UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 000-20908

PREMIER FINANCIAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:

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

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

Common stock, no par value, – 14,805,095 shares outstanding at August 4, 2021

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2021

INDEX TO REPORT

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

2.

PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2021

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant’s annual report on Form 10-K.  Accordingly, the reader of the Form 10-Q may wish to refer to the registrant’s Form 10-K for the year ended December 31, 2020 for further information in this regard.

Index to consolidated financial statements:

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

3.

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2021 AND DECEMBER 31, 2020

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

	(UNAUDITED)
	June 30, 2021			December 31, 2020
ASSETS
Cash and due from banks	$	24,265		$	24,961
Interest bearing bank balances		124,523			174,209
Federal funds sold		16,047			11,306
Cash and cash equivalents		164,835			210,476
Securities available for sale		572,785			421,190
Loans		1,245,961			1,214,378
Allowance for loan losses		(13,260	)		(13,516	)
Net loans		1,232,701			1,200,862
Federal Home Loan Bank stock, at cost		4,159			4,166
Premises and equipment, net		33,799			35,287
Other real estate owned, net		12,042			13,215
Interest receivable		6,011			5,991
Goodwill		47,640			47,640
Other intangible assets		3,979			4,424
Other assets		1,948			2,571
Total assets	$	2,079,899		$	1,945,822
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	519,552		$	487,675
Time deposits, $250,000 and over		64,218			63,602
Other interest bearing		1,143,012			1,082,463
Total deposits		1,726,782			1,633,740
Securities sold under agreements to repurchase		62,256			33,827
Subordinated debt		5,495			5,475
Interest payable		225			360
Other liabilities		35,956			12,513
Total liabilities		1,830,714			1,685,915
Stockholders' equity
Common stock, no par value; 30,000,000 shares authorized; 14,801,195 shares issued and outstanding at June 30, 2021, and 14,674,379 shares issued and outstanding at December 31, 2020		135,132			134,110
Retained earnings		108,970			116,378
Accumulated other comprehensive income		5,083			9,419
Total stockholders' equity		249,185			259,907
Total liabilities and stockholders' equity	$	2,079,899		$	1,945,822

4

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Interest income
Loans, including fees	$	16,024	$	16,416	$	31,472	$	32,170
Securities available for sale
Taxable		1,393		2,014		2,722		4,557
Tax-exempt		163		182		334		271
Federal funds sold and other		23		26		62		284
Total interest income		17,603		18,638		34,590		37,282
Interest expense
Deposits		586		1,715		1,351		3,880
Repurchase agreements and other		12		15		24		39
FHLB advances		-		23		-		53
Subordinated debt		59		76		119		159
Total interest expense		657		1,829		1,494		4,131
Net interest income		16,946		16,809		33,096		33,151
Provision for loan losses		428		590		1,076		1,590
Net interest income after provision for loan losses		16,518		16,219		32,020		31,561
Non-interest income
Service charges on deposit accounts		707		692		1,440		1,798
Electronic banking income		1,101		937		2,108		1,755
Security gains		-		-		1,096		-
Secondary market mortgage income		120		85		231		151
Other		194		176		391		435
		2,122		1,890		5,266		4,139
Non-interest expenses
Salaries and employee benefits		5,247		5,267		9,862		10,675
Occupancy and equipment expenses		1,811		1,798		3,600		3,523
Outside data processing		1,732		1,702		3,449		3,233
Professional fees		463		246		866		490
Taxes, other than payroll, property and income		172		252		303		527
Write-downs, expenses, sales of other real estate owned, net		995		354		1,159		422
Amortization of intangibles		223		241		445		483
FDIC insurance		124		72		251		68
Other expenses		1,052		1,147		2,074		2,395
		11,819		11,079		22,009		21,816
Income before income taxes		6,821		7,030		15,277		13,884
Provision for income taxes		1,647		1,524		3,553		3,010
Net income	$	5,174	$	5,506	$	11,724	$	10,874
Net income per share:
Basic	$	0.35	$	0.38	$	0.80	$	0.74
Diluted		0.35		0.37		0.79		0.74

5

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE AND SIX MONTHS ENDED 2021 AND 2020

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Net income	$	5,174		$	5,506		$	11,724		$	10,874
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period		(325	)		1,998			(4,393	)		8,890
Reclassification of realized amount		-			-			(1,096	)		-
Net change in unrealized gain (loss) on securities		(325	)		1,998			(5,489	)		8,890
Less tax impact		68			(419	)		1,153			(1,866	)
Other comprehensive income (loss)		(257	)		1,579			(4,336	)		7,024
Comprehensive income	$	4,917		$	7,085		$	7,388		$	17,898

6

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020

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

Three months ended June 30	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, April 1, 2021	$	134,322	$	106,017		$	5,340		$	245,679
Net income		-		5,174			-			5,174
Other comprehensive income (loss)		-		-			(257	)		(257	)
Cash dividends paid ($0.15 per share)		-		(2,221	)		-			(2,221	)
Stock options exercised		800		-			-			800
Stock based compensation expense		10		-			-			10
Balances, June 30, 2021	$	135,132	$	108,970		$	5,083		$	249,185
Balances, April 1, 2020	$	133,866	$	105,911		$	9,148		$	248,925
Net income		-		5,506			-			5,506
Other comprehensive income (loss)		-		-			1,579			1,579
Cash dividends paid ($0.15 per share)		-		(2,201	)		-			(2,201	)
Stock based compensation expense		186		-			-			186
Balances, June 30, 2020	$	134,052	$	109,216		$	10,727		$	253,995

Six months ended June 30	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, January 1, 2021	$	134,110	$	116,378		$	9,419		$	259,907
Net income		-		11,724			-			11,724
Other comprehensive income		-		-			(4,336	)		(4,336	)
Cash dividends paid ($1.30 per share)		-		(19,132	)		-			(19,132	)
Stock options exercised		991		-			-			991
Stock based compensation expense		31		-			-			31
Balances, June 30, 2021	$	135,132	$	108,970		$	5,083		$	249,185
Balances, January 1, 2020	$	133,795	$	102,743		$	3,703		$	240,241
Net income		-		10,874			-			10,874
Other comprehensive income		-		-			7,024			7,024
Cash dividends paid ($0.30 per share)		-		(4,401	)		-			(4,401	)
Stock options exercised		31		-			-			31
Stock based compensation expense		226		-			-			226
Balances, June 30, 2020	$	134,052	$	109,216		$	10,727		$	253,995

7

PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2021 AND 2020

(UNAUDITED, DOLLARS IN THOUSANDS)

	2021			2020
Cash flows from operating activities
Net income	$	11,724		$	10,874
Adjustments to reconcile net income to net cash from operating activities
Depreciation		1,034			987
Provision for loan losses		1,076			1,590
Amortization, net of accretion		2,611			666
Writedowns of other real estate owned, net		894			263
Stock compensation expense		31			226
Gain on the disposition of securities available for sale		(1,096	)		-
Changes in:
Interest receivable		(20	)		(1,298	)
Other assets		623			(496	)
Interest payable		(135	)		(274	)
Other liabilities		(771	)		2,213
Net cash from operating activities		15,971			14,751
Cash flows from investing activities
Purchases of securities available for sale		(263,301	)		(91,614	)
Proceeds from maturities and calls of securities available for sale		104,916			73,821
Proceeds from the sale of securities available for sale		25,526			-
Redemption of FHLB stock		7			164
Net change in loans		(32,509	)		(70,720	)
Purchases of premises and equipment, net		(179	)		(360	)
Proceeds from sales of other real estate acquired through foreclosure		596			612
Net cash from (used in) investing activities		(164,944	)		(88,097	)
Cash flows from financing activities
Net change in deposits		93,044			112,361
Net change in agreements to repurchase securities		28,429			7,309
Repayment of FHLB advances		-			(3,400	)
Proceeds from stock option exercises		991			31
Common stock dividends paid		(19,132	)		(4,401	)
Net cash from financing activities		103,332			111,900
Net change in cash and cash equivalents		(45,641	)		38,554
Cash and cash equivalents at beginning of period		210,476			95,056
Cash and cash equivalents at end of period	$	164,835		$	133,610
Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	1,629		$	4,404
Cash paid during period for income taxes		3,208			-
Loans transferred to real estate acquired through foreclosure		317			900
Security purchases settled in subsequent period		26,000			-
Operating right-of-use asset resulting from lease liability		(633	)		78

8

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 - BASIS OF PRESENTATION

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

		Year	Total		June 30, 2021  Net Income
Subsidiary	Location	Acquired	Assets		Qtr		YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	654,258	$	1,952	$	3,826
Premier Bank, Inc.	Huntington, West Virginia	1998		1,418,684		3,948		9,113
Parent and Intercompany Eliminations				6,957		(726)		(1,215)
Consolidated Total			$	2,079,899	$	5,174	$	11,724

All significant intercompany transactions and balances have been eliminated.

