UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September 30, 2017~~March 31, 2020

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

For the transition period from ___________ to ___________

Commission file number 000-20908

PREMIER FINANCIAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky		61-1206757
(State or other jurisdiction of incorporation organization)		(I.R.S. Employer Identification No.)

2883 Fifth Avenue Huntington, West Virginia		25702
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number (304) 525-1600

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

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

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

Large accelerated filer □		Accelerated filer ☑
Non-accelerated filer □ ~~(Do not check if smaller reporting company~~)	Smaller reporting company ☑	Emerging growth company □

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

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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	PFBI	The Nasdaq Stock Market LLC

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

Common stock, no par value, – ~~10,668,589~~14,662,257 shares outstanding at ~~November 1, 2017~~April 29, 2020

PREMIER FINANCIAL BANCORP, INC.

~~SEPTEMBER 30, 2017~~MARCH 31, 2020

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements		3
Item 2 – ~~Management's~~Management’s Discussion and Analysis		40
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	53	51
Item 4 – Controls and Procedures	53	51
Part II - Other Information	54	52
Item 1 – Legal Proceedings	54	52
Item 1A – Risk Factors	54	52
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	54	52
Item 3 – Defaults Upon Senior Securities	54	52
Item 4 – Mine Safety Disclosures	54	52
Item 5 – Other Information	54	52
Item 6 – Exhibits	54	53
Signatures	55	54

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PREMIER FINANCIAL BANCORP, INC.

~~SEPTEMBER 30, 2017~~MARCH 31, 2020

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, ~~2016~~2019 for further information in this regard.

Index to consolidated financial statements:

Consolidated Balance Sheets		4
Consolidated Statements of Income		5
Consolidated Statements of Comprehensive Income		6
Consolidated Statement of Changes in ~~Stockholders'~~Stockholders’ Equity	6	7
Consolidated Statements of Cash Flows	7	8
Notes to Consolidated Financial Statements		9

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

~~SEPTEMBER 30, 2017~~MARCH 31, 2020 AND DECEMBER 31, ~~2016~~2019

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)
September 30, December 31,
2017 2016
ASSETS
Cash and due from banks $ 41,831 $ 41,443
Interest bearing bank balances 21,681 55,720
Federal funds sold 11,632 7,555
Cash and cash equivalents 75,144 104,718
Time deposits with other banks 2,582 2,332
Securities available for sale 289,203 288,607
Loans 1,055,324 1,024,823
Allowance for loan losses (12,359 ) (10,836 )
Net loans 1,042,965 1,013,987
Federal Home Loan Bank stock, at cost 3,185 3,200
Premises and equipment, net 23,504 24,224
Real estate and other property acquired through foreclosure 11,458 12,665
Interest receivable 4,060 3,862
Goodwill 35,371 35,371
Other intangible assets 3,581 4,349
Other assets 1,622 2,878
Total assets $ 1,492,675 $ 1,496,193

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 327,965 $ 319,618
Time deposits, $250,000 and over 64,919 66,378
Other interest bearing 876,500 893,390
Total deposits 1,269,384 1,279,386
Securities sold under agreements to repurchase 25,116 23,820
Other borrowed funds 6,000 8,859
Subordinated debt 5,368 5,343
Interest payable 358 364
Other liabilities 3,192 4,237
Total liabilities 1,309,418 1,322,009

Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 10,668,589 shares issued and outstanding at September 30, 2017, and 10,640,735 shares issued and outstanding at December 31, 2016 110,353 109,911
Retained earnings 72,449 66,195
Accumulated other comprehensive income (loss) 455 (1,922 )
Total stockholders' equity 183,257 174,184
Total liabilities and stockholders' equity $ 1,492,675 $ 1,496,193

	(UNAUDITED)
	March 31, 2020			December 31, 2019
ASSETS
Cash and due from banks	$	23,455		$	23,091
Interest bearing bank balances		37,894			65,465
Federal funds sold		8,134			5,902
Cash and cash equivalents		69,483			94,458
Time deposits with other banks		598			598
Securities available for sale		404,478			390,754
Loans		1,185,043			1,195,295
Allowance for loan losses		(13,856	)		(13,542	)
Net loans		1,171,187			1,181,753
Federal Home Loan Bank stock, at cost		4,314			4,450
Premises and equipment, net		37,148			37,257
Real estate acquired through foreclosure		12,709			12,242
Interest receivable		5,192			4,699
Goodwill		47,640			47,640
Other intangible assets		5,134			5,376
Other assets		1,350			1,783
Total assets	$	1,759,233		$	1,781,010

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	356,220		$	367,870
Time deposits, $250,000 and over		98,460			100,638
Other interest bearing		1,007,700			1,027,245
Total deposits		1,462,380			1,495,753
Securities sold under agreements to repurchase		19,694			20,428
FHLB advances		7,986			6,375
Subordinated debt		5,445			5,436
Interest payable		865			912
Other liabilities		13,938			11,865
Total liabilities		1,510,308			1,540,769

Stockholders' equity
Common stock, no par value; 30,000,000 shares authorized; 14,662,257 shares issued and outstanding at March 31, 2020, and 14,657,432 shares issued and outstanding at December 31, 2019		133,866			133,795
Retained earnings		105,911			102,743
Accumulated other comprehensive income		9,148			3,703
Total stockholders' equity		248,925			240,241
Total liabilities and stockholders' equity	$	1,759,233		$	1,781,010

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2020 AND ~~2016~~2019

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016
Interest income
Loans, including fees $ 13,469 $ 13,375 $ 41,667 $ 39,084
Securities available for sale
Taxable 1,427 1,285 4,236 4,075
Tax-exempt 62 82 198 254
Federal funds sold and other 176 123 515 328
Total interest income 15,134 14,865 46,616 43,741

Interest expense
Deposits 954 965 2,854 2,917
Repurchase agreements and other 7 10 21 28
FHLB advances - 10 - 32
Other borrowings 68 101 234 321
Subordinated debt 74 63 218 181
Total interest expense 1,103 1,149 3,327 3,479

Net interest income 14,031 13,716 43,289 40,262
Provision for loan losses 891 312 2,033 1,436
Net interest income after provision for loan losses 13,140 13,404 41,256 38,826

Non-interest income
Service charges on deposit accounts 1,136 1,031 3,201 2,975
Electronic banking income 811 791 2,424 2,355
Secondary market mortgage income 67 64 173 163
Other 163 176 530 571
2,177 2,062 6,328 6,064
Non-interest expenses
Salaries and employee benefits 4,760 4,817 14,703 15,025
Occupancy and equipment expenses 1,511 1,635 4,481 4,697
Outside data processing 1,344 1,300 4,019 3,935
Professional fees 196 167 721 500
Taxes, other than payroll, property and income 189 156 589 473
Write-downs, expenses, sales of other real estate owned, net 346 765 1,139 1,402
Amortization of intangibles 252 278 768 862
FDIC insurance 159 278 506 752
Other expenses 1,168 1,212 3,401 3,674
9,925 10,608 30,327 31,320
Income before income taxes 5,392 4,858 17,257 13,570
Provision for income taxes 1,925 1,694 6,207 4,803

Net income $ 3,467 $ 3,164 $ 11,050 $ 8,767

Net income per share:
Basic $ 0.33 $ 0.30 $ 1.04 $ 0.83
Diluted 0.32 0.30 1.03 0.83

	Three Months Ended March 31,
	2020			2019
Interest income
Loans, including fees	$	15,754		$	16,289
Securities available for sale
Taxable		2,543			2,338
Tax-exempt		89			92
Federal funds sold and other		258			345
Total interest income		18,644			19,064

Interest expense
Deposits		2,165			2,050
Repurchase agreements and other		24			9
Other borrowings		-			21
FHLB advances		30			55
Subordinated debt		83			94
Total interest expense		2,302			2,229

Net interest income		16,342			16,835
Provision for loan losses		1,000			560
Net interest income after provision for loan losses		15,342			16,275

Non-interest income
Service charges on deposit accounts		1,106			1,094
Electronic banking income		818			822
Secondary market mortgage income		66			24
Other		259			236
		2,249			2,176
Non-interest expenses
Salaries and employee benefits		5,408			5,199
Occupancy and equipment expenses		1,725			1,664
Outside data processing		1,531			1,384
Professional fees		244			365
Taxes, other than payroll, property and income		275			238
Write-downs, expenses, sales of other real estate owned, net		68			249
Amortization of intangibles		242			227
FDIC insurance		(4	)		124
Other expenses		1,248			1,143
		10,737			10,593
Income before income taxes		6,854			7,858
Provision for income taxes		1,486			1,682

Net income	$	5,368		$	6,176

Net income per share:
Basic	$	0.37		$	0.42
Diluted		0.36			0.42

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2020 AND ~~2016~~2019

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017 2016 2017 2016
Net income $ 3,467 $ 3,164 $ 11,050 $ 8,767

Other comprehensive income (loss):

Unrealized gains (losses) arising during the period (68 ) 15 3,658 4,504
Reclassification of realized amount - - - (4 )
Net change in unrealized gain on securities (68 ) 15 3,658 4,500
Less tax impact 24 (5 ) (1,281 ) (1,576 )
Other comprehensive income (loss) (44 ) 10 2,377 2,924

Comprehensive income $ 3,423 $ 3,174 $ 13,427 $ 11,691

	Three Months Ended March 31,
	2020			2019
Net income	$	5,368		$	6,176

Other comprehensive income:
Unrealized gains arising during the period		6,892			5,604
Reclassification of realized amount		-			-
Net change in unrealized gain on securities		6,892			5,604
Less tax impact		(1,447	)		(1,177	)
Other comprehensive income		5,445			4,427

Comprehensive income	$	10,813		$	10,603

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2020 AND 2019

(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, January 1, 2019	$	133,248	$	87,333		$	(3,852	)	$	216,729
Net income		-		6,176			-			6,176
Other comprehensive income		-		-			4,427			4,427
Cash dividends paid ($0.15 per share)		-		(2,195	)		-			(2,195	)
Stock options exercised		51		-			-			51
Stock based compensation expense		39		-			-			39
Balances, March 31, 2019	$	133,338	$	91,314		$	575		$	225,227

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income			Total			Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)		Total
Balances, January 1, 2017	$	109,911	$	66,195		$	(1,922	)	$	174,184
Balances, January 1, 2020												$	133,795	$	102,743		$	3,703	$	240,241
Net income		-		11,050			-			11,050			-		5,368			-		5,368
Other comprehensive income		-		-			2,377			2,377			-		-			5,445		5,445
Cash dividends paid ($0.45 per share)		-		(4,796	)		-			(4,796	)
Cash dividends paid ($0.15 per share)													-		(2,200	)		-		(2,200	)
Stock options exercised													31		-			-		31
Stock based compensation expense		194		-			-			194			40		-			-		40
Stock options exercised		248		-			-			248
Balances, September 30, 2017	$	110,353	$	72,449		$	455		$	183,257
Balances, March 31, 2020												$	133,866	$	105,911		$	9,148	$	248,925

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30, 2017~~MARCH 31, 2020 AND ~~2016~~2019

(UNAUDITED, DOLLARS IN THOUSANDS)

2017 2016
Cash flows from operating activities
Net income $ 11,050 $ 8,767
Adjustments to reconcile net income to net cash from operating activities
Depreciation 1,303 1,461
Provision for loan losses 2,033 1,436
Amortization (accretion), net 1,166 2,010
OREO writedowns, net 434 508
Stock compensation expense 194 160
Changes in :
Interest receivable (198 ) (259 )
Other assets (24 ) (140 )
Interest payable (6 ) (76 )
Other liabilities (1,045 ) (2,071 )
Net cash from operating activities 14,907 11,796

Cash flows from investing activities
Net change in time deposits with other banks (250 ) -
Purchases of securities available for sale (49,210 ) (22,512 )
Proceeds from maturities and calls of securities available for sale 50,787 62,011
Redemption of FRB and FHLB stock 15 190
Net change in loans (30,865 ) (51,417 )
Acquisition of subsidiary, net of cash received - 16,385
Purchases of premises and equipment, net (654 ) (413 )
Proceeds from sales of other real estate acquired through foreclosure 1,827 870
Net cash from (used in) investing activities (28,350 ) 5,114

Cash flows from financing activities
Net change in deposits (10,020 ) 8,246
Net change in agreements to repurchase securities 1,296 3,282
Repayment of other borrowed funds (2,859 ) (1,824 )
Proceeds from stock option exercises 248 645
Repayment of FHLB advances, net - (772 )
Common stock dividends paid (4,796 ) (4,338 )
Net cash from (used in) financing activities (16,131 ) 5,239

Net change in cash and cash equivalents (29,574 ) 22,149

Cash and cash equivalents at beginning of period 104,718 72,539

Cash and cash equivalents at end of period $ 75,144 $ 94,688

	2020			2019
Cash flows from operating activities
Net income	$	5,368		$	6,176
Adjustments to reconcile net income to net cash from operating activities
Depreciation		460			467
Provision for loan losses		1,000			560
Amortization (accretion), net		94			(47	)
Writedowns (gains on the sale) of other real estate owned, net		14			(15	)
Stock compensation expense		40			39
Changes in:
Interest receivable		(493	)		(343	)
Other assets		434			(228	)
Interest payable		(47	)		127
Other liabilities		455			1,131
Net cash from operating activities		7,325			7,867

Cash flows from investing activities
Purchases of securities available for sale		(47,360	)		(13,854	)
Proceeds from maturities and calls of securities available for sale		40,458			15,869
Redemption of FHLB stock		136			60
Net change in loans		8,960			(7,555	)
Purchases of premises and equipment, net		(181	)		(361	)
Proceeds from sales of other real estate acquired through foreclosure		380			414
Net cash from (used in) investing activities		2,393			(5,427	)

Cash flows from financing activities
Net change in deposits		(33,390	)		23,637
Net change in agreements to repurchase securities		(734	)		(37	)
Advances from FHLB		5,000			-
Repayment of other borrowed funds		-			(1,050	)
Repayment of FHLB advances		(3,400	)		(1,500	)
Proceeds from stock option exercises		31			51
Common stock dividends paid		(2,200	)		(2,195	)
Net cash from financing activities		(34,693	)		18,906

Net change in cash and cash equivalents		(24,975	)		21,346

Cash and cash equivalents at beginning of period		94,458			80,775

Cash and cash equivalents at end of period	$	69,483		$	102,121

Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	2,349	$	2,102
Loans transferred to real estate acquired through foreclosure		891		753
Operating right-of-use asset resulting from lease liability		171		7,453

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016~~

~~(UNAUDITED, DOLLARS IN THOUSANDS)~~

2017 2016
Supplemental disclosures of cash flow information:
Cash paid during period for interest $ 3,333 $ 3,555

Cash paid during period for income taxes 6,395 5,122

Loans transferred to real estate acquired through foreclosure 983 631

Stock issued to acquire subsidiary - 22,041

Premises transferred to other real estate owned 71 -

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 - BASIS OF PRESENTATION

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

September 30, 2017
Year Total Net Income
Subsidiary

Location
Acquired Assets Qtr YTD
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 425,115 $ 1,209 $ 3,509
Premier Bank, Inc. Huntington, West Virginia 1998 1,060,991 2,734 9,007
Parent and Intercompany Eliminations 6,569 (476 ) (1,466 )
Consolidated Total $ 1,492,675 $ 3,467 $ 11,050

					March 31, 2020
		Year			Net Income
Subsidiary	Location	Acquired	Assets		Qtr
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	554,340	$	1,583
Premier Bank, Inc.	Huntington, West Virginia	1998		1,197,522		4,233
Parent and Intercompany Eliminations				7,371		(448	)
Consolidated Total			$	1,759,233	$	5,368

All significant intercompany transactions and balances have been eliminated.

