See Accompanying Notes to Consolidated Financial Statements

(UNAUDITED)

March 31,
2020

December 31,
2019

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

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

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

~~-4 -~~

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED ~~CONSOLIDATED~~ STATEMENTS OF INCOME

THREE AND SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2020 AND 2019

(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

Three Months Ended
March 31,

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

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

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

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

Net income $ 5,368 $ 6,176

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

~~-5 -~~

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED ~~MARCH 31,~~ 2020 AND 2019

(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
March 31,

2020 2019
Net income $ 5,368 $ 6,176

Other comprehensive income:

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

Comprehensive income $ 10,813 $ 10,603

~~-6 -~~

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2020 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

See Accompanying Notes to Consolidated Financial Statements

Common
Stock

Retained
Earnings

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

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (loss)
Total
Balances, January 1, 2020 $ 133,795 $ 102,743 $ 3,703 $ 240,241
Net income - 5,368 - 5,368
Other comprehensive income - - 5,445 5,445
Cash dividends paid ($0.15 per share) - (2,200 ) - (2,200 )
Stock options exercised 31 - - 31
Stock based compensation expense 40 - - 40
Balances, March 31, 2020 $ 133,866 $ 105,911 $ 9,148 $ 248,925

~~-7 -~~

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED ~~CONSOLIDATED~~ STATEMENTS OF CASH FLOWS

~~THREE~~SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2020 AND 2019

(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

2020 2019
Cash flows from operating activities
Net income $ 5,368 $ 6,176
Adjustments to reconcile net income to net cash from
operating activities

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

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

Cash flows from financing activities
Net change in deposits (33,390 ) 23,637
Net change in agreements to repurchase securities (734 ) (37 )
Advances from FHLB 5,000 -
Repayment of other borrowed funds -

(1,050 )
Repayment of FHLB advances (3,400
)
(1,500 )
Proceeds from stock option exercises 31 51
Common stock dividends paid (2,200 ) (2,195 )
Net cash from financing activities (34,693 ) 18,906

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

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

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

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

~~-8 -~~

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 - BASIS OF PRESENTATION

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

					March 31, 2020
		Year			Net Income
Year								Year		Total		June 30, 2020 Net Income
Subsidiary	Location	Acquired	Assets		Qtr			Location	Acquired	Assets		Qtr			YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	554,340	$	1,583		Vanceburg, Kentucky	1991	$	578,556	$	1,438		$	3,021
Premier Bank, Inc.	Huntington, West Virginia	1998		1,197,522		4,233		Huntington, West Virginia	1998		1,328,897		4,741			8,974
Parent and Intercompany Eliminations				7,371		(448	)				7,541		(673	)		(1,121	)
Consolidated Total			$	1,759,233	$	5,368				$	1,914,994	$	5,506		$	10,874

All significant intercompany transactions and balances have been eliminated.

Estimates in the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates are, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change. Those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations include the allowance for loan losses, business combinations and impairment of goodwill, and other than temporary impairment (“OTTI”) of securities available for sale. The estimates and assumptions used in these calculations affect the amounts reported in the financial statements and the disclosures provided. N~~ational~~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. AsDuring the first quarter of 2020, management determined that the deterioration in the general economic conditions as a result of these efforts to curb the spread of the COVID-19 virus represented a triggering event prompting a qualitative evaluation of goodwill impairment. Based on the analyses performed in the first and second quarters of 2020, management ~~conducted an interim goodwill impairment test and concluded~~determined that ~~the~~ goodwill was not ~~impaired as of March 31, 2020.~~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 uncertain and could cause assumptions and conditions to change in the near term. In the event that changes to assumptions or conditions ~~than~~from what was originally estimated were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

~~Recently Issued Accounting Pronouncements~~

~~In 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, 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. The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method. The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements. Upon adoption, an initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard.

~~-9 -~~9.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Loans: In addition to the eight 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 payment deferrals for the first six months of the loan. 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 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 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 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 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, 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. The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method. The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements. Upon adoption, an initial cumulative increase in the allowance for loan losses is 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.

Table of Contents

~~PREMIER FINANCIAL BANCORP, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~NOTE 2 - SECURITIES~~

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

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

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

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

~~-11 -~~

~~Table of Contents~~

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SECURITIES

Amortized cost and fair value of investment securities, by category, at June 30, 2020 are summarized as follows:

2020	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	305,338	$	11,053	$	(248	)	$	316,143
U. S. sponsored agency CMO’s - residential		47,888		1,308		–			49,196
Total mortgage-backed securities of government sponsored agencies		353,226		12,361		(248	)		365,339
U. S. government sponsored agency securities		9,392		154		–			9,546
Obligations of states and political subdivisions		38,541		1,183		–			39,724
Other securities		1,963		135		(7	)		2,091
Total available for sale	$	403,122	$	13,833	$	(255	)	$	416,700

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

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

11.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SECURITIES - continued

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

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Due in one year or less	$	7,085	$	7,124	$	8,742	$	8,825
Due after one year through five years		29,988		29,948		26,090		26,718
Due after five years through ten years		10,543		10,647		9,437		9,716
Due after ten years		6,443		6,700		5,627		6,102
Mortgage-backed securities of government sponsored agencies		338,839		350,059		353,226		365,339
Total available for sale	$	392,898	$	404,478	$	403,122	$	416,700

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

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

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

U.S government sponsored agency MBS – residential	$	851	$	(14	)	$	-	$	-		$	851	$	(14	)	$	43,995	$	(248	)	$	–	$	–	$	43,995	$	(248	)
U.S government sponsored agency CMO – residential		10,747		(109	)		2,449		(50	)		13,196		(159	)
Obligations of states and political subdivisions		4,968		(56	)		-		-			4,968		(56	)
Other securities		848		(129	)		-		-			848		(129	)		241		(7	)		–		–		241		(7	)
Total temporarily impaired	$	17,414	$	(308	)	$	2,449	$	(50	)	$	19,863	$	(358	)	$	44,236	$	(255	)	$	–	$	–	$	44,236	$	(255	)

~~-12 -~~12.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SECURITIES - continued

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

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

U.S government sponsored agency securities	$	10,851	$	(84	)	$	3,957	$	(4	)	$	14,808	$	(88	)	$	10,851	$	(84	)	$	3,957	$	(4	)	$	14,808	$	(88	)
U.S government sponsored agency MBS – residential		50,945		(199	)		12,930		(123	)		63,875		(322	)		50,945		(199	)		12,930		(123	)		63,875		(322	)
U.S government sponsored agency CMO’s – residential		4,376		(3	)		8,815		(110	)		13,191		(113	)		4,376		(3	)		8,815		(110	)		13,191		(113	)
Obligations of states and political subdivisions		1,866		(6	)		-		-			1,866		(6	)		1,866		(6	)		–		–			1,866		(6	)
Total temporarily impaired	$	68,038	$	(292	)	$	25,702	$	(237	)	$	93,740	$	(529	)	$	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 ~~March 31,~~June 30, 2020 and December 31, 2019 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities. Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery. Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.

