDERS' EQUITYDepositsNon-interest bearing

$
172,182


$
101,588Time deposits, $100,000 and over


149,890



71,145Other interest bearing


591,712



416,449Total deposits


913,784



589,182Securities sold under agreements to repurchase


24,600



18,351Federal Home Loan Bank advances


14,937



7,607Other borrowed funds


16,027



15,560Interest payable


1,037



1,054Other liabilities


2,809



3,289Total liabilities


973,194



635,043Commitments and contingent liabilities


-



-Stockholders' equityPreferred stock, no par value, $1,000 liquidation preference,
1,000,000 shares authorized, 22,252 shares issued in 2009


21,705



-Common stock, no par value; 20,000,000 shares authorized;7,937,143 in 2009 and 6,392,772 in 2008shares issued and outstanding


71,412



60,259Retained earnings


33,349



27,346Accumulated other comprehensive income


2,090



1,547Total stockholders' equity


128,556



89,422Total liabilities and stockholders' equity

$
1,101,750


$
724,465


See accompanying notes
 94
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF INCOME


Years Ended December 31


(In Thousands, Except Per Share Data)








2009


2008


2007Interest incomeLoans, including fees

$
34,171


$
29,692


$
27,201Investment securitiesTaxable


6,730



7,148



5,509Tax-exempt


245



211



157Federal funds sold


24



748



1,829Other interest income


57



45



56Total interest income


41,227



37,844



34,752Interest expenseDeposits


9,121



10,676



11,019Repurchase agreements and other


138



251



321FHLB advances and other borrowings


885



882



1,116Total interest expense


10,144



11,809



12,456Net interest income


31,083



26,035



22,296Provision for loan losses


1,052



147



(78
)Net interest income after provision for loan losses


30,031



25,888



22,374Non-interest incomeService charges


3,521



3,249



2,738Electronic banking income


1,084



824



608Secondary market mortgage income


443



458



650Securities gains


-



93



-Gain on acquisition of subsidiary


3,552



-



-Other


536



667



6279,136



5,291



4,623Non-interest expensesSalaries and employee benefits


12,509



10,229



8,771Occupancy and equipment expenses


3,261



2,546



2,017Outside data processing


3,312



2,587



2,132Professional fees


1,492



840



461Taxes, other than payroll, property and income


766



603



580Write-downs, expenses, and losses on salesof other real estate owned, net of gains


758



59



(50
)Supplies


406



406



315FDIC insurance


1,292



273



182Amortization of intangibles


348



204



-Other expenses


2,971



2,147



2,00027,115



19,894



16,408Income before income taxes


12,052



11,285



10,589Provision for income taxes


2,934



3,749



3,470Net income

$
9,118


$
7,536


$
7,119Preferred stock dividends


133



-



-Net income available to common stockholders

$
8,985


$
7,536


$
7,119Earnings per share:Basic

$
1.32


$
1.25


$
1.36Diluted


1.32



1.25



1.35


See accompanying notes
 95
 Table of Contents
  PREMIER FINANCIAL BANCORP, INC.
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


Years Ended December 31


(In Thousands, Except Per Share Data)








2009


2008


2007Net income available to common shareholders

$
8,985


$
7,536


$
7,119Other comprehensive income:Unrealized gains on securities arising during the period


691



2,457



1,853Reclassification of realized amount


-



(93
)


-Net change in unrealized gain on securities


691



2,364



1,853Change in funded status of pension plan


132



(132
)


-Less tax impact


280



758



630Other comprehensive income:


543



1,474



1,223Comprehensive income

$
9,528


$
9,010


$
8,342








See accompanying notes
 96
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


Years Ended December 31, 2009, 2008 and 2007


(Dollars In Thousands, Except Per Share Data)








Preferred
Stock


Common
Stock


Retained
Earnings


Accumulated
Other
Comprehensive
Income (Loss)


TotalBalances, January 1, 2007

$
-


$
44,732


$
17,420


$
(1,150
)

$
61,002Net income


-



-



7,119



-



7,119Other comprehensive income


-



-



-



1,223



1,223Cash dividends paid($0.40 per common share)


-



-



(2,095
)


-



(2,095
)Stock options exercised


-



10



-



-



10Stock based compensation expense


-



130



-



-



130Balances, December 31, 2007


-



44,872



22,444



73



67,389Net income


-



-



7,536



-



7,536Other comprehensive income


-



-



-



1,474



1,474Cash dividends paid ($0.43 per common share)


-



-



(2,634
)


-



(2,634
)Stock issued to acquire subsidiaries


-



15,537



-



-



15,537Stock based compensation expense


-



120



-



-



120Balances, December 31, 2008


-



60,529



27,346



1,547



89,422Net income


-



-



9,118



-



9,118Other comprehensive income


-



-



-



543



543Issuance of preferred stock andcommon stock warrant


21,705



547



-



-



22,252Cash dividends paid ($0.44 per common share)


-



-



(2,982
)


-



(2,982
)Dividend paid on preferred stock


-



-



(133
)


-



(133
)Stock issued to acquire subsidiary, net


-



10,285



-



-



10,285Stock based compensation expense


-



51



-



-



51Balances, December 31, 2009

$
21,705


$
71,412


$
33,349


$
2,090


$
128,556





See accompanying notes
 97
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


Years Ended December 31


(In Thousands, Except Per Share Data)








2009


2008


2007Cash flows from operating activitiesNet income

$
9,118


$
7,536


$
7,119Adjustments to reconcile net income  to net cashfrom operating activitiesDepreciation and impairment of real estate


1,135



1,001



833Provision for loan losses


1,052



147



(78
)Amortization (accretion), net


(410
)


290



(40
)FHLB stock dividends


-



(102
)


-Writedowns (gains) on other real estate owned, net


561



21



(20
)Stock compensation expense


51



120



130Deferred income taxes


1,327



1,002



648Loans originated for sale


(28,329
)


(23,066
)


(27,461
)Secondary market loans sold


29,068



24,222



28,198Secondary market income


(443
)


(458
)


(650
)Bargain purchase gain on acquisition


(3,552
)


-



-Gain on the sale of securities available for sale


-



(93
)


-Changes in :Interest receivable


898



6



53Other assets


(2,983
)


(142
)


558Interest payable


(556
)


(395
)


3Other liabilities


(1,851
)


(69
)


68Net cash from operating activities


5,086



10,020



9,361Cash flows from investing activitiesPurchases of securities available for sale


(148,533
)


(90,616
)


(41,078
)Proceeds from sales of securities available for sale


-



2,088



25Proceeds from maturities and calls of securitiesavailable for sale


149,221



80,314



43,571Purchase of FHLB  stock, net of redemptions


83



(130
)


(49
)Purchases of subsidiaries, net of cash received


12,579



(8,717
)


-Net change in federal funds sold


(5,148
)


26,978



(4,452
)Net change in loans


14,148



(23,996
)


(3,141
)Purchases of premises and equipment, net


(898
)


(1,221
)


(500
)Proceeds from sale of other real estate acquired
through foreclosure


1,602



326



623Net cash from investing activities


23,054



(14,974
)


(5,001
)








(continued)
 98
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)


Years Ended December 31


(In Thousands, Except Per Share Data)








2009


2008


2007Cash flows from financing activitiesNet change in deposits


26,215



(8,351
)


10,083Net change in short-term Federal Home Loan Bank advances


(6,450
)


3,000



-Net change in federal funds purchased


-



(392
)


(584
)Net change in agreements to repurchase securities


(10,184
)


5,874



(78
)Repayment of Federal Home Loan Bank advances


(212
)


(236
)


(2,442
)Repayment of other borrowed funds


(19,583
)


(4,074
)


(3,863
)Proceeds from other borrowings


2,400



11,550



-Proceeds from issuance of preferred stock


22,252



-



-Cash dividends paid


(3,115
)


(2,634
)


(2,095
)Proceeds from stock option exercises


-



-



10Net cash from financing activities


11,323



4,737



1,031Net change in cash and cash equivalents


39,463



(217
)


5,391Cash and cash equivalents at beginning of year


22,148



22,365



16,974Cash and cash equivalents at end of year

$
61,611


$
22,148


$
22,365Supplemental disclosures of cash flow information:Cash paid during year for -Interest

$
10,700


$
12,204


$
12,453Income taxes paid


1,630



3,082



3,066Non-cash transactionsLoans transferred to real estate acquiredthrough foreclosure

$
7,182


$
679


$
282Purchases of securities available for sale not yet settled


-



-



3,500Subsidiaries acquired:Fair value of assets acquired from Abigail Adams

$
363,057Common stock issued to acquire Abigail Adams


10,290Gain on bargain purchase


3,552Liabilities assumed of Abigail Adams

$
349,215Fair value of assets acquired from Citizens First Bank, Inc.





$
68,048Common stock issued to acquire Citizens First Bank, Inc.






6,400Cash paid for capital stock of Citizens First Bank, Inc.






5,300Liabilities assumed of Citizens First Bank, Inc.





$
56,348Fair value of assets acquired from Traders Bankshares, Inc.





$
112,488Common stock issued to acquire Traders Bankshares, Inc.






9,138Cash paid for capital stock of Traders Bankshares, Inc.






9,002Liabilities assumed of Traders Bankshares, Inc.





$
94,348


See accompanying notes
 99
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





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





UnauditedDecember 31, 2009Subsidiary
Location
Year
Acquired

Total
Assets


Net
IncomeCitizens Deposit Bank & Trust
Vanceburg, Kentucky
1991

$
123,007


$
1,557Farmers Deposit Bank
Eminence, Kentucky
1996


63,324



705Ohio River Bank
Ironton, Ohio
1998


91,747



1,176First Central Bank, Inc.
Philippi, West Virginia
1998


125,742



1,175Boone County Bank, Inc.
Madison, West Virginia
1998


167,746



1,818Traders Bank, Inc.
Ravenswood, West Virginia
2008


158,223



262Adams National Bank
Washington, DC
2009


289,897



475Consolidated Bank & Trust
Richmond, Virginia
2009


76,861



294Mt. Vernon Financial Holdings, Inc.
Huntington, West Virginia
1999


216



(19
)Parent and Intercompany Eliminations




4,987



1,675Consolidated total



$
1,101,750


$
9,118





All material intercompany transactions and balances have been eliminated.





