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 SeptemberJune 30, 20172020
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________


Commission file number 000-20908


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


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


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

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

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


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

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valuePFBIThe Nasdaq Stock Market LLC

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


Common stock, no par value, – 10,668,58914,673,257 shares outstanding at November 1, 2017August 3, 2020






PREMIER FINANCIAL BANCORP, INC.
SEPTEMBERJUNE 30, 20172020
INDEX TO REPORT


Part I - Financial Information
 
Item 1 – Financial Statements
3
Item 2 – Management'sManagement’s Discussion and Analysis
4041
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
5362
Item 4 – Controls and Procedures
5362
Part II - Other Information
5463
Item 1 – Legal Proceedings
5463
Item 1A – Risk Factors
5463
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
5463
Item 3 – Defaults Upon Senior Securities
5463
Item 4 – Mine Safety Disclosures
5463
Item 5 – Other Information
5463
Item 6 – Exhibits
5464
Signatures
5565




2.
- 2 -

PREMIER FINANCIAL BANCORP, INC.
SEPTEMBERJUNE 30, 20172020


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, 20162019 for further information in this regard.


Index to consolidated financial statements:






- 3 -3.

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED CONSOLIDATED BALANCE SHEETS
SEPTEMBERJUNE 30, 20172020 AND DECEMBER 31, 20162019
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


 (UNAUDITED)    
  
June 30,
2020
  
December 31,
2019
 
ASSETS      
Cash and due from banks $23,724  $23,091 
Interest bearing bank balances  101,521   66,063 
Federal funds sold  8,365   5,902 
Cash and cash equivalents  133,610   95,056 
Securities available for sale  416,700   390,754 
Loans  1,265,002   1,195,295 
Allowance for loan losses  (14,388)  (13,542)
Net loans  1,250,614   1,181,753 
Federal Home Loan Bank stock, at cost  4,286   4,450 
Premises and equipment, net  36,708   37,257 
Other real estate owned, net  12,267   12,242 
Interest receivable  5,997   4,699 
Goodwill  47,640   47,640 
Other intangible assets  4,893   5,376 
Other assets  2,279   1,783 
Total assets $1,914,994  $1,781,010 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Deposits        
Non-interest bearing $475,241  $367,870 
Time deposits, $250,000 and over  71,523   100,638 
Other interest bearing  1,061,387   1,027,245 
Total deposits  1,608,151   1,495,753 
Securities sold under agreements to repurchase  27,737   20,428 
FHLB advances  2,995   6,375 
Subordinated debt  5,455   5,436 
Interest payable  638   912 
Other liabilities  16,023   11,865 
Total liabilities  1,660,999   1,540,769 
         
Stockholders' equity        
Common stock, 0 par value; 30,000,000 shares authorized;
14,673,257 shares issued and outstanding at June 30, 2020, and
14,657,432 shares issued and outstanding at December 31, 2019
  134,052   133,795 
Retained earnings  109,216   102,743 
Accumulated other comprehensive income (loss)  10,727   3,703 
Total stockholders' equity  253,995   240,241 
Total liabilities and stockholders' equity $1,914,994  $1,781,010 

  (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 
         


See Accompanying Notes to Consolidated Financial Statements
- 4 -
4.

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172020 AND 20162019
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2020  2019  2020  2019 
Interest income            
Loans, including fees $16,416  $16,227  $32,170  $32,516 
Securities available for sale                
Taxable  2,014   2,313   4,557   4,651 
Tax-exempt  182   88   271   180 
Federal funds sold and other  26   478   284   823 
Total interest income  18,638   19,106   37,282   38,170 
                 
Interest expense                
Deposits  1,715   2,285   3,880   4,335 
Repurchase agreements and other  15   12   39   21 
Other borrowings  -   10   -   31 
FHLB advances  23   48   53   103 
Subordinated debt  76   96   159   190 
Total interest expense  1,829   2,451   4,131   4,680 
                 
Net interest income  16,809   16,655   33,151   33,490 
Provision for loan losses  590   330   1,590   890 
Net interest income after provision for loan losses  16,219   16,325   31,561   32,600 
                 
Non-interest income                
Service charges on deposit accounts  692   1,122   1,798   2,216 
Electronic banking income  937   927   1,755   1,749 
Secondary market mortgage income  85   33   151   57 
Other  176   265   435   501 
   1,890   2,347   4,139   4,523 
Non-interest expenses                
Salaries and employee benefits  5,267   5,427   10,675   10,626 
Occupancy and equipment expenses  1,798   1,877   3,523   3,541 
Outside data processing  1,702   1,426   3,233   2,810 
Professional fees  246   306   490   671 
Taxes, other than payroll, property and income  252   261   527   499 
Write-downs, expenses, sales of
other real estate owned, net
  354   228   422   477 
Amortization of intangibles  241   223   483   450 
FDIC insurance  72   119   68   243 
Other expenses  1,147   1,174   2,395   2,317 
   11,079   11,041   21,816   21,634 
Income before income taxes  7,030   7,631   13,884   15,489 
Provision for income taxes  1,524   1,772   3,010   3,454 
                 
Net income $5,506  $5,859  $10,874  $12,035 
                 
Net income per share:                
Basic $0.38  $0.40  $0.74  $0.82 
Diluted  0.37   0.40   0.74   0.82 
See Accompanying Notes to Consolidated Financial Statements

5.
  
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 

PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE AND NINESIX MONTHS ENDED SEPTEMBER 30, 20172020 AND 20162019
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


 
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
  2020  2019  2020  2019 
Net income $5,506  $5,859  $10,874  $12,035 
                 
Other comprehensive income (loss):
                
Unrealized gains (losses) arising during the period  1,998   3,989   8,890   9,593 
Reclassification of realized amount  -   -   -   - 
Net change in unrealized gain (loss) on securities  1,998   3,989   8,890   9,593 
Less tax impact  (419)  (837)  (1,866)  (2,014)
Other comprehensive income (loss)  1,579   3,152   7,024   7,579 
                 
Comprehensive income $7,085  $9,011  $17,898  $19,614 


See Accompanying Notes to Consolidated Financial Statements
  
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 


6.


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
NINETHREE AND SIX MONTHS ENDED SEPTEMBERJUNE 30, 20172020 AND 2019
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


Three months ended June 30 
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (loss)
  Total 
Balances, April 1, 2020 $133,866  $105,911  $9,148  $248,925 
Net income  -   5,506   -   5,506 
Other comprehensive income (loss)  -   -   1,579   1,579 
Cash dividends paid ($0.15 per share)  -   (2,201)  -   (2,201)
Stock options exercised  -   -   -   - 
Stock based compensation expense  186   -   -   186 
Balances, June 30, 2020 $134,052  $109,216  $10,727  $253,995 
                 
                 
Balances, April 1, 2019 $133,338  $91,314  $575  $225,227 
Net income  -   5,859   -   5,859 
Other comprehensive income (loss)  -   -   3,152   3,152 
Cash dividends paid ($0.15 per share)  -   (2,195)  -   (2,195)
Stock options exercised  89   -   -   89 
Stock based compensation expense  170   -   -   170 
Balances, June 30, 2019 $133,597  $94,978  $3,727  $232,302 

Six months ended June 30 
Common
Stock
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (loss)
  Total 
Balances, January 1, 2020 $133,795  $102,743  $3,703  $240,241 
Net income  -   10,874   -   10,874 
Other comprehensive income  -   -   7,024   7,024 
Cash dividends paid ($0.30 per share)  -   (4,401)  -   (4,401)
Stock options exercised  31   -   -   31 
Stock based compensation expense  226   -   -   226 
Balances, June 30, 2020 $134,052  $109,216  $10,727  $253,995 
                 
                 
Balances, January 1, 2019 $133,248  $87,333  $(3,852) $216,729 
Net income  -   12,035   -   12,035 
Other comprehensive income  -   -   7,579   7,579 
Cash dividends paid ($0.30 per share)  -   (4,390)  -   (4,390)
Stock options exercised  140   -   -   140 
Stock based compensation expense  209   -   -   209 
Balances, June 30, 2019 $133,597  $94,978  $3,727  $232,302 



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


See Accompanying Notes to Consolidated Financial Statements
- 6 -7.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(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 
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172020 AND 20162019
(UNAUDITED, DOLLARS IN THOUSANDS)


 2020  2019 
Cash flows from operating activities      
Net income $10,874  $12,035 
Adjustments to reconcile net income to net cash from
operating activities
        
Depreciation  987   1,150 
Provision for loan losses  1,590   890 
Amortization, net of accretion  666   80 
Writedowns of other real estate owned, net  263   100 
Stock compensation expense  226   209 
Changes in:        
Interest receivable  (1,298)  (380)
Other assets  (496)  (155)
Interest payable  (274)  152 
Other liabilities  2,213   (380)
Net cash from operating activities  14,751   13,701 
         
Cash flows from investing activities        
Purchases of securities available for sale  (91,614)  (21,020)
Proceeds from maturities and calls of securities available for sale  73,821   35,107 
Purchase of FHLB stock  -   (10)
Redemption of FHLB stock  164   100 
Net change in loans  (70,720)  273 
Purchases of premises and equipment, net  (360)  (876)
Proceeds from sales of other real estate acquired through foreclosure  612   633 
Net cash from (used in) investing activities  (88,097)  14,207 
         
Cash flows from financing activities        
Net change in deposits  112,361   (2,804)
Net change in agreements to repurchase securities  7,309   (1,228)
Repayment of other borrowed funds  -   (2,500)
Repayment of FHLB advances  (3,400)  (2,500)
Proceeds from stock option exercises  31   140 
Common stock dividends paid  (4,401)  (4,390)
Net cash from financing activities  111,900   (13,282)
         
Net change in cash and cash equivalents  38,554   14,626 
         
Cash and cash equivalents at beginning of period  95,056   80,775 
         
Cash and cash equivalents at end of period $133,610  $95,401 
         
Supplemental disclosures of cash flow information:        
Cash paid during period for interest $4,404  $4,528 
Cash paid during period for income taxes  -   3,500 
Loans transferred to real estate acquired through foreclosure  900   957 
Operating right-of-use asset resulting from lease liability  78   7,558 

See Accompanying Notes to Consolidated Financial Statements
  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   - 

8.
- 8 -

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




NOTE 1 - BASIS OF PRESENTATION


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

       September 30, 2017 
   Year Total Net Income 
Year Year Total  
June 30, 2020
Net Income
 
Subsidiary
 
Location 
 Acquired Assets Qtr YTD LocationAcquired Assets  Qtr  YTD 
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $425,115  $1,209  $3,509 Vanceburg, Kentucky1991 $578,556  $1,438  $3,021 
Premier Bank, Inc. Huntington, West Virginia 1998  1,060,991   2,734   9,007 Huntington, West Virginia1998  1,328,897   4,741   8,974 
Parent and Intercompany Eliminations      6,569   (476)  (1,466)   7,541   (673)  (1,121)
Consolidated Total      $1,492,675  $3,467  $11,050     $1,914,994  $5,506  $10,874 



All significant intercompany transactions and balances have been eliminated.


Recently Issued Accounting Pronouncements

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from ContractsEstimates in the Financial Statements:  The preparation of financial statements in conformity with Customers (Topic 606).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 ASU createsselection 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 new topic, Topic 606,worldwide effort to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts forcurb the transfer of nonfinancial assets. The core principlespread of the guidance is that an entity should recognize revenueCOVID-19 virus has resulted in and may continue to depictresult in negative changes in the transfer of promised goods or services to customersnational and regional business climate in an amount that reflects the consideration togeographic areas in 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 duringPremier operates.  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,2020, management has determined that the majoritydeterioration in the general economic conditions as a result of these efforts to curb the spread of the revenues earned byCOVID-19 virus represented a triggering event prompting a qualitative evaluation of goodwill impairment.  Based on the Companyanalyses performed in the first and second quarters of 2020, management determined that goodwill was not impaired.   At this time, management does not believe there exists any impairment to goodwill and intangible assets, long-lived assets, or available-for-sale securities due to the COVID-19 pandemic. The effects of government measures to curb the spread of the COVID-19 virus on the local or national economy are not within the scope of ASU 2014-09 because they are already governed by other accounting standards.  For those revenue streams management has determineduncertain and could cause assumptions and conditions 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 timingnear term.  In the event that changes to assumptions or conditions from what was originally estimated were to prevail, and depending upon the severity of whensuch changes, the revenuepossibility of materially different financial condition or results of operations 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.a reasonable likelihood.


- 9 -9.

