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FAIR VALUE

6 Months Ended

Jun. 30, 2020

NOTE 8 - FAIR VALUE

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

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

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

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

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

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

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

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

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

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

Financial liabilities
Deposits	$	1,608,151	$	1,243,622	$	365,688	$	-	$	1,609,310
Securities sold under agreements to repurchase		27,737		-		27,737		-		27,737
FHLB advance		2,995		-		3,003		-		3,003
Subordinated debt		5,455		-		5,354		-		5,354
Interest payable		638		7		631		-		638

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

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

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

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at June 30, 2020 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	316,143	$	-	$	316,143	$	-
U. S. agency CMO’s - residential		49,196		-		49,196		-
Total mortgage-backed securities of government sponsored agencies		365,339		-		365,339		-
U. S. government sponsored agency securities		9,546		-		9,546		-
Obligations of states and political subdivisions		39,724		-		39,724		-
Other securities		2,091		-		2,091		-
Total securities available for sale	$	416,700	$	-	$	416,700	$	-

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

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

Assets and Liabilities Measured on a Non-Recurring Basis

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

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

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

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

			Fair Value Measurements at June 30, 2020 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	1,843	$	-	$	-	$	1,843
Commercial real estate
Non-owner occupied		3,151		-		-		3,151
Commercial and industrial		317		-		-		317
Total impaired loans	$	5,311	$	-	$	-	$	5,311

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

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

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

At December 31, 2019, other real estate owned had a net carrying amount of $10,875,000, made up of the outstanding balance of $12,474,000, net of a valuation allowance of $1,599,000.

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

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

Other real estate owned:
Residential real estate	$	205	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		529	sales comparison	adjustment for estimated realizable value		29.5%-29.5% (29.5	%)
Construction and land		551	sales comparison	adjustment for estimated realizable value		50.3%-86.3% (76.5	%)
Total OREO	$	10,788

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

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

Item 2. Management’s Discussion and Analysis

of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

A. Results of Operations

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

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

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

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

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

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

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

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

Additional interest expense savings have been realized in the first six months of 2020 from the reduction in outstanding Federal Home Loan Bank (“FHLB”) borrowings and other borrowings at the parent company. Interest expense on FHLB borrowings decreased by $50,000, or 48.5%, in the first six months of 2020 when compared to the same six months of 2019, largely due to the payment upon maturity of approximately $5.4 million of FHLB borrowings since the end of January 2019. Average FHLB borrowings decreased by $2.9 million in the first six months of 2020 compared to the same six months of 2019. In addition, the average rate paid on FHLB borrowings in 2020 decreased by 39 basis points to 2.54% from the average rate paid during the first six months of 2019. Interest on other borrowings at the parent company decreased by $31,000. This borrowing was fully repaid during the first half of 2019 and therefore no interest expense was recognized on this debt in 2020. Also contributing to the decrease in interest expense during the first six months of 2020 was a $31,000, or 16.3%, decrease in interest expense on Premier’s subordinated debt due to a decrease in the variable interest rate paid in 2020 compared to the first six months of 2019. The variable interest rate is indexed to the short-term three-month London Interbank Offered Rate (“LIBOR”), interest rate, which was lower in the first six months of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors. Contrary to these interest expense savings, interest expense on short-term borrowings, primarily customer repurchase agreements, increased by $18,000, or 85.7%, in 2020 when compared to 2019. The additional interest expense was largely due to a 15 basis point increase in the average rate paid on a 3.2% higher average balance outstanding during the first six months of 2020.

