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”):

Year			Total		June 30, 2020 Net Income
												Year	Total		September 30, 2020 Net Income
Subsidiary	Location	Acquired	Assets		Qtr			YTD			Location	Acquired	Assets		Qtr		YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	578,556	$	1,438		$	3,021		Vanceburg, Kentucky	1991	$	568,963	$	1,548	$	4,569
Premier Bank, Inc.	Huntington, West Virginia	1998		1,328,897		4,741			8,974		Huntington, West Virginia	1998		1,312,288		4,481		13,455
Parent and Intercompany Eliminations				7,541		(673	)		(1,121	)				7,642		(405)		(1,526)
Consolidated Total			$	1,914,994	$	5,506		$	10,874				$	1,888,893	$	5,624	$	16,498

All significant intercompany transactions and balances have been eliminated.

Estimates in the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates are, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change. Those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations include the allowance for loan losses, business combinations and impairment of goodwill, and other than temporary impairment (“OTTI”) of securities available for sale. The estimates and assumptions used in these calculations affect the amounts reported in the financial statements and the disclosures provided. National and local participation in a worldwide effort to curb the spread of the COVID-19 virus has resulted in and may continue to result in negative changes in the national and regional business climate in the geographic areas in which Premier operates. During 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~~third quarter of 2020, management determined that goodwill was not impaired. At this time, management does not believe there exists any impairment to goodwill and intangible assets, long-lived assets, or available-for-sale securities due to the COVID-19 pandemic. The effects of government measures to curb the spread of the COVID-19 virus on the local or national economy are uncertain and could cause assumptions and conditions to change in the near term. In the event that changes to assumptions or conditions 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.

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~~Subsequent changes to the program provide for an additional 10 months before repayment must commence and allows borrowers an option to extend the repayment period up to 60 ~~months.~~months if the bank agrees.

NOTE 2 - SECURITIES

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

2020	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		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	$	331,400	$	10,388	$	(1,001	)	$	340,787
U. S. sponsored agency CMO’s - residential		47,888		1,308		–			49,196		37,872		1,065		0			38,937
Total mortgage-backed securities of government sponsored agencies		353,226		12,361		(248	)		365,339		369,272		11,453		(1,001	)		379,724
U. S. government sponsored agency securities		9,392		154		–			9,546		5,983		170		0			6,153
Obligations of states and political subdivisions		38,541		1,183		–			39,724		43,554		1,317		0			44,871
Other securities		1,963		135		(7	)		2,091		5,717		128		(13	)		5,832
Total available for sale	$	403,122	$	13,833	$	(255	)	$	416,700	$	424,526	$	13,068	$	(1,014	)	$	436,580

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		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	$	276,013	$	3,618	$	(322	)	$	279,309
U. S. sponsored agency CMO’s - residential		61,989		768		(113	)		62,644		61,989		768		(113	)		62,644
Total mortgage-backed securities of government sponsored agencies		338,002		4,386		(435	)		341,953		338,002		4,386		(435	)		341,953
U. S. government sponsored agency securities		30,538		280		(88	)		30,730		30,538		280		(88	)		30,730
Obligations of states and political subdivisions		15,570		453		(6	)		16,017		15,570		453		(6	)		16,017
Other securities		1,956		98		–			2,054		1,956		98		0			2,054
Total available for sale	$	386,066	$	5,217	$	(529	)	$	390,754	$	386,066	$	5,217	$	(529	)	$	390,754

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

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

Residential real estate	$	1,711	$	288		$	(94	)	$	10	$	1,915	$	1,711	$	262		$	(95	)	$	11	$	1,889
Multifamily real estate		1,954		161			–			–		2,115		1,954		494			(2,183	)		0		265
Commercial real estate:
Owner occupied		2,441		590			(566	)		5		2,470		2,441		637			(566	)		7		2,519
Non-owner occupied		3,184		1,200			(77	)		3		4,310		3,184		1,562			(226	)		3		4,523
Commercial and industrial		1,767		(247	)		(5	)		39		1,554		1,767		(162	)		(5	)		45		1,645
Consumer		281		14			(99	)		34		230		281		66			(155	)		47		239
Construction and land		1,724		(529	)		–			38		1,233		1,724		(615	)		(4	)		55		1,160
All other		480		113			(94	)		62		561		480		111			(135	)		77		533
Total	$	13,542	$	1,590		$	(935	)	$	191	$	14,388	$	13,542	$	2,355		$	(3,369	)	$	245	$	12,773

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

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

Residential real estate	$	1,808	$	104		$	(59	)	$	27	$	1,880	$	1,808	$	165		$	(121	)	$	34	$	1,886
Multifamily real estate		1,649		65			–			2		1,716		1,649		143			0			7		1,799
Commercial real estate:
Owner occupied		2,120		200			(533	)		3		1,790		2,120		700			(533	)		5		2,292
Non-owner occupied		3,058		277			(57	)		2		3,280		3,058		334			(57	)		2		3,337
Commercial and industrial		1,897		178			(113	)		38		2,000		1,897		191			(393	)		48		1,743
Consumer		351		129			(140	)		28		368		351		125			(175	)		34		335
Construction and land		2,255		(102	)		(13	)		–		2,140		2,255		(349	)		(14	)		0		1,892
All other		600		39			(97	)		57		599		600		6			(171	)		92		527
Total	$	13,738	$	890		$	(1,012	)	$	157	$	13,773	$	13,738	$	1,315		$	(1,464	)	$	222	$	13,811

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

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

Residential real estate	$	1,838	$	72		$	(1	)	$	6	$	1,915	$	1,915	$	(26	)	$	(1	)	$	1	$	1,889
Multifamily real estate		2,104		11			–			–		2,115		2,115		333			(2,183	)		0		265
Commercial real estate:
Owner occupied		2,220		248			–			2		2,470		2,470		47			0			2		2,519
Non-owner occupied		3,642		721			(53	)		–		4,310		4,310		362			(149	)		0		4,523
Commercial and industrial		1,817		(269	)		(5	)		11		1,554		1,554		85			0			6		1,645
Consumer		241		12			(30	)		7		230		230		52			(56	)		13		239
Construction and land		1,412		(180	)		–			1		1,233		1,233		(86	)		(4	)		17		1,160
All other		582		(25	)		(20	)		24		561		561		(2	)		(41	)		15		533
Total	$	13,856	$	590		$	(109	)	$	51	$	14,388	$	14,388	$	765		$	(2,434	)	$	54	$	12,773

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

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

Residential real estate	$	1,823	$	62		$	(27	)	$	22	$	1,880	$	1,880	$	61		$	(62	)	$	7	$	1,886
Multifamily real estate		1,590		126			–			–		1,716		1,716		78			0			5		1,799
Commercial real estate:
Owner occupied		1,824		(36	)		–			2		1,790		1,790		500			0			2		2,292
Non-owner occupied		3,401		(123	)		–			2		3,280		3,280		57			0			0		3,337
Commercial and industrial		1,721		275			(3	)		7		2,000		2,000		13			(280	)		10		1,743
Consumer		365		19			(33	)		17		368		368		(4	)		(35	)		6		335
Construction and land		2,149		(9	)		–			–		2,140		2,140		(247	)		(1	)		0		1,892
All other		606		16			(46	)		23		599		599		(33	)		(74	)		35		527
Total	$	13,479	$	330		$	(109	)	$	73	$	13,773	$	13,773	$	425		$	(452	)	$	65	$	13,811

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 ~~June~~September 30, 2020 and December 31, 2019.

	2020		2019		2020		2019
Residential real estate	$	2,384	$	2,565	$	2,348	$	2,565
Commercial real estate
Owner occupied		1,108		1,804		1,044		1,804
Non-owner occupied		2,482		2,628		2,428		2,628
Commercial and industrial		19		305		17		305
Consumer		17		22		13		22
Construction and land		416		483		409		483
All other		176		174		175		174
Total carrying amount	$	6,602	$	7,981	$	6,434	$	7,981
Contractual principal balance	$	9,880	$	11,681	$	9,633	$	11,681

Carrying amount, net of allowance	$	6,602	$	7,981	$	6,434	$	7,981

For those purchased loans disclosed above, the Company did 0t increase the allowance for loan losses during the ~~three and six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 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.

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 ~~June~~September 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.

June 30, 2020	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
September 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	$	5,460	$	4,197	$	748	$	5,583	$	4,340	$	975
Multifamily real estate		4,088		3,708		–
Commercial real estate
Owner occupied		2,160		1,734		9		2,132		1,677		0
Non-owner occupied		4,042		2,726		–		3,357		2,315		0
Commercial and industrial		1,341		787		74		1,346		784		0
Consumer		324		236		–		194		125		0
Construction and land		355		313		149		394		341		149
All other		75		60		–		14		0		0
Total	$	17,845	$	13,761	$	980	$	13,020	$	9,582	$	1,124

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		0
Commercial real estate
Owner occupied		3,399		2,995		–		3,399		2,995		0
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		0
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.

The following table presents the aging of the recorded investment in past due loans as of ~~June~~September 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	$	390,150	$	3,971	$	2,802	$	6,773	$	383,377	$	386,540	$	4,163	$	2,637	$	6,800	$	379,740
Multifamily real estate		37,376		–		3,708		3,708		33,668		35,905		0		0		0		35,905
Commercial real estate:
Owner occupied		164,121		26		505		531		163,590		162,108		590		316		906		161,202
Non-owner occupied		303,141		–		1,591		1,591		301,550		308,478		1,129		1,228		2,357		306,121
Commercial and industrial		85,073		703		723		1,426		83,647		91,146		157		651		808		90,338
SBA PPP		110,690		–		–		–		110,690		113,478		0		0		0		113,478
Consumer		25,416		96		112		208		25,208		25,420		125		42		167		25,253
Construction and land		115,053		4		152		156		114,897		111,221		0		213		213		111,008
All other		33,982		–		60		60		33,922		34,185		0		0		0		34,185
Total	$	1,265,002	$	4,800	$	9,653	$	14,453	$	1,250,549	$	1,268,481	$	6,164	$	5,087	$	11,251	$	1,257,230

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		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	$	389,985	$	9,479	$	3,192	$	12,671	$	377,314
Multifamily real estate		36,684		–		3,726		3,726		32,958		36,684		0		3,726		3,726		32,958
Commercial real estate:
Owner occupied		164,218		337		1,199		1,536		162,682		164,218		337		1,199		1,536		162,682
Non-owner occupied		304,316		838		1,017		1,855		302,461		304,316		838		1,017		1,855		302,461
Commercial and industrial		105,079		245		708		953		104,126		105,079		245		708		953		104,126
Consumer		29,007		309		230		539		28,468		29,007		309		230		539		28,468
Construction and land		136,138		3,856		4		3,860		132,278		136,138		3,856		4		3,860		132,278
All other		29,868		–		73		73		29,795		29,868		0		73		73		29,795
Total	$	1,195,295	$	15,064	$	10,149	$	25,213	$	1,170,082	$	1,195,295	$	15,064	$	10,149	$	25,213	$	1,170,082

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 ~~June~~September 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	$	0	$	1,889	$	0	$	1,889	$	59	$	384,133	$	2,348	$	386,540
Multifamily real estate		0		265		0		265		0		35,905		0		35,905
Commercial real estate:
Owner occupied		0		2,519		0		2,519		1,402		159,662		1,044		162,108
Non-owner occupied		303		4,220		0		4,523		1,917		304,133		2,428		308,478
Commercial and industrial		448		1,197		0		1,645		743		90,386		17		91,146
SBA PPP		0		0		0		0		0		113,478		0		113,478
Consumer		0		239		0		239		0		25,407		13		25,420
Construction and land		0		1,160		0		1,160		270		110,542		409		111,221
All other		0		533		0		533		0		34,010		175		34,185
Total	$	751	$	12,022	$	0	$	12,773	$	4,391	$	1,257,656	$	6,434	$	1,268,481

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	$	0	$	1,711	$	0	$	1,711	$	63	$	387,357	$	2,565	$	389,985
Multifamily real estate		1,737		217		0		1,954		3,726		32,958		0		36,684
Commercial real estate:
Owner occupied		653		1,788		0		2,441		2,685		159,729		1,804		164,218
Non-owner occupied		271		2,913		0		3,184		3,830		297,858		2,628		304,316
Commercial and industrial		390		1,377		0		1,767		678		104,096		305		105,079
Consumer		0		281		0		281		0		28,985		22		29,007
Construction and land		51		1,673		0		1,724		431		135,224		483		136,138
All other		0		480		0		480		0		29,694		174		29,868
Total	$	3,102	$	10,440	$	0	$	13,542	$	11,413	$	1,175,901	$	7,981	$	1,195,295