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




NOTE  1 - BASIS OF PRESENTATION –- continued


Loans:  In January 2016,addition to the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognitioneight loan portfolio segments already identified as having differing risk characteristics, in the second quarter of 2020 Premier added the following porfolio segment:
Small Business Administration Paycheck Protection Plan:  Loans originated under the Small Business Administration’s Paycheck Protection Plan (“SBA PPP”), as originally enacted, provide qualifying small business borrowers with a fixed rate loan bearing an interest rate of 1.00%, a 24-month maturity date, and Measurement of Financial Assets and Financial Liabilities.  The ASU makes several modifications to Subtopic 825-10, includingpayment deferrals for the eliminationfirst six months of the available-for-sale classificationloan.  The loans require no collateral and are fully guaranteed, both principal and interest, by the Small Business Administration (“SBA”) and the U. S. Treasury.  As fully guaranteed loans, no allowance for loans losses is considered necessary.  Loan amounts per borrower are limited to an amount approximating two and one-half months 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 measuringtheir average payroll expense during the fair valuecalendar year 2019.  A key feature of financial instruments for disclosure purposes.  This ASU will become effectivethe loan program is that borrowers can receive repayment forgiveness by the SBA for the Company for interim and annual periods beginning after December 15, 2017. The adoptionportion 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 leasestheir loan proceeds that were historically classified as operating leases under previous generally accepted accounting principles. This ASU will become effectiveexpended on certain employee payroll related costs and qualifying premises and equipment costs during the eight weeks following loan disbursement, up to 100% of the loan amount.  The program has since been modified to allow borrowers up to twenty-four weeks to expend the proceeds on those qualifying expenses.  Upon forgiveness, the issuing bank would be reimbursed by the SBA for the Company for interimforgiveness portion and annual periods beginning after December 15, 2018.  The Company leases some of its branch locations.  Upon adoption of this standard, an asset willany accrued interest thereon.  Any remaining balance would 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 adoptedrepaid by the Company beginning January 1, 2017.  The adoption of ASU No. 2016-09 did not have a material impact onborrower over the Company's financial statements.remaining eighteen months to loan maturity.  A subsequent change to the program allows borrowers an option to extend the repayment period up to 60 months.


Recently Issued Accounting Pronouncements
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. ManagementThe company has formed a steering committee thatto oversee the steps required in the adoption of the new current expected credit loss method.  The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the data gathering requirements, available economic forecasting and loss estimation models and potential software that would be employed by the Company to facilitateimpact of the adoption of this guidance and its required disclosures on the Company’s financial statements.  Upon adoption, management anticipates an initial one-timecumulative increase in the allowance for loan losses which will be offsetis currently anticipated by management along with a corresponding decrease in capital as permitted by the standard. However, due to the complexity of the calculation and evolving guidance on adoption management has not yet determined the one-time adjustment. 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 -10.

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




NOTE 2 –SECURITIES- SECURITIES


Amortized cost and fair value of investment securities, by category, at SeptemberJune 30, 20172020 are summarized as follows:


2017 Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 
2020 
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  $305,338  $11,053  $(248) $316,143 
U. S. sponsored agency CMO’s - residential  56,330   553   (369)  56,514   47,888   1,308   –   49,196 
Total mortgage-backed securities of government sponsored agencies  255,813   1,581   (947)  256,447   353,226   12,361   (248)  365,339 
U. S. government sponsored agency securities  19,344   5   (74)  19,275   9,392   154   –   9,546 
Obligations of states and political subdivisions  13,346   140   (5)  13,481   38,541   1,183   –   39,724 
Other securities  1,963   135   (7)  2,091 
Total available for sale $288,503  $1,726  $(1,026) $289,203  $403,122  $13,833  $(255) $416,700 


Amortized cost and fair value of investment securities, by category, at December 31, 20162019 are summarized as follows:


2016 Amortized Cost  Unrealized Gains  Unrealized Losses  Fair Value 
2019 
Amortized
Cost
  
Unrealized
Gains
  
Unrealized
Losses
  Fair Value 
Available for sale                        
Mortgage-backed securities                        
U. S. sponsored agency MBS - residential $177,105  $245  $(3,173) $174,177  $276,013  $3,618  $(322) $279,309 
U. S. sponsored agency CMO’s - residential  73,163   761   (657)  73,267   61,989   768   (113)  62,644 
Total mortgage-backed securities of government sponsored agencies  250,268   1,006   (3,830)  247,444   338,002   4,386   (435)  341,953 
U. S. government sponsored agency securities  24,652   23   (174)  24,501   30,538   280   (88)  30,730 
Obligations of states and political subdivisions  16,645   111   (94)  16,662   15,570   453   (6)  16,017 
Other securities  1,956   98   –   2,054 
Total available for sale $291,565  $1,140  $(4,098) $288,607  $386,066  $5,217  $(529) $390,754 



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




NOTE  2–2 - SECURITIES - continued


The amortized cost and fair value of securities at SeptemberJune 30, 20172020 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  $8,742  $8,825 
Due after one year through five years  17,073   17,070   26,090   26,718 
Due after five years through ten years  5,375   5,430   9,437   9,716 
Due after ten years  555   555   5,627   6,102 
Mortgage-backed securities of government sponsored agencies  255,813   256,447   353,226   365,339 
Total available for sale $288,503  $289,203  $403,122  $416,700 


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

Securities with unrealized losses at SeptemberJune 30, 20172020 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) $43,995  $(248) $–  $–  $43,995  $(248)
U.S government sponsored agency CMO’s – residential  11,256   (129)  11,184   (240)  22,440   (369)
Obligations of states and political subdivisions  619   (4)  775   (1)  1,394   (5)
Other securities  241   (7)  –   –   241   (7)
Total temporarily impaired $85,937  $(636) $17,193  $(390) $103,130  $(1,026) $44,236  $(255) $–  $–  $44,236  $(255)



- 12 -12.
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, 20162019 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 SeptemberJune 30, 20172020 and December 31, 20162019 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 SeptemberJune 30, 20172020 and December 31, 20162019 are summarized as follows:


 2017  2016  2020  2019 
Residential real estate $337,502  $342,294  $390,150  $389,985 
Multifamily real estate  70,698   74,165   37,376   36,684 
Commercial real estate:                
Owner occupied  134,773   129,370   164,121   164,218 
Non owner occupied  237,655   220,836 
Non-owner occupied  303,141   304,316 
Commercial and industrial  82,332   76,736   85,073   105,079 
SBA PPP  110,690   – 
Consumer  29,675   30,916   25,416   29,007 
Construction and land  115,053   136,138 
All other  162,689   
150,506
   33,982   29,868 
 $1,055,324  $1,024,823  $1,265,002  $1,195,295 

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




NOTE  3–3 - LOANS - continued


Activity in the allowance for loan losses by portfolio segment for the ninesix months ended SeptemberJune 30, 20172020 was as follows:


Loan Class 
Balance
Dec 31, 2016
  Provision (credit) for loan losses  
Loans
charged-off
  Recoveries  
Balance
Sept 30, 2017
  
Balance
December 31, 2019
  
Provision (credit)
for loan losses
  
Loans
charged-off
  Recoveries  
Balance
June 30, 2020
 
                              
Residential real estate $2,948  $363  $(362) $52  $3,001  $1,711  $288  $(94) $10  $1,915 
Multifamily real estate  785   475   -   -   1,260   1,954   161   –   –   2,115 
Commercial real estate:                                        
Owner occupied  1,543   (161)  (7)  242   1,617   2,441   590   (566)  5   2,470 
Non owner occupied  2,350   265   (8)  -   2,607 
Non-owner occupied  3,184   1,200   (77)  3   4,310 
Commercial and industrial  1,140   3   (138)  95   1,100   1,767   (247)  (5)  39   1,554 
Consumer  347   148   (214)  86   367   281   14   (99)  34   230 
Construction and land  1,724   (529)  –   38   1,233 
All other  1,723   940   (373)  117   2,407   480   113   (94)  62   561 
Total $10,836  $2,033  $(1,102) $592  $12,359  $13,542  $1,590  $(935) $191  $14,388 


Activity in the allowance for loan losses by portfolio segment for the ninesix months ending Septemberended June 30, 20162019 was as follows:


Loan Class 
Balance
Dec 31, 2015
  Provision (credit) for loan losses  
Loans
charged-off
  Recoveries  
Balance
Sept 30, 2016
  
Balance
December 31, 2018
  
Provision (credit)
for loan losses
  
Loans
charged-off
  Recoveries  
Balance
June 30, 2019
 
                              
Residential real estate $2,501  $377  $(107) $19  $2,790  $1,808  $104  $(59) $27  $1,880 
Multifamily real estate  821   92   -   -   913   1,649   65   –   2   1,716 
Commercial real estate:                                        
Owner occupied  1,509   (140)  -   2   1,371   2,120   200   (533)  3   1,790 
Non owner occupied  2,070   645   -   -   2,715 
Non-owner occupied  3,058   277   (57)  2   3,280 
Commercial and industrial  1,033   83   (29)  42   1,129   1,897   178   (113)  38   2,000 
Consumer  307   172   (232)  71   318   351   129   (140)  28   368 
Construction and land  2,255   (102)  (13)  –   2,140 
All other  1,406   207   (207)  221   1,627   600   39   (97)  57   599 
Total $9,647  $1,436  $(575) $355  $10,863  $13,738  $890  $(1,012) $157  $13,773 




- 14 -14.

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


NOTE  3–LOANS - continued

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

Loan Class 
Balance
June 30, 2017
  Provision (credit) for loan losses  
Loans
charged-off
  Recoveries  
Balance
Sept 30, 2017
 
                
Residential real estate $2,973  $170  $(163) $21  $3,001 
Multifamily real estate  1,337   (77)  -   -   1,260 
Commercial real estate:                    
Owner occupied  1,618   5   (7)  1   1,617 
Non owner occupied  2,334   276   (3)  -   2,607 
Commercial and industrial  1,093   (6)  (4)  17   1,100 
Consumer  373   10   (49)  33   367 
All other  1,967   513   (110)  37   2,407 
Total $11,695  $891  $(336) $109  $12,359 

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

Loan Class 
Balance
June 30, 2016
  Provision (credit) for loan losses  
Loans
charged-off
  Recoveries  
Balance
Sept 30, 2016
 
                
Residential real estate $2,747  $91  $(51) $3  $2,790 
Multifamily real estate  822   91   -   -   913 
Commercial real estate:                    
Owner occupied  1,442   (72)  -   1   1,371 
Non owner occupied  2,708   7   -   -   2,715 
Commercial and industrial  1,111   43   (29)  4   1,129 
Consumer  306   139   (142)  15   318 
All other  1,668   13   (81)  27   1,627 
Total $10,804  $312  $(303) $50  $10,863 

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




NOTE  3–3 - LOANS - continued


Activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2020 was as follows:

Loan Class 
Balance
March 31, 2020
  
Provision (credit)
for loan losses
  
Loans
charged-off
  Recoveries  
Balance
June 30, 2020
 
                
Residential real estate $1,838  $72  $(1) $6  $1,915 
Multifamily real estate  2,104   11   –   –   2,115 
Commercial real estate:                    
Owner occupied  2,220   248   –   2   2,470 
Non-owner occupied  3,642   721   (53)  –   4,310 
Commercial and industrial  1,817   (269)  (5)  11   1,554 
Consumer  241   12   (30)  7   230 
Construction and land  1,412   (180)  –   1   1,233 
All other  582   (25)  (20)  24   561 
Total $13,856  $590  $(109) $51  $14,388 

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

Loan Class 
Balance
March 31, 2019
  
Provision (credit)
for loan losses
  
Loans
charged-off
  Recoveries  
Balance
June 30, 2019
 
                
Residential real estate $1,823  $62  $(27) $22  $1,880 
Multifamily real estate  1,590   126   –   –   1,716 
Commercial real estate:                    
Owner occupied  1,824   (36)  –   2   1,790 
Non-owner occupied  3,401   (123)  –   2   3,280 
Commercial and industrial  1,721   275   (3)  7   2,000 
Consumer  365   19   (33)  17   368 
Construction and land  2,149   (9)  –   –   2,140 
All other  606   16   (46)  23   599 
Total $13,479  $330  $(109) $73  $13,773 


15.

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


NOTE  3 - LOANS - continued

Purchased Impaired Loans


The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at SeptemberJune 30, 20172020 and December 31, 2016.2019.
 2020  2019 
Residential real estate $2,384  $2,565 
Commercial real estate        
Owner occupied  1,108   1,804 
Non-owner occupied  2,482   2,628 
Commercial and industrial  19   305 
Consumer  17   22 
Construction and land  416   483 
All other  176   174 
Total carrying amount $6,602  $7,981 
Contractual principal balance $9,880  $11,681 
         
Carrying amount, net of allowance $6,602  $7,981 

  2017  2016 
Residential real estate $1,515  $1,619 
Commercial real estate        
Owner occupied  1,564   2,013 
Non owner occupied  -   5,396 
Commercial and industrial  214   232 
All other  1,828   2,061 
Total carrying amount $5,121  $11,321 
Contractual principal balance $7,116  $14,784 
         
Carrying amount, net of allowance $5,071  $11,311 


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 not0t increase the allowance for loan losses for purchased impaired loans during the nine-monthsthree and six months ended SeptemberJune 30, 2016.2020 and June 30, 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 -16.

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


NOTE  3–LOANS - continued

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

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


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




NOTE  3–3 - LOANS - continued


The accretable yield, or income expected to be collected, on the purchased loans above is as follows at June 30, 2020 and June 30, 2019.