Nature of Operations:  The subsidiary banks (Banks) operate under state bank charters except for Adams National Bank which operates under a national bank charter.  The Banks provide traditional banking services to customers primarily
located in the counties and adjoining counties in Kentucky, Ohio, West Virginia, Maryland, Washington DC and Virginia in which the Banks operate.  The state chartered banks are subject to regulation by their respective state banking regulators and the Federal Deposit Insurance Corporation (“FDIC”) or the Federal Reserve Board for member banks.  Adams National Bank is subject to regulation by the Office of the Comptroller of the Currency (“OCC”).  The Company
is also subject to regulation by the Federal Reserve Board.





Estimates in the Financial Statements:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  The allowance for loan losses, the identification and evaluation of impaired loans, the fair value of assets and liabilities acquired, impairment of goodwill, and fair values of financial instruments are particularly subject to
change.


(continued)
 100
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





Cash Flows:  For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and interest-earning balances with banks with an original maturity less than ninety days.  Net cash flows
are reported for loans, federal funds sold, deposits, and short-term borrowing transactions.





Securities:  The Company classifies its securities portfolio as either securities available for sale or securities held to maturity.  Securities held to maturity are carried at amortized cost.





Securities available for sale might be sold before maturity and are carried at fair value.  Adjustments from amortized cost to fair value are recorded in other comprehensive income, net of related income tax. Other securities such as Federal Home Loan Bank stock and Federal Reserve Bank  stock
are carried at cost.





Interest income includes amortization of purchase premium or discount computed using the level yield method.  Gains or losses on dispositions are recorded on the trade date and are based on the net proceeds and adjusted carrying amount of the securities sold using the specific identification method.  Securities
are written down to fair value when a decline in fair value is not temporary.





Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  Declines in the fair value of securities below their cost that are other-than-temporary are reflected
as realized losses.  In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer.





Loans Held for Sale:  Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors.  Net unrealized losses,
if any, are recorded as a valuation allowance and charged to earnings.  Loans are generally sold with servicing released.





Loans:  Net loans are stated at the amount of unpaid principal, reduced by purchase discounts, unearned income and an allowance for loan losses.  Interest income on loans is recognized on the unpaid principal balance on the accrual
basis except for those loans in a non-accrual of income status.  The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.


(continued)
 101
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection.  Consumer loans are typically charged off no later than 120 days past due.  Past due status is based on the contractual terms
of the loan.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.





All interest accrued but not received for loans placed on non-accrual is reversed against interest income.  Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments are reasonably assured.





Certain Purchased Loans:  The Company purchased groups of loans in conjunction with the acquisitions described in Note 24, some of which have shown evidence of credit deterioration since origination. These
purchased loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses.  After acquisition, losses are recognized by an increase in the allowance for loan losses.





Such purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination.  The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash
flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield).  The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).





Over the life of the loan or pool, expected cash flows continue to be estimated.  If the present value of expected cash flows is less than the carrying amount, a loss is recorded.  If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future
interest income.





Concentration of Credit Risk:  Most of the Company’s loans located in the Washington, DC metro area are commercial real estate loans.  Therefore, the Company’s exposure to credit risk is significantly affected by changes
in the economy and commercial real estate collateral values in the Washington, DC metro area.


(continued)
 102
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





Allowance for Loan Losses:  The allowance for loan losses is a valuation allowance for probable incurred credit losses increased by a provision for loan losses charged to expense.  The allowance is an amount that management believes
will be adequate to absorb probable incurred losses on existing loans based on evaluations of the collectability of the loans and prior loan loss experience.  The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay.  Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management’s judgment, should be charged-off.  Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.





A loan is impaired when full payment under the loan terms is not expected.  Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and accordingly, they are not separately identified for impairment disclosures.  All
other loans are evaluated for impairment on an individual basis. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.   If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely
from the collateral.  Loans with restructured terms to enable a delinquent borrower to repay (Trouble Debt Restructurings) are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.





Transfers of Financial Assets:  Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.  Control over transferred assets is deemed to be surrendered when the assets have been
isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.








(continued)
 103
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





Premises and Equipment:  Land is carried at cost.  Premises and equipment are stated at cost less accumulated depreciation.  Depreciation is recorded principally by the straight-line method with useful lives ranging from
7 to 40 years for premises and from 3 to 15 years for equipment.





Real Estate Acquired Through Foreclosure:  Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell.  Upon repossession, the value
of the underlying loan is written down to the fair value of the real estate less estimated costs to sell by a charge to the allowance for loan losses, if necessary.  Any subsequent write-downs are charged to operating expenses. Parcels of real estate maybe leased to third parties to offset holding period costs. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.





Federal Home Loan Bank (FHLB) stock:  The Banks are members of the FHLB system.  Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.  FHLB
stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Both cash and stock dividends are reported as income.





Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate that the carrying amount may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded
at fair value.





Repurchase Agreements:  Substantially all repurchase agreement liabilities represent amounts advanced by various customers.  Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.





Goodwill and Other Intangible Assets:  Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired.  Goodwill resulting
from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquired company, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill is not amortized but is assessed at least annually for impairment and any such impairment will be recognized in the period identified.  Impairment is evaluated using the
aggregate of all banking operations.  To evaluate impairment, management uses pricing valuation factors such as price-to-total assets and price-to-total deposits from databases of actual peer group bank sales.  These valuation factors are applied to the comparable factors of the Company’s aggregate banking operations to arrive at estimated fair value.


(continued)
 104
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





Other intangible assets consist of core deposit intangible assets arising from whole bank acquisitions.  They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives of approximately 8 years.





Stock Based Compensation:  Compensation cost is recognized for stock options granted to employees based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options.  Compensation
cost is recognized on a straight-line basis over the required service period, generally defined as the vesting period.





Income Taxes:  Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for
the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.





The Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”) as of January 1, 2007. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The adoption had no effect on the Company's financial statements.





The Company recognizes interest related to income tax matters as other interest expense and penalties related to income tax matters as other noninterest expense.





Off Balance Sheet Financial Instruments:  Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.  The face
amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded.





Earnings Per Common Share:  Basic earnings per common share is net income (available to common shareholders) divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share
includes the dilutive effect of additional potential common shares issuable under stock options and warrants.  Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.





Reclassifications:  Some items in the prior year financial statements were reclassified to conform to the current presentation.


(continued)
 105
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





Comprehensive Income:  Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status
of the pension plan prior to its termination which are also recognized as a separate component of equity.





Loss Contingencies:  Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably
estimated.  Management does not believe there now are such matters that will have a material effect on the financial statements.





Fair Value of Financial Instruments:  Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.  Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.





Operating Segments:  All of the Company’s operations are considered by management to be aggregated into one reportable operating segment.  While the chief decision-makers monitor the revenue streams of the various products
and services, the identifiable segments are not material.  Operations are managed and financial performance is evaluated on a Company-wide basis.





Adoption of New Accounting Standards:  In September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This guidance
establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset.  The guidance was effective for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued guidance that delayed the effective date of this fair value guidance for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring
basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  In October 2008, the FASB issued guidance clarifying the application of the fair value guidance in a market that is not active.  The impact of adoption was not material.





In December 2007, the FASB guidance that 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.  The guidance is effective for


(continued)
 106
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





fiscal years beginning on or after December 15, 2008.  There was no immediate impact to the Company upon adoption of this guidance.  However, the accounting for the acquisition of Abigail Adams National Bancorp, Inc. was determined using this guidance.  See Note 24 below.





In December 2007, the FASB issued guidance that changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. The guidance was effective for the Company as of the beginning of 2009
and had no impact on its results of operations or financial position.





In March 2008, the FASB issued guidance that amends and expands the disclosure requirements for derivative instruments and hedging activities. The guidance 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. The guidance was effective for the Company as of the beginning of 2009 and had no impact on the Company’s results of operations or financial position.





In May 2009, the FASB issued guidance which requires the effects of events that occur subsequent to the balance-sheet date be evaluated through the date the financial statements are either issued or available to be issued.  Companies are required to reflect in their financial statements the effects of
subsequent events that provide additional evidence about conditions at the balance-sheet date (recognized subsequent events).  Companies are also prohibited from reflecting in their financial statements the effects of subsequent events that provide evidence about conditions that arose after the balance-sheet date (nonrecognized subsequent events), but requires information about those events to be disclosed if the financial statements would otherwise be misleading.  This guidance was effective
for the Company beginning with the second quarter 2009 interim financial statements.





In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards CodificationTM (“The
Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting principals generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for
financial statements issued by the Company for periods ending after September 15, 2009.





(continued)
 107
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per share (EPS) under the two-class method.  Unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method.  This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings,
and selected financial data) to conform to the provisions of this guidance.  The guidance had no material impact of the Company’s financial statements.





In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before
recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement.  The
credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded.  This guidance was effective the Company beginning with the June 30, 2009 interim financial statements and had no impact on the Company’s results of operations or financial position.





In April 2009, the FASB issued guidance that emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or liability has decreased significantly.  Fair value is the price that would be received for an asset sold or paid to transfer a liability in
an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  When observable transactions or quoted prices are not considered orderly, then little, if any, weight should be assigned to the indication of the asset or liability’s fair value.   Adjustments to those transactions or prices should be applied to determine the appropriate fair value.  This guidance was effective
the Company beginning with the June 30, 2009 interim financial statements and had no impact on the Company’s results of operations or financial position.