Premier’s net interest margin during the first six months of 2020 was 3.91% compared to 4.25% for the first six months of 2019. A portion of the interest income on loans is the result of recognizing deferred interest income on loans that paid-off during the period. Excluding this income, Premier’s net interest margin during the first six months of 2020 would have been 3.85% compared to 4.12% for the first six months of 2019. As shown in the table below, Premier’s yield earned on federal funds sold and interest bearing bank balances decreased to 0.62% in the first six months of 2020, from the 2.50% earned in the first six months of 2019. The average yield earned on securities available for sale decreased to 2.48% in the first six months of 2020, from the 2.65% earned during the first six months of 2019. Similarly, the average yield earned on total loans outstanding decreased to 5.31% in 2020 from the 5.68% earned during the first six months of 2019. Earning asset yields have decreased generally in response to decreases in long-term interest rates driven by economic uncertainty resulting from worldwide governmental actions intended to curb the spread of the COVID-19 virus. The Federal Reserve Board of Governors also dramatically reduced its the short-term interest rate policy as a means to stimulate the economy of the United States responsive to COVID-19 governmental actions. As new loans have been made with lower interest rates, some borrowers have requested interest rate lowering adjustments on their existing loans with Premier. Premier has been very selective in granting these loan interest rate concessions. Nevertheless, the impact of both on the average loan yield in the first six months of 2020 has been a decrease of approximately 37 basis points when compared to the first six months of 2019.

Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased from 0.87% during the first six months of 2019 to 0.72% in the first six months of 2020. The average rates paid on interest-bearing deposits decreased from 0.83% in the first six months to 2019 to 0.70% during the first six months of 2020, largely due to lower rates paid on savings deposits and transaction based interest bearing deposits. Furthermore, the average rate paid on Premier’s variable rate subordinated debentures decreased from 7.08% in the first six months of 2019 to 5.87% in the first six months of 2020 due to decreases in short-term interest rate policy by the Federal Reserve and the impact on market short-term interest rates. Due to competition for funds in Premier’s Washington DC metro market, the average rate paid on short-term borrowings, primarily customer repurchase agreements, increased by 15 basis points to 0.34% in the first six months of 2020, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston decreased to 2.54% as higher cost borrowings have been repaid upon maturity. The overall effect was to decrease Premier’s net interest spread by 30 basis points to 3.68% and decrease Premier’s net interest margin by 34 basis points to 3.91% in the first six months of 2020 when compared to the first six months of 2019.

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

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

	Six Months Ended June 30, 2020								Six Months Ended June 30, 2019
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	91,842		$	284		0.62	%	$	66,493		$	823		2.50	%
Securities available for sale
Taxable		369,836			4,557		2.46			354,497			4,651		2.62
Tax-exempt		25,632			271		2.68			13,291			180		3.43
Total investment securities		395,468			4,828		2.48			367,788			4,831		2.65
Total loans		1,218,360			32,170		5.31			1,154,691			32,516		5.68
Total interest-earning assets		1,705,670			37,282		4.40	%		1,588,972			38,170		4.85	%
Allowance for loan losses		(13,816	)							(13,751	)
Cash and due from banks		22,827								23,768
Other assets		107,310								109,922
Total assets	$	1,821,991							$	1,708,911

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,121,858			3,880		0.70		$	1,053,286			4,335		0.83
Short-term borrowings		22,750			39		0.34			22,054			21		0.19
FHLB Advances		4,201			53		2.54			7,082			103		2.93
Other borrowings		-			-		0.00			1,432			31		4.37
Subordinated debt		5,444			159		5.87			5,412			190		7.08
Total interest-bearing liabilities		1,154,253			4,131		0.72	%		1,089,266			4,680		0.87	%
Non-interest bearing deposits		406,163								383,128
Other liabilities		12,106								11,468
Stockholders’ equity		249,469								225,049
Total liabilities and equity	$	1,821,991							$	1,708,911

Net interest earnings				$	33,151							$	33,490
Net interest spread							3.68	%							3.98	%
Net interest margin							3.91	%							4.25	%