 2020  2019 
Balance at January 1 $619  $642 
New loans purchased  –   – 
Accretion of income  (59)  (94)
Loans placed on non-accrual  –   – 
Income recognized upon full repayment  (65)  (73)
Reclassifications to accretable difference  (190)  – 
Disposals  –   – 
Balance at June 30 $305  $475 


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


NOTE  3 - LOANS - continued

Past Due and Non-performing Loans


The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of SeptemberJune 30, 20172020 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
 
June 30, 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  $5,460  $4,197  $748 
Multifamily real estate  11,101   11,095   334   4,088   3,708   – 
Commercial real estate                        
Owner occupied  2,052   1,974   63   2,160   1,734   9 
Non owner occupied  310   209   86 
Non-owner occupied  4,042   2,726   – 
Commercial and industrial  2,062   1,054   648   1,341   787   74 
Consumer  331   304   -   324   236   – 
Construction and land  355   313   149 
All other  6,984   6,863   -   75   60   – 
Total $26,088  $24,345  $1,716  $17,845  $13,761  $980 


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 -18.
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 SeptemberJune 30, 20172020 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  $390,150  $3,971  $2,802  $6,773  $383,377 
Multifamily real estate  70,698   -   11,429   11,429   59,269   37,376   –   3,708   3,708   33,668 
Commercial real estate:                                        
Owner occupied  134,773   172   1,979   2,151   132,622   164,121   26   505   531   163,590 
Non owner occupied  237,655   374   227   601   237,054 
Non-owner occupied  303,141   –   1,591   1,591   301,550 
Commercial and industrial  82,332   179   1,628   1,807   80,525   85,073   703   723   1,426   83,647 
SBA PPP  110,690   –   –   –   110,690 
Consumer  29,675   365   121   486   29,189   25,416   96   112   208   25,208 
Construction and land  115,053   4   152   156   114,897 
All other  162,689   1,370   6,861   8,231   154,458   33,982   –   60   60   33,922 
Total $1,055,324  $8,920  $23,962  $32,882  $1,022,442  $1,265,002  $4,800  $9,653  $14,453  $1,250,549 


The following table presents the aging of the recorded investment in past due loans as of December 31, 20162019 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 -19.
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 SeptemberJune 30, 2017:2020:
 Allowance for Loan Losses  Loan Balances 
Loan Class 
Individually
Evaluated for
Impairment
  
Collectively
Evaluated for
Impairment
  
Acquired with
Deteriorated
Credit Quality
  Total  
Individually
Evaluated for
Impairment
  
Collectively
Evaluated for
Impairment
  
Acquired with
Deteriorated
Credit Quality
  Total 
                         
Residential real estate $–  $1,915  $–  $1,915  $60  $387,706  $2,384  $390,150 
Multifamily real estate  1,865   250   –   2,115   3,708   33,668   –   37,376 
Commercial real estate:                                
Owner occupied  –   2,470   –   2,470   1,440   161,573   1,108   164,121 
Non-owner occupied  448   3,862   –   4,310   4,022   296,637   2,482   303,141 
Commercial and industrial  446   1,108   –   1,554   763   84,291   19   85,073 
SBA PPP  –   –   –   –   –   110,690   –   110,690 
Consumer  –   230   –   230   –   25,399   17   25,416 
Construction and land  –   1,233   –   1,233   303   114,334   416   115,053 
All other  –   561   –   561   –   33,806   176   33,982 
Total $2,759  $11,629  $–  $14,388  $10,296  $1,248,104  $6,602  $1,265,002 
  Allowance for Loan Losses  Loan Balances 
Loan Class Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Acquired with Deteriorated Credit Quality  Total  Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Acquired with Deteriorated Credit Quality  Total 
                         
Residential real estate $-  $3,001  $-  $3,001  $320  $335,667  $1,515  $337,502 
Multifamily real estate  517   743   -   1,260   13,588   57,110   -   70,698 
Commercial real estate:                                
Owner occupied  301   1,316   -   1,617   3,725   129,484   1,564   134,773 
Non-owner occupied  88   2,519   -   2,607   5,583   232,072   -   237,655 
Commercial and industrial  105   945   50   1,100   1,129   80,989   214   82,332 
Consumer  19   348   -   367   19   29,656   -   29,675 
All other  518   1,889   -   2,407   7,177   153,684   1,828   162,689 
Total $1,548  $10,761  $50  $12,359  $31,541  $1,018,662  $5,121  $1,055,324 


The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2016:2019:
 Allowance for Loan Losses  Loan Balances 
Loan Class 
Individually
Evaluated for
Impairment
  
Collectively
Evaluated for
Impairment
  
Acquired with
Deteriorated
Credit Quality
  Total  
Individually
Evaluated for
Impairment
  
Collectively
Evaluated for
Impairment
  
Acquired with
Deteriorated
Credit Quality
  Total 
                         
Residential real estate $–  $1,711  $–  $1,711  $63  $387,357  $2,565  $389,985 
Multifamily real estate  1,737   217   –   1,954   3,726   32,958   –   36,684 
Commercial real estate:                                
Owner occupied  653   1,788   –   2,441   2,685   159,729   1,804   164,218 
Non-owner occupied  271   2,913   –   3,184   3,830   297,858   2,628   304,316 
Commercial and industrial  390   1,377   –   1,767   678   104,096   305   105,079 
Consumer  –   281   –   281   –   28,985   22   29,007 
Construction and land  51   1,673   –   1,724   431   135,224   483   136,138 
All other  –   480   –   480   –   29,694   174   29,868 
Total $3,102  $10,440  $–  $13,542  $11,413  $1,175,901  $7,981  $1,195,295 

  Allowance for Loan Losses  Loan Balances 
Loan Class Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Acquired with Deteriorated Credit Quality  Total  Individually Evaluated for Impairment  Collectively Evaluated for Impairment  Acquired with Deteriorated Credit Quality  Total 
                         
Residential real estate $-  $2,948  $-  $2,948  $379  $340,296  $1,619  $342,294 
Multifamily real estate  -   785   -   785   13,641   60,524   -   74,165 
Commercial real estate:                                
Owner occupied  244   1,299   -   1,543   2,801   124,556   2,013   129,370 
Non-owner occupied  -   2,350   -   2,350   2,373   213,067   5,396   220,836 
Commercial and industrial  266   864   10   1,140   1,418   75,086   232   76,736 
Consumer  -   347   -   347   -   30,916   -   30,916 
All other  86   1,637   -   1,723   12,976   135,469   2,061   150,506 
Total $596  $10,230  $10  $10,836  $33,588  $979,914  $11,321  $1,024,823 

- 20 -20.
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 SeptemberJune 30, 2017.2020.  The table includes $199,000$701,000 of loans acquired with deteriorated credit quality thatfor which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.


 
Unpaid Principal Balance
  
Recorded Investment
  
Allowance for Loan Losses Allocated
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance for
Loan Losses
Allocated
 
With no related allowance recorded:                  
Residential real estate $360  $320  $-  $184  $60  $- 
Multifamily real estate  2,492   2,492   - 
Commercial real estate                        
Owner occupied  2,916   2,855   -   2,166   1,759   - 
Non owner occupied  3,604   3,512   - 
Non-owner occupied  1,661   805   - 
Commercial and industrial  1,767   1,012   -   509   –   - 
All other  3,186   3,066   - 
Construction and land  344   303   - 
  14,325   13,257   -   4,864   2,927   - 
With an allowance recorded:                        
Multifamily real estate $11,102  $11,095  $517   4,088   3,708   1,865 
Commercial real estate                        
Owner occupied  888   870   301 
Non owner occupied  2,072   2,072   88 
Non-owner occupied  3,748   3,599   448 
Commercial and industrial  468   316   155   781   763   446 
Consumer  19   19   19 
All other  4,116   4,111   518 
  18,665   18,483   1,598   8,617   8,070   2,759 
Total $32,990  $31,740  $1,598  $13,481  $10,997  $2,759 
            



- 21 -21.


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 thatfor which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.


 
Unpaid Principal Balance
  
Recorded Investment
  
Allowance for Loan Losses Allocated
  
Unpaid
Principal
Balance
  
Recorded
Investment
  
Allowance for
Loan Losses
Allocated
 
With no related allowance recorded:                  
Residential real estate $743  $379  $-  $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 -22.
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 ninesix months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016.2019.  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  Six Months Ended June 30, 2020  Six Months Ended June 30, 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  $–  $–  $267  $–  $– 
Multifamily real estate  13,605   196   181   1,580   121   121   3,744   –   –   3,855   –   – 
Commercial real estate:                                                
Owner occupied  3,340   49   49   1,144   3   3   2,191   6   4   3,898   6   6 
Non-owner occupied  2,955   124   124   5,066   275   273   4,376   72   36   10,556   186   186 
Commercial and industrial  1,474   114   114   1,155   26   26   738   2   2   562   2   2 
Consumer  5   -   -   -   -   - 
All other  8,641   342   341   3,011   40   6 
Construction and land  353   –   –   1,065   121   121 
Total $30,359  $826  $810  $12,568  $481  $443  $11,464  $80  $42  $20,203  $315  $315 


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 SeptemberJune 30, 20172020 and SeptemberJune 30, 20162019.  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  Three months ended June 30, 2020  Three months ended June 30, 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 $323  $-  $-  $667  $5  $5  $61  $–  $–  $253  $–  $– 
Multifamily real estate  13,590   66   60   2,594   63   63   3,753   –   –   3,830   –   – 
Commercial real estate:                                                
Owner occupied  3,910   27   27   1,847   3   3   1,785   3   1   4,062   3   3 
Non-owner occupied  3,749   63   63   4,240   175   175   4,429   36   –   10,573   92   92 
Commercial and industrial  1,390   13   13   1,809   10   10   768   1   1   562   1   1 
Consumer  9   -   -   -   -   - 
All other  7,183   53   53   5,243   33   - 
Construction and land  314   –   –   922   113   113 
Total $30,154  $222  $216  $16,400  $289  $256
 
 $11,110  $40  $2  $20,202  $209  $209 


- 23 -23.
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 SeptemberJune 30, 20172020 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 
             
June 30, 2020 
TDR’s on
Non-accrual
  
Other
TDR’s
  
Total
TDR’s
 
          
Residential real estate $25  $151  $176 
Multifamily real estate  3,708   –   3,708 
Commercial real estate            
Owner occupied  –   201   201 
Non-owner occupied  856   1,781   2,637 
Commercial and industrial  191   –   191 
Total $4,780  $2,133  $6,913 


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 SeptemberJune 30, 2017 $640,0002020, $2,118,000 in specific reserves were allocated to loans that had restructured terms resulting in a provision for loan losses of $10,000 for the three months ended June 30, 2020 and $213,000 for the six months ended June 30, 2020.  This compares to a provision for loan losses on restructured loans of $216,000 for the three months ended June 30, 2019 and $150,000 for the six months ended June 30, 2019.  At December 31, 2019, $2,471,000 in specific reserves were allocated to loans that had restructured terms.  At December 31, 2016 $43,000 in specific reservesThere were allocated to loans that had restructured terms.  As of September 30, 2017 and December 31, 2016, there were no0 commitments to lend additional amounts to these borrowers.



- 24 -24.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)




NOTE  3–3 - LOANS - continued


The following tables presentThere were 0 new TDR’s that occurred during the ninethree and six months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016, and three months ended September 30, 2017 and September 30, 2016.2019.

  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 forDuring the three and ninesix months ended SeptemberJune 30, 2017 involve reducing2020 and June 30, 2019, there were 0 TDR’s for which there as a payment default within twelve months following the borrowers’ required monthlymodification.

A loan is considered to be in payment by offering extended interest only periods that exceeddefault once it is 90 days contractually past due under the timeframes customarily offered bymodified terms.

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the Company and/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 reductionend of March 2020.  Provisions of the recorded investment inCARES Act permit certain loan payment modifications by banks that would normally be considered TDR’s to be exempt from the TDR rules.  Management has exercised these provisions of the CARES Act on the following loans and did not decrease the stated interest rateoutstanding as of June 30, 2020 to some degree 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.an individually requested basis.


June 30, 2020 
Modified to
Interest Only
Payment
  
Modified to Defer
Principal and
Interest Payment
  Total 
          
Residential real estate $9,756  $6,444  $16,200 
Multifamily real estate  2,526   5,280   7,806 
Commercial real estate            
Owner occupied  16,880   23,856   40,736 
Non-owner occupied  56,735   79,410   136,145 
Commercial and industrial  3,510   6,634   10,144 
Consumer  218   313   531 
Construction and land  21,979   6,817   28,796 
All other  10   334   344 
Total $111,614  $129,088  $240,702 
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 -25.
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 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.

During the three and nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, 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.


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.


- 26 -26.
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 SeptemberJune 30, 20172020, 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  $376,261  $2,992  $10,897  $–  $390,150 
Multifamily real estate  52,472   3,590   12,024   2,612   70,698   29,216   4,452   3,708   –   37,376 
Commercial real estate:                                        
Owner occupied  122,983   4,305   7,485   -   134,773   155,443   4,284   4,394   –   164,121 
Non-owner occupied  220,173   11,243   6,239   -   237,655   288,198   9,597   5,346   –   303,141 
Commercial and industrial  71,850   7,400   3,082   -   82,332   80,192   3,498   1,383   –   85,073 
SBA PPP  110,690   –   –   –   110,690 
Consumer  29,145   136   375   19   29,675   25,107   2   307   –   25,416 
Construction and land  110,807   3,676   570   –   115,053 
All other  148,216   5,479   8,994   -   162,689   33,922   –   60   –   33,982 
Total $968,960  $35,655  $48,077  $2,632  $1,055,324  $1,209,836  $28,501  $26,665  $–  $1,265,002 


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 



- 27 -27.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)




NOTE 4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

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

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

In 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 and its subsidiary banks meet all three of these criteria and have elected to utilize the CBLR as their measure of regulatory capital adequacy .