NOTE 3 - LOANS

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

2020 2019
Residential real estate $ 387,909 $ 389,985
Multifamily real estate 40,286 36,684
Commercial real estate:
Owner occupied 168,102 164,218
Non-owner occupied 306,854 304,316
Commercial and industrial 101,132 105,079
Consumer 26,409 29,007
Construction and land 119,415 136,138
All other 34,936 29,868
$ 1,185,043 $ 1,195,295

	2020		2019
Residential real estate	$	390,150	$	389,985
Multifamily real estate		37,376		36,684
Commercial real estate:
Owner occupied		164,121		164,218
Non-owner occupied		303,141		304,316
Commercial and industrial		85,073		105,079
SBA PPP		110,690		–
Consumer		25,416		29,007
Construction and land		115,053		136,138
All other		33,982		29,868
	$	1,265,002	$	1,195,295

~~-13 -~~13.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

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

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

Residential real estate	$	1,711	$	216		$	(93	)	$	4	$	1,838	$	1,711	$	288		$	(94	)	$	10	$	1,915
Multifamily real estate		1,954		150			-			-		2,104		1,954		161			–			–		2,115
Commercial real estate:
Owner occupied		2,441		342			(566	)		3		2,220		2,441		590			(566	)		5		2,470
Non-owner occupied		3,184		479			(24	)		3		3,642		3,184		1,200			(77	)		3		4,310
Commercial and industrial		1,767		22			-			28		1,817		1,767		(247	)		(5	)		39		1,554
Consumer		281		2			(69	)		27		241		281		14			(99	)		34		230
Construction and land		1,724		(349	)		-			37		1,412		1,724		(529	)		–			38		1,233
All other		480		138			(74	)		38		582		480		113			(94	)		62		561
Total	$	13,542	$	1,000		$	(826	)	$	140	$	13,856	$	13,542	$	1,590		$	(935	)	$	191	$	14,388

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

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

Residential real estate	$	1,808	$	42		$	(32	)	$	5	$	1,823	$	1,808	$	104		$	(59	)	$	27	$	1,880
Multifamily real estate		1,649		(61	)		-			2		1,590		1,649		65			–			2		1,716
Commercial real estate:
Owner occupied		2,120		236			(533	)		1		1,824		2,120		200			(533	)		3		1,790
Non-owner occupied		3,058		400			(57	)		-		3,401		3,058		277			(57	)		2		3,280
Commercial and industrial		1,897		(97	)		(110	)		31		1,721		1,897		178			(113	)		38		2,000
Consumer		351		110			(107	)		11		365		351		129			(140	)		28		368
Construction and land		2,255		(93	)		(13	)		-		2,149		2,255		(102	)		(13	)		–		2,140
All other		600		23			(51	)		34		606		600		39			(97	)		57		599
Total	$	13,738	$	560		$	(903	)	$	84	$	13,479	$	13,738	$	890		$	(1,012	)	$	157	$	13,773

~~-14 -~~14.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ended 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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

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 ~~March 31,~~June 30, 2020 and December 31, 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

2020 2019
Residential real estate $ 2,436 $ 2,565
Commercial real estate
Owner occupied 1,750 1,804
Non-owner occupied 2,533 2,628
Commercial and industrial 291 305
Consumer 19 22
Construction and land 476 483
All other 171 174
Total carrying amount $ 7,676 $ 7,981
Contractual principal balance $ 11,424 $ 11,681

Carrying amount, net of allowance $ 7,676 $ 7,981

For those purchased loans disclosed above, the Company did ~~not~~0t increase the allowance for loan losses during the ~~three-months~~three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~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.

~~-15 -~~16.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019.

	2020			2019			2020			2019
Balance at January 1	$	619		$	642		$	619		$	642
New loans purchased		-			-			–			–
Accretion of income		(36	)		(53	)		(59	)		(94	)
Loans placed on non-accrual		-			(14	)		–			–
Income recognized upon full repayment		(7	)		(42	)		(65	)		(73	)
Reclassifications from non-accretable difference		-			-
Reclassifications to accretable difference								(190	)		–
Disposals		-			-			–			–
Balance at March 31	$	576		$	533
Balance at June 30							$	305		$	475

~~-16 -~~17.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - 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 ~~March 31,~~June 30, 2020 and December 31, 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.

March 31, 2020	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	$	5,478	$	4,266	$	710	$	5,460	$	4,197	$	748
Multifamily real estate		4,184		3,797		-		4,088		3,708		–
Commercial real estate
Owner occupied		3,125		2,396		10		2,160		1,734		9
Non-owner occupied		4,214		2,872		66		4,042		2,726		–
Commercial and industrial		1,047		498		300		1,341		787		74
Consumer		367		283		16		324		236		–
Construction and land		374		337		-		355		313		149
All other		75		60		-		75		60		–
Total	$	18,864	$	14,509	$	1,102	$	17,845	$	13,761	$	980

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

Residential real estate	$	5,801	$	4,618	$	1,425	$	5,801	$	4,618	$	1,425
Multifamily real estate		4,113		3,726		-		4,113		3,726		–
Commercial real estate
Owner occupied		3,399		2,995		-		3,399		2,995		–
Non-owner occupied		3,120		1,852		340		3,120		1,852		340
Commercial and industrial		1,026		420		451		1,026		420		451
Consumer		364		313		9		364		313		9
Construction and land		470		440		3		470		440		3
All other		75		73		-		75		73		–
Total	$	18,368	$	14,437	$	2,228	$	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.

~~-17 -~~18.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

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

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

Residential real estate	$	387,909	$	5,829	$	2,505	$	8,334	$	379,575	$	390,150	$	3,971	$	2,802	$	6,773	$	383,377
Multifamily real estate		40,286		-		3,797		3,797		36,489		37,376		–		3,708		3,708		33,668
Commercial real estate:
Owner occupied		168,102		786		964		1,750		166,352		164,121		26		505		531		163,590
Non-owner occupied		306,854		3,058		849		3,907		302,947		303,141		–		1,591		1,591		301,550
Commercial and industrial		101,132		1,370		655		2,025		99,107		85,073		703		723		1,426		83,647
SBA PPP												110,690		–		–		–		110,690
Consumer		26,409		128		152		280		26,129		25,416		96		112		208		25,208
Construction and land		119,415		150		5		155		119,260		115,053		4		152		156		114,897
All other		34,936		-		60		60		34,876		33,982		–		60		60		33,922
Total	$	1,185,043	$	11,321	$	8,987	$	20,308	$	1,164,735	$	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, 2019 by class of loans:

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

Residential real estate $ 389,985 $ 9,479 $ 3,192 $ 12,671 $ 377,314
Multifamily real estate 36,684 - 3,726 3,726 32,958
Commercial real estate:
Owner occupied 164,218 337 1,199 1,536 162,682
Non-owner occupied 304,316 838 1,017 1,855 302,461
Commercial and industrial 105,079 245 708 953 104,126
Consumer 29,007 309 230 539 28,468
Construction and land 136,138 3,856 4 3,860 132,278
All other 29,868 - 73 73 29,795
Total $ 1,195,295 $ 15,064 $ 10,149 $ 25,213 $ 1,170,082

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

Residential real estate	$	389,985	$	9,479	$	3,192	$	12,671	$	377,314
Multifamily real estate		36,684		–		3,726		3,726		32,958
Commercial real estate:
Owner occupied		164,218		337		1,199		1,536		162,682
Non-owner occupied		304,316		838		1,017		1,855		302,461
Commercial and industrial		105,079		245		708		953		104,126
Consumer		29,007		309		230		539		28,468
Construction and land		136,138		3,856		4		3,860		132,278
All other		29,868		–		73		73		29,795
Total	$	1,195,295	$	15,064	$	10,149	$	25,213	$	1,170,082

~~-18 -~~19.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - 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 ~~March 31,~~June 30, 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 $ - $ 1,838 $ - $ 1,838 $ 62 $ 385,411 $ 2,436 $ 387,909
Multifamily real estate 1,855 249 - 2,104 3,797 36,489 - 40,286
Commercial real estate:
Owner occupied - 2,220 - 2,220 1,492 164,860 1,750 168,102
Non-owner occupied 407 3,235 - 3,642 4,064 300,257 2,533 306,854
Commercial and industrial 456 1,361 - 1,817 773 100,068 291 101,132
Consumer - 241 - 241 - 26,390 19 26,409
Construction and land - 1,412 1,412 325 118,614 476 119,415
All other - 582 - 582 - 34,765 171 34,936
Total $ 2,718 $ 11,138 $ - $ 13,856 $ 10,513 $ 1,166,854 $ 7,676 $ 1,185,043