Estimates in the Financial Statements:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates are, to a large degree, dependent upon our accounting policies. The selection and application of these accounting policies involve judgments, estimates, and uncertainties that are susceptible to change. Those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations include the allowance for loan losses, business combinations and impairment of goodwill, and the identification and evaluation of impaired loans.  The estimates and assumptions used in these calculations affect the amounts reported in the financial statements and the disclosures provided.  At this time, management does not believe there exists any impairment to goodwill and intangible assets, long-lived assets, or available-for-sale securities due to the COVID-19 pandemic. The effects of government measures to curb the spread of the COVID-19 virus on the local or national economy are uncertain and could cause assumptions and conditions to change in the near term.  In the event that changes to assumptions or conditions from what was originally estimated were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

9

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  1 - BASIS OF PRESENTATION - continued

Accounting Pronouncements

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

10

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2 - SECURITIES

Amortized cost and fair value of investment securities, by category, at June 30, 2021 are summarized as follows:

2021	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	216,286	$	6,752	$	(544	)	$	222,494
U. S. sponsored agency CMO’s - residential		17,694		510		-			18,204
Total mortgage-backed securities of government sponsored agencies		233,980		7,262		(544	)		240,698
U. S. government sponsored agency securities		273,329		331		(1,409	)		272,251
Obligations of states and political subdivisions		54,054		966		(202	)		54,818
Other securities		4,988		67		(37	)		5,018
Total available for sale	$	566,351	$	8,626	$	(2,192	)	$	572,785

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

2020	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	318,315	$	9,777	$	(292	)	$	327,800
U. S. sponsored agency CMO’s - residential		29,264		812		-			30,076
Total mortgage-backed securities of government sponsored agencies		347,579		10,589		(292	)		357,876
U. S. government sponsored agency securities		2,490		136		-			2,626
Obligations of states and political subdivisions		53,639		1,361		-			55,000
Other securities		5,559		129		-			5,688
Total available for sale	$	409,267	$	12,215	$	(292	)	$	421,190

11

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  2 - SECURITIES - continued

The amortized cost and fair value of securities at June 30, 2021 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Available for sale
Due in one year or less	$	16,503	$	16,599
Due after one year through five years		22,785		23,106
Due after five years through ten years		279,970		279,110
Due after ten years		13,113		13,272
Mortgage-backed securities of government sponsored agencies		233,980		240,698
Total available for sale	$	566,351	$	572,785

During the first three and six months of 2021 Premier sold $25.5 million of mortgage-backed securities and realized gains upon the sales totaling $1,096,000.  There were no sales of securities during the first three and six months of  2020.

Securities with unrealized losses at June 30, 2021 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S government sponsored agency securities	$	129,585	$	(1,409	)	$	-	$	-		$	129,585	$	(1,409	)
U.S government sponsored agency MBS – residential		40,751		(400	)		16,525		(144	)		57,276		(544	)
Obligations of states and political subdivisions		11,717		(202	)		-		-			11,717		(202	)
Other securities		3,963		(37	)		-		-			3,963		(37	)
Total temporarily impaired	$	186,016	$	(2,048	)	$	16,525	$	(144	)	$	202,541	$	(2,192	)

12

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  2 - SECURITIES - continued

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

	Less than 12 Months					12 Months or More				Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S government sponsored agency MBS – residential	$	58,207	$	(292	)	$	-	$	-	$	58,207	$	(292	)
Total temporarily impaired	$	58,207	$	(292	)	$	-	$	-	$	58,207	$	(292	)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at June 30, 2021 and December 31, 2020 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities.  Management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.

NOTE  3 - LOANS

Major classifications of loans at June 30, 2021 and December 31, 2020 are summarized as follows:

	2021		2020
Residential real estate	$	379,647	$	378,659
Multifamily real estate		37,593		37,978
Commercial real estate:
Owner occupied		171,281		164,706
Non-owner occupied		339,418		329,031
Commercial and industrial		83,961		90,062
SBA PPP		73,404		61,169
Consumer		21,505		23,984
Construction and land		103,591		92,648
All other		35,561		36,141
	$	1,245,961	$	1,214,378

13

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2021 was as follows:

Loan Class	Balance December 31, 2020		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2021
Residential real estate	$	2,071	$	301		$	(175	)	$	12	$	2,209
Multifamily real estate		184		(17	)		-			-		167
Commercial real estate:
Owner occupied		2,874		(184	)		(214	)		3		2,479
Non-owner occupied		5,129		964			(856	)		-		5,237
Commercial and industrial		1,538		(129	)		(90	)		12		1,331
Consumer		226		(4	)		(44	)		18		196
Construction and land		946		152			-			4		1,102
All other		548		(7	)		(50	)		48		539
Total	$	13,516	$	1,076		$	(1,429	)	$	97	$	13,260

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

Loan Class	Balance December 31, 2019		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2020
Residential real estate	$	1,711	$	288		$	(94	)	$	10	$	1,915
Multifamily real estate		1,954		161			-			-		2,115
Commercial real estate:
Owner occupied		2,441		590			(566	)		5		2,470
Non-owner occupied		3,184		1,200			(77	)		3		4,310
Commercial and industrial		1,767		(247	)		(5	)		39		1,554
Consumer		281		14			(99	)		34		230
Construction and land		1,724		(529	)		-			38		1,233
All other		480		113			(94	)		62		561
Total	$	13,542	$	1,590		$	(935	)	$	191	$	14,388

14

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

Activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2021 was as follows:

Loan Class	Balance March 31, 2021		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance June 30, 2021
Residential real estate	$	2,111	$	202		$	(115	)	$	11	$	2,209
Multifamily real estate		166		1			-			-		167
Commercial real estate:
Owner occupied		2,970		(279	)		(214	)		2		2,479
Non-owner occupied		5,628		465			(856	)		-		5,237
Commercial and industrial		1,385		(34	)		(27	)		7		1,331
Consumer		205		(5	)		(18	)		14		196
Construction and land		1,022		78			-			2		1,102
All other		540		-			(22	)		21		539
Total	$	14,027	$	428		$	(1,252	)	$	57	$	13,260

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

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

15

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at June 30, 2021 and December 31, 2020.

	2021		2020
Residential real estate	$	1,904	$	2,092
Commercial real estate
Owner occupied		658		1,012
Non-owner occupied		1,948		2,357
Commercial and industrial		-		16
Consumer		2		9
Construction and land		334		368
All other		39		110
Total carrying amount	$	4,885	$	5,964
Contractual principal balance	$	7,746	$	9,267
Carrying amount, net of allowance	$	4,885	$	5,964

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three and six months ended June 30, 2021 and June 30, 2020.

For those purchased loans disclosed above, where the Company can reasonably estimate the cash flows expected to be collected on the loans, a portion of the purchase discount is allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion is being recognized as interest income over the remaining life of the loan.

Where the Company cannot reasonably estimate the cash flows expected to be collected on the loans, it has continued to account for those loans using the cost recovery method of income recognition.  As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method.  If, in the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan.  Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero.  Any loan accounted for under the cost recovery method is also still included as a non-accrual loan in the amounts presented in the tables below.

16

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at June 30, 2021 and June 30, 2020.

	2021			2020
Balance at January 1	$	277		$	619
New loans purchased		-			-
Accretion of income		(137	)		(59	)
Loans placed on non-accrual		(19	)		-
Income recognized upon full repayment		(11	)		(65	)
Reclassifications to accretable difference		231			(190	)
Disposals		-			-
Balance at June 30	$	341		$	305

17

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2021 and December 31, 2020.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

June 30, 2021	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	4,050	$	3,086	$	984
Commercial real estate
Owner occupied		3,375		3,105		-
Non-owner occupied		6,434		5,231		83
Commercial and industrial		992		422		-
Consumer		114		73		1
Construction and land		10		8		-
Total	$	14,975	$	11,925	$	1,068

December 31, 2020	Principal Owed on Non- accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	5,144	$	3,955	$	1,348
Commercial real estate
Owner occupied		2,601		2,103		7
Non-owner occupied		3,305		2,230		975
Commercial and industrial		1,173		604		-
Consumer		168		94		1
Construction and land		12		10		1
Total	$	12,403	$	8,996	$	2,332

Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one category.  Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

18

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of June 30, 2021 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
Residential real estate	$	379,647	$	3,419	$	2,218	$	5,637	$	374,010
Multifamily real estate		37,593		-		-		-		37,593
Commercial real estate:
Owner occupied		171,281		21		1,874		1,895		169,386
Non-owner occupied		339,418		835		2,120		2,955		336,463
Commercial and industrial		83,961		398		304		702		83,259
SBA PPP		73,404		-		-		-		73,404
Consumer		21,505		161		7		168		21,337
Construction and land		103,591		963		3		966		102,625
All other		35,561		-		-		-		35,561
Total	$	1,245,961	$	5,797	$	6,526	$	12,323	$	1,233,638

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

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
Residential real estate	$	378,659	$	3,978	$	3,190	$	7,168	$	371,491
Multifamily real estate		37,978		32		-		32		37,946
Commercial real estate:
Owner occupied		164,706		1,197		814		2,011		162,695
Non-owner occupied		329,031		987		2,196		3,183		325,848
Commercial and industrial		90,062		75		476		551		89,511
SBA PPP		61,169		-		-		-		61,169
Consumer		23,984		190		38		228		23,756
Construction and land		92,648		-		5		5		92,643
All other		36,141		23		-		23		36,118
Total	$	1,214,378	$	6,482	$	6,719	$	13,201	$	1,201,177

19

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2021:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total
Residential real estate	$	-	$	2,209	$	-	$	2,209	$	54	$	377,689	$	1,904	$	379,647
Multifamily real estate		-		167		-		167		-		37,593		-		37,593
Commercial real estate:
Owner occupied		-		2,479		-		2,479		3,267		167,356		658		171,281
Non-owner occupied		352		4,885		-		5,237		5,139		332,331		1,948		339,418
Commercial and industrial		276		1,055		-		1,331		389		83,572		-		83,961
SBA PPP		-		-		-		-		-		73,404		-		73,404
Consumer		-		196		-		196		-		21,503		2		21,505
Construction and land		-		1,102		-		1,102		-		103,257		334		103,591
All other		-		539		-		539		-		35,522		39		35,561
Total	$	628	$	12,632	$	-	$	13,260	$	8,849	$	1,232,227	$	4,885	$	1,245,961

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2020:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total
Residential real estate	$	-	$	2,071	$	-	$	2,071	$	57	$	376,510	$	2,092	$	378,659
Multifamily real estate		-		184		-		184		-		37,978		-		37,978
Commercial real estate:
Owner occupied		240		2,634		-		2,874		1,981		161,713		1,012		164,706
Non-owner occupied		385		4,744		-		5,129		1,843		324,831		2,357		329,031
Commercial and industrial		374		1,164		-		1,538		548		89,498		16		90,062
SBA PPP		-		-		-		-		-		61,169		-		61,169
Consumer		-		226		-		226		-		23,975		9		23,984
Construction and land		-		946		-		946		-		92,280		368		92,648
All other		-		548		-		548		-		36,031		110		36,141
Total	$	999	$	12,517	$	-	$	13,516	$	4,429	$	1,203,985	$	5,964	$	1,214,378

20.