28.
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 sourceUnder interim guidance issued in June 2020, a community bank leverage ratio of funds for dividend paymentsTotal Tier 1 capital to shareholders is dividends received fromquarterly average assets must be at least 8.0% to be considered well capitalized.  Premier’s Tier 1 capital totaled $200.1 million at June 30, 2020, which represents a community bank leverage ratio of 10.9%.  Premier’s wholly owned subsidiary Citizens Deposit Bank  adopted the CBLR simplification standard during the second quarter of 2020 as its Tier 1 leverage ratio was 8.2% at June 30, 2020.  Premier’s other wholly owned subsidiary Banks.  Banking regulations limitbank, Premier Bank, Inc., adopted the amountregulatory capital simplification rules in the first quarter and maintained a CBLR of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid11.0% at June 30, 2020, well in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profitsexcess of the preceding two years, subject8.0% required to be considered well capitalized under the capital requirements and additional restrictions as discussed below.  During 2017 the Banks could, without prior approval, declare dividends to the Company of approximately $4.1 million plus any 2017 net profits retained to the date of the dividend declaration.

The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action the Banks must meet specific guidelines that involve quantitative measuresframework.

Shown below is a summary of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

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


 
June 30,
2020
  
December 31,
2019
  
Regulatory
Minimum
Requirements
  
To Be
Considered
Well Capitalized
 
Tier 1 Capital to average assets (CBLR):  10.9%  11.3%  8.0%  8.0%


- 28 -29.


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




NOTE 4- STOCKHOLDERS’ EQUITY5 – PREMISES AND REGULATORY MATTERS - continuedEQUIPMENT


Shown below isThe 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 over the term of the lease.  Short-term leases of equipment are recognized on a summarystraight-line basis over the lease term.  As of regulatory capital ratiosJune 30, 2020, the weighted average remaining lease term for operating leases was 9.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was 0.94%.

Total lease expense for the Company:
  
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%

six months ended June 30, 2020, which is included in net occupancy and equipment expense, was $673,000, consisting of $74,000 short-term lease expense and $599,000 of operating lease expense. For the three months ended June 30, 2020, lease expense was $340,000, consisting of $36,000 short-term lease expense and $304,000 of operating lease expense.
Beginning on January 1, 2016 an additional capital conservation buffer has been added to
Total lease expense for the six months ended June 30, 2019, which is included in net occupancy and equipment expense, was $622,000, consisting of $48,000 short-term lease expense and $574,000 of operating lease expense.  For the three months ended June 30, 2019, lease expense was $310,000, consisting of $20,000 short-term lease expense and $290,000 of operating lease expense.

The following table summarizes the future minimum regulatory capital ratiosrental commitments under the regulatory framework for prompt corrective action.  The capital conservation buffer will be measured as a percentage of risk weighted assets and will be phased-in over a four year period from 2016 thru 2019, resulting in a required capital conservation buffer 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 restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company.  The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk-weighted assets ratio of at least 8.50% and a Total Capital to risk-weighted assets ratio of at least 10.50%.  The Company’s capital conservation buffer was 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.operating leases:

2020 $556 
2021  1,067 
2022  1,050 
2023  805 
2024  680 
2025 and Thereafter  3,494 
Total undiscounted cash flows  7,652 
Discounted cash flows  (422)
Total lease liability $7,230 


- 29 -30.


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




NOTE  6 – STOCK COMPENSATION EXPENSE

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

On March 18, 2020, 74,025 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $8.50, the closing market price of Premier’s common stock on the 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 $15.57, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 20, 2022.

On June 9, 2020, 11,000 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 $14.54 per share based upon the closing price of Premier’s stock on the date of grant and $160,000 of stock-based compensation was recorded as a result.  On April 17, 2019, 7,500 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 $16.78 per share based upon the closing price of Premier’s stock on the date of grant and $126,000 of stock-based compensation was recorded as a result.

Compensation expense of $226,000 was recorded for the first six months of 2020 while $209,000 was recorded for the first six 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 June 30, 2020.  This unrecognized expense is expected to be recognized over the next 32 months based on the vesting periods of the options.

31.

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


NOTE  5 – STOCK COMPENSATION EXPENSE

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

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

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

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

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


NOTE  67 – 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 ninesix months ended SeptemberJune 30, 20172020 and 20162019 is presented below:


 
Three Months Ended
Sept 30,
  
Nine Months Ended
Sept 30,
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
 
 2017  2016  2017  2016  2020  2019  2020  2019 
Basic earnings per share                        
Income available to common stockholders $3,467  $3,164  $11,050  $8,767  $5,506  $5,859  $10,874  $12,035 
Weighted average common shares outstanding  10,661,157   10,626,185   10,653,594   10,508,809   14,664,916   14,636,569   14,661,957   14,631,430 
Earnings per share $0.33  $0.30  $1.04  $0.83  $0.38  $0.40  $0.74  $0.82 
                                
Diluted earnings per share                                
Income available to common stockholders $3,467  $3,164  $11,050  $8,767  $5,506  $5,859  $10,874  $12,035 
Weighted average common shares outstanding  10,661,157   10,626,185   10,653,594   10,508,809   14,725,075   14,718,419   14,728,208   14,708,377 
Add dilutive effects of potential additional
common stock
  77,794   60,742   80,418   60,372   60,159   81,850   66,251   76,947 
Weighted average common and dilutive potential
common shares outstanding
  10,738,951   10,686,927   10,734,012   10,569,181   14,725,075   14,718,419   14,728,208   14,708,377 
Earnings per share assuming dilution $0.32  $0.30  $1.03  $0.83  $0.37  $0.40  $0.74  $0.82 


Stock options for 183,242 shares of common stock were not considered in computing diluted earnings per share for the three and six months ended June 30, 2020 because they were antidultive.  There were no0 stock options considered antidilutive for the three or nineand six months ended SeptemberJune 30, 2017 and 2016.2019.

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.

- 31 -32.

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




NOTE 7 –8 - FAIR VALUE


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


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


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


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


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


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


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


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


- 32 -33.

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 June 30, 2020 were as follows:

  Carrying  Fair Value Measurements at June 30, 2020 Using 
  Amount  Level 1  Level 2  Level 3  Total 
Financial assets               
Cash and due from banks $124,647  $124,647  $-  $-  $124,647 
Time deposits with other banks  598   –   601   –   601 
Federal funds sold  8,365   8,365   –   –   8,365 
Securities available for sale  416,700   -   416,700   -   416,700 
Loans, net  1,250,614   -   -   1,251,278   1,251,278 
Interest receivable  5,997   -   1,282   4,715   5,997 
                     
Financial liabilities                    
Deposits $1,608,151  $1,243,622  $365,688  $-  $1,609,310 
Securities sold under agreements to repurchase  27,737   -   27,737   -   27,737 
FHLB advance  2,995   -   3,003   -   3,003 
Subordinated debt  5,455   -   5,354   -   5,354 
Interest payable  638   7   631   -   638 

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

  Carrying  Fair Value Measurements at December 31, 2019 Using 
  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   –   –   1,172,755   1,172,755 
Interest receivable  4,699   4   1,110   3,585   4,699 
                     
Financial liabilities                    
Deposits $1,495,753  $1,068,399  $424,886  $–  $1,493,285 
Securities sold under agreements to repurchase  20,428   –   20,428   –   20,428 
FHLB advance  6,375   –   6,352   –   6,352 
Subordinated debt  5,436   –   5,527   –   5,527 
Interest payable  912   15   897   –   912 


34.
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 June 30, 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 $316,143  $-  $316,143  $- 
U. S. agency CMO’s - residential  49,196   -   49,196   - 
Total mortgage-backed securities of government sponsored agencies  365,339   -   365,339   - 
U. S. government sponsored agency securities  9,546   -   9,546   - 
Obligations of states and political subdivisions  39,724   -   39,724   - 
Other securities  2,091   -   2,091   - 
Total securities available for sale $416,700  $-  $416,700  $- 

     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.

35.

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 writedown.


36.

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 June 30, 2020 are summarized below:

     Fair Value Measurements at June 30, 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 $1,843  $-  $-  $1,843 
Commercial real estate                
Non-owner occupied  3,151   -   -   3,151 
Commercial and industrial  317   -   -   317 
Total impaired loans $5,311  $-  $-  $5,311 
                 
Other real estate owned:                
Residential real estate $205  $-  $-  $205 
Commercial real estate                
Owner occupied  529   –   –   529 
Multifamily real estate  9,503   -   -   9,503 
Construction and land  551   -   -   551 
Total OREO $10,788  $-  $-  $10,788 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $8,070,000 at June 30, 2020 with a valuation allowance of $2,759,000 and a recorded investment of $8,445,000 at December 31, 2019 with a valuation allowance of $3,102,000.  The change resulted in a provision for loan losses of $223,000  for the six-months ended June 30, 2020, compared to a $226,000 provision for loan losses for the six-months ended June 30, 2019 and a $41,000 in provision for loan losses for the three months ended June 30, 2020, compared to a $416,000 provision for loan losses for the three months ended June 30, 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 $10,788,000 which is made up of the outstanding balance of $12,435,000 net of a valuation allowance of $1,647,000 at June 30, 2020.  There were $277,000 of write downs during the six months ended June 30, 2020, compared to $131,000 of write downs during the six months ended June 30, 2019. For the three months ended June 30, 2020 there were $277,000 of additional write downs compared to $131,000 of additional write downs during the three months ended June 30, 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.

37.

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 June 30, 2020 are summarized below:

 June 30, 2020 
Valuation
Techniques
Unobservable Inputs 
Range
(Weighted Avg)
 
Impaired loans:        
Multifamily real estate $1,843 sales comparisonadjustment for estimated realizable value  13.9%-67.4% (43.9%)
Commercial real estate          
Non-owner occupied  3,151 income approachadjustment for differences in net operating income expectations  13.9%-67.4% (43.9%)
Commercial and industrial  317 sales comparisonadjustment for estimated realizable value  25.0%-86.1% (45.8%)
Total impaired loans $5,311       
           
Other real estate owned:          
Residential real estate $205 sales comparisonadjustment for estimated realizable value  0.2%-59.8% (18.1%)
Multifamily real estate  9,503 income approachadjustment for differences in net operating income expectations  26.2%-26.2% (26.2%)
Commercial real estate          
Owner occupied  529 sales comparisonadjustment for estimated realizable value  29.5%-29.5% (29.5%)
Construction and land  551 sales comparisonadjustment for estimated realizable value  50.3%-86.3% (76.5%)
Total OREO $10,788       


38.

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 


39.

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:

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 comparisonadjustment for estimated realizable value  58.9%-58.9% (58.9%)
Commercial real estate          
Owner occupied  509 sales comparisonadjustment for estimated realizable value  76.1%-76.1% (76.1%)
Non-owner occupied  2,266 income approachadjustment for differences in net operating income expectations  36.6%-67.4% (60.6%)
Commercial and industrial  288 sales comparisonadjustment for estimated realizable value  25.0%-87.0% (43.6%)
Construction and land  380 sales comparisonadjustment for estimated realizable value  56.5%-56.5% (56.5%)
Total impaired loans $5,343       
           
Other real estate owned:          
Residential real estate $249 sales comparisonadjustment for estimated realizable value  0.2%-59.8% (17.5%)
Multifamily real estate  9,588 income approachadjustment for differences in net operating income expectations  25.6%-25.6% (25.6%)
Commercial real estate          
Owner occupied  288 sales comparisonadjustment for estimated realizable value  14.6%-70.4% (34.0%)
Construction and land  750 sales comparisonadjustment for estimated realizable value  50.3%-69.9% (66.0%)
Total OREO $10,875       



40.
Table of Contents
PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020



NOTE  7Item 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 – FAIR VALUE - continued

The carrying amountsRisk Factors and estimated fair valuesthe 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 instruments at Septemberservices, 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 six months ended June 30, 20172020 was $10,874,000, or $0.74 per diluted share, compared to net income of $12,035,000, or $0.82 per diluted share, for the six months ended June 30, 2019.  The decrease in net income in the first six months of 2020 is largely due to decreases in interest income and non-interest income, coupled with an increase in the provision for loan losses and an increase in non-interest expense.  These changes that negatively affected net income more than offset decreases in interest expense and income tax expense.  The provision for loan losses increased by $700,000, or 78.7%, in the first six months of 2020, largely to provide for the $1,650,000 of 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 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 amountsapproximately 8.72% and estimated fair values of financial instruments at December 31, 2016 were as follows:1.19% for the six months ended June 30, 2020 compared to 10.70% and 1.41% for the same period in 2019.

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


- 33 -41.
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.JUNE 30, 2020

- 34 -


Net income for the three months ended June 30, 2020 was $5,506,000, or $0.37 per diluted share, compared to net income of $5,859,000, or $0.40 per diluted share for the three months ended June 30, 2019.  The decrease in income in the second quarter of 2020 is largely due to a decrease in interest income on investments and other liquid assets, a decrease in non-interest income, and an increase in provision for loan losses, all of which more than offset a decrease in interest expense and an increase in interest income on loans.  A majority of these changes were largely in response to changes in the economy related to COVID-19, whether a result of governmental stimulus to depositors and borrowers, Federal Reserve Board of Governors’ changes in interest rate policy to stimulate the economy and/or customer behavior in response to government guidelines aimed to minimize the spread of COVID-19, as more fully explained throughout this analysis below.  The annualized returns on average common shareholders’ equity and average assets were approximately 8.68% and 1.17% for the three months ended June 30, 2020 compared to 10.26% and 1.36% for the same period in 2019.