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

~~-19 -~~20.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - 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 ~~March 31,~~June 30, 2020. The table includes ~~$710,000~~$701,000 of loans acquired with deteriorated credit quality ~~that~~for which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	184	$	62	$	-	$	184	$	60	$	-
Multifamily real estate		97		89		-
Commercial real estate
Owner occupied		2,189		1,811		-		2,166		1,759		-
Non-owner occupied		1,668		830		-		1,661		805		-
Commercial and industrial		509		-		-		509		–		-
Construction and land		361		326		-		344		303		-
		5,008		3,118		-		4,864		2,927		-
With an allowance recorded:
Multifamily real estate		4,088		3,708		1,855		4,088		3,708		1,865
Commercial real estate
Non-owner occupied		3,760		3,624		407		3,748		3,599		448
Commercial and industrial		786		773		456		781		763		446
		8,634		8,105		2,718		8,617		8,070		2,759
Total	$	13,642	$	11,223	$	2,718	$	13,481	$	10,997	$	2,759

~~-20 -~~21.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

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

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	188	$	63	$	-	$	188	$	63	$	-
Multifamily real estate		96		89		-		96		89		-
Commercial real estate
Owner occupied		2,201		1,842		-		2,201		1,842		-
Non-owner occupied		2,512		1,732		-		2,512		1,732		-
Commercial and industrial		509		-		-		509		–		-
		5,506		3,726		-		5,506		3,726		-
With an allowance recorded:
Multifamily real estate	$	4,017	$	3,637	$	1,737	$	4,017	$	3,637	$	1,737
Commercial real estate
Owner occupied		1,189		1,162		653		1,189		1,162		653
Non-owner occupied		2,654		2,537		271		2,654		2,537		271
Commercial and industrial		689		678		390		689		678		390
Construction and land		460		431		51		460		431		51
		9,009		8,445		3,102		9,009		8,445		3,102
Total	$	14,515	$	12,171	$	3,102	$	14,515	$	12,171	$	3,102

~~-21 -~~22.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the six months ended June 30, 2020 and June 30, 2019. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	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

Residential real estate	$	62	$	–	$	–	$	267	$	–	$	–
Multifamily real estate		3,744		–		–		3,855		–		–
Commercial real estate:
Owner occupied		2,191		6		4		3,898		6		6
Non-owner occupied		4,376		72		36		10,556		186		186
Commercial and industrial		738		2		2		562		2		2
Construction and land		353		–		–		1,065		121		121
Total	$	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 ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended March 31, 2020						Three months ended March 31, 2019						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	$	62	$	-	$	-	$	264	$	-	$	-	$	61	$	–	$	–	$	253	$	–	$	–
Multifamily real estate		3,761		-		-		3,877		-		-		3,753		–		–		3,830		–		–
Commercial real estate:
Owner occupied		2,408		3		3		3,874		3		3		1,785		3		1		4,062		3		3
Non-owner occupied		4,362		36		36		10,580		94		91		4,429		36		–		10,573		92		92
Commercial and industrial		726		1		1		500		1		1		768		1		1		562		1		1
Construction and land		378		-		-		1,341		8		8		314		–		–		922		113		113
Total	$	11,697	$	40	$	40	$	20,436	$	106	$	103	$	11,110	$	40	$	2	$	20,202	$	209	$	209

~~-22 -~~23.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - 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 ~~March 31,~~June 30, 2020 and December 31, 2019:

March 31, 2020	TDR’s on Non-accrual		Other TDR’s		Total TDR’s
June 30, 2020							TDR’s on Non-accrual		Other TDR’s		Total TDR’s

Residential real estate	$	28	$	153	$	181	$	25	$	151	$	176
Multifamily real estate		3,708		-		3,708		3,708		–		3,708
Commercial real estate
Owner occupied		-		202		202		–		201		201
Non-owner occupied		-		2,637		2,637		856		1,781		2,637
Commercial and industrial		191		-		191		191		–		191
Total	$	3,927	$	2,992	$	6,919	$	4,780	$	2,133	$	6,913

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

Residential real estate	$	32	$	157	$	189	$	32	$	157	$	189
Multifamily real estate		3,636		-		3,636		3,636		–		3,636
Commercial real estate
Owner occupied		1,162		207		1,369		1,162		207		1,369
Non-owner occupied		-		2,656		2,656		–		2,656		2,656
Commercial and industrial		191		-		191		191		–		191
Total	$	5,021	$	3,020	$	8,041	$	5,021	$	3,020	$	8,041

At ~~March 31,~~June 30, 2020, ~~$2,108,000~~$2,118,000 in specific reserves ~~was~~were allocated to loans that had restructured terms resulting in a provision for loan losses of ~~$203,000~~$10,000 for the three months ended ~~March 31,~~June 30, 2020 ~~compared~~and $213,000 for the six months ended June 30, 2020. This compares to a ~~negative $65,000 in~~ provision for loan losses on restructured loans ~~during~~of $216,000 for the three months ended ~~March 31,~~June 30, 2019 and $150,000 for the six months ended June 30, 2019. At December 31, 2019, $2,471,000 in specific reserves ~~was~~were allocated to loans that had restructured terms. There were no0 commitments to lend additional amounts to these borrowers.

~~-23 -~~24.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

There were no0 new TDR’s that occurred during the three and six months ended ~~March 31,~~June 30, 2020 ~~or the three months ended March 31,~~and June 30, 2019.

During the three and six months ended ~~March 31,~~June 30, 2020 and ~~the three months ended March 31,~~June 30, 2019, there were no0 TDR’s for which there ~~was~~as a payment default within twelve months following the modification.

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

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020. Provisions of the CARES Act permit certain loan payment modifications by banks that would normally be considered TDR’s to be exempt from the TDR rules. ~~To date, management~~Management has exercised these provisions of the CARES Act on the following loans outstanding as of June 30, 2020 to some ~~loan modifications~~degree on 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

~~-24 -~~

25.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

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 90 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.

~~-25 -~~26.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3 - LOANS - continued

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

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

Residential real estate	$	373,530	$	3,210	$	11,169	$	-	$	387,909	$	376,261	$	2,992	$	10,897	$	–	$	390,150
Multifamily real estate		32,269		4,220		3,797		-		40,286		29,216		4,452		3,708		–		37,376
Commercial real estate:
Owner occupied		158,862		4,766		4,474		-		168,102		155,443		4,284		4,394		–		164,121
Non-owner occupied		290,508		10,782		5,564		-		306,854		288,198		9,597		5,346		–		303,141
Commercial and industrial		96,476		3,250		1,406		-		101,132		80,192		3,498		1,383		–		85,073
SBA PPP												110,690		–		–		–		110,690
Consumer		26,063		4		342		-		26,409		25,107		2		307		–		25,416
Construction and land		111,084		7,667		664		-		119,415		110,807		3,676		570		–		115,053
All other		34,876		-		60		-		34,936		33,922		–		60		–		33,982
Total	$	1,123,668	$	33,899	$	27,476	$	-	$	1,185,043	$	1,209,836	$	28,501	$	26,665	$	–	$	1,265,002

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

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

Residential real estate	$	374,835	$	3,477	$	11,673	$	-	$	389,985	$	374,835	$	3,477	$	11,673	$	-	$	389,985
Multifamily real estate		28,103		4,855		3,726		-		36,684		28,103		4,855		3,726		-		36,684
Commercial real estate:
Owner occupied		152,695		5,123		6,400		-		164,218		152,695		5,123		6,400		-		164,218
Non-owner occupied		290,096		8,617		5,603		-		304,316		290,096		8,617		5,603		-		304,316
Commercial and industrial		101,085		2,693		1,301		-		105,079		101,085		2,693		1,301		-		105,079
Consumer		28,618		5		384		-		29,007		28,618		5		384		-		29,007
Construction and land		123,473		11,868		797				136,138		123,473		11,868		797		-		136,138
All other		29,698		97		73		-		29,868		29,698		97		73		-		29,868
Total	$	1,128,603	$	36,735	$	29,957	$	-	$	1,195,295	$	1,128,603	$	36,735	$	29,957	$	-	$	1,195,295

~~-26 -~~27.

Table of Contents

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

~~-27 -~~28.

