UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________

Commission file number 000-20908

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes      No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§230.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 
 
Accelerated filer 
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).      Yes     No .
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, no par value
 
PFBI
 
The Nasdaq Stock Market LLC

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

Common stock, no par value, – 14,673,257 shares outstanding at November 3, 2020



Table of Contents


PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2020
INDEX TO REPORT

Part I - Financial Information
 
Item 1 – Financial Statements
3
Item 2 – Management’s Discussion and Analysis
43
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
66
Item 4 – Controls and Procedures
66
Part II - Other Information
67
Item 1 – Legal Proceedings
67
Item 1A – Risk Factors
67
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
67
Item 3 – Defaults Upon Senior Securities
67
Item 4 – Mine Safety Disclosures
67
Item 5 – Other Information
67
Item 6 – Exhibits
68
Signatures
69


2.

Table of Contents


PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2020

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

Index to consolidated financial statements:

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



3.

Table of Contents


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2020 AND DECEMBER 31, 2019
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 
(UNAUDITED)
       
   
September 30,
2020
   
December 31,
2019
 
ASSETS
           
Cash and due from banks
 
$
23,505
   
$
23,091
 
Interest bearing bank balances
   
52,652
     
66,063
 
Federal funds sold
   
5,859
     
5,902
 
Cash and cash equivalents
   
82,016
     
95,056
 
Securities available for sale
   
436,580
     
390,754
 
Loans
   
1,268,481
     
1,195,295
 
Allowance for loan losses
   
(12,773
)
   
(13,542
)
Net loans
   
1,255,708
     
1,181,753
 
Federal Home Loan Bank stock, at cost
   
4,166
     
4,450
 
Premises and equipment, net
   
36,154
     
37,257
 
Other real estate owned, net
   
13,331
     
12,242
 
Interest receivable
   
6,662
     
4,699
 
Goodwill
   
47,640
     
47,640
 
Other intangible assets
   
4,652
     
5,376
 
Other assets
   
1,984
     
1,783
 
Total assets
 
$
1,888,893
   
$
1,781,010
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Non-interest bearing
 
$
449,361
   
$
367,870
 
Time deposits, $250,000 and over
   
66,170
     
100,638
 
Other interest bearing
   
1,069,858
     
1,027,245
 
Total deposits
   
1,585,389
     
1,495,753
 
Securities sold under agreements to repurchase
   
28,214
     
20,428
 
FHLB advances
   
-
     
6,375
 
Subordinated debt
   
5,465
     
5,436
 
Interest payable
   
510
     
912
 
Other liabilities
   
13,074
     
11,865
 
Total liabilities
   
1,632,652
     
1,540,769
 
                 
Stockholders' equity
               
Common stock, no 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
   
112,639
     
102,743
 
Accumulated other comprehensive income (loss)
   
9,523
     
3,703
 
Total stockholders' equity
   
256,241
     
240,241
 
Total liabilities and stockholders' equity
 
$
1,888,893
   
$
1,781,010
 


4.

Table of Contents


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Interest income
                       
Loans, including fees
 
$
16,296
   
$
16,438
   
$
48,466
   
$
48,954
 
Securities available for sale
                               
Taxable
   
1,992
     
2,266
     
6,549
     
6,917
 
Tax-exempt
   
179
     
85
     
450
     
265
 
Federal funds sold and other
   
24
     
519
     
308
     
1,342
 
Total interest income
   
18,491
     
19,308
     
55,773
     
57,478
 
                                 
Interest expense
                               
Deposits
   
1,421
     
2,367
     
5,301
     
6,702
 
Repurchase agreements and other
   
20
     
24
     
60
     
45
 
Other borrowings
   
-
     
-
     
-
     
31
 
FHLB advances
   
12
     
48
     
64
     
151
 
Subordinated debt
   
64
     
91
     
223
     
281
 
Total interest expense
   
1,517
     
2,530
     
5,648
     
7,210
 
                                 
Net interest income
   
16,974
     
16,778
     
50,125
     
50,268
 
Provision for loan losses
   
765
     
425
     
2,355
     
1,315
 
Net interest income after provision for loan losses
   
16,209
     
16,353
     
47,770
     
48,953
 
                                 
Non-interest income
                               
Service charges on deposit accounts
   
860
     
1,216
     
2,658
     
3,432
 
Electronic banking income
   
975
     
891
     
2,730
     
2,640
 
Secondary market mortgage income
   
154
     
97
     
305
     
154
 
Other
   
208
     
267
     
643
     
768
 
     
2,197
     
2,471
     
6,336
     
6,994
 
Non-interest expenses
                               
Salaries and employee benefits
   
5,401
     
5,422
     
16,076
     
16,048
 
Occupancy and equipment expenses
   
1,856
     
1,700
     
5,379
     
5,241
 
Outside data processing
   
1,778
     
1,478
     
5,011
     
4,288
 
Professional fees
   
211
     
286
     
701
     
957
 
Taxes, other than payroll, property and income
   
251
     
235
     
778
     
734
 
Write-downs, expenses, sales of other real estate owned, net
   
149
     
213
     
571
     
690
 
Amortization of intangibles
   
241
     
223
     
724
     
673
 
FDIC insurance
   
115
     
(5
)
   
183
     
238
 
Other expenses
   
1,153
     
1,198
     
3,548
     
3,515
 
     
11,155
     
10,750
     
32,971
     
32,384
 
Income before income taxes
   
7,251
     
8,074
     
21,135
     
23,563
 
Provision for income taxes
   
1,627
     
1,807
     
4,637
     
5,261
 
                                 
Net income
 
$
5,624
   
$
6,267
   
$
16,498
   
$
18,302
 
                                 
Net income per share:
                               
Basic
 
$
0.38
   
$
0.43
   
$
1.12
   
$
1.25
 
Diluted
   
0.38
     
0.43
     
1.12
     
1.24
 

5.

Table of Contents


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED 2020 AND 2019
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Net income
 
$
5,624
   
$
6,267
   
$
16,498
   
$
18,302
 
                                 
Other comprehensive income (loss):
                               
Unrealized gains (losses) arising during the period
   
(1,524
)
   
450
     
7,366
     
10,042
 
Reclassification of realized amount
   
-
     
-
     
-
     
-
 
Net change in unrealized gain (loss) on securities
   
(1,524
)
   
450
     
7,366
     
10,042
 
Less tax impact
   
320
     
(96
)
   
(1,546
)
   
(2,109
)
Other comprehensive income (loss)
   
(1,204
)
   
354
     
5,820
     
7,933
 
                                 
Comprehensive income
 
$
4,420
   
$
6,621
   
$
22,318
   
$
26,235
 


6.

Table of Contents


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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
   
-
     
5,624
     
-
     
5,624
 
Other comprehensive income (loss)
   
-
     
-
     
(1,204
)
   
(1,204
)
Cash dividends paid ($0.15 per share)
   
-
     
(2,201
)
   
-
     
(2,201
)
Stock options exercised
   
-
     
-
     
-
     
-
 
Stock based compensation expense
   
27
     
-
     
-
     
27
 
Balances, September 30, 2020
 
$
134,079
   
$
112,639
   
$
9,523
   
$
256,241
 
                                 
                                 
Balances, July 1, 2019
 
$
133,597
   
$
94,978
   
$
3,727
   
$
232,302
 
Net income
   
-
     
6,267
     
-
     
6,267
 
Other comprehensive income (loss)
   
-
     
-
     
354
     
354
 
Cash dividends paid ($0.15 per share)
   
-
     
(2,198
)
   
-
     
(2,198
)
Stock options exercised
   
36
     
-
     
-
     
36
 
Stock based compensation expense
   
47
     
-
     
-
     
47
 
Balances, September 30, 2019
 
$
133,680
   
$
99,047
   
$
4,081
   
$
236,808
 

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
 
Net income
   
-
     
16,498
     
-
     
16,498
 
Other comprehensive income
   
-
     
-
     
5,820
     
5,820
 
Cash dividends paid ($0.45 per share)
   
-
     
(6,602
)
   
-
     
(6,602
)
Stock options exercised
   
31
     
-
     
-
     
31
 
Stock based compensation expense
   
253
     
-
     
-
     
253
 
Balances, September 30, 2020
 
$
134,079
   
$
112,639
   
$
9,523
   
$
256,241
 
                                 
                                 
Balances, January 1, 2019
 
$
133,248
   
$
87,333
   
$
(3,852
)
 
$
216,729
 
Net income
   
-
     
18,302
     
-
     
18,302
 
Other comprehensive income
   
-
     
-
     
7,933
     
7,933
 
Cash dividends paid ($0.45 per share)
   
-
     
(6,588
)
   
-
     
(6,588
)
Stock options exercised
   
176
     
-
     
-
     
176
 
Stock based compensation expense
   
256
     
-
     
-
     
256
 
Balances, September 30, 2019
 
$
133,680
   
$
99,047
   
$
4,081
   
$
236,808
 



7.