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

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

	Three Months Ended June 30, 2020								Three Months Ended June 30, 2019
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	112,513		$	26		0.09	%	$	81,672		$	478		2.35	%
Securities available for sale
Taxable		365,394			2,014		2.20			356,862			2,313		2.59
Tax-exempt		36,484			182		2.53			13,016			88		3.42
Total investment securities		401,878			2,196		2.23			369,878			2,401		2.62
Total loans		1,252,337			16,416		5.27			1,155,920			16,227		5.63
Total interest-earning assets		1,766,728			18,638		4.25	%		1,607,470			19,106		4.78	%
Allowance for loan losses		(14,039	)							(13,685	)
Cash and due from banks		22,980								23,461
Other assets		107,744								109,372
Total assets	$	1,883,413							$	1,726,618

Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,132,726			1,715		0.61		$	1,063,511			2,285		0.86
Short-term borrowings		25,653			15		0.24			21,938			12		0.22
FHLB Advances		4,253			23		2.18			6,496			48		2.96
Other borrowings		-			-		0.00			879			10		4.56
Subordinated debentures		5,448			76		5.61			5,416			96		7.11
Total interest-bearing liabilities		1,168,080			1,829		0.63	%		1,098,240			2,451		0.90	%
Non-interest bearing deposits		448,766								388,752
Other liabilities		12,812								11,248
Stockholders’ equity		253,755								228,378
Total liabilities and equity	$	1,883,413							$	1,726,618

Net interest earnings				$	16,809							$	16,655
Net interest spread							3.62	%							3.88	%
Net interest margin							3.83	%							4.16	%

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

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

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

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

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

Premier’s net interest margin during the second quarter of 2020 was 3.83% compared to 4.16% for the second quarter of 2019. A portion of the interest income on loans is the result of recognizing deferred interest income on loans that paid-off during the period. Excluding this income, Premier’s net interest margin during the second quarter of 2020 would have been 3.73% compared to 4.09% for the second quarter of 2019. As shown in the table above, Premier’s yield earned on federal funds sold and interest bearing bank balances decreased to 0.09% in the second quarter of 2020, from the 2.35% earned in the second quarter of 2019. The average yield earned on securities available for sale decreased to 2.23% in the second quarter of 2020, from the 2.62% earned during the second quarter of 2019. Similarly, the average yield earned on total loans outstanding decreased to 5.27% in 2020 from the 5.63% earned during the second quarter of 2019. Earning asset yields have decreased generally in response to decreases in long-term interest rates driven by economic uncertainty resulting from worldwide governmental actions intended to curb the spread of the COVID-19 virus. The Federal Reserve Board of Governors also dramatically reduced its the short-term interest rate policy as a means to stimulate the economy of the United States responsive to COVID-19 governmental actions. As new loans have been made with lower interest rates, some borrowers have requested interest rate lowering adjustments on their existing loans with Premier. Premier has been very selective in granting these loan interest rate concessions. Nevertheless, the impact of both on the average loan yield in the second quarter of 2020 has been a decrease of approximately 36 basis points when compared to the second quarter of 2019.

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

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

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

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

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

Income tax expense was $3,010,000 for the first six months of 2020 compared to $3,454,000 for the first six months of 2019. The effective tax rate for the six months ended June 30, 2020 was 21.7% compared to 22.3% for the same period in 2019. For the quarter ended June 30, 2020, income tax expense was $1,524,000, (a 21.7% effective tax rate), compared to $1,772,000, (a 23.2% effective tax rate), for the same period in 2019.

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

B. Financial Position

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

Cash and due from banks at June 30, 2020 was $23.7 million, a $633,000 increase from the $23.1 million at December 31, 2019. Interest bearing bank balances increased by $35.5 million, or 53.7%, from the $66.1 million reported at December 31, 2019. Federal funds sold increased by $2.5 million to $8.4 million at June 30, 2020. Changes in these highly liquid assets are generally in response to increases in deposits, the demand for deposit withdrawals or the funding of loans or investment purchases, and are part of Premier’s management of its liquidity and interest rate risks. With the significant increase in deposit balances during the second quarter of 2020 and the related potential for a significant reversal of that increase, Premier has retained a higher level of these liquid assets at June 30, 2020 to be able to immediately satisfy deposit withdrawals.