Table of Contents

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 - continued

AUnder interim guidance issued in June 2020, a community bank leverage ratio of Total Tier 1 capital to quarterly average assets must be at least ~~9.00%~~8.0% to be considered well capitalized. Premier’s Tier 1 capital totaled ~~$196.4~~$200.1 million at ~~March 31,~~June 30, 2020, which represents a community bank leverage ratio of ~~11.5%~~10.9%. Premier’s wholly owned subsidiary Citizens Deposit Bank ~~has not~~ adopted the CBLR simplification standard during the second quarter of 2020 as its Tier 1 leverage ratio was ~~only 8.36%~~8.2% at ~~March 31,~~June 30, 2020. Nevertheless, utilizing the standard risk-based capital ratio calculations, Citizens Deposit Bank was still considered to be well capitalized under the prompt corrective action framework and maintained a capital conservation buffer of 6.58%, well in excess of the 2.50% buffer required for equity distributions. Premier’s other wholly owned subsidiary bank, Premier Bank, Inc., ~~has~~ adopted the regulatory capital simplification rules in the first quarter and maintained a CBLR of ~~11.66%,~~11.0% at June 30, 2020, well in excess of the ~~9.00%~~8.0% required to be considered well capitalized under the prompt corrective action framework.

Shown below is a summary of regulatory capital ratios for the Company:

Mar 31,
2020

December 31,
2019

Regulatory
Minimum
Requirements

To Be Considered
Well Capitalized

Tier 1 Capital to average assets (CBLR): 11.5 % 11.3 % 9.0 % 9.0 %

		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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 – PREMISES AND EQUIPMENT

The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options. Certain leases contain renewal options and rent escalation clauses calling for rent increases ofover the term of the lease. Short-term leases of equipment are recognized on a straight-line basis over the lease term. As of ~~March 31,~~June 30, 2020, the weighted average remaining lease term for operating leases was ~~9.1~~9.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was ~~1.32%~~0.94%.

Total lease expense for the ~~three~~six months ended ~~March 31,~~ June 30, 2020, which is included in net occupancy and equipment expense, was ~~$332,000,~~$673,000, consisting of ~~$38,000~~$74,000 short-term lease expense and ~~$294,000~~$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.

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 rental commitments under operating leases:

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

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

30.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6 -– 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 ~~$40,000~~$226,000 was recorded for the first ~~three~~six months of 2020 while ~~$39,000~~$209,000 was recorded for the first ~~three~~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 ~~March 31,~~June 30, 2020. This unrecognized expense is expected to be recognized over the next 3532 months based on the vesting periods of the options.

~~-29 -~~31.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 -– 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 six months ended ~~March 31,~~June 30, 2020 and 2019 is presented below:

	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
Basic earnings per share
Income available to common stockholders	$	5,368	$	6,176	$	5,506	$	5,859	$	10,874	$	12,035
Weighted average common shares outstanding		14,658,998		14,626,234		14,664,916		14,636,569		14,661,957		14,631,430
Earnings per share	$	0.37	$	0.42	$	0.38	$	0.40	$	0.74	$	0.82

Diluted earnings per share
Income available to common stockholders	$	5,368	$	6,176	$	5,506	$	5,859	$	10,874	$	12,035
Weighted average common shares outstanding		14,658,998		14,626,234		14,725,075		14,718,419		14,728,208		14,708,377
Add dilutive effects of potential additional common stock		67,473		72,865		60,159		81,850		66,251		76,947
Weighted average common and dilutive potential common shares outstanding		14,726,471		14,699,099		14,725,075		14,718,419		14,728,208		14,708,377
Earnings per share assuming dilution	$	0.36	$	0.42	$	0.37	$	0.40	$	0.74	$	0.82

Stock options for ~~72,075~~183,242 shares of common stock were not considered in computing diluted earnings per share for the three and six months ended ~~March 31,~~June 30, 2020 ~~and March 31, 2019~~ because they were ~~antidilutive.~~antidultive. There were 0 stock options considered antidilutive for the three and six months ended June 30, 2019.

~~-30 -~~32.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 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 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 was not practicable to determine the fair value of Federal Home Loan Bank stock due to the restrictions placed on its transferability. For deposits and variable rate deposits with infrequent repricing, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair values for loans is measured at the exit price notion by using the discounted cash flow or collateral value but also incorporates additional factors such as using economic factors, credit risk, and market rates and conditions. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not material.

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

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

~~-31 -~~33.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at ~~March 31,~~June 30, 2020 were as follows:

				Fair Value Measurements at March 31, 2020 Using											Carrying		Fair Value Measurements at June 30, 2020 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total			Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	61,349		$	61,349		$	-		$	-	$	61,349		$	124,647	$	124,647	$	-	$	-	$	124,647
Time deposits with other banks		598			-			598			-		598			598		–		601		–		601
Federal funds sold		8,134			8,134			-			-		8,134			8,365		8,365		–		–		8,365
Securities available for sale		404,478			-			404,478			-		404,478			416,700		-		416,700		-		416,700
Loans, net		1,171,187			-			-			1,160,850		1,160,850			1,250,614		-		-		1,251,278		1,251,278
Interest receivable		5,192			-			1,579			3,613		5,192			5,997		-		1,282		4,715		5,997

Financial liabilities
Deposits	$	(1,462,380	)	$	(1,052,200	)	$	(409,834	)	$	-	$	(1,462,034	)	$	1,608,151	$	1,243,622	$	365,688	$	-	$	1,609,310
Securities sold under agreements to repurchase		(19,694	)		-			(19,694	)		-		(19,694	)		27,737		-		27,737		-		27,737
FHLB advance		(7,986	)		-			(8,007	)		-		(8,007	)		2,995		-		3,003		-		3,003
Subordinated debt		(5,445	)		-			(5,383	)		-		(5,383	)		5,455		-		5,354		-		5,354
Interest payable		(865	)		(10	)		(855	)		-		(865	)		638		7		631		-		638

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

				Fair Value Measurements at December 31, 2019 Using											Carrying		Fair Value Measurements at December 31, 2019 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total			Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	88,556		$	88,556		$	-		$	-	$	88,556		$	88,556	$	88,556	$	–	$	–	$	88,556
Time deposits with other banks		598			-			599			-		599			598		–		599		–		599
Federal funds sold		5,902			5,902			-			-		5,902			5,902		5,902		–		–		5,902
Securities available for sale		390,754			-			390,754			-		390,754			390,754		–		390,754		–		390,754
Loans, net		1,181,753			-			-			1,172,575		1,172,575			1,181,753		–		–		1,172,755		1,172,755
Interest receivable		4,699			4			1,110			3,585		4,699			4,699		4		1,110		3,585		4,699

Financial liabilities
Deposits	$	(1,495,753	)	$	(1,070,610	)	$	(424,886	)	$	-	$	(1,495,496	)	$	1,495,753	$	1,068,399	$	424,886	$	–	$	1,493,285
Securities sold under agreements to repurchase		(20,428	)		-			(20,428	)		-		(20,428	)		20,428		–		20,428		–		20,428
FHLB advance		(6,375	)		-			(6,406	)		-		(6,406	)		6,375		–		6,352		–		6,352
Subordinated debt		(5,436	)		-			(5,527	)		-		(5,527	)		5,436		–		5,527		–		5,527
Interest payable		(912	)		(15	)		(897	)		-		(912	)		912		15		897		–		912

~~-32 -~~34.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at March 31, 2020 Using:								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)		Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	293,291	$	-	$	293,291	$	-	$	316,143	$	-	$	316,143	$	-
U. S. agency CMO’s - residential		56,768		-		56,768		-		49,196		-		49,196		-
Total mortgage-backed securities of government sponsored agencies		350,059		-		350,059		-		365,339		-		365,339		-
U. S. government sponsored agency securities		12,231		-		12,231		-		9,546		-		9,546		-
Obligations of states and political subdivisions		40,312		-		40,312		-		39,724		-		39,724		-
Other securities		1,876		-		1,876		-		2,091		-		2,091		-
Total securities available for sale	$	404,478	$	-	$	404,478	$	-	$	416,700	$	-	$	416,700	$	-

			Fair Value Measurements at December 31, 2019 Using:								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)		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	$	-	$	279,309	$	-	$	279,309	$	-
U. S. agency CMO’s		62,644		-		62,644		-		62,644		-		62,644		-
Total mortgage-backed securities of government sponsored agencies		341,953		-		341,953		-		341,953		-		341,953		-
U. S. government sponsored agency securities		30,730		-		30,730		-		30,730		-		30,730		-
Obligations of states and political subdivisions		16,017		-		16,017		-		16,017		-		16,017		-
Other securities		2,054		-		2,054		-		2,054		-		2,054		-
Total securities available for sale	$	390,754	$	-	$	390,754	$	-	$	390,754	$	-	$	390,754	$	-

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

~~-33 -~~35.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE - continued

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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

writedown.