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 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						Nine Months Ended September 30, 2020						Nine Months Ended September 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	$	–	$	–	$	267	$	–	$	–	$	61	$	0	$	0	$	217	$	0	$	0
Multifamily real estate		3,744		–		–		3,855		–		–		2,808		0		0		3,823		0		0
Commercial real estate:
Owner occupied		2,191		6		4		3,898		6		6		2,073		8		8		3,779		10		10
Non-owner occupied		4,376		72		36		10,556		186		186		3,855		75		75		9,009		664		664
Commercial and industrial		738		2		2		562		2		2		739		3		3		517		3		3
Construction and land		353		–		–		1,065		121		121		332		0		0		910		123		123
Total	$	11,464	$	80	$	42	$	20,203	$	315	$	315	$	9,868	$	86	$	86	$	18,255	$	800	$	800

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 ~~June~~September 30, 2020 and ~~June~~September 30, 2019. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended June 30, 2020						Three months ended June 30, 2019						Three months ended September 30, 2020						Three months ended September 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	$	61	$	–	$	–	$	253	$	–	$	–	$	60	$	0	$	0	$	170	$	0	$	0
Multifamily real estate		3,753		–		–		3,830		–		–		1,854		0		0		3,768		0		0
Commercial real estate:
Owner occupied		1,785		3		1		4,062		3		3		1,738		5		5		3,683		4		4
Non-owner occupied		4,429		36		–		10,573		92		92		3,347		39		39		7,439		478		478
Commercial and industrial		768		1		1		562		1		1		753		2		2		535		1		1
Construction and land		314		–		–		922		113		113		287		0		0		480		2		2
Total	$	11,110	$	40	$	2	$	20,202	$	209	$	209	$	8,039	$	46	$	46	$	16,075	$	485	$	485

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 ~~June~~September 30, 2020 and December 31, 2019:

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

Residential real estate	$	25	$	151	$	176	$	23	$	204	$	227
Multifamily real estate		3,708		–		3,708
Commercial real estate
Owner occupied		–		201		201		0		199		199
Non-owner occupied		856		1,781		2,637		856		0		856
Commercial and industrial		191		–		191		184		0		184
Total	$	4,780	$	2,133	$	6,913	$	1,063	$	403	$	1,466

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		0		3,636
Commercial real estate
Owner occupied		1,162		207		1,369		1,162		207		1,369
Non-owner occupied		–		2,656		2,656		0		2,656		2,656
Commercial and industrial		191		–		191		191		0		191
Total	$	5,021	$	3,020	$	8,041	$	5,021	$	3,020	$	8,041

At ~~June~~September 30, 2020, ~~$2,118,000~~$222,000 in specific reserves were allocated to loans that had restructured terms resulting in a provision for loan losses of ~~$10,000~~$287,000 for the three months ended ~~June~~September 30, 2020 and ~~$213,000~~$499,000 for the ~~six~~nine months ended ~~June~~September 30, 2020. This compares to a provision for loan losses on restructured loans of ~~$216,000~~$263,000 for the three months ended ~~June~~September 30, 2019 and ~~$150,000~~$413,000 for the ~~six~~nine months ended ~~June~~September 30, 2019. At December 31, 2019, $2,471,000 in specific reserves were allocated to loans that had restructured terms. There were 0 commitments to lend additional amounts to these borrowers.

During the three and nine months ended September 30, 2020 there was 1 loan added as a TDR in residential real estate for $56,000. The modification involves reducing the borrowers’ required monthly payment by consolidating the borrower’s debt, reducing their interest rate, and/or lengthening the amortization period for loan repayment, each in an effort to help the borrowers keep their loan current. The modifications did not include a permanent reduction of the recorded investment in the loans. There were 0 new TDR’s that occurred during the three and ~~six~~nine months ended ~~June~~September 30, ~~2020 and June 30,~~ 2019.

During the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, there were 0 TDR’s for which there 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. ~~Management has exercised these provisions of~~To qualify under the CARES Act, ona loan could not be past due at the time the payment modification was granted.

The following table presents the status of the remaining loans ~~outstanding~~ as of ~~June~~September 30, 2020 towith some degree ~~on an individually requested basis.~~of payment modification under the CARES Act.

June 30, 2020	Modified to Interest Only Payment		Modified to Defer Principal and Interest Payment		Total
September 30, 2020							Modified to Interest Only Payment		Modified to Defer Principal and Interest Payment		Total

Residential real estate	$	9,756	$	6,444	$	16,200	$	1,739	$	415	$	2,154
Multifamily real estate		2,526		5,280		7,806		0		671		671
Commercial real estate
Owner occupied		16,880		23,856		40,736		4,732		6,580		11,312
Non-owner occupied		56,735		79,410		136,145		14,466		19,626		34,092
Commercial and industrial		3,510		6,634		10,144		974		99		1,073
Consumer		218		313		531
Construction and land		21,979		6,817		28,796		4,219		14,550		18,769
All other		10		334		344
Total	$	111,614	$	129,088	$	240,702	$	26,130	$	41,941	$	68,071

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.

As of ~~June~~September 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	$	376,261	$	2,992	$	10,897	$	–	$	390,150	$	372,551	$	2,973	$	11,016	$	0	$	386,540
Multifamily real estate		29,216		4,452		3,708		–		37,376		33,444		2,461		0		0		35,905
Commercial real estate:
Owner occupied		155,443		4,284		4,394		–		164,121		154,564		3,627		3,917		0		162,108
Non-owner occupied		288,198		9,597		5,346		–		303,141		296,137		9,487		2,854		0		308,478
Commercial and industrial		80,192		3,498		1,383		–		85,073		86,182		3,238		1,726		0		91,146
SBA PPP		110,690		–		–		–		110,690		113,478		0		0		0		113,478
Consumer		25,107		2		307		–		25,416		25,224		1		195		0		25,420
Construction and land		110,807		3,676		570		–		115,053		106,928		3,628		665		0		111,221
All other		33,922		–		60		–		33,982		34,125		0		60		0		34,185
Total	$	1,209,836	$	28,501	$	26,665	$	–	$	1,265,002	$	1,222,633	$	25,415	$	20,433	$	0	$	1,268,481

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	$	0	$	389,985
Multifamily real estate		28,103		4,855		3,726		-		36,684		28,103		4,855		3,726		0		36,684
Commercial real estate:
Owner occupied		152,695		5,123		6,400		-		164,218		152,695		5,123		6,400		0		164,218
Non-owner occupied		290,096		8,617		5,603		-		304,316		290,096		8,617		5,603		0		304,316
Commercial and industrial		101,085		2,693		1,301		-		105,079		101,085		2,693		1,301		0		105,079
Consumer		28,618		5		384		-		29,007		28,618		5		384		0		29,007
Construction and land		123,473		11,868		797		-		136,138		123,473		11,868		797		0		136,138
All other		29,698		97		73		-		29,868		29,698		97		73		0		29,868
Total	$	1,128,603	$	36,735	$	29,957	$	-	$	1,195,295	$	1,128,603	$	36,735	$	29,957	$	0	$	1,195,295

NOTE 4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

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

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

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

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 over the term of the lease. Short-term leases of equipment are recognized on a straight-line basis over the lease term. As of ~~June~~September 30, 2020, the weighted average remaining lease term for operating leases was ~~9.0~~8.8 years and the weighted average discount rate used in the measurement of operating lease liabilities was ~~0.94%~~0.85%.

Total lease expense for the ~~six~~nine months ended ~~June~~September 30, 2020, which is included in net occupancy and equipment expense, was $~~673,000~~1,012,000, consisting of $~~74,000~~113,000 short-term lease expense and $~~599,000~~899,000 of operating lease expense. For the three months ended ~~June~~September 30, 2020, lease expense was ~~$340,000,~~$339,000, consisting of ~~$36,000~~$39,000 short-term lease expense and ~~$304,000~~$300,000 of operating lease expense.

Total lease expense for the ~~six~~nine months ended ~~June~~September 30, 2019, which is included in net occupancy and equipment expense, was ~~$622,000,~~$922,000, consisting of ~~$48,000~~$75,000 short-term lease expense and ~~$574,000~~$847,000 of operating lease expense. For the three months ended ~~June~~September 30, 2019, lease expense was ~~$310,000,~~$300,000, consisting of ~~$20,000~~$27,000 short-term lease expense and ~~$290,000~~$273,000 of operating lease expense.

The following table summarizes the future minimum rental commitments under operating leases:

2020	$	556		$	279
2021		1,067			1,067
2022		1,050			1,050
2023		805			805
2024		680			680
2025 and Thereafter		3,494			3,494
Total undiscounted cash flows		7,652			7,375
Discounted cash flows		(422	)		(375	)
Total lease liability	$	7,230		$	7,000

NOTE 6 – STOCK COMPENSATION EXPENSE

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

On March 18, 2020, 74,025 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $8.50, the closing market price of Premier’s common stock on the grant date. These options vest in three equal annual installments ending on March 18, 2023. On March 20, 2019, 72,075 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $15.57, the closing market price of Premier’s common stock on the grant date. These options vest in three equal annual installments ending on March 20, 2022.

On June 9, 2020, 11,000 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan. The fair value of the stock at the time of the grant was $14.54 per share based upon the closing price of Premier’s stock on the date of grant and $160,000 of stock-based compensation was recorded as a result. On April 17, 2019, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan. The fair value of the stock at the time of the grant was $16.78 per share based upon the closing price of Premier’s stock on the date of grant and $126,000 of stock-based compensation was recorded as a result.

Compensation expense of ~~$226,000~~$253,000 was recorded for the first ~~six~~nine months of 2020 while ~~$209,000~~$256,000 was recorded for the first ~~six~~nine 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~~$155,000 at ~~June~~September 30, 2020. This unrecognized expense is expected to be recognized over the next 3229 months based on the vesting periods of the options.

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).

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

	Carrying		Fair Value Measurements at June 30, 2020 Using								Carrying		Fair Value Measurements at September 30, 2020 Using
	Amount		Level 1		Level 2		Level 3		Total		Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	124,647	$	124,647	$	-	$	-	$	124,647	$	75,559	$	75,559	$	0	$	0	$	75,559
Time deposits with other banks		598		–		601		–		601		598		0		599		0		599
Federal funds sold		8,365		8,365		–		–		8,365		5,859		5,859		0		0		5,859
Securities available for sale		416,700		-		416,700		-		416,700		436,580		0		436,580		0		436,580
Loans, net		1,250,614		-		-		1,251,278		1,251,278		1,255,708		0		0		1,260,773		1,260,773
Interest receivable		5,997		-		1,282		4,715		5,997		6,662		0		1,620		5,042		6,662

Financial liabilities
Deposits	$	1,608,151	$	1,243,622	$	365,688	$	-	$	1,609,310	$	1,585,389	$	1,240,462	$	347,536	$	0	$	1,587,998
Securities sold under agreements to repurchase		27,737		-		27,737		-		27,737		28,214		0		28,214		0		28,214
FHLB advance		2,995		-		3,003		-		3,003
Subordinated debt		5,455		-		5,354		-		5,354		5,465		0		5,364		0		5,364
Interest payable		638		7		631		-		638		510		8		502		0		510

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

	Carrying		Fair Value Measurements at December 31, 2019 Using								Carrying		Fair Value Measurements at December 31, 2019 Using
	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	$	0	$	0	$	88,556
Time deposits with other banks		598		–		599		–		599		598		0		599		0		599
Federal funds sold		5,902		5,902		–		–		5,902		5,902		5,902		0		0		5,902
Securities available for sale		390,754		–		390,754		–		390,754		390,754		0		390,754		0		390,754
Loans, net		1,181,753		–		–		1,172,755		1,172,755		1,181,753		0		0		1,172,575		1,172,575
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	$	1,068,399	$	424,886	$	–	$	1,493,285	$	1,495,753	$	1,070,610	$	424,886	$	0	$	1,495,496
Securities sold under agreements to repurchase		20,428		–		20,428		–		20,428		20,428		0		20,428		0		20,428
FHLB advance		6,375		–		6,352		–		6,352		6,375		0		6,406		0		6,406
Subordinated debt		5,436		–		5,527		–		5,527		5,436		0		5,527		0		5,527
Interest payable		912		15		897		–		912		912		15		897		0		912