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

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

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

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

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

Deposits totaled $1.608 billion as of June 30, 2020, an $112.4 million, or 7.5%, increase from the $1.496 billion in deposits at December 31, 2019. The overall increase in deposits is largely due to a $107.4 million, or 29.2%, increase in non-interest bearing deposits, a $54.1 million, or 14.1%, increase in savings and money market deposits, and a $13.8 million, or 4.3%, increase in interest bearing transaction deposits. Partially offsetting these increases, certificates of deposit (“CD”) balances decreased by $62.9 million, or 14.8%. The decrease in certificate of deposit balances is not only primarily the result of discontinuing CD rate specials, but also a significant decrease in traditional CD rates, as management lowered offering rates in response to decreases in market short-term and long-term interest rates. As certificates of deposit mature, depositors are either seeking higher deposit rates from other competitive depository institutions or are transferring their balances to more liquid interest-bearing deposit accounts such as NOW, money market and savings deposits as a means to keep immediate access to their funds during the uncertainty of employment or economic conditions. Much of the SBA’s PPP loan program proceeds were originally deposited with Premier’s subsidiary banks, giving rise to an increase in commercial based deposit balances. Furthermore, government based economic stimulus checks to individuals have resulted in increases in retail based deposit balances. Repurchase agreements with corporate and public entity customers increased by $7.3 million, or 35.8%. Long-term FHLB advances decreased by $3.4 million due to payments at maturity on the FHLB advances assumed by Premier as part of its acquisition of First Bank of Charleston. Subordinated debentures increased by $19,000, due to the regular amortization of the fair value adjustment. Other liabilities increased by $4.2 million, primarily due to increases in net deferred tax liabilities related to the increase in the unrealized gain on securities available for sale and the accrual of income taxes on first two quarters of 2020 pretax income not due to be paid until July 15, 2020. The accrued income tax payments for the first two quarters of a calendar year are normally paid on April 15, and June 15 during the second calendar quarter but have been postponed in the year 2020 by governmental regulation to help mitigate some of the adverse economic effects of government actions designed to curb the spread of the COVID-19 virus.

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

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

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

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

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

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

Gross charge-offs totaled $935,000 during the first six months of 2020, largely due to a first quarter 2020 foreclosure on one commercial real estate property from a previously identified impaired loan relationship that also resulted in a $566,000 loan charge-off. Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first six months of 2020 totaled $191,000, resulting in net charge-offs for the first six months of 2020 of $744,000. This compares to $855,000 of net charge-offs recorded in the first six months of 2019. The allowance for loan losses at June 30, 2020 was 1.14% of total loans compared to 1.13% at December 31, 2019. The slight change in the ratio is due to opposing impacts to the ratio. First, the allowance for loan losses has increased by $846,000 in the first six months of 2020, largely due to $1.650 million of additional provision expense to provide for an estimate of additional credit risk in the loan portfolio due to uncertainty related to future economic conditions resulting from government actions designed to curb the spread of the COVID-19 virus and that impact on borrowers’ ability to repay their loans. This increase in the allowance, by itself, would have resulted in a more significant increase in the ratio to total loans. However, due to the $69.7 million increase in total loans outstanding since December 31, 2019, largely due to $114.2 million of SBA Paycheck Protection Program loans outstanding at June 30, 2020 that are fully guaranteed by the U.S. Treasury and, therefore, have no allowance for loan losses attributed to them, the allowance for loan losses ratio to total loans remained steady at 1.14%. Excluding the SBA PPP loan portfolio, the allowance for loan losses at June 30, 2020 would have been 1.25% of the remaining loans outstanding.