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 based on available information. These estimates are, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change. Those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations include the allowance for loan losses, business combinations and impairment of goodwill, and other than temporary impairment (“OTTI”) of securities available for sale. The estimates and assumptions used in these calculations affect the amounts reported in the financial statements and the disclosures provided. National and local participation in a worldwide effort to curb the spread of the COVID-19 virus has resulted in and may continue to result in negative changes in the national and regional business climate in the geographic areas in which Premier operates. As a result, management conducted an interim goodwill impairment test and concluded that the goodwill was not impaired as of March 31, 2020. The effects of government measures to curb the spread of the COVID-19 virus on the local or national economy are uncertain and could cause assumptions and conditions to change in the near term. In the event that changes to assumptions or conditions than originally estimated 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.

Recently Issued Accounting Pronouncements

~~In May 2014, FASB issued Accounting Standards Update 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~. The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance was originally effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year, making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Companies have the option to apply ASU 2014-09 as of the original effective date. Early adoption is not permitted. The Company plans to adopt the guidance during the first quarter of 2018. Management continues to evaluate the impact ASU 2014-09 will have on the Company’s consolidated financial statements as well as the most appropriate transition method of application. Based on this evaluation to date, management has determined that the majority of the revenues earned by the Company are not within the scope of ASU 2014-09 because they are already governed by other accounting standards. For those revenue streams management has determined to be within the scope of ASU 2014-09, namely elements of non-interest income such as service charges on deposit accounts that are governed by deposit account agreements with customers and the timing of revenue from the sale of real estate acquired through foreclosure, the guidance or any of its amendments is not anticipated to result in any material change in the timing of when the revenue is recognized. Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on the consolidated financial statements as new interpretations and guidance are issued, such as the applicability of Topic 606 to interchange revenues included in the Company’s electronic banking income, focusing on the new disclosures required by the adoption of ASU 2014-09.

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~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 1 - BASIS OF PRESENTATION – continued~~

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

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

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss” or “CECL”. The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other ~~contracts.~~contracts, in which organizations will now use forward-looking information to enhance their credit loss estimates on these assets. The largest impact will be on the allowance for loan and lease losses. ~~This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2019. Management~~The company has formed a ~~steering~~ committee ~~that~~to oversee the steps required in the adoption of the new current expected credit loss method. The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the ~~data gathering requirements, available economic forecasting and loss estimation models and potential software that would be employed by the Company to facilitate~~impact of the adoption of this guidance ~~and its required disclosures~~ on the Company’s financial statements. Upon adoption, ~~management anticipates~~ an initial ~~one-time~~cumulative increase in the allowance for loan losses ~~which will be offset~~is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard.

-9 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1 - 10BASIS OF PRESENTATION -continued

However, due to the complexity of the calculation and evolving guidance on adoption management has not yet determined the one-time adjustment. On July 17, 2019, the Financial Accounting Standards Board (“FASB”) voted for a proposal to extend the implementation deadline for smaller reporting companies like Premier. The proposal extends the implementation deadline for Premier for a period of three-years until January 1, 2023. The proposal was approved on October 16, 2019.

-10 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 2 - SECURITIES

Amortized cost and fair value of investment securities, by category, at March 31, 2020 are summarized as follows:

2020	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	282,478	$	10,827	$	(14	)	$	293,291
U. S. sponsored agency CMO’s - residential		56,361		566		(159	)		56,768
Total mortgage-backed securities of government sponsored agencies		338,839		11,393		(173	)		350,059
U. S. government sponsored agency securities		12,080		151		-			12,231
Obligations of states and political subdivisions		40,020		348		(56	)		40,312
Other securities		1,959		46		(129	)		1,876
Total available for sale	$	392,898	$	11,938	$	(358	)	$	404,478

Amortized cost and fair value of investment securities, by category, at December 31, 2019 are summarized as follows:

2019	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	276,013	$	3,618	$	(322	)	$	279,309
U. S. sponsored agency CMO’s - residential		61,989		768		(113	)		62,644
Total mortgage-backed securities of government sponsored agencies		338,002		4,386		(435	)		341,953
U. S. government sponsored agency securities		30,538		280		(88	)		30,730
Obligations of states and political subdivisions		15,570		453		(6	)		16,017
Other securities		1,956		98		-			2,054
Total available for sale	$	386,066	$	5,217	$	(529	)	$	390,754

-11 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 2 ~~–SECURITIES~~

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

2017 Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential $ 199,483 $ 1,028 $ (578 ) $ 199,933
U. S. sponsored agency CMO’s - residential 56,330 553 (369 ) 56,514
Total mortgage-backed securities of government sponsored agencies 255,813 1,581 (947 ) 256,447
U. S. government sponsored agency securities 19,344 5 (74 ) 19,275
Obligations of states and political subdivisions 13,346 140 (5 ) 13,481
Total available for sale $ 288,503 $ 1,726 $ (1,026 ) $ 289,203

~~Amortized cost and fair value of investment securities, by category, at December 31, 2016 are summarized as follows:~~

2016 Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential $ 177,105 $ 245 $ (3,173 ) $ 174,177
U. S. sponsored agency CMO’s - residential 73,163 761 (657 ) 73,267
Total mortgage-backed securities of government sponsored agencies 250,268 1,006 (3,830 ) 247,444
U. S. government sponsored agency securities 24,652 23 (174 ) 24,501
Obligations of states and political subdivisions 16,645 111 (94 ) 16,662
Total available for sale $ 291,565 $ 1,140 $ (4,098 ) $ 288,607

- ~~11 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 2–~~SECURITIES - continued

The amortized cost and fair value of securities at ~~September 30, 2017~~March 31, 2020 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Due in one year or less	$	9,687	$	9,701	$	7,085	$	7,124
Due after one year through five years		17,073		17,070		29,988		29,948
Due after five years through ten years		5,375		5,430		10,543		10,647
Due after ten years		555		555		6,443		6,700
Mortgage-backed securities of government sponsored agencies		255,813		256,447		338,839		350,059
Total available for sale	$	288,503	$	289,203	$	392,898	$	404,478

There were no sales of securities during the first three months of 2020 and 2019.

Securities with unrealized losses at ~~September 30, 2017~~March 31, 2020 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

U.S government sponsored agency securities	$	17,242	$	(74	)	$	-	$	-		$	17,242	$	(74	)
U.S government sponsored agency MBS – residential		56,820		(429	)		5,234		(149	)		62,054		(578	)	$	851	$	(14	)	$	-	$	-		$	851	$	(14	)
U.S government sponsored agency CMO’s – residential		11,256		(129	)		11,184		(240	)		22,440		(369	)
U.S government sponsored agency CMO – residential																	10,747		(109	)		2,449		(50	)		13,196		(159	)
Obligations of states and political subdivisions		619		(4	)		775		(1	)		1,394		(5	)		4,968		(56	)		-		-			4,968		(56	)
Other securities																	848		(129	)		-		-			848		(129	)
Total temporarily impaired	$	85,937	$	(636	)	$	17,193	$	(390	)	$	103,130	$	(1,026	)	$	17,414	$	(308	)	$	2,449	$	(50	)	$	19,863	$	(358	)

~~- 12~~-12 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 2–2 - SECURITIES - continued

Securities with unrealized losses at December 31, ~~2016~~2019 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or More					Total					Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

U.S government sponsored agency securities	$	17,207	$	(174	)	$	-	$	-		$	17,207	$	(174	)	$	10,851	$	(84	)	$	3,957	$	(4	)	$	14,808	$	(88	)
U.S government sponsored agency MBS – residential		157,022		(3,173	)		-		-			157,022		(3,173	)		50,945		(199	)		12,930		(123	)		63,875		(322	)
U.S government sponsored agency CMO’s – residential		18,374		(373	)		8,750		(284	)		27,124		(657	)		4,376		(3	)		8,815		(110	)		13,191		(113	)
Obligations of states and political subdivisions		7,961		(94	)		-		-			7,961		(94	)		1,866		(6	)		-		-			1,866		(6	)
Total temporarily impaired	$	200,564	$	(3,814	)	$	8,750	$	(284	)	$	209,314	$	(4,098	)	$	68,038	$	(292	)	$	25,702	$	(237	)	$	93,740	$	(529	)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities. The unrealized losses at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities. Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery. Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.

NOTE 3 - LOANS

Major classifications of loans at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 are summarized as follows:

	2017		2016		2020		2019
Residential real estate	$	337,502	$	342,294	$	387,909	$	389,985
Multifamily real estate		70,698		74,165		40,286		36,684
Commercial real estate:
Owner occupied		134,773		129,370		168,102		164,218
Non owner occupied		237,655		220,836
Non-owner occupied						306,854		304,316
Commercial and industrial		82,332		76,736		101,132		105,079
Consumer		29,675		30,916		26,409		29,007
Construction and land						119,415		136,138
All other		162,689		150,506		34,936		29,868
	$	1,055,324	$	1,024,823	$	1,185,043	$	1,195,295

~~- 13~~-13 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE ~~3–LOANS~~3 - ~~continued~~

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

Loan Class
Balance
Dec 31, 2016
Provision (credit) for loan losses
Loans
charged-off
Recoveries
Balance
Sept 30, 2017

Residential real estate $ 2,948 $ 363 $ (362 ) $ 52 $ 3,001
Multifamily real estate 785 475 - - 1,260
Commercial real estate:
Owner occupied 1,543 (161 ) (7 ) 242 1,617
Non owner occupied 2,350 265 (8 ) - 2,607
Commercial and industrial 1,140 3 (138 ) 95 1,100
Consumer 347 148 (214 ) 86 367
All other 1,723 940 (373 ) 117 2,407
Total $ 10,836 $ 2,033 $ (1,102 ) $ 592 $ 12,359

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

Loan Class
Balance
Dec 31, 2015
Provision (credit) for loan losses
Loans
charged-off
Recoveries
Balance
Sept 30, 2016

Residential real estate $ 2,501 $ 377 $ (107 ) $ 19 $ 2,790
Multifamily real estate 821 92 - - 913
Commercial real estate:
Owner occupied 1,509 (140 ) - 2 1,371
Non owner occupied 2,070 645 - - 2,715
Commercial and industrial 1,033 83 (29 ) 42 1,129
Consumer 307 172 (232 ) 71 318
All other 1,406 207 (207 ) 221 1,627
Total $ 9,647 $ 1,436 $ (575 ) $ 355 $ 10,863

~~- 14 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 3–~~LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ended ~~September 30, 2017~~March 31, 2020 was as follows:

Loan Class	Balance June 30, 2017		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2017		Balance Dec 31, 2019		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance March 31, 2020

Residential real estate	$	2,973	$	170		$	(163	)	$	21	$	3,001	$	1,711	$	216		$	(93	)	$	4	$	1,838
Multifamily real estate		1,337		(77	)		-			-		1,260		1,954		150			-			-		2,104
Commercial real estate:
Owner occupied		1,618		5			(7	)		1		1,617		2,441		342			(566	)		3		2,220
Non owner occupied		2,334		276			(3	)		-		2,607
Non-owner occupied														3,184		479			(24	)		3		3,642
Commercial and industrial		1,093		(6	)		(4	)		17		1,100		1,767		22			-			28		1,817
Consumer		373		10			(49	)		33		367		281		2			(69	)		27		241
Construction and land														1,724		(349	)		-			37		1,412
All other		1,967		513			(110	)		37		2,407		480		138			(74	)		38		582
Total	$	11,695	$	891		$	(336	)	$	109	$	12,359	$	13,542	$	1,000		$	(826	)	$	140	$	13,856

Activity in the allowance for loan losses by portfolio segment for the three months ~~ending September 30, 2016~~ended March 31, 2019 was as follows:

Loan Class	Balance June 30, 2016		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2016		Balance Dec 31, 2018		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance March 31, 2019

Residential real estate	$	2,747	$	91		$	(51	)	$	3	$	2,790	$	1,808	$	42		$	(32	)	$	5	$	1,823
Multifamily real estate		822		91			-			-		913		1,649		(61	)		-			2		1,590
Commercial real estate:
Owner occupied		1,442		(72	)		-			1		1,371		2,120		236			(533	)		1		1,824
Non owner occupied		2,708		7			-			-		2,715
Non-owner occupied														3,058		400			(57	)		-		3,401
Commercial and industrial		1,111		43			(29	)		4		1,129		1,897		(97	)		(110	)		31		1,721
Consumer		306		139			(142	)		15		318		351		110			(107	)		11		365
Construction and land														2,255		(93	)		(13	)		-		2,149
All other		1,668		13			(81	)		27		1,627		600		23			(51	)		34		606
Total	$	10,804	$	312		$	(303	)	$	50	$	10,863	$	13,738	$	560		$	(903	)	$	84	$	13,479

~~- 15~~-14 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019.

	2017		2016		2020		2019
Residential real estate	$	1,515	$	1,619	$	2,436	$	2,565
Commercial real estate
Owner occupied		1,564		2,013		1,750		1,804
Non owner occupied		-		5,396
Non-owner occupied						2,533		2,628
Commercial and industrial		214		232		291		305
Consumer						19		22
Construction and land						476		483
All other		1,828		2,061		171		174
Total carrying amount	$	5,121	$	11,321	$	7,676	$	7,981
Contractual principal balance	$	7,116	$	14,784	$	11,424	$	11,681

Carrying amount, net of allowance	$	5,071	$	11,311	$	7,676	$	7,981

For those purchased loans disclosed above, the Company ~~increased the allowance for loan losses by $50,000 for the nine-months ended September 30, 2017, but~~ did not increase the allowance for loan losses ~~for purchased impaired loans~~ during the ~~nine-months~~three-months ended ~~September 30, 2016.~~March 31, 2020 and March 31, 2019.

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

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

~~- 16 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 3–LOANS - continued~~

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

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

~~- 17~~-15 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at March 31, 2020 and March 31, 2019.