~~-34 -~~36.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at ~~March 31,~~June 30, 2020 are summarized below:

			Fair Value Measurements at March 31, 2020 Using								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)		Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	1,853	$	-	$	-	$	1,853	$	1,843	$	-	$	-	$	1,843
Commercial real estate
Non-owner occupied		3,217		-		-		3,217		3,151		-		-		3,151
Commercial and industrial		317		-		-		317		317		-		-		317
Total impaired loans	$	5,387	$	-	$	-	$	5,387	$	5,311	$	-	$	-	$	5,311

Other real estate owned:
Residential real estate	$	249	$	-	$	-	$	249	$	205	$	-	$	-	$	205
Commercial real estate
Owner occupied										529		–		–		529
Multifamily real estate		9,533		-		-		9,533		9,503		-		-		9,503
Construction and land		750		-		-		750		551		-		-		551
Total OREO	$	10,532	$	-	$	-	$	10,532	$	10,788	$	-	$	-	$	10,788

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a ~~carrying amount~~recorded investment of ~~$8,105,000~~$8,070,000 at ~~March 31,~~June 30, 2020 with a valuation allowance of ~~$2,718,000~~$2,759,000 and a ~~carrying amount~~recorded investment of $8,445,000 at December 31, 2019 with a valuation allowance of ~~$3,102,000 resulting~~$3,102,000. The change resulted in a provision for loan losses of ~~$182,000~~$223,000 for the ~~three months~~six-months ended ~~March 31,~~June 30, 2020, compared to a ~~$189,000~~$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 ~~March 31,~~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 ~~$10,532,000~~$10,788,000 which is made up of the outstanding balance of ~~$11,906,000~~$12,435,000 net of a valuation allowance of ~~$1,374,000~~$1,647,000 at ~~March 31,~~June 30, 2020. There were ~~$25,000~~$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 ~~March 31, 2020 and no write downs were recorded during the three months ended March 31,~~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.

~~-35 -~~37.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at ~~March 31,~~June 30, 2020 are summarized below:

	March 31, 2020		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)	June 30, 2020		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	1,853	sales comparison	adjustment for estimated realizable value	60.0%-60.0% (60.0%)	$	1,843	sales comparison	adjustment for estimated realizable value		13.9%-67.4% (43.9	%)
Commercial real estate
Non-owner occupied		3,217	income approach	adjustment for differences in net operating income expectations	13.9%-67.4% (43.3%)		3,151	income approach	adjustment for differences in net operating income expectations		13.9%-67.4% (43.9	%)
Commercial and industrial		317	sales comparison	adjustment for estimated realizable value	25.0%-86.5% (45.9%)		317	sales comparison	adjustment for estimated realizable value		25.0%-86.1% (45.8	%)
Total impaired loans	$	5,387				$	5,311

Other real estate owned:
Residential real estate	$	249	sales comparison	adjustment for estimated realizable value	0.2%-59.8% (17.5%)	$	205	sales comparison	adjustment for estimated realizable value		0.2%-59.8% (18.1	%)
Multifamily real estate		9,533	income approach	adjustment for differences in net operating income expectations	26.0%-26.0% (26.0%)		9,503	income approach	adjustment for differences in net operating income expectations		26.2%-26.2% (26.2	%)
Commercial real estate
Owner occupied							529	sales comparison	adjustment for estimated realizable value		29.5%-29.5% (29.5	%)
Construction and land		750	sales comparison	adjustment for estimated realizable value	50.3%-69.9% (66.0%)		551	sales comparison	adjustment for estimated realizable value		50.3%-86.3% (76.5	%)
Total OREO	$	10,532				$	10,788

~~-36 -~~38.

Table of Contents

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								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)		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	$	1,900	$	-	$	-	$	1,900
Commercial real estate
Owner occupied		509		-		-		509		509		-		-		509
Non-owner occupied		2,266		-		-		2,266		2,266		-		-		2,266
Commercial and industrial		288		-		-		288		288		-		-		288
Construction and land		380		-		-		380		380		-		-		380
Total impaired loans	$	5,343	$	-	$	-	$	5,343	$	5,343	$	-	$	-	$	5,343

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

~~-37 -~~39.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 8 - FAIR VALUE - continued

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

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

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

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

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

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

~~-38 -~~40.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

JUNE 30, 2020

~~NOTE 9 – SUBSEQUENT EVENT~~

~~COVID-19 Virus~~

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

~~-39 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MARCH 31, 2020~~

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

A. Results of Operations

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

Net income for the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~$5,368,000,~~$10,874,000, or ~~$0.36~~$0.74 per diluted share, compared to net income of ~~$6,176,000,~~$12,035,000, or ~~$0.42~~$0.82 per diluted share, for the ~~three~~six months ended ~~March 31,~~June 30, 2019. The decrease in net income in the first ~~three~~six months of ~~2019~~2020 is largely due to ~~a decrease~~decreases in interest income ~~on loans,~~and non-interest income, coupled with an increase in ~~interest expense on deposits,~~the provision for loan losses and an increase in non-interest ~~expense, and an increase in provision for loan losses, all of which~~expense. These changes that negatively affected net income more than offset ~~an increase in non-interest income. The comparative increases~~decreases in interest expense and ~~non-interest expense are partially attributable to the operations of the newly acquired First National Bank of Jackson (“Jackson”), which were not included in the first quarter 2019~~ income ~~statement results.~~tax expense. The provision for loan losses increased by ~~$440,000,~~$700,000, or ~~78.6%~~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”~~(“COVID-19”). The annualized returns on average common shareholders’ equity and average assets were approximately ~~8.76%~~8.72% and ~~1.22%~~1.19% for the ~~three~~six months ended ~~March 31,~~June 30, 2020 compared to ~~11.14%~~10.70% and ~~1.46%~~1.41% for the same period in 2019.

~~-40 -~~41.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

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 ~~quarter~~six months ended ~~March 31,~~June 30, 2020 totaled ~~$16.342~~$33.151 million, ~~down $493,000,~~a decrease of $339,000, or ~~2.9%~~1.0%, from the ~~$16.835~~$33.490 million of net interest income earned in the first ~~quarter~~six months of 2019. Interest income in 2020 decreased by ~~$420,000, a 2.2% decrease,~~$888,000, or 2.3%, largely due to a ~~$535,000,~~$539,000, or ~~3.3%~~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 ~~loans~~interest-bearing bank balances and federal funds sold decreased in the first ~~quarter~~six months of 2020 ~~included~~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 ~~$75,000~~$543,000 of interest income ~~recognized~~was realized from deferred interest and discounts recognized on loans that ~~paid off~~paid-off or paid-down during the ~~quarter~~first six months of 2020 compared to ~~approximately $719,000~~$1,012,000 of interest income of this kind recognized during the first ~~quarter~~six months of 2019. ~~Excluding this~~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 ~~recognition,~~on loans decreased by $469,000. Otherwise, interest income on loans increased by ~~$109,000,~~$123,000, or ~~0.7%~~0.4%, in the first ~~quarter~~six months of ~~2020, largely due to a higher average balance~~2020. This increase includes approximately $1,007,000 of interest income on loans ~~outstanding although with a lower average yield during the first quarter of 2020 when compared to the first quarter of 2019. The increase in average loans is largely due to loans added via~~acquired from the acquisition of ~~Jackson. The~~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 ~~during~~and the ~~first quarter of 2020 was approximately $457,000. Without this additional loan~~decrease in deferred interest ~~income,~~and discounts recognized on loans, interest income on loans ~~would have~~ decreased by ~~$348,000,~~$884,000, or ~~2.1%~~2.8%, in the first six months of 2020 when compared to the ~~first quarter~~same six months of 2019, largely due to a ~~lower~~decrease in the average ~~balance~~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 ~~with a slightly lower~~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 ~~yield.~~ 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.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