(continued)
 108
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)





In August 2009, the FASB amended existing guidance for the fair value measurement of liabilities by clarifying that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses
the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with existing fair value guidance. The amendments in this guidance also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are
Level 1 fair value measurements. The guidance was effective for the Company beginning on October 1, 2009 and had no impact on the Company’s results of operations or financial position.





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





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


(continued)
 109
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  2 – REGULATORY MATTERS





On October 1, 2008, the Company’s newly acquired subsidiary Adams National Bank (“Adams National”), entered into a written agreement with its primary regulator, the OCC.  The written agreement outlined a number of steps to be taken by Adams National to remedy unsafe and unsound banking
practices relating to the level of credit risk and the administration of the loan portfolio, and violations of credit-related laws and regulations at the bank.  These include 1) ensuring that Adams National has competent management and that senior management can perform the duties required under the Bank’s policies and procedures and the requirements of the written agreement; 2) maintaining a 12% total risk-based capital to total risk-weighted assets ratio; an 11% Tier 1 capital to risk-weighted
assets ratio; and a 9% Tier 1 capital to adjusted total assets ratio, which are greater than the regulatory requirements to be “well capitalized” under the framework for prompt corrective action; 3) developing and implementing a three-year capital program; 4) adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the written agreement; 5) requiring the Board to review the adequacy of the allowance for loan losses at least quarterly;
6) implementing an asset diversification program consistent with OCC guidelines on concentrations in commercial real estate lending and sound risk management practices and reducing Adams National’s exposure to concentrations of credit risk accordingly; 7) taking all necessary actions to protect the Adams National’s interest in its criticized assets and implementing a program to eliminate regulatory criticism of these assets; 8) engaging in an ongoing review of the bank’s criticized assets and
implementing procedures for the effective monitoring of the loan portfolio; 9) implementing a program to improve the management of the loan portfolio and to provide the Board with monthly written reports on credit quality; 10) employing a loan review consultant acceptable to the OCC to perform quarterly quality reviews of the bank’s assets; 11) revising the bank’s lending policy in accordance with OCC requirements; and 12) maintaining acceptable liquidity levels.





The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including quarterly progress reports to the OCC. The written agreement also requires the bank to establish a committee of the Board of Directors which will be responsible for overseeing
compliance with the written agreement. The Bank has taken steps to comply with the requirements of the written agreement, including hiring a new chief executive officer.  The written agreement with the OCC requires Adams National to maintain minimum capital ratios in excess of the ratios needed to be defined as well capitalized.  This requirement means that the bank may not be deemed to be well capitalized while the written agreement is in effect.  At December 31, 2009, Adams National’s
capital ratio levels met the regulatory capital levels required in the written agreement. For further details see Note 21 “Stockholders Equity”.


(continued)
 110
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  3 - RESTRICTIONS ON CASH AND DUE FROM BANKS





Included in cash and due from banks are certain interest bearing and non-interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance reserve requirements specified by the Federal Reserve Board of Governors. The balance requirement at December 31,
2009 and 2008 was approximately $10,935 and $5,548.





NOTE  4 –SECURITIES





Amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:





2009

Amortized Cost


Unrealized Gains


Unrealized Losses


Fair ValueAvailable for saleMortgage-backed securitiesU. S. agency MBS - residential

$
52,563


$
1,934


$
(15
)

$
54,482U. S. agency CMO’s


18,771



789



-



19,560Total mortgage-backed securities ofgovernment sponsored agencies


71,334



2,723



(15
)


74,042U. S. Treasury securities


1,000



5



-



1,005U. S. government sponsored entity securities


149,951



407



(291
)


150,067Obligations of states and politicalsubdivisions


10,195



175



(123
)


10,247Other securitiessubdivisions


5,323



322



(36
)


5,609Total available for sale

$
237,803


$
3,632


$
(465
)

$
240,970








2008

Amortized Cost


Unrealized Gains


Unrealized Losses


Fair ValueAvailable for saleU. S. Treasury securities

$
1,494


$
50


$
-


$
1,544U. S. government sponsored entity securities


96,154



1,018



(67
)


97,105Obligations of states and politicalsubdivisions


7,065



75



(10
)


7,130Mortgage-backed securities ofgovernment sponsored agencies


68,553



1,479



(70
)


69,962Total available for sale

$
173,266


$
2,622


$
(147
)

$
175,741





(continued)
 111
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  4 –SECURITIES (Continued)





The amortized cost and fair value of securities at December 31, 2009 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
ValueAvailable for saleDue in one year or less

$
3,107


$
3,146Due after one year through five years


118,091



118,505Due after five years through ten years


40,495



40,298Due after ten years


3,684



3,791Corporate preferred securities


1,092



1,188Mortgage-backed securities of government sponsored agencies


71,334



74,042Total available for sale

$
237,803


$
240,970





There were no sales of securities in 2009. Proceeds from sale of securities during 2008 and 2007 were $2,008 and $25.  A $93 gain was recognized from sales of securities in 2008 while no gain or loss was realized on the sale in 2007.





Securities with an approximate carrying value of $124,685 and $90,324 at December 31, 2009 and 2008 were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.





Securities with unrealized losses at year-end 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


TotalDescription of Securities

Fair Value


Unrealized Loss


Fair Value


Unrealized Loss


Fair Value


Unrealized LossU.S. government sponsored entity securities

$
52,300


$
(291
)

$
-


$
-


$
52,300


$
(291
)Obligations of states andpolitical subdivisions


3,439



(123
)


-



-



3,439



(123
)U.S agency MBS – residential


5,197



(15
)


-



-



5,197



(15
)Other securities


964



(36
)


-



-



964



(36
)Total temporarily impaired

$
61,900


$
(465
)

$
-


$
-


$
61,900


$
(465
)





(continued)
 112
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  4 –SECURITIES (Continued)





Securities with unrealized losses at year-end 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


TotalDescription of Securities

Fair Value


Unrealized Loss


Fair Value


Unrealized Loss


Fair Value


Unrealized LossU.S. government sponsored entity securities

$
12,475


$
(67
)

$
-


$
-


$
12,475


$
(67
)Obligations of states andpolitical subdivisions


871



(10
)


-



-



871



(10
)Mortgage-backed securitiesof governmentsponsoredagencies


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 entities.The unrealized losses at December
31, 2009 and December 31, 2008 are price changes resulting from changes in the interest rate environmentand are considered to be 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  5 - LOANS





Loans at year-end were as follows:





2009


2008Commercial, secured by real estate

$
304,607


$
133,742Commercial, other


76,140



61,655Real estate construction


51,637



26,182Residential real estate


211,552



185,536Agricultural


2,710



2,446Consumer and home equity


49,312



51,793Other


3,175



5,757$
699,133


$
467,111





(continued)
 113
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  5 – LOANS (Continued)





Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during 2009 and 2008.   Such related party loans are governed by federal banking regulations which require such loans to be made in the ordinary course of
business.





An analysis of the 2009 activity with respect to all director and executive officer loans is as follows (in thousands):





Balance, December 31, 2008

$
22,481Additions, including loans now meeting disclosure requirements


10,979Amounts collected and loans no longer meeting disclosure requirements


(17,407
)Balance, December 31, 2009

$
16,053





Activity in the allowance for loan losses was as follows:





2009


2008


2007Balance, beginning of year

$
8,544


$
6,497


$
6,661Balance of acquired subsidiaries


-



2,300



-Loans charged off


(2,437
)


(1,232
)


(758
)Recoveries


410



832



672Provision for loan losses


1,052



147



(78
)Balance, end of year

$
7,569


$
8,544


$
6,497





Impaired loans were as follows:





2009


2008


2007Impaired loans at year-end with an allowance

$
14,494


$
11,610


$
4,761Impaired loans at year-end with no allowance


49,370



0



0Amount of the allowance for loan losses allocated


1,279



2,208



1,482Average of impaired loans during the year


21,236



8,506



5,926Interest income recognized during impairment


1,339



795



495Cash-basis interest income recognized


1,305



793



495





(continued)
 114
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  5 – LOANS (Continued)





Nonperforming loans at year end were as follows:





2009


2008


2007Loans past due over 90 days still on accrual

$
489


$
625


$
987Non-accrual loans


46,299



6,943



3,157Restructured loans


11,974



1,203



1,489





Nonperforming loans include some impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.  Loan impairment is reported when full payment under the loan terms is not anticipated, which can include loans that are
current or less than 90 days past due.








NOTE 6 – PREMISES AND EQUIPMENT





Year-end premises and equipment were as follows:





2009


2008Land and improvements

$
3,496


$
2,497Buildings and leasehold improvements


11,816



9,536Construction in progress


-



77Furniture and equipment


7,302



8,70522,614



20,815Less: accumulated depreciation


(7,414
)


(9,448
)$
15,200


$
11,367





Operating Leases: The Company leases certain branch and other properties as well as some equipment under operating leases.  Some leases provide for periodic rate adjustments based on cost-of-living index changes. Rent expense, net of rental
income, was $506, $230, and $213 for 2009, 2008, and 2007.  Rent commitments, before considering renewal options that generally are present, were as follows:





2010

$
1,2652011


1,2492012


1,0342013


3162014 and thereafter


186$
4,050


(continued)
 115
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  7 – GOODWILL AND OTHER INTANGIBLE ASSETS





The change in the balance for goodwill during the year is as follows:





2009


2008


2007Beginning of year

$
28,543


$
15,816


$
15,816Acquired goodwill and other adjustments


181



12,727



-Impairment


-



-



-End of year

$
28,724


$
28,543


$
15,816





Acquired intangible assets at December 31, 2009 and 2008 were as follows.





2009


2008Gross Carrying
Amount


Accumulated Amortization


Gross Carrying
Amount


Accumulated AmortizationCore deposit intangible

$
3,347


$
(552
)

$
1,635


$
(204
)





Aggregate intangible amortization expense was $348 for 2009 and $204 for 2008 while none was recorded for the year 2007.