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at June 30, 2020 Using:								Fair Value Measurements at September 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	$	316,143	$	-	$	316,143	$	-	$	340,787	$	0	$	340,787	$	0
U. S. agency CMO’s - residential		49,196		-		49,196		-		38,937		0		38,937		0
Total mortgage-backed securities of government sponsored agencies		365,339		-		365,339		-		379,724		0		379,724		0
U. S. government sponsored agency securities		9,546		-		9,546		-		6,153		0		6,153		0
Obligations of states and political subdivisions		39,724		-		39,724		-		44,871		0		44,871		0
Other securities		2,091		-		2,091		-		5,832		0		5,832		0
Total securities available for sale	$	416,700	$	-	$	416,700	$	-	$	436,580	$	0	$	436,580	$	0

			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	$	0	$	279,309	$	0
U. S. agency CMO’s		62,644		-		62,644		-		62,644		0		62,644		0
Total mortgage-backed securities of government sponsored agencies		341,953		-		341,953		-		341,953		0		341,953		0
U. S. government sponsored agency securities		30,730		-		30,730		-		30,730		0		30,730		0
Obligations of states and political subdivisions		16,017		-		16,017		-		16,017		0		16,017		0
Other securities		2,054		-		2,054		-		2,054		0		2,054		0
Total securities available for sale	$	390,754	$	-	$	390,754	$	-	$	390,754	$	0	$	390,754	$	0

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

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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

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

			Fair Value Measurements at June 30, 2020 Using								Fair Value Measurements at September 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	$	1,843	$	-	$	-	$	1,843
Commercial real estate
Non-owner occupied		3,151		-		-		3,151	$	1,209	$	0	$	0	$	1,209
Commercial and industrial		317		-		-		317		295		0		0		295
Total impaired loans	$	5,311	$	-	$	-	$	5,311	$	1,504	$	0	$	0	$	1,504

Other real estate owned:
Residential real estate	$	205	$	-	$	-	$	205	$	206	$	0	$	0	$	206
Multifamily real estate										9,503		0		0		9,503
Commercial real estate
Owner occupied		529		–		–		529		829		0		0		829
Multifamily real estate		9,503		-		-		9,503
Construction and land		551		-		-		551		551		0		0		551
Total OREO	$	10,788	$	-	$	-	$	10,788	$	11,089	$	0	$	0	$	11,089

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of ~~$8,070,000~~$2,255,000 at ~~June~~September 30, 2020 with a valuation allowance of ~~$2,759,000~~$751,000 and a recorded investment of $8,445,000 at December 31, 2019 with a valuation allowance of $3,102,000. The change resulted in a provision for loan losses of ~~$223,000~~$546,000 for the ~~six-months~~nine-months ended ~~June~~September 30, 2020, compared to a ~~$226,000~~$324,000 provision for loan losses for the ~~six-months~~nine-months ended ~~June~~September 30, 2019 and a ~~$41,000~~$323,000 in provision for loan losses for the three months ended ~~June~~September 30, 2020, compared to a ~~$416,000~~$98,000 provision for loan losses for the three months ended ~~June~~September 30, 2019. The detail of impaired loans by loan class is contained in Note 3 ~~above~~.above.

Other real estate owned measured at fair value less costs to sell had a net carrying amount of ~~$10,788,000~~$11,089,000 which is made up of the outstanding balance of ~~$12,435,000~~$12,835,000 net of a valuation allowance of ~~$1,647,000~~$1,746,000 at ~~June~~September 30, 2020. There were ~~$277,000~~$377,000 of write downs during the ~~six~~nine months ended ~~June~~September 30, 2020, compared to ~~$131,000~~$311,000 of write downs during the ~~six~~nine months ended ~~June~~September 30, 2019. For the three months ended ~~June~~September 30, 2020 there were ~~$277,000~~$100,000 of additional write downs compared to ~~$131,000~~$180,000 of additional write downs during the three months ended ~~June~~September 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.

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

	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

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 ~~six~~nine months ended ~~June~~September 30, 2020 was ~~$10,874,000,~~$16,498,000, or ~~$0.74~~$1.12 per diluted share, compared to net income of ~~$12,035,000,~~$18,302,000, or ~~$0.82~~$1.24 per diluted share, for the ~~six~~nine months ended ~~June~~September 30, 2019. The decrease in net income in the first ~~six~~nine months of 2020 is largely due to decreases in interest income and non-interest income, coupled with an increase in the provision for loan losses and an increase in non-interest expense. These changes that negatively affected net income more than offset decreases in interest expense and income tax expense. The provision for loan losses increased by ~~$700,000,~~$1,040,000, or ~~78.7%~~79.1%, in the first ~~six~~nine months of 2020, largely to provide for the ~~$1,650,000~~$2,112,000 of estimated additional credit risk in the loan portfolio related to consequences of the national economic shutdown aimed to moderate the spread of the novel corona virus of 2019 (“COVID-19”). The annualized returns on average common shareholders’ equity and average assets were approximately ~~8.72%~~8.73% and 1.19% for the ~~six~~nine months ended ~~June~~September 30, 2020 compared to ~~10.70%~~10.67% and ~~1.41%~~1.43% for the same period in 2019.

Net income for the three months ended ~~June~~September 30, 2020 was ~~$5,506,000,~~$5,624,000, or ~~$0.37~~$0.38 per diluted share, compared to net income of ~~$5,859,000,~~$6,267,000, or ~~$0.40~~$0.43 per diluted share for the three months ended ~~June~~September 30, 2019. The decrease in income in the ~~second~~third quarter of 2020 is largely due to ~~a decrease~~decreases in interest income ~~on investments~~ and ~~other liquid assets, a decrease in~~ non-interest income, coupled with an increase in the provision for loan losses and an increase in ~~provision for loan losses, all of which~~non-interest expense. These changes that negatively affected net income more than offset ~~a decrease~~decreases in interest expense and ~~an increase in interest~~ income ~~on loans.~~tax expense. 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%~~8.74% and ~~1.17%~~1.18% for the three months ended ~~June~~September 30, 2020 compared to ~~10.26%~~10.61% and ~~1.36%~~1.46% for the same period in 2019.

Net interest income for the ~~six~~nine months ended ~~June~~September 30, 2020 totaled ~~$33.151~~$50.125 million, a decrease of ~~$339,000,~~$143,000, or ~~1.0%~~0.3%, from the ~~$33.490~~$50.268 million of net interest income earned in the first ~~six~~nine months of 2019. Interest income in 2020 decreased by ~~$888,000,~~$1,705,000, or ~~2.3%~~3.0%, largely due to a ~~$539,000,~~$1,034,000, or ~~65.5%~~77.0%, decrease in interest income on interest-bearing bank balances and federal funds sold, and a ~~$346,000,~~$488,000, or ~~1.1%~~1.0%, decrease in interest income on loans. Interest income on interest-bearing bank balances and federal funds sold decreased in the first ~~six~~nine months of 2020 when compared to the same ~~six~~nine months of 2019 due to significant decreases in the earning yields on these balances, although the average balance increased from ~~$66.5~~$75.7 million during the first ~~six~~nine months of 2019 to ~~$91.8~~$91.2 million during the first ~~six~~nine 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~~nine months of 2019, the targeted rate ranged from ~~2.25%~~1.75% 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%~~0.45% during the first ~~six~~nine months of 2020, compared to an average yield of ~~2.50%~~2.37% during the same ~~six~~nine months of 2019.

The decrease in interest income on loans was the net result of a few opposing changes in loan interest income. During the first ~~six~~nine months of 2020, approximately ~~$543,000~~$894,000 of interest income was realized from deferred interest and discounts recognized on loans that paid-off or paid-down during the first ~~six~~nine months of 2020 compared to ~~$1,012,000~~$1,619,000 of interest income of this kind recognized during the first ~~six~~nine months of 2019. The loan payments in 2019 and 2020 included both non-accrual loans and performing loans that were once on non-accrual status. As a result of the $725,000 higher level of recognition in 2019, interest income on loans decreased by ~~$469,000.~~$488,000 in 2020 when compared to 2019. Otherwise, interest income on loans increased by ~~$123,000,~~$237,000, or ~~0.4%~~0.5%, in the first ~~six~~nine months of 2020. This increase includes approximately ~~$1,007,000~~$1,484,000 of interest income on loans acquired from the acquisition of the First National Bank of Jackson (“Jackson”) on October 25, 2019. Interest income on these loans is included in Premier’s loan interest income only from the date of acquisition in October 2019 and therefore no interest income from these loans is included in the first ~~six~~nine months of 2019. Excluding the loan interest income earned on the Jackson loans and the decrease in deferred interest and discounts recognized on loans, interest income on loans decreased by ~~$884,000,~~$1,247,000, or ~~2.8%~~2.5%, in the

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

first ~~six~~nine months of 2020 when compared to the same ~~six~~nine months of ~~2019,~~2019. The decrease is largely due to a decrease in the average yield on the remaining loan portfolio from ~~5.50%~~5.49% in the first ~~six~~nine months of 2019 to ~~5.21%~~5.13% in the first ~~six~~nine months of 2020. Premier’s participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) resulted in ~~$114,192,000~~$115,990,000 of new loans during the second ~~quarter~~and third quarters of 2020. These loans increased the ~~six-month~~nine-month average loans outstanding by approximately ~~$42,068,000~~$66,701,000 and increased interest income on loans during the first ~~six~~nine months of 2020 by approximately ~~$824,000.~~$1,980,000, which resulted in an average yield on these loans of 3.97%. Without Premier’s participation in the SBA PPP loan program, and excluding the average loans from the Jackson acquisition, average loans outstanding during the first ~~six~~nine months of 2020 would have decreased by ~~$15,920,000,~~$19,250,000, or ~~1.4%~~1.7%, when compared to the average loans outstanding during the first ~~six~~nine months of 2019.

Interest income on investment securities in the first ~~six~~nine months of 2020 ~~was relatively unchanged at $4,828,000~~decreased by $183,000, or 2.5%, to $6,999,000 compared to ~~$4,831,000~~$7,182,000 in the first ~~six~~nine months of 2019. While the average balance of investments increased by ~~$27.680~~$44.104 million in the first ~~six~~nine months of 2020 when compared to the same ~~six~~nine months of 2019, the average yield earned decreased to ~~2.48%~~2.32% in 2020 from 2.65% in 2019. The ~~net result was little change in investment interest income~~decrease in the ~~first six-month comparison~~average yield is largely due to calls of higher yielding securities during 2020 after the Federal Reserve Board of Governors reduced the targeted federal funds rate to a range of 0.00% to 0.25% on March 16, 2020 combined with a lower reinvestment rate on surplus funds from increases in deposits and monthly payments on the ~~first six months of 2019.~~

existing mortgage-backed security portfolio.