Net interest income for the six months ended June 30, 2020 totaled $33.151 million, a decrease of $339,000, or 1.0%, from the $33.490 million of net interest income earned in the first six months of 2019.  Interest income in 2020 decreased by $888,000, or 2.3%, largely due to a $539,000, or 65.5%, decrease in interest income on interest-bearing bank balances and federal funds sold, and a $346,000, or 1.1%, decrease in interest income on loans.  Interest income on interest-bearing bank balances and federal funds sold decreased in the first six months of 2020 when compared to the same six months of 2019 due to significant decreases in the earning yields on these balances, although the average balance increased from $66.5 million during the first six months of 2019 to $91.8 million during the first six months of 2020.  Earning yields dropped significantly in response to the Federal Reserve Board of Governors’ policy decision to drop the targeted federal funds rate to a range of 0.00% to 0.25% on March 16, 2020.  The policy decision was an effort to stimulate the economy during government actions to curb the spread of COVID-19 requiring non-essential business closures.  For comparison, the targeted rate from January 1 to March 2, 2020 was 1.50% to 1.75% and during the entire first six months of 2019, the targeted rate ranged from 2.25% to 2.50%.  The actions taken by the Federal Reserve Board of Governors to reduce short-term interest rates reduced Premier’s earning yield on these highly liquid funds to an average of 0.62% during the first six months of 2020, compared to an average yield of 2.50% during the same six months of 2019.

The decrease in interest income on loans was the result of a few opposing changes in loan interest income.  During the first six months of 2020, approximately $543,000 of interest income was realized from deferred interest and discounts recognized on loans that paid-off or paid-down during the first six months of 2020 compared to $1,012,000 of interest income of this kind recognized during the first six months of 2019.  The loan payments in 2019 and 2020 included both non-accrual loans and performing loans that were once on non-accrual status.  As a result of the higher level of recognition in 2019, interest income on loans decreased by $469,000. Otherwise, interest income on loans increased by $123,000, or 0.4%, in the first six months of 2020.  This increase includes approximately $1,007,000 of interest income on loans acquired from the acquisition of the First National Bank of Jackson (“Jackson”) on October 25, 2019.  Interest income on these loans is included in Premier’s loan interest income only from the date of acquisition in October 2019 and therefore no interest income from these loans is included in the first six months of 2019.  Excluding the loan interest income earned on the Jackson loans and the decrease in deferred interest and discounts recognized on loans, interest income on loans decreased by $884,000, or 2.8%, in the first six months of 2020 when compared to the same six months of 2019, largely due to a decrease in the average yield on the loan portfolio from 5.50% in the first six months of 2019 to 5.21% in the first six months of 2020.  Premier’s participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) resulted in $114,192,000 of new loans during the second quarter of 2020.  These loans increased the six-month average loans outstanding by approximately $42,068,000 and increased interest income on loans during the first six months of 2020 by approximately $824,000.  Without Premier’s participation in the SBA PPP loan program, and excluding the average loans from the Jackson acquisition, average loans outstanding during the first six months of 2020 would have decreased by $15,920,000, or 1.4%, when compared to the average loans outstanding during the first six months of 2019.


42.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATEDJUNE 30, 2020




Interest income on investment securities in the first six months of 2020 was relatively unchanged at $4,828,000 compared to $4,831,000 in the first six months of 2019.  While the average balance of investments increased by $27.680 million in the first six months of 2020 when compared to the same six months of 2019, the average yield earned decreased to 2.48% in 2020 from 2.65% in 2019.  The net result was little change in investment interest income in the first six-month comparison of 2020 to the first six months of 2019.

Partially offsetting the decrease in interest income in the first six months of 2020 was a $549,000, or 11.7%, decrease in interest expense, driven by a decrease in interest expense on deposits.  Interest expense on deposits decreased by $455,000, or 10.5% in the first half of 2020, largely due to decreases in the average rate paid on certificates of deposit, savings deposits, and NOW and money market deposits during the first six months of 2020 compared to the same period in 2019.  Further interest expense savings were realized due to decreases in the average balance of higher-costing certificates of deposit during the first six months of 2020 compared to the same period in 2019.  Nevertheless, average interest-bearing deposit balances increased by $68.6 million, or 6.5%, in the first six months of 2020 compared to the same period of 2019, largely due to the acquisition of Jackson in the fourth quarter of 2019.  The average interest rate paid on interest-bearing deposits decreased by 13 basis points from 0.83% during the first six months of 2019 to 0.70% during the first six months of 2020.  Decreases in short-term rates resulting from actions by the Federal Reserve Board of Governors to reduce the targeted federal funds rate to a range of 0.00% to 0.25% on March 16, 2020, plus an inflow of funds from direct stimulus payments from the U.S. Treasury to deposit account holders in an effort to offset some of the negative effects of COVID-19 governmental restrictions on non-essential businesses, have resulted in a decrease in competition for bank deposit rates.  As a result, the average interest rate paid on highly liquid NOW and money market deposits decreased by 13 basis points and the average rate paid on savings deposits decreased by 12 basis points in the first six months of 2020 when compared to the first six months of 2019.  Even with these resulting decreases in the average rate paid on transaction based deposits, the average outstanding balance of transaction based deposits increased with less than half of the increase coming from the acquisition of Jackson.  NOW and money market deposit account balances averaged $452.771 million in the first six months of 2020, a $48.125 million increase over the average outstanding balances during the first six months of 2019.  Approximately $11.889 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.  The remaining $36.236 million, or 9.0%, increase was largely due to other sources of deposit funds, such as direct stimulus payments from the U.S. Treasury to deposit account holders, the initial retention of proceeds by SBA PPP loan borrowers, and a lack of deposit withdrawals resulting from normal consumer spending habits as non-essential businesses were required to close in an effort to help curb the spread of the COVID-19 virus.  Similarly, savings deposit account balances averaged $271.872 million in the first six months of 2020, a $26.781 million increase over the average outstanding balances during the first six months of 2019.  Approximately $19.951 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.  The remaining $6.8 million, or 2.8%, increase was due to other sources of deposit funds as noted above.  Even with the increases in their average balances, interest expense savings on interest-bearing transaction deposit accounts totaled $340,000 of the $455,000 decrease in interest expense on interest-bearing deposits, largely as a result of rate reductions on NOW, money market and savings deposit accounts.

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PREMIER FINANCIAL STATEMENTSBANCORP, INC.
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)JUNE 30, 2020




NOTE  7 – FAIR VALUE - continued



AssetsThe remaining $115,000 decrease in interest expense on deposit accounts came from a decrease in average outstanding certificates of deposits and Liabilities Measureda minor decrease in the average rates paid in the first six months of 2020 when compared to the first six months of 2019.  Certificates of deposit decreased on average by approximately $6.335 million, or 1.6%.  Yet, even when factoring in the approximately $38.063 million of average certificate of deposit balances from the two Jackson branches included in the first six months of 2020 but not part of Premier in the first six months of 2019, average certificate of deposit balances in Premier’s other branch locations decreased by $44.398 million or 11.0% in the first six months of 2020, when compared to the same six months of 2019.  As certificates mature, depositors are either seeking higher deposit rates from other competitive depository institutions or are transferring their balances to more liquid interest-bearing deposit accounts such as NOW, money market and savings deposits as a means to keep immediate access to their funds during the uncertainty of employment or economic conditions.

Additional interest expense savings have been realized in the first six months of 2020 from the reduction in outstanding Federal Home Loan Bank (“FHLB”) borrowings and other borrowings at the parent company.  Interest expense on FHLB borrowings decreased by $50,000, or 48.5%, in the first six months of 2020 when compared to the same six months of 2019, largely due to the payment upon maturity of approximately $5.4 million of FHLB borrowings since the end of January 2019.  Average FHLB borrowings decreased by $2.9 million in the first six months of 2020 compared to the same six months of 2019.  In addition, the average rate paid on FHLB borrowings in 2020 decreased by 39 basis points to 2.54% from the average rate paid during the first six months of 2019.  Interest on other borrowings at the parent company decreased by $31,000.  This borrowing was fully repaid during the first half of 2019 and therefore no interest expense was recognized on this debt in 2020.  Also contributing to the decrease in interest expense during the first six months of 2020 was a $31,000, or 16.3%, 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 six months of 2019.  The variable interest rate is indexed to the short-term three-month London Interbank Offered Rate (“LIBOR”), interest rate, which was lower in the first six months of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors.   Contrary to these interest expense savings, interest expense on short-term borrowings, primarily customer repurchase agreements, increased by $18,000, or 85.7%, in 2020 when compared to 2019.  The additional interest expense was largely due to a 15 basis point increase in the average rate paid on a Non-Recurring Basis3.2% higher average balance outstanding during the first six months of 2020.


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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020



Premier’s net interest margin during the first six months of 2020 was 3.91% compared to 4.25% for the first six months of 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 six months of 2020 would have been 3.85% compared to 4.12% for the first six months of 2019.  As shown in the table below, Premier’s yield earned on federal funds sold and interest bearing bank balances decreased to 0.62% in the first six months of 2020, from the 2.50% earned in the first six months of 2019.  The average yield earned on securities available for sale decreased to 2.48% in the first six months of 2020, from the 2.65% earned during the first six months of 2019.  Similarly, the average yield earned on total loans outstanding decreased to 5.31% in 2020 from the 5.68% earned during the first six months 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 six months of 2020 has been a decrease of approximately 37 basis points when compared to the first six months of 2019.

Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased from 0.87% during the first six months of 2019 to 0.72% in the first six months of 2020.  The average rates paid on interest-bearing deposits decreased from 0.83% in the first six months to 2019 to 0.70% during the first six 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 7.08% in the first six months of 2019 to 5.87% in the first six 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 15 basis points to 0.34% in the first six months of 2020, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston decreased to 2.54% as higher cost borrowings have been repaid upon maturity.  The overall effect was to decrease Premier’s net interest spread by 30 basis points to 3.68% and decrease Premier’s net interest margin by 34 basis points to 3.91% in the first six months of 2020 when compared to the first six months of 2019.

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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020




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

PREMIER FINANCIAL BANCORP, INC. 
AVERAGE CONSOLIDATED BALANCE SHEETS 
AND NET INTEREST INCOME ANALYSIS 
  
  Six Months Ended June 30, 2020  Six Months Ended June 30, 2019 
  Balance  Interest  Yield/Rate  Balance  Interest  Yield/Rate 
Assets                  
Interest Earning Assets                  
Federal funds sold and other $91,842  $284   0.62% $66,493  $823   2.50%
Securities available for sale                        
Taxable  369,836   4,557   2.46   354,497   4,651   2.62 
Tax-exempt  25,632   271   2.68   13,291   180   3.43 
Total investment securities  395,468   4,828   2.48   367,788   4,831   2.65 
Total loans  1,218,360   32,170   5.31   1,154,691   32,516   5.68 
Total interest-earning assets  1,705,670   37,282   4.40%  1,588,972   38,170   4.85%
Allowance for loan losses  (13,816)          (13,751)        
Cash and due from banks  22,827           23,768         
Other assets  107,310           109,922         
Total assets $1,821,991          $1,708,911         
                         
Liabilities and Equity                        
Interest-bearing liabilities                        
Interest-bearing deposits $1,121,858   3,880   0.70  $1,053,286   4,335   0.83 
Short-term borrowings  22,750   39   0.34   22,054   21   0.19 
FHLB Advances  4,201   53   2.54   7,082   103   2.93 
Other borrowings  -   -   0.00   1,432   31   4.37 
Subordinated debt  5,444   159   5.87   5,412   190   7.08 
Total interest-bearing liabilities  1,154,253   4,131   0.72%  1,089,266   4,680   0.87%
Non-interest bearing deposits  406,163           383,128         
Other liabilities  12,106           11,468         
Stockholders’ equity  249,469           225,049         
Total liabilities and equity $1,821,991          $1,708,911         
                         
Net interest earnings     $33,151          $33,490     
Net interest spread          3.68%          3.98%
Net interest margin          3.91%          4.25%


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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020




Additional information on Premier’s net interest income for the second quarter of 2020 and second 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 June 30, 2020  Three Months Ended June 30, 2019 
  Balance  Interest  Yield/Rate  Balance  Interest  Yield/Rate 
Assets                  
Interest Earning Assets                  
Federal funds sold and other $112,513  $26   0.09% $81,672  $478   2.35%
Securities available for sale                        
Taxable  365,394   2,014   2.20   356,862   2,313   2.59 
Tax-exempt  36,484   182   2.53   13,016   88   3.42 
Total investment securities  401,878   2,196   2.23   369,878   2,401   2.62 
Total loans  1,252,337   16,416   5.27   1,155,920   16,227   5.63 
Total interest-earning assets  1,766,728   18,638   4.25%  1,607,470   19,106   4.78%
Allowance for loan losses  (14,039)          (13,685)        
Cash and due from banks  22,980           23,461         
Other assets  107,744           109,372         
Total assets $1,883,413        �� $1,726,618         
                         
Liabilities and Equity                        
Interest-bearing liabilities                        
Interest-bearing deposits $1,132,726   1,715   0.61  $1,063,511   2,285   0.86 
Short-term borrowings  25,653   15   0.24   21,938   12   0.22 
FHLB Advances  4,253   23   2.18   6,496   48   2.96 
Other borrowings  -   -   0.00   879   10   4.56 
Subordinated debentures  5,448   76   5.61   5,416   96   7.11 
Total interest-bearing liabilities  1,168,080   1,829   0.63%  1,098,240   2,451   0.90%
Non-interest bearing deposits  448,766           388,752         
Other liabilities  12,812           11,248         
Stockholders’ equity  253,755           228,378         
Total liabilities and equity $1,883,413          $1,726,618         
                         
Net interest earnings     $16,809          $16,655     
Net interest spread          3.62%          3.88%
Net interest margin          3.83%          4.16%


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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020




Net interest income for the quarter ended June 30, 2020 totaled $16.809 million, up $154,000, or 0.9%, from the $16.655 million of net interest income earned in the second quarter of 2019, as interest expense savings exceeded a decrease in interest income.  Interest income in 2020 decreased $468,000, or 2.4%, in the second quarter of 2020 when compared to the second quarter of 2019, largely due to a $452,000, or 94.6%, decrease in interest income on interest-bearing bank balances and federal funds sold, and a $205,000, or 8.5%, decrease in interest income on investment securities. These decreases were partially offset by a $189,000, or 1.2%, increase in interest income on loans.  Interest income on interest-bearing bank balances and federal funds sold decreased in the second quarter of 2020 when compared to the same quarter of 2019 due to the significant decreases in the earning yields on these balances discussed above.  Although the average balance increased from $81.7 million during the second quarter of 2019 to $112.5 million during the second quarter of 2020, earning yields dropped significantly in response to the Federal Reserve Board of Governors’ policy decision to drop the targeted federal funds rate to a range of 0.00% to 0.25% on March 16, 2020.  The actions taken by the Federal Reserve Board of Governors to reduce short-term interest rates reduced Premier’s earning yield on these highly liquid funds to an average of 0.09% during the second quarter of 2020 compared to an average yield of 2.35% during the same quarter of 2019.  Similarly, interest income on investment securities in the second quarter of 2020 decreased by $205,000, or 8.5%, when compared to the second quarter of 2019.  While the average balance of investments increased by $32.000 million in the second quarter of 2020 when compared to the same quarter of 2019, the average yield earned decreased to 2.23% in 2020 from 2.62% in 2019.