Interest income on investment securities in the first ~~quarter~~six months of 2020 ~~increased by $202,000, or 8.3%, largely due~~was relatively unchanged at $4,828,000 compared to ~~a higher~~$4,831,000 in the first six months of 2019. While the average balance of investments ~~outstanding with higher average yields when compared to the first quarter of 2019. Interest income from interest-bearing bank balances and federal funds sold decreased~~increased by $87,000, or 25.2%, largely due to a significant decrease in the yield earned on these balances in 2020 compared to the yield earned in 2019 resulting from decreases in the short-term interest rate policy of the Federal Reserve Board of Governors. The decrease in interest income from interest-bearing bank balances and federal funds sold occurred although the average balance outstanding during the first quarter of 2020 was $20.0$27.680 million ~~higher than the first quarter of 2019.~~

~~In addition to the $420,000 decrease in interest income, net interest income decreased as a result of a $73,000, or 3.3%, increase in interest expense~~ in the first ~~quarter~~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 ~~quarter~~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 ~~increased~~decreased by ~~$115,000,~~$455,000, or ~~5.6%,~~10.5% in the first ~~quarter~~half of 2020, largely due to ~~a higher average of interest-bearing deposit balances outstanding~~decreases in ~~2020 although on a slightly lower~~the average rate paid on ~~these deposits. Average~~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 ~~were up $68.0~~increased by $68.6 million, or 6.5%, in the first ~~quarter~~six months of 2020 compared to the ~~first quarter~~same period of 2019, largely due to the ~~$69.7 million~~acquisition of ~~deposits attributable to the two~~ Jackson ~~branches acquired~~ in the fourth quarter of 2019. The average interest rate paid on interest-bearing deposits decreased by 213 basis points from ~~0.80%~~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 ~~quarter~~six months of ~~2019~~2020 when compared to ~~0.78% in~~ the first ~~quarter~~six months of 2020. Adding to the interest expense increase in 2020 was $15,000 of additional interest expense paid on short-term borrowings, primarily customer repurchase agreements. The additional interest expense was largely due to a 33 basis point increase2019. Even with these resulting decreases in the average rate paid ~~partially offset by a 10.5% decrease~~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 ~~balance~~ 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 ~~2020. Partially offsetting these~~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 ~~was a $25,000~~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.

43.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

The remaining $115,000 decrease in interest expense on deposit accounts came from a decrease in average outstanding certificates of deposits and a minor decrease in the ~~remaining~~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 ~~of First Bank of Charleston assumed by Premier as part of~~and other borrowings at the ~~2018 acquisition. Premier has been repaying these~~parent company. Interest expense on FHLB borrowings ~~as they mature and has reduced the average balance outstanding~~decreased by $50,000, or 48.5%, in the first ~~quarter~~six months of 2020 ~~by 45.9%~~ 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 ~~quarter~~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 ~~partially offsetting~~contributing to the ~~increase~~decrease in interest expense ~~on deposits~~ during the first ~~quarter~~six months of 2020 was ~~an $11,000,~~a $31,000, or ~~11.7%~~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 ~~quarter~~six months of 2019. The variable interest rate is indexed to the short-term three-month ~~LIBOR~~London Interbank Offered Rate (“LIBOR”), interest rate, which was lower in the first ~~quarter~~six months of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors. ~~Lastly,~~Contrary to these interest expense savings, interest expense on ~~other~~short-term borrowings, ~~also decreased~~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 ~~first quarter of 2020 by $21,000 compared to~~average rate paid on a 3.2% higher average balance outstanding during the first ~~quarter~~six months of ~~2019, as the outstanding borrowings at the parent company were fully repaid by June 30, 2019.~~2020.

~~-41 -~~44.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

Premier’s net interest margin during the first ~~three~~six months of 2020 was ~~4.00%~~3.91% compared to ~~4.35%~~4.25% for the ~~same period in~~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 ~~three~~six months of 2020 would have been ~~3.98%~~3.85% compared to ~~4.17%~~4.12% for the ~~same period in~~first six months of 2019. As shown in the table below, Premier’s yield earned on federal funds sold and ~~interest-bearing~~interest bearing bank balances decreased to ~~1.46%~~0.62% in the first ~~three~~six months of 2020, from the ~~2.74%~~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.

45.

Table of Contents

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	%

46.

Table of Contents

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	%

47.

Table of Contents

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.

48.

Table of Contents

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 remaining $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.

49.

Table of Contents

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 ~~increased~~decreased to ~~2.73%~~2.23% in the ~~first three months~~second quarter of 2020, from the ~~2.68%~~2.62% earned induring the ~~first~~second quarter of 2019. ~~The~~Similarly, the average yield earned on total loans outstanding decreased to ~~5.35%~~5.27% in 2020 from the ~~5.73% average yield~~5.63% earned in the first three months of 2019. The average yield on loans in the first three months of 2019 benefited from the $719,000 of interest income earned from deferred interest and discounts recognized on loans that paid off during the ~~quarter. The $719,000 added 26 basis point to the average loan yield in the first~~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 ~~first~~second quarter of 2020 has been a decrease of approximately 1536 basis points when compared to the ~~first~~second quarter of 2019.

50.

Table of Contents

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 ~~first three months~~second quarter of 2020 from ~~0.84%~~0.90% during the ~~first three months~~second quarter of 2019 to ~~0.81%~~0.63% in the ~~first three months~~second quarter of 2020. The average rates paid on interest-bearing deposits decreased from ~~0.80%~~0.86% in the ~~first three months~~second quarter to 2019 to ~~0.78%~~0.61% during the ~~first three months~~second quarter of 2020, ~~largely~~ due to lower rates paid on savings deposits, ~~and~~ transaction based interest bearing ~~deposits.~~deposits and certificates of deposit. Furthermore, the average rate paid on Premier’s variable rate subordinated debentures decreased from ~~7.05%~~7.11% in the ~~first three months~~second quarter of 2019 to ~~6.14%~~5.61% in the ~~first three months~~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 332 basis points to ~~0.49%~~0.24% in the ~~first~~second quarter of 2020, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston ~~remained unchanged.~~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 3325 basis points to ~~3.75%~~3.62% and decrease Premier’s net interest margin by 3533 basis points to ~~4.00%~~3.83% in the ~~first three months~~second quarter of 2020 when compared to the ~~first three months~~second quarter of 2019.

~~-42 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MARCH 31, 2020~~

~~Additional information on Premier’s net interest~~Non-interest income decreased by $384,000, or 8.5%, to $4,139,000 for the first ~~quarter of 2020 and first quarter of 2019 is contained in the following table.~~

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

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

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

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

~~-43 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MARCH 31, 2020~~

~~Non-interest income increased by $73,000, or 3.4%, to $2,249,000 for the first three~~six months of 2020 compared to the same ~~three months~~period of ~~2019,~~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 ~~$42,000,~~$377,000, or ~~175.0% increase~~22.6%, decrease in ~~secondary market mortgage income,~~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 ~~$23,000, or 9.7% increase~~decline in ~~other~~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 ~~a $12,000, or 1.1% increase~~commissions on insurance premiums as well as brokerage and annuity commission income. Partially offsetting these decreases in ~~service charges on deposit accounts. These increases were partially offset by a $4,000, or 0.5% decrease 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%. ~~A portion~~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.