Partially offsetting the $1,705,000 decrease in interest income in the first ~~six~~nine months of 2020 was a ~~$549,000,~~$1,562,000, or ~~11.7%~~21.7%, decrease in interest expense, driven by a decrease in interest expense on deposits. Interest expense on deposits decreased by ~~$455,000,~~$1,401,000, or ~~10.5%~~20.9% in the first ~~half~~nine months of 2020, largely due to decreases in the average rate paid on certificates of deposit, savings deposits, and NOW and money market deposits during the first ~~six~~nine 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~~nine months of 2020 compared to the same period in 2019. Nevertheless, average interest-bearing deposit balances increased by ~~$68.6~~$72.5 million, or ~~6.5%~~6.9%, in the first ~~six~~nine months of 2020 compared to the same period of 2019, largely due to the acquisition of Jackson in the fourth quarter of 2019. The average interest rate paid on interest-bearing deposits decreased by 1322 basis points from ~~0.83%~~0.85% during the first ~~six~~nine months of 2019 to ~~0.70%~~0.63% during the first ~~six~~nine 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 1315 basis points and the average rate paid on savings deposits decreased by 1213 basis points in the first ~~six~~nine months of 2020 when compared to the first ~~six~~nine months of 2019. Even with these resulting decreases in the average rate paid on interest-bearing transaction based deposits, the average outstanding balance of interest-bearing transaction based deposits increased with ~~less than half~~just over a third of the increase coming from the acquisition of Jackson. NOW and money market deposit account balances averaged ~~$452.771~~$465.840 million in the first ~~six~~nine months of 2020, a ~~$48.125~~$60.596 million increase over the average outstanding balances during the first ~~six~~nine months of 2019. Approximately ~~$11.889~~$12.500 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019. The remaining ~~$36.236~~$48.096 million, or ~~9.0%~~11.9%, 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~~$278.180 million in the first ~~six~~nine months of 2020, a ~~$26.781~~$33.801 million increase over the average outstanding balances during the first ~~six~~nine months of 2019. Approximately ~~$19.951~~$20.049 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

The remaining ~~$6.8~~$13.752 million, or ~~2.8%~~5.6%, increase was due to other sources of deposit funds as noted above. Even with the increases in their average balances, interest expense savings on interest-bearing transaction deposit accounts totaled ~~$340,000~~$535,000 of the ~~$455,000~~$1,401,000 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 ~~$115,000~~$866,000 decrease in interest expense on deposit accounts came from a decrease in average outstanding certificates of deposits and a ~~minor~~ decrease in the average rates paid on those deposits in the first ~~six~~nine months of 2020 when compared to the first ~~six~~nine months of 2019. Certificates of deposit decreased on average by approximately ~~$6.335~~$21.897 million, or ~~1.6%~~5.4%. Yet, even when factoring in the approximately ~~$38.063~~$37.126 million of average certificate of deposit balances from the two Jackson branches included in the first ~~six~~nine months of 2020 but not part of Premier in the first ~~six~~nine months of 2019, average certificate of deposit balances in Premier’s other branch locations decreased by ~~$44.398~~$59.023 million or ~~11.0%~~14.6% in the first ~~six~~nine months of 2020, when compared to the same ~~six~~nine 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~~transaction oriented 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.

Also in response to decreases in short-term rates resulting from actions by the Federal Reserve Board of Governors, Premier’s average rate paid on certificates of deposit decreased by 20 basis points to 1.51% during the first nine months of 2020 compared to the 1.71% average rate paid on certificates of deposit during the first nine months of 2019.

Additional interest expense savings have been realized in the first ~~six~~nine months of 2020 from the reduction in outstanding Federal Home Loan Bank (“FHLB”) borrowings and other borrowings at the parent company. Interest expense on FHLB borrowings decreased by ~~$50,000,~~$87,000, or ~~48.5%~~57.6%, in the first ~~six~~nine months of 2020 when compared to the same ~~six~~nine months of 2019, largely due to the payment upon maturity of approximately ~~$5.4~~$8.8 million of FHLB borrowings since the end of ~~January 2019.~~December 2018. Average FHLB borrowings decreased by ~~$2.9~~$4.1 million in the first ~~six~~nine months of 2020 compared to the same ~~six~~nine months of 2019. ~~In addition,~~However, the average rate paid on FHLB borrowings in 2020 ~~decreased~~increased by 3917 basis points to ~~2.54%~~3.12% from the average rate paid during the first ~~six~~nine months of 2019. Interest on other borrowings at the parent company decreased by $31,000. This borrowing was fully repaid during the first half of 2019 and therefore no interest expense was recognized on this debt in 2020. Also contributing to the decrease in interest expense during the first ~~six~~nine months of 2020 was a ~~$31,000,~~$58,000, or ~~16.3%~~20.6%, decrease in interest expense on Premier’s subordinated debt due to a decrease in the variable interest rate paid in 2020 compared to the first ~~six~~nine months of 2019. The variable interest rate is indexed to the short-term three-month London Interbank Offered Rate (“LIBOR”), interest rate, which was lower in the first ~~six~~nine months of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors. Contrary to these interest expense savings, interest expense on short-term borrowings, primarily customer repurchase agreements, increased by ~~$18,000,~~$15,000, or ~~85.7%~~33.3%, in 2020 when compared to 2019. The additional interest expense was largely due to a ~~15 basis point~~$5.535 million, or 25.3%, increase in the ~~average rate paid on a 3.2% higher~~ average balance outstanding during the first ~~six~~nine months of ~~2020.~~

2020 compared to the same nine months of 2019. Approximately $2.555 million of this increase was from short-term FHLB advances that were borrowed and repaid within short time frames during 2020 as part of Premier’s interest rate risk management and investment purchase strategies.

Premier’s net interest margin during the first ~~six~~nine months of 2020 was ~~3.91%~~3.87% compared to ~~4.25%~~4.22% for the first ~~six~~nine months of 2019. A portion of the interest income on loans is the result of recognizing deferred interest income on loans that paid-off during the period. Excluding this income, Premier’s net interest margin during the first ~~six~~nine months of 2020 would have been ~~3.85%~~3.80% compared to ~~4.12%~~4.09% for the first ~~six~~nine months of 2019. As shown in the table below, Premier’s yield earned on federal funds sold and interest bearing bank balances decreased to ~~0.62%~~0.45% in the first ~~six~~nine months of 2020, from the ~~2.50%~~2.37% earned in the first ~~six~~nine months of 2019. The average yield earned on securities available for sale decreased to ~~2.48%~~2.32% in the first ~~six~~nine months of 2020, from the 2.65% earned during the first ~~six~~nine months of 2019. Similarly, the average yield earned on total loans outstanding decreased to ~~5.31%~~5.24% in 2020 from the 5.68% earned during the first ~~six~~nine 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~~nine months of 2020 has been a decrease of approximately 3744 basis points when compared to the first ~~six~~nine months of 2019.

Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased from ~~0.87%~~0.89% during the first ~~six~~nine months of 2019 to ~~0.72%~~0.65% in the first ~~six~~nine months of 2020. The average rates paid on interest-bearing deposits decreased from ~~0.83%~~0.85% in the first ~~six~~nine months toof 2019 to ~~0.70%~~0.63% during the first ~~six~~nine months of 2020, ~~largely~~ due to lower rates paid on all deposit products, including certificates of deposit, savings deposits and transaction based interest bearing deposits. Furthermore, the average rate paid on Premier’s variable rate subordinated debentures decreased from ~~7.08%~~6.94% in the first ~~six~~nine months of 2019 to ~~5.87%~~5.47% in the first ~~six~~nine 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~~The average rate paid on short-term borrowings, primarily customer repurchase agreements, ~~increased by 15 basis points to 0.34%~~remained consistent in the first ~~six~~nine months of 2020 with the first nine months of 2019, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston ~~decreased~~increased to ~~2.54%~~3.12% simply as ~~higher~~a result of lower cost borrowings ~~have been~~maturing sooner as borrowings were repaid upon maturity. The overall effect was to decrease Premier’s net interest spread by 3029 basis points to ~~3.68%~~3.65% and decrease Premier’s net interest margin by 3435 basis points to ~~3.91%~~3.87% in the first ~~six~~nine months of 2020 when compared to the first ~~six~~nine months of 2019.

Additional information on Premier’s net interest income for the ~~six~~nine months of 2020 and ~~six~~nine 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 %

PREMIER FINANCIAL BANCORP, INC.

AVERAGE CONSOLIDATED BALANCE SHEETS

AND NET INTEREST INCOME ANALYSIS

	Nine Months Ended Sept. 30, 2020								Nine Months Ended Sept. 30, 2019
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	91,183		$	308		0.45	%	$	75,694		$	1,342		2.37	%
Securities available for sale
Taxable		379,989			6,549		2.30			351,783			6,917		2.62
Tax-exempt		28,956			450		2.62			13,058			265		3.43
Total investment securities		408,945			6,999		2.32			364,841			7,182		2.65
Total loans		1,234,627			48,466		5.24			1,151,855			48,954		5.68
Total interest-earning assets		1,734,755			55,773		4.30	%		1,592,390			57,478		4.83	%
Allowance for loan losses		(13,621	)							(13,780	)
Cash and due from banks		22,996								22,935
Other assets		107,392								109,325
Total assets	$	1,851,522							$	1,710,870

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,126,376			5,301		0.63		$	1,053,876			6,702		0.85
Short-term borrowings		27,399			60		0.29			21,864			45		0.28
FHLB Advances		2,742			64		3.12			6,837			151		2.95
Other borrowings		-			-		0.00			949			31		4.37
Subordinated debt		5,449			223		5.47			5,416			281		6.94
Total interest-bearing liabilities		1,161,966			5,648		0.65	%		1,088,942			7,210		0.89	%
Non-interest bearing deposits		425,645								381,655
Other liabilities		11,808								11,479
Stockholders’ equity		252,103								228,794
Total liabilities and equity	$	1,851,522							$	1,710,870

Net interest earnings				$	50,125							$	50,268
Net interest spread							3.65	%							3.94	%
Net interest margin							3.87	%							4.22	%

~~46.~~

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Additional information on Premier’s net interest income for the ~~second quarter~~three months of 2020 and ~~second quarter~~three months 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 %

PREMIER FINANCIAL BANCORP, INC.

AVERAGE CONSOLIDATED BALANCE SHEETS

AND NET INTEREST INCOME ANALYSIS

	Three Months Ended Sept. 30, 2020								Three Months Ended Sept. 30, 2019
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	89,880		$	24		0.11	%	$	93,796		$	519		2.20	%
Securities available for sale
Taxable		400,074			1,992		1.99			346,444			2,266		2.62
Tax-exempt		35,532			179		2.55			12,600			85		3.42
Total investment securities		435,606			2,171		2.04			359,044			2,351		2.64
Total loans		1,266,807			16,296		5.12			1,146,275			16,438		5.69
Total interest-earning assets		1,792,293			18,491		4.12	%		1,599,115			19,308		4.80	%
Allowance for loan losses		(13,235	)							(13,837	)
Cash and due from banks		23,330								21,296
Other assets		107,554								108,150
Total assets	$	1,909,942							$	1,714,724

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,135,314			1,421		0.50		$	1,055,037			2,367		0.89
Short-term borrowings		35,075			20		0.23			21,490			24		0.44
FHLB Advances		1,377			12		3.47			6,354			48		3.00
Subordinated debentures		5,459			64		4.66			5,424			91		6.66
Total interest-bearing liabilities		1,177,225			1,517		0.51	%		1,088,305			2,530		0.92	%
Non-interest bearing deposits		464,185								378,757
Other liabilities		11,218								11,500
Stockholders’ equity		257,314								236,162
Total liabilities and equity	$	1,909,942							$	1,714,724

Net interest earnings				$	16,974							$	16,778
Net interest spread							3.61	%							3.88	%
Net interest margin							3.78	%							4.17	%

~~47.~~

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Net interest income for the quarter ended ~~June~~September 30, 2020 totaled ~~$16.809~~$16.974 million, up ~~$154,000,~~$196,000, or ~~0.9%~~1.2%, from the ~~$16.655~~$16.778 million of net interest income earned in the ~~second~~third quarter of 2019, as interest expense savings exceeded a decrease in interest income. Interest income ~~in 2020~~ decreased ~~$468,000,~~$817,000, or ~~2.4%~~4.2%, in the ~~second~~third quarter of 2020 when compared to the ~~second~~third quarter of 2019, largely due to a ~~$452,000,~~$495,000, or ~~94.6%~~95.4%, decrease in interest income on interest-bearing bank balances and federal funds sold, and a ~~$205,000,~~$180,000, or ~~8.5%~~7.7%, decrease in interest income on investment securities. ~~These~~In addition to these decreases, ~~were partially offset by a $189,000, or 1.2%, increase in~~ interest income on ~~loans.~~loans decreased by $142,000, or 0.9%, as more fully explained below. Interest income on interest-bearing bank balances and federal funds sold decreased in the ~~second~~third quarter of 2020 when compared to the same quarter of 2019 due to the significant decreases in the earning yields on these balances as discussed above. Although the average balance ~~increased~~for the quarter decreased slightly from ~~$81.7~~$93.8 million during the ~~second~~third quarter of 2019 to ~~$112.5~~$89.9 million during the ~~second~~third quarter of 2020, the 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%~~0.11% during the ~~second~~third quarter of 2020 compared to an average yield of ~~2.35%~~2.20% during the same quarter of 2019. Similarly, interest income on investment securities in the ~~second~~third quarter of 2020 decreased by ~~$205,000,~~$180,000, or ~~8.5%~~7.7%, when compared to the ~~second~~third quarter of 2019. While the average balance of investments increased by ~~$32.000~~$76.6 million in the ~~second~~third quarter of 2020 when compared to the same quarter of 2019, the average yield earned decreased to ~~2.23%~~2.04% in 2020 from ~~2.62%~~2.64% in 2019. The decrease in the average yield is largely due to calls of higher yielding securities during 2020 after the Federal Reserve Board of Governors reduced the targeted federal funds rate to a range of 0.00% to 0.25% on March 16, 2020 combined with a lower reinvestment rate on surplus funds from maturing investments, increases in deposits, and monthly payments on the existing mortgage-backed security portfolio.