During the first six months of 2020, Premier recorded $1,590,000 of provision for loan losses. This provision compares to $890,000 of provision for loan losses recorded during the same six months of 2019. The provision for loan losses recorded during the first six months of 2020 was primarily to provide for an estimate of additional identified credit risk in the loan portfolio due to uncertainty related to future economic conditions resulting from government actions designed to curb the spread of the COVID-19 virus (“Potential COVID-19 Losses”). Premier added approximately $1,650,000 to its qualitative credit risk analysis of the loan portfolio related to loans originated to various industries believed to be more susceptible to future credit risk resulting from an economic slowdown, such as lodging, restaurants, amusement, non-owner occupied rental real estate, religious and civic organizations, personal services, and retail stores. Additional risk-weighting was given to loans in those industries where the borrower has been granted either an interest-only payment deferral period or a full principal and interest payment deferral period. Due to government intervention efforts to stimulate the economy and maintain personal and business liquidity, the extent, if any, of the impact of the economic slowdown on such industries may not be known for quite some time in the future. Management will continue to monitor past due and non-performing loans and work with borrowers within the permitted guidance provided by federal and state banking supervisory regulators to assist borrowers to avoid defaulting on their loans. The additional provision expense related to Potential COVID-19 Losses was partially offset by reductions in estimated credit risk within the loan portfolio resulting from decreases in higher-risk loans outstanding, such as commercial and industrial loans, construction and land development loans and consumer loans, as well as other portfolio credit risk improving indications such as improvements in past due ratios and decreases in historical loss ratios.

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

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

The provisions for loan losses recorded in 2019 and 2020 were made in accordance with Premier’s policies regarding management’s estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America. Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk. With the concentrations of commercial real estate loans in the Washington, DC, Richmond, Virginia, and Cincinnati, Ohio markets, fluctuations in commercial real estate values will be monitored. Premier also continues to monitor the impact of declines in the coal mining industry that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry, which may have a larger impact in the central area of West Virginia. A resulting decline in employment could increase non-performing assets from loans originated in these areas.

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

C. Critical Accounting Policies

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

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

D. Liquidity

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

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

Cash flow generated by repayment of loans and interest.

Arrangements with correspondent banks for purchase of unsecured federal funds.

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

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

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

E. Capital

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

In 2020, Premier elected to adopt regulatory capital simplification rules permitting bank holding companies of Premier’s size to utilize one measure of regulatory capital, the community bank leverage ratio (also known as the “CBLR”), to determine regulatory capital adequacy. The community bank leverage ratio requires a 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 $200.1 million at June 30, 2020, which represents a community bank leverage ratio of 10.9%. This ratio is down from the 11.3% Tier 1 leverage ratio and $192.7 million of Tier 1 capital at December 31, 2019. The decrease in the Tier 1 leverage ratio is largely due to the growth in quarterly average assets related largely in response to increases in funds from the growth in total deposits. Premier’s wholly owned subsidiary Citizens Deposit Bank adopted the CBLR simplification standard during the second quarter of 2020 as its Tier 1 leverage ratio was 8.2% at June 30, 2020. Premier’s other wholly owned subsidiary bank, Premier Bank, Inc. adopted the regulatory capital simplification rules in the first quarter and maintained a CBLR of 11.0% at June 30, 2020, well in excess of the 9.00% required to be considered well capitalized under the prompt corrective action framework.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company currently does not engage in any derivative or hedging activity. Refer to the Company’s 2019 10-K for analysis of the interest rate sensitivity. The Company believes there have been no significant changes in the interest rate sensitivity since previously reported on the Company’s 2019 10-K.

Item 4. Controls and Procedures

A. Disclosure Controls & Procedures

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

B. Changes in Internal Controls over Financial Reporting

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

C. Inherent Limitations on Internal Control

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

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 Disclosures

Not Applicable

Item 5.

Other Information

None

Item 6.

Exhibits

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

31.1

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

31.2

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

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

101.INS

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

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

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

SIGNATURES

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

		PREMIER FINANCIAL BANCORP, INC.



Date: August 6, 2020		/s/ Robert W. Walker
		Robert W. Walker
		President & Chief Executive Officer


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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details