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2021.  The table includes $73,000 of loans acquired with deteriorated credit quality for which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	171	$	54	$	-
Commercial real estate
Owner occupied		3,535		3,267		-
Non-owner occupied		3,270		2,358		-
Commercial and industrial		509		-		-
		7,485		5,679		-
With an allowance recorded:
Commercial real estate
Non-owner occupied		3,139		2,854		352
Commercial and industrial		435		389		276
		3,574		3,243		628
Total	$	11,059	$	8,922	$	628

21

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2020.  The table includes $689,000 of loans acquired with deteriorated credit quality for which the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Residential real estate	$	175	$	57	$	-
Commercial real estate
Owner occupied		2,295		1,815		-
Non-owner occupied		1,638		743		-
Commercial and industrial		509		-		-
		4,617		2,615		-
With an allowance recorded:
Commercial real estate
Owner occupied		506		490		240
Non-owner occupied		1,638		1,465		385
Commercial and industrial		581		548		374
		2,725		2,503		999
Total	$	7,342	$	5,118	$	999

22

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the six months ended June 30, 2021 and June 30, 2020.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Six Months Ended June 30, 2021						Six Months Ended June 30, 2020
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Residential real estate	$	56	$	-	$	-	$	62	$	-	$	-
Multifamily real estate		-		-		-		3,744		-		-
Commercial real estate:
Owner occupied		3,123		155		155		2,191		6		4
Non-owner occupied		3,871		-		-		4,376		72		36
Commercial and industrial		446		1		1		738		2		2
Construction and land		-		-		-		353		-		-
Total	$	7,496	$	156	$	156	$	11,464	$	80	$	42

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended June 30, 2021 and June 30, 2020.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended June 30, 2021						Three months ended June 30, 2020
Loan Class	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
Residential real estate	$	55	$	-	$	-	$	61	$	-	$	-
Multifamily real estate		-		-		-		3,753		-		-
Commercial real estate:
Owner occupied		3,532		3		3		1,785		3		1
Non-owner occupied		4,703		-		-		4,429		36		-
Commercial and industrial		395		-		-		768		1		1
Construction and land		-		-		-		314		-		-
Total	$	8,685	$	3	$	3	$	11,110	$	40	$	2

23

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR’s as of June 30, 2021 and December 31, 2020:

June 30, 2021	TDR’s on Non-accrual		Other TDR’s		Total TDR’s
Residential real estate	$	1	$	211	$	212
Commercial real estate
Owner occupied		-		184		184
Total	$	1	$	395	$	396

December 31, 2020	TDR’s on Non-accrual		Other TDR’s		Total TDR’s
Residential real estate	$	19	$	203	$	222
Commercial real estate
Owner occupied		-		195		195
Non-owner occupied		856		-		856
Total	$	875	$	398	$	1,273

At June 30, 2021, no specific reserves were allocated to loans that had restructured terms.  However, deterioration of a TDR that was charged-off during the three months ended June 30, 2021 resulted in a provision for loan losses of $550,000 for the three months ended June 30, 2021 and $580,000 for the six months ended June 30, 2021.  This compares to a provision for loan losses on restructured loans of $10,000 for the three months ended June 30, 2020 and $213,000 for the six months ended June 30, 2020.  At December 31, 2020, $276,000 in specific reserves were allocated to loans that had restructured terms.  There were no commitments to lend additional amounts to these borrowers.

24

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

There were no new TDR’s that occurred during the three and six months ended June 30, 2021 and June 30, 2020.

During the three and six months ended June 30, 2021 and June 30, 2020, there were no TDR’s for which there as a payment default within twelve months following the modification.

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

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

The following table presents the status of the remaining loans as of June 30, 2021 with some degree of payment modification under the CARES Act.

June 30, 2021	Modified to Interest Only Payment		Modified to Defer Principal and Interest Payment		Total
Commercial real estate
Owner occupied	$	967	$	-	$	967
Non-owner occupied		3,839		-		3,839
Construction and land		1,920		-		1,920
Total	$	6,726	$	-	$	6,726

December 31, 2020	Modified to Interest Only Payment		Modified to Defer Principal and Interest Payment		Total
Residential real estate	$	560	$	338	$	898
Multifamily real estate		667		-		667
Commercial real estate
Owner occupied		10,567		396		10,963
Non-owner occupied		17,659		214		17,873
Commercial and industrial		-		898		898
Consumer		7		19		26
Construction and land		2,472		3,849		6,321
Total	$	31,932	$	5,714	$	37,646

25

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

Credit Quality Indicators:

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

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

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

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

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

26

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3 - LOANS - continued

As of June 30, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans
Residential real estate	$	368,576	$	2,401	$	8,670	$	-	$	379,647
Multifamily real estate		36,526		1,067		-		-		37,593
Commercial real estate:
Owner occupied		163,510		4,424		3,347		-		171,281
Non-owner occupied		309,471		24,188		5,759		-		339,418
Commercial and industrial		79,815		2,999		1,147		-		83,961
SBA PPP		73,404		-		-		-		73,404
Consumer		21,411		-		94		-		21,505
Construction and land		98,943		4,590		58		-		103,591
All other		35,535		26		-		-		35,561
Total	$	1,187,191	$	39,695	$	19,075	$	-	$	1,245,961

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

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans
Residential real estate	$	365,397	$	3,093	$	10,169	$	-	$	378,659
Multifamily real estate		35,412		2,566		-		-		37,978
Commercial real estate:
Owner occupied		155,707		4,686		4,313		-		164,706
Non-owner occupied		312,139		13,959		2,933		-		329,031
Commercial and industrial		84,948		3,747		1,367		-		90,062
SBA PPP		61,169		-		-		-		61,169
Consumer		23,837		5		142		-		23,984
Construction and land		88,587		3,833		228		-		92,648
All other		36,141		-		-		-		36,141
Total	$	1,163,337	$	31,889	$	19,152	$	-	$	1,214,378

As of June 30, 2021 and December 31, 2020, there were no loans with payment deferrals under the CARES Act that were delinquent or on nonaccrual status. As of June 30, 2021, one non-owner occupied loan totaling $3,839,000 was risk rated special mention.  As of December 31, 2020, one non-owner occupied loan totaling $3,839,000 was risk rated special mention and one residential real estate loan totaling $38,000 was risk rated substandard. The Company evaluates its deferred loans after a deferral period expires to determine if a further deferment should be granted and if a downgrade in risk rating is appropriate. Otherwise, loans are returned to their original payment terms.

27

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS

The Company’s principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks.  Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below.  During 2021 the Banks could, without prior approval, declare dividends to the Company of approximately $12.3 million plus any 2021 net profits retained to the date of the dividend declaration.

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

In 2020, the Company elected to adopt the regulatory capital simplification rules permitting bank holding companies of Premier’s size to utilize one measure of regulatory capital, the Community Bank Leverage Ratio ("CBLR"), to determine regulatory capital adequacy.  The CBLR requires a higher amount of Tier 1 capital to average assets than the standard leverage ratio for a financial institution 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 wholly owned subsidiary Premier Bank, Inc. 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 CBLR of Total Tier 1 capital to quarterly average assets must be at least 8.50% in year 2021 and at least 9.00% in year 2022.  Premier’s other wholly owned subsidiary bank, Citizens Deposit Bank did not maintain a CBLR of 8.50% at June 30, 2021, and provided full regulatory capital ratio calcuations in its June 30, 2021 FDIC call report. 

28

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  4 - STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS - continued

Premier’s Tier 1 capital totaled $201.8 million at June 30, 2021, which represents a community bank leverage ratio of 10.19%.  Premier’s wholly owned subsidiary Premier Bank, Inc. maintained a CBLR of 10.29% at June 30, 2021, well in excess of the 8.50% required to be considered well capitalized under the prompt corrective action framework.  Premier’s other wholly owned subsidiary bank, Citizens Deposit Bank did not maintain a CBLR of 8.50% at June 30, 2021, and provided full regulatory capital ratio calcuations in its June 30, 2021 FDIC call report.  The bank remained well-capitalized with a Tier 1 Risk-based Capital Ratio of 15.40%, a Total Risk-based Capital Ratio of 16.17%, and a Tier 1 Leverage Ratio of 8.24%.  Citizens Deposit Bank’s Risk-based Capital Conversation Buffer was 8.17%, well in excess of the required 2.50% at June 30, 2021.

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

	June 30, 2021			December 31, 2020			Regulatory Minimum Requirements			To Be Considered Well Capitalized
Tier 1 Capital to average assets (CBLR):		10.19	%		11.27	%		8.50	%		8.50	%

29

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5 – PREMISES AND EQUIPMENT

The Company leases certain banking facilities and equipment under various agreements with original terms providing for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options.  Certain leases contain renewal options and rent escalation clauses calling for rent increases over the term of the lease.  Short-term leases of equipment are recognized on a straight-line basis over the lease term.  As of June 30, 2021, the weighted average remaining lease term for operating leases was 8.4 years and the weighted average discount rate used in the measurement of operating lease liabilities was 1.18%.

Total lease expense for the six months ended June 30, 2021, which is included in net occupancy and equipment expense, was $685,000, consisting of $76,000 short-term lease expense and $609,000 of operating lease expense.  For the three months ended June 30, 2021, was $347,000, which is included in net occupancy and equipment expense, consisting of $40,000 short-term lease expense and $307,000 of operating lease expense.

Total lease expense for the six months ended June 30, 2020, which is included in net occupancy and equipment expense, was $673,000, consisting of $74,000 short-term lease expense and $599,000 of operating lease expense.  For the three months ended June 30, 2020, was $340,000, which is included in net occupancy and equipment expense, consisting of $36,000 short-term lease expense and $304,000 of operating lease expense.