Table of Contents


PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED, DOLLARS IN THOUSANDS)

 
2020
   
2019
 
Cash flows from operating activities
           
Net income
 
$
16,498
   
$
18,302
 
Adjustments to reconcile net income to net cash from
operating activities
               
Depreciation
   
1,522
     
1,624
 
Provision for loan losses
   
2,355
     
1,315
 
Amortization, net of accretion
   
1,439
     
89
 
Writedowns of other real estate owned, net
   
268
     
176
 
Stock compensation expense
   
253
     
256
 
Changes in:
               
Interest receivable
   
(1,963
)
   
(120
)
Other assets
   
(201
)
   
(1,158
)
Interest payable
   
(402
)
   
114
 
Other liabilities
   
(185
)
   
812
 
Net cash from operating activities
   
19,584
     
21,410
 
                 
Cash flows from investing activities
               
Net change in bank owned CD's
   
-
     
496
 
Purchases of securities available for sale
   
(155,116
)
   
(39,961
)
Proceeds from maturities and calls of securities available for sale
   
115,029
     
67,203
 
Purchase of FHLB stock
   
-
     
(10
)
Redemption of FHLB stock
   
284
     
100
 
Net change in loans
   
(78,012
)
   
7,394
 
Purchases of premises and equipment, net
   
(571
)
   
(1,211
)
Proceeds from sales of other real estate acquired through foreclosure
   
1,362
     
1,254
 
Net cash from (used in) investing activities
   
(117,024
)
   
35,265
 
                 
Cash flows from financing activities
               
Net change in deposits
   
89,585
     
(3,029
)
Net change in agreements to repurchase securities
   
7,786
     
(341
)
Repayment of other borrowed funds
   
-
     
(2,500
)
Repayment of FHLB advances
   
(6,400
)
   
(2,500
)
Proceeds from stock option exercises
   
31
     
176
 
Common stock dividends paid
   
(6,602
)
   
(6,588
)
Net cash from financing activities
   
84,400
     
(14,782
)
                 
Net change in cash and cash equivalents
   
(13,040
)
   
41,893
 
                 
Cash and cash equivalents at beginning of period
   
95,056
     
80,775
 
                 
Cash and cash equivalents at end of period
 
$
82,016
   
$
122,668
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid during period for interest
 
$
6,050
   
$
7,096
 
Cash paid during period for income taxes
   
3,980
     
5,090
 
Loans transferred to real estate acquired through foreclosure
   
2,719
     
1,330
 
Operating right-of-use asset resulting from lease liability
   
(152
)
   
7,412
 

8.

Table of Contents


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


NOTE 1 - BASIS OF PRESENTATION

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

     
Year
 
 Total
 
September 30, 2020
 Net Income
Subsidiary
 
Location
 
Acquired
 
Assets
 
Qtr
 
YTD
Citizens Deposit Bank & Trust
 
Vanceburg, Kentucky
 
1991
 
$
568,963
 
$
1,548
 
$
4,569
Premier Bank, Inc.
 
Huntington, West Virginia
 
1998
   
1,312,288
   
4,481
   
13,455
Parent and Intercompany Eliminations
           
7,642
   
(405)
   
(1,526)
Consolidated Total
         
$
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 analyses performed in the 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.


9.

Table of Contents


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


NOTE  1 - BASIS OF PRESENTATION - continued

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.  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 if the bank agrees.



10.

Table of Contents


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


NOTE  1 - BASIS OF PRESENTATION - continued

Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.  This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss” or “CECL”.  The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts, in which organizations will now use forward-looking information to enhance their credit loss estimates on these assets.  The largest impact will be on the allowance for loan and lease losses.  The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method.  The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.  Upon adoption, an initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard. However, due to the complexity of the calculation and evolving guidance on adoption management has not yet determined the one-time adjustment. On July 17, 2019, the Financial Accounting Standards Board (“FASB”) voted for a proposal to extend the implementation deadline for smaller reporting companies like Premier.  The proposal extends the implementation deadline for Premier for a period of three-years until January 1, 2023.  The proposal was approved on October 16, 2019.



11.

Table of Contents

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


NOTE 2 - SECURITIES

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

2020
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
331,400
   
$
10,388
   
$
(1,001
)
 
$
340,787
 
U. S. sponsored agency CMO’s - residential
   
37,872
     
1,065
     
     
38,937
 
Total mortgage-backed securities of government sponsored agencies
   
369,272
     
11,453
     
(1,001
)
   
379,724
 
U. S. government sponsored
agency securities
   
5,983
     
170
     
     
6,153
 
Obligations of states and political subdivisions
   
43,554
     
1,317
     
     
44,871
 
Other securities
   
5,717
     
128
     
(13
)
   
5,832
 
Total available for sale
 
$
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
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. sponsored agency MBS - residential
 
$
276,013
   
$
3,618
   
$
(322
)
 
$
279,309
 
U. S. sponsored agency CMO’s - residential
   
61,989
     
768
     
(113
)
   
62,644
 
Total mortgage-backed securities of government sponsored agencies
   
338,002
     
4,386
     
(435
)
   
341,953
 
U. S. government sponsored agency securities
   
30,538
     
280
     
(88
)
   
30,730
 
Obligations of states and political subdivisions
   
15,570
     
453
     
(6
)
   
16,017
 
Other securities
   
1,956
     
98
     
     
2,054
 
Total available for sale
 
$
386,066
   
$
5,217
   
$
(529
)
 
$
390,754
 


12.

Table of Contents

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


NOTE  2 - SECURITIES - continued

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

 
Amortized
Cost
   
Fair
Value
 
Available for sale
           
Due in one year or less
 
$
10,662
   
$
10,745
 
Due after one year through five years
   
24,978
     
25,574
 
Due after five years through ten years
   
13,323
     
13,741
 
Due after ten years
   
6,291
     
6,796
 
Mortgage-backed securities of government sponsored agencies
   
369,272
     
379,724
 
Total available for sale
 
$
424,526
   
$
436,580
 

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

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

 
Less than 12 Months
 
12 Months or More
 
Total
Description of Securities
 
 Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
                                     
U.S government sponsored agency MBS – residential
 
$
90,516
 
$
(1,001)
 
$
 
$
 
$
90,516
 
$
(1,001)
Other securities
   
4,235
   
(13)
   
   
   
4,235
   
(13)
Total temporarily impaired
 
$
94,751
 
$
(1,014)
 
$
 
$
 
$
94,751
 
$
(1,014)


13.

Table of Contents

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


NOTE  2 - SECURITIES - continued

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

 
Less than 12 Months
 
12 Months or More
 
Total
Description of Securities
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
 
Fair Value
 
Unrealized
Loss
                                     
U.S government sponsored agency securities
 
$
10,851
 
$
(84)
 
$
3,957
 
$
(4)
 
$
14,808
 
$
(88)
U.S government sponsored agency MBS – residential
   
50,945
   
(199)
   
12,930
   
(123)
   
63,875
   
(322)
U.S government sponsored agency CMO’s – residential
   
4,376
   
(3)
   
8,815
   
(110)
   
13,191
   
(113)
Obligations of states and political subdivisions
   
1,866
   
(6)
   
   
   
1,866
   
(6)
Total temporarily impaired
 
$
68,038
 
$
(292)
 
$
25,702
 
$
(237)
 
$
93,740
 
$
(529)

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



14.

Table of Contents


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


NOTE  3 - LOANS

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

 
2020
   
2019
 
Residential real estate
 
$
386,540
   
$
389,985
 
Multifamily real estate
   
35,905
     
36,684
 
Commercial real estate:
               
Owner occupied
   
162,108
     
164,218
 
Non-owner occupied
   
308,478
     
304,316
 
Commercial and industrial
   
91,146
     
105,079
 
SBA PPP
   
113,478
     
 
Consumer
   
25,420
     
29,007
 
Construction and land
   
111,221
     
136,138
 
All other
   
34,185
     
29,868
 
   
$
1,268,481
   
$
1,195,295
 


15.