	2020			2019
Balance at January 1	$	619		$	642
New loans purchased		-			-
Accretion of income		(36	)		(53	)
Loans placed on non-accrual		-			(14	)
Income recognized upon full repayment		(7	)		(42	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at March 31	$	576		$	533

-16 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016.~~2019. The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

September 30, 2017	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
March 31, 2020							Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,248	$	2,846	$	585	$	5,478	$	4,266	$	710
Multifamily real estate		11,101		11,095		334		4,184		3,797		-
Commercial real estate
Owner occupied		2,052		1,974		63		3,125		2,396		10
Non owner occupied		310		209		86
Non-owner occupied								4,214		2,872		66
Commercial and industrial		2,062		1,054		648		1,047		498		300
Consumer		331		304		-		367		283		16
Construction and land								374		337		-
All other		6,984		6,863		-		75		60		-
Total	$	26,088	$	24,345	$	1,716	$	18,864	$	14,509	$	1,102

December 31, 2016	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
December 31, 2019							Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing

Residential real estate	$	3,467	$	2,794	$	606	$	5,801	$	4,618	$	1,425
Multifamily real estate		11,157		11,106		334		4,113		3,726		-
Commercial real estate
Owner occupied		1,769		1,704		15		3,399		2,995		-
Non owner occupied		294		196		36
Non-owner occupied								3,120		1,852		340
Commercial and industrial		2,537		1,209		1,008		1,026		420		451
Consumer		366		347		-		364		313		9
Construction and land								470		440		3
All other		8,408		8,391		-		75		73		-
Total	$	27,998	$	25,747	$	1,999	$	18,368	$	14,437	$	2,228

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

~~- 18~~-17 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of ~~September 30, 2017~~March 31, 2020 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	337,502	$	6,460	$	1,717	$	8,177	$	329,325	$	387,909	$	5,829	$	2,505	$	8,334	$	379,575
Multifamily real estate		70,698		-		11,429		11,429		59,269		40,286		-		3,797		3,797		36,489
Commercial real estate:
Owner occupied		134,773		172		1,979		2,151		132,622		168,102		786		964		1,750		166,352
Non owner occupied		237,655		374		227		601		237,054
Non-owner occupied												306,854		3,058		849		3,907		302,947
Commercial and industrial		82,332		179		1,628		1,807		80,525		101,132		1,370		655		2,025		99,107
Consumer		29,675		365		121		486		29,189		26,409		128		152		280		26,129
Construction and land												119,415		150		5		155		119,260
All other		162,689		1,370		6,861		8,231		154,458		34,936		-		60		60		34,876
Total	$	1,055,324	$	8,920	$	23,962	$	32,882	$	1,022,442	$	1,185,043	$	11,321	$	8,987	$	20,308	$	1,164,735

The following table presents the aging of the recorded investment in past due loans as of December 31, ~~2016~~2019 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due		Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due

Residential real estate	$	342,294	$	6,113	$	1,596	$	7,709	$	334,585	$	389,985	$	9,479	$	3,192	$	12,671	$	377,314
Multifamily real estate		74,165		-		11,440		11,440		62,725		36,684		-		3,726		3,726		32,958
Commercial real estate:
Owner occupied		129,370		1,746		1,474		3,220		126,150		164,218		337		1,199		1,536		162,682
Non owner occupied		220,836		1,803		159		1,962		218,874
Non-owner occupied												304,316		838		1,017		1,855		302,461
Commercial and industrial		76,736		330		2,120		2,450		74,286		105,079		245		708		953		104,126
Consumer		30,916		403		223		626		30,290		29,007		309		230		539		28,468
Construction and land												136,138		3,856		4		3,860		132,278
All other		150,506		577		8,187		8,764		141,742		29,868		-		73		73		29,795
Total	$	1,024,823	$	10,972	$	25,199	$	36,171	$	988,652	$	1,195,295	$	15,064	$	10,149	$	25,213	$	1,170,082

~~- 19~~-18 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of ~~September 30, 2017:~~March 31, 2020:

	Allowance for Loan Losses								Loan Balances								Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	-	$	3,001	$	-	$	3,001	$	320	$	335,667	$	1,515	$	337,502	$	-	$	1,838	$	-	$	1,838	$	62	$	385,411	$	2,436	$	387,909
Multifamily real estate		517		743		-		1,260		13,588		57,110		-		70,698		1,855		249		-		2,104		3,797		36,489		-		40,286
Commercial real estate:
Owner occupied		301		1,316		-		1,617		3,725		129,484		1,564		134,773		-		2,220		-		2,220		1,492		164,860		1,750		168,102
Non-owner occupied		88		2,519		-		2,607		5,583		232,072		-		237,655		407		3,235		-		3,642		4,064		300,257		2,533		306,854
Commercial and industrial		105		945		50		1,100		1,129		80,989		214		82,332		456		1,361		-		1,817		773		100,068		291		101,132
Consumer		19		348		-		367		19		29,656		-		29,675		-		241		-		241		-		26,390		19		26,409
Construction and land																		-		1,412				1,412		325		118,614		476		119,415
All other		518		1,889		-		2,407		7,177		153,684		1,828		162,689		-		582		-		582		-		34,765		171		34,936
Total	$	1,548	$	10,761	$	50	$	12,359	$	31,541	$	1,018,662	$	5,121	$	1,055,324	$	2,718	$	11,138	$	-	$	13,856	$	10,513	$	1,166,854	$	7,676	$	1,185,043

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, ~~2016:~~2019:

	Allowance for Loan Losses								Loan Balances								Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total

Residential real estate	$	-	$	2,948	$	-	$	2,948	$	379	$	340,296	$	1,619	$	342,294	$	-	$	1,711	$	-	$	1,711	$	63	$	387,357	$	2,565	$	389,985
Multifamily real estate		-		785		-		785		13,641		60,524		-		74,165		1,737		217		-		1,954		3,726		32,958		-		36,684
Commercial real estate:
Owner occupied		244		1,299		-		1,543		2,801		124,556		2,013		129,370		653		1,788		-		2,441		2,685		159,729		1,804		164,218
Non-owner occupied		-		2,350		-		2,350		2,373		213,067		5,396		220,836		271		2,913		-		3,184		3,830		297,858		2,628		304,316
Commercial and industrial		266		864		10		1,140		1,418		75,086		232		76,736		390		1,377		-		1,767		678		104,096		305		105,079
Consumer		-		347		-		347		-		30,916		-		30,916		-		281		-		281		-		28,985		22		29,007
Construction and land																		51		1,673		-		1,724		431		135,224		483		136,138
All other		86		1,637		-		1,723		12,976		135,469		2,061		150,506		-		480		-		480		-		29,694		174		29,868
Total	$	596	$	10,230	$	10	$	10,836	$	33,588	$	979,914	$	11,321	$	1,024,823	$	3,102	$	10,440	$	-	$	13,542	$	11,413	$	1,175,901	$	7,981	$	1,195,295

~~- 20~~-19 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of ~~September 30, 2017.~~March 31, 2020. The table includes ~~$199,000~~$710,000 of loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	360	$	320	$	-	$	184	$	62	$	-
Multifamily real estate		2,492		2,492		-		97		89		-
Commercial real estate
Owner occupied		2,916		2,855		-		2,189		1,811		-
Non owner occupied		3,604		3,512		-
Non-owner occupied								1,668		830		-
Commercial and industrial		1,767		1,012		-		509		-		-
All other		3,186		3,066		-
Construction and land								361		326		-
		14,325		13,257		-		5,008		3,118		-
With an allowance recorded:
Multifamily real estate	$	11,102	$	11,095	$	517		4,088		3,708		1,855
Commercial real estate
Owner occupied		888		870		301
Non owner occupied		2,072		2,072		88
Non-owner occupied								3,760		3,624		407
Commercial and industrial		468		316		155		786		773		456
Consumer		19		19		19
All other		4,116		4,111		518
		18,665		18,483		1,598		8,634		8,105		2,718
Total	$	32,990	$	31,740	$	1,598	$	13,642	$	11,223	$	2,718

~~- 21~~-20 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

The following table presents loans individually evaluated for impairment by class of loans as of December 31, ~~2016.~~2019. The table includes ~~$208,000~~$758,000 of loans acquired with deteriorated credit quality ~~that~~for which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	743	$	379	$	-	$	188	$	63	$	-
Multifamily real estate		13,692		13,641		-		96		89		-
Commercial real estate
Owner occupied		1,803		1,766		-		2,201		1,842		-
Non owner occupied		2,465		2,373		-
Non-owner occupied								2,512		1,732		-
Commercial and industrial		2,429		1,338		-		509		-		-
All other		9,868		9,853		-
		31,000		29,350		-		5,506		3,726		-
With an allowance recorded:
Multifamily real estate							$	4,017	$	3,637	$	1,737
Commercial real estate
Owner occupied	$	1,055	$	1,035	$	244		1,189		1,162		653
Non-owner occupied								2,654		2,537		271
Commercial and industrial		431		288		276		689		678		390
All other		3,124		3,123		86
Construction and land								460		431		51
		4,610		4,446		606		9,009		8,445		3,102
Total	$	35,610	$	33,796	$	606	$	14,515	$	12,171	$	3,102

~~- 22~~-21 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016.~~March 31, 2019. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Nine months ended Sept 30, 2017						Nine months ended Sept 30, 2016						Three months ended March 31, 2020						Three months ended March 31, 2019
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	339	$	1	$	1	$	612	$	16	$	14	$	62	$	-	$	-	$	264	$	-	$	-
Multifamily real estate		13,605		196		181		1,580		121		121		3,761		-		-		3,877		-		-
Commercial real estate:
Owner occupied		3,340		49		49		1,144		3		3		2,408		3		3		3,874		3		3
Non-owner occupied		2,955		124		124		5,066		275		273		4,362		36		36		10,580		94		91
Commercial and industrial		1,474		114		114		1,155		26		26		726		1		1		500		1		1
Consumer		5		-		-		-		-		-
All other		8,641		342		341		3,011		40		6
Construction and land														378		-		-		1,341		8		8
Total	$	30,359	$	826	$	810	$	12,568	$	481	$	443	$	11,697	$	40	$	40	$	20,436	$	106	$	103

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

Three months ended Sept 30, 2017 Three months ended Sept 30, 2016
Loan Class Average Recorded Investment Interest Income Recognized Cash Basis Interest Recognized Average Recorded Investment Interest Income Recognized Cash Basis Interest Recognized

Residential real estate $ 323 $ - $ - $ 667 $ 5 $ 5
Multifamily real estate 13,590 66 60 2,594 63 63
Commercial real estate:
Owner occupied 3,910 27 27 1,847 3 3
Non-owner occupied 3,749 63 63 4,240 175 175
Commercial and industrial 1,390 13 13 1,809 10 10
Consumer 9 - - - - -
All other 7,183 53 53 5,243 33 -
Total $ 30,154 $ 222 $ 216 $ 16,400 $ 289 $ 256

~~- 23~~-22 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR’s as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016:~~2019:

September 30, 2017 TDR’s on Non-accrual Other TDR’s Total TDR’s

Residential real estate $ 317 $ 110 $ 427
Multifamily real estate - 2,159 2,159
Commercial real estate
Owner occupied 602 1,766 2,368
Non owner occupied - 3,875 3,875
Commercial and industrial 57 508 565
Consumer - - -
All other 4,783 297 5,080
Total $ 5,759 $ 8,715 $ 14,474

March 31, 2020	TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	28	$	153	$	181
Multifamily real estate		3,708		-		3,708
Commercial real estate
Owner occupied		-		202		202
Non-owner occupied		-		2,637		2,637
Commercial and industrial		191		-		191
Total	$	3,927	$	2,992	$	6,919

December 31, 2016	TDR’s on Non-accrual		Other TDR’s		Total TDR’s
December 31, 2019							TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	129	$	464	$	593	$	32	$	157	$	189
Multifamily real estate		-		2,201		2,201		3,636		-		3,636
Commercial real estate
Owner occupied		-		856		856		1,162		207		1,369
Non-owner occupied								-		2,656		2,656
Commercial and industrial		62		352		414		191		-		191
All other		751		4,395		5,146
Total	$	942	$	8,268	$	9,210	$	5,021	$	3,020	$	8,041

At ~~September 30, 2017 $640,000~~March 31, 2020, $2,108,000 in specific reserves ~~were~~was allocated to loans that had restructured terms resulting in a provision for loan losses of $203,000 for the three months ended March 31, 2020, compared to a negative $65,000 in provision for loan losses on restructured loans during the three months ended March 31, 2019. At December 31, 2019, $2,471,000 in specific reserves was allocated to loans that had restructured terms. ~~At December 31, 2016 $43,000 in specific reserves were allocated to loans that had restructured terms. As of September 30, 2017 and December 31, 2016, there~~There were no commitments to lend additional amounts to these borrowers.

~~- 24~~-23 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

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

Nine months ended Sept 30, 2017 Nine months ended Sept 30, 2016
Loan Class Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment

Residential real estate - $ - $ - 8 $ 483 $ 483
Commercial real estate
Owner occupied 2 1,525 1,525 3 865 865
Non owner occupied 2 3,875 3,875 1 100 100
Commercial and industrial 1 191 191 1 20 20
All other - - - 1 4,106 4,106
Total 5 $ 5,591 $ 5,591 14 $ 5,574 $ 5,574

Three months ended Sept 30, 2017 Three months ended Sept 30, 2016
Loan Class Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment

Residential real estate - $ - $ - 6 $ 184 $ 184
Commercial real estate
Owner occupied - - - 1 255 255
Non owner occupied 2 3,875 3,875 - - -
All other - - - 1 4,106 4,106
Total 2 $ 3,875 $ 3,875 8 $ 4,545 $ 4,545

The modifications reported above for the three and nine months ended September 30, 2017 involve reducing the borrowers’ required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/March 31, 2020 or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current. The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans. The Company increased the allowance for loan losses related to these loans by $88,000 during the three and nine months ended September 30, 2017.

The modifications reported above for the three and nine months ended September 30, 2016 involve reducing the borrowers’ required monthly payment by offering extended interest only periods that exceed the timeframes customarily offered by the Company and/or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current.

~~- 25 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 3–LOANS - continued~~

The modifications did not include a permanent reduction of the recorded investment in the loans and did not decrease the stated interest rate on loans. The Company increased the allowance for loan losses related to these loans by $35,000 during the three months ended ~~September 30, 2016, and by $181,000 during the nine months ended September 30, 2016.~~March 31, 2019.

During the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and the three ~~and nine~~ months ended ~~September 30, 2016,~~March 31, 2019, there were no TDR’s for which there was a payment default within twelve months following the modification.

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

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020. Provisions of the CARES Act permit certain loan payment modifications by banks that would normally be considered TDR’s to be exempt from the TDR rules. To date, management has exercised these provisions of the CARES Act on some loan modifications on an individually requested basis.

-24 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3 - LOANS - continued

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis. For consumer loans, including consumer loans secured by residential real estate, and smaller balance non-homogeneous loans, the analysis involves monitoring the performing status of the loan. At the time such loans become past due by 3090 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

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

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

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

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

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3–3 - LOANS - continued

As of ~~September 30, 2017~~March 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans		Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	324,121	$	3,502	$	9,878	$	1	$	337,502	$	373,530	$	3,210	$	11,169	$	-	$	387,909
Multifamily real estate		52,472		3,590		12,024		2,612		70,698		32,269		4,220		3,797		-		40,286
Commercial real estate:
Owner occupied		122,983		4,305		7,485		-		134,773		158,862		4,766		4,474		-		168,102
Non-owner occupied		220,173		11,243		6,239		-		237,655		290,508		10,782		5,564		-		306,854
Commercial and industrial		71,850		7,400		3,082		-		82,332		96,476		3,250		1,406		-		101,132
Consumer		29,145		136		375		19		29,675		26,063		4		342		-		26,409
Construction and land												111,084		7,667		664		-		119,415
All other		148,216		5,479		8,994		-		162,689		34,876		-		60		-		34,936
Total	$	968,960	$	35,655	$	48,077	$	2,632	$	1,055,324	$	1,123,668	$	33,899	$	27,476	$	-	$	1,185,043

As of December 31, ~~2016,~~2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans		Pass		Special Mention		Substandard		Doubtful		Total Loans

Residential real estate	$	328,905	$	4,880	$	8,507	$	2	$	342,294	$	374,835	$	3,477	$	11,673	$	-	$	389,985
Multifamily real estate		59,375		78		14,712		-		74,165		28,103		4,855		3,726		-		36,684
Commercial real estate:
Owner occupied		118,134		6,720		4,516		-		129,370		152,695		5,123		6,400		-		164,218
Non-owner occupied		213,641		4,391		2,804		-		220,836		290,096		8,617		5,603		-		304,316
Commercial and industrial		72,094		2,337		2,275		30		76,736		101,085		2,693		1,301		-		105,079
Consumer		30,369		242		305		-		30,916		28,618		5		384		-		29,007
Construction and land												123,473		11,868		797				136,138
All other		134,945		1,958		13,603		-		150,506		29,698		97		73		-		29,868
Total	$	957,463	$	20,606	$	46,722	$	32	$	1,024,823	$	1,128,603	$	36,735	$	29,957	$	-	$	1,195,295

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

The Company’s principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below. During 2020 the Banks could, without prior approval, declare dividends to the Company of approximately $11.4 million plus any 2020 net profits retained to the date of the dividend declaration.