Contrary to these two decreases, interest income on loans increased by $189,000, or 1.2%, in the second quarter of 2020 when compared to the second quarter of 2019.  During the second quarter of 2020, approximately $468,000 of interest income was realized from deferred interest and discounts recognized on loans that paid-off or paid-down during the second quarter of 2020 compared to $293,000 of interest income of this kind recognized during the second quarter of 2019.  The loan payments in 2019 and 2020 included both non-accrual loans and performing loans that were once on non-accrual status.  As a result of the higher level of recognition in 2020, interest income on loans increased by $175,000. Otherwise, interest income on loans increased by $14,000, or 0.1%, in the second quarter of 2020.  This increase includes approximately $550,000 of interest income on loans acquired from the acquisition of Jackson on October 25, 2019.  Interest income on these loans is included in Premier’s loan interest income only from the date of acquisition in October 2019 and therefore no interest income from these loans is included in the second quarter of 2019.  Excluding the loan interest income earned on the Jackson loans and the increase in deferred interest and discounts recognized on loans, interest income on loans decreased by $536,000, or 3.4%, in the second quarter of 2020 when compared to the same quarter of 2019, largely due to a decrease in the average yield on the loan portfolio from 5.53% in the second quarter of 2019 to 5.09% in the second quarter of 2020.  As stated above, Premier’s participation in the SBA’s PPP loan program resulted in $114,192,000 of new loans during the second quarter of 2020.  These loans increased the second quarter average loans outstanding by approximately $84,136,000 and increased interest income on loans during the second quarter of 2020 by approximately $824,000.  Without Premier’s participation in the SBA PPP loan program, and excluding the average loans from the Jackson acquisition, average loans outstanding during the second quarter of 2020 decreased by $23,448,000, or 2.0%, when compared to the average loans outstanding during the second quarter of 2019.  This decrease in loans and, in particular, the types of loans the decreased, had an effect on the second quarter 2020 provision for loans losses as more fully explained below.

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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020




More than offsetting the decrease in interest income in the second quarter of 2020 was a $622,000, or 25.4%, decrease in interest expense, driven by a decrease in interest expense on deposits.  Interest expense on deposits decreased by $570,000, or 24.9% in the second quarter of 2020, largely due to decreases in the average rate paid on certificates of deposit, savings deposits, and NOW and money market deposits during the second quarter of 2020 compared to the same quarter in 2019.  Further interest expense savings were realized due to decreases in the average balance of higher-costing certificates of deposit during the second quarter of 2020 compared to the same quarter in 2019.  Nevertheless, average interest-bearing deposit balances increased by $69.2 million, or 6.5%, in the second quarter of 2020 compared to the same quarter of 2019, largely due to the acquisition of Jackson in the fourth quarter of 2019.  The average interest rate paid on interest-bearing deposits decreased by 25 basis points from 0.86% during the second quarter of 2019 to 0.61% during the second quarter of 2020.  Decreases in short-term rates resulting from actions by the Federal Reserve Board of Governors to reduce the targeted federal funds rate, plus an inflow of funds from direct stimulus payments from the U.S. Treasury to deposit account holders during the second quarter of 2020, have resulted in a decrease in competition for bank deposit rates.  As a result, the average interest rate paid on highly liquid NOW and money market deposits decreased by 18 basis points and the average rate paid on savings deposits decreased by 16 basis points in the second quarter of 2020 when compared to the second quarter of 2019.  Even with these resulting decreases in the average rate paid on transaction based deposits, the average outstanding balance of transaction based deposits increased with less than half of the increase coming from the acquisition of Jackson.  NOW and money market deposit account balances averaged $474.014 million in the second quarter of 2020, a $63.072 million increase over the average outstanding balances during the second quarter of 2019.  Approximately $13.582 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.  The remaining $49.490 million, or 12.0%, increase was largely due to other sources of deposit funds such as direct stimulus payments from the U.S. Treasury to deposit account holders, the initial retention of proceeds by SBA PPP loan borrowers, and a lack of deposit withdrawals resulting from normal consumer spending habits as non-essential businesses were required to close in an effort to help curb the spread of the COVID-19 virus.  Similarly, savings deposit account balances averaged $279.425 million in the second quarter of 2020, a $32.404 million increase over the average outstanding balances during the second quarter of 2019.  Approximately $19.941 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.  The remaining $12.5 million, or 5.0%, increase was due to other sources of deposit funds as noted above.  Even with the increases in their average balances, interest expense savings on interest-bearing transaction deposit accounts totaled $245,000 of the $570,000 decrease in interest expense on interest-bearing deposits, largely as a result of rate reductions on NOW, money market and savings deposit accounts.

The Companyremaining $325,000 decrease in interest expense on deposit accounts came from a decrease in average outstanding certificates of deposits and a decrease in the average rates paid during the second quarter of 2020 when compared to the second quarter of 2019.  Certificates of deposit decreased on average by approximately $26.377 million, or 6.5%.  Yet, even when factoring in the approximately $36.613 million of average certificate of deposit balances from the two Jackson branches included in the second quarter of 2020 but not part of Premier in the second quarter of 2019, average certificate of deposit balances in Premier’s other branch locations decreased by $62.990 million or 15.5% in the second quarter of 2020, when compared to the same quarter of 2019.  As certificates mature, depositors are either seeking higher deposit rates from other competitive depository institutions or are transferring their balances to more liquid interest-bearing deposit accounts such as NOW, money market and savings deposits as a means to keep immediate access to their funds during the uncertainty of employment or economic conditions.

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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020




Additional interest expense savings have been realized in the second quarter of 2020 from the reduction in outstanding Federal Home Loan Bank (“FHLB”) borrowings and other borrowings at the parent company.  Interest expense on FHLB borrowings decreased by $25,000, or 52.1%, in the second quarter of 2020 when compared to the same quarter of 2019, largely due to the payment upon maturity of approximately $5.4 million of FHLB borrowings since the end of January 2019.  Average FHLB borrowings decreased by $2.2 million in the second quarter of 2020 compared to the same quarter of 2019.  In addition, the average rate paid on FHLB borrowings in 2020 decreased by 78 basis points to 2.18% from the average rate paid during the second quarter of 2019.  Interest on other borrowings at the parent company decreased by $10,000.  This borrowing was fully repaid during the first half of 2019 and therefore no interest expense was recognized on this debt in 2020.  Also contributing to the decrease in interest expense during the second quarter of 2020 was a $20,000, or 20.8%, decrease in interest expense on Premier’s subordinated debt due to a decrease in the variable interest rate paid in 2020 compared to the second quarter of 2019.  The variable interest rate is indexed to the short-term three-month London Interbank Offered Rate (“LIBOR”), interest rate, which was lower in the second quarter of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors.   Contrary to these interest expense savings, interest expense on short-term borrowings, primarily customer repurchase agreements, increased by $3,000, or 25.0%, in 2020 when compared to 2019.  The additional interest expense was largely due to a $3.715 million higher average balance outstanding during the second quarter of 2020, as the average rate paid increased by only 2 basis points.

Premier’s net interest margin during the second quarter of 2020 was 3.83% compared to 4.16% for the second quarter of 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 second quarter of 2020 would have been 3.73% compared to 4.09% for the second quarter of 2019.  As shown in the table above, Premier’s yield earned on federal funds sold and interest bearing bank balances decreased to 0.09% in the second quarter of 2020, from the 2.35% earned in the second quarter of 2019.  The average yield earned on securities available for sale decreased to 2.23% in the second quarter of 2020, from the 2.62% earned during the second quarter of 2019.  Similarly, the average yield earned on total loans outstanding decreased to 5.27% in 2020 from the 5.63% earned during the second 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 second quarter of 2020 has been a decrease of approximately 36 basis points when compared to the second quarter of 2019.

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PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 2020




Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased in the second quarter of 2020 from 0.90% during the second quarter of 2019 to 0.63% in the second quarter of 2020.  The average rates paid on interest-bearing deposits decreased from 0.86% in the second quarter to 2019 to 0.61% during the second quarter of 2020, due to lower rates paid on savings deposits, transaction based interest bearing deposits and certificates of deposit.  Furthermore, the average rate paid on Premier’s variable rate subordinated debentures decreased from 7.11% in the second quarter of 2019 to 5.61% in the second quarter 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 2 basis points to 0.24% in the second quarter of 2020, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston decreased to 2.18% as higher cost borrowings have been repaid upon maturity.  The overall effect was to decrease Premier’s net interest spread by 25 basis points to 3.62% and decrease Premier’s net interest margin by 33 basis points to 3.83% in the second quarter of 2020 when compared to the second quarter of 2019.

Non-interest income decreased by $384,000, or 8.5%, to $4,139,000 for the first six months of 2020 compared to the same period of 2019.  Service charges on deposit accounts decreased by $418,000, or 18.9%, and other sources of non-interest income decreased by $66,000, or 13.2%, both largely in the second quarter, due to significant declines in economic activity resulting from government actions designed to curb the spread of the COVID-19 virus.  Service charges on deposit accounts decreased largely due to a $377,000, or 22.6%, decrease in customer overdraft fees.  Transaction based deposit account balances have increased significantly during the first six months of 2020 compared to the same six months of 2019.  The lack of deposit withdrawals resulting from a decline in normal consumer spending habits as non-essential businesses were required to close in an effort to help curb the spread of the COVID-19 virus has reduced transaction activity and the propensity of deposit customers to overdraft their accounts.  Other sources of non-interest income that have decreased in the first six months of 2020 include checkbook sales, wire transfer fees, and commissions on insurance premiums as well as brokerage and annuity commission income.  Partially offsetting these decreases in non-interest income, electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $6,000, or 0.3% and secondary market mortgage income increased by $94,000, or 165%.  Electronic banking income increased only marginally, as increases in income from debit card transaction activity were largely offset by decreases non-customer ATM transaction fees.  Secondary market mortgage income increased, in part, due to the lower long-term interest rate environment, resulting in an increase in home loan refinances as customers are taking advantage of lowering their long-term fixed home loan interest rate.


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Non-interest income decreased by $457,000, or 19.5%, to $1,890,000 for the second quarter of 2020 compared to the same three months of 2019, more than offsetting an increase in non-interest income realized during the first quarter of 2020.  Service charges on deposit accounts decreased by $430,000, or 38.3% and other sources of non-interest income decreased by $89,000, or 33.6%.  Service charges on deposit accounts decreased largely due to a $390,000, or 46.1%, decrease in customer overdraft fees.  Transaction based deposit account balances have increased significantly during the second quarter of 2020 compared to the same quarter of 2019.  The lack of deposit withdrawals resulting from a decline in normal consumer spending habits as non-essential businesses were required to close in an effort to help curb the spread of the COVID-19 virus has reduced transaction activity and the propensity of deposit customers to overdraft their accounts.  Other sources of non-interest income that decreased in the second quarter of 2020 include checkbook sales, commissions on insurance premiums, income from Premier’s partial ownership of an insurance agency as well as brokerage and annuity commission income.  Partially offsetting these decreases in non-interest income, electronic banking income increased by $10,000, or 1.1% and secondary market mortgage income increased by $52,000, or 158%.  Electronic banking income increased only marginally as increases in income from debit card transaction activity were largely offset by decreases non-customer ATM transaction fees.  Secondary market mortgage income increased, in part, due to the lower long-term interest rate environment resulting in an increase in home loan refinances as customers are taking advantage of lowering their long-term fixed home loan interest rate.