51.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

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 isrealized during the ~~result~~first quarter of ~~including~~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 ~~operations~~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 ~~two branches added from~~COVID-19 virus has reduced transaction activity and the ~~acquisition~~propensity of ~~Jackson~~deposit customers to overdraft their accounts. Other sources of non-interest income that decreased in the ~~fourth~~second quarter of ~~2019.~~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 ~~quarter~~six months of 2020 totaled ~~$10,737,000,~~$21,816,000, or ~~2.45%~~2.41%, of average assets on an annualized basis, compared to ~~$10,593,000,~~$21,634,000, or ~~2.54%~~2.55%, of average assets for the same period of 2019. The ~~$144,000,~~$182,000, or ~~1.4%~~0.8%, increase in non-interest expenses in 2020 when compared to the first ~~quarter~~six months of 2019 ~~was~~is largely due to the ~~operations~~inclusion of ~~two branches~~the newly acquired Jackson branch locations, which added ~~from~~approximately $513,000 of direct non-interest expense during the ~~acquisition~~first six months of ~~Jackson. Increases~~2020. Overall increases in operating costs include a ~~$209,000,~~$49,000, or ~~4.0%~~0.5%, increase in staff costs, a ~~$147,000,~~$423,000, or ~~10.6% increase in data processing expense, a $61,000, or 3.7%~~15.1%, increase in ~~net occupancy and equipment expense,~~outside data processing costs, a ~~$37,000,~~$28,000, or ~~15.5%~~5.6%, increase in taxes not on income, a ~~$129,000 increase in other operating expenses, and a $15,000,~~$33,000, or ~~6.6%~~7.3%, increase in the amortization of intangible ~~assets.~~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 ~~a $181,000,~~$175,000, or ~~72.7%~~72.0%, ~~decrease in OREO expenses, a $128,000, or 103.2%~~ decrease in FDIC insurance expense, a ~~$121,000,~~$181,000, or ~~33.2%~~27.0%, decrease in professional fees, ~~and~~ a ~~$14,000,~~$55,000, or ~~10.9%~~11.5%, decrease in ~~loan collection~~expenses and writedowns on OREO properties, and an $18,000, or 0.5%, decrease in occupancy and equipment expenses. FDIC insurance expense decreased by ~~$128,000~~$175,000 largely due to the utilization of FDIC based community bank assessment credits used to ~~fully~~substantially offset the first and second quarter 2020 FDIC insurance ~~premium.~~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.

52.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

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 ~~$1,486,000~~$3,010,000 for the first ~~three~~six months of 2020 compared to ~~$1,682,000~~$3,454,000 for the first ~~three~~six months of 2019. The ~~decrease in income tax expense is largely due to the decrease in pretax income described above, as the~~ effective tax rate for the ~~three~~six months ended ~~March 31,~~June 30, 2020 was 21.7% ~~which compares similarly~~compared to 22.3% for the ~~21.4%~~same period in 2019. For the quarter ended June 30, 2020, income tax expense was $1,524,000, (a 21.7% effective tax ~~rate~~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 ~~Payroll~~Paycheck Protection Program. These efforts may or may not enhance Premier’s business model or future results of operations.

~~-44 -~~53.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

B. Financial Position

Total assets at ~~March 31,~~June 30, 2020 ~~decreased~~increased by ~~$21.8~~$134.0 million to ~~$1.759~~$1.915 billion from the $1.781 billion at December 31, 2019. The ~~decrease~~increase in total assets since year-end is largely due to a ~~$27.6~~$35.5 million ~~decrease~~increase in interest bearing bank balances, ~~and~~ a ~~$10.3 million decrease in total loans, partially offset by a $13.7~~$25.9 million increase in securities available for sale, ~~and~~ a ~~$2.2~~$2.5 million increase in federal funds ~~sold.~~sold and a $69.7 million increase in total loans outstanding. Earning assets ~~decreased~~increased by ~~$22.0~~$133.4 million from the $1.662 billion at year-end 2019 to end the quarter at ~~$1.640~~$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 ~~March 31,~~June 30, 2020 was ~~$23.5~~$23.7 million, a ~~$364,000~~$633,000 increase from the $23.1 million at December 31, 2019. Interest bearing bank balances ~~decreased~~increased by ~~$27.6~~$35.5 million, or 53.7%, from the $66.1 million reported at December 31, 2019. Federal funds sold increased by ~~$2.2~~$2.5 million to ~~$8.1~~$8.4 million at ~~March 31,~~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 ~~$404.5~~$416.7 million at ~~March 31,~~June 30, 2020, a ~~$13.7~~$25.9 million increase from the $390.8 million at December 31, 2019. The increase was largely due to the purchase of ~~$47.4~~$91.6 million of investment securities and ~~a $6.9~~an $8.9 million increase in market value of securities available for sale. These increases more than offset ~~$40.5~~$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 ~~quarter.~~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 ~~March 31,~~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 ~~March 31,~~June 30, 2020 were ~~$1.185~~$1.265 billion compared to $1.195 billion at December 31, 2019, ~~a decrease~~an increase of approximately ~~$10.3~~$69.7 million, or ~~0.9%~~5.8%. The ~~decrease~~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 ~~$16.7~~$21.1 million or ~~12.2%, and~~15.5%; consumer loans, decreased by ~~$2.6~~$3.6 million,

54.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

or 12.4%; and commercial and industrial loans, decreased by $23.5 million, or ~~9.0%~~22.4%. These decreases more than offset a ~~$3.6 million~~$692,000, or 1.9%, increase in multifamily residential loans and a ~~$3.9 million~~$165,000 increase in ~~owner occupied commercial real estate loans and a $2.5 million increase in non-owner occupied commercial~~residential real estate loans. The ~~$5.1~~$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 ~~quarter~~half of 2020 resulted in recognizing approximately ~~$75,000~~$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 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 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 portion 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 the 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 ~~$109,000,~~$549,000, largely due to normal quarterly depreciation of fixed assets. Other intangible assets decreased by ~~$242,000,~~$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.

~~-45 -~~55.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

Deposits totaled ~~$1.462~~$1.608 billion as of ~~March 31,~~June 30, 2020, ~~a $33.4~~an $112.4 million, or ~~2.2%~~7.5%, ~~decrease~~increase from the $1.496 billion in deposits at December 31, 2019. The overall ~~decrease~~increase in deposits is largely due to a ~~$17.1~~$107.4 million, or ~~4.0% decrease in certificates of deposit, an $11.7 million, or 3.2% decrease~~29.2%, increase in non-interest bearing deposits, a $54.1 million, or 14.1%, increase in savings and money market deposits, and a ~~$6.6~~$13.8 million, or ~~2.1% decrease~~4.3%, increase in interest bearing transaction deposits. Partially offsetting these ~~decreases, savings and money market deposits increased~~increases, certificates of deposit (“CD”) balances decreased by ~~$2.0~~$62.9 million, or ~~0.5%~~14.8%. The decrease in certificate of deposit balances ~~are~~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. ~~The decrease in non-interest bearing~~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 ~~was largely due~~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 ~~influx of these deposits~~increase in ~~the fourth quarter of 2019 that were temporary~~commercial based deposit balances. Furthermore, government based economic stimulus checks to individuals have resulted in ~~nature.~~increases in retail based deposit balances. Repurchase agreements with corporate and public entity customers ~~decreased by $734,000, or 3.6%. Short-term FHLB borrowings~~ increased by ~~$5.0~~$7.3 million, ~~since year-end 2019 due to a 4-week advance to supplement Premier’s investment purchases.~~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 ~~$9,000,~~$19,000, due to the regular amortization of the fair value adjustment. Other liabilities increased by ~~$2.1~~$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 income taxes on first ~~quarter~~two quarters of 2020 pretax income not due to be paid until ~~after March 31,~~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.