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

2021	$	562
2022		1,052
2023		788
2024		663
2025		664
2026 and Thereafter		2,795
Total undiscounted cash flows		6,524
Discounted cash flows		(435	)
Total lease liability	$	6,089

30

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  6 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and six months ended June 30, 2021 and 2020 is presented below:

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Basic earnings per share
Income available to common stockholders	$	5,174	$	5,506	$	11,724	$	10,874
Weighted average common shares outstanding		14,759,185		14,664,916		14,728,244		14,661,957
Earnings per share	$	0.35	$	0.38	$	0.80	$	0.74
Diluted earnings per share
Income available to common stockholders	$	5,174	$	5,506	$	11,724	$	10,874
Weighted average common shares outstanding		14,759,185		14,664,916		14,728,244		14,661,957
Add dilutive effects of potential additional common stock		89,669		60,159		91,700		66,251
Weighted average common and dilutive potential common shares outstanding		14,848,854		14,725,075		14,819,944		14,728,208
Earnings per share assuming dilution	$	0.35	$	0.37	$	0.79	$	0.74

There were no stock options that were considered anti-dilutive for the three and six months ended June 30, 2021.  There were 183,242 stock options considered antidilutive for the three and six months ended June 30, 2020.

31

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7 - 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).

32

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 - FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at June 30, 2021 were as follows:

	Carrying		Fair Value Measurements at June 30, 2021 Using
	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	148,788	$	148,438	$	350	$	-	$	148,788
Federal funds sold		16,047		16,047		-		-		16,047
Securities available for sale		572,785		-		572,785		-		572,785
Loans, net		1,232,701		-		-		1,233,412		1,233,412
Interest receivable		6,011		-		1,878		4,133		6,011
Financial liabilities
Deposits	$	1,726,782	$	1,425,037	$	302,090	$	-	$	1,727,127
Securities sold under agreements to repurchase		62,256		-		62,256		-		62,256
Subordinated debt		5,495		-		5,383		-		5,383
Interest payable		225		4		221		-		225

The carrying amounts and estimated fair values of financial instruments at December 31, 2020 were as follows:

	Carrying		Fair Value Measurements at December 31, 2020 Using
	Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and due from banks	$	199,170	$	198,820	$	350	$	-	$	199,170
Federal funds sold		11,306		11,306		-		-		11,306
Securities available for sale		421,190		-		421,190		-		421,190
Loans, net		1,200,862		-		-		1,209,579		1,209,579
Interest receivable		5,991		-		1,301		4,690		5,991
Financial liabilities
Deposits	$	1,633,740	$	1,308,188	$	327,448	$	-	$	1,635,636
Securities sold under agreements to repurchase		33,827		-		33,827		-		33,827
Subordinated debt		5,475		-		5,366		-		5,366
Interest payable		360		4		356		-		360

33

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 - FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at June 30, 2021 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	$	222,494	$	-	$	222,494	$	-
U. S. agency CMO’s - residential		18,204		-		18,204		-
Total mortgage-backed securities of government sponsored agencies		240,698		-		240,698		-
U. S. government sponsored agency securities		272,251		-		272,251		-
Obligations of states and political subdivisions		54,818		-		54,818		-
Other securities		5,018		-		5,018		-
Total securities available for sale	$	572,785	$	-	$	572,785	$	-

			Fair Value Measurements at December 31, 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	$	327,800	$	-	$	327,800	$	-
U. S. agency CMO’s		30,076		-		30,076		-
Total mortgage-backed securities of government sponsored agencies		357,876		-		357,876		-
U. S. government sponsored agency securities		2,626		-		2,626		-
Obligations of states and political subdivisions		55,000		-		55,000		-
Other securities		5,688		-		5,688		-
Total securities available for sale	$	421,190	$	-	$	421,190	$	-

There were no transfers between Level 1 and Level 2 during 2021 or 2020.

34

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 - FAIR VALUE - continued

Assets and Liabilities Measured on a 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.

35

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 - FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2021 are summarized below:

			Fair Value Measurements at June 30, 2021 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate
Non-owner occupied	$	2,502	$	-	$	-	$	2,502
Commercial and industrial		113		-		-		113
Total impaired loans	$	2,615	$	-	$	-	$	2,615
Other real estate owned:
Residential real estate	$	297	$	-	$	-	$	297
Multifamily real estate		10,070		-		-		10,070
Commercial real estate
Owner occupied		817		-		-		817
Construction and land		400		-		-		400
Total OREO	$	11,584	$	-	$	-	$	11,584

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment of $3,243,000 at June 30, 2021 with a valuation allowance of $628,000 and a recorded investment of $2,503,000 at December 31, 2020 with a valuation allowance of $999,000.  The change resulted in a provision for loan losses of $760,000  for the six-months ended June 30, 2021, compared to a $223,000 provision for loan losses for the six-months ended June 30, 2020 and a $729,000 in provision for loan losses for the three months ended June 30, 2021, compared to a $41,000 provision for loan losses for the three months ended June 30, 2020.  The detail of impaired loans by loan class is contained in Note 3 above.

Other real estate owned measured at fair value less costs to sell had a net carrying amount of $11,584,000 which is made up of the outstanding balance of $14,478,000 net of a valuation allowance of $2,894,000 at June 30, 2021.  There were $859,000 of write downs during the six months ended June 30, 2021, compared to $277,000 of write downs during the six months ended June 30, 2020. For the three months ended June 30, 2021 there were $859,000 of additional write downs compared to $252,000 of additional write downs during the three months ended June 30, 2020.  At December 31, 2020, other real estate owned had a net carrying amount of $12,273,000, made up of the outstanding balance of $14,320,000, net of a valuation allowance of $2,047,000.

36

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 - FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at June 30, 2021 are summarized below:

	June 30, 2021		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Commercial real estate
Non-owner occupied	$	2,502	income approach	adjustment for differences in net operating income expectations	20.1%-47.1% (24.7%)
Commercial and industrial		113	sales comparison	adjustment for estimated realizable value	61.7%-91.8% (64.3%)
Total impaired loans	$	2,615
Other real estate owned:
Residential real estate	$	297	sales comparison	adjustment for estimated realizable value	41.9%-65.9% (54.6%)
Multifamily real estate		10,070	income approach	adjustment for differences in net operating income expectations	45.8%-70.3% (49.1%)
Commercial real estate
Owner occupied		817	sales comparison	adjustment for estimated realizable value	22.1%-28.5% (26.3%)
Construction and land		400	sales comparison	adjustment for estimated realizable value	50.3%-98.6% (80.5%)
Total OREO	$	11,584

37

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 - FAIR VALUE - continued

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

			Fair Value Measurements at December 31, 2020 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial real estate
Owner occupied	$	250	$	-	$	-	$	250
Non-owner occupied		1,080		-		-		1,080
Commercial and industrial		174		-		-		174
Total impaired loans	$	1,504	$	-	$	-	$	1,504
Other real estate owned:
Residential real estate	$	206	$	-	$	-	$	206
Multifamily real estate		10,838		-		-		10,838
Commercial real estate
Owner occupied		829		-		-		829
Construction and land		400		-		-		400
Total OREO	$	12,273	$	-	$	-	$	12,273

38

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 - FAIR VALUE - continued

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

	December 31, 2020		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Commercial real estate
Owner occupied	$	250	sales comparison	adjustment for estimated realizable value	73.8%-73.8% (73.8%)
Non-owner occupied		1,080	income approach	adjustment for differences in net operating income expectations	14.7%-37.4% (25.2%)
Commercial and industrial		174	sales comparison	adjustment for estimated realizable value	50.0%-85.0% (62.0%)
Total impaired loans	$	1,504
Other real estate owned:
Residential real estate	$	206	sales comparison	adjustment for estimated realizable value	0.2%-59.8% (18.1%)
Multifamily real estate		10,838	income approach	adjustment for differences in net operating income expectations	42.0%-70.4% (45.5%)
Commercial real estate
Owner occupied		829	sales comparison	adjustment for estimated realizable value	22.1%-26.8% (25.2%)
Construction and land		400	sales comparison	adjustment for estimated realizable value	50.3%-98.6% (80.5%)
Total OREO	$	12,273

39

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 - MERGER AGREEMENT

On March 26, 2021, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. (“Peoples”).  The Merger Agreement provides for a business combination whereby Premier Financial will merge with and into Peoples (the “Merger”), with Peoples as the surviving corporation in the Merger.  Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Premier common stock, issued and outstanding immediately prior to the Effective Time (except for Treasury Shares and Dissenting Shares, both as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.58 (the “Exchange Ratio”) of common shares, no par value, of Peoples. The Merger Agreement contains certain termination rights for both Peoples and Premier Financial, and further provides that, upon termination of the Merger Agreement under specified circumstances, Premier Financial may be required to pay Peoples a termination fee of $11,000,000.  The Merger is expected to close in the third quarter of 2021.  Satisfaction of various pre-closing conditions have occurred, including, but not limited to: (1) adoption of the Merger Agreement by the shareholders of Peoples and Premier Financial; (2) the receipt of required regulatory approvals, including the approval of the Board of Governors of the Federal Reserve System and the Ohio Division of Financial Institutions; and (3) effectiveness of the registration statement on Form S-4 for the Peoples Common Shares to be issued in the Merger.  The Merger Agreement provides for other closing conditions,  including, but not limited to (1) the absence of any order, injunction or other legal restraint preventing or making illegal the completion of the Merger or any of the other transactions contemplated by the Merger Agreement; and (2) authorization for listing on Nasdaq of the Peoples Common Shares to be issued in the Merger.