Non-interest expenses for the first six months of 2020 totaled $21,816,000, or 2.41%, of average assets on an annualized basis, compared to $21,634,000, or 2.55%, of average assets for the same period of 2019.  The $182,000, or 0.8%, increase in non-interest expenses in 2020 when compared to the first six months of 2019 is largely due to the inclusion of the newly acquired Jackson branch locations, which added approximately $513,000 of direct non-interest expense during the first six months of 2020.  Overall increases in operating costs include a $49,000, or 0.5%, increase in staff costs, a $423,000, or 15.1%, increase in outside data processing costs, a $28,000, or 5.6%, increase in taxes not on income, a $33,000, or 7.3%, increase in the amortization of intangible assets, and an $86,000 increase in data conversion expenses.  The $423,000 increase in outside data processing costs included a $125,000 increase in internet and mobile banking charges, as banking by electronic means becomes more and more popular among Premier’s customer base, and a $122,000 increase in data line costs as Premier is migrating to a more robust data line network across its branch network.  Upon full migration, data line expenses should return to near pre-migration levels.  These increases in non-interest expense were partially offset by $175,000, or 72.0%, decrease in FDIC insurance expense, a $181,000, or 27.0%, decrease in professional fees, a $55,000, or 11.5%, decrease in expenses and writedowns on OREO properties, and an $18,000, or 0.5%, decrease in occupancy and equipment expenses.  FDIC insurance expense decreased by $175,000 largely due to the utilization of FDIC based community bank assessment credits used to substantially offset the first and second quarter 2020 FDIC insurance premiums.  Professional fees decreased by $181,000 largely due to decreases in legal fees and consulting expenses.   Occupancy and equipment expenses decreased in the first six months of 2020 due, in part, to higher expenses in the first six months of 2019 due to an $185,000 building impairment charge in the second quarter of 2019 related to a branch location that is in the process of being liquidated.


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Non-interest expense for the second quarter of 2020 totaled $11,079,000, or 2.37%, of average assets on an annualized basis, compared to $11,041,000, or 2.56%, of average assets for the same period of 2019.  The $38,000, or 0.3%, increase in non-interest expenses in the second quarter of 2020 compared to the second quarter of 2019, is largely due to the operations of the acquired Jackson branch locations which added approximately $253,000 of direct non-interest expense during the second quarter of 2020.  Overall increases in operating costs include a $276,000, or 19.4%, increase in outside data processing costs, a $126,000, or 55.3%, increase in expenses and writedowns on OREO properties, a $56,000 increase in data conversion expenses, and an $18,000, or 8.1%, increase in the amortization of intangible assets.  The $276,000 increase in outside data processing costs included a $79,000 increase in internet and mobile banking charges, as banking by electronic means becomes more and more popular among Premier’s customer base, and a $115,000 increase in data line costs as Premier is migrating to a more robust data line network across its branch network.  Upon full migration, data line expenses should return to near pre-migration levels.  The increase in OREO expenses and writedowns includes $277,000 of property writedowns in the second quarter of 2020 compared to only $116,000 of property writedowns in the same quarter of 2019.  These increases were nearly offset by a $160,000, or 2.9%, decrease in staff costs, a $79,000, or 4.2%, decrease in occupancy and equipment expenses, a $60,000, or 19.6%, decrease in professional fees, a $9,000, or 3.4%, decrease in taxes not on income, and a $47,000, or 39.5%, decrease in FDIC insurance premiums, when compared to the second quarter of 2019.  The decrease in staff costs is largely due to an increase in the deferral of staff costs related to loan originations in the second quarter of 2020 from the high volume of SBA PPP loans originated during the quarter compared to the level of loan originations in the second quarter of 2019, which reduced staff costs by $238,000.  During the shutdown of most business operations mandated by governmental actions designed to curb the spread of the COVID-19 virus, as an essential business, most of Premier’s branch locations remained open but were limited primarily to drive-thru traffic or in branch meetings by appointment.  Branches with no drive-thru facilities and those close to another branch location were closed during much of the second quarter of 2020.  As a result, some employees were given employment deferrals and the number of hours of non-salaried employees were reduced commensurate with decrease in customer demand on branch transactions.  The result was a decrease in wages paid by approximately $169,000 in the second quarter of 2020 when compared to the second quarter of 2019.  This decrease was substantially offset by wages paid to employees of the two newly acquired Jackson branch locations, which totaled approximately $137,000 during the second quarter of 2020 but were not included in Premier’s second quarter 2019 operations.  These decreases in staff costs were partially offset by a $116,000 increase in stock compensation expense in the second quarter of 2020, largely due to a stock grant award given to President and CEO Walker during the second quarter of 2020.  A comparable stock grant in 2019 was expensed in the first quarter of 2019.  Occupancy and equipment expenses decreased in the second quarter of 2020 due, in part, to higher expenses in the second quarter of 2019, due to a $185,000 building impairment charge related to a branch location that is in the process of being liquidated.  Professional fees decreased by $60,000 largely due to a decrease in legal fees.  FDIC insurance expense decreased by $47,000, largely due to the utilization of FDIC based community bank assessment credits used to partially offset the second quarter 2020 FDIC insurance premiums.

Income tax expense was $3,010,000 for the first six months of 2020 compared to $3,454,000 for the first six months of 2019.  The effective tax rate for the six months ended June 30, 2020 was 21.7% compared to 22.3% for the same period in 2019.  For the quarter ended June 30, 2020, income tax expense was $1,524,000, (a 21.7% effective tax rate), compared to $1,772,000, (a 23.2% 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 Paycheck Protection Program.  These efforts may or may not enhance Premier’s business model or future results of operations.

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B.          Financial Position


Total assets at June 30, 2020 increased by $134.0 million to $1.915 billion from the $1.781 billion at December 31, 2019.  The increase in total assets since year-end is largely due to a $35.5 million increase in interest bearing bank balances, a $25.9 million increase in securities available for sale, a $2.5 million increase in federal funds sold and a $69.7 million increase in total loans outstanding.  Earning assets increased by $133.4 million from the $1.662 billion at year-end 2019 to end the quarter at $1.796 billion.  Premier’s participation in the SBA’s PPP loan program generated $114.2 million of new loans.  Much of the loan proceeds were originally deposited with the Premier’s subsidiary banks, giving rise to an increase in commercial based deposit balances.  Furthermore, government based economic stimulus checks to individuals have resulted in increases in retail based deposit balances.

Cash and due from banks at June 30, 2020 was $23.7 million, a $633,000 increase from the $23.1 million at December 31, 2019.  Interest bearing bank balances increased by $35.5 million, or 53.7%, from the $66.1 million reported at December 31, 2019.  Federal funds sold increased by $2.5 million to $8.4 million at June 30, 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.  With the significant increase in deposit balances during the second quarter of 2020 and the related potential for a significant reversal of that increase, Premier has retained a higher level of these liquid assets at June 30, 2020 to be able to immediately satisfy deposit withdrawals.

Securities available for sale totaled $416.7 million at June 30, 2020, a $25.9 million increase from the $390.8 million at December 31, 2019.  The increase was largely due to the purchase of $91.6 million of investment securities and an $8.9 million increase in market value of securities available for sale.  These increases more than offset $73.8 million of proceeds from monthly principal payments on Premier’s mortgage backed securities portfolio and securities that matured or were called during the first six months of 2020.  Purchases exceeded maturities as Premier sought higher yields on surplus funds resulting from the growth in deposits and payoffs on non-SBA PPP loans.  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 June 30, 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 June 30, 2020 were $1.265 billion compared to $1.195 billion at December 31, 2019, an increase of approximately $69.7 million, or 5.8%. The increase is largely due Premier’s robust participation in the SBA’s PPP loan program in the second quarter of 2020, which generated $114.2 million of new loans, or 9.0% of Premier’s outstanding loans at June 30, 2020.  Without these loans, Premier’s loan portfolio would have decreased by approximately $44.5 million, or 3.7%, during the first six months of 2020, 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 $21.1 million or 15.5%; consumer loans, decreased by $3.6 million,

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or 12.4%; and commercial and industrial loans, decreased by $23.5 million, or 22.4%.  These decreases more than offset a $692,000, or 1.9%, increase in multifamily residential loans and a $165,000 increase in residential real estate loans.  The $4.1 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.  Since year-end 2019, Premier has also had improvements in the total amount of loans downgraded to Special Mention or further downgraded to Substandard.  Loans categorized as Special Mention decreased by $8.2 million, or 22.4%, since year-end, primarily in construction and land loans, while loans categorized as Substandard decreased by $3.3 million, or 11.0%, since year-end, largely in owner-occupied commercial real estate loans.  Loan payoffs during the first half of 2020 resulted in recognizing approximately $249,000 of interest income deferred while the loans were on non-accrual status and $294,000 of remaining fair value discounts associated with the loans.

The SBA PPP loan program, as originally enacted, provided qualifying small business borrowers with a fixed rate loan bearing an interest rate of 1.00%, a 24-month maturity date, and payment deferrals for the first six months of the loan.  The loans required no collateral and are fully guaranteed, both principal and interest, by the Small Business Administration and the U. S. Treasury.  Loan amounts per borrower were limited to an amount approximating two and one-half months of their average payroll expense during the calendar year 2019.  A key feature of the loan program is that borrowers can receive repayment forgiveness by the SBA for the portion of their loan proceeds that were expended on certain employee payroll related costs and qualifying premises and equipment costs during the eight weeks following methodsloan disbursement, up to 100% of the loan amount.  The program has since been modified to allow borrowers up to twenty-four weeks to expend the proceeds on those qualifying expenses.  Upon forgiveness, the bank would be reimbursed by the SBA for the forgiveness portion and any accrued interest thereon.  Any remaining balance would be repaid by the borrower over the remaining eighteen months to loan maturity.  A subsequent change to the program will allow borrowers an option to extend the repayment period up to 60 months.  Management believes that with the expanded timeframe to make the qualifying expenditures, most of the outstanding loan balance made to borrowers will qualify for forgiveness.  The ultimate timing of the reimbursement by the SBA is within 90 days after the forgiveness application is received by the SBA.  As such, management anticipates that a significant assumptionsportion of the SBA PPP loan balances outstanding at June 30, 2020 will be reimbursed by the SBA before the end of the calendar year under the forgiveness feature.  In addition to estimatethe 1.00% stated interest rate, the SBA pays the loan originating bank a fee based upon a percentage of the loan amount.  The fee percentage decreases based upon a ladder of increases in the size of the loan.  Like all loan origination fees paid by borrowers, the fee is accreted into income over the life of the loan and is fully recognized when the loan is fully repaid.  Based upon the SBA PPP loans originated through June 30, 2020, Premier received origination fees from the SBA of approximately $4.4 million which is being deferred and accreted into loan interest income over the life of the SBA PPP loan portfolio.

Premises and equipment decreased by $549,000, largely due to normal quarterly depreciation of fixed assets.  Other intangible assets decreased by $483,000, due to the amortization of core deposit intangibles.  Accrued interest receivable increased by $1,298,000, or 27.6%, largely due to approximately $216,000 of accrued interest on the SBA PPP loans for which payments are deferred for the first six months of the loan and approximately $1,557,000 of accrued interest on loans whereby Premier has granted full payment deferrals for a period of 90 days in accordance with regulatory guidance provided under the CARES Act during the COVID-19 based economic slowdown.

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Deposits totaled $1.608 billion as of June 30, 2020, an $112.4 million, or 7.5%, increase from the $1.496 billion in deposits at December 31, 2019.  The overall increase in deposits is largely due to a $107.4 million, or 29.2%, increase in non-interest bearing deposits, a $54.1 million, or 14.1%, increase in savings and money market deposits, and a $13.8 million, or 4.3%, increase in interest bearing transaction deposits.  Partially offsetting these increases, certificates of deposit (“CD”) balances decreased by $62.9 million, or 14.8%.  The decrease in certificate of deposit balances is not only primarily the result of discontinuing CD rate specials, but also a significant decrease in traditional CD rates, as management lowered offering rates in response to decreases in market short-term and long-term interest rates.  As certificates of deposit mature, depositors are either seeking higher deposit rates from other competitive depository institutions or are transferring their balances to more liquid interest-bearing deposit accounts such as NOW, money market and savings deposits as a means to keep immediate access to their funds during the uncertainty of employment or economic conditions.  Much of the SBA’s PPP loan program proceeds were originally deposited with Premier’s subsidiary banks, giving rise to an increase in commercial based deposit balances.  Furthermore, government based economic stimulus checks to individuals have resulted in increases in retail based deposit balances.  Repurchase agreements with corporate and public entity customers increased by $7.3 million, or 35.8%.  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 $19,000, due to the regular amortization of the fair value adjustment.  Other liabilities increased by $4.2 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 each typeincome taxes on first two quarters of 2020 pretax income not due to be paid until July 15, 2020.  The accrued income tax payments for the first two quarters of a calendar year are normally paid on April 15, and June 15 during the second calendar quarter but have been postponed in the year 2020 by governmental regulation to help mitigate some of the adverse economic effects of government actions designed to curb the spread of the COVID-19 virus.


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The following table sets forth information with respect to the Company’s nonperforming assets at June 30, 2020 and December 31, 2019.

  (In Thousands) 
  2020  2019 
Non-accrual loans $13,761  $14,437 
Accruing loans which are contractually
past due 90 days or more
  980   2,228 
Accruing restructured loans  2,133   3,020 
Total non-performing loans  16,874   19,685 
Other real estate acquired through foreclosure (OREO)  12,267   12,242 
Total non-performing assets $29,141  $31,927 
         
Non-performing loans as a percentage of total loans  1.33%  1.65%
         
Non-performing assets as a percentage of total assets  1.52%  1.79%


Total non-performing loans have decreased since year-end, largely due to a $676,000 decrease in non-accrual loans, a $1.2 million decrease in accruing loans past due 90 days or more and an $887,000 decrease in accruing restructured loans.  The decrease in accruing restructured loans was largely due to the placing of one loan on non-accrual status.  This $856,000 increase in non-accrual loans has been more than offset by a decrease in non-accrual loans from moving one loan to foreclosure and receiving payments on existing 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 $25,000 increase in other real estate owned acquired through foreclosure (“OREO”).  Other real estate owned increased by $600,000 during the first quarter of 2020 largely due to the foreclosure on one commercial real estate property previously categorized as an impaired loan.  The impaired loan had a specific allowance for loan losses allocation and, upon foreclosure, resulted in a $566,000 loan charge-off.  This increase has been nearly offset by sales of several OREO properties during the first six months of 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.