56.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

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

	(In Thousands)						(In Thousands)
	2020			2019			2020			2019
Non-accrual loans	$	14,509		$	14,437		$	13,761		$	14,437
Accruing loans which are contractually past due 90 days or more		1,102			2,228			980			2,228
Accruing restructured loans		2,992			3,020			2,133			3,020
Total non-performing loans		18,603			19,685			16,874			19,685
Other real estate acquired through foreclosure (OREO)		12,709			12,242			12,267			12,242
Total non-performing assets	$	31,312		$	31,927		$	29,141		$	31,927

Non-performing loans as a percentage of total loans		1.57	%		1.65	%		1.33	%		1.65	%

Non-performing assets as a percentage of total assets		1.78	%		1.79	%		1.52	%		1.79	%

Total non-performing loans have decreased since year-end, largely due to a ~~$1.1~~$676,000 decrease in non-accrual loans, a $1.2 million decrease in accruing loans past due 90 days or more and ~~a $28,000~~an $887,000 decrease in accruing restructured loans. ~~These decreases~~The decrease in ~~non-performing~~accruing restructured loans ~~were partially~~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 ~~$72,000 increase~~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 ~~$467,000~~$25,000 increase in other real estate owned acquired through foreclosure (“OREO”). Other real estate owned increased by ~~$467,000, or 3.8%,~~$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 ~~with~~had a specific allowance for loan losses allocation ~~which~~and, upon foreclosure, resulted in a $566,000 loan ~~charge-off upon foreclosure.~~charge-off. This increase has been nearly offset by sales of several OREO properties during the first six months of 2020.

~~-46 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MARCH 31, 2020~~

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

57.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

Gross charge-offs totaled ~~$826,000~~$935,000 during the first ~~three~~six months of 2020, largely due to ~~the~~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 statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first ~~three~~six months of 2020 totaled ~~$140,000,~~$191,000, resulting in net charge-offs for the first ~~quarter~~six months of 2020 of ~~$686,000.~~$744,000. This compares to ~~$819,000~~$855,000 of net charge-offs recorded in the first ~~quarter~~six months of 2019. The allowance for loan losses at ~~March 31,~~June 30, 2020 was ~~1.17%~~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 more significant increase in the ratio ~~is largely~~to total loans. However, due to ~~a decrease~~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, ~~an increase in~~therefore, have no allowance for loan losses attributed to them, the ~~amount~~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 ~~allowance allocated to~~the remaining loans ~~collectively evaluated for impairment.~~outstanding.

During the first ~~quarter~~six months of 2020, Premier recorded ~~$1,000,000~~$1,590,000 of provision for loan losses. This provision compares to ~~$560,000~~$890,000 of provision for loan losses recorded during the same ~~quarter~~six months of 2019. The ~~increase in the~~ provision for loan losses recorded during the first ~~quarter~~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.~~virus (“Potential COVID-19 Losses”). Premier added approximately ~~$514,000~~$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.

58.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

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

~~-47 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MARCH 31, 2020~~

A resulting decline in employment could increase non-performing assets from loans originated in these areas.

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

59.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2020

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

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

~~-48 -~~

~~Table of Contents~~

~~PREMIER FINANCIAL BANCORP, INC.~~

~~MARCH 31, 2020~~

D. Liquidity

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

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

Cash flow generated by repayment of loans and interest.

Arrangements with correspondent banks for purchase of unsecured federal funds.

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

Maintenance of an adequate available-for-sale security portfolio. The Company owns ~~$404.5~~$416.7 million of securities at fair value as of ~~March 31,~~June 30, 2020.

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

~~-49 -~~60.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

E. Capital

At ~~March 31,~~June 30, 2020, total stockholders’ equity of ~~$248.9~~$254.0 million was ~~14.1%~~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 ~~$5.4~~$10.9 million of ~~first quarter~~ net income for the first six months of 2020 and a ~~$5.4~~$7.0 million, net of tax, increase in the market value of the investment portfolio available for sale. ~~This increase~~These increases in stockholders’ equity ~~was~~were partially offset by ~~a $0.15~~$0.30 per share in cash ~~dividend~~dividends declared and paid during the first ~~quarter~~six months of 2020.

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

Under interim guidance issued in June 2020, a ~~consolidated basis as well as for its largest subsidiary bank.~~

A community bank leverage ratio of Total Tier 1 capital to quarterly average assets must be at least ~~9.00%~~8.00% to be considered well capitalized. Premier’s Tier 1 capital totaled ~~$196.4~~$200.1 million at ~~March 31,~~June 30, 2020, which represents a community bank leverage ratio of ~~11.5%~~10.9%. This ratio is updown from the 11.3% Tier 1 leverage ratio and $192.7 million of Tier 1 capital at December 31, 2019. The ~~slight increase~~decrease in the Tier 1 leverage ratio is largely due to the growth in ~~Tier 1 capital combined with a slight decrease in the~~ quarterly average assets related largely in response to increases in funds from the growth in total ~~assets used to compute the CBLR.~~ deposits. Premier’s wholly owned subsidiary Citizens Deposit Bank ~~has not~~ adopted the CBLR simplification standard during the second quarter of 2020 as its Tier 1 leverage ratio was ~~only 8.36%~~8.2% at ~~March 31,~~June 30, 2020. Nevertheless, utilizing the standard risk-based capital ratio calculations, Citizens Deposit Bank was still considered to be well capitalized under the prompt corrective action framework and maintained a capital conservation buffer of 6.58%, well in excess of the 2.50% buffer required for equity distributions. Premier’s other wholly owned subsidiary bank, ~~has~~Premier Bank, Inc. adopted the regulatory capital simplification rules in the first quarter and maintained a CBLR of ~~11.66%,~~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 ~~$16.98~~$17.31 at ~~March 31,~~June 30, 2020 and $16.39 at December 31, 2019. The increase in book value per share was largely due to the ~~$0.36~~$0.74 per share earned during the first ~~quarter,~~six months, partially offset by the ~~$0.15~~$0.30 per share in quarterly cash ~~dividend~~dividends to common shareholders declared and paid during the first ~~quarter~~six months of 2020. Also increasing Premier’s book value per share at ~~March 31,~~June 30, 2020 was the ~~$5.4~~$7.0 million of other comprehensive income for the first ~~three~~six months of 2020 related to the increase in the market value of investment securities available for sale, which increased book value by approximately ~~$0.37~~$0.48 per share.

~~-50 -~~

61.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

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 2019 10-K for analysis of the interest rate sensitivity. The Company believes there have been no significant changes in the interest rate sensitivity since previously reported on the Company’s 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.

~~-51 -~~62.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None


Item 1A.	Risk Factors

~~Please refer to~~ ~~Premier's Annual Report on Form 10-K for the year ended December 31, 2019~~ ~~for disclosures with respect to Premier's risk factors at December 31, 2019. There~~

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.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None


Item 3.	Defaults Upon Senior Securities	None


Item 4.	Mine Safety Disclosures	Not Applicable


Item 5.	Other Information	None

~~-52 -~~63.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~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

Certification 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.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

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

~~-53 -~~64.

Table of Contents

PREMIER FINANCIAL BANCORP, INC.

~~MARCH 31,~~JUNE 30, 2020

SIGNATURES

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

		PREMIER FINANCIAL BANCORP, INC.



Date: 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.~~

65.

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

~~Robert W. Walker~~

~~President & Chief Executive Officer~~

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

~~Brien M. Chase~~

~~Senior Vice President & Chief Financial Officer~~

~~-54 -~~

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

Large accelerated filer □		Accelerated filer☑
Non-accelerated filer □	Smaller reporting company ☑	Emerging growth company □☐

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

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

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management’s Discussion and Analysis	40	41
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	51	62
Item 4 – Controls and Procedures	51	62
Part II - Other Information	52	63
Item 1 – Legal Proceedings	52	63
Item 1A – Risk Factors	52	63
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	52	63
Item 3 – Defaults Upon Senior Securities	52	63
Item 4 – Mine Safety Disclosures	52	63
Item 5 – Other Information	52	63
Item 6 – Exhibits	53	64
Signatures	54	65

	(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

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

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

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