40

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

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, 2020, 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, 2021 was $11,724,000, or $0.79 per diluted share, compared to net income of $10,874,000, or $0.74 per diluted share, for the six months ended June 30, 2020.  The increase in net income in the first six months of 2021 is largely due to $1,096,000 of gains on the sale of securities and a $514,000 decrease in the provision for loan losses.  These items more than offset a $55,000 decrease in net interest income and a $193,000 increase in non-interest expense. The decrease in net interest income is a combination of larger decreases in both interest income and interest expense, while the increase in non-interest expense was mainly due to an increase in expenses and writedowns of other real estate owned (“OREO”) and an increase in professional fees largely related to the Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. (“Peoples”) with Peoples as the surviving corporation in the Merger.  The decrease in the provision for loan losses related primarily to a higher portion of the provision for loan losses recorded during the first six months of 2020 attributed to additional identified credit risk in the loan portfolio related to anticipated consequences of the national economic shutdown designed to curb the spread of the novel corona virus of 2019 (“COVID-19”) compared to the net negative COVID-19 portion of the loan loss provision recorded in the first six months of 2021.  The annualized returns on average common shareholders’ equity and average assets were approximately 9.22% and 1.21% for the six months ended June 30, 2021 compared to 8.72% and 1.19% for the same period in 2020.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Net income for the three months ended June 30, 2021 was $5,174,000, or $0.35 per diluted share, compared to net income of $5,506,000, or $0.37 per diluted share for the three months ended June 30, 2020.  The decrease in net income in the second quarter of 2021 is largely due to an increase in non-interest expenses, primarily professional fees and expenses and writedowns of OREO.  The increase in non-interest expense more than offset positive quarter-over-quarter earnings comparisons in 2021, such as increases in net interest income and non-interest income and a decrease in the provision for loan losses when compared to the second quarter of 2020.  The annualized returns on average common shareholders’ equity and average assets were approximately 8.14% and 1.06% for the three months ended June 30, 2021 compared to 8.68% and 1.17% for the same period in 2020.

Net interest income for the six months ended June 30, 2021 totaled $33.096 million, a decrease of $55,000, or 0.2%, from the $33.151 million of net interest income earned in the first six months of 2020.  Interest income in 2021 decreased by $2,692,000, or 7.2%, largely due to a $1,772,000, or 36.7%, decrease in interest income on investment securities.  Interest income on investment securities decreased in the first six months of 2021 largely due to significantly lower average yields although on a higher outstanding average balance.  The decrease in the average yield earned is largely due to accelerated prepayments of mortgage-backed securities which resulted in a corresponding higher rate of purchase premium amortization on these securities as well as a significantly lower reinvestment yield on the accelerated prepayment funds and investments purchased with funds from the growth in deposit balances and customer repurchase agreements.  In addition to the decrease in interest income on investment securities, interest income on loans decreased $698,000, or 2.2%, compared to the first six months of 2020.  Interest income on loans in the first six months of 2021 included approximately $556,000 of income from deferred interest and discounts recognized on loans that paid off or paid-down during during the first six months of 2021 compared to approximately $543,000 of interest income of this kind recognized during the six months of 2020.  Excluding this loan income recognition, interest income on loans decreased by $711,000, or 2.2%, in the first six months of 2021, largely due to a lower average yield earned, although on a higher average balance of loans outstanding during the first six months of 2021 when compared to the first six months of 2020.  Premier’s participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) resulted in $91,511,000 of average PPP loans outstanding during the first six months of 2021.  This compares to an average balance of only $42,068,000 of PPP loans outstanding during the first six months of 2020.  The PPP loan program of the SBA did not get underway until after March 31, 2020.  Excluding participation in the PPP loan program, Premier’s average loans outstanding during the first six months of 2021 decreased by $28,800,000 compared to the average loans outstanding during the same six months of 2020, while the average yield on these loans decreased to 4.91% during the first six months of 2021 compared to 5.27% during the same six months of 2020.  Earning yields dropped 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.  As a result, the prime lending rate dropped to 3.25% at this time.  As new loans were recorded or existing loans were renewed or repriced after March 2020, the lower prime lending rate generally resulted in a lower interest rate on these loans.  Also contributing to the decrease in interest income, interest income from interest-bearing bank balances and federal funds sold decreased by $222,000, or 78.2%, largely due to a significant decrease in the yield earned on these balances, from 0.09% in 2021 compared to the 0.62% yield earned in 2020, resulting from decreases in the short-term interest rate policy of the Federal Reserve Board of Governors.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Substantially offsetting the decrease in interest income in the first six months of 2021 was a $2,637,000, or 63.8%, decrease in interest expense, driven by a decrease in interest expense on deposits.  Interest expense on deposits decreased by $2,529,000, or 65.2% in the first half of 2021, 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 2021 compared to the same period in 2020.  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 2021 compared to the same period in 2020.  Nevertheless, average interest-bearing deposit balances increased by $46.7 million, or 4.2%, in the first six months of 2021 compared to the same period of 2020.  The average interest rate paid on interest-bearing deposits decreased by 47 basis points from 0.70% during the first six months of 2020 to 0.23% during the first six months of 2021.  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 2021 when compared to the first six months of 2020.  Even with these resulting decreases in the average rate paid on transaction based deposits, the average outstanding balance of transaction based deposits increased significantly.  NOW and money market deposit account balances averaged $534.517 million in the first six months of 2021, an $81.746 million, or 18.1%, increase over the average outstanding balances during the first six months of 2020.  Similarly, savings deposit account balances averaged $322.537 million in the first six months of 2021, a $50.665 million, or 18.6%, increase over the average outstanding balances during the first six months of 2019.  Even with the increases in their average balances, interest expense savings on interest-bearing transaction deposit accounts totaled $422,000 of the $2,529,000 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 $2,107,000 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 in the first six months of 2021 when compared to the first six months of 2020.  The average rate paid on certificates of deposit decreased from 1.62% during the first six months of 2020 to 0.70% during the same six months of 2021.  Premier eliminated its interest rate specials on certificates of deposit during 2020 and lowered the interest rate paid on all deposit products in response to decreases in the short-term interest rate policy of the Federal Reserve Board of Governors.  As certificates mature and are renewed, they are priced using the new lower rates.  Certificate of deposit balances averaged $311.538 million in the first six months of 2021, an $85.677 million, or 21.6%, increase from the average outstanding balances during the first six months of 2020.  As certificates mature, depositors are either seeking higher deposit rates from other competitive depository institutions or are transferring their balances to more liquid interest-bearing deposit accounts such as NOW, money market and savings deposits as a means to keep immediate access to their funds during the uncertainty of employment or economic conditions.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Similarly, interest expense paid on short-term borrowings, primarily customer repurchase agreements, decreased by $15,000, or 38.5%, in the first six months of 2021 compared to the same six months of 2020.  The interest expense decrease was largely due to a 23 basis point decrease in the average rate paid on short-term borrowings, partially offset by an 83.8% increase in the average balance outstanding during the first six months of 2021 compared to 2020.  Also contributing to the overall 63.8% decrease in interest expense during the first six months of 2021 was a $53,000, or 100%, decrease in interest expense on Federal Home Loan Bank (“FHLB”) borrowings and a $40,000, or 25.2%, decrease in interest expense on Premier’s subordinated debt.  All FHLB borrowings were repaid in 2020 resulting in no interest expense during the first six months of 2021.   Premier’s subordinated debt features a variable interest rate indexed to the short-term three-month LIBOR interest rate, which was lower in the first and second quarters of 2021 in conjunction with the decrease in short-term interest rate policy by the Federal Reserve Board of Governors.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Premier’s net interest margin during the first six months of 2021 was 3.57% compared to 3.91% for the first six months of 2020.  A portion of the interest income on loans is the result of recognizing deferred interest income on loans that paid-off or paid down during the period.  Excluding this income, Premier’s net interest margin during the first six months of 2021 would have been 3.51% compared to 3.85% for the first six months of 2020.  As shown in the table below, Premier’s yield earned on federal funds sold and interest bearing bank balances decreased to 0.09% in the first six months of 2021, from the 0.62% earned in the first six months of 2020.  The average yield earned on securities available for sale decreased to 1.28% in the first six months of 2021, from the 2.48% earned during the first six months of 2020.  Similarly, the average yield earned on total loans outstanding decreased to 5.08% in 2021 from the 5.31% earned during the first six months of 2020.  Earning asset yields have decreased generally in response to decreases in both short- and 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 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 in March of 2020.  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 2021 has been a decrease of approximately 23 basis points when compared to the first six months of 2020.

Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased from 0.72% during the first six months of 2020 to 0.25% in the first six months of 2021.  The average rates paid on interest-bearing deposits decreased from 0.70% in the first six months to 2020 to 0.23% during the first six months of 2021, largely due to lower rates paid on certificates of deposit.  Furthermore, the average rate paid on Premier’s variable rate subordinated debentures decreased from 5.87% in the first six months of 2020 to 4.38% in the first six months of 2021, due to decreases in short-term interest rate policy by the Federal Reserve and the impact on market short-term interest rates.  Due to a lack of competition for funds, the average rate paid on short-term borrowings, primarily customer repurchase agreements, decreased by 22 basis points to 0.12% in the first six months of 2021, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston decreased from 2.54% to zero as the borrowings have been repaid upon maturity.  The overall effect was to decrease Premier’s net interest spread by 20 basis points to 3.48% and decrease Premier’s net interest margin by 34 basis points to 3.57% in the first six months of 2021 when compared to the first six months of 2020.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Additional information on Premier’s net interest income for the six months of 2021 and six months of 2020 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.

AVERAGE CONSOLIDATED BALANCE SHEETS

AND NET INTEREST INCOME ANALYSIS

	Six Months Ended June 30, 2021								Six Months Ended June 30, 2020
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	132,699		$	62		0.09	%	$	91,842		$	284		0.62	%
Securities available for sale
Taxable		458,902			2,722		1.19			369,836			4,557		2.46
Tax-exempt		32,922			334		2.57			25,632			271		2.68
Total investment securities		491,824			3,056		1.28			395,468			4,828		2.48
Total loans		1,249,059			31,472		5.08			1,218,360			32,170		5.31
Total interest-earning assets		1,873,582			34,590		3.73	%		1,705,670			37,282		4.40	%
Allowance for loan losses		(13,869	)							(13,816	)
Cash and due from banks		24,165								22,827
Other assets		105,968								107,310
Total assets	$	1,989,846							$	1,821,991
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,168,592			1,351		0.23		$	1,121,858			3,880		0.70
Short-term borrowings		41,823			24		0.12			22,750			39		0.34
FHLB Advances		-			-		0.00			4,201			53		2.54
Subordinated debt		5,483			119		4.38			5,444			159		5.87
Total interest-bearing liabilities		1,215,898			1,494		0.25	%		1,154,253			4,131		0.72	%
Non-interest bearing deposits		510,357								406,163
Other liabilities		11,800								12,106
Stockholders’ equity		251,791								249,469
Total liabilities and equity	$	1,989,846							$	1,821,991
Net interest earnings				$	33,096							$	33,151
Net interest spread							3.48	%							3.68	%
Net interest margin							3.57	%							3.91	%

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Additional information on Premier’s net interest income for the second quarter of 2021 and second quarter of 2020 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.