~~Contrary to these two decreases, interest~~Interest income on loans ~~increased~~decreased by ~~$189,000,~~$142,000, or ~~1.2%~~0.9%, in the ~~second~~third quarter of 2020 when compared to the ~~second~~third quarter of 2019. During the ~~second~~third quarter of 2020, approximately ~~$468,000~~$351,000 of interest income was realized from deferred interest and discounts recognized on loans that paid-off or paid-down during the ~~second~~third quarter of 2020 compared to ~~$293,000~~$608,000 of interest income of this kind recognized during the ~~second~~third 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 $257,000 higher level of recognition in ~~2020,~~2019, interest income on loans ~~increased~~decreased by ~~$175,000.~~$142,000 in the third quarter of 2020 when compared to the same quarter of 2019. Otherwise, interest income on loans increased by ~~$14,000,~~$115,000, or ~~0.1%~~0.7%, in the ~~second~~third quarter of 2020. This increase includes approximately ~~$550,000~~$477,000 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~~third quarter of 2019. Excluding the loan interest income earned on the Jackson loans and the ~~increase~~decrease in deferred interest and discounts recognized on loans, interest income on loans decreased by ~~$536,000,~~$362,000, or ~~3.4%~~2.2%, in the ~~second~~third quarter of 2020 when compared to the same quarter of ~~2019,~~2019. The decrease is largely due to a decrease in the average yield on the remaining loan portfolio from ~~5.53%~~5.48% in the ~~second~~third quarter of 2019 to ~~5.09%~~4.98% in the ~~second~~third quarter of 2020. As stated above, Premier’s participation in the SBA’s PPP loan program resulted in ~~$114,192,000~~$115,990,000 of new loans during the second ~~quarter~~and third quarters of 2020. These loans increased the ~~second~~third quarter average loans outstanding by approximately ~~$84,136,000~~$115,432,000 and increased interest income on loans during the ~~second~~third quarter of 2020 by approximately ~~$824,000.~~$1,155,000, which resulted

51.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

in an average yield on these loans of 3.98%. 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~~third quarter of 2020 decreased by ~~$23,448,000,~~$25,791,000, or ~~2.0%~~2.3%, when compared to the average loans outstanding during the ~~second~~third quarter of 2019. This decrease in loans and, in particular, the types of loans ~~the~~that decreased, had an effect on the second ~~quarter~~and third quarter’s 2020 provision for loans losses as more fully explained below.

More than offsetting the decrease in interest income in the ~~second~~third quarter of 2020 was a ~~$622,000,~~$1,013,000, or ~~25.4%~~40.0%, decrease in interest expense, driven by a decrease in interest expense on deposits. Interest expense on deposits decreased by ~~$570,000,~~$946,000, or ~~24.9%~~40.0% in the ~~second~~third 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~~third 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~~third quarter of 2020 compared to the same quarter in 2019. Nevertheless, average interest-bearing deposit balances increased by ~~$69.2~~$80.3 million, or ~~6.5%~~7.6%, in the ~~second~~third 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 2539 basis points from ~~0.86%~~0.89% during the ~~second~~third quarter of 2019 to ~~0.61%~~0.50% during the ~~second~~third 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 the competition for bank deposit rates. As a result, the average interest rate paid on highly liquid NOW and money market deposits decreased by 1816 basis points and the average rate paid on savings deposits decreased by 1613 basis points in the ~~second~~third quarter of 2020 when compared to the ~~second~~third 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~~only approximatly one-fourth of the increase coming from the acquisition of Jackson. NOW and money market deposit account balances averaged ~~$474.014~~$491.694 million in the ~~second~~third quarter of 2020, ~~a $63.072~~an $85.273 million increase over the average outstanding balances during the ~~second~~third quarter of 2019. Approximately ~~$13.582~~$13.707 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019. The remaining ~~$49.490~~$71.566 million, or ~~12.0%~~17.6%, increase was largely due to other sources of deposit funds such as maturing certificates of deposit, direct stimulus payments from the U.S. Treasury to deposit account holders, ~~the initial retention of~~ proceeds byto borrowers from the SBA PPP loan ~~borrowers,~~program, and a lack of deposit withdrawals ~~resulting~~ from ~~normal~~pre COVID-19 virus consumer spending habits as ~~non-essential businesses~~certain sectors of the economy have been recovering slowly after they 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~~$290.659 million in the ~~second~~third quarter of 2020, a ~~$32.404~~$47.681 million increase over the average outstanding balances during the ~~second~~third quarter of 2019. Approximately ~~$19.941~~$20.242 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019. The remaining ~~$12.5~~$27.438 million, or ~~5.0%~~11.3%, 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~~$195,000 of the ~~$570,000~~$946,000 decrease in interest expense on interest-bearing deposits, largely as a result of rate reductions on NOW, money market and savings deposit accounts.

52.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

The remaining ~~$325,000~~$751,000 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~~third quarter of 2020 when compared to the ~~second~~third quarter of 2019. Certificates of deposit decreased on average by approximately ~~$26.377~~$52.677 million, or ~~6.5%~~13.0%. Yet, even when factoring in the approximately ~~$36.613~~$35.273 million of average certificate of deposit balances from the two Jackson branches included in the ~~second~~third quarter of 2020 but not part of Premier in the ~~second~~third quarter of 2019, average certificate of deposit balances in Premier’s other branch locations decreased by ~~$62.990~~$87.950 million or ~~15.5%~~21.7% in the ~~second~~third 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.

Additional interest expense savings have been realized in the ~~second~~third quarter of 2020 from the reduction in outstanding Federal Home Loan Bank (“FHLB”) ~~borrowings and other borrowings at the parent company.~~borrowings. Interest expense on FHLB borrowings decreased by ~~$25,000,~~$36,000, or ~~52.1%~~75.0%, in the ~~second~~third quarter of 2020 when compared to the same quarter of 2019, largely due to the payment upon maturity of approximately ~~$5.4~~$8.8 million of FHLB borrowings since the end of ~~January 2019.~~December 2018. The final $3.0 million outstanding FHLB borrowings were repaid upon maturity in August 2020. Average FHLB borrowings decreased by ~~$2.2~~$5.0 million in the ~~second~~third quarter of 2020 compared to the same quarter of 2019. ~~In addition, the~~The average rate paid on FHLB borrowings in 2020 ~~decreased~~increased by 7847 basis points to ~~2.18%~~3.47% from the average rate paid during the ~~second~~third quarter of ~~2019. Interest on other~~2019 simply as a result of lower cost borrowings ~~at the parent company decreased by $10,000. This borrowing was fully~~maturing sooner as borrowings were repaid ~~during the first half of 2019 and therefore no interest expense was recognized on this debt in 2020.~~upon maturity. Also contributing to the decrease in interest expense during the ~~second~~third quarter of 2020 was a ~~$20,000,~~$27,000, or ~~20.8%~~29.7%, decrease in interest expense on Premier’s subordinated debt due to a decrease in the variable interest rate paid in 2020 compared to the ~~second~~third 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~~third 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~~Interest expense on short-term borrowings, primarily customer repurchase agreements, ~~increased~~decreased by ~~$3,000,~~$4,000, or ~~25.0%~~16.7%, in 2020 when compared to 2019. The ~~additional~~decrease in interest expense was largely due to a ~~$3.715~~decrease in the average rate paid from 0.44% in the third quarter of 2019 to 0.23% in the third quarter of 2020, although on a $13.584 million higher average ~~balance outstanding~~balance. Approximately $6.087 million of this increase was from short-term FHLB advances that were borrowed and repaid within short time frames during the ~~second~~third quarter of 2020 as ~~the average~~part of Premier’s interest rate ~~paid increased by only 2 basis points.~~

risk management and investment purchase strategies.

Premier’s net interest margin during the ~~second~~third quarter of 2020 was ~~3.83%~~3.78% compared to ~~4.16%~~4.17% for the ~~second~~third 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~~third quarter of 2020 would have been ~~3.73%~~3.70% compared to ~~4.09%~~4.02% for the ~~second~~third 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%~~0.11% in the ~~second~~third quarter of 2020, from the ~~2.35%~~2.20% earned in the ~~second~~third quarter of 2019. The average yield earned on securities available for sale decreased to ~~2.23%~~2.04% in the ~~second~~third quarter of 2020, from the ~~2.62%~~2.64% earned during the ~~second~~third quarter of 2019. Similarly, the average yield earned on total loans outstanding decreased to ~~5.27%~~5.12% in 2020 from the ~~5.63%~~5.69% earned during the ~~second~~third 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

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intended to curb the spread of the COVID-19 virus. The Federal Reserve Board of Governors also dramatically reduced its the short-term interest rate policy as a means to stimulate the economy of the United States responsive to COVID-19 governmental actions. As new loans have been made with lower interest rates, some borrowers have requested interest rate lowering adjustments on their existing loans with Premier. Premier has been very selective in granting these loan interest rate concessions. Nevertheless, the impact of both on the average loan yield in the ~~second~~third quarter of 2020 has been a decrease of approximately 3657 basis points when compared to the ~~second~~third quarter of 2019.

Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased in the ~~second~~third quarter of 2020 from ~~0.90%~~0.92% during the ~~second~~third quarter of 2019 to ~~0.63%~~0.51% in the ~~second~~third quarter of 2020. The average rates paid on interest-bearing deposits decreased from ~~0.86%~~0.89% in the ~~second~~third quarter to 2019 to ~~0.61%~~0.50% during the ~~second~~third quarter of 2020, due to lower rates paid on savings deposits, transaction based interest bearing deposits and certificates of deposit. Furthermore, the average rate paid on Premier’s variable rate subordinated debentures decreased from ~~7.11%~~6.66% in the ~~second~~third quarter of 2019 to ~~5.61%~~4.66% in the ~~second~~third 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,~~Similarly, the average rate paid on short-term borrowings, primarily customer repurchase agreements, ~~increased~~decreased by 221 basis points to ~~0.24%~~0.23% in the ~~second~~third quarter of ~~2020, while the~~2020. The average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston ~~decreased~~was contrary to ~~2.18%~~this trend and increased to 3.47% in the third quarter of 2020 compared to only 3.00% in the third quarter of 2019 as the lower cost borrowings matured sooner than the higher cost borrowings ~~have been~~as each were repaid upon maturity. The overall effect was to decrease Premier’s net interest spread by 2527 basis points to ~~3.62%~~3.61% and decrease Premier’s net interest margin by 3339 basis points to ~~3.83%~~3.78% in the ~~second~~third quarter of 2020 when compared to the ~~second~~third quarter of 2019.

Non-interest income decreased by ~~$384,000,~~$658,000, or ~~8.5%~~9.4%, to ~~$4,139,000~~$6,336,000 for the first ~~six~~nine months of 2020 compared to the same period of 2019. Service charges on deposit accounts decreased by ~~$418,000,~~$774,000, or ~~18.9%,~~22.6% and other sources of non-interest income decreased by ~~$66,000,~~$125,000, or ~~13.2%~~16.3%, both largely ~~in the second quarter,~~ due to significant declines in economic activity resulting from government actions designed to curb the spread of the COVID-19 virus. Service charges on deposit accounts decreased largely due to a ~~$377,000,~~$717,000, or ~~22.6%~~26.8%, decrease in customer overdraft fees. Transaction based deposit account balances have increased significantly during the first ~~six~~nine months of 2020 compared to the same ~~six~~nine months of 2019. The lack of deposit withdrawals resulting from a decline in normal consumer spending habits as ~~non-essential businesses~~certain sectors of the economy have been recovering slowly after they 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~~nine months of 2020 include checkbook sales, wire transfer fees, ~~and~~ commissions on insurance premiums, and 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 (income from debit/credit cards, ATM fees and internet banking charges) increased by ~~$6,000,~~$90,000, or ~~0.3%~~3.4% and secondary market mortgage income increased by ~~$94,000,~~$151,000, or ~~165%~~98.1%. Electronic banking income increased ~~only marginally, as~~largely due to increases in income from debit card transaction activity ~~were largely~~partially offset by decreases in 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 income decreased by ~~$457,000,~~$274,000, or ~~19.5%~~11.1%, to ~~$1,890,000~~$2,197,000 for the ~~second~~third quarter of 2020 compared to the same three months of ~~2019, more than offsetting an increase in non-interest income realized during the first quarter of 2020.~~2019. Service charges on deposit accounts decreased by ~~$430,000,~~$356,000, or ~~38.3%~~29.3% and other sources of non-interest income decreased by ~~$89,000,~~$59,000, or ~~33.6%~~22.1%. Service charges on deposit accounts decreased largely due to a ~~$390,000,~~$332,000, or ~~46.1%~~34.4%, decrease in customer overdraft fees. Transaction based deposit account balances have increased significantly during the ~~second~~third 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~~certain sectors of the economy have been recovering slowly after they were required to close in an effort to help curb the spread of the COVID-19 virus has reduced transaction activity and the propensity of deposit customers to overdraft their accounts. Other sources of non-interest income that decreased in the ~~second~~third quarter of 2020 include checkbook sales, wire transfer fees, and 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,~~$84,000, or ~~1.1%~~9.4% and secondary market mortgage income increased by ~~$52,000,~~$57,000, or ~~158%~~58.8%. Electronic banking income increased ~~only marginally as increases~~largely due to an $81,000, or 11.0%, increase in income from debit card transaction activity ~~were largely offset by decreases non-customer ATM transaction fees.~~resulting from an increase in electronic payment transactions to facilitate customer purchases during the third quarter of 2020. Secondary market mortgage income increased, in part, due to the lower long-term interest rate environment resulting in an increase in home loan refinances as customers are taking advantage of lowering their long-term fixed home loan interest rate.