Table of Contents

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


NOTE  3 - LOANS - continued

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

Loan Class
 
Balance
December 31, 2019
   
Provision (credit)
for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
September 30, 2020
 
                               
Residential real estate
 
$
1,711
   
$
262
   
$
(95
)
 
$
11
   
$
1,889
 
Multifamily real estate
   
1,954
     
494
     
(2,183
)
   
     
265
 
Commercial real estate:
                                       
Owner occupied
   
2,441
     
637
     
(566
)
   
7
     
2,519
 
Non-owner occupied
   
3,184
     
1,562
     
(226
)
   
3
     
4,523
 
Commercial and industrial
   
1,767
     
(162
)
   
(5
)
   
45
     
1,645
 
Consumer
   
281
     
66
     
(155
)
   
47
     
239
 
Construction and land
   
1,724
     
(615
)
   
(4
)
   
55
     
1,160
 
All other
   
480
     
111
     
(135
)
   
77
     
533
 
Total
 
$
13,542
   
$
2,355
   
$
(3,369
)
 
$
245
   
$
12,773
 

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

Loan Class
 
Balance
December 31, 2018
   
Provision (credit)
for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
September 30, 2019
 
                               
Residential real estate
 
$
1,808
   
$
165
   
$
(121
)
 
$
34
   
$
1,886
 
Multifamily real estate
   
1,649
     
143
     
     
7
     
1,799
 
Commercial real estate:
                                       
Owner occupied
   
2,120
     
700
     
(533
)
   
5
     
2,292
 
Non-owner occupied
   
3,058
     
334
     
(57
)
   
2
     
3,337
 
Commercial and industrial
   
1,897
     
191
     
(393
)
   
48
     
1,743
 
Consumer
   
351
     
125
     
(175
)
   
34
     
335
 
Construction and land
   
2,255
     
(349
)
   
(14
)
   
     
1,892
 
All other
   
600
     
6
     
(171
)
   
92
     
527
 
Total
 
$
13,738
   
$
1,315
   
$
(1,464
)
 
$
222
   
$
13,811
 


16.

Table of Contents

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


NOTE  3 - LOANS - continued

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

Loan Class
 
Balance
June 30, 2020
   
Provision (credit)
for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
September 30, 2020
 
                               
Residential real estate
 
$
1,915
   
$
(26
)
 
$
(1
)
 
$
1
   
$
1,889
 
Multifamily real estate
   
2,115
     
333
     
(2,183
)
   
     
265
 
Commercial real estate:
                                       
Owner occupied
   
2,470
     
47
     
     
2
     
2,519
 
Non-owner occupied
   
4,310
     
362
     
(149
)
   
     
4,523
 
Commercial and industrial
   
1,554
     
85
     
     
6
     
1,645
 
Consumer
   
230
     
52
     
(56
)
   
13
     
239
 
Construction and land
   
1,233
     
(86
)
   
(4
)
   
17
     
1,160
 
All other
   
561
     
(2
)
   
(41
)
   
15
     
533
 
Total
 
$
14,388
   
$
765
   
$
(2,434
)
 
$
54
   
$
12,773
 

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

Loan Class
 
Balance
June 30, 2019
   
Provision (credit)
for loan losses
   
Loans
charged-off
   
Recoveries
   
Balance
September 30, 2019
 
                               
Residential real estate
 
$
1,880
   
$
61
   
$
(62
)
 
$
7
   
$
1,886
 
Multifamily real estate
   
1,716
     
78
     
     
5
     
1,799
 
Commercial real estate:
                                       
Owner occupied
   
1,790
     
500
     
     
2
     
2,292
 
Non-owner occupied
   
3,280
     
57
     
     
     
3,337
 
Commercial and industrial
   
2,000
     
13
     
(280
)
   
10
     
1,743
 
Consumer
   
368
     
(4
)
   
(35
)
   
6
     
335
 
Construction and land
   
2,140
     
(247
)
   
(1
)
   
     
1,892
 
All other
   
599
     
(33
)
   
(74
)
   
35
     
527
 
Total
 
$
13,773
   
$
425
   
$
(452
)
 
$
65
   
$
13,811
 


17.

Table of Contents


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


NOTE  3 - LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at September 30, 2020 and December 31, 2019.
 
2020
   
2019
 
Residential real estate
 
$
2,348
   
$
2,565
 
Commercial real estate
               
Owner occupied
   
1,044
     
1,804
 
Non-owner occupied
   
2,428
     
2,628
 
Commercial and industrial
   
17
     
305
 
Consumer
   
13
     
22
 
Construction and land
   
409
     
483
 
All other
   
175
     
174
 
Total carrying amount
 
$
6,434
   
$
7,981
 
Contractual principal balance
 
$
9,633
   
$
11,681
 
                 
Carrying amount, net of allowance
 
$
6,434
   
$
7,981
 

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the nine months ended September 30, 2020 and 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.

18.

Table of Contents

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


NOTE  3 - LOANS - continued

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

 
2020
   
2019
 
Balance at January 1
 
$
619
   
$
642
 
New loans purchased
   
     
 
Accretion of income
   
(147
)
   
(149
)
Loans placed on non-accrual
   
     
 
Income recognized upon full repayment
   
(65
)
   
(74
)
Reclassifications to accretable difference
   
     
 
Disposals
   
(190
)
   
 
Balance at September 30
 
$
217
   
$
419
 


19.

Table of Contents

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


NOTE  3 - LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 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.

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
 
$
5,583
   
$
4,340
   
$
975
 
Commercial real estate
                       
Owner occupied
   
2,132
     
1,677
     
 
Non-owner occupied
   
3,357
     
2,315
     
 
Commercial and industrial
   
1,346
     
784
     
 
Consumer
   
194
     
125
     
 
Construction and land
   
394
     
341
     
149
 
All other
   
14
     
     
 
Total
 
$
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
 
                   
Residential real estate
 
$
5,801
   
$
4,618
   
$
1,425
 
Multifamily real estate
   
4,113
     
3,726
     
 
Commercial real estate
                       
Owner occupied
   
3,399
     
2,995
     
 
Non-owner occupied
   
3,120
     
1,852
     
340
 
Commercial and industrial
   
1,026
     
420
     
451
 
Consumer
   
364
     
313
     
9
 
Construction and land
   
470
     
440
     
3
 
All other
   
75
     
73
     
 
Total
 
$
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.

20.

Table of Contents

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


NOTE  3 - LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of 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
 
                               
Residential real estate
 
$
386,540
   
$
4,163
   
$
2,637
   
$
6,800
   
$
379,740
 
Multifamily real estate
   
35,905
     
     
     
     
35,905
 
Commercial real estate:
                                       
Owner occupied
   
162,108
     
590
     
316
     
906
     
161,202
 
Non-owner occupied
   
308,478
     
1,129
     
1,228
     
2,357
     
306,121
 
Commercial and industrial
   
91,146
     
157
     
651
     
808
     
90,338
 
SBA PPP
   
113,478
     
     
     
     
113,478
 
Consumer
   
25,420
     
125
     
42
     
167
     
25,253
 
Construction and land
   
111,221
     
     
213
     
213
     
111,008
 
All other
   
34,185
     
     
     
     
34,185
 
Total
 
$
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
 
                               
Residential real estate
 
$
389,985
   
$
9,479
   
$
3,192
   
$
12,671
   
$
377,314
 
Multifamily real estate
   
36,684
     
     
3,726
     
3,726
     
32,958
 
Commercial real estate:
                                       
Owner occupied
   
164,218
     
337
     
1,199
     
1,536
     
162,682
 
Non-owner occupied
   
304,316
     
838
     
1,017
     
1,855
     
302,461
 
Commercial and industrial
   
105,079
     
245
     
708
     
953
     
104,126
 
Consumer
   
29,007
     
309
     
230
     
539
     
28,468
 
Construction and land
   
136,138
     
3,856
     
4
     
3,860
     
132,278
 
All other
   
29,868
     
     
73
     
73
     
29,795
 
Total
 
$
1,195,295
   
$
15,064
   
$
10,149
   
$
25,213
   
$
1,170,082
 



21.

Table of Contents

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


NOTE  3 - LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 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
 
$
   
$
1,889
   
$
   
$
1,889
   
$
59
   
$
384,133
   
$
2,348
   
$
386,540
 
Multifamily real estate
   
     
265
     
     
265
     
     
35,905
     
     
35,905
 
Commercial real estate:
                                                               
Owner occupied
   
     
2,519
     
     
2,519
     
1,402
     
159,662
     
1,044
     
162,108
 
Non-owner occupied
   
303
     
4,220
     
     
4,523
     
1,917
     
304,133
     
2,428
     
308,478
 
Commercial and industrial
   
448
     
1,197
     
     
1,645
     
743
     
90,386
     
17
     
91,146
 
SBA PPP
   
     
     
     
     
     
113,478
     
     
113,478
 
Consumer
   
     
239
     
     
239
     
     
25,407
     
13
     
25,420
 
Construction and land
   
     
1,160
     
     
1,160
     
270
     
110,542
     
409
     
111,221
 
All other
   
     
533
     
     
533
     
     
34,010
     
175
     
34,185
 
Total
 
$
751
   
$
12,022
   
$
   
$
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
 


22.