AVERAGE CONSOLIDATED BALANCE SHEETS

AND NET INTEREST INCOME ANALYSIS

	Three Months Ended June 30, 2021								Three Months Ended June 30, 2020
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	108,641		$	23		0.08	%	$	112,513		$	26		0.09	%
Securities available for sale
Taxable		512,721			1,393		1.09			365,394			2,014		2.20
Tax-exempt		31,577			163		2.61			36,484			182		2.53
Total investment securities		544,298			1,556		1.18			401,878			2,196		2.23
Total loans		1,265,240			16,024		5.08			1,252,337			16,416		5.27
Total interest-earning assets		1,918,179			17,603		3.69	%		1,766,728			18,638		4.25	%
Allowance for loan losses		(14,017	)							(14,039	)
Cash and due from banks		24,620								22,980
Other assets		105,556								107,744
Total assets	$	2,034,338							$	1,883,413
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,191,619			586		0.20		$	1,132,726			1,715		0.61
Short-term borrowings		47,914			12		0.10			25,653			15		0.24
FHLB Advances		-			-		0.00			4,253			23		2.18
Subordinated debentures		5,488			59		4.31			5,448			76		5.61
Total interest-bearing liabilities		1,245,021			657		0.21	%		1,168,080			1,829		0.63	%
Non-interest bearing deposits		527,507								448,766
Other liabilities		12,557								12,812
Stockholders’ equity		249,253								253,755
Total liabilities and equity	$	2,034,338							$	1,883,413
Net interest earnings				$	16,946							$	16,809
Net interest spread							3.48	%							3.62	%
Net interest margin							3.55	%							3.83	%

47

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Net interest income for the quarter ended June 30, 2021 totaled $16.946 million, up $137,000, or 0.8%, from the $16.809 million of net interest income earned in the second quarter of 2020, as interest expense savings exceeded a decrease in interest income.  Interest income in 2021 decreased $1,035,000, or 5.6%, in the second quarter of 2021 when compared to the second quarter of 2020, largely due to a $640,000, or 29.1%, decrease in interest income on investment securities and a $392,000, or 2.4%, decrease in interest income on loans.  Interest income on interest-bearing bank balances and federal funds sold decreased by $3,000, or 11.5%, in the second quarter of 2021 when compared to the same quarter of 2020, due to lower earning yields on slightly lower average balances.  Similarly, interest income on investment securities in the second quarter of 2021 decreased by $640,000, or 29.1%, when compared to the second quarter of 2020.  While the average balance of investments increased by $142.4 million in the second quarter of 2021 when compared to the same quarter of 2020, the average yield earned decreased from 2.23% during the second quarter of 2020 to 1.17% during the second quarter of 2021.  The decrease in the average yield earned is largely due to accelerated prepayments of mortgage-backed securities which resulted in a corresponding higher rate of purchase premium amortization on these securities, as well as a significantly lower reinvestment yield on the accelerated prepayment funds and investments purchased with funds from the growth in deposit balances and customer repurchase agreements.

Interest income on loans decreased by $392,000, or 2.4%, in the second quarter of 2021 when compared to the second quarter of 2020.  Interest income on loans in the second quarter of 2021 included approximately $50,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter, compared to approximately $468,000 of interest income of this kind recognized during the second quarter of 2020.  Otherwise, interest income on loans increased by $26,000, or 0.2%, in the second quarter of 2021.  The increase in interest income on loans is a combination of an increase in interest income on commercial loans partially offset by decreases in interest income on real estate mortgage and consumer loans.  Interest income on real estate mortgage and consumer loans decreased by $516,000, or 12.0%, in the second quarter of 2021 when compared to the second quarter of 2020, largely due to a lower average yield earned on a lower average balance of these loans outstanding.  Conversely, interest income on commercial loans increased by $542,000, or 4.7%, in the second quarter of 2021 when compared to the second quarter of 2020, largely due to a higher average balance of these loans outstanding earning a similar yield in 2021 compared to the second quarter of 2020.  Premier’s participation in the U.S. Treasury’s and Small Business Administration’s Paycheck Protection Program (“PPP”) accounted for $17.4 million of the $40.6 million increase in average commercial loans outstanding in the second quarter of 2021 compared to the second quarter of 2020.  In addition, interest income on PPP loans and the recognition of fee income when a borrower’s PPP loan is paid off resulted in a $1,194,000 increase in loan interest income in the second quarter of 2021 compared to the second quarter of 2020.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

More than offsetting the decrease in interest income in the second quarter of 2021 was a $1,172,000, or 64.1%, decrease in interest expense, driven by a decrease in interest expense on deposits.  Interest expense on deposits decreased by $1,129,000, or 65.8% in the second quarter of 2021, 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 2021 compared to the same quarter in 2020.  Further interest expense savings were realized due to decreases in the average balance of higher-costing certificates of deposit during the second quarter of 2021 compared to the same quarter in 2020.  Nevertheless, average interest-bearing deposit balances increased by $58.9 million, or 5.2%, in the second quarter of 2021 compared to the same quarter of 2020, largely due to a $53.8 million, or 19.2%, increase in savings deposits and a $79.0 million, or 16.7%, increase in NOW and money market deposits.  These increases more than offset a $73.9 million, or 19.5%, decrease in certificate of deposit balances.  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.  The average interest rate paid on interest-bearing deposits decreased by 41 basis points from 0.61% during the second quarter of 2020 to 0.20% during the second quarter of 2021, as Premier eliminated its interest rate specials on certificates of deposit and lowered the interest rate paid on all deposit products in response to decreases in the short-term interest rate policy of the Federal Reserve Board of Governors.  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 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 8 basis points and the average rate paid on savings deposits decreased by 9 basis points in the second quarter of 2021 when compared to the second quarter of 2020.  Even with these resulting decreases in the average rate paid on transaction based deposits, the average outstanding balance of transaction-based deposits increased.  Interest expense savings on interest-bearing transaction deposit accounts totaled $143,000 of the $1,129,000 decrease in interest expense on interest-bearing deposits.  The remaining $986,000 decrease in interest expense on deposit accounts came from a decrease in average outstanding certificates of deposits and a 93 basis point decrease in the average rates paid during the second quarter of 2021 when compared to the second quarter of 2020.

Similarly, interest expense paid on short-term borrowings, primarily customer repurchase agreements, decreased by $3,000, or 20%, in 2021.  The reduction in interest expense was largely due to a 14 basis point decrease in the average rate paid, partially offset by an 86.8% increase in the average balance outstanding during the second quarter of 2021.  Also contributing to the overall 64.1% decrease in interest expense during the second quarter of 2021 was a $23,000, or 100%, decrease in interest expense on FHLB borrowings and a $17,000, or 22.4%, decrease in interest expense on Premier’s subordinated debt.  All FHLB borrowings were repaid in 2020 resulting in no interest expense during the second quarter of 2021.  Premier’s subordinated debt features a variable interest rate indexed to the short-term three-month LIBOR interest rate, which was lower in the second quarter of 2021 compared to the second quarter of 2020 in conjunction with decreases in short-term interest rate policy by the Federal Reserve Board of Governors.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Premier’s net interest margin during the second quarter of 2021 was 3.55% compared to 3.83% for the second quarter of 2020.  A portion of the interest income on loans is the result of recognizing deferred interest income on loans that paid-off or paid down during the period.  Excluding this income, Premier’s net interest margin during the second quarter of 2021 would have been 3.54% compared to 3.73% for the second quarter of 2020.  As shown in the table above, Premier’s yield earned on federal funds sold and interest bearing bank balances decreased slightly to 0.08% in the second quarter of 2021, from the 0.09% earned in the second quarter of 2020.  The average yield earned on securities available for sale decreased to 1.18% in the second quarter of 2021, from the 2.23% earned during the second quarter of 2020.  Similarly, the average yield earned on total loans outstanding decreased to 5.08% in 2021 from the 5.27% earned during the second quarter of 2020.  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 in March 2020 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 2021 has been a decrease of approximately 19 basis points when compared to the second quarter of 2020.

Similar to the decrease in earning asset yields, the average rate paid on interest bearing liabilities decreased in the second quarter of 2021 from 0.63% during the second quarter of 2020 to 0.21% in the second quarter of 2021.  The average rates paid on interest-bearing deposits decreased from 0.61% in the second quarter to 2020 to 0.20% during the second quarter of 2021, 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 5.61% in the second quarter of 2020 to 4.31% in the second quarter of 2021 due to decreases in short-term interest rate policy by the Federal Reserve and the impact on market short-term interest rates.  Due to a lack of competition for funds, the average rate paid on short-term borrowings, primarily customer repurchase agreements, decreased by 14 basis points to 0.10% in the second quarter of 2021, while the average interest rate on the fixed rate FHLB borrowings assumed in the acquisition of First Bank of Charleston decreased from 2.18% to zero as the borrowings have been repaid upon maturity. The overall effect was to decrease Premier’s net interest spread by 14 basis points to 3.48% and decrease Premier’s net interest margin by 28 basis points to 3.55% in the second quarter of 2021 when compared to the second quarter of 2020.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Non-interest income increased by $1,127,000, or 27.2%, to $5,266,000 for the first six months of 2021 compared to the same six months of 2020, mainly due to a gain on the sale of securities.  During the first quarter of 2021 Premier sold $25.5 million of mortgage-backed securities and realized gains upon the sales totaling $1,096,000.  In reviewing its investment portfolio, Premier identified some mortgage-backed securities that had short-term projected weighted average remaining lives and proportionately significant unrealized market value gains.  Rather than hold the securities until their full maturity, Premier decided to liquidate these securities, realize the market value gains, and reinvest the proceeds.  Otherwise, non-interest income increased by $31,000, or 0.7%, in the first six months of 2021 when compared to the same six months of 2020, as decreases in service charges on deposit accounts and other sources of non-interest income were more than offset by increases in electronic banking income and secondary market mortgage income.  Service charges on deposit accounts decreased by $358,000, or 19.9%, largely due to a $377,000, or 29.2%, decrease in customer overdraft fees.  Other sources of non-interest income decreased by $44,000, or 10.1%, in the first six months of 2021, as decreases in  commissions on insurance premiums, brokerage and annuity commission income and fees on letters of credit were partially offset by an increase in check cashing fees and wire transfer fees.  More than offsetting these decreases in non-interest income, electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) increased by $353,000, or 20.1% and secondary market mortgage income increased by $80,000, or 53.0%, in the first six months of 2021 compared to the same six months of 2020.  Electronic banking income increased from income from debit card transaction activity and 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 purchases in Premier’s markets and home loan refinances as customers are taking advantage of lowering their long-term fixed home loan interest rate.