Non-interest expenses for the first ~~six~~nine months of 2020 totaled ~~$21,816,000,~~$32,971,000, or ~~2.41%~~2.38%, of average assets on an annualized basis, compared to ~~$21,634,000,~~$32,384,000, or ~~2.55%~~2.53%, of average assets for the same period of 2019. The ~~$182,000,~~$587,000, or ~~0.8%~~1.8%, increase in non-interest expenses in 2020 when compared to the first ~~six~~nine months of 2019 is largely due to the inclusion of the newly acquired Jackson branch locations, which added approximately ~~$513,000~~$753,000 of direct non-interest expense during the first ~~six~~nine months of 2020. Overall increases in operating costs include a ~~$49,000,~~$28,000, or ~~0.5%~~0.2%, increase in staff costs, a ~~$423,000,~~$138,000, or ~~15.1%~~2.6% increase in occupancy and equipment expenses, a $723,000, or 16.9%, increase in outside data processing costs, a ~~$28,000,~~$44,000, or ~~5.6%~~6.0%, increase in taxes not on income, a ~~$33,000,~~$51,000, or ~~7.3%~~7.6%, increase in the amortization of intangible assets, an $88,000, or 35.5%, increase in loan collection expenses, and an ~~$86,000~~$83,000 increase in data conversion expenses. The ~~$423,000~~$28,000 increase in ~~outside data processing~~staff 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~~includes $423,000 of additional staff costs ~~as Premier is migrating to a more robust data line network across its~~from the operations of the two newly acquired Jackson branch network. Upon full migration, data line expenses should return to near pre-migration levels. These increases in non-interest expense were partially offset by $175,000, or 72.0%, decrease in FDIC insurance expense, a $181,000, or 27.0%, decrease in professional fees, a $55,000, or 11.5%, decrease in expenses and writedowns on OREO properties, and an $18,000, or 0.5%, decrease in occupancy and equipment expenses. FDIC insurance expenselocations. Without these two new branches, staff costs decreased by $175,000 largely due to the utilization of FDIC based community bank assessment credits used to substantially offset the first and second quarter 2020 FDIC insurance premiums. Professional fees decreased by $181,000 largely due to decreases in legal fees and consulting expenses. Occupancy and equipment expenses decreased$395,000, or 2.5%, in the first ~~six~~nine months of 2020 ~~due, in part,~~compared to ~~higher expenses in~~ the ~~first six~~same nine months of 2019 partially due to reduced staffing hours at some of Premier’s other branch locations in response to lower customer activity at the branches believed to be in response to government mandated activity restrictions to help curb the spread of the COVID-19 virus, reductions in incentive compensation expense, and an ~~$185,000 building impairment charge~~increase in deferred loan costs related to the significant volume of PPP loans processed by Premier in the second quarter of ~~2019 related to a branch location that is in the process of being liquidated.~~

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~~and third quarters 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~~$723,000 increase in outside data processing costs includes a ~~decrease~~$186,000, or 19.6%, increase in ~~wages paid~~internet and mobile banking charges, as banking by ~~approximately $169,000~~electronic means

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becomes more and more popular among Premier’s customer base, and a $288,000 increase in ~~the second quarter of 2020 when compared~~data line costs as Premier is migrating to ~~the second quarter of 2019. This decrease was substantially offset by wages paid~~a more robust data line network across its branch network. Upon full migration, data line expenses should return 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~~near pre-migration levels. These increases in ~~Premier’s second quarter 2019 operations. These decreases in staff costs~~non-interest expense were partially offset by a ~~$116,000 increase~~$256,000, or 26.8%, decrease in ~~stock compensation~~professional fees, a $55,000, or 23.1%, decrease in FDIC insurance expense, a $119,000, or 17.2%, decrease in ~~the second quarter of 2020, largely due to~~expenses and writedowns on OREO properties, a ~~stock grant award given to President~~$55,000, or 23.1%, decrease in supplies expense, and ~~CEO Walker during the second quarter of 2020. A comparable stock grant~~a $97,000, or 3.4%, decrease 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.other operating expenses. Professional fees decreased by ~~$60,000~~$256,000 largely due to ~~a decrease~~decreases in legal ~~fees.~~fees and consulting expenses. FDIC insurance expense decreased by ~~$47,000,~~$55,000 in the first nine months of 2020, largely due to the utilization of FDIC based community bank assessment credits which were used to ~~partially~~substantially offset the first and second quarter 2020 FDIC insurance premiums.

Non-interest expense for the third quarter of 2020 totaled $11,155,000, or 2.32%, of average assets on an annualized basis, compared to $10,750,000, or 2.49%, of average assets for the same period of 2019. The $405,000, or 3.8%, increase in non-interest expenses in the third quarter of 2020 compared to the third quarter of 2019, include approximately $253,000 of direct non-interest expense from the operations of the acquired Jackson branch locations during the third quarter of 2020. Overall increases in operating costs include a $156,000, or 9.2%, increase in occupancy and equipment expenses, a $300,000, or 20.3.%, increase in outside data processing costs, a $120,000 increase in FDIC insurance premiums, a $53,000, or 79.1%, increase in loan collection expenses, and an $18,000, or 8.1%, increase in the amortization of intangible assets. The $300,000 increase in outside data processing costs includes a $61,000, or 18.1%, increase in internet and mobile banking charges, as banking by electronic means becomes more and more popular among Premier’s customer base, and a $166,000 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 $156,000 increase in occupancy and equipment expenses include $54,000 of direct expenses related to the operations of the two newly acquired Jackson branches, a $26,000 increase in building rental expense, a $17,000 increase in janitorial expenses, and a $56,000 increase in equipment expenses. The $120,000 increase in FDIC insurance premiums is a result of utilizing FDIC based community bank assessment credits to eliminate the third quarter 2019 premium. Such credit were fully utilized in the first half of 2020 an no credits were available to offset the third quarter 2020 premium. These increases were partially offset by a $21,000, or 0.4%, decrease in staff costs, a $75,000, or 26.2%, decrease in professional fees, a 64,000, or 30.0%, decrease in OREO expenses and writedowns, and a $98,000, decrease in other operating expenses when compared to the third quarter of 2019. The decrease in staff costs is largely due to reduced staffing hours at some of Premier’s other branch locations and reductions in incentive compensation expense which more than offset $147,000 of additional staff costs related to the two newly acquired Jackson branches, but were not included in Premier’s third quarter 2019 operations. Professional fees decreased by $75,000 largely due to a decrease in legal fees, partially offset by increases in accounting and audit fees and higher consulting expenses. The decrease in OREO expenses and writedowns includes $180,000 of property writedowns, net of $104,000 in realized gains on the sale of OREO, in the third quarter of 2019 compared to only $100,000 of property writedowns, net of $95,000 in realized gains on the sale of OREO, in the third quarter of 2020.

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Income tax expense was ~~$3,010,000~~$4,637,000 for the first ~~six~~nine months of 2020 compared to ~~$3,454,000~~$5,261,000 for the first ~~six~~nine months of 2019. The effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2020 was ~~21.7%~~21.9% compared to 22.3% for the same period in 2019. For the quarter ended ~~June~~September 30, 2020, income tax expense was ~~$1,524,000,~~$1,627,000, (a ~~21.7%~~22.4% effective tax rate), compared to ~~$1,772,000, (a 23.2%~~$1,807,000, (also a 22.4% effective tax rate), for the same period in 2019.

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

B. Financial Position

Total assets at ~~June~~September 30, 2020 increased by ~~$134.0~~$107.9 million to ~~$1.915~~$1.889 billion from the $1.781 billion at December 31, 2019. The increase in total assets since year-end is largely due to a ~~$35.5 million increase in interest bearing bank balances, a $25.9~~$45.8 million increase in securities available for sale ~~a $2.5 million increase in federal funds sold~~ and a ~~$69.7~~$73.2 million increase in total loans outstanding. Earning assets increased by ~~$133.4~~$105.3 million from the $1.662 billion at year-end 2019 to end the quarter at ~~$1.796~~$1.768 billion. Premier’s participation in the SBA’s PPP loan program generated ~~$114.2~~$116.0 million of new loans. Much of the loan proceeds were originally deposited with ~~the~~ Premier’s subsidiary banks, giving rise to an increase in commercial based deposit balances. Furthermore, government based economic stimulus checks to individuals have resulted in increases in retail based deposit balances.

Cash and due from banks at ~~June~~September 30, 2020 was ~~$23.7~~$23.5 million, a ~~$633,000~~$414,000 increase from the $23.1 million at December 31, 2019. Interest bearing bank balances ~~increased~~decreased by ~~$35.5~~$13.4 million, or ~~53.7%~~20.5%, from the $66.1 million reported at December 31, 2019. Federal funds sold ~~increased~~remained relatively unchanged, decreasing by ~~$2.5 million~~$43,000, or 0.7%, to ~~$8.4~~end the quarter at $5.9 million at ~~June~~September 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~~initially retained a higher level of these liquid assets at June 30, 2020 to be able to immediately satisfy deposit withdrawals.

However, as deposit balances have demonstrated some stability, Premier has partially reduced its high liquidity position in favor of increased interest earning yield from the purchase of investment securities.

Securities available for sale totaled ~~$416.7~~$436.6 million at ~~June~~September 30, 2020, a ~~$25.9~~$45.8 million increase from the $390.8 million at December 31, 2019. The increase was largely due to the purchase of ~~$91.6~~$155.1 million of investment securities and ~~an $8.9~~a $7.4 million increase in market value of securities available for sale. These increases more than offset ~~$73.8~~$115.0 million of proceeds from monthly principal payments on Premier’s mortgage backed securities portfolio and securities that matured or were called during the first ~~six~~nine months of 2020. Purchases exceeded maturities as Premier sought higher yields on surplus funds resulting from the growth in deposits and payoffs on non-SBA PPP loans. The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies. Any unrealized losses on securities within the portfolio at ~~June~~September 30, 2020 and December 31, 2019 are believed to be price changes resulting from changes in the long-term interest rate environment and management anticipates receiving all principal and interest on these investments as they come due. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

Total loans at ~~June~~September 30, 2020 were ~~$1.265~~$1.268 billion compared to $1.195 billion at December 31, 2019, an increase of approximately ~~$69.7~~$73.2 million, or ~~5.8%~~6.1%. The increase is largely due to Premier’s robust participation in the SBA’s PPP loan program in the second ~~quarter~~and third quarters of 2020, which generated ~~$114.2~~$116.0 million of new loans, or ~~9.0%~~9.1% of Premier’s outstanding loans at ~~June~~September 30, 2020. Without these loans, Premier’s loan portfolio would have decreased by approximately ~~$44.5~~$42.8 million, or ~~3.7%~~3.6%, during the first ~~six~~nine months of 2020, largely due to regular principal payments, loan payoffs, and transfers of loans to OREO upon foreclosure, partially offset by internal loan growth. Higher risk categories of loans such as construction and land loans decreased by approximately ~~$21.1~~$24.9 million, or ~~15.5%; consumer loans, decreased by $3.6 million,~~

18.3%; consumer loans decreased by $3.6 million, or 12.4%; and commercial and industrial loans decreased by ~~$23.5~~$13.9 million, or ~~22.4%~~13.3%. These decreases more than offset a ~~$692,000,~~$4.2 million, or ~~1.9%~~1.4%, increase in ~~multifamily residential~~non-owner occupied commercial real estate loans and a ~~$165,000~~$4.3 million, or 14.5%, increase in ~~residential real estate~~other loans. The ~~$4.1~~$4.3 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~~$11.3 million, or ~~22.4%~~30.8%, since year-end, primarily in construction and land loans, while loans categorized as Substandard decreased by ~~$3.3~~$9.5 million, or ~~11.0%~~31.8%, since year-end, largely in owner-occupied and non-owner occupied commercial real estate loans and multifamily real estate loans. Loan payoffs during the first ~~half~~nine of 2020 resulted in recognizing approximately ~~$249,000~~$397,000 of interest income deferred while the loans were on non-accrual status and ~~$294,000~~$497,000 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~~September 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~~September 30, 2020, Premier received origination fees from the SBA of approximately ~~$4.4~~$4.5 million which is being deferred and accreted into loan interest income over the life of the SBA PPP loan portfolio.