In the first quarter of 2020, the Company elected to adopt regulatory capital simplification rules permitting bank holding companies of Premier’s size to utilize one measure of regulatory capital, the community bank leverage ratio (also known as the “CBLR”), to determine regulatory capital adequacy. The community bank leverage ratio requires a higher amount of Tier 1 capital to average assets than the standard leverage ratio to be considered well capitalized. However, meeting this higher standard eliminates the need to compute and monitor the Tier 1 risk-based capital ratio, the Common Equity Tier 1 risk-based capital ratio and the total risk-based capital ratio as well as maintain the 2.50% regulatory capital buffer necessary to avoid limitations on equity distributions and discretionary bonus payments. Other criteria required to be able to utilize the CBLR as the sole measure of capital adequacy include 1.) total assets less than $10.0 billion, 2.) trading assets and liabilities equal to less than 5.0% of total assets and 3.) off-balance sheet exposures, such as the unused portion of conditionally cancellable lines of credit, equal to less than 25% of total assets. Premier meets all three of these criteria and has elected to utilize the CBLR as its measure of regulatory capital adequacy on a consolidated basis as well as for its largest subsidiary bank.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

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

~~The Company’s principal source~~A community bank leverage ratio of ~~funds for dividend payments~~Total Tier 1 capital to ~~shareholders is dividends received from~~quarterly average assets must be at least 9.00% to be considered well capitalized. Premier’s Tier 1 capital totaled $196.4 million at March 31, 2020, which represents a community bank leverage ratio of 11.5%. Premier’s wholly owned subsidiary Citizens Deposit Bank has not adopted the ~~subsidiary Banks. Banking regulations limit~~CBLR simplification standard as its Tier 1 leverage ratio was only 8.36% at March 31, 2020. Nevertheless, utilizing the ~~amount of dividends that may~~standard risk-based capital ratio calculations, Citizens Deposit Bank was still considered to be ~~paid without prior approval of regulatory agencies. Under these regulations,~~well capitalized under the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below. During 2017 the Banks could, without prior approval, declare dividends to the Company of approximately $4.1 million plus any 2017 net profits retained to the date of the dividend declaration.

The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action framework and maintained a capital conservation buffer of 6.58%, well in excess of the ~~Banks must meet specific guidelines that involve quantitative measures~~2.50% buffer required for equity distributions. Premier’s other wholly owned subsidiary bank, Premier Bank, Inc., has adopted the regulatory capital simplification rules and maintained a CBLR of ~~their assets, liabilities, and certain off-balance sheet items as calculated~~11.66%, well in excess of the 9.00% required to be considered well capitalized under ~~regulatory accounting practices.~~the prompt corrective action framework.

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

		Mar 31, 2020				December 31, 2019				Regulatory Minimum Requirements				To Be Considered Well Capitalized
Tier 1 Capital to average assets (CBLR):			11.5	%			11.3	%			9.0	%			9.0	%

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE ~~4- STOCKHOLDERS’ EQUITY~~5 – PREMISES AND ~~REGULATORY MATTERS - continued~~EQUIPMENT

~~Shown below is~~The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options. Certain leases contain renewal options and rent escalation clauses calling for rent increases of the term of the lease. Short-term leases of equipment are recognized on a ~~summary~~straight-line basis over the lease term. As of ~~regulatory capital ratios~~March 31, 2020, the weighted average remaining lease term for operating leases was 9.1 years and the weighted average discount rate used in the measurement of operating lease liabilities was 1.32%.

Total lease expense for the ~~Company:~~three months ended March 31, 2020, which is included in net occupancy and equipment expense, was $332,000, consisting of $38,000 short-term lease expense and $294,000 of operating lease expense.

September 30,
2017

December 31,
2016

Regulatory
Minimum
Requirements

To Be Considered
Well Capitalized

Common Equity Tier 1 Capital (to Risk-Weighted Assets) 13.8 % 13.4 % 4.5 % 6.5 %
Tier 1 Capital (to Risk-Weighted Assets) 14.4 % 13.9 % 6.0 % 8.0 %
Total Capital (to Risk-Weighted Assets) 15.5 % 15.0 % 8.0 % 10.0 %
Tier 1 Capital (to Average Assets) 10.7 % 10.1 % 4.0 % 5.0 %

~~Beginning on January 1, 2016 an additional capital conservation buffer has been added~~The following table summarizes the future minimum rental commitments under operating leases:

2020	$	834
2021		1,067
2022		1,050
2023		805
2024		680
2025 and thereafter		3,494
Total undiscounted cash flows		7,930
Discounted cash flows		(607	)
Total lease liability	$	7,323

NOTE 6 - STOCK COMPENSATION EXPENSE

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

On March 18, 2020, 74,025 incentive stock options were granted under the ~~regulatory framework for prompt corrective action. The capital conservation buffer will be measured as a percentage~~2012 Long Term Incentive Plan at an exercise price of ~~risk weighted assets and will be phased-in over a four year period from 2016 thru 2019, resulting in a required capital conservation buffer~~$8.50, the closing market price of 0.625% in 2016 and 1.25% in 2017. When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk-weighted assets, Tier 1 Capital to risk-weighted assets, and Total Capital to risk-weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictionsPremier’s common stock on the ~~payment~~grant date. These options vest in three equal annual installments ending on March 18, 2023. On March 20, 2019, 72,075 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of ~~dividends, restrictions~~$15.57, the closing market price of Premier’s common stock on the ~~payment~~grant date. These options vest in three equal annual installments ending on March 20, 2022.

Compensation expense of ~~discretionary bonuses, and restrictions~~$40,000 was recorded for the first three months of 2020 while $39,000 was recorded for the first three months of 2019. Stock-based compensation expense related to incentive stock option grants is recognized ratably over the requisite vesting period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $101,000 at March 31, 2020. This unrecognized expense is expected to be recognized over the next 35 months based on the ~~repurchasing of common shares by the Company. The capital ratios~~vesting periods of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk-weighted assets ratio of at least 8.50% and a Total Capital to risk-weighted assets ratio of at least 10.50%. The Company’s capital conservation buffer was 7.50% at September 30, 2017 and 6.95% at December 31, 2016, well in excess of the fully phased-in 2.50% required by December 31, 2019.options.

~~- 29~~-29 -

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE ~~5 – STOCK COMPENSATION EXPENSE~~

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

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

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

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

7 - ~~30 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 6 –~~ EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 is presented below:

	Three Months Ended Sept 30,				Nine Months Ended Sept 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2020		2019
Basic earnings per share
Income available to common stockholders	$	3,467	$	3,164	$	11,050	$	8,767	$	5,368	$	6,176
Weighted average common shares outstanding		10,661,157		10,626,185		10,653,594		10,508,809		14,658,998		14,626,234
Earnings per share	$	0.33	$	0.30	$	1.04	$	0.83	$	0.37	$	0.42

Diluted earnings per share
Income available to common stockholders	$	3,467	$	3,164	$	11,050	$	8,767	$	5,368	$	6,176
Weighted average common shares outstanding		10,661,157		10,626,185		10,653,594		10,508,809		14,658,998		14,626,234
Add dilutive effects of potential additional common stock		77,794		60,742		80,418		60,372		67,473		72,865
Weighted average common and dilutive potential common shares outstanding		10,738,951		10,686,927		10,734,012		10,569,181		14,726,471		14,699,099
Earnings per share assuming dilution	$	0.32	$	0.30	$	1.03	$	0.83	$	0.36	$	0.42

~~There~~Stock options for 72,075 shares of common stock were ~~no stock options~~not considered ~~antidilutive~~in computing diluted earnings per share for the three ~~or nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~March 31, 2019 because they were antidilutive.

On December 9, 2016, Premier paid a 10% stock dividend (1 share for every 10 shares owned on record date) to shareholders of record on December 2, 2016. Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a result of the stock dividend to aid in the comparison to current period results.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE ~~7 –~~8 - FAIR VALUE

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

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

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

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

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

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

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

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

-31 -

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 - FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at March 31, 2020 were as follows:

				Fair Value Measurements at March 31, 2020 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	61,349		$	61,349		$	-		$	-	$	61,349
Time deposits with other banks		598			-			598			-		598
Federal funds sold		8,134			8,134			-			-		8,134
Securities available for sale		404,478			-			404,478			-		404,478
Loans, net		1,171,187			-			-			1,160,850		1,160,850
Interest receivable		5,192			-			1,579			3,613		5,192

Financial liabilities
Deposits	$	(1,462,380	)	$	(1,052,200	)	$	(409,834	)	$	-	$	(1,462,034	)
Securities sold under agreements to repurchase		(19,694	)		-			(19,694	)		-		(19,694	)
FHLB advance		(7,986	)		-			(8,007	)		-		(8,007	)
Subordinated debt		(5,445	)		-			(5,383	)		-		(5,383	)
Interest payable		(865	)		(10	)		(855	)		-		(865	)

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

				Fair Value Measurements at December 31, 2019 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	88,556		$	88,556		$	-		$	-	$	88,556
Time deposits with other banks		598			-			599			-		599
Federal funds sold		5,902			5,902			-			-		5,902
Securities available for sale		390,754			-			390,754			-		390,754
Loans, net		1,181,753			-			-			1,172,575		1,172,575
Interest receivable		4,699			4			1,110			3,585		4,699

Financial liabilities
Deposits	$	(1,495,753	)	$	(1,070,610	)	$	(424,886	)	$	-	$	(1,495,496	)
Securities sold under agreements to repurchase		(20,428	)		-			(20,428	)		-		(20,428	)
FHLB advance		(6,375	)		-			(6,406	)		-		(6,406	)
Subordinated debt		(5,436	)		-			(5,527	)		-		(5,527	)
Interest payable		(912	)		(15	)		(897	)		-		(912	)

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 - FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at March 31, 2020 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	293,291	$	-	$	293,291	$	-
U. S. agency CMO’s - residential		56,768		-		56,768		-
Total mortgage-backed securities of government sponsored agencies		350,059		-		350,059		-
U. S. government sponsored agency securities		12,231		-		12,231		-
Obligations of states and political subdivisions		40,312		-		40,312		-
Other securities		1,876		-		1,876		-
Total securities available for sale	$	404,478	$	-	$	404,478	$	-

			Fair Value Measurements at December 31, 2019 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	279,309	$	-	$	279,309	$	-
U. S. agency CMO’s		62,644		-		62,644		-
Total mortgage-backed securities of government sponsored agencies		341,953		-		341,953		-
U. S. government sponsored agency securities		30,730		-		30,730		-
Obligations of states and political subdivisions		16,017		-		16,017		-
Other securities		2,054		-		2,054		-
Total securities available for sale	$	390,754	$	-	$	390,754	$	-

There were no transfers between Level 1 and Level 2 during 2020 or 2019.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 - FAIR VALUE - continued

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 - FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at March 31, 2020 are summarized below:

			Fair Value Measurements at March 31, 2020 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	1,853	$	-	$	-	$	1,853
Commercial real estate
Non-owner occupied		3,217		-		-		3,217
Commercial and industrial		317		-		-		317
Total impaired loans	$	5,387	$	-	$	-	$	5,387

Other real estate owned:
Residential real estate	$	249	$	-	$	-	$	249
Multifamily real estate		9,533		-		-		9,533
Construction and land		750		-		-		750
Total OREO	$	10,532	$	-	$	-	$	10,532

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $8,105,000 at March 31, 2020 with a valuation allowance of $2,718,000 and a carrying amount of $8,445,000 at December 31, 2019 with a valuation allowance of $3,102,000 resulting in a provision for loan losses of $182,000 for the three months ended March 31, 2020, compared to a $189,000 provision for loan losses for the three months ended March 31, 2019. The detail of impaired loans by loan class is contained in Note 3 above.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $10,532,000 which is made up of the outstanding balance of $11,906,000 net of a valuation allowance of $1,374,000 at March 31, 2020. There were $25,000 of write downs during the three months ended March 31, 2020 and no write downs were recorded during the three months ended March 31, 2019. At December 31, 2019, other real estate owned had a net carrying amount of $10,875,000, made up of the outstanding balance of $12,474,000, net of a valuation allowance of $1,599,000.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 - FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at March 31, 2020 are summarized below:

	March 31, 2020		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	1,853	sales comparison	adjustment for estimated realizable value	60.0%-60.0% (60.0%)
Commercial real estate
Non-owner occupied		3,217	income approach	adjustment for differences in net operating income expectations	13.9%-67.4% (43.3%)
Commercial and industrial		317	sales comparison	adjustment for estimated realizable value	25.0%-86.5% (45.9%)
Total impaired loans	$	5,387

Other real estate owned:
Residential real estate	$	249	sales comparison	adjustment for estimated realizable value	0.2%-59.8% (17.5%)
Multifamily real estate		9,533	income approach	adjustment for differences in net operating income expectations	26.0%-26.0% (26.0%)
Construction and land		750	sales comparison	adjustment for estimated realizable value	50.3%-69.9% (66.0%)
Total OREO	$	10,532

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 - FAIR VALUE - continued

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

			Fair Value Measurements at December 31, 2019 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	1,900	$	-	$	-	$	1,900
Commercial real estate
Owner occupied		509		-		-		509
Non-owner occupied		2,266		-		-		2,266
Commercial and industrial		288		-		-		288
Construction and land		380		-		-		380
Total impaired loans	$	5,343	$	-	$	-	$	5,343

Other real estate owned:
Residential real estate	$	249	$	-	$	-	$	249
Multifamily real estate		9,588		-		-		9,588
Commercial real estate
Owner occupied		288		-		-		288
Construction and land		750		-		-		750
Total OREO	$	10,875	$	-	$	-	$	10,875

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8 - FAIR VALUE - continued

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

	December 31, 2019		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	1,900	sales comparison	adjustment for estimated realizable value	58.9%-58.9% (58.9%)
Commercial real estate
Owner occupied		509	sales comparison	adjustment for estimated realizable value	76.1%-76.1% (76.1%)
Non-owner occupied		2,266	income approach	adjustment for differences in net operating income expectations	36.6%-67.4% (60.6%)
Commercial and industrial		288	sales comparison	adjustment for estimated realizable value	25.0%-87.0% (43.6%)
Construction and land		380	sales comparison	adjustment for estimated realizable value	56.5%-56.5% (56.5%)
Total impaired loans	$	5,343

Other real estate owned:
Residential real estate	$	249	sales comparison	adjustment for estimated realizable value	0.2%-59.8% (17.5%)
Multifamily real estate		9,588	income approach	adjustment for differences in net operating income expectations	25.6%-25.6% (25.6%)
Commercial real estate
Owner occupied		288	sales comparison	adjustment for estimated realizable value	14.6%-70.4% (34.0%)
Construction and land		750	sales comparison	adjustment for estimated realizable value	50.3%-69.9% (66.0%)
Total OREO	$	10,875

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 9 – SUBSEQUENT EVENT

COVID-19 Virus

As an essential business, Premier has taken steps to modify its normal business operations to include keeping branches open with appropriate “social distancing” measures; utilizing permitted guidance provided by federal and state banking supervisory regulators to assist borrowers to avoid defaulting on their loans; and robustly participating in the U.S. Treasury’s and Small Business Administration’s Payroll Protection Program (“PPP”). Through April 30, 2020, Premier has originated 667 PPP loans totaling over $80.6 million. These efforts may or may not enhance Premier’s business model or future results of operations.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. Furthermore, uncertainty related to future economic conditions resulting from government actions designed to curb the spread of the COVID-19 virus may affect Premier’s operations more or less than currently estimated. These important factors include, but are not limited to, those set forth in Premier’s Annual Report on Form 10-K for the year ended December 31, 2019, under Item 1A – Risk Factors and the following: 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) as well as state and local emergency orders related to COVID-19, changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth or lack thereof, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier. The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “predict,” “continue” and similar expressions are intended to identify forward-looking statements.