Estimated amortization expense for each of the next five years:





2010

$
5242011


4332012


3802013


3592014 and thereafter


1,099$
2,795





(continued)
 116
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  8 – DEPOSITS





At December 31, 2009 the scheduled maturities of time deposits are as follows:





2010

$
308,5492011


64,7582012


16,6952013


13,0012014 and thereafter


9,928$
412,931





Certain directors and executive officers of the Banks and companies in which they have beneficial ownership were deposit customers of the Banks during 2009 and 2008.  The balance of such deposits at December 31, 2009 and 2008 were approximately $16,427 and $18,013.








NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE





Securities sold under agreements to repurchase generally mature within one to ninety days from the transaction date.  Information concerning securities sold under agreements to repurchase is summarized as follows:





2009


2008Year-end balance

$
24,600


$
18,351Average balance during the year

$
15,714


$
17,133Average interest rate during the year


0.87
%


1.44
%Maximum month-end balance during the year

$
27,331


$
23,805Weighted average interest rate at year-end


0.72
%


0.83
%


(continued)
 117
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 10 – FEDERAL HOME LOAN BANK ADVANCES





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





At year-end, advances from these Federal Home Loan Banks were as follows:





2009


2008Payments due at maturity in May 2010 and March 2012, fixed rate at rates from 1.81% to 6.64%, averaging 3.12%

$
14,542


$
4,000Payments due monthly with maturities from November 2011 to July 2012, fixed rates from 4.10% to 4.40%, averaging 4.26%


395



607Overnight borrowed funds


-



3,000$
14,937


$
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 December 31, 2009 are as follows:





2010

$
4,4222011


4222012


10,0932013


-2014


-Thereafter


-$
14,937





(continued)
 118
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 11 – NOTES PAYABLE AND OTHER BORROWED FUNDS





On April 30, 2008, the Company executed and delivered to First Guaranty Bank of Hammond, Louisiana a Promissory Note and Business Loan Agreement dated April 30, 2008 for the principal amount of $11,550, bearing interest floating daily at the “Wall Street Journal” prime rate (the “Index”)
minus 1.00% and requiring 59 monthly principal payments of $50 and one final payment of $8.6 million due at maturity on April 30, 2013.  On December 31, 2009, the Company executed and delivered to First Guaranty Bank a modification agreement whereby the interest rate would be fixed at 3.96% through the remaining maturity of the note.  The note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a wholly owned subsidiary) under a Commercial Pledge Agreement dated April
30, 2008.  The proceeds of this note were used to fund the $9,000 of cash needed to purchase Traders Bankshares, Inc. and to refinance the remaining $2,550 balance of Premier’s outstanding note with First Guaranty Bank dated January 31, 2006. Premier’s chairman owns approximately 27.6% of the voting stock of First Guaranty Bank and is the chairman of its board of directors.  Premier’s board of directors reviewed the loan and authorized the Company to enter into the loan transaction.





On November 10, 2006, the Company executed and delivered to The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) a Term Note and Business Loan Agreement dated November 10, 2006 in the principal amount of $6,500, bearing interest floating daily at the “JP Morgan
Chase” prime rate minus 1.00% and requiring 83 monthly principal and interest payments of $100 and a final payment of any balance due at maturity on November 9, 2013. The note is secured by a pledge of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. (a wholly owned subsidiary) and Premier’s 100% interest in Farmers-Deposit Bank, Eminence, Kentucky (a wholly owned subsidiary) under a Stock Pledge and Security Agreement dated November 10, 2006.  On December 22, 2008,
the Company executed and delivered to Bankers’ Bank a modification agreement whereby the interest rate would not fall below 3.00% or exceed 6.00% for the remaining term of the Note.  The current interest rate on the Term Note is 3.00%.





(continued)
 119
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 11 – NOTES PAYABLE AND OTHER BORROWED FUNDS(Continued)





In addition to the $6,500 Term Note, Premier executed and delivered to the Bankers’ Bank a Promissory Note whereby Premier may request and receive monies from Bankers’ Bank from time to time.  On December 11, 2009, Premier executed and delivered to the Bankers’ Bank a Modification and
Extension Agreement and a fully revised Promissory Note whereby Premier may request and receive monies from Bankers’ Bank from time to time, but the aggregate outstanding principal balance under the Promissory Note at any time shall not exceed $4,500 principal amount.  The right to request and receive monies from Bankers’ Bank under the Promissory Note shall cease and terminate on December 11, 2010.  Any outstanding principal balance under this Promissory Note shall bear an annual
interest rate floating daily at the JP Morgan Chase Co. prime rate with an interest rate floor of 4.00%.  Interest on the Promissory Note shall be due and payable on the 11th day of each, March, June, September and December during the term of this Promissory Note, and at the maturity date thereof.  Any outstanding principal amount loaned to Premier under this Promissory Note, and not previously repaid, is due on December 11, 2010.  The Promissory Note is secured by the same collateral
as the $6,500 Term Note. At December 31, 2009, there was $2,400 outstanding principal balance on the Promissory Note.





Scheduled principal payments due on the borrowings subsequent to December 31, 2009 are as follows:





2010

$
4,1072011


1,7402012


1,7752013


8,4052014


-Thereafter


-$
16,027








(continued)
 120
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 12–INCOME TAXES





The components of the provision (benefit) for income taxes are as follows:





2009


2008


2007Current

$
1,727


$
2,747


$
2,822Deferred


1,327



718



746Change in valuation allowance


(120
)


284



(98
)Provision for income taxes

$
2,934


$
3,749


$
3,470





The Company’s deferred tax assets and liabilities at December 31 are shown below.





2009


2008Deferred tax assetsAllowance for loan losses

$
6,869


$
2,782Purchase accounting adjustments


5,065



-Net operating loss carryforward


4,307



2,584Write-downs of other real estate owned


555



23Taxable income on non-accrual loans


2,119



63Defined benefit pension plan


-



456Security writedown


266



-Accrued expenses


168



-Other


-



1Total deferred tax assets


19,349



5,909Deferred tax liabilitiesAmortization of intangibles

$
(3,522
)

$
(3,125
)Depreciation


(1,015
)


(435
)Federal Home Loan Bank dividends


(354
)


(355
)Deferred loan fees


(282
)


(255
)Purchase accounting adjustments


-



(169
)Unrealized gain on investment securities


(1,077
)


(842
)Other


(211
)


(194
)Total deferred tax liabilities


(6,461
)


(5,375
)Valuation allowance on deferred tax assets


(2,175
)


(721
)Net deferred taxes

$
10,713


$
(187
)





(continued)
 121
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 12–INCOME TAXES (Continued)





At December 31, 2009 the Company has federal net operating loss carryforwards of $9,246 and various state net operating loss carryforwards of $19,870 which begin to expire in 2022.  The deductibility of these net operating losses is limited under Internal Revenue Code Section 382.





A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character
in the future and in the appropriate taxing jurisdictions. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.





The Company maintains a valuation allowance on the West Virginia deferred tax assets, including the West Virginia state net operating loss carryforward of $15,307, as it does not anticipate generating enough taxable income in West Virginia to utilize the deferred tax assets.





An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows:





2009


2008


2007U.S. federal income tax rate

$
4,098



34.0
%

$
3,837



34.0
%

$
3,600



34.0
%Changes from the statutory rateBargain purchase gain recorded on
tax-exempt acquisition


(1,208
)


(10.0
)


-



-



-



-Tax-exempt interest income


(165
)


(1.4
)


(120
)


(1.1
)


(124
)


(1.2
)Non-deductible interest expense
related to carrying tax-exempt
interest earning assets


12



0.1



11



0.1



11



0.1Non-deductible stock compensationexpense


17



0.1



41



0.4



44



0.4Non-deductible acquisition expenses


172



1.4



-



-



-



-Tax credits, net


(49
)


(0.4
)


(49
)


(0.4
)


(2
)


(0.0
)Officer’s life insurance death benefit


-



-



-



-



(73
)


(0.6
)Other


57



0.5



29



0.2



14



0.1$
2,934



24.3
%

$
3,749



33.2
%

$
3,470



32.8
%








(continued)
 122
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 12–INCOME TAXES (Continued)





Unrecognized Tax Benefits: The Company does not have any beginning or ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.  There
were no interest and penalties recorded in the income statement or accrued for the year ended December 31, 2009, 2008 and 2007 related to unrecognized tax benefits.





The Company and its subsidiaries file a consolidated U.S. Corporation income tax return and a combined return in the state of West Virginia. The Company also files a corporate income tax return in the states of Kentucky and Maryland and the District of Columbia. The Company is no longer subject to examination by
taxing authorities for years before 2006.





NOTE 13 – EMPLOYEE BENEFIT PLANS





The Company has qualified profit sharing plans that cover substantially all employees. Contributions to the plans consist of a Company match and additional amounts at the discretion of the Company’s Board of Directors.  Total contributions to the plans were $320, $266 and $245 in 2009, 2008, and
2007.





(continued)
 123
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 14 – STOCK COMPENSATION EXPENSE





In 2002, the Company registered 200,000 shares of its common stock to be reserved for stock based incentive programs (“the 2002 Plan”).  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 February 18, 2009, 47,100 incentive stock options were granted out of the 2002 Plan at an exercise price of $6.55.  These options vest in three equal annual installments ending on February 18, 2012.   On February 20, 2008, 45,300 incentive stock options were granted out of the 2002 Plan
at an exercise price of $12.92, 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


2007Risk-free interest rate


2.74
%


3.50
%


4.78
%Expected option life (yrs)


10.00



7.00



5.00Expected stock price volatility


19.26
%


23.00
%


25.00
%Dividend yield


6.72
%


3.10
%


1.41
%Weighted average fair value ofoptions 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 dividend yield is estimated at the time of the option grant based upon Premier’s dividend rate and stock price at that time.





(continued)
 124
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 14 – STOCK COMPENSATION EXPENSE(Continued)





Compensation expense of $51, $120, and $130 was recorded for the years ended December 31, 2009, 2008, and 2007, respectively.