Table of Contents

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


NOTE  3 - LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2020.  The table includes $689,000 of loans acquired with deteriorated credit quality for which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance for
Loan Losses
Allocated
 
With no related allowance recorded:
                 
Residential real estate
 
$
179
   
$
59
   
$
-
 
Commercial real estate
                       
Owner occupied
   
2,149
     
1,718
     
-
 
Non-owner occupied
   
1,655
     
778
     
-
 
Commercial and industrial
   
509
     
     
-
 
Construction and land
   
321
     
270
     
-
 
     
4,813
     
2,825
     
-
 
With an allowance recorded:
                       
Commercial real estate
                       
Non-owner occupied
   
1,671
     
1,512
     
303
 
Commercial and industrial
   
769
     
743
     
448
 
     
2,440
     
2,255
     
751
 
Total
 
$
7,253
   
$
5,080
   
$
751
 


23.

Table of Contents


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


NOTE  3 - LOANS - continued

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

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


24.

Table of Contents

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


NOTE  3 - LOANS - continued

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

 
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
 
                                     
Residential real estate
 
$
61
   
$
   
$
   
$
217
   
$
   
$
 
Multifamily real estate
   
2,808
     
     
     
3,823
     
     
 
Commercial real estate:
                                               
Owner occupied
   
2,073
     
8
     
8
     
3,779
     
10
     
10
 
Non-owner occupied
   
3,855
     
75
     
75
     
9,009
     
664
     
664
 
Commercial and industrial
   
739
     
3
     
3
     
517
     
3
     
3
 
Construction and land
   
332
     
     
     
910
     
123
     
123
 
Total
 
$
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 September 30, 2020 and September 30, 2019.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

 
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
 
                                     
Residential real estate
 
$
60
   
$
   
$
   
$
170
   
$
   
$
 
Multifamily real estate
   
1,854
     
     
     
3,768
     
     
 
Commercial real estate:
                                               
Owner occupied
   
1,738
     
5
     
5
     
3,683
     
4
     
4
 
Non-owner occupied
   
3,347
     
39
     
39
     
7,439
     
478
     
478
 
Commercial and industrial
   
753
     
2
     
2
     
535
     
1
     
1
 
Construction and land
   
287
     
     
     
480
     
2
     
2
 
Total
 
$
8,039
   
$
46
   
$
46
   
$
16,075
   
$
485
   
$
485
 


25.

Table of Contents

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


NOTE  3 - LOANS - continued

Troubled Debt Restructurings

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

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

September 30, 2020
 
TDR’s on
Non-accrual
   
Other
TDR’s
   
Total
TDR’s
 
                   
Residential real estate
 
$
23
   
$
204
   
$
227
 
Commercial real estate
                       
Owner occupied
   
     
199
     
199
 
Non-owner occupied
   
856
     
     
856
 
Commercial and industrial
   
184
     
     
184
 
Total
 
$
1,063
   
$
403
   
$
1,466
 

December 31, 2019
 
TDR’s on
Non-accrual
   
Other
TDR’s
   
Total
TDR’s
 
                   
Residential real estate
 
$
32
   
$
157
   
$
189
 
Multifamily real estate
   
3,636
     
     
3,636
 
Commercial real estate
                       
Owner occupied
   
1,162
     
207
     
1,369
 
Non-owner occupied
   
     
2,656
     
2,656
 
Commercial and industrial
   
191
     
     
191
 
Total
 
$
5,021
   
$
3,020
   
$
8,041
 

At September 30, 2020, $222,000 in specific reserves were allocated to loans that had restructured terms resulting in a provision for loan losses of $287,000 for the three months ended September 30, 2020 and $499,000 for the nine months ended September 30, 2020.  This compares to a provision for loan losses on restructured loans of $263,000 for the three months ended September 30, 2019 and $413,000 for the nine months ended September 30, 2019.  At December 31, 2019, $2,471,000 in specific reserves were allocated to loans that had restructured terms.  There were no commitments to lend additional amounts to these borrowers.


26.

Table of Contents

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


NOTE  3 - LOANS - continued

During the three and nine months ended September 30, 2020 there was one 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 no new TDR’s that occurred during the three and nine months ended September 30, 2019.   During the three and nine months ended September 30, 2020 and September 30, 2019, there were no 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.  To qualify under the CARES Act, a loan could not be past due at the time the payment modification was granted.

The following table presents the status of the remaining loans as of September 30, 2020 with some degree of payment modification under the CARES Act.

September 30, 2020
 
Modified to
Interest Only
Payment
   
Modified to Defer
Principal and
Interest Payment
   
Total
 
                   
Residential real estate
 
$
1,739
   
$
415
   
$
2,154
 
Multifamily real estate
   
-
     
671
     
671
 
Commercial real estate
                       
Owner occupied
   
4,732
     
6,580
     
11,312
 
Non-owner occupied
   
14,466
     
19,626
     
34,092
 
Commercial and industrial
   
974
     
99
     
1,073
 
Construction and land
   
4,219
     
14,550
     
18,769
 
Total
 
$
26,130
   
$
41,941
   
$
68,071
 


27.

Table of Contents

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


NOTE  3 - LOANS - continued

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes non-homogeneous loans, such as commercial, commercial real estate, multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis.  For consumer loans, including consumer loans secured by residential real estate, and smaller balance non-homogeneous loans, the analysis involves monitoring the performing status of the loan.  At the time such loans become past due by 90 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

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

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

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

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


28.

Table of Contents

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


NOTE  3 - LOANS - continued

As of 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
 
                               
Residential real estate
 
$
372,551
   
$
2,973
   
$
11,016
   
$
   
$
386,540
 
Multifamily real estate
   
33,444
     
2,461
     
     
     
35,905
 
Commercial real estate:
                                       
Owner occupied
   
154,564
     
3,627
     
3,917
     
     
162,108
 
Non-owner occupied
   
296,137
     
9,487
     
2,854
     
     
308,478
 
Commercial and industrial
   
86,182
     
3,238
     
1,726
     
     
91,146
 
SBA PPP
   
113,478
     
     
     
     
113,478
 
Consumer
   
25,224
     
1
     
195
     
     
25,420
 
Construction and land
   
106,928
     
3,628
     
665
     
     
111,221
 
All other
   
34,125
     
     
60
     
     
34,185
 
Total
 
$
1,222,633
   
$
25,415
   
$
20,433
   
$
   
$
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
 
                               
Residential real estate
 
$
374,835
   
$
3,477
   
$
11,673
   
$
-
   
$
389,985
 
Multifamily real estate
   
28,103
     
4,855
     
3,726
     
-
     
36,684
 
Commercial real estate:
                                       
Owner occupied
   
152,695
     
5,123
     
6,400
     
-
     
164,218
 
Non-owner occupied
   
290,096
     
8,617
     
5,603
     
-
     
304,316
 
Commercial and industrial
   
101,085
     
2,693
     
1,301
     
-
     
105,079
 
Consumer
   
28,618
     
5
     
384
     
-
     
29,007
 
Construction and land
   
123,473
     
11,868
     
797
     
-
     
136,138
 
All other
   
29,698
     
97
     
73
     
-
     
29,868
 
Total
 
$
1,128,603
   
$
36,735
   
$
29,957
   
$
-
   
$
1,195,295
 



29.

Table of Contents

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


NOTE 4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

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

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

In 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.


30.

Table of Contents

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


NOTE  4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS - continued

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 Tier 1 capital totaled $203.8 million at September 30, 2020, which represents a community bank leverage ratio of 11.0%.  Premier’s wholly owned subsidiary Citizens Deposit Bank  adopted the CBLR simplification standard during the second quarter of 2020 and maintained a CBLR of 8.5% at September 30, 2020.  Premier’s other wholly owned subsidiary bank, Premier Bank, Inc., adopted the regulatory capital simplification rules in the first quarter and maintained a CBLR of 10.8% at September 30, 2020, well in excess of the 8.00% required to be considered well capitalized under the prompt corrective action framework.

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

 
September 30,
2020
   
December 31,
2019
   
Regulatory
Minimum
Requirements
   
To Be
Considered
Well Capitalized
 
Tier 1 Capital to average assets (CBLR):
   
11.0
%
   
11.3
%
   
8.0
%
   
8.0
%



31.