Non-interest income increased by $232,000, or 12.3%, to $2,122,000 for the second quarter of 2021 compared to the same three months of 2020, largely due to an increase in electronic banking income.   Service charges on deposit accounts increased by $15,000, or 2.2%, largely due to a $21,000, or 4.6%, increase in customer overdraft fees.  Electronic banking income increased by $164,000, or 17.5%, largely due to a $163,000, or 20.9%, increase in  income from debit card transaction activity.  Secondary market mortgage income increased by $35,000, or 41.2%, in the second quarter of 2021 when compared to the same quarter of 2020 due, in part, to the lower long-term interest rate environment resulting in an increase in home purchases in Premier’s markets and home loan refinances as customers are taking advantage of lowering their long-term fixed home loan interest rate.  Other sources of non-interest income increased by $18,000, or 10.2%, in the second quarter of 2021 as decreases in lending based fees were more than offset by increases in commissions on insurance premiums, check cashing fees and commissions on checkbook sales.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Non-interest expenses for the first six months of 2021 totaled $22,009,000, or 2.29%, of average assets on an annualized basis, compared to $21,816,000, or 2.41%, of average assets for the same period of 2020.  The $193,000, or 0.9%, increase in non-interest expenses in 2021 when compared to the first six months of 2020 is largely due to a $737,000, or 175%, increase in expenses and writedowns on OREO properties, a $376,000, or 76.7%, increase in professional fees, a $183,000, or 269%, increase in FDIC insurance expense, a $216,000, or 6.7%, increase in outside data processing costs and a $77,000, or 2.2%, increase in occupancy and equipment expenses.  Expenses and writedowns of OREO properties increased, largely due to $859,000 of OREO value writedowns in the first six months of 2021 compared to $277,000 of value writedowns in the first six month of 2020, as well as a $107,000, or 67.5%, increase in expenses related to operating and maintaining OREO properties.  Professional fees increased largely due to a $286,000 increase in legal fees and an $80,000 increase in consulting fees related to the pending acquisition of Premier by Peoples Bancorp Inc.  FDIC insurance expense increased, largely due to the prior utilization of FDIC based community bank assessment credits to substantially offset the first and second quarter 2020 FDIC insurance premiums.  The $216,000 increase in outside data processing costs included a $61,000 increase in internet and mobile banking charges, as banking by electronic means becomes more and more popular among Premier’s customer base, a $94,000 increase in ATM processing charges from increased transaction activity and a $64,000 increase in communication line expenses as Premier migrated to a more robust data line network across its branch network to improve customer service.  The $77,000 increase in occupancy and equipment expenses included a $52,000 increase in snow removal costs, an $11,000 increase in utility costs and $49,000 of gains on the disposition of company vehicles in 2020 that did not reoccur in 2021.

These increases in non-interest expense were substantially offset by an $813,000, or 7.6%, decrease in staff costs, a $224,000, or 42.5% decrease in taxes not on income, a $150,000, or 69.4%, decrease in loan collection expenses, a $38,000, or 7.9%, decrease in core deposit amortization expense and a $171,000, or 7.8%, decrease in other operating expenses in the first six months of 2021 compared to the same six months of 2020.  Staff costs decreased by $813,000, largely due to a $500,000 decrease in employee wages and incentive compensation and a $177,000 decrease in benefit costs predominantly from a reduction in total employees as well as a $135,000 increase in the deferral of expensing staff costs related to an increase in number of loans originated (primarily PPP loans) during the first six months of 2021 compared to the first six months of 2020.   The $224,000 decrease in taxes not on income is due to a change in the taxation of banks in the Commonwealth of Kentucky, from an equity based franchise tax to a state imposed income tax.  As a result, income tax increased by $208,000 in the first six months of 2021 related to the Kentucky income tax.  Decreases in other operating expenses include supplies, postage, advertising, conversion and travel expenses.

52

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Non-interest expense for the second quarter of 2021 totaled $11,819,000, or 2.44%, of average assets on an annualized basis, compared to $11,079,000, or 2.37%, of average assets for the same period of 2020.  Non-interest expense increased by $740,000, or 6.7% in the second quarter of 2021 compared to the second quarter of 2020, largely due to a $641,000, or 181%, increase in expenses and writedowns on OREO properties and a $217,000, or 88.2%, increase in professional fees.  During the second quarter of 2021, Premier recorded $859,000 of writedowns on OREO property values and another $14,000 of net losses on the completed sale of OREO properties compared to $277,000 of such writedowns of OREO property values and the realization of $28,000 of net gains upon the sale of OREO properties in the second quarter of 2020. Professional fees increased largely due to a $171,000 increase in legal fees and a $25,000 increase in consulting fees related to the pending acquisition of Premier by Peoples Bancorp Inc.  Other increases in non-interest expense include a $52,000, or 72.2%, increase in FDIC insurance costs, largely due to the prior utilization of FDIC based community bank assessment credits to partially offset the second quarter 2020 FDIC insurance premiums, a $30,000, or 1.8%, increase in outside data processing costs and a $13,000, or 0.7%, increase in occupancy and equipment expenses.  These increases more than offset decreases in non-interest expense in the second quarter of 2021 when compared to the second quarter of 2020.  Decreases in non-interest expense include an $80,000, or 31.7%, decrease in taxes not on income, a $74,000, or 73.3%, decrease in loan collection expenses, a $21,000, or 18.4%, decrease in supplies expense, an $18,000, or 7.5%, decrease in the amortization of intangible assets and a $20,000, or 0.4%, decrease in staff costs.

Income tax expense was $3,553,000 for the first six months of 2021 compared to $3,010,000 for the first six months of 2020.  The effective tax rate for the six months ended June 30, 2021 was 23.3% compared to 21.7% for the same period in 2020.  For the quarter ended June 30, 2021, income tax expense was $1,647,000, (a 24.1% effective tax rate), compared to $1,524,000, (a 21.7% effective tax rate), for the same period in 2020.  The increases in the 2021 effective tax rate for both the first six months of 2021 and the second quarter of 2021 are largely due to a change in the taxation of banks in the Commonwealth of Kentucky, from an equity based franchise tax to a state imposed income tax.  As a result, income tax increased by $208,000 in the first six months of 2021 and by $105,000 in the second quarter of 2021 related to the Kentucky income tax.

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

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

B.          Financial Position

Total assets at June 30, 2021 increased by $134.1 million to $2.080 billion from the $1.946 billion at December 31, 2020.  The increase in total assets since year-end is largely due to a $151.6 million increase in securities available for sale and a $31.6 million increase in total loans outstanding.  Earning assets increased by $138.2 million from the $1.825 billion at year-end 2020 to end the quarter at $1.963 billion.

Cash and due from banks at June 30, 2021 was $24.3 million, a $696,000 decrease from the $25.0 million at December 31, 2020.  Interest bearing bank balances decreased by $49.7 million, or 28.5%, from the $174.2 million reported at December 31, 2020.  Federal funds sold increased by $4.7 million, or 41.9%, to $16.0 million at June 30, 2021.  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.

Securities available for sale totaled $572.8 million at June 30, 2021, a $151.6 million increase from the $421.2 million at December 31, 2020.  The increase was largely due to the purchase of $289.3 million of investment securities.  These increase more than offset $104.9 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 2021.  Purchases exceeded maturities as Premier sought higher yields on surplus funds resulting from the growth in deposits and payoffs on non-SBA PPP loans.  During the first quarter of 2021, Premier also sold $25.5 million of mortgage-backed securities and realized gains upon the sales totaling $1,096,000.  In reviewing its investment portfolio, Premier identified some mortgage-backed securities that had short-term projected weighted average remaining lives and proportionately significant unrealized market value gains.  Rather than hold the securities until their full maturity, Premier decided to liquidate these securities, realize the market value gains, and reinvest the proceeds.  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, 2021 and December 31, 2020 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, 2021 were $1.246 billion compared to $1.214 billion at December 31, 2020, an increase of approximately $31.6 million, or 2.6%.  Premier generated $38.5 million of new PPP loans, net of deferred fees and forgiveness payments received, during the first six months of 2021.  These loans more than offset a $6.9 million, or 0.6%, decrease in traditional loans as new loans generated during the quarter were exceeded by payoffs and principal payments received. Construction and land loans increased by approximately $10.9 million, or 11.8%; non-owner occupied loans increased by $10.4 million, or 3.2%; owner occupied loans increased by $6.6 million, or 4.0%; and residential real estate loans increased by $988,000, or 0.3%.  These increases were more than offset by a $32.4 million, or 35.9%, decrease in commercial and industrial loans, a $2.5 million, or 10.3%, decrease in consumer loans, a $580,000, or 1.6%, decrease in other loans, and a $385,000, or 1.0% decrease in multifamily real estate loans.  Loan payoffs and paydowns during the first six months of 2021 resulted in recognizing approximately $556,000 of income from purchase discounts on acquired loans or deferred interest while the loans were on non-accrual status.

Premises and equipment decreased by $1,488,000, largely due to normal quarterly depreciation of fixed assets.  Other intangible assets decreased by $445,000, due to the amortization of core deposit intangibles.