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 $22 at December 31, 2009. This unrecognized expense is expected to be recognized over the next 25 months based on the vesting periods
of the options.





Information related to the stock option plan during each year follows:





2009


2008


2007Intrinsic value of options exercised

$
-


$
-


$
3Cash received from option exercises


-



-



10Tax benefit realized from option exercises


-



-



1








A summary of the Company’s stock option activity is as follows:




----------2009----------

----------2008----------

----------2007----------Weighted
Average
Exercise





Weighted
Average
Exercise





Weighted
Average
ExerciseOptions


Price


Options


Price


Options


PriceOutstanding at beginning of year


181,916


$
12.47



150,249


$
12.65



120,248


$
12.25Grants


47,100



6.55



45,300



12.92



37,000



14.22Exercises


-



-



-



-



(1,000
)


10.85Forfeitures or expired


(16,567
)


12.25



(13,633
)


15.89



(5,999
)


14.60Outstanding at year-end


212,449


$
11.18



181,916


$
12.47



150,249


$
12.65Exercisable at year-end


127,630


$
12.27



106,433


$
11.59



84,096


$
11.31Weighted average remaining life


6.7







7.0







6.9Weighted average fair value of
options granted during the year

$
0.37






$
2.55






$
3.81





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


(continued)
 125
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 14 – STOCK COMPENSATION EXPENSE(Continued)








Additional information regarding stock options outstanding and exercisable at December 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



84,516


$
7.49


$
7



37,416



3.6


$
8.69


$
-$10.01 to $12.50



28,333



11.62



-



28,333



5.1



11.62



-$12.51 to $15.00



71,600



13.47



-



33,881



7.5



13.69



-$15.01 to $17.50



28,000



16.00



-



28,000



6.1



16.00



-Outstanding at Dec 31, 2009



212,449



11.18


$
7



127,630



5.5



12.27


$
-








NOTE 15 – ACQUIRED PENSION PLAN IN PROCESS OF LIQUIDATION





As part of the acquisition of Traders Bankshares, Inc. on April 30, 2008, Premier assumed the assets and liabilities of the Traders employee defined benefit pension plan.  The plan provided defined benefits based on years of service and final average salary.  Prior to the acquisition by Premier,
the plan benefits were frozen and a plan of termination had been submitted to the Internal Revenue Service (“IRS”).  Also, all the plan assets were reinvested into a money market account to preserve the principal balance for distribution upon termination.  The plan received termination approval in 2009.  All plan assets have been paid out to participants.








(continued)
 126
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 15 – ACQUIRED PENSION PLAN IN PROCESS OF LIQUIDATION(Continued)





The following table sets forth changes in obligations and plan assets of the defined benefit pension plan from the April 30, 2008 acquisition date through December 31, 2008 and for the year ended December 31, 2009:





2009


2008Change in Benefit ObligationBenefit Obligation, beginning of period

$
(3,413
)

$
(3,723
)Interest cost


-



(119
)Amendments


-



(6
)Actuarial loss


(139
)


(132
)Actual distributions


102



69Settlement


3,450



498Benefit Obligation , end of period

$
-


$
(3,413
)Change in Plan AssetsPlan Assets at fair value, beginning of period

$
2,155


$
2,685Actual return on Plan Assets


45



37Employer contribution


1,352



-Settlement


(3,450
)


(498
)Actual distributions


(102
)


(69
)Plan Assets at fair value, end of period

$
-


$
2,155Funded status at end of period

$
-


$
(1,258
)





The $87 loss recognized in accumulated other comprehensive income at December 31, 2008 consists of the net actuarial loss from May 1, 2008 through December 31, 2008.  This amount was included in the net periodic pension benefit expense during the 2009 fiscal year.  Since the pension benefit plan
was terminated before December 31, 2009, there are no longer any amounts included in accumulated other comprehensive income at December 31, 2009.





The accumulated benefit obligation (ABO) was $3,413 at year-end 2008.





The actuarial assumptions used to determine the pension benefit obligation at April 30, 2008 and December 31, 2008 follow:





Dec. 31, 2008


April 30, 2008Discount rate


4.27
%


4.27
%Rate of compensation increase


3.00
%


3.00
%


(continued)
 127
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 16 – RELATED PARTY TRANSACTIONS





During 2009, 2008 and 2007, the Company paid approximately $439, $218, and $231 for printing, supplies, statement rendering, furniture, and equipment to a company affiliated by common ownership.  The Company also paid another affiliate approximately $632, $533, and $459 in 2009, 2008 and 2007 to permit
the Company’s employees to participate in that entity’s employee medical benefit plan.





During 2009, 2008 and 2007, the Company paid approximately $52, $52, and $52 to lease its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia from River City Properties, LLC, an entity 12.5% owned by the Company’s Chairman of the Board.








NOTE 17 – 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 2009, 2008 and 2007 is presented below:





2009


2008


2007Basic earnings per shareIncome available to common stockholders

$
8,985


$
7,536


$
7,119Weighted average common shares outstanding


6,782



6,011



5,237Earnings per share

$
1.32


$
1.25


$
1.36Diluted earnings per shareIncome available to common stockholders

$
8,985


$
7,536


$
7,119Weighted average common shares outstanding


6,782



6,011



5,237Add dilutive effects of potential additional common stock


20



8



26Weighted average common and dilutive potential
Common shares outstanding


6,802



6,019



5,263Earnings per share assuming dilution

$
1.32


$
1.25


$
1.35





Stock options for 212,449, 153,133 and 42,500 shares of common stock were not considered in computing diluted earnings per share for 2009, 2008 and 2007 because they were antidilutive.





(continued)
 128
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  18 – 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 values:





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.





The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:





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). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities
are reviewed and incorporated into the calculations.





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


(continued)
 129
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  18 – 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
December 31, 2009 Using:Carrying Value


Quoted Prices in Active Markets for Identical Assets
(Level 1)


Significant Other Observable Inputs
(Level 2)


Significant Unobservable Inputs
(Level 3)Available for saleMortgage-backed securitiesU. S. agency MBS - residential

$
54,482


$
-


$
54,482


$
-U. S. agency CMO’s


19,560



-



19,560



-Total mortgage-backed securities ofgovernment sponsored agencies


74,042



-



74,042



-U. S. Treasury securities


1,005



-



1,005



-U. S. government sponsored entity securities


150,067



-



150,067



-Obligations of states and politicalsubdivisions


10,247



-



10,107



140Other securities


5,609



-



5,609



-Total available for sale

$
240,970


$
-


$
240,830


$
140





Fair Value Measurements at
December 31, 2008 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 saleU. S. Treasury securities

$
1,544


$
-


$
1,544


$
-U. S. government sponsored entity securities


97,105



-



97,105



-Mortgage-backed securities ofgovernment sponsored agencies


69,962



-



69,962



-Obligations of states and politicalsubdivisions


7,130



-



7,130



-Total available for sale

$
175,741


$
-


$
175,741


$
-


(continued)
 130
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  18 – 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 year ended December 31, 2009:





Securities Available-for-saleYear Ended
Dec. 31, 2009Balance of recurring Level 3 assets at beginning of period

$
-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


140Balance of recurring Level 3 assets at December 31, 2009

$
140





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 December 31, 2009 UsingDec 31, 2009


Quoted Prices in Active Markets for Identical Assets
(Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs
(Level 3)Assets:Impaired loans

$
13,215


$
-


$
-


$
13,215Other real estate owned


9,251



-



-



9,251





Fair Value Measurements at December 31, 2008 UsingDec. 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


$
-


$
-


$
9,402Other real estate owned


1,056



-



-



1,056





(continued)
 131
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE  18 – FAIR VALUE(Continued)





Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $14,494 with a valuation allowance of $1,279.  The change since year-end 2008 resulted in a net negative provision for loan losses of $929 for the twelve month
period.




The carrying amount and estimated fair values of financial instruments at year end were as follows:




2009


2008Carrying
Amount


Fair
Value


Carrying
Amount


Fair
ValueFinancial assetsCash and due from banks

$
61,611


$
61,611


$
22,148


$
22,148Federal funds sold


22,985



22,985



15,899



15,899Securities available for sale


240,970



240,970



175,741



175,741Loans held for sale


897



897



1,193



1,193Loans, net


691,564



691,708



458,567



465,488Federal Home Loan Bank and
Federal Reserve Bank stock


7,005



n/a



3,931



n/aInterest receivable


4,250



4,250



3,720



3,720Financial liabilitiesDeposits

$
(913,784
)

$
(917,859
)

$
(589,182
)

$
(592,658
)Securities sold under agreementsto repurchase


(24,600
)


(24,600
)


(18,351
)


(18,351
)Federal Home Loan Bank advances


(14,937
)


(15,028
)


(7,607
)


(7,860
)Other borrowed funds


(16,027
)


(15,984
)


(15,560
)


(15,660
)Interest payable


(1,037
)


(1,037
)


(1,054
)


(1,054
)





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


(continued)
 132
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK





The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers.  These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Banks use
the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments.  In addition, the Banks offer a service whereby deposit customers for a fee are permitted to overdraw their accounts up to a certain deminimus amount, also known as “bounce protection” or “overdraft protection”.  The aggregate unused portion of “overdraft protection” was $9,008 and $7,742 at December 31, 2009 and 2008.





At December 31, 2009 and 2008, the Banks had the following financial instruments whose approximate contract amounts represent credit risk:





2009


2008Standby letters of credit

$
5,890


$
1,411Commitments to extend creditFixed

$
23,865


$
12,674Variable


48,931



41,167





Standby letters of credit represent conditional commitments issued by the Banks to guarantee the performance of a third party.  The credit risk involved in issuing these letters of credit is essentially the same as the risk involved in extending loans to customers.  Collateral held varies but
primarily includes real estate and certificates of deposit.  Some letters of credit are unsecured.





Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Outstanding commitments are at current market rates.  Fixed rate loan commitments have interest rates ranging from 3.25% to 18.00%. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. The Banks evaluate each customer’s creditworthiness on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing properties.





(continued)
 133
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 20 - LEGAL PROCEEDINGS





Legal proceedings involving the Company and its subsidiaries periodically arise in the ordinary course of business, including claims by debtors and their related interests against the Company’s subsidiaries following initial collection proceedings. These legal proceedings sometimes can involve claims for
substantial damages.  At December 31, 2009 management is unaware of any legal proceedings for which the expected outcome would have a material adverse effect upon the consolidated financial statements of the Company.








NOTE 21 - STOCKHOLDERS’ EQUITY





The Company’s principal source of funds for dividend payments 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 2010 the Banks could, without prior approval, declare dividends to Premier of approximately $2.5 million plus any 2010 net profits retained to the date of the dividend declaration.





The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company’s 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 December 31, 2009 the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.





(continued)
 134
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)





Adams entered into an agreement with the OCC on October 1, 2008 restricting Adams from declaring or paying dividends, without prior approval from the OCC (See Note 2 above).  During 2009, Farmers Deposit Bank requested and received approval from its primary regulatory authority to
make a dividend payment to the Company in an amount that exceeded the retained net profits of the preceding two years.  As such, Farmers Deposit will be required to continue to request permission to pay any additional dividends to the Company for up to two years.





As of December 31, 2009, the most recent notification from each of the Banks’ primary Federal regulators categorized the subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action, except Adams.  To be categorized as well capitalized, the Banks must maintain
minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since that notification that management believes have changed the Banks’ categories.  Adams is subject to a written agreement with the OCC and is required to maintain minimum capital ratios in excess of the ratios required to be defined as well capitalized under the framework for prompt corrective action.  This requirement means that
the bank may not be deemed to be well capitalized while the written agreement is in effect.





(continued)
 135
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)





The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 2009 are presented in the table below.





To Be Well CapitalizedFor Capital


Under Prompt CorrectiveActual


Adequacy Purposes


Action Provisions2009

Amount


Ratio


Amount


Ratio


Amount


RatioTotal Capital (to Risk-Weighted Assets):Consolidated (1)

$
102,440



14.6
%

$
55,970



8
%

$
69,962



10
%Boone County Bank


19,358



23.6



6,568



8



8,211



10Citizens Deposit Bank


13,463



17.4



6,192



8



7,740



10Farmers Deposit Bank


6,594



15.9



3,321



8



4,151



10Ohio River Bank


8,142



15.6



4,172



8



5,215



10First Central Bank


11,464



12.4



7,403



8



9,254



10Traders Bank


15,534



16.6



7,472



8



9,340



10Adams National Bank (2)


25,195



12.3



16,436



8



20,545



10Consolidated Bank & Trust


6,571



11.9



4,432



8



5,539



10Tier I Capital (to Risk-Weighted Assets):Consolidated (1)

$
94,871



13.6
%

$
27,985



4
%

$
41,977



6
%Boone County Bank


18,327



22.3



3,284



4



4,926



6Citizens Deposit Bank


12,583



16.3



3,096



4



4,644



6Farmers Deposit Bank


6,061



14.6



1,660



4



2,491



6Ohio River Bank


7,585



14.6



2,086



4



3,129



6First Central Bank


10,432



11.3



3,702



4



5,553



6Traders Bank


14,356



15.4



3,736



4



5,604



6Adams National Bank (2)


25,097



12.2



8,218



4



12,327



6Consolidated Bank & Trust


6,518



11.8



2,216



4



3,324



6Tier I Capital (to Average Assets):Consolidated (1)

$
94,871



8.9
%

$
42,651



4
%

$
53,314



5
%Boone County Bank


18,327



11.2



6,552



4



8,190



5Citizens Deposit Bank


12,583



10.4



4,865



4



6,082



5Farmers Deposit Bank


6,061



10.1



2,402



4



3,003



5Ohio River Bank


7,585



8.3



3,675



4



4,594



5First Central Bank


10,432



8.7



4,819



4



6,024



5Traders Bank


14,356



9.4



6,117



4



7,647



5Adams National Bank (2)


25,097



9.0



11,131



4



13,914



5Consolidated Bank & Trust


6,518



7.9



3,283



4



4,104



5(1) Consolidated company is not subject to Prompt Corrective Action Provisions(2) Adams National Bank is not designated as well capitalized by its primary regulatory authority the OCC.





(continued)
 136
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)





The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 2008 are presented in the table below:





To Be Well CapitalizedFor Capital


Under Prompt CorrectiveActual


Adequacy Purposes


Action Provisions2008

Amount


Ratio


Amount


Ratio


Amount


RatioTotal Capital (to Risk-Weighted Assets):Consolidated (1)

$
66,556



15.3
%

$
34,882



8
%

$
43,602



10
%Boone County Bank


18,546



22.3



6,647



8



8,309



10Citizens Deposit Bank


13,487



17.5



6,157



8



7,697



10Farmers Deposit Bank


8,441



18.6



3,627



8



4,534



10Ohio River Bank


7,943



15.5



4,111



8



5,139



10First Central Bank


10,663



13.0



6,544



8



8,180



10Traders Bank


15,584



16.1



7,763



8



9,704



10Tier I Capital (to Risk-Weighted Assets):Consolidated (1)

$
61,070



14.0
%

$
17,441



4
%

$
26,161



6
%Boone County Bank


17,503



21.1



3,323



4



4,985



6Citizens Deposit Bank


12,526



16.3



3,079



4



4,618



6Farmers Deposit Bank


7,856



17.3



1,813



4



2,720



6Ohio River Bank


7,419



14.4



2,056



4



3,083



6First Central Bank


9,773



12.0



3,272



4



4,908



6Traders Bank


14,357



14.8



3,882



4



5,822



6Tier I Capital (to Average Assets):Consolidated (1)

$
61,070



8.7
%

$
28,114



4
%

$
35,143



5
%Boone County Bank


17,503



11.4



6,163



4



7,703



5Citizens Deposit Bank


12,526



10.1



4,983



4



6,229



5Farmers Deposit Bank


7,856



12.6



2,496



4



3,120



5Ohio River Bank


7,419



8.1



3,687



4



4,609



5First Central Bank


9,773



8.8



4,432



4



5,540



5Traders Bank


14,357



9.1



6,318



4



7,897



5(1) Consolidated company is not subject to Prompt Corrective Action Provisions


(continued)
 137
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS





CONDENSED BALANCE SHEETSDecember 312009


2008ASSETSCash

$
6,829


$
4,659Investment in subsidiaries


137,369



100,494Premises and equipment


384



437Other assets


433



231Total assets

$
145,015


$
105,821LIABILITIES AND STOCKHOLDERS’ EQUITYOther liabilities

$
432


$
839Other borrowed funds


16,027



15,560Total liabilities


16,459



16,399Stockholders’ equityPreferred stock


21,705



-Common stock


71,412



60,259Retained earnings


33,349



27,346Accumulated other comprehensive income


2,090



1,547Total stockholders’ equity


128,556



89,422Total liabilities and stockholders’ equity

$
145,015


$
105,821











(continued)
 138
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS(Continued)





Condensed Statement of OperationsYears Ended December 312009


2008


2007IncomeDividends from subsidiaries

$
7,730


$
7,395


$
11,085Interest and dividend income


47



62



41Gain on bargain purchase of subsidiary


3,552



-



-Other income


801



648



648Total income


12,130



8,105



11,774ExpensesInterest expense


488



590



769Salaries and employee benefits


1,558



1,448



1,337Professional fees


563



362



136Other expenses


855



569



497Total expenses


3,464



2,969



2,739Income before income taxes
and equity in undistributed income of subsidiaries


8,666



5,136



9,035Income tax (benefit)


(838
)


(907
)


(837
)Income before equity in undistributed income of subsidiaries


9,504



6,043



9,872Equity in undistributed income (excess distributions)
of subsidiaries


(386
)


1,493



(2,753
)Net income

$
9,118


$
7,536


$
7,119








(continued)
 139
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS(Continued)





Condensed Statement of Cash FlowsYears Ended December 312009


2008


2007Cash flows from operating activitiesNet income

$
9,118


$
7,536


$
7,119Adjustments to reconcile net income to
net cash from operating activitiesDepreciation


71



95



97Stock compensation expense


51



120



130Gain from sales of assets


-



-



(5
)Gain on bargain purchase


(3,552
)


-



-Dividends in excess of net income of subsidiaries


386



-



2,753Equity in undistributed earnings of subsidiaries


-



(1,493
)


-Change in other assets


(203
)


(52
)


324Change in other liabilities


(406
)


85



(141
)Net cash from operating activities


5,465



6,291



10,277Cash flows from investing activitiesPurchases of subsidiaries


-



(14,300
)


-Additional investments in subsidiaries


(22,876
)


-



-Proceeds from sales of assets, net of purchases


(23
)


(31
)


(33
)Net cash from investing activities


(22,899
)


(14,331
)


(33
)Cash flows from financing activitiesCash dividends on preferred stock


(133
)


-



-Cash dividends paid to shareholders


(2,982
)


(2,634
)


(2,095
)Issuance of common stock


-



-



10Issuance of preferred stock


22,252



-



-Proceeds from borrowings


2,400



11,550



-Payments on other borrowed funds


(1,933
)


(4,075
)


(3,863
)Net cash from financing activities


19,604



4,841



(5,948
)Net change in cash and cash equivalents


2,170



(3,199
)


4,296Cash and cash equivalents at beginning of year


4,659



7,858



3,562Cash and cash equivalents at end of year

$
6,829


$
4,659


$
7,858





(continued)
 140
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)




Interest


Net Interest


Net


Earnings Per ShareIncome


Income


Income


Basic


Diluted2009First Quarter

$
9,136


$
6,558


$
1,229


$
0.19


$
0.19Second Quarter


9,120



6,662



1,355



0.21



0.21Third Quarter


9,114



6,768



1,502



0.23



0.23Fourth Quarter


13,857



11,095



5,032



0.62



0.612008First Quarter

$
8,427


$
5,594


$
1,774


$
0.34


$
0.34Second Quarter


9,433



6,449



1,930



0.32



0.32Third Quarter


10,276



7,177



1,930



0.30



0.30Fourth Quarter


9,708



6,815



1,902



0.30



0.30





In 2009, interest income increased significantly in the fourth due to the additional earning assets of Adams and Consolidated Bank & Trust Company (CB&T) acquired via the purchase of Abigail Adams National Bancorp, Inc. on October 1, 2009.  The increase in interest income resulted in increases
in net interest income and net income in 2009.  During the first three quarters of 2009, net interest income increased largely due to interest expense savings from continually lower market interest rates related to time deposits.  The increased net interest income combined with lower non-interest expenses to result in progressively higher quarterly net income and earnings per share.