Premises and equipment decreased by ~~$549,000,~~$1,103,000, largely due to normal quarterly depreciation of fixed ~~assets.~~assets partially offset by new equipment purchases. Other intangible assets decreased by ~~$483,000,~~$724,000, due to the amortization of core deposit intangibles. Accrued interest receivable increased by ~~$1,298,000,~~$1,963,000, or ~~27.6%~~41.8%, largely due to approximately ~~$216,000~~$511,000 of accrued interest on the SBA PPP loans for which payments are deferred ~~for~~at the ~~first six months~~beginning of the loan and approximately ~~$1,557,000~~$1,829,000 of

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SEPTEMBER 30, 2019

remaining accrued interest on $119,392,000 of loans whereby Premier ~~has~~ granted full payment deferrals for a select period of ~~90 days~~time in accordance with regulatory guidance provided under the CARES Act during the COVID-19 based economic slowdown.

approximately $60,605,000 of these loans have been restored to full principal and interest payments and another $19,996,000 have been converted to an interest only required payment for a period of time.

Deposits totaled ~~$1.608~~$1.585 billion as of ~~June~~September 30, 2020, an ~~$112.4~~$89.6 million, or ~~7.5%~~6.0%, increase from the $1.496 billion in deposits at December 31, 2019. The overall increase in deposits is largely due to ~~a $107.4~~an $81.5 million, or ~~29.2%~~22.2%, increase in non-interest bearing deposits, a ~~$54.1~~$69.1 million, or ~~14.1%~~18.0%, increase in savings and money market deposits, and a ~~$13.8~~$19.3 million, or ~~4.3%~~6.0%, increase in interest bearing transaction deposits. Partially offsetting these increases, certificates of deposit (“CD”) balances decreased by ~~$62.9~~$80.2 million, or ~~14.8%~~18.9%. The decrease in certificate of deposit balances is not only primarily the result of discontinuing CD rate specials, but also a significant decrease in traditional CD rates, as management lowered offering rates in response to decreases in market short-term and long-term interest rates. As certificates of deposit mature, depositors are either seeking higher deposit rates from other competitive depository institutions or are transferring their balances to more liquid interest-bearing deposit accounts such as NOW, money market and savings deposits as a means to keep immediate access to their funds during the uncertainty of employment or economic conditions. Much of the SBA’s PPP loan program proceeds were originally deposited with Premier’s subsidiary banks, giving rise to an increase in commercial based deposit balances. Furthermore, government based economic stimulus checks to individuals have resulted in increases in retail based deposit balances. Repurchase agreements with corporate and public entity customers increased by ~~$7.3~~$7.8 million, or ~~35.8%~~38.1%. Long-term FHLB advances decreased by ~~$3.4~~$6.4 million to zero at September 30, 2020, due to payments at maturity on all of the remaining FHLB advances assumed by Premier as part of its acquisition of First Bank of Charleston. Subordinated debentures increased by ~~$19,000,~~$29,000, due to the regular amortization of the fair value adjustment. Other liabilities increased by ~~$4.2~~$1.2 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 two quarters of 2020 pretax income not due~~from December 31, 2019 to ~~be paid until July 15,~~September 30, 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.

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

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

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

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

	(In Thousands)
	2020			2019
Non-accrual loans	$	9,582		$	14,437
Accruing loans which are contractually past due 90 days or more		1,124			2,228
Accruing restructured loans		403			3,020
Total non-performing loans		11,109			19,685
Other real estate acquired through foreclosure OREO)		13,331			12,242
Total non-performing assets	$	24,440		$	31,927

Non-performing loans as a percentage of total loans		0.88	%		1.65	%

Non-performing assets as a percentage of total assets		1.29	%		1.79	%

Total non-performing loans have decreased by $8.6 million, or 43.6%, since year-end, largely due to a ~~$676,000~~$4,855,000 decrease in non-accrual loans, a ~~$1.2 million~~$1,104,000 decrease in accruing loans past due 90 days or more and ~~an $887,000~~a $2,617,000 decrease in accruing restructured loans. The decrease in accruing restructured loans was largely due to a full payoff received on a $1,800,000 performing loan and the placing of one loan on non-accrual status. This $856,000 increase in non-accrual loans has been more than offset by a decrease in non-accrual loans from moving ~~one loan~~loans to foreclosure and receiving payments on existing non-accrual loans. Total non-performing assets have decreased since year-end, largely due to the decrease in non-performing loans. This decrease was partially offset by a ~~$25,000~~$1,089,000 increase in other real estate owned acquired through foreclosure (“OREO”). Other real estate owned increased by $600,000 during the first quarter of 2020 largely due to the foreclosure on one commercial real estate property previously categorized as an impaired loan. The impaired loan had a specific allowance for loan losses allocation and, upon foreclosure, resulted in a $566,000 loan charge-off. Another foreclosure on an impaired multifamily real estate loan in the third quarter of 2020 resulted in a $3,708,000 reduction in non-accrual loans and a $1,500,000 increase in OREO. This ~~increase has~~impaired loan also had a specific allowance for loan losses allocation and, upon foreclosure, resulted in a $2,183,000 loan charge-off. These increases in OREO have been ~~nearly~~partially offset by sales and $377,000 of ~~several~~writedowns on OREO properties during the first ~~six~~nine months of 2020.

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

Gross charge-offs totaled ~~$935,000~~$3,369,000 during the first ~~six~~nine months of 2020, largely due to a third quarter 2020 foreclosure on one multifamily real estate property from a previously identifed impaired loan relationship that also resulted in a $2,183,000 loan charge-off, and 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. As these loans had previously been identified as impaired, specific allocations of the allowance for loan losses had been assigned to these loans. Primarily as a result of these two charge-offs, specific reserves allocated to impaired loans decreased from $3,102,000 at December 31, 2019 to $751,000 at September 30, 2020. 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 ~~six~~nine months of 2020 totaled ~~$191,000,~~$245,000, resulting in net charge-offs for the first ~~six~~nine months of 2020 of ~~$744,000.~~$3,124,000. This compares to ~~$855,000~~$1,242,000 of net charge-offs recorded in the first ~~six~~nine months of 2019.

The allowance for loan losses at ~~June~~September 30, 2020 was ~~1.14%~~1.01% of total loans compared to 1.13% at December 31, 2019. The ~~slight change~~decrease in the ratio is due to ~~opposing impacts to the ratio.~~two primary reasons. First, the allowance for loan losses has ~~increased~~decreased by ~~$846,000~~$769,000 in the first ~~six~~nine months of 2020, largely due to ~~$1.650 million~~the $3,124,000 of net charge-offs during the first nine months, as discussed above, which were only partially offset by $2,355,000 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.those months, as discussed in more detail below. This ~~increase~~decrease in the allowance, by itself, would have resulted in a ~~more significant increase~~decrease in the ratio to total loans. However, due to the ~~$69.7~~$73.2 million increase in total loans outstanding since December 31, 2019, largely due to ~~$114.2~~$116.0 million of SBA Paycheck Protection Program loans outstanding at ~~June~~September 30, 2020 that are fully guaranteed by the U.S. Treasury and, therefore, have no allowance for loan losses attributed to them, the allowance for loan losses ratio decreased further to ~~total loans remained steady~~1.01% at ~~1.14%.~~September 30, 2020. Excluding the SBA PPP loan portfolio, the allowance for loan losses at ~~June~~September 30, 2020 would have been ~~1.25%~~1.11% of the remaining loans outstanding.

During the first ~~six~~nine months of 2020, Premier recorded ~~$1,590,000~~$2,355,000 of provision for loan losses. This provision compares to ~~$890,000~~$1,315,000 of provision for loan losses recorded during the same ~~six~~nine months of 2019. The provision for loan losses recorded during the first ~~six~~nine months of 2020 was primarily to provide for an estimate of additional identified credit risk in the loan portfolio due to uncertainty related to future economic conditions resulting from government actions designed to curb the spread of the COVID-19 virus (“Potential COVID-19 Losses”). Premier added approximately ~~$1,650,000~~$2,110,000 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~~Furthermore, additional risk-weighting was given to loans in ~~those~~all industries where the borrower ~~has been granted~~currently remains on either an interest-only payment deferral period or a full principal and interest payment deferral ~~period.~~period as permitted under the CARES Act. 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 remaining additional provision expense not related to Potential COVID-19 Losses was a result of Premier’s normal analyses of the credit risk identified within the loan portfolio which were 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.

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~~and third quarters of 2020 include decreases in loans classified as Special Mention and Substandard and improvements in past due ~~ratios~~ratios.

During the third quarter of 2020, Premier recorded $765,000 of provision for loan losses. This provision compares to $425,000 of provision for loan losses recorded during the same quarter of 2019. The provision for loan losses recorded during the third quarter of 2020 was primarily to provide for an increase in the estimate of Potential COVID-19 Losses. Premier added approximately $460,000 to its qualitative credit risk analysis of the loan portfolio related to Potential COVID-19 Losses. Management also increased the estimate of Potential COVID-19 Losses on loans where the borrower remains on either an interest-only payment deferral period or a full principal and interest payment deferral period. The remaining additional provision expense not related to Potential COVID-19 Losses in the third quarter of 2020 was a result of Premier’s normal analyses of the credit risk identified within the loan portfolio. This includes additional risk related to increases in non-owner occupied loans and commercial and industrial loans outstanding during the third quarter, which were partially offset by reductions in estimated credit risk within the loan portfolio resulting from decreases during the third quarter of 2020 in ~~historical loss ratios.~~

loans classified as Special Mention and Substandard.

The provision for loan losses recorded during the first ~~six~~nine months of 2019 and the ~~second~~third quarter of 2019 were primarily to provide for new loans recorded and additional identified credit risk in Premier’s ~~impaired~~ multifamily residential real estate ~~loans and collectively impaired~~loan, owner occupied real estate loan, non-owner occupied real estate loan, and commercial and industrial loan ~~portfolios. The level of provision expense is determined under Premier’s internal analyses of evaluating credit risk.~~

portfolios partially offset by a decrease in the allowance for construction loans that transferred to repayment status.

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

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

C. Critical Accounting Policies

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

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

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 ~~$416.7~~$436.6 million of securities at fair value as of ~~June~~September 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.

~~60.~~

64.

Table of Contents

E. Capital

At ~~June~~September 30, 2020, total stockholders’ equity of ~~$254.0~~$256.2 million was ~~13.3%~~13.6% of total assets. This compares to total stockholders’ equity of $240.2 million, or 13.5% of total assets on December 31, 2019. The increase in stockholders’ equity was largely due to the ~~$10.9~~$16.5 million of net income for the first ~~six~~nine months of 2020 and a ~~$7.0~~$5.8 million, net of tax, increase in the market value of the investment portfolio available for sale. These increases in stockholders’ equity were partially offset by ~~$0.30~~$0.45 per share in cash dividends declared and paid during the first ~~six~~nine months of 2020.