A. Results of Operations

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

Net income for the three months ended March 31, 2020 was $5,368,000, or $0.36 per diluted share, compared to net income of $6,176,000, or $0.42 per diluted share for the three months ended March 31, 2019. The decrease in income in the first three months of 2019 is largely due to a decrease in interest income on loans, an increase in interest expense on deposits, an increase in non-interest expense, and an increase in provision for loan losses, all of which more than offset an increase in non-interest income. The comparative increases in interest expense and non-interest expense are partially attributable to the operations of the newly acquired First National Bank of Jackson (“Jackson”), which were not included in the first quarter 2019 income statement results. The provision for loan losses increased by $440,000, or 78.6%, largely to provide for estimated additional credit risk in the loan portfolio related to consequences of the national economic shutdown aimed to moderate the spread of the novel corona virus of 2019 “COVID-19”. The annualized returns on average common shareholders’ equity and average assets were approximately 8.76% and 1.22% for the three months ended March 31, 2020 compared to 11.14% and 1.46% for the same period in 2019.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

Net interest income for the quarter ended March 31, 2020 totaled $16.342 million, down $493,000, or 2.9%, from the $16.835 million of net interest income earned in the first quarter of 2019. Interest income in 2020 decreased by $420,000, a 2.2% decrease, largely due to a $535,000, or 3.3%, decrease in interest income on loans. Interest income on loans in the first quarter of 2020 included approximately $75,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter compared to approximately $719,000 of interest income of this kind recognized during the first quarter of 2019. Excluding this loan income recognition, interest income on loans increased by $109,000, or 0.7%, in the first quarter of 2020, largely due to a higher average balance of loans outstanding although with a lower average yield during the first quarter of 2020 when compared to the first quarter of 2019. The increase in average loans is largely due to loans added via the acquisition of Jackson. The interest income earned on the Jackson loans during the first quarter of 2020 was approximately $457,000. Without this additional loan interest income, interest income on loans would have decreased by $348,000, or 2.1%, when compared to the first quarter of 2019, largely due to a lower average balance of loans outstanding with a slightly lower average yield. Interest income on investment securities in the first quarter of 2020 increased by $202,000, or 8.3%, largely due to a higher average balance of investments outstanding with higher average yields when compared to the first quarter of 2019. Interest income from interest-bearing bank balances and federal funds sold decreased by $87,000, or 25.2%, largely due to a significant decrease in the yield earned on these balances in 2020 compared to the yield earned in 2019 resulting from decreases in the short-term interest rate policy of the Federal Reserve Board of Governors. The decrease in interest income from interest-bearing bank balances and federal funds sold occurred although the average balance outstanding during the first quarter of 2020 was $20.0 million higher than the first quarter of 2019.

In addition to the $420,000 decrease in interest income, net interest income decreased as a result of a $73,000, or 3.3%, increase in interest expense in the first quarter of 2020 when compared to the first quarter of 2019. Interest expense on deposits increased by $115,000, or 5.6%, in the first quarter of 2020, largely due to a higher average of interest-bearing deposit balances outstanding in 2020 although on a slightly lower average rate paid on these deposits. Average interest-bearing deposit balances were up $68.0 million, or 6.5%, in the first quarter of 2020 compared to the first quarter of 2019, largely due to the $69.7 million of deposits attributable to the two Jackson branches acquired in the fourth quarter of 2019. The average interest rate paid on interest-bearing deposits decreased by 2 basis points from 0.80% in the first quarter of 2019 to 0.78% in the first quarter of 2020. Adding to the interest expense increase in 2020 was $15,000 of additional interest expense paid on short-term borrowings, primarily customer repurchase agreements. The additional interest expense was largely due to a 33 basis point increase in the average rate paid, partially offset by a 10.5% decrease in the average balance outstanding during the first quarter of 2020. Partially offsetting these increases in interest expense was a $25,000 decrease in interest expense on the remaining Federal Home Loan Bank (“FHLB”) borrowings of First Bank of Charleston assumed by Premier as part of the 2018 acquisition. Premier has been repaying these FHLB borrowings as they mature and has reduced the average balance outstanding in the first quarter of 2020 by 45.9% when compared to the first quarter of 2019. Also partially offsetting the increase in interest expense on deposits during the first quarter of 2020 was an $11,000, or 11.7%, decrease in interest expense on Premier’s subordinated debt due to a decrease in the variable interest rate paid in 2020 compared to the first quarter of 2019. The variable interest rate is indexed to the short-term three-month LIBOR interest rate, which was lower in the first quarter of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors. Lastly, interest expense on other borrowings also decreased in the first quarter of 2020 by $21,000 compared to the first quarter of 2019, as the outstanding borrowings at the parent company were fully repaid by June 30, 2019.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

Premier’s net interest margin during the first three months of 2020 was 4.00% compared to 4.35% for the same period in 2019. A portion of the interest income on loans is the result of recognizing deferred interest income on loans that paid-off during the period. Excluding this income, Premier’s net interest margin during the first three months of 2020 would have been 3.98% compared to 4.17% for the same period in 2019. As shown in the table below, Premier’s yield earned on federal funds sold and interest-bearing bank balances decreased to 1.46% in the first three months of 2020, from the 2.74% earned in the first quarter of 2019. The average yield earned on securities available for sale increased to 2.73% in the first three months of 2020, from the 2.68% earned in the first quarter of 2019. The average yield earned on total loans outstanding decreased to 5.35% from the 5.73% average yield earned in the first three months of 2019. The average yield on loans in the first three months of 2019 benefited from the $719,000 of interest income earned from deferred interest and discounts recognized on loans that paid off during the quarter. The $719,000 added 26 basis point to the average loan yield in the first quarter of 2019. Earning asset yields have decreased generally in response to decreases in long-term interest rates driven by economic uncertainty resulting from worldwide governmental actions intended to curb the spread of the COVID-19 virus. The Federal Reserve Board of Governors also dramatically reduced its the short-term interest rate policy as a means to stimulate the economy of the United States responsive to COVID-19 governmental actions. As new loans have been made with lower interest rates, some borrowers have requested interest rate lowering adjustments on their existing loans with Premier. Premier has been very selective in granting these loan interest rate concessions. Nevertheless, the impact of both on the average loan yield in the first quarter of 2020 has been a decrease of approximately 15 basis points when compared to the first quarter of 2019.

Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased in the first three months of 2020 from 0.84% during the first three months of 2019 to 0.81% in the first three months of 2020. The average rates paid on interest-bearing deposits decreased from 0.80% in the first three months to 2019 to 0.78% during the first three months of 2020, largely due to lower rates paid on savings deposits and transaction based interest bearing deposits. Furthermore, the average rate paid on Premier’s variable rate subordinated debentures decreased from 7.05% in the first three months of 2019 to 6.14% in the first three months of 2020 due to decreases in short-term interest rate policy by the Federal Reserve and the impact on market short-term interest rates. Due to competition for funds in Premier’s Washington DC metro market, the average rate paid on short-term borrowings, primarily customer repurchase agreements, increased by 33 basis points to 0.49% in the first quarter of 2020, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston remained unchanged. The overall effect was to decrease Premier’s net interest spread by 33 basis points to 3.75% and decrease Premier’s net interest margin by 35 basis points to 4.00% in the first three months of 2020 when compared to the first three months of 2019.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

Additional information on Premier’s net interest income for the first quarter of 2020 and first quarter of 2019 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS

	Three Months Ended March 31, 2020								Three Months Ended March 31, 2019
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	71,171		$	258		1.46	%	$	51,145		$	345		2.74	%
Securities available for sale
Taxable		374,278			2,543		2.72			352,106			2,338		2.66
Tax-exempt		14,780			89		3.05			13,569			92		3.43
Total investment securities		389,058			2,632		2.73			365,675			2,430		2.68
Total loans		1,184,383			15,754		5.35			1,153,448			16,289		5.73
Total interest-earning assets		1,644,612			18,644		4.56	%		1,570,268			19,064		4.92	%
Allowance for loan losses		(13,593	)							(13,817	)
Cash and due from banks		22,674								24,078
Other assets		106,876								110,478
Total assets	$	1,760,569							$	1,691,007

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,110,990			2,165		0.78		$	1,042,947			2,050		0.80
Short-term borrowings		19,847			24		0.49			22,171			9		0.16
FHLB Advances		4,149			30		2.91			7,675			55		2.91
Other borrowings		-			-		-			1,991			21		4.28
Subordinated debt		5,440			83		6.14			5,408			94		7.05
Total interest-bearing liabilities		1,140,426			2,302		0.81	%		1,080,192			2,229		0.84	%
Non-interest bearing deposits		363,560								377,442
Other liabilities		11,400								11,690
Stockholders’ equity		245,183								221,683
Total liabilities and equity	$	1,760,569							$	1,691,007

Net interest earnings				$	16,342							$	16,835
Net interest spread							3.75	%							4.08	%
Net interest margin							4.00	%							4.35	%

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

Non-interest income increased by $73,000, or 3.4%, to $2,249,000 for the first three months of 2020 compared to the same three months of 2019, largely due to a $42,000, or 175.0% increase in secondary market mortgage income, a $23,000, or 9.7% increase in other non-interest income, and a $12,000, or 1.1% increase in service charges on deposit accounts. These increases were partially offset by a $4,000, or 0.5% decrease in electronic banking income (income from debit/credit cards, ATM fees and internet banking charges). A portion of the increase in non-interest income is the result of including the operations of the two branches added from the acquisition of Jackson in the fourth quarter of 2019.

Non-interest expenses for the first quarter of 2020 totaled $10,737,000, or 2.45% of average assets on an annualized basis, compared to $10,593,000, or 2.54% of average assets for the same period of 2019. The $144,000, or 1.4% increase in non-interest expenses in 2020 when compared to the first quarter of 2019 was largely due to the operations of two branches added from the acquisition of Jackson. Increases in operating costs include a $209,000, or 4.0%, increase in staff costs, a $147,000, or 10.6% increase in data processing expense, a $61,000, or 3.7%, increase in net occupancy and equipment expense, a $37,000, or 15.5%, increase in taxes not on income, a $129,000 increase in other operating expenses, and a $15,000, or 6.6% increase in the amortization of intangible assets. These increases were partially offset by a $181,000, or 72.7%, decrease in OREO expenses, a $128,000, or 103.2% decrease in FDIC insurance, a $121,000, or 33.2% decrease in professional fees, and a $14,000, or 10.9% decrease in loan collection expenses. FDIC insurance expense decreased by $128,000 due to the utilization of FDIC based community bank assessment credits used to fully offset the first quarter 2020 FDIC insurance premium.

Income tax expense was $1,486,000 for the first three months of 2020 compared to $1,682,000 for the first three months of 2019. The decrease in income tax expense is largely due to the decrease in pretax income described above, as the effective tax rate for the three months ended March 31, 2020 was 21.7% which compares similarly to the 21.4% effective tax rate for the same period in 2019.

As an essential business, Premier has taken steps to modify its normal business operations to include keeping branches open with appropriate “social distancing” measures; utilizing permitted guidance provided by federal and state banking supervisory regulators to assist borrowers to avoid defaulting on their loans; and robustly participating in the U.S. Treasury’s and Small Business Administration’s Payroll Protection Program. These efforts may or may not enhance Premier’s business model or future results of operations.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

B. Financial Position

Total assets at March 31, 2020 decreased by $21.8 million to $1.759 billion from the $1.781 billion at December 31, 2019. The decrease in total assets since year-end is largely due to a $27.6 million decrease in interest bearing bank balances and a $10.3 million decrease in total loans, partially offset by a $13.7 million increase in securities available for sale and a $2.2 million increase in federal funds sold. Earning assets decreased by $22.0 million from the $1.662 billion at year-end 2019 to end the quarter at $1.640 billion.

Cash and due from banks at March 31, 2020 was $23.5 million, a $364,000 increase from the $23.1 million at December 31, 2019. Interest bearing bank balances decreased by $27.6 million from the $66.1 million reported at December 31, 2019. Federal funds sold increased by $2.2 million to $8.1 million at March 31, 2020. Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases, and are part of Premier’s management of its liquidity and interest rate risks.

Securities available for sale totaled $404.5 million at March 31, 2020, a $13.7 million increase from the $390.8 million at December 31, 2019. The increase was largely due to the purchase of $47.4 million of investment securities and a $6.9 million increase in market value of securities available for sale. These increases more than offset $40.5 million of proceeds from monthly principal payments on Premier’s mortgage backed securities portfolio and securities that matured or were called during the quarter. The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies. Any unrealized losses on securities within the portfolio at March 31, 2020 and December 31, 2019 are believed to be price changes resulting from changes in the long-term interest rate environment and management anticipates receiving all principal and interest on these investments as they come due. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

Total loans at March 31, 2020 were $1.185 billion compared to $1.195 billion at December 31, 2019, a decrease of approximately $10.3 million, or 0.9%. The decrease is largely due to regular principal payments, loan payoffs, and transfers of loans to OREO upon foreclosure partially offset by internal loan growth. Higher risk categories of loans such as construction and land loans, decreased by approximately $16.7 million or 12.2%, and consumer loans, decreased by $2.6 million, or 9.0%. These decreases more than offset a $3.6 million increase in multifamily residential loans, a $3.9 million increase in owner occupied commercial real estate loans and a $2.5 million increase in non-owner occupied commercial real estate loans. The $5.1 million increase in other loans was largely due to a municipal entity line of credit draw on an economic development project well underway in Premier’s West Virginia market. Loan payoffs during the first quarter of 2020 resulted in recognizing approximately $75,000 of remaining fair value discounts associated with the loans.

Premises and equipment decreased by $109,000, largely due to normal quarterly depreciation of fixed assets. Other intangible assets decreased by $242,000, due to the amortization of core deposit intangibles.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

Deposits totaled $1.462 billion as of March 31, 2020, a $33.4 million, or 2.2%, decrease from the $1.496 billion in deposits at December 31, 2019. The overall decrease in deposits is largely due to a $17.1 million, or 4.0% decrease in certificates of deposit, an $11.7 million, or 3.2% decrease in non-interest bearing deposits, and a $6.6 million, or 2.1% decrease in interest bearing transaction deposits. Partially offsetting these decreases, savings and money market deposits increased by $2.0 million, or 0.5%. The decrease in certificate of deposit balances are primarily the result of discontinuing CD rate specials as management lowered offering rates in response to decreases in market short-term and long-term interest rates. The decrease in non-interest bearing deposits was largely due to an influx of these deposits in the fourth quarter of 2019 that were temporary in nature. Repurchase agreements with corporate and public entity customers decreased by $734,000, or 3.6%. Short-term FHLB borrowings increased by $5.0 million since year-end 2019 due to a 4-week advance to supplement Premier’s investment purchases. Long-term FHLB advances decreased by $3.4 million due to payments at maturity on the FHLB advances assumed by Premier as part of its acquisition of First Bank of Charleston. Subordinated debentures increased by $9,000, due to the regular amortization of the fair value adjustment. Other liabilities increased by $2.1 million, primarily due to increases in net deferred tax liabilities related to the increase in the unrealized gain on securities available for sale and the accrual of income taxes on first quarter 2020 pretax income not due to be paid until after March 31, 2020.

The following table sets forth information with respect to the Company’s nonperforming assets at March 31, 2020 and December 31, 2019.

	(In Thousands)
	2020			2019
Non-accrual loans	$	14,509		$	14,437
Accruing loans which are contractually past due 90 days or more		1,102			2,228
Accruing restructured loans		2,992			3,020
Total non-performing loans		18,603			19,685
Other real estate acquired through foreclosure (OREO)		12,709			12,242
Total non-performing assets	$	31,312		$	31,927

Non-performing loans as a percentage of total loans		1.57	%		1.65	%

Non-performing assets as a percentage of total assets		1.78	%		1.79	%

Total non-performing loans have decreased since year-end, largely due to a $1.1 million decrease in loans past due 90 days or more and a $28,000 decrease in accruing restructured loans. These decreases in non-performing loans were partially offset by a $72,000 increase in non-accrual loans. Total non-performing assets have decreased since year-end, largely due to the decrease in non-performing loans. This decrease was partially offset by a $467,000 increase in other real estate owned acquired through foreclosure (“OREO”). Other real estate owned increased by $467,000, or 3.8%, largely due to the foreclosure on one commercial real estate property previously categorized as an impaired loan with a specific allowance for loan losses allocation which resulted in a $566,000 loan charge-off upon foreclosure.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

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.

Gross charge-offs totaled $826,000 during the first three months of 2020, largely due to the foreclosure on one commercial real estate property from a previously identified impaired loan relationship that also resulted in a $566,000 loan charge-off. Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first three months of 2020 totaled $140,000, resulting in net charge-offs for the first quarter of 2020 of $686,000. This compares to $819,000 of net charge-offs recorded in the first quarter of 2019. The allowance for loan losses at March 31, 2020 was 1.17% of total loans compared to 1.13% at December 31, 2019. The increase in the ratio is largely due to a decrease in total loans outstanding and an increase in the amount of allowance allocated to loans collectively evaluated for impairment.