In 2008, interest income increased significantly in the second quarter and further still in the third quarter largely due to the additional earning assets acquired via the purchases of Citizens First and Traders on April 30, 2008.  The increase in interest income was tempered somewhat in the fourth quarter
due to declining yields on loans and federal funds sold.  The increases in interest income resulted in increases in net interest income and net income in 2008.  In contrast to the increases in net income, earnings per share decreased in the second and third quarters of 2008 due to the additional shares issued to acquire Citizens First and Traders on April 30, 2008.











(continued)
 141
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 24- ACQUISITIONS





At the close of business on April 30, 2008, the Company completed its acquisition of Traders Bankshares, Inc. (“Traders”), a $108 million bank holding company headquartered in Spencer, West Virginia.  Under terms of the definitive agreement of merger dated November 27, 2007, each share of
Traders common stock was entitled to merger consideration of $50.00 cash and 3.75 shares of Premier common stock.  Premier issued approximately 675,000 shares of its common stock and paid in total $9.0 million in cash to the shareholders of Traders.  The cash portion of the merger consideration was funded by proceeds from a borrowing from First Guaranty Bank more fully described in Note 11.  The value of the transaction is approximately $18.1 million.  The
acquisition of Traders afforded Premier the opportunity to expand its presence in Jackson County, West Virginia and enter new adjoining markets in Roane and Wood Counties, West Virginia.  The purchase price resulted in approximately $7.3 million in goodwill and $1.5 million in core deposit intangible, none of which is deductible for tax purposes.  The purchase price resulted in goodwill as the Company believes there are cost saving synergies to be obtained and long-term expansion opportunities
in the acquired markets beyond the existing customer base.  The core deposit intangible is amortized using an accelerated method.





Also at the close of business on April 30, 2008, the Company completed its acquisition of Citizens First Bank, Inc. (“Citizens First”) a $62 million bank headquartered in Ravenswood, West Virginia.  Under terms of the definitive agreement of merger dated October 24, 2007, each share of Citizens
First common stock was entitled to merger consideration of $13.25 cash and 1.20 shares of Premier common stock.  Premier issued approximately 480,000 shares of its common stock and paid in total $5.3 million in cash to the shareholders of Citizens First.  The cash portion of the merger consideration was funded from cash on hand of Premier.  The value of the transaction is approximately $11.7 million.  The acquisition of Citizens First afforded Premier the opportunity to
enter new markets in Jackson County, West Virginia.  The purchase price resulted in approximately $5.4 million in goodwill and $169,000 in core deposit intangible, none of which is deductible for tax purposes.  The purchase price resulted in goodwill as the Company believes there are long-term expansion opportunities in the acquired markets beyond the existing customer base.  The core deposit intangible is amortized using an accelerated method. On October 24, 2008, Citizens
First Bank was merged into Traders Bank, Inc.


(continued)
 142
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 24- ACQUISITIONS(Continued)





At the open of business on October 1, 2009, the Company completed its acquisition of Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a two bank holding company with $369 million of total assets with locations in and around Washington, DC and Richmond, Virginia.  Under terms of the
definitive agreement of merger dated December 31, 2008, each share of Abigail Adams common stock was entitled to merger consideration of 0.4461 shares of Premier common stock.  Premier issued approximately 1,545,000 shares of its common stock to the shareholders of Abigail Adams.  The value of the transaction totaled $10,290 based upon the closing price of Premier common stock on the day before closing the acquisition.  The estimated fair value of the net assets acquired totaled
$13,842.  Under new accounting guidance for business combinations adopted by the Premier on January 1, 2009, the difference between the value of the stock issued and the fair value of the net assets acquired resulted in a bargain purchase gain of $3,552.  The acquisition of Abigail Adams afforded Premier the opportunity to utilize its management’s experience in rehabilitating troubled financial institutions and expand the franchise into new markets in and around Washington, DC and Richmond,
Virginia.  Furthermore, the increase in the size of the total franchise will allow Premier to market its community style banking to attract larger commercial customers within its existing markets via expanded internal loan participations.  The purchase price resulted in approximately $1,172 in core deposit intangible, none of which is deductible for tax purposes.  The core deposit intangible will be amortized using an accelerated method.  Purchase accounting adjustments
to the fair value of the net assets acquired are subject to refinement as management finalizes the calculations.





(continued)
 143
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 24- ACQUISITIONS(Continued)





Net assets acquired via each transaction are shown in the table below:





Abigail Adams


Citizens First


TradersCash and due from banks

$
12,584


$
2,300


$
3,285Federal funds sold


1,938



8,394



2,448Securities available for sale


65,706



4,097



40,643Loans, net


254,664



44,773



50,551Goodwill and other intangible assets


1,712



5,580



8,752Other assets


26,453



2,904



6,809Total assets acquired


363,057



68,048



112,488Deposits


(298,849
)


(56,020
)


(92,807
)Repurchase agreements


(16,433
)


-



-FHLB borrowings


(14,054
)


-



-Other borrowings


(17,650
)


-



-Other liabilities


(2,229
)


(328
)


(1,541
)Total liabilities assumed


(349,215
)


(56,348
)


(94,348
)Net assets acquired

$
13,842


$
11,700


$
18,140





(continued)
 144
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 24- ACQUISITIONS(Continued)





The results of operations of Citizens First and Traders are included in Premier’s consolidated statements of income beginning as of the April 30, 2008 acquisition date.  The results of operations of Abigail Adams are included in Premier’s consolidated statements of income beginning as of the
October 1, 2009 acquisition date.  The following table presents pro forma condensed income statements as if all three mergers had occurred at the beginning of each of the two periods presented.  Since participation in the TARP Capital Purchase Program (see Note 25 below) was a condition precedent to the completion of the Abigail Adams merger, pro forma Series A Preferred Stock dividends are included for each of the two periods presented.




(Unaudited)2009


2008Interest income

$
57,507


$
68,604Interest expense


13,600



21,706Net interest income


43,907



46,898Provision for loan losses


2,347



11,969Net interest income after provision


41,560



34,929Non-interest income


10,419



6,530Non-interest expense


41,007



38,982Income before income taxes


10,972



2,477Income tax expense


2,404



104Net income


8,568



2,373Dividends and discount on preferred stock


1,211



1,211Net income allocable to common stockholders

$
7,357


$
1,162Basic earnings per share

$
0.99


$
0.14Diluted earnings per share


0.99



0.14











(continued)
 145
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 25 – PREFERRED STOCK





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





Under standardized TARP Capital Purchase Program terms, cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum until November 14, 2014, and at a rate of 9% per annum thereafter.  These dividends will be paid only if, as and when declared
by Premier’s Board of Directors.  The Series A Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of Premier.  Subject to the approval of the Appropriate Federal Banking Agency (as defined in the Securities Purchase Agreement, which for Premier is the Board of Governors of the Federal Reserve System), the Series A Preferred
Stock is redeemable at the option of Premier at 100% of its liquidation preference plus accrued and unpaid dividends, without penalty, delay or the need to raise additional replacement capital.


(continued)
 146
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 25- PREFERRED STOCK(Continued)





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





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





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





The Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”). In this connection, as a condition to the closing of the transaction, the Company’s Senior Executive Officers (as defined
in the Purchase Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the U.S. Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the TARP Capital Purchase Program and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the
period the U.S. Treasury owns the Preferred Stock of the Company; and (ii) entered into a letter with the Company amending the Benefit Plans with respect to such Senior Executive Officers as may be necessary, during the period that the Treasury owns the Preferred Stock of the Company, as necessary to comply with Section 111(b) of the EESA.


(continued)
 147
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2009, 2008, and 2007


(Dollars in Thousands, Except Per Share Data)








NOTE 25- PREFERRED STOCK(Continued)





The American Recovery and Reinvestment Act of 2009 (“ARRA”) passed by the United States Congress and signed by the President on February 17, 2009, provides that the U.S. Treasury, subject to consultation with the Appropriate Federal Banking Agency, must permit a TARP recipient to repay any assistance
previously provided under TARP, without regard to whether the TARP recipient has replaced those funds from any other source or to any waiting period.  As a result, subject to consultation with the Federal Reserve Board, the U.S. Treasury must permit Premier to redeem the Series A Preferred Stock at the appropriate redemption price without regard to whether the redemption price is to be paid from proceeds of a qualified equity offering or any other source or when the redemption date occurs.  If
the Series A Preferred Stock were redeemed, Premier has the right to repurchase the Warrant at its appraised value.  If Premier chooses not to repurchase the Warrant, the U.S. Treasury must liquidate the related Warrant at the current market price.





148
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure





There have been no changes in or disagreements with accountants on accounting or financial disclosure matters.





Item 9A(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 annual 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 annual 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 December 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 December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.




This 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.





149
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








/s/ Robert W. Walker

/s/ Brien M. ChaseRobert W. Walker, President and

Brien M. Chase, Senior Vice PresidentChief Executive Officer

and Chief Financial OfficerDate:  March 27, 2010

Date:  March 27, 2010





C.         Changes in Internal Controls over Financial Reporting




There were no changes in internal controls over financial reporting during the fourth 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.