Table of Contents

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


NOTE 5 – PREMISES AND EQUIPMENT

The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options.  Certain leases contain renewal options and rent escalation clauses calling for rent increases over the term of the lease.  Short-term leases of equipment are recognized on a straight-line basis over the lease term.  As of September 30, 2020, the weighted average remaining lease term for operating leases was 8.8 years and the weighted average discount rate used in the measurement of operating lease liabilities was 0.85%.

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

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

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

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



32.

Table of Contents

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


NOTE  6 – STOCK COMPENSATION EXPENSE

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

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

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

Compensation expense of $253,000 was recorded for the first nine months of 2020 while $256,000 was recorded for the first 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 $155,000 at September 30, 2020.  This unrecognized expense is expected to be recognized over the next 29 months based on the vesting periods of the options.


33.

Table of Contents

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



NOTE  7 – EARNINGS PER SHARE

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Basic earnings per share
                       
Income available to common stockholders
 
$
5,624
   
$
6,267
   
$
16,498
   
$
18,302
 
Weighted average common shares outstanding
   
14,673,257
     
14,645,002
     
14,665,751
     
14,636,004
 
Earnings per share
 
$
0.38
   
$
0.43
   
$
1.12
   
$
1.25
 
                                 
Diluted earnings per share
                               
Income available to common stockholders
 
$
5,624
   
$
6,267
   
$
16,498
   
$
18,302
 
Weighted average common shares outstanding
   
14,673,257
     
14,645,002
     
14,665,751
     
14,636,004
 
Add dilutive effects of potential additional common stock
   
48,930
     
75,513
     
62,198
     
76,136
 
Weighted average common and dilutive potential common shares outstanding
   
14,722,187
     
14,720,515
     
14,727,949
     
14,712,140
 
Earnings per share assuming dilution
 
$
0.38
   
$
0.43
   
$
1.12
   
$
1.24
 

Stock options for 183,242 shares of common stock were not considered in computing diluted earnings per share for the three and nine months ended September 30, 2020 because they were antidultive.  There were no stock options considered antidilutive for the three and nine months ended September 30, 2019.


34.

Table of Contents

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



NOTE 8 - FAIR VALUE

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).

35.

Table of Contents


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


NOTE  8 - FAIR VALUE - continued

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

   
Carrying
   
Fair Value Measurements at September 30, 2020 Using
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
 
$
75,559
   
$
75,559
   
$
-
   
$
-
   
$
75,559
 
Time deposits with other banks
   
598
     
     
599
     
     
599
 
Federal funds sold
   
5,859
     
5,859
     
     
     
5,859
 
Securities available for sale
   
436,580
     
-
     
436,580
     
-
     
436,580
 
Loans, net
   
1,255,708
     
-
     
-
     
1,260,773
     
1,260,773
 
Interest receivable
   
6,662
     
-
     
1,620
     
5,042
     
6,662
 
                                         
Financial liabilities
                                       
Deposits
 
$
1,585,389
   
$
1,240,462
   
$
347,536
   
$
-
   
$
1,587,998
 
Securities sold under agreements to repurchase
   
28,214
     
-
     
28,214
     
-
     
28,214
 
Subordinated debt
   
5,465
     
-
     
5,364
     
-
     
5,364
 
Interest payable
   
510
     
8
     
502
     
-
     
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
 
   
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets
                             
Cash and due from banks
 
$
88,556
   
$
88,556
   
$
   
$
   
$
88,556
 
Time deposits with other banks
   
598
     
     
599
     
     
599
 
Federal funds sold
   
5,902
     
5,902
     
     
     
5,902
 
Securities available for sale
   
390,754
     
     
390,754
     
     
390,754
 
Loans, net
   
1,181,753
     
     
     
1,172,575
     
1,172,575
 
Interest receivable
   
4,699
     
4
     
1,110
     
3,585
     
4,699
 
                                         
Financial liabilities
                                       
Deposits
 
$
1,495,753
   
$
1,070,610
   
$
424,886
   
$
   
$
1,495,496
 
Securities sold under agreements to repurchase
   
20,428
     
     
20,428
     
     
20,428
 
FHLB advance
   
6,375
     
     
6,406
     
     
6,406
 
Subordinated debt
   
5,436
     
     
5,527
     
     
5,527
 
Interest payable
   
912
     
15
     
897
     
     
912
 


36.

Table of Contents

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


NOTE  8 - FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

         
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)
 
Available for sale
                       
Mortgage-backed securities
                       
U. S. agency MBS - residential
 
$
340,787
   
$
-
   
$
340,787
   
$
-
 
U. S. agency CMO’s - residential
   
38,937
     
-
     
38,937
     
-
 
Total mortgage-backed securities of government sponsored agencies
   
379,724
     
-
     
379,724
     
-
 
U. S. government sponsored agency securities
   
6,153
     
-
     
6,153
     
-
 
Obligations of states and political subdivisions
   
44,871
     
-
     
44,871
     
-
 
Other securities
   
5,832
     
-
     
5,832
     
-
 
Total securities available for sale
 
$
436,580
   
$
-
   
$
436,580
   
$
-
 

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

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

37.

Table of Contents


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


NOTE  8 - FAIR VALUE - continued

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.


38.

Table of Contents


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


NOTE  8 - FAIR VALUE - continued

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

         
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)
 
Assets:
                       
Impaired loans:
                       
Commercial real estate
                       
Non-owner occupied
 
$
1,209
   
$
-
   
$
-
   
$
1,209
 
Commercial and industrial
   
295
     
-
     
-
     
295
 
Total impaired loans
 
$
1,504
   
$
-
   
$
-
   
$
1,504
 
                                 
Other real estate owned:
                               
Residential real estate
 
$
206
   
$
-
   
$
-
   
$
206
 
Multifamily real estate
   
9,503
     
-
     
-
     
9,503
 
Commercial real estate
                               
Owner occupied
   
829
     
     
     
829
 
Construction and land
   
551
     
-
     
-
     
551
 
Total OREO
 
$
11,089
   
$
-
   
$
-
   
$
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 $2,255,000 at September 30, 2020 with a valuation allowance of $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 $546,000  for the nine-months ended September 30, 2020, compared to a $324,000 provision for loan losses for the nine-months ended September 30, 2019 and a $323,000 in provision for loan losses for the three months ended September 30, 2020, compared to a $98,000 provision for loan losses for the three months ended September 30, 2019.  The detail of impaired loans by loan class is contained in Note 3 above.

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

39.

Table of Contents


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


NOTE  8 - FAIR VALUE - continued

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

September 30, 2020
 
Valuation
Techniques
 
Unobservable Inputs
 
Range
(Weighted Avg)
Impaired loans:
               
Commercial real estate
               
Non-owner occupied
$
1,209
 
income approach
 
adjustment for differences in net operating income expectations
 
0.0%-33.3% (14.6%)
Commercial and industrial
 
295
 
sales comparison
 
adjustment for estimated realizable value
 
25.0%-97.5% (43.9%)
Total impaired loans
$
1,504
           
                 
Other real estate owned:
               
Residential real estate
$
206
 
sales comparison
 
adjustment for estimated realizable value
 
0.2%-59.8% (18.1%)
Multifamily real estate
 
9,503
 
income approach
 
adjustment for differences in net operating income expectations
 
26.2%-26.2% (26.2%)
Commercial real estate
               
Owner occupied
 
829
 
sales comparison
 
adjustment for estimated realizable value
 
16.1%-29.5% (24.6%)
Construction and land
 
551
 
sales comparison
 
adjustment for estimated realizable value
 
50.3%-86.3% (76.5%)
Total OREO
$
11,089
           


40.

Table of Contents


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


NOTE  8 - FAIR VALUE - continued

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

         
Fair Value Measurements at December 31, 2019 Using
 
   
Carrying
Value
   
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable Inputs
(Level 3)
 
Assets:
                       
Impaired loans:
                       
Multifamily real estate
 
$
1,900
   
$
-
   
$
-
   
$
1,900
 
Commercial real estate
                               
Owner occupied
   
509
     
-
     
-
     
509
 
Non-owner occupied
   
2,266
     
-
     
-
     
2,266
 
Commercial and industrial
   
288
     
-
     
-
     
288
 
Construction and land
   
380
     
-
     
-
     
380
 
Total impaired loans
 
$
5,343
   
$
-
   
$
-
   
$
5,343
 
                                 
Other real estate owned:
                               
Residential real estate
 
$
249
   
$
-
   
$
-
   
$
249
 
Multifamily real estate
   
9,588
     
-
     
-
     
9,588
 
Commercial real estate
                               
Owner occupied
   
288
     
-
     
-
     
288
 
Construction and land
   
750
     
-
     
-
     
750
 
Total OREO
 
$
10,875
   
$
-
   
$
-
   
$
10,875
 


41.