During the first quarter of 2020, Premier recorded $1,000,000 of provision for loan losses. This provision compares to $560,000 of provision for loan losses recorded during the same quarter of 2019. The increase in the provision for loan losses recorded during the first quarter of 2020 was primarily to provide for an estimate of additional identified credit risk in the loan portfolio due to uncertainty related to future economic conditions resulting from government actions designed to curb the spread of the COVID-19 virus. Premier added approximately $514,000 to its qualitative credit risk analysis of the loan portfolio related to loans originated to various industries believed to be more susceptible to future credit risk resulting from an economic slowdown such as lodging, restaurants, amusement, personal services and retail stores. Due to government intervention efforts to stimulate the economy and maintain personal and business liquidity, the extent, if any, of the impact of the economic slowdown on such industries may not be known for quite some time in the future. Management will continue to monitor past due and non-performing loans and work with borrowers within the permitted guidance provided by federal and state banking supervisory regulators to assist borrowers to avoid defaulting on their loans.

The provision for loan losses recorded during the first quarter of 2019 was primarily to provide for additional identified credit risk in Premier’s commercial real estate loan, residential real estate loan, and all other loan portfolios. The level of provision expense is determined under Premier’s internal analyses of evaluating credit risk. The provisions for loan losses recorded in 2019 and 2020 were made in accordance with Premier’s policies regarding management’s estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America. Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk. With the concentrations of commercial real estate loans in the Washington, DC, Richmond, Virginia, and Cincinnati, Ohio markets, fluctuations in commercial real estate values will be monitored. Premier also continues to monitor the impact of declines in the coal mining industry that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry, which may have a larger impact in the central area of West Virginia.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

A resulting decline in employment could increase non-performing assets from loans originated in these areas. In each of the last five years, Premier sold some OREO properties at a gain while other OREO properties have required subsequent write-downs to net realizable values. These factors are considered in determining the adequacy of the allowance for loan losses. For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans and restructured loans, see Note 3 to the consolidated financial statements.

C. Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America. These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2019. Some of these accounting policies, as discussed below, are considered to be critical accounting policies. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified two accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance for loan losses and the identification and evaluation of impaired loans. A detailed description of these accounting policies is contained in the Company’s annual report on Form 10-K for the year ended December 31, 2019. There have been no significant changes in the application of these accounting policies since December 31, 2019.

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

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

D. Liquidity

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

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

Cash flow generated by repayment of loans and interest.

Arrangements with correspondent banks for purchase of unsecured federal funds.

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

Maintenance of an adequate available-for-sale security portfolio. The Company owns $404.5 million of securities at fair value as of March 31, 2020.

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

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

E. Capital

At March 31, 2020, total stockholders’ equity of $248.9 million was 14.1% of total assets. This compares to total stockholders’ equity of $240.2 million, or 13.5% of total assets on December 31, 2019. The increase in stockholders’ equity was largely due to the $5.4 million of first quarter net income and a $5.4 million, net of tax, increase in the market value of the investment portfolio available for sale. This increase in stockholders’ equity was partially offset by a $0.15 per share cash dividend declared and paid during the first quarter of 2020.

In the first quarter of 2020, Premier elected to adopt regulatory capital simplification rules permitting bank holding companies of Premier’s size to utilize one measure of regulatory capital, the community bank leverage ratio (also known as the “CBLR”), to determine regulatory capital adequacy. The community bank leverage ratio requires a higher amount of Tier 1 capital to average assets than the standard leverage ratio to be considered well capitalized. However, meeting this higher standard eliminates the need to compute and monitor the Tier 1 risk-based capital ratio, the Common Equity Tier 1 risk-based capital ratio and the total risk-based capital ratio as well as maintain the 2.50% regulatory capital buffer necessary to avoid limitations on equity distributions and discretionary bonus payments. Other criteria required to be able to utilize the CBLR as the sole measure of capital adequacy include 1.) total assets less than $10.0 billion, 2.) trading assets and liabilities equal to less than 5.0% of total assets and 3.) off-balance sheet exposures, such as the unused portion of conditionally cancellable lines of credit, equal to less than 25% of total assets. Premier meets all three of these criteria and has elected to utilize the CBLR as its measure of regulatory capital adequacy on a consolidated basis as well as for its largest subsidiary bank.

A community bank leverage ratio of Total Tier 1 capital to quarterly average assets must be at least 9.00% to be considered well capitalized. Premier’s Tier 1 capital totaled $196.4 million at March 31, 2020, which represents a community bank leverage ratio of 11.5%. This ratio is up from the 11.3% Tier 1 leverage ratio and $192.7 million of Tier 1 capital at December 31, 2019. The slight increase in the Tier 1 leverage ratio is largely due to the growth in Tier 1 capital combined with a slight decrease in the quarterly average total assets used to compute the CBLR. Premier’s wholly owned subsidiary Citizens Deposit Bank has not adopted the CBLR simplification standard as its Tier 1 leverage ratio was only 8.36% at March 31, 2020. Nevertheless, utilizing the standard risk-based capital ratio calculations, Citizens Deposit Bank was still considered to be well capitalized under the prompt corrective action framework and maintained a capital conservation buffer of 6.58%, well in excess of the 2.50% buffer required for equity distributions. Premier’s other wholly owned subsidiary bank has adopted the regulatory capital simplification rules and maintained a CBLR of 11.66%, well in excess of the 9.00% required to be considered well capitalized under the prompt corrective action framework.

Book value per common share was $16.98 at March 31, 2020 and $16.39 at December 31, 2019. The increase in book value per share was largely due to the $0.36 per share earned during the first quarter, partially offset by the $0.15 per share quarterly cash dividend to common shareholders declared and paid during the first quarter of 2020. Also increasing Premier’s book value per share at March 31, 2020 was the $5.4 million of other comprehensive income for the first three months of 2020 related to the increase in the market value of investment securities available for sale, which increased book value by approximately $0.37 per share.

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020

~~NOTE 7 – FAIR VALUE - continued~~

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

Fair Value Measurements at September 30, 2017 Using

Carrying
Amount
Level 1 Level 2 Level 3 Total
Financial assets
Cash and due from banks $ 63,512 $ 63,512 $ - $ - $ 63,512
Time deposits with other banks 2,582 - 2,589 - 2,589
Federal funds sold 11,632 11,632 - - 11,632
Securities available for sale 289,203 - 289,203 - 289,203
Loans, net 1,042,965 - - 1,029,145 1,029,145
Federal Home Loan Bank stock 3,185 n/a n/a n/a n/a
Interest receivable 4,060 - 829 3,231 4,060

Financial liabilities
Deposits $ (1,269,384 ) $ (925,328 ) $ (340,134 ) $ - $ (1,265,462 )
Securities sold under agreements to repurchase (25,116 ) - (25,116 ) - (25,116 )
Other borrowed funds (6,000 ) - (5,966 ) - (5,966 )
Subordinated Debt (5,368 ) - (5,381 ) - (5,381 )
Interest payable (358 ) (7 ) (351 ) - (358 )

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

Fair Value Measurements at December 31, 2016 Using

Carrying
Amount
Level 1 Level 2 Level 3 Total
Financial assets
Cash and due from banks $ 97,163 $ 97,163 $ - $ - $ 97,163
Time deposits with other banks 2,332 - 2,352 - 2,352
Federal funds sold 7,555 7,555 - - 7,555
Securities available for sale 288,607 - 288,607 - 288,607
Loans, net 1,013,987 - - 1,004,388 1,004,388
Federal Home Loan Bank stock 3,200 n/a n/a n/a n/a
Interest receivable 3,862 - 771 3,091 3,862

Financial liabilities
Deposits $ (1,279,386 ) $ (920,745 ) $ (354,885 ) $ - $ (1,275,630 )
Securities sold under agreements to repurchase (23,820 ) - (23,820 ) - (23,820 )
Other borrowed funds (8,859 ) - (8,906 ) - (8,906 )
Subordinated debt (5,343 ) - (5,341 ) - (5,341 )
Interest payable (364 ) (7 ) (357 ) - (364 )

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~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 7 – FAIR VALUE - continued~~

~~Assets and Liabilities Measured on a Recurring Basis~~

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

Fair Value Measurements at
September 30, 2017 Using:

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

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Available for sale
Mortgage-backed securities
U. S. agency MBS - residential $ 199,933 $ - $ 199,933 $ -
U. S. agency CMO’s - residential 56,514 - 56,514 -
Total mortgage-backed securities of government sponsored agencies 256,447 - 256,447 -
U. S. government sponsored agency securities 19,275 - 19,275 -
Obligations of states and political subdivisions 13,481 - 13,481 -
Total available for sale $ 289,203 $ - $ 289,203 $ -

Fair Value Measurements at
December 31, 2016 Using:

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

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Available for sale
Mortgage-backed securities
U. S. agency MBS - residential $ 174,177 $ - $ 174,177 $ -
U. S. agency CMO’s - residential 73,267 - 73,267 -
Total mortgage-backed securities of government sponsored agencies 247,444 - 247,444 -
U. S. government sponsored agency securities 24,501 - 24,501 -
Obligations of states and political subdivisions 16,662 - 16,662 -
Total securities available for sale $ 288,607 $ - $ 288,607 $ -

~~There were no transfers between Level 1 and Level 2 during 2017 or 2016.~~

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~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 7 – FAIR VALUE - continued~~

~~Assets and Liabilities Measured on a Non-Recurring Basis~~Qualitative Disclosures About Market Risk

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

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent collateral appraisals. Real estate appraisals may utilize a single valuation approachcurrently does not engage in any derivative or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and unique to each property and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports. Management periodically evaluates the appraised collateral values and will discount the collateral’s appraised value to account for a number of factors including but not limitedhedging activity. Refer to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, management’s expertise and knowledge of the client and client’s business, or other factors unique to the collateral. To the extent an adjusted collateral value is lower than the carrying value of an impaired loan, a specific allocation of the allowanceCompany’s 2019 10-K for ~~loan losses is assigned to the loan.~~

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~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 7 – FAIR VALUE - continued~~

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

Fair Value Measurements at
September 30, 2017 Using

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

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Assets:
Impaired loans:
Multifamily real estate $ 10,578 $ - $ - $ 10,578
Commercial real estate:
Owner occupied 569 - - 569
Non-owner occupied 1,984 - - 1,984
Commercial and industrial 161 - - 161
All other 3,593 - - 3,593
Total impaired loans $ 16,885 $ - $ - $ 16,885

Other real estate owned:
Residential real estate $ 370 $ - $ - $ 370
Commercial real estate:
Owner occupied 175 - - 175
Non-owner occupied 1,853 - - 1,853
All other 2,855 - - 2,855
Total OREO $ 5,253 $ - $ - $ 5,253

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

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $5,253,000 which is made up of the outstanding balance of $8,642,000 net of a valuation allowance of $3,389,000 at September 30, 2017. There were $474,000 of additional write downs during the nine months ended September 30, 2017, compared to $478,000 of additional write downs during the nine months ended September 30, 2016. For the three months ended September 30, 2017 there were $111,000 of additional write downs compared to $478,000 of additional write downs during the three months ended September 30, 2016. At December 31, 2016, other real estate owned had a net carrying amount of $6,624,000, made up of the outstanding balance of $9,900,000, net of a valuation allowance of $3,276,000.

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~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 7 – FAIR VALUE - continued~~

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

September 30, 2017 Valuation Techniques Unobservable Inputs
Range
(Weighted Avg)
Impaired loans:
Multifamily real estate: $ 10,578 sales comparison adjustment for differences between the comparable sales 4.0%-4.0% (4.0%)
Commercial real estate:
Owner occupied 569 sales comparison adjustment for estimated realizable value 23.1%-23.1% (23.1%)
Non-owner occupied 1,984 income approach adjustment for differences in net operating income expectations 67.4%-67.4% (67.4%)
Commercial and industrial 161 sales comparison adjustment for estimated realizable value 8.0%-56.5% (52.8%)
All other 3,593 sales comparison adjustment for percentage of completion of construction 8.0%-23.0% (22.7%)
Total impaired loans $ 16,885

Other real estate owned:
Residential real estate $ 370 sales comparison adjustment for differences between the comparable sales 0.0%-50.2% (16.4%)
Commercial real estate:
Owner occupied 175 sales comparison adjustment for estimated realizable value 21.8%-21.8% (21.8%)
Non-owner occupied 1,853 sales comparison adjustment for estimated realizable value 31.8%-58.9% (34.7%)
All other 2,855 sales comparison adjustment for estimated realizable value 15.1%-69.0% (18.8%)
Total OREO $ 5,253

~~- 37 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 7 – FAIR VALUE - continued~~

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

Fair Value Measurements at
December 31, 2016 Using

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

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

Assets:
Impaired loans:
Commercial real estate:
Owner occupied $ 793 $ - $ - $ 793
Commercial and Industrial 12 - - 12
All Other 3,036 - - 3,036
Total impaired loans $ 3,841 $ - $ - $ 3,841

Other real estate owned:
Residential real estate: $ 613 $ - $ - $ 613
Commercial real estate:
Owner occupied 175 - - 175
Non-owner occupied 2,153 - - 2,153
All other 3,683 - - 3,683
Total OREO $ 6,624 $ - $ - $ 6,624

~~- 38 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)~~

~~NOTE 7 – FAIR VALUE - continued~~

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

December 31, 2016 Valuation Techniques Unobservable Inputs
Range
(Weighted Avg)
Impaired loans:
Commercial Real Estate
Owner Occupied $ 793 sales comparison adjustment for limited salability of specialized property 9.3%-76.4% (19.3%)
Commercial and Industrial 12 sales comparison adjustment for differences between the comparable sales 8.0%-8.0% (8.0%)
All Other 3,036 sales comparison adjustment for differences between the comparable sales 5.7%-9.0% (8.0%)
Total impaired loans $ 3,841

Other real estate owned:
Residential Real Estate $ 613 sales comparison adjustment for differences between the comparable sales 0.7%-86.8% (25.2%)
Commercial Real Estate
Owner Occupied 175 sales comparison adjustment for differences between the comparable sales 21.8%-21.8% (21.8%)
Non-owner Occupied 2,153 sales comparison adjustment for differences between the comparable sales 17.2%-27.6% (25.7%)
All Other 3,683 sales comparison adjustment for estimated realizable value 15.1%-45.4% (21.8%)
Total OREO $ 6,624

~~- 39 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

~~Item 2. Management’s Discussion and Analysis~~

~~of Financial Condition and Results of Operations~~

~~FORWARD-LOOKING STATEMENTS~~

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

A.~~Results of Operations~~

Net income for the nine months ended September 30, 2017 was $11,050,000, or $1.03 per diluted share, compared to net income of $8,767,000, or $0.83 per diluted share, for the nine months ended September 30, 2016. The increase in income in 2017 is largely due to an increase in net interest income, an increase in other operating income, and a decrease in other operating expense. The annualized returns on average common stockholders’ equity and average assets were approximately 8.13% and 0.99% for the nine months ended September 30, 2017 compared to 6.71% and 0.79%% for the same period in 2016.

Net income for the three months ended September 30, 2017 was $3,467,000, or $0.32 per diluted share, compared to net income of $3,164,000, or $0.30 per diluted share for the three months ended September 30, 2016. The increase in net income during the three months ended September 30, 2017 is largely due to an increase in interest income and non-interest income as well as a decrease in interest expense and non-interest expense. The annualized returns on average common stockholders’ equity and average assets were approximately 7.53% and 0.93% for the three months ended September 30, 2017 compared to 7.10% and 0.84% for the same period in 2016.