Item 9B.  Other Information





None





150
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








PART III




Item 10, 11, 12, 13 and 14.  Directors, Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and Director Independence; and Principal Accountant Fees and Services







The information required by these Items is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required
information contained in the Company's proxy statement is incorporated herein by reference.








151
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








PART IV





Item 15.  Exhibits and Financial Statement Schedules





(a)           The following documents are filed as part of this report:





1.           Financial Statements:





2.           Financial Statement Schedules:





No financial statement schedules have been included as part of this report because they are either not required or the information is otherwise included.





3.           List of Exhibits:





The following is a list of exhibits required by Item 601 of Regulation S-K and by paragraph (c) of this Item 14.





Exhibit
Number

Description of Document2.1

Definitive Merger Agreement between Premier Financial Bancorp, Inc. and Citizens First Bank, Inc. dated October 24, 2007, filed as Exhibit 10.1 to form 8-K filed on October 25, 2007 is incorporated herein by reference.2.2

Definitive Merger Agreement between Premier Financial Bancorp, Inc. and Traders Bankshares, Inc. dated November 27, 2007, filed as Exhibit 10.1 to form 8-K filed on November 28, 2007 is incorporated herein by reference.2.3

Definitive Merger Agreement between Premier Financial Bancorp, Inc. and Abigail Adams National Bancorp, Inc. dated December 30, 2008, filed as Exhibit 2.1 to form 8-K filed on January 2, 2009 is incorporated herein by reference.3.1(a)

Form of Articles of Incorporation of registrant (included as Exhibit 3.1 to registrant’s Registration Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated herein by reference).3.1(b)

Form of Articles of Amendment to Articles of Incorporation effective March 15, 1996 re: amendment to Article IV (included as Exhibit 3.2 to registrant’s Amendment No. 1 to Registration Statement on Form S-1, Registration No. 333-1702, filed on March 25, 1996 with the Commission and incorporated herein by reference.3.1(c)

Articles of Amendment to Articles of Incorporation effective September 3, 2009 re: increase in authorized common shares (included as Exhibit 3.1 to Form 8-K filed on September 9, 2009) is incorporated herein by reference.


152
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Exhibit
Number

Description of Document3.1(d)

Articles of Amendment to Articles of Incorporation effective September 29, 2009 evidencing adoption of amendments by the Board of Directors of registrant to Article IV of Articles of Incorporation to establish express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of registrant
(included as Exhibit 3.1(i) to Form 8-K filed on October 2, 2009) is incorporated herein by reference.3.1(e)

Articles of Incorporation of registrant (reflecting amendments through September 29, 2009) [For SEC reporting compliance purposes only – not filed with Kentucky Secretary of State].3.2

Bylaws of registrant, as amended through September 23, 2009 (filed as Exhibit 3.1(ii)) to Form 8-K filed September 23, 2009 is incorporated herein by reference.4.1

Letter Agreement, dated October 2, 2009, including Securities Purchase Agreement Standard Terms attached thereto as Exhibit A, between registrant and the United States Department of the Treasury (filed as Exhibit 10.1 to Form 8-K filed October 7, 2009) is incorporated herein by reference.  [NOTE:  Annex
A to Securities Purchase Agreement is not included herewith; filed as Exhibit 3.1(i) to Current Report on Form 8-K filed by registrant on October 2, 2009 and incorporated herein by reference.]4.2

Warrant to purchase 628,588 Shares of Common Stock (common shares) of registrant issued to the United States Department of the Treasury on October 2, 2009 (filed as Exhibit 4.1 to Form 8-K filed October 7, 2009) is incorporated herein by reference.*** 10.1

Premier Financial Bancorp, Inc.'s 2002 Employee Stock Ownership Incentive Plan, filed as Annex A to definitive proxy statement dated May 17, 2002, filed on April 30, 2002 with the Commission, is incorporated herein by reference.*** 10.2

Form of Stock Option Agreement pursuant to 2002 Employee Stock Ownership Incentive Plan, filed as Exhibit 10.1 to form 8-K filed January 24, 2005, is incorporated herein by reference.10.3

Premier Financial Bancorp, Inc. written agreement with the Federal Reserve Bank of Cleveland dated January 29, 2003, filed as Exhibit 10.4 to form 10-K filed on March 27, 2003, is incorporated herein by reference.10.4

Premier Financial Bancorp, Inc. contract with Fiserv Solutions, Inc. dated December 20, 2004, filed as Exhibit 10 to form 8-K filed December 23, 2004, is incorporated herein by reference.10.5

Loan Agreement between Premier Financial Bancorp, Inc. and The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed on November 10, 2006, is incorporated herein by reference.10.6

Term Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.2 to form 8-K filed on November 10, 2006, is incorporated herein by reference.


153
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009











Exhibit
Number

Description of Document10.7

Promissory Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.3to form    8-K filed on November 10, 2006, is incorporated herein by reference.10.8

Stock Pledge and Security Agreement between Premier Financial Bancorp, Inc. and The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.4 to form 8-K filed on November 10, 2006, is incorporated herein by reference.10.9

Loan Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.1 to form 8-K filed May 1, 2008, is incorporated herein by reference.10.10

Promissory Note to First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.2 to form 8-K filed May 1, 2008, is incorporated herein by reference.10.11

Collateral Agreement with First Guaranty Bank, Hammond Louisiana, filed as Exhibit 10.8 to form 10-K filed March 30, 2006, is incorporated herein by reference.10.12

Loan Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed November 10, 2008, is incorporated herein by reference.10.13

Loan Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed December 23, 2008, is incorporated herein by reference.*** 10.14

Letter Agreement between registrant and Robert W. Walker, executed on September 22, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(a) to Form 8-K filed October 7, 2009) is incorporated herein by reference.*** 10.15

Letter Agreement between registrant and Brien M. Chase, executed on September 22, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(b) to Form 8-K filed October 7, 2009) is incorporated herein by reference.*** 10.16

Letter Agreement between registrant and Dennis J. Klingensmith, executed on September 25, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(c) to Form 8-K filed October 7, 2009) is incorporated herein by reference.*** 10.17

Letter Agreement between registrant and Michael R. Mineer, executed on September 25, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(d) to Form 8-K filed October 7, 2009) is incorporated herein by reference.*** 10.18

Letter Agreement between registrant and Duane K. Bickings, executed on September 22, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(e) to Form 8-K filed October 7, 2009) is incorporated herein by reference.10.19

Loan Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed December 15, 2009, is incorporated herein by reference.10.20

Promissory Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.2 to form    8-K filed on December 15, 2009, is incorporated herein by reference.


154
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Exhibit
Number

Description of Document10.21

Change in Terms Agreement with First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.1 to form 8-K filed January 4, 2010, is incorporated herein by reference.10.22

Loan Agreement between Premier Financial Bancorp, Inc. and First Sentry Bank, Huntington, West Virginia, filed as Exhibit 10.1 to form 8-K filed January 6, 2010, is incorporated herein by reference.10.23

Promissory Note to First Sentry Bank filed as Exhibit 10.2 to form 8-K filed January 6, 2010, is incorporated herein by reference.10.24

Commercial Pledge Agreement between Premier Financial Bancorp, Inc. and First Sentry Bank, Huntington, West Virginia filed as Exhibit 10.3 to form 8-K filed January 6, 2010, is incorporated herein by reference.10.25

Loan Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.1 to form 8-K filed January 7, 2010, is incorporated herein by reference.10.26

Promissory Note to First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.2 to form 8-K filed January 7, 2010, is incorporated herein by reference.10.27

Commercial Pledge Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank, Hammond, Louisiana filed as Exhibit 10.3 to form 8-K filed January 7, 2010, is incorporated herein by reference.14.1

Premier Financial Bancorp, Inc. Code of Ethics for the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, filed as Exhibit 14.1 to form 10-K filed on April 14, 2004, is incorporated herein by reference.14.2

Premier Financial Bancorp, Inc. Code of Business Conduct and Ethics, filed as Exhibit 14.2 to form 10-K filed on April 14, 2004, is incorporated herein by reference.21

Subsidiaries of registrant23

Consent of Independent Registered Public Accounting Firm31.1

Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Robert W. Walker31.2

Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Brien M. Chase32

Robert W. Walker and Brien M. Chase Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 2002.99.1

Certification Pursuant to Section 111(B)(4) of the Emergency Economic Stabilization Act of 2008 and 31 CFR Section 30.15 [Principal Executive Officer].99.2

Certification Pursuant to Section 111(B)(4) of the Emergency Economic Stabilization Act of 2008 and 31 CFR Section 30.15 [Principal Financial Officer].*** Denotes executive compensation plans and arrangements.


155
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








SIGNATURES





Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





PREMIER FINANCIAL BANCORP, INC.By:  /s/ Robert W. Walker, PresidentRobert W. Walker, PresidentDate:  March 30, 2010





156
 Table of Contents


PREMIER FINANCIAL BANCORP, INC.


FORM 10-K


December 31, 2009








Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.





/s/ Robert W. Walker
Principal Executive and Director
March 30, 2010Robert W. Walker/s/ Brien M. Chase
Principal Financial and Accounting
March 30, 2010Brien M. Chase
Officer/s/ Toney K. Adkins
Director
March 17, 2010Toney K. Adkins/s/ Hosmer A. Brown, III
Director
March 29, 2010Hosmer A. Brown, III/s/ Edsel Burns
Director
March 17, 2010Edsel Burns/s/ E. V. Holder, Jr.
Director
March 17, 2010E. V. Holder, Jr./s/ Keith F. Molihan
Director
March 17, 2010Keith F. Molihan/s/ Marshall T. Reynolds
Chairman of the Board
March 17, 2010Marshall T. Reynolds/s/ Neal Scaggs
Director
March 17, 2010Neal Scaggs/s/ Thomas W. Wright
Director
March 17, 2010Thomas W. Wright







157