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


NOTE  8 - FAIR VALUE - continued

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

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
           


42.

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019


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 nine months ended September 30, 2020 was $16,498,000, or $1.12 per diluted share, compared to net income of $18,302,000, or $1.24 per diluted share, for the nine months ended September 30, 2019.  The decrease in net income in the first 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 $1,040,000, or 79.1%, in the first nine months of 2020, largely to provide for the $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 8.73% and 1.19% for the nine months ended September 30, 2020 compared to 10.67% and 1.43% for the same period in 2019.

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

Net income for the three months ended September 30, 2020 was $5,624,000, or $0.38 per diluted share, compared to net income of $6,267,000, or $0.43 per diluted share for the three months ended September 30, 2019.  The decrease in income in the third quarter 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.  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 8.74% and 1.18% for the three months ended September 30, 2020 compared to 10.61% and 1.46% for the same period in 2019.
Net interest income for the nine months ended September 30, 2020 totaled $50.125 million, a decrease of $143,000, or 0.3%, from the $50.268 million of net interest income earned in the first nine months of 2019.  Interest income in 2020 decreased by $1,705,000, or 3.0%, largely due to a $1,034,000, or 77.0%, decrease in interest income on interest-bearing bank balances and federal funds sold, and a $488,000, or 1.0%, decrease in interest income on loans.  Interest income on interest-bearing bank balances and federal funds sold decreased in the first nine months of 2020 when compared to the same nine months of 2019 due to significant decreases in the earning yields on these balances, although the average balance increased from $75.7 million during the first nine months of 2019 to $91.2 million during the first 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 nine months of 2019, the targeted rate ranged from 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 0.45% during the first nine months of 2020, compared to an average yield of 2.37% during the same 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 nine months of 2020, approximately $894,000 of interest income was realized from deferred interest and discounts recognized on loans that paid-off or paid-down during the first nine months of 2020 compared to $1,619,000 of interest income of this kind recognized during the first 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 $488,000 in 2020 when compared to 2019. Otherwise, interest income on loans increased by $237,000, or 0.5%, in the first nine months of 2020.  This increase includes approximately $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 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 $1,247,000, or 2.5%, in the

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

first nine months of 2020 when compared to the same nine months of 2019.  The decrease is largely due to a decrease in the average yield on the remaining loan portfolio from 5.49% in the first nine months of 2019 to 5.13% in the first nine months of 2020.  Premier’s participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) resulted in $115,990,000 of new loans during the second and third quarters of 2020.  These loans increased the nine-month average loans outstanding by approximately $66,701,000 and increased interest income on loans during the first nine months of 2020 by approximately $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 nine months of 2020 would have decreased by $19,250,000, or 1.7%, when compared to the average loans outstanding during the first nine months of 2019.


45.

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

Interest income on investment securities in the first nine months of 2020 decreased by $183,000, or 2.5%, to $6,999,000 compared to $7,182,000 in the first nine months of 2019.  While the average balance of investments increased by $44.104 million in the first nine months of 2020 when compared to the same nine months of 2019, the average yield earned decreased to 2.32% in 2020 from 2.65% 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 increases in deposits and monthly payments on the existing mortgage-backed security portfolio.
Partially offsetting the $1,705,000 decrease in interest income in the first nine months of 2020 was a $1,562,000, or 21.7%, decrease in interest expense, driven by a decrease in interest expense on deposits.  Interest expense on deposits decreased by $1,401,000, or 20.9% in the first 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 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 nine months of 2020 compared to the same period in 2019.  Nevertheless, average interest-bearing deposit balances increased by $72.5 million, or 6.9%, in the first 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 22 basis points from 0.85% during the first nine months of 2019 to 0.63% during the first 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 15 basis points and the average rate paid on savings deposits decreased by 13 basis points in the first nine months of 2020 when compared to the first 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 just over a third of the increase coming from the acquisition of Jackson.  NOW and money market deposit account balances averaged $465.840 million in the first nine months of 2020, a $60.596 million increase over the average outstanding balances during the first nine months of 2019.  Approximately $12.500 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.  The remaining $48.096 million, or 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 $278.180 million in the first nine months of 2020, a $33.801 million increase over the average outstanding balances during the first nine months of 2019.  Approximately $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 $13.752 million, or 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 $535,000 of the $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 $866,000 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 on those deposits in the first nine months of 2020 when compared to the first nine months of 2019.  Certificates of deposit decreased on average by approximately $21.897 million, or 5.4%.  Yet, even when factoring in the approximately $37.126 million of average certificate of deposit balances from the two Jackson branches included in the first nine months of 2020 but not part of Premier in the first nine months of 2019, average certificate of deposit balances in Premier’s other branch locations decreased by $59.023 million or 14.6% in the first nine months of 2020, when compared to the same 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 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 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 $87,000, or 57.6%, in the first nine months of 2020 when compared to the same nine months of 2019, largely due to the payment upon maturity of approximately $8.8 million of FHLB borrowings since the end of December 2018.  Average FHLB borrowings decreased by $4.1 million in the first nine months of 2020 compared to the same nine months of 2019.  However, the average rate paid on FHLB borrowings in 2020 increased by 17 basis points to 3.12% from the average rate paid during the first 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 nine months of 2020 was a $58,000, or 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 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 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 $15,000, or 33.3%, in 2020 when compared to 2019.  The additional interest expense was largely due to a $5.535 million, or 25.3%, increase in the average balance outstanding during the first nine months of 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.

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

Premier’s net interest margin during the first nine months of 2020 was 3.87% compared to 4.22% for the first 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 nine months of 2020 would have been 3.80% compared to 4.09% for the first 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 0.45% in the first nine months of 2020, from the 2.37% earned in the first nine months of 2019.  The average yield earned on securities available for sale decreased to 2.32% in the first nine months of 2020, from the 2.65% earned during the first nine months of 2019.  Similarly, the average yield earned on total loans outstanding decreased to 5.24% in 2020 from the 5.68% earned during the first 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 nine months of 2020 has been a decrease of approximately 44 basis points when compared to the first nine months of 2019.
Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased from 0.89% during the first nine months of 2019 to 0.65% in the first nine months of 2020.  The average rates paid on interest-bearing deposits decreased from 0.85% in the first nine months of 2019 to 0.63% during the first nine months of 2020, 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 6.94% in the first nine months of 2019 to 5.47% in the first 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.  The average rate paid on short-term borrowings, primarily customer repurchase agreements, remained consistent in the first 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 increased to 3.12% simply as a result of lower cost borrowings maturing sooner as borrowings were repaid upon maturity.  The overall effect was to decrease Premier’s net interest spread by 29 basis points to 3.65% and decrease Premier’s net interest margin by 35 basis points to 3.87% in the first nine months of 2020 when compared to the first nine months of 2019.

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

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


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
%

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

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


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SEPTEMBER 30, 2019

Net interest income for the quarter ended September 30, 2020 totaled $16.974 million, up $196,000, or 1.2%, from the $16.778 million of net interest income earned in the third quarter of 2019, as interest expense savings exceeded a decrease in interest income.  Interest income decreased $817,000, or 4.2%, in the third quarter of 2020 when compared to the third quarter of 2019, largely due to a $495,000, or 95.4%, decrease in interest income on interest-bearing bank balances and federal funds sold, and a $180,000, or 7.7%, decrease in interest income on investment securities.  In addition to these decreases, interest income on 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 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 for the quarter decreased slightly from $93.8 million during the third quarter of 2019 to $89.9 million during the 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 0.11% during the third quarter of 2020 compared to an average yield of 2.20% during the same quarter of 2019.  Similarly, interest income on investment securities in the third quarter of 2020 decreased by $180,000, or 7.7%, when compared to the third quarter of 2019.  While the average balance of investments increased by $76.6 million in the third quarter of 2020 when compared to the same quarter of 2019, the average yield earned decreased to 2.04% in 2020 from 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.
Interest income on loans decreased by $142,000, or 0.9%, in the third quarter of 2020 when compared to the third quarter of 2019.  During the third quarter of 2020, approximately $351,000 of interest income was realized from deferred interest and discounts recognized on loans that paid-off or paid-down during the third quarter of 2020 compared to $608,000 of interest income of this kind recognized during the 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 2019, interest income on loans decreased by $142,000 in the third quarter of 2020 when compared to the same quarter of 2019. Otherwise, interest income on loans increased by $115,000, or 0.7%, in the third quarter of 2020.  This increase includes approximately $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 third quarter 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 $362,000, or 2.2%, in the third quarter of 2020 when compared to the same quarter of 2019.  The decrease is largely due to a decrease in the average yield on the remaining loan portfolio from 5.48% in the third quarter of 2019 to 4.98% in the third quarter of 2020.  As stated above, Premier’s participation in the SBA’s PPP loan program resulted in $115,990,000 of new loans during the second and third quarters of 2020.  These loans increased the third quarter average loans outstanding by approximately $115,432,000 and increased interest income on loans during the third quarter of 2020 by approximately $1,155,000, which resulted