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~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

Net interest income for the nine months ended September 30, 2017 totaled $43.289 million, up $3.027 million, or 7.5%, from the $40.262 million of net interest income earned in the first nine months of 2016. Interest income in 2017 increased by $2.875 million, or 6.6%, largely due to a $2.583 million increase in interest income on loans. Interest income on loans in the first nine months of 2017 included approximately $1.607 million of deferred interest and discounts recognized on loans that paid off during the first nine months of 2017, compared to $212,000 of loan interest income of this kind recognized during the first nine months of 2016. The loan payoffs in 2017 included both non-accrual loans and performing loans that were once on non-accrual status. Otherwise, interest income on loans increased by $1.188 million, or 3.0%, largely due to a higher average balance of loans outstanding during the period. Interest income on investment securities in the first nine months of 2017 increased by $105,000, or 2.4%, largely due to a higher yielding investment portfolio, although on a lower average balance of investments outstanding, as surplus funds and maturing investments have been used to fund the higher yielding loan portfolio. Interest income from interest-bearing bank balances and federal funds sold increased by $187,000, or 57.0%, largely due to an increase in the yield on these balances in 2017 resulting from the Federal Reserve Board of Governors’ decisions to increase the federal funds target rate by a total of 75 basis points in the last twelve months, on a lower average balance outstanding during the first nine months of 2017.

Interest expense decreased in total during the first nine months of 2017 by $152,000, or 4.4%, when compared to the same nine months of 2016. Interest expense on deposits decreased by $63,000, or 2.2%, in the first nine months of 2017, primarily due to a lower average balance of higher rate certificates of deposit in the first nine months of 2017 compared to the same nine months of 2016. The decrease in the average of these deposit balances was partially replaced by an increase in average transaction based interest-bearing deposits and savings deposits, which typically pay a lower interest rate than certificates of deposit. Interest expense on borrowings in the first nine months of 2017 decreased by $119,000, or 33.7%, largely due to a decrease in outstanding borrowings from principal payments, including the full repayment of bank based FHLB borrowings during 2016. Partially offsetting the decrease in interest expense on borrowings was a $37,000, or 20.4%, increase in interest expense on Premier’s subordinated debt due to an increase in the variable rate interest rate paid in 2017. The variable interest rate is indexed to the three month London Interbank Offered Rate, which is sensitive to moves in the short-term interest rate market.

~~Premier’s net interest margin during the first nine months of 2017 was 4.19%, compared to 3.92% for the same period in 2016. A portion~~ of the interest income on loans is the result of recognizing deferred interest income and discounts on loans that paid-off during the period. Excluding this income, Premier’s net interest margin during the first nine months of 2017 would have been 4.03%, compared to 3.90% for the same period in 2016. As shown in the table below, Premier’s yield earned on federal funds sold and interest bearing bank balances increased to 1.47% in the first nine months of 2017, from the 0.66% earned in the first nine months of 2016. The average yield earned on securities available for sale and total loans outstanding also increased when compared to the first nine months of 2016. Further improving Premier’s net interest margin, the average rate paid on interest-bearing liabilities decreased in the first nine months of 2017, as decreases in the average rates paid on interest-bearing deposits and short-term borrowings were partially offset by a higher average rate paid on Premier’s variable rate subordinated debentures. The overall effect was to increase Premier’s net interest spread by 26 basis points to 4.06% and its net interest margin by 27 basis points to 4.19% in the first nine months of 2017 when compared to the first nine months of 2016.

~~- 41 -~~

~~Table of Contents~~sensitivity

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

~~Additional information on Premier’s net interest income for the first nine months of 2017 and first nine months of 2016 is contained in the following table.~~

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS

Nine Months Ended Sept 30, 2017 Nine Months Ended Sept 30, 2016
Balance Interest Yield/Rate Balance Interest Yield/Rate
Assets
Interest earning assets
Federal funds sold and other $ 46,851 $ 515 1.47 % $ 66,518 $ 328 0.66 %
Securities available for sale
Taxable 286,602 4,236 1.97 294,926 4,075 1.84
Tax-exempt 12,523 198 3.24 18,048 254 2.89
Total investment securities 299,125 4,434 2.02 312,974 4,329 1.90
Total loans 1,038,719 41,667 5.36 995,517 39,084 5.24
Total interest-earning assets 1,384,695 46,616 4.51 % 1,375,009 43,741 4.26 %
Allowance for loan losses (11,231 ) (10,235 )
Cash and due from banks 40,700 38,291
Other assets 80,857 81,678
Total assets $ 1,495,021 $ 1,484,743

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits $ 959,489 2,854 0.40 $ 960,668 2,917 0.41
Short-term borrowings 22,512 21 0.12 25,068 28 0.15
FHLB advances - - - 2,904 32 1.47
Other borrowings 7,586 234 4.12 10,396 321 4.12
Subordinated debentures 5,355 218 5.44 5,027 181 4.81
Total interest-bearing liabilities 994,942 3,327 0.45 % 1,004,063 3,479 0.46 %
Non-interest bearing deposits 314,344 302,558
Other liabilities 4,582 3,918
Stockholders’ equity 181,153 174,204
Total liabilities and equity $ 1,495,021 $ 1,484,743

Net interest earnings $ 43,289 $ 40,262
Net interest spread 4.06 % 3.80 %
Net interest margin 4.19 % 3.92 %

~~- 42 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

~~Additional information on Premier’s net interest income for the third quarter of 2017 and third quarter of 2016 is contained in the following table.~~

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS

Three Months Ended Sept 30, 2017 Three Months Ended Sept 30, 2016
Balance Interest Yield/Rate Balance Interest Yield/Rate
Assets
Interest earning assets
Federal funds sold and other $ 32,288 $ 176 2.16 % $ 69,396 $ 123 0.71 %
Securities available for sale
Taxable 288,241 1,427 1.98 288,582 1,285 1.78
Tax-exempt 11,579 62 3.30 16,796 82 3.00
Total investment securities 299,820 1,489 2.03 305,378 1,367 1.85
Total loans 1,047,202 13,469 5.10 1,027,011 13,375 5.18
Total interest-earning assets 1,379,310 15,134 4.37 % 1,401,785 14,865 4.23 %
Allowance for loan losses (11,760 ) (10,840 )
Cash and due from banks 41,253 42,224
Other assets 79,702 81,240
Total assets $ 1,488,505 $ 1,514,409

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits $ 946,258 954 0.40 $ 970,005 965 0.40
Short-term borrowings 22,784 7 0.12 29,571 10 0.13
FHLB advances - - - 5,104 10 0.78
Other borrowings 6,553 68 4.12 9,779 101 4.11
Subordinated debentures 5,365 74 5.47 5,328 63 4.70
Total interest-bearing liabilities 980,960 1,103 0.45 % 1,019,787 1,149 0.45 %
Non-interest bearing deposits 318,894 312,898
Other liabilities 4,539 3,536
Stockholders’ equity 184,112 178,188
Total liabilities and equity $ 1,488,505 $ 1,514,409

Net interest earnings $ 14,031 $ 13,716
Net interest spread 3.92 % 3.78 %
Net interest margin 4.05 % 3.91 %

~~- 43 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

Net interest income for the quarter ended September 30, 2017 totaled $14.031 million, up $315,000, or 2.3%, from the $13.716 million of net interest income earned in the third quarter of 2016. Interest income in 2017 increased by $269,000, or 1.8%, largely due to a $122,000, or 8.9%, increase in interest income on investment securities. Interest income on loans in the third quarter of 2017 increased $94,000, or 0.7%, compared to the interest income on loans earned during the same quarter of 2016. Interest income on loans in the third quarter of the prior year included approximately $142,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter, compared to no interest income of this kind recognized during the third quarter of 2017. Otherwise, interest income on loans increased by $236,000, or 1.8%, in the third quarter of 2017, largely due to a higher average balance of loans outstanding during the quarter. Interest income on investment securities in the third quarter of 2017 increased by $122,000, or 8.9%, largely due to a higher average yield on the investment portfolio, although on a lower average balance of investments outstanding during the quarter. Interest income from interest-bearing bank balances and federal funds sold increased by $53,000, or 43.1%, largely due to an increase in the yield on these balances in 2017 although on a lower average balance outstanding during the quarter.

Complementing the increase in interest income in the third quarter of 2017 was a $46,000, or 4.0%, decrease in interest expense. Interest expense on deposits decreased by $11,000, or 1.1%, in the third quarter of 2017, primarily due to a lower average of interest-bearing deposits outstanding during the quarter. Interest expense on repurchase agreements in the third quarter of 2017 decreased by $3,000, or 30.0%, primarily due to a lower average balance outstanding during the quarter. Interest expense on borrowings in the third quarter of 2017 decreased by $43,000, or 38.7%, largely due to a decrease in outstanding borrowings, including the full repayment of bank based FHLB borrowings during 2016. Partially offsetting the decrease in interest expense on borrowings was an $11,000, or 17.5%, increase in interest expense on Premier’s subordinated debt, largely due to an increase in the variable interest rate paid in 2017.

Premier’s net interest margin during the third quarter of 2017 was 4.05% compared to 3.91% for the same period in 2016. As shown in the table above, Premier’s yield earned on federal funds sold and interest bearing bank balances increased to 2.16% in the third quarter of 2017, from the 0.71% earned in the third quarter of 2016. The average yield earned on securities available for sale also increased when compared to the third quarter of 2016. The average yield earned on total loans outstanding decreased to 5.10% in the third quarter of 2017, from the 5.18% earned in the third quarter of 2016, partially due to the $142,000 of income recognized from deferred interest and discounts in the third quarter of 2016. The average rate paid on interest-bearing liabilities remained unchanged in the third quarter of 2017, as a decrease in interest expense on bank based FHLB advances was offset by a higher average rate paid on Premier’s variable rate subordinated debentures. The overall effect was to increase Premier’s net interest spread by 14 basis points to 3.92% and its net interest margin by 14 basis points to 4.05% in the third quarter of 2017 when compared to the same quarter of 2016.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

Non-interest income increased by $264,000, or 4.4%, to $6,328,000 for the first nine months of 2017 compared to the same period of 2016. Service charges on deposit accounts increased by $226,000, or 7.6%, and electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $69,000, or 2.9%. Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, particularly in the third quarter of 2017, as Premier Bank introduced updated courtesy overdraft protection features on its consumer checking accounts. Electronic banking income increased primarily due to an increase in income from debit card transaction activity. Partially offsetting these increases was a $37,000, or 6.5%, decrease in other non- interest income, largely due to lower revenue on checkbook sales and wire transfer fees as well as a lower level of loan extension and other fees on loans.

For the quarter ending September 30, 2017, non-interest income increased by $115,000, or 5.6%, to $2,177,000 compared to $2,062,000 recognized during the same quarter of 2016. Service charges on deposit accounts increased by $105,000, or 10.2% and electronic banking income increased by $20,000, or 2.5%. Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, particularly in the third quarter of 2017, while electronic banking income increased primarily due to an increase in revenue from non-customer use of bank owned automated teller machines. Partially offsetting these increases was a $13,000, or 7.4%, decrease in other non-interest income, largely due to a lower amount of loan extension and other fees on loans.

Non-interest expenses for the first nine months of 2017 totaled $30.33 million, or 2.71% of average assets on an annualized basis, compared to $31.32 million, or 2.82% of average assets for the same period of 2016. The $993,000, or 3.2%, decrease in non-interest expenses in 2017 when compared to the first nine months of 2016 is largely due to a $322,000, or 2.1%, decrease in staff costs, a $263,000, or 18.8%, decrease in expenses and write-downs of OREO, a $246,000, or 32.7%, decrease in FDIC insurance expense, a $216,000, or 4.6%, decrease in occupancy and equipment expenses, and a $273,000, or 7.4%, decrease in other non-interest expenses. Staff costs decreased largely due to reductions in salary expense, payroll taxes, medical benefit costs, and retirement benefit costs related to reductions in personnel and changes to benefit plans at the acquired First National Bankshares locations. These savings were partially offset by normal salary increases at Premier’s other operations. OREO expenses decreased in 2017, largely due to lower cost to maintain properties held while being marketed for sale when compared to the first nine months of 2016. In addition to lower maintenance costs, Premier recorded $41,000 of net gains on the sale of OREO compared to $30,000 of net losses on the sale of OREO properties in the first nine months of 2016. Occupancy and equipment expense decreased largely due to lower building repairs and lower deprecation on information technology equipment. FDIC insurance decreased, largely due to lower rates charged on the assessment base. Other non-interest expenses decreased due in large part to $196,000 of conversion related expenses incurred in 2016 related to the acquisition and data systems conversion of First National Bankshares versus only $17,000 of conversion costs incurred in 2017. These decreases in non-interest expense were partially offset by a $221,000, or 44.2%, increase in professional fees, a $116,000, or 24.5%, increase in taxes not on income, and a $84,000, or 2.1%, increase in data processing costs when compared to the first nine months of 2016. Professional fees increased largely due to increases in legal fees, audit costs, and expenditures on third party consultants. Taxes not on income increased largely due to increases in equity and deposit based taxes in Kentucky and Ohio due to growth in those markets from Premier’s expanding branch network into the metro Cincinnati, Ohio area. Outside data processing costs increased in 2017 largely due to the costs of expanding electronic access products such as internet banking and mobile banking.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

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

Income tax expense was $6.207 million for the first nine months of 2017 compared to $4.803 million for the first nine months of 2016. The effective tax rate for the nine months ended September 30, 2017 was 36.0% compared to 35.4% for the same period in 2016. For the quarter ended September 30, 2017, income tax expense was $1.925 million, a 35.7% effective tax rate, compared to $1.694 million (a 34.9% effective tax rate) for the same period in 2016. The increase in income tax expense during the first nine months of 2017 can be primarily attributed to the increase in pre-tax income detailed above. The increase in the effective tax rate in 2017 is largely due to higher levels of state taxable income. Similarly, the increase in income tax expense during the third quarter of 2017 when compared to the same quarter of 2016, can be primarily attributed to the increase in pre-tax income for the quarter as detailed above. The increase in the third quarter effective tax rate in 2017 is also largely due to higher levels of state taxable income.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

B.~~Financial Position~~

Total assets at September 30, 2017 decreased by $3.5 million to $1.493 billion from the $1.496 billion at December 31, 2016. The decrease in total assets since year-end is largely due a $33.8 million decrease in interest bearing bank balances, a $1.3 million decrease in other assets and a $1.2 million decrease in OREO. These decreases were partially offset by a $30.5 million increase in total loans outstanding and a $4.1 million increase in federal funds sold. Contrary to the decrease in total assets, earning assets increased by $1.4 million from the $1.382 billion at year-end 2016 to end the third quarter at $1.384 billion.

Cash and due from banks at September 30, 2017 was $41.8 million, a $388,000 increase from the $41.4 million at December 31, 2016. Interest-bearing bank balances decreased by $34.0 million from the $55.7 million reported at December 31, 2016. Federal funds sold increased by $4.1 million to $11.6 million at September 30, 2017. Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases and are part of Premier’s management of its liquidity and interest rate risks. The decrease in interest-bearing bank balances during the first nine months of 2017 was largely in response to an increase in total loans outstanding.

Securities available for sale totaled $289.2 million at September 30, 2017, a $596,000 increase from the $288.6 million at December 31, 2016. The increase was largely due to the purchase of $49.2 million of investment securities and a $3.7 million increase in the market value of the securities available for sale, which more than offset $50.8 million of proceeds from monthly principal payments on Premier’s mortgage backed securities portfolio and securities that matured or were called during the year. The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies. Any unrealized losses on securities within the portfolio at September 30, 2017 and December 31, 2016 are believed to be price changes resulting from increases in the long-term interest rate environment since acquiring the investment security and management anticipates receiving all principal and interest on these investments as they come due. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

~~Total loans at September 30, 2017 were $1.055 billion compared to $1.025 billion at December 31, 2016, an increase of approximately $30.5 million, or 3.0%~~. The increase in loans was largely due to internal loan growth which more than offset regular principal payments, loan payoffs, and transfers of loans to OREO upon foreclosure. Loan payoffs during the first nine months of 2017 included payoffs on $5.6 million of non-accrual loans and $5.4 million of performing loans which resulted in recognizing approximately $1,407,000 of interest income deferred while the loans were on non-accrual status and $199,000 of remaining purchase discounts associated with the loans. The increase in total loans since year-end resulted from increases in commercial real estate loans, commercial and industrial loans, and all other loans. These increases more than offset decreases in residential real estate loans, multifamily real estate loans, and retail consumer loans.