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

Under interim guidance issued in June 2020, a community bank leverage ratio of Total Tier 1 capital to quarterly average assets must be at least 8.00% to be considered well capitalized. ~~Premier’s~~Premier's Tier 1 capital totaled ~~$200.1~~$203.8 million at ~~June~~ September 30, 2020, which represents a community bank leverage ratio of ~~10.9%~~11.0%. This ratio is down from the 11.3% Tier 1 leverage ratio and $192.7 million of Tier 1 capital at December 31, 2019. The decrease in the Tier 1 leverage ratio is largely due to the growth in quarterly average assets related largely in response to increases in funds from the growth in total deposits. Premier’s wholly owned subsidiary Citizens Deposit Bank adopted the CBLR simplification standard during the second quarter of 2020 as its Tier 1 leverage ratio was ~~8.2%~~8.17% at June 30, 2020. At September 30, 2020 Citizens Deposit Bank’s CBLR ratio improved to 8.5%. Premier’s other wholly owned subsidiary bank, Premier Bank, Inc. adopted the regulatory capital simplification rules in the first quarter and maintained a CBLR of ~~11.0%~~10.8% at ~~June~~ September 30, 2020, well in excess of the ~~9.00%~~8.00% required to be considered well capitalized under the prompt corrective action framework.

Book value per common share was ~~$17.31~~$17.46 at ~~June~~September 30, 2020 and $16.39 at December 31, 2019. The increase in book value per share was largely due to the ~~$0.74~~$1.12 per share earned during the first ~~six~~nine months, partially offset by the ~~$0.30~~$0.45 per share in quarterly cash dividends to common shareholders declared and paid during the first ~~six~~nine months of 2020. Also increasing Premier’s book value per share at ~~June~~September 30, 2020 was the ~~$7.0~~$5.8 million of other comprehensive income for the first ~~six~~nine months of 2020 related to the increase in the market value of investment securities available for sale, which increased book value by approximately ~~$0.48~~$0.40 per share.

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.

Item 1A.~~Item 1A.~~

Risk Factors

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

COVID-19 Virus

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

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

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management’s Discussion and Analysis	4143
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	6266
Item 4 – Controls and Procedures	6266
Part II - Other Information	6367
Item 1 – Legal Proceedings	6367
Item 1A – Risk Factors	6367
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	6367
Item 3 – Defaults Upon Senior Securities	6367
Item 4 – Mine Safety Disclosures	6367
Item 5 – Other Information	6367
Item 6 – Exhibits	6468
Signatures	6569

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

	(UNAUDITED)						(UNAUDITED)
	June 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
ASSETS
Cash and due from banks	$	23,724		$	23,091		$	23,505		$	23,091
Interest bearing bank balances		101,521			66,063			52,652			66,063
Federal funds sold		8,365			5,902			5,859			5,902
Cash and cash equivalents		133,610			95,056			82,016			95,056
Securities available for sale		416,700			390,754			436,580			390,754
Loans		1,265,002			1,195,295			1,268,481			1,195,295
Allowance for loan losses		(14,388	)		(13,542	)		(12,773	)		(13,542	)
Net loans		1,250,614			1,181,753			1,255,708			1,181,753
Federal Home Loan Bank stock, at cost		4,286			4,450			4,166			4,450
Premises and equipment, net		36,708			37,257			36,154			37,257
Other real estate owned, net		12,267			12,242			13,331			12,242
Interest receivable		5,997			4,699			6,662			4,699
Goodwill		47,640			47,640			47,640			47,640
Other intangible assets		4,893			5,376			4,652			5,376
Other assets		2,279			1,783			1,984			1,783
Total assets	$	1,914,994		$	1,781,010		$	1,888,893		$	1,781,010

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	475,241		$	367,870		$	449,361		$	367,870
Time deposits, $250,000 and over		71,523			100,638			66,170			100,638
Other interest bearing		1,061,387			1,027,245			1,069,858			1,027,245
Total deposits		1,608,151			1,495,753			1,585,389			1,495,753
Securities sold under agreements to repurchase		27,737			20,428			28,214			20,428
FHLB advances		2,995			6,375			0			6,375
Subordinated debt		5,455			5,436			5,465			5,436
Interest payable		638			912			510			912
Other liabilities		16,023			11,865			13,074			11,865
Total liabilities		1,660,999			1,540,769			1,632,652			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
Common stock, 0 par value; 30,000,000 shares authorized; 14,673,257 shares issued and outstanding at September 30, 2020, and 14,657,432 shares issued and outstanding at December 31, 2019								134,079			133,795
Retained earnings		109,216			102,743			112,639			102,743
Accumulated other comprehensive income (loss)		10,727			3,703			9,523			3,703
Total stockholders' equity		253,995			240,241			256,241			240,241
Total liabilities and stockholders' equity	$	1,914,994		$	1,781,010		$	1,888,893		$	1,781,010

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019		2020		2019		2020		2019			2020		2019
Interest income
Loans, including fees	$	16,416	$	16,227	$	32,170	$	32,516	$	16,296	$	16,438		$	48,466	$	48,954
Securities available for sale
Taxable		2,014		2,313		4,557		4,651		1,992		2,266			6,549		6,917
Tax-exempt		182		88		271		180		179		85			450		265
Federal funds sold and other		26		478		284		823		24		519			308		1,342
Total interest income		18,638		19,106		37,282		38,170		18,491		19,308			55,773		57,478

Interest expense
Deposits		1,715		2,285		3,880		4,335		1,421		2,367			5,301		6,702
Repurchase agreements and other		15		12		39		21		20		24			60		45
Other borrowings		-		10		-		31		0		0			0		31
FHLB advances		23		48		53		103		12		48			64		151
Subordinated debt		76		96		159		190		64		91			223		281
Total interest expense		1,829		2,451		4,131		4,680		1,517		2,530			5,648		7,210

Net interest income		16,809		16,655		33,151		33,490		16,974		16,778			50,125		50,268
Provision for loan losses		590		330		1,590		890		765		425			2,355		1,315
Net interest income after provision for loan losses		16,219		16,325		31,561		32,600		16,209		16,353			47,770		48,953

Non-interest income
Service charges on deposit accounts		692		1,122		1,798		2,216		860		1,216			2,658		3,432
Electronic banking income		937		927		1,755		1,749		975		891			2,730		2,640
Secondary market mortgage income		85		33		151		57		154		97			305		154
Other		176		265		435		501		208		267			643		768
		1,890		2,347		4,139		4,523		2,197		2,471			6,336		6,994
Non-interest expenses
Salaries and employee benefits		5,267		5,427		10,675		10,626		5,401		5,422			16,076		16,048
Occupancy and equipment expenses		1,798		1,877		3,523		3,541		1,856		1,700			5,379		5,241
Outside data processing		1,702		1,426		3,233		2,810		1,778		1,478			5,011		4,288
Professional fees		246		306		490		671		211		286			701		957
Taxes, other than payroll, property and income		252		261		527		499		251		235			778		734
Write-downs, expenses, sales of other real estate owned, net		354		228		422		477		149		213			571		690
Amortization of intangibles		241		223		483		450		241		223			724		673
FDIC insurance		72		119		68		243		115		(5	)		183		238
Other expenses		1,147		1,174		2,395		2,317		1,153		1,198			3,548		3,515
		11,079		11,041		21,816		21,634		11,155		10,750			32,971		32,384
Income before income taxes		7,030		7,631		13,884		15,489		7,251		8,074			21,135		23,563
Provision for income taxes		1,524		1,772		3,010		3,454		1,627		1,807			4,637		5,261

Net income	$	5,506	$	5,859	$	10,874	$	12,035	$	5,624	$	6,267		$	16,498	$	18,302

Net income per share:
Basic	$	0.38	$	0.40	$	0.74	$	0.82	$	0.38	$	0.43		$	1.12	$	1.25
Diluted		0.37		0.40		0.74		0.82		0.38		0.43			1.12		1.24

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
Three months ended September 30											Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, July 1, 2020											$	134,052	$	109,216		$	10,727		$	253,995
Net income		-		5,506			-		5,506			0		5,624			0			5,624
Other comprehensive income (loss)		-		-			1,579		1,579			0		0			(1,204	)		(1,204	)
Cash dividends paid ($0.15 per share)		-		(2,201	)		-		(2,201	)		0		(2,201	)		0			(2,201	)
Stock options exercised		-		-			-		-			0		0			0			0
Stock based compensation expense		186		-			-		186			27		0			0			27
Balances, June 30, 2020	$	134,052	$	109,216		$	10,727	$	253,995
Balances, September 30, 2020											$	134,079	$	112,639		$	9,523		$	256,241


Balances, April 1, 2019	$	133,338	$	91,314		$	575	$	225,227
Balances, July 1, 2019											$	133,597	$	94,978		$	3,727		$	232,302
Net income		-		5,859			-		5,859			0		6,267			0			6,267
Other comprehensive income (loss)		-		-			3,152		3,152			0		0			354			354
Cash dividends paid ($0.15 per share)		-		(2,195	)		-		(2,195	)		0		(2,198	)		0			(2,198	)
Stock options exercised		89		-			-		89			36		0			0			36
Stock based compensation expense		170		-			-		170			47		0			0			47
Balances, June 30, 2019	$	133,597	$	94,978		$	3,727	$	232,302
Balances, September 30, 2019											$	133,680	$	99,047		$	4,081		$	236,808

Six months ended June 30	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Nine months ended September 30												Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, January 1, 2020	$	133,795	$	102,743		$	3,703		$	240,241		$	133,795	$	102,743		$	3,703		$	240,241
Net income		-		10,874			-			10,874			0		16,498			0			16,498
Other comprehensive income		-		-			7,024			7,024			0		0			5,820			5,820
Cash dividends paid ($0.30 per share)		-		(4,401	)		-			(4,401	)
Cash dividends paid ($0.45 per share)													0		(6,602	)		0			(6,602	)
Stock options exercised		31		-			-			31			31		0			0			31
Stock based compensation expense		226		-			-			226			253		0			0			253
Balances, June 30, 2020	$	134,052	$	109,216		$	10,727		$	253,995
Balances, September 30, 2020												$	134,079	$	112,639		$	9,523		$	256,241


Balances, January 1, 2019	$	133,248	$	87,333		$	(3,852	)	$	216,729		$	133,248	$	87,333		$	(3,852	)	$	216,729
Net income		-		12,035			-			12,035			0		18,302			0			18,302
Other comprehensive income		-		-			7,579			7,579			0		0			7,933			7,933
Cash dividends paid ($0.30 per share)		-		(4,390	)		-			(4,390	)
Cash dividends paid ($0.45 per share)													0		(6,588	)		0			(6,588	)
Stock options exercised		140		-			-			140			176		0			0			176
Stock based compensation expense		209		-			-			209			256		0			0			256
Balances, June 30, 2019	$	133,597	$	94,978		$	3,727		$	232,302
Balances, September 30, 2019												$	133,680	$	99,047		$	4,081		$	236,808

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Due in one year or less	$	8,742	$	8,825	$	10,662	$	10,745
Due after one year through five years		26,090		26,718		24,978		25,574
Due after five years through ten years		9,437		9,716		13,323		13,741
Due after ten years		5,627		6,102		6,291		6,796
Mortgage-backed securities of government sponsored agencies		353,226		365,339		369,272		379,724
Total available for sale	$	403,122	$	416,700	$	424,526	$	436,580

	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	$	43,995	$	(248	)	$	–	$	–	$	43,995	$	(248	)	$	90,516	$	(1,001)	$	0	$	0	$	90,516	$	(1,001)
Other securities		241		(7	)		–		–		241		(7	)		4,235		(13)		0		0		4,235		(13)
Total temporarily impaired	$	44,236	$	(255	)	$	–	$	–	$	44,236	$	(255	)	$	94,751	$	(1,014)	$	0	$	0	$	94,751	$	(1,014)

	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	$	60	$	-	$	179	$	59	$	-
Commercial real estate
Owner occupied		2,166		1,759		-		2,149		1,718		-
Non-owner occupied		1,661		805		-		1,655		778		-
Commercial and industrial		509		–		-		509		0		-
Construction and land		344		303		-		321		270		-
		4,864		2,927		-		4,813		2,825		-
With an allowance recorded:
Multifamily real estate		4,088		3,708		1,865
Commercial real estate
Non-owner occupied		3,748		3,599		448		1,671		1,512		303
Commercial and industrial		781		763		446		769		743		448
		8,617		8,070		2,759		2,440		2,255		751
Total	$	13,481	$	10,997	$	2,759	$	7,253	$	5,080	$	751

		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	%