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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 third quarter of 2020 decreased by $25,791,000, or 2.3%, when compared to the average loans outstanding during the third quarter of 2019.  This decrease in loans and, in particular, the types of loans that decreased, had an effect on the second and third quarter’s 2020 provision for loans losses as more fully explained below.
More than offsetting the decrease in interest income in the third quarter of 2020 was a $1,013,000, or 40.0%, decrease in interest expense, driven by a decrease in interest expense on deposits.  Interest expense on deposits decreased by $946,000, or 40.0% in the 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 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 third quarter of 2020 compared to the same quarter in 2019.  Nevertheless, average interest-bearing deposit balances increased by $80.3 million, or 7.6%, in the 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 39 basis points from 0.89% during the third quarter of 2019 to 0.50% during the 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 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 16 basis points and the average rate paid on savings deposits decreased by 13 basis points in the third quarter of 2020 when compared to the 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 only approximatly one-fourth of the increase coming from the acquisition of Jackson.  NOW and money market deposit account balances averaged $491.694 million in the third quarter of 2020, an $85.273 million increase over the average outstanding balances during the third quarter of 2019.  Approximately $13.707 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.  The remaining $71.566 million, or 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, proceeds to borrowers from the SBA PPP loan program, and a lack of deposit withdrawals from pre COVID-19 virus consumer spending habits as 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 $290.659 million in the third quarter of 2020, a $47.681 million increase over the average outstanding balances during the third quarter of 2019.  Approximately $20.242 million of this increase is attributed to the two Jackson branches acquired in the fourth quarter of 2019.  The remaining $27.438 million, or 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 $195,000 of the $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.

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The remaining $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 third quarter of 2020 when compared to the third quarter of 2019.  Certificates of deposit decreased on average by approximately $52.677 million, or 13.0%.  Yet, even when factoring in the approximately $35.273 million of average certificate of deposit balances from the two Jackson branches included in the third quarter of 2020 but not part of Premier in the third quarter of 2019, average certificate of deposit balances in Premier’s other branch locations decreased by $87.950 million or 21.7% in the 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 third quarter of 2020 from the reduction in outstanding Federal Home Loan Bank (“FHLB”) borrowings.  Interest expense on FHLB borrowings decreased by $36,000, or 75.0%, in the third quarter of 2020 when compared to the same quarter of 2019, largely due to the payment upon maturity of approximately $8.8 million of FHLB borrowings since the end of December 2018.  The final $3.0 million outstanding FHLB borrowings were repaid upon maturity in August 2020.  Average FHLB borrowings decreased by $5.0 million in the third quarter of 2020 compared to the same quarter of 2019.  The average rate paid on FHLB borrowings in 2020 increased by 47 basis points to 3.47% from the average rate paid during the third quarter of 2019 simply as a result of lower cost borrowings maturing sooner as borrowings were repaid upon maturity.  Also contributing to the decrease in interest expense during the third quarter of 2020 was a $27,000, or 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 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 third quarter of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors.  Interest expense on short-term borrowings, primarily customer repurchase agreements, decreased by $4,000, or 16.7%, in 2020 when compared to 2019.  The decrease in interest expense was largely due to a 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.  Approximately $6.087 million of this increase was from short-term FHLB advances that were borrowed and repaid within short time frames during the third quarter of 2020 as part of Premier’s interest rate risk management and investment purchase strategies.
Premier’s net interest margin during the third quarter of 2020 was 3.78% compared to 4.17% for the 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 third quarter of 2020 would have been 3.70% compared to 4.02% for the 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 0.11% in the third quarter of 2020, from the 2.20% earned in the third quarter of 2019.  The average yield earned on securities available for sale decreased to 2.04% in the third quarter of 2020, from the 2.64% earned during the third quarter of 2019.  Similarly, the average yield earned on total loans outstanding decreased to 5.12% in 2020 from the 5.69% earned during the 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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SEPTEMBER 30, 2019

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 third quarter of 2020 has been a decrease of approximately 57 basis points when compared to the third quarter of 2019.
Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased in the third quarter of 2020 from 0.92% during the third quarter of 2019 to 0.51% in the third quarter of 2020.  The average rates paid on interest-bearing deposits decreased from 0.89% in the third quarter to 2019 to 0.50% during the 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 6.66% in the third quarter of 2019 to 4.66% in the 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.  Similarly, the average rate paid on short-term borrowings, primarily customer repurchase agreements, decreased by 21 basis points to 0.23% in the third quarter of 2020.  The average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston was contrary to 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 as each were repaid upon maturity.  The overall effect was to decrease Premier’s net interest spread by 27 basis points to 3.61% and decrease Premier’s net interest margin by 39 basis points to 3.78% in the third quarter of 2020 when compared to the third quarter of 2019.
Non-interest income decreased by $658,000, or 9.4%, to $6,336,000 for the first nine months of 2020 compared to the same period of 2019.  Service charges on deposit accounts decreased by $774,000, or 22.6% and other sources of non-interest income decreased by $125,000, or 16.3%, both largely 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 $717,000, or 26.8%, decrease in customer overdraft fees.  Transaction based deposit account balances have increased significantly during the first nine months of 2020 compared to the same nine months of 2019.  The lack of deposit withdrawals resulting from a decline in normal consumer spending habits as 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 nine months of 2020 include checkbook sales, wire transfer fees, 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 $90,000, or 3.4% and secondary market mortgage income increased by $151,000, or 98.1%.  Electronic banking income increased largely due to increases in income from debit card transaction activity 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.

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Non-interest income decreased by $274,000, or 11.1%, to $2,197,000 for the third quarter of 2020 compared to the same three months of 2019.  Service charges on deposit accounts decreased by $356,000, or 29.3% and other sources of non-interest income decreased by $59,000, or 22.1%.  Service charges on deposit accounts decreased largely due to a $332,000, or 34.4%, decrease in customer overdraft fees.  Transaction based deposit account balances have increased significantly during the 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 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 third quarter of 2020 include checkbook sales, wire transfer fees, and commissions on insurance premiums, as well as brokerage and annuity commission income.  Partially offsetting these decreases in non-interest income, electronic banking income increased by $84,000, or 9.4% and secondary market mortgage income increased by $57,000, or 58.8%.  Electronic banking income increased largely due to an $81,000, or 11.0%, increase in income from debit card transaction activity 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 nine months of 2020 totaled $32,971,000, or 2.38%, of average assets on an annualized basis, compared to $32,384,000, or 2.53%, of average assets for the same period of 2019.  The $587,000, or 1.8%, increase in non-interest expenses in 2020 when compared to the first nine months of 2019 is largely due to the inclusion of the newly acquired Jackson branch locations, which added approximately $753,000 of direct non-interest expense during the first nine months of 2020.  Overall increases in operating costs include a $28,000, or 0.2%, increase in staff costs, a $138,000, or 2.6% increase in occupancy and equipment expenses, a $723,000, or 16.9%, increase in outside data processing costs, a $44,000, or 6.0%, increase in taxes not on income, a $51,000, or 7.6%, increase in the amortization of intangible assets, an $88,000, or 35.5%, increase in loan collection expenses, and an $83,000 increase in data conversion expenses.  The $28,000 increase in staff costs includes $423,000 of additional staff costs from the operations of the two newly acquired Jackson branch locations.  Without these two new branches, staff costs decreased by $395,000, or 2.5%, in the first nine months of 2020 compared to the 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 increase in deferred loan costs related to the significant volume of PPP loans processed by Premier in the second quarter of 2020.  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 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 $723,000 increase in outside data processing costs includes a $186,000, or 19.6%, increase in internet and mobile banking charges, as banking by electronic means

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becomes more and more popular among Premier’s customer base, and a $288,000 increase in data line costs as Premier is migrating to a more robust data line network across its branch network.  Upon full migration, data line expenses should return to near pre-migration levels.  These increases in non-interest expense were partially offset by a $256,000, or 26.8%, decrease in professional fees, a $55,000, or 23.1%, decrease in FDIC insurance expense, a $119,000, or 17.2%, decrease in expenses and writedowns on OREO properties, a $55,000, or 23.1%, decrease in supplies expense, and a $97,000, or 3.4%, decrease in other operating expenses.  Professional fees decreased by $256,000 largely due to decreases in legal fees and consulting expenses.  FDIC insurance expense decreased by $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 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 $4,637,000 for the first nine months of 2020 compared to $5,261,000 for the first nine months of 2019.  The effective tax rate for the nine months ended September 30, 2020 was 21.9% compared to 22.3% for the same period in 2019.  For the quarter ended September 30, 2020, income tax expense was $1,627,000, (a 22.4% effective tax rate), compared to $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.