Premises and equipment decreased by $720,000 largely due to normal depreciation of fixed assets. Other real estate owned acquired through foreclosure (“OREO”) decreased by $1.2 million largely due to $1.8 million of sales and $474,000 of OREO write-downs on existing OREO, partially offset by $1.1 million of new additions. Goodwill and other intangible assets decreased by $768,000, due to the year-to-date amortization of core deposit intangibles. Other assets decreased by $1.3 million primarily due to a decrease in deferred tax assets.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

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

~~The following table sets forth information with respect to the Company’s nonperforming assets at September 30, 2017 and December 31, 2016.~~

(In Thousands)
2017 2016
Non-accrual loans $ 24,345 $ 25,747
Accruing loans which are contractually past due 90 days or more 1,716 1,999
Accruing restructured loans 8,715 8,268
Total non-performing and restructured loans 34,776 36,014
Other real estate acquired through foreclosure (OREO) 11,458 12,665
Total non-performing assets $ 46,234 $ 48,679

Non-performing loans as a percentage of total loans 3.30 % 3.51 %

Non-performing assets as a percentage of total assets 3.10 % 3.25 %

Total non-performing and restructured loans have decreased since year-end, largely due to a $1.4 million decrease in non-accrual loans and a $238,000 decrease in loans past due 90 days or more. These decreases in non-performing loans were partially offset by a $447,000 increase in accruing restructured loans. Total non-performing assets have decreased since year-end, largely due to the reduction in non-performing loans plus a $1.2 million decrease in other real estate acquired through foreclosure (“OREO”). Other real estate owned decreased as sales of OREO and additional write-downs on existing properties in the first nine months of 2017 exceeded new foreclosures.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

Gross charge-offs totaled $1.1 million during the first nine months of 2017, largely due to consumer lending based charge-offs, including residential real estate loans and the partial charge-off of loans upon foreclosure and placement into OREO. Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first nine months of 2017 totaled $592,000, resulting in net charge-offs for the first nine months of 2017 of $510,000. This compares to $220,000 of net charge-offs recorded in the first nine months of 2016. During the three months ending on September 30, 2017, Premier recorded net charge-offs of $227,000 compared to $253,000 of net charge-offs recorded in the same three months ending on September 30, 2016. The allowance for loan losses at September 30, 2017 was 1.17% of total loans compared to 1.06% at December 31, 2016. The increase in the ratio is largely due to an increase in the amount of allowance allocated to loans individually evaluated for impairment. At December 31, 2016, specific allocations of the allowance for loan losses related to loans individually evaluated for impairment totaled $606,000. This amount increased to $1,598,000 at September 30, 2017, largely due to a $517,000 increase in estimated credit loss on an impaired multifamily real estate loan and a $514,000 increase in estimated credit loss on an impaired construction loan.

During the first nine months of 2017, Premier recorded a $2,033,000 provision for loan losses. This provision compares to a $1,436,000 provision for loan losses recorded during the same nine months of 2016. The provision for loan losses recorded during the third quarter of 2017 was $891,000 compared to an $312,000 provision for loan losses in the third quarter of 2016. The 2017 provision for loan losses was due in large part to increases in specific allocations of the allowance for loan losses related to loans individually evaluated for impairment as well as a $38.7 million, or 4.0%, increase in loans collectively evaluated for impairment. The 2016 provision for loan losses was due in large part to the $51.2 million of growth in outstanding loans in 2016, exclusive of the loans acquired from the January 2016 acquisition of First National Bankshares, and an estimate for the potential loan losses related to the flash flooding that occurred in some of Premier’s West Virginia markets during the last week of June 2016. Management’s initial estimate of loan losses related to unreimbursed damage to borrowers’ collateral or the lasting economic impact to business customers in areas that rely on vacation season tourism resulted in adding $500,000 to the provision for loan losses during the second quarter of 2016. Due to substantial assistance from both public and private sources to the regions of West Virginia affected by the flooding, Premier’s actual loan loss experience related to the flooding was minor, and management nowCompany believes the affected geographic areas demonstrate no more additional credit risk than that of the other general economic areas served by Premier’s branch network. As a result, much of the initial provision for loan losses has been reversed and helped offset additional provisions for loan losses related to individually impaired loans and increases in estimates of potential losses from declining economic activity in southern and central West Virginia. Premier also continues to monitor the impact of the decline in coal mining that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry which may have a larger impact in the central area of West Virginia. A resulting decline in employment and local economic activity could increase non-performing assets from loans originated in these areas.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

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

C.~~Critical Accounting Policies~~

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

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

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

D.~~Liquidity~~

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

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

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

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

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

E.~~Capital~~

At September 30, 2017, total stockholders’ equity of $183.3 million was 12.3% of total assets. This compares to total stockholders’ equity of $174.2 million, or 11.6% of total assets on December 31, 2016. The increase in stockholders’ equity was largely due to $11.1 million of net income in the first nine months of 2017 as well as a $2.4 million, net of tax, increase in the market value of the investment portfolio available for sale. These increases were partially offset by $4.8 million, or $0.45 per share, in cash dividends declared and paid to stockholders.

Tier 1 capital totaled $155.2 million at September 30, 2017, which represents a Tier 1 leverage ratio of 10.7%. This ratio is up from the 10.1% Tier 1 leverage ratio and $147.6 million of Tier 1 capital at December 31, 2016. The slight increase in the Tier 1 leverage ratio is largely due to the growth in Tier 1 capital exceeding the proportional growth in average total assets at September 30, 2017.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~SEPTEMBER 30, 2017~~

The regulatory authorities introduced a new capital measure in the first quarter of 2015 for financial institutions of Premier’s size, Common Equity Tier 1 Capital. The Common Equity Tier 1 capital measure seeks to determine how much of the traditional Tier 1 capital is attributable to equity contributed by common shareholders by excluding Tier 1 capital from other sources such as preferred stockholders’ equity and subordinated debt. As of September 30, 2017, Premier’s Common Equity Tier 1 capital is $6.0 million lower than its total Tier 1 capital due to the additional Tier 1 capital included from the subordinated debentures. Since the subordinated debentures are held by the parent company, the Common Equity Tier 1 capital of the subsidiary banks is identical to their total Tier 1 capital, as none of the subsidiary banks have issued any preferred stock or subordinated debentures. Beginning January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action. The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over the four year period from 2016 thru 2019. When fully implemented, the capital conservation buffer requirement will be 2.50% of risk-weighted assets over and above the regulatory minimum capital ratios for Tier 1 Capital to risk-weighted assets, Total Capital to risk-weighted assets and Common Equity Tier 1 Capital (CET1) to risk weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company. The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted asset ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%. At September 30, 2017, the Company’s capital conservation buffer was 7.50%, well in excess of the 1.250% required.

Book value per common share was $17.18 at September 30, 2017 compared to $16.37 at December 31, 2016. Adding to Premier’s book value per share in the first nine months of 2017 was the $1.04 per share earned during the period partially offset by $0.45 per share in total quarterly cash dividends to common shareholders declared and paid during the first three quarters of 2017. Also adding to Premier’s book value per share at September 30, 2017 was the $2,377,000 of other comprehensive income for the first nine months of 2017 related to the after tax increase in the market value of investment securities available for sale, which increased book value at September 30, 2017 by approximately $0.22 per share.

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~~PREMIER FINANCIAL BANCORP, INC.~~

~~SEPTEMBER 30, 2017~~

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~

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

Item 4. Controls and Procedures

A.Disclosure Controls & Procedures

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

B.Changes in Internal Controls over Financial Reporting

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

C.Inherent Limitations on Internal Control

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

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Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~SEPTEMBER 30, 2017~~MARCH 31, 2020

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	None

Item 1A.	Risk Factors

Please refer to Premier's Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 for disclosures with respect to Premier's risk factors at December 31, ~~2016.~~2019. There have been no material changes since year-end ~~2016~~2019 in the specified risk factors disclosed in the Annual Report on Form ~~10-K~~.10-K.

COVID-19 Virus

National and local participation in a worldwide effort to curb the spread of the COVID-19 virus has resulted in and may continue to result in negative changes in the national and regional business climate in the geographic areas in which Premier operates. Many of the Risk Factors discussed in Premier’s annual report on Form 10-K, which are outside of the Company’s control, may be influenced by actions responsive to efforts to curb the spread of the COVID-19 virus, the results of which are impossible to predict and could materially impact the Company’s business and future results of operations. These risk topics include, but are not limited to, “Regional economic changes in the Company’s markets”, “New or revised tax, accounting, and other laws, regulations, rules and standards”, “Extensive regulation and supervision”, “Changes in interest rates”, “Concentrations of commercial real estate and commercial business loans”, “Defaults by other larger financial institutions”, the “Allowance for loan losses may be insufficient”, “Changes in energy and natural resource markets”, “Extended disruption of vital infrastructure”, “Loss of large checking and money market deposit customers”, “Inability to hire and retain qualified employees”, “Market volatility”, and “the Availability of additional capital when needed”. The combination of any of these risk factors in this unprecedented time in world history could further compound the negative results to Premier’s business and future results of operations.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	None

Item 3.	Defaults Upon Senior Securities	None

Item 4.	Mine Safety Disclosures	Not Applicable

Item 5.	Other Information	None

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PREMIER FINANCIAL BANCORP, INC.

MARCH 31, 2020


Item 6.	Exhibits

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

31.1

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

31.2

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

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

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

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

~~- 54~~-53 -

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~SEPTEMBER 30, 2017~~MARCH 31, 2020

SIGNATURES

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

PREMIER FINANCIAL BANCORP, INC.

Date: ~~November 9, 2017~~ May 8, 2020/s/ Robert W. Walker

Robert W. Walker

President & Chief Executive Officer

Date: ~~November 9, 2017~~May 8, 2020/s/ Brien M. Chase

Brien M. Chase

Senior Vice President & Chief Financial Officer

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	(UNAUDITED)
	September 30,			December 31,
	2017			2016
ASSETS
Cash and due from banks	$	41,831		$	41,443
Interest bearing bank balances		21,681			55,720
Federal funds sold		11,632			7,555
Cash and cash equivalents		75,144			104,718
Time deposits with other banks		2,582			2,332
Securities available for sale		289,203			288,607
Loans		1,055,324			1,024,823
Allowance for loan losses		(12,359	)		(10,836	)
Net loans		1,042,965			1,013,987
Federal Home Loan Bank stock, at cost		3,185			3,200
Premises and equipment, net		23,504			24,224
Real estate and other property acquired through foreclosure		11,458			12,665
Interest receivable		4,060			3,862
Goodwill		35,371			35,371
Other intangible assets		3,581			4,349
Other assets		1,622			2,878
Total assets	$	1,492,675		$	1,496,193

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	327,965		$	319,618
Time deposits, $250,000 and over		64,919			66,378
Other interest bearing		876,500			893,390
Total deposits		1,269,384			1,279,386
Securities sold under agreements to repurchase		25,116			23,820
Other borrowed funds		6,000			8,859
Subordinated debt		5,368			5,343
Interest payable		358			364
Other liabilities		3,192			4,237
Total liabilities		1,309,418			1,322,009

Stockholders' equity
Common stock, no par value; 20,000,000 shares authorized; 10,668,589 shares issued and outstanding at September 30, 2017, and 10,640,735 shares issued and outstanding at December 31, 2016		110,353			109,911
Retained earnings		72,449			66,195
Accumulated other comprehensive income (loss)		455			(1,922	)
Total stockholders' equity		183,257			174,184
Total liabilities and stockholders' equity	$	1,492,675		$	1,496,193

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Interest income
Loans, including fees	$	13,469	$	13,375	$	41,667	$	39,084
Securities available for sale
Taxable		1,427		1,285		4,236		4,075
Tax-exempt		62		82		198		254
Federal funds sold and other		176		123		515		328
Total interest income		15,134		14,865		46,616		43,741

Interest expense
Deposits		954		965		2,854		2,917
Repurchase agreements and other		7		10		21		28
FHLB advances		-		10		-		32
Other borrowings		68		101		234		321
Subordinated debt		74		63		218		181
Total interest expense		1,103		1,149		3,327		3,479

Net interest income		14,031		13,716		43,289		40,262
Provision for loan losses		891		312		2,033		1,436
Net interest income after provision for loan losses		13,140		13,404		41,256		38,826

Non-interest income
Service charges on deposit accounts		1,136		1,031		3,201		2,975
Electronic banking income		811		791		2,424		2,355
Secondary market mortgage income		67		64		173		163
Other		163		176		530		571
		2,177		2,062		6,328		6,064
Non-interest expenses
Salaries and employee benefits		4,760		4,817		14,703		15,025
Occupancy and equipment expenses		1,511		1,635		4,481		4,697
Outside data processing		1,344		1,300		4,019		3,935
Professional fees		196		167		721		500
Taxes, other than payroll, property and income		189		156		589		473
Write-downs, expenses, sales of other real estate owned, net		346		765		1,139		1,402
Amortization of intangibles		252		278		768		862
FDIC insurance		159		278		506		752
Other expenses		1,168		1,212		3,401		3,674
		9,925		10,608		30,327		31,320
Income before income taxes		5,392		4,858		17,257		13,570
Provision for income taxes		1,925		1,694		6,207		4,803

Net income	$	3,467	$	3,164	$	11,050	$	8,767

Net income per share:
Basic	$	0.33	$	0.30	$	1.04	$	0.83
Diluted		0.32		0.30		1.03		0.83

Loan Class	Balance Dec 31, 2016		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2017

Residential real estate	$	2,948	$	363		$	(362	)	$	52	$	3,001
Multifamily real estate		785		475			-			-		1,260
Commercial real estate:
Owner occupied		1,543		(161	)		(7	)		242		1,617
Non owner occupied		2,350		265			(8	)		-		2,607
Commercial and industrial		1,140		3			(138	)		95		1,100
Consumer		347		148			(214	)		86		367
All other		1,723		940			(373	)		117		2,407
Total	$	10,836	$	2,033		$	(1,102	)	$	592	$	12,359

Loan Class	Balance Dec 31, 2015		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2016

Residential real estate	$	2,501	$	377		$	(107	)	$	19	$	2,790
Multifamily real estate		821		92			-			-		913
Commercial real estate:
Owner occupied		1,509		(140	)		-			2		1,371
Non owner occupied		2,070		645			-			-		2,715
Commercial and industrial		1,033		83			(29	)		42		1,129
Consumer		307		172			(232	)		71		318
All other		1,406		207			(207	)		221		1,627
Total	$	9,647	$	1,436		$	(575	)	$	355	$	10,863

	Three months ended Sept 30, 2017						Three months ended Sept 30, 2016
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Residential real estate	$	323	$	-	$	-	$	667	$	5	$	5
Multifamily real estate		13,590		66		60		2,594		63		63
Commercial real estate:
Owner occupied		3,910		27		27		1,847		3		3
Non-owner occupied		3,749		63		63		4,240		175		175
Commercial and industrial		1,390		13		13		1,809		10		10
Consumer		9		-		-		-		-		-
All other		7,183		53		53		5,243		33		-
Total	$	30,154	$	222	$	216	$	16,400	$	289	$	256

	September 30, 2017			December 31, 2016			Regulatory Minimum Requirements			To Be Considered Well Capitalized
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		13.8	%		13.4	%		4.5	%		6.5	%
Tier 1 Capital (to Risk-Weighted Assets)		14.4	%		13.9	%		6.0	%		8.0	%
Total Capital (to Risk-Weighted Assets)		15.5	%		15.0	%		8.0	%		10.0	%
Tier 1 Capital (to Average Assets)		10.7	%		10.1	%		4.0	%		5.0	%