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Gross charge-offs totaled $935,000 during the first six months of 2020, largely due to a first quarter 2020 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 instrument measuredstatements as recoveries of the amounts charged against the allowance.  Recoveries recorded during the first six months of 2020 totaled $191,000, resulting in net charge-offs for the first six months of 2020 of $744,000.  This compares to $855,000 of net charge-offs recorded in the first six months of 2019.  The allowance for loan losses at June 30, 2020 was 1.14% of total loans compared to 1.13% at December 31, 2019.  The slight change in the ratio is due to opposing impacts to the ratio.   First, the allowance for loan losses has increased by $846,000 in the first six months of 2020, largely due to $1.650 million of additional provision expense to provide for an estimate of additional 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 and that impact on borrowers’ ability to repay their loans.  This increase in the allowance, by itself, would have resulted in a non-recurring basis:more significant increase in the ratio to total loans.  However, due to the $69.7 million increase in total loans outstanding since December 31, 2019, largely due to $114.2 million of SBA Paycheck Protection Program loans outstanding at June 30, 2020 that are fully guaranteed by the U.S. Treasury and, therefore, have no allowance for loan losses attributed to them, the allowance for loan losses ratio to total loans remained steady at 1.14%.  Excluding the SBA PPP loan portfolio, the allowance for loan losses at June 30, 2020 would have been 1.25% of the remaining loans outstanding.


Impaired Loans:During the first six months of 2020, Premier recorded $1,590,000 of provision for loan losses.  This provision compares to $890,000 of provision for loan losses recorded during the same six months of 2019.  The fair valueprovision for loan losses recorded during the first six months 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 (“Potential COVID-19 Losses”).  Premier added approximately $1,650,000 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, non-owner occupied rental real estate, religious and civic organizations, personal services, and retail stores.  Additional risk-weighting was given to loans in those industries where the borrower has been granted either an interest-only payment deferral period or a full principal and interest payment deferral period.  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 additional provision expense related to Potential COVID-19 Losses was partially offset by reductions in estimated credit risk within the loan portfolio resulting from decreases in higher-risk loans outstanding, such as commercial and industrial loans, construction and land development loans and consumer loans, as well as other portfolio credit risk improving indications such as improvements in past due ratios and decreases in historical loss ratios.


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During the second quarter of 2020, Premier recorded $590,000 of provision for loan losses.  This provision compares to $330,000 of provision for loan losses recorded during the same quarter of 2019.  The provision for loan losses recorded during the second quarter of 2020 was primarily to provide for an increase in the estimate of Potential COVID-19 Losses.  Premier added approximately $1,000,000 to its qualitative credit risk analysis of the loan portfolio related to Potential COVID-19 Losses, expanding the initial estimate to include loans to non-owner occupied rental real estate borrowers and religious and civic organizations.  Management also increased the estimate of Potential COVID-19 Losses on loans where the borrower has been granted either an interest-only payment deferral period or a full principal and interest payment deferral period within all of the industries identified above that are believed to be more susceptible to future credit risk.  The additional provision expense related to Potential COVID-19 Losses in the second quarter of 2020 was partially offset by reductions in estimated credit risk within the loan portfolio resulting from decreases in loans outstanding, such as owner-occupied commercial real estate and multifamily real estate loans, as well as higher risk loans, such as commercial and industrial loans, construction and land development loans and consumer loans.  Other indications of improving portfolio credit risk that occurred during the second quarter of 2020 include decreases in loans classified as Special Mention and Substandard, improvements in past due ratios and decreases in historical loss ratios.

The provision for loan losses recorded during the first six months of 2019 and the second quarter of 2019 were primarily to provide for new loans recorded and additional identified credit risk in Premier’s impaired multifamily residential real estate loans and collectively impaired owner occupied real estate loan and commercial and industrial 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 specific allocationsPremier’s policies regarding management’s estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, iswhich are in accordance with accounting principles generally basedaccepted in the United States of America.  Future provisions to the allowance for loan losses, positive or negative, will depend on recent collateral appraisals. Realfuture 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 appraisalsloans 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 utilizehave a single valuation approach or a combinationlarger impact in the southern area of approaches including comparable salesWest Virginia and the income approach. Adjustments are routinely madedecrease in the appraisal process bylevel of drilling activity in the appraisers to adjust for differences betweenoil & gas industry, which may have a larger impact in the comparable sales and income data available. Such adjustments are typically significant and unique tocentral area of West Virginia.  A resulting decline in employment could increase non-performing assets from loans originated in these areas.

In each property and result in a Level 3 classification of the inputslast 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 determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value perloan losses.  For additional details on the borrower’sactivity 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.

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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 aging reports. Management periodically evaluates the appraised collateral values and will discount the collateral’s appraised value to account forcomplex judgments, often as a number of factors including but not limited to the cost of liquidating the collateral, the ageresult of the appraisal, observable deterioration sinceneed to make estimates about the appraisal, management’s expertiseeffect of matters that are inherently uncertain.  The Company has identified two accounting policies that are critical accounting policies, and knowledgean understanding of these policies is necessary to understand the client and client’s business, or other factors uniquefinancial statements.  These policies relate to determining the collateral.  To the extent an adjusted collateral value is lower than the carrying value of an impaired loan, a specific allocationadequacy of the allowance for loan losses and the identification and evaluation of impaired loans.  A detailed description of these accounting policies is assigned tocontained in the loan.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.


Other real estate owned (OREO):  The fair valueManagement believes that the judgments, estimates and assumptions used in the preparation of OREO is based on appraisals less cost to sellthe consolidated financial statements are appropriate given the factual circumstances at the datetime.


D.          Liquidity


Liquidity objectives for the Company can be expressed in terms of foreclosure.  Management may obtain additional updated appraisals dependingmaintaining 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 length of time since foreclosure.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable salesfollowing sources:
1.Core deposits consisting of both consumer and commercial deposits and certificates of deposit of $250,000 or more.  Management believes that the majority of its $250,000 or more certificates of deposit are no more volatile than its other deposits.  This is due to the nature of the markets in which the subsidiaries operate.

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

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

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

5.Maintenance of an adequate available-for-sale security portfolio.  The Company owns $416.7 million of securities at fair value as of June 30, 2020.


The cash flow statements for the income approach. Adjustments are routinely madeperiods presented 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 classificationfinancial statements provide an indication of the inputs for determining fair value.  Management periodically evaluates the appraised valuesCompany’s sources and will discount a property’s appraised value to account for a numberuses of factors including but not limited to the cost of liquidating the collateral, the agecash as well as an indication of the appraisal, observable deterioration sinceability of the appraisal, or other factors uniqueCompany to the property. To the extentmaintain an adjusted appraised value is lower than the carrying valueadequate level of an OREO property, a direct charge to earnings is recorded as an OREO write-down.

liquidity.

- 35 -60.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2020
(UNAUDITED, DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)






NOTE  7 – FAIR VALUE - continuedE.          Capital


Assets
At June 30, 2020, total stockholders’ equity of $254.0 million was 13.3% 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 $10.9 million of net income for the first six months of 2020 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$7.0 million, net of tax, increase in the fairmarket value of the collateralinvestment portfolio available for collateral dependent loans, hadsale.  These increases in stockholders’ equity were partially offset by $0.30 per share in cash dividends declared and paid during the first six months of 2020.

In 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 carryinghigher amount of $18,483,000Tier 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 and its subsidiary banks meet all three of these criteria and have elected to utilize the CBLR as their measure of regulatory capital adequacy.

Under interim guidance issued in June 2020, a community bank leverage ratio of Total Tier 1 capital to quarterly average assets must be at Septemberleast 8.00% to be considered well capitalized.  Premier’s Tier 1 capital totaled $200.1 million at June 30, 2017 with2020, which represents a valuation allowancecommunity bank leverage ratio of $1,598,00010.9%.  This ratio is down from the 11.3% Tier 1 leverage ratio and a carrying amount$192.7 million of $4,446,000Tier 1 capital at December 31, 2016 with2019.  The decrease in the Tier 1 leverage ratio is largely due to the growth in quarterly average assets related largely in response to increases in funds from the growth in total deposits. Premier’s wholly owned subsidiary Citizens Deposit Bank adopted the CBLR simplification standard during the second quarter of 2020 as its Tier 1 leverage ratio was 8.2% at June 30, 2020.  Premier’s other wholly owned subsidiary bank, Premier Bank, Inc. adopted the regulatory capital simplification rules in the first quarter and maintained a valuation allowanceCBLR of $606,000.11.0% at June 30, 2020, 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 $17.31 at June 30, 2020 and $16.39 at December 31, 2019.  The change resultedincrease in a provision for loan lossesbook value per share was largely due to the $0.74 per share earned during the first six months, partially offset by the $0.30 per share in quarterly cash dividends to common shareholders declared and paid during the first six months of $1,165,0002020.  Also increasing Premier’s book value per share at June 30, 2020 was the $7.0 million of other comprehensive income for the ninefirst six months ended September 30, 2017, comparedof 2020 related to an $215,000 provisionthe increase in the market value of investment securities available 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 loanssale, which increased book value by loan class is contained in Note 3 above.approximately $0.48 per share.


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.

- 36 -61.
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 SeptemberJUNE 30, 2017 are summarized below:

  September 30, 2017 Valuation Techniques Unobservable Inputs 
Range
(Weighted Avg)
Impaired loans:         
Multifamily real estate: $10,578 sales comparison adjustment for differences between the comparable sales 4.0%-4.0% (4.0%)
Commercial real estate:           
Owner occupied  569 sales comparison adjustment for estimated realizable value 23.1%-23.1% (23.1%)
Non-owner occupied  1,984 income approach adjustment for differences in net operating income expectations 67.4%-67.4% (67.4%)
Commercial and industrial  161 sales comparison adjustment for estimated realizable value 8.0%-56.5% (52.8%)
All other3,593sales comparisonadjustment for percentage of completion of construction8.0%-23.0% (22.7%)
Total impaired loans $16,885        
            
Other real estate owned:           
Residential real estate $370 sales comparison adjustment for differences between the comparable sales 0.0%-50.2% (16.4%)
Commercial real estate:           
Owner occupied  175 sales comparison adjustment for estimated realizable value 21.8%-21.8% (21.8%)
Non-owner occupied  1,853 sales comparison adjustment for estimated realizable value 31.8%-58.9% (34.7%)
All other  2,855 sales comparison adjustment for estimated realizable value 15.1%-69.0% (18.8%)
Total OREO $5,253        
2020

- 37 -

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


NOTE  7 – FAIR VALUE - continued

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

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


NOTE  7 – FAIR VALUE - continued

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

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


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

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

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


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

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

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

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


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


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


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

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

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


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

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


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


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


C.Critical Accounting Policies
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 have been no significant changes in the application of these accounting policies since December 31, 2016.
Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time.

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


D.Liquidity

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

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

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

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

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

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

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


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


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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk



The Company currently does not engage in any derivative or hedging activity.  Refer to the Company’s 20162019 10-K for analysis of the interest rate sensitivity.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.2019 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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PREMIER FINANCIAL BANCORP, INC.
SEPTEMBERJUNE 30, 20172020



PART II - OTHER INFORMATION


Item 1.Legal ProceedingsNone

Item 1A.Risk Factors


Please refer to Premier’s Annual Report on Form 10-K for the year ended December 31, 2019 for disclosures with respect to Premier’s risk factors at December 31, 2019. Other than the additional risk factor below, there have been no material changes since year-end 2019 in the specified risk factors disclosed in the Annual Report on Form 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.

Please refer to Premier's Annual Report on Form 10-K for the year ended December 31, 2016 for disclosures with respect to Premier's risk factors at December 31, 2016. There have been no material changes since year-end 2016 in the specified risk factors disclosed in the Annual Report on Form 10-K.
Item 2.Unregistered Sales of Equity Securities and Use of ProceedsNone

Item 3.Defaults Upon Senior SecuritiesNone

Item 4.Mine Safety DisclosuresNot Applicable

Item 5.Other InformationNone

63.
Table of Contents
PREMIER FINANCIAL BANCORP, INC.
JUNE 30, 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

32
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

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

101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).

101.SCHInline XBRL Taxonomy Extension Schema Document

101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.

101.LABInline XBRL Taxonomy Extension Label Linkbase Document

101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document

104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)



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PREMIER FINANCIAL BANCORP, INC.
SEPTEMBERJUNE 30, 20172020



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: August 6, 2020/s/ Robert W. Walker
Robert W. Walker
President & Chief Executive Officer
Date: August 6, 2020/s/ Brien M. Chase
Brien M. Chase
Senior Vice President & Chief Financial Officer

PREMIER FINANCIAL BANCORP, INC.


Date: November 9, 2017          /s/ Robert W. Walker                     
Robert W. Walker
President & Chief Executive Officer


Date: November 9, 2017/s/ Brien M. Chase                         
Brien M. Chase
Senior Vice President & Chief Financial Officer

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65.