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SEPTEMBER 30, 2019

B.          Financial Position

Total assets at September 30, 2020 increased by $107.9 million to $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 $45.8 million increase in securities available for sale and a $73.2 million increase in total loans outstanding.  Earning assets increased by $105.3 million from the $1.662 billion at year-end 2019 to end the quarter at $1.768 billion.  Premier’s participation in the SBA’s PPP loan program generated $116.0 million of new loans.  Much of the loan 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.
Cash and due from banks at September 30, 2020 was $23.5 million, a $414,000 increase from the $23.1 million at December 31, 2019.  Interest bearing bank balances decreased by $13.4 million, or 20.5%, from the $66.1 million reported at December 31, 2019.  Federal funds sold remained relatively unchanged, decreasing by $43,000, or 0.7%, to end the quarter at $5.9 million at 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 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 $436.6 million at September 30, 2020, a $45.8 million increase from the $390.8 million at December 31, 2019.  The increase was largely due to the purchase of $155.1 million of investment securities and a $7.4 million increase in market value of securities available for sale.  These increases more than offset $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 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 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 September 30, 2020 were $1.268 billion compared to $1.195 billion at December 31, 2019, an increase of approximately $73.2 million, or 6.1%. The increase is largely due to Premier’s robust participation in the SBA’s PPP loan program in the second and third quarters of 2020, which generated $116.0 million of new loans, or 9.1% of Premier’s outstanding loans at September 30, 2020.  Without these loans, Premier’s loan portfolio would have decreased by approximately $42.8 million, or 3.6%, during the first 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 $24.9 million, or

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SEPTEMBER 30, 2019

18.3%; consumer loans decreased by $3.6 million, or 12.4%; and commercial and industrial loans decreased by $13.9 million, or 13.3%.  These decreases more than offset a $4.2 million, or 1.4%, increase in non-owner occupied commercial real estate loans and a $4.3 million, or 14.5%, increase in other loans.  The $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 $11.3 million, or 30.8%, since year-end, primarily in construction and land loans, while loans categorized as Substandard decreased by $9.5 million, or 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 nine of 2020 resulted in recognizing approximately $397,000 of interest income deferred while the loans were on non-accrual status and $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 portion of the SBA PPP loan balances outstanding at 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 September 30, 2020, Premier received origination fees from the SBA of approximately $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 $1,103,000, largely due to normal quarterly depreciation of fixed assets partially offset by new equipment purchases.  Other intangible assets decreased by $724,000, due to the amortization of core deposit intangibles.  Accrued interest receivable increased by $1,963,000, or 41.8%, largely due to approximately $511,000 of accrued interest on the SBA PPP loans for which payments are deferred at the beginning of the loan and approximately $1,829,000 of

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MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

remaining accrued interest on $119,392,000 of loans whereby Premier granted full payment deferrals for a select period of time in accordance with regulatory guidance provided under the CARES Act during the COVID-19 based economic slowdown. As of September 30, 2020, 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 $1.585 billion as of September 30, 2020, an $89.6 million, or 6.0%, increase from the $1.496 billion in deposits at December 31, 2019.  The overall increase in deposits is largely due to an $81.5 million, or 22.2%, increase in non-interest bearing deposits, a $69.1 million, or 18.0%, increase in savings and money market deposits, and a $19.3 million, or 6.0%, increase in interest bearing transaction deposits.  Partially offsetting these increases, certificates of deposit (“CD”) balances decreased by $80.2 million, or 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 $7.8 million, or 38.1%.  Long-term FHLB advances decreased by $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 $29,000, due to the regular amortization of the fair value adjustment.  Other liabilities increased by $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 from December 31, 2019 to September 30, 2020.


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

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

   
(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 $4,855,000 decrease in non-accrual loans, a $1,104,000 decrease in accruing loans past due 90 days or more and 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 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 $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 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 partially offset by sales and $377,000 of writedowns on OREO properties during the first 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.


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Gross charge-offs totaled $3,369,000 during the first 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 nine months of 2020 totaled $245,000, resulting in net charge-offs for the first nine months of 2020 of $3,124,000.  This compares to $1,242,000 of net charge-offs recorded in the first nine months of 2019.
The allowance for loan losses at September 30, 2020 was 1.01% of total loans compared to 1.13% at December 31, 2019.  The decrease in the ratio is due to two primary reasons.  First, the allowance for loan losses has decreased by $769,000 in the first nine months of 2020, largely due to 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 in those months, as discussed in more detail below.  This decrease in the allowance, by itself, would have resulted in a decrease in the ratio to total loans.  However, due to the $73.2 million increase in total loans outstanding since December 31, 2019, largely due to $116.0 million of SBA Paycheck Protection Program loans outstanding at 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 1.01% at September 30, 2020.  Excluding the SBA PPP loan portfolio, the allowance for loan losses at September 30, 2020 would have been 1.11% of the remaining loans outstanding.
During the first nine months of 2020, Premier recorded $2,355,000 of provision for loan losses.  This provision compares to $1,315,000 of provision for loan losses recorded during the same nine months of 2019.  The provision for loan losses recorded during the first 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 $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.  Furthermore, additional risk-weighting was given to loans in all industries where the borrower currently remains on either an interest-only payment deferral period or a full principal and interest payment deferral 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 resulting from decreases in higher-risk loans outstanding

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during the second quarter of 2020, 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 and third quarters of 2020 include decreases in loans classified as Special Mention and Substandard and improvements in past due 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 loans classified as Special Mention and Substandard.
The provision for loan losses recorded during the first nine months of 2019 and the third quarter of 2019 were primarily to provide for new loans recorded and additional identified credit risk in Premier’s multifamily residential real estate loan, owner occupied real estate loan, non-owner occupied real estate loan, and commercial and industrial loan 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.

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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

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

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

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

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

5.
Maintenance of an adequate available-for-sale security portfolio.  The Company owns $436.6 million of securities at fair value as of 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2019

E.          Capital

At September 30, 2020, total stockholders’ equity of $256.2 million was 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 $16.5 million of net income for the first nine months of 2020 and a $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 $0.45 per share in cash dividends declared and paid during the first 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 Tier 1 capital totaled $203.8 million at September 30, 2020, which represents a community bank leverage ratio of 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 8.17% 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 10.8% at September 30, 2020, well in excess of the 8.00% required to be considered well capitalized under the prompt corrective action framework.
Book value per common share was $17.46 at September 30, 2020 and $16.39 at December 31, 2019.  The increase in book value per share was largely due to the $1.12 per share earned during the first nine months, partially offset by the $0.45 per share in quarterly cash dividends to common shareholders declared and paid during the first nine months of 2020.  Also increasing Premier’s book value per share at September 30, 2020 was the $5.8 million of other comprehensive income for the first nine months of 2020 related to the increase in the market value of investment securities available for sale, which increased book value by approximately $0.40 per share.


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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.

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SEPTEMBER 30, 2019

PART II - OTHER INFORMATION

Item 1.          Legal Proceedings
None
   
Item 1A.          Risk Factors
 

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

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

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds
None
   
Item 3.          Defaults Upon Senior Securities
None
   
Item 4.          Mine Safety Disclosure
Not Applicable
   
Item 5.          Other Information
None

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Item 6.          Exhibits

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

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

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

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

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

101.SCH
Inline XBRL Taxonomy Extension Schema Document

101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document

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



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PREMIER FINANCIAL BANCORP, INC.
SEPTEMBER 30, 2019

SIGNATURES


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


PREMIER FINANCIAL BANCORP, INC.
   
   
   
Date: November 6, 2020
/s/ Robert W. Walker          
 
 
Robert W. Walker
 
President & Chief Executive Officer
   
   
Date: November 6, 2020
/s/ Brien M. Chase          
 
 
Brien M. Chase
 
Senior Vice President & Chief Financial Officer




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