54

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Deposits totaled $1.727 billion as of June 30, 2021, a $93.0 million, or 5.7%, increase from the $1.634 billion in deposits at December 31, 2020.  The overall increase in deposits is largely due to a $31.9 million, or 6.5%, increase in non-interest bearing deposits, a $48.6 million, or 13.6%, increase in interest bearing transaction deposits, and a $36.4 million, or 7.9%, increase in savings and money market deposits.  Partially offsetting these increases, certificates of deposit (“CD”) balances decreased by $23.8 million, or 7.3%.  The decrease in certificate of deposit balances is primarily the result of significant decreases in traditional CD rates, as management has 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 round two PPP loan program proceeds were originally deposited with Premier’s subsidiary banks, giving rise to an increase in 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 $28.4 million, or 84.0%.  Subordinated debentures increased by $20,000 since year-end 2020, due to the regular amortization of the purchase accounting fair value adjustment applied to the $6.186 million face value of the subordinated debentures.  Other liabilities increased by $23.4 million, largely due to $26.0 million of investment security purchases during the last days of June 2021 for which the purchase proceeds were not required to be remitted until July 2021.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

The following table sets forth information with respect to the Company’s nonperforming assets at June 30, 2021 and December 31, 2020.

	(In Thousands)
	2021			2020
Non-accrual loans	$	11,925		$	8,996
Accruing loans which are contractually past due 90 days or more		1,068			2,332
Accruing restructured loans		395			398
Total non-performing loans		13,388			11,726
Other real estate acquired through foreclosure (OREO)		12,042			13,215
Total non-performing assets	$	25,430		$	24,941
Non-performing loans as a percentage of total loans		1.07	%		0.97	%
Non-performing assets as a percentage of total assets		1.22	%		1.28	%

Total non-performing loans have increased by $1,662,000, or 14.2%, since year-end, largely due to a $2,929,000 increase in non-accrual loans.  This increase was partially offset by a $1,264,000 decrease in accruing loans past due 90 days or more and a $3,000 decrease in accruing restructured loans.  The increase in non-accrual loans was largely due to two non-owner occupied commercial real estate secured loans and one owner occupied commercial real estate secured loan becoming impaired during the first six months of 2021.  Of the three loans, only one non-owner occupied commercial real estate secured loan required any specific allowance for loan losses allocation at June 30, 2021.  Total non-performing assets have increased since year-end, largely due to the increase in non-performing loans.  This increase was partially offset by a $1,173,000 decrease in other real estate owned acquired through foreclosure (“OREO”).  Other real estate owned decreased by $1,173,000, or 8.9%, largely due to $859,000 of writedowns of carrying values as well as the sale of a few small residential real estate properties during the first six months of 2021.

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 $1,429,000 during the first six months of 2021, largely due to an $856,000 charge-off of a previously identified impaired non-owner occupied commercial real estate secured loan and a $214,000 charge-off of a previously identified impaired owner occupied commercial real estate secured loan, both in the second quarter.  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 2021 totaled $97,000, resulting in net charge-offs for the first six months of 2021 of $1,332,000.  This compares to $744,000 of net charge-offs recorded in the first six months of 2020.

56

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

The allowance for loan losses at June 30, 2021 was $13.3 million, or 1.06% of total loans, compared to $13.5 million, or 1.11% of total loans at December 31, 2020.  The decrease in the ratio is due to two primary reasons.  First, the allowance for loan losses has decreased by $256,000 in the first six months of 2021, largely due to the $1,332,000 of net charge-offs during the first six months, as discussed above, which was only partially offset by $1,076,000 of additional provision expense in those months, as discussed in more detail below.  This decrease in the allowance, by itself, would have resulted in a decrease in the ratio to total loans.  However, due to the $31.6 million increase in total loans outstanding since December 31, 2020, the allowance for loan losses ratio decreased further to 1.06% at June 30, 2021.  The PPP loans outstanding at June 30, 2021 and December 31, 2020 have a 100% guarantee by the SBA and, therefore, no allowance for loan losses is allocated to these loans. Excluding the SBA PPP loans, the $13.3 million allowance at June 30, 2021 is 1.16% of the total remaining non-PPP portfolio loans while the $13.5 million allowance at December 31, 2020 is 1.17% of the total remaining non-PPP portfolio loans.

During the first six months of 2021, Premier recorded $1,076,000 of provision for loan losses.  This provision compares to $1,590,000 of provision for loan losses recorded during the same six months of 2020.  The provision for loan losses recorded during the first six months of 2021 included approximately $250,000 of additional provision during the first quarter of 2021 related to 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 included approximately $2,500,000 in its qualitative credit risk analysis of the loan portfolio at year-end 2020 related to loans originated to various industries believed to be more susceptible to future credit risk resulting from an economic slowdown, such as lodging, restaurants, amusement, non-owner occupied rental real estate, religious and civic organizations, personal services, and retail stores.  Furthermore, additional risk-weighting was given to loans in all industries where the borrower was on either an interest-only payment deferral period or a full principal and interest payment deferral period as permitted under the CARES Act.  Due to improvements in the economy during the second quarter of 2021, the elimination of virtually all loan payment deferrals under the CARES Act, and the resumption of regular payments on loans originated to the various industries believed to be more susceptible to future credit risk under COVID-19, Premier reduced its estimate of the qualitative credit risk analysis of the loan portfolio related to COVID-19 by approximately $1,000,000.  The remaining provision expense recorded in the the first six months of 2021 was related primarily to increases in specific reserves on impaired commercial real estate secured loans some of which were eventually charged-off by the end of June 2021.  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 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.  The additional provision expense related to Potential COVID-19 Losses was partially offset by reductions in estimated credit risk within the loan portfolio resulting from decreases in higher-risk loans outstanding, such as commercial and industrial loans, construction and land development loans and consumer loans, as well as other portfolio credit risk improving indications such as improvements in past due ratios and decreases in historical loss ratios.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

During the second quarter of 2021, Premier recorded $428,000 of provision for loan losses.  This provision compares to $590,000 of provision for loan losses recorded during the same quarter of 2020.  A significant portion of the provision for loan losses recorded during the second quarter 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.  During the second quarter of 2020, Premier added approximately $1,000,000 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, personal services and retail stores.  During the remainder of 2020 and into the first quarter of 2021, Premier refined its estimates on the qualitative credit risk analysis of the loan portfolio related to COVID-19 and added approximately $250,000 of additional provision during the first quarter of 2021 to the estimated $2.5 million of qualitative credit risk analysis related to COVID-19 at year-end 2020.  Due to improvements in the economy during the second quarter of 2021, the elimination of virtually all loan payment deferrals under the CARES Act, and the resumption of regular payments on loans originated to the various industries believed to be more susceptible to future credit risk under COVID-19, Premier reduced its estimate of the qualitative credit risk analysis of the loan portfolio related to COVID-19 by approximately $1,000,000.  More than offsetting this decrease, the net provision expense in the second quarter of 2021 was related primarily to increases in specific reserves on impaired commercial real estate secured loans that were eventually charged-off by the end of the quarter.  The $1,000,000 of 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 provisions for loan losses recorded in 2020 and 2021 were made in accordance with Premier’s policies regarding management’s estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America.  Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk.  With the concentrations of commercial real estate loans in the Washington, DC, Richmond, Virginia, and Cincinnati, Ohio markets, fluctuations in commercial real estate values will be monitored. Premier also continues to monitor the impact of declines in the coal mining industry that may have a larger impact in the southern area of West Virginia and the decrease in the level of drilling activity in the oil & gas industry, which may have a larger impact in the central area of West Virginia.  A resulting decline in employment could increase non-performing assets from loans originated in these areas.

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

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

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, 2020.  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, 2020.  There have been no significant changes in the application of these accounting policies since December 31, 2020.

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

D.          Liquidity

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

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

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

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

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

5. Maintenance of an adequate available-for-sale security portfolio.  The Company owns $572.8 million of securities at fair value as of June 30, 2021.

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

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

E.          Capital

At June 30, 2021, total stockholders’ equity of $249.2 million was 12.0% of total assets.  This compares to total stockholders’ equity of $259.9 million, or 13.4% of total assets on December 31, 2020.  The decrease in stockholders’ equity was largely due to the normal quarterly $0.15 per share cash dividend declared and paid during the first and second quarters of 2021 and also a $1.00 per share special cash dividend declared in January 2021 and paid in February 2021.  The dividends combined to reduce stockholders’ equity by $19.1 million.  Furthermore, a decrease in the market value of the investment portfolio available for sale reduced stockholders’ equity by $4.3 million, net of tax.  These decreases in stockholders’ equity were partially offset by the $11.7 million of net income earned during the first six months of 2021 and approximately $991,000 of contributed capital from the exercise of employee stock options during the first six months of 2021 .

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

In 2020, the Company elected to adopt the regulatory capital simplification rules permitting bank holding companies of Premier’s size to utilize one measure of regulatory capital, the Community Bank Leverage Ratio ("CBLR"), to determine regulatory capital adequacy.  The CBLR requires a higher amount of Tier 1 capital to average assets than the standard leverage ratio for a financial institution 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 wholly owned subsidiary Premier Bank, Inc. 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 CBLR of Total Tier 1 capital to quarterly average assets must be at least 8.50% in year 2021 and at least 9.00% in year 2022.  Premier’s other wholly owned subsidiary bank, Citizens Deposit Bank did not maintain a CBLR of 8.50% at June 30, 2021, and provided full regulatory capital ratio calcuations in its June 30, 2021 FDIC call report.

60

PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

JUNE 30, 2021

Premier’s Tier 1 capital totaled $201.8 million at June 30, 2021, which represents a community bank leverage ratio of 10.19%.  Premier’s wholly owned subsidiary Premier Bank, Inc. maintained a CBLR of 10.29% at June 30, 2021, well in excess of the 8.50% required to be considered well capitalized under the prompt corrective action framework.  Premier’s other wholly owned subsidiary bank, Citizens Deposit Bank did not maintain a CBLR of 8.50% at June 30, 2021, and provided full regulatory capital ratio calcuations in its June 30, 2021 FDIC call report.  The bank remained well-capitalized with a Tier 1 Risk-based Capital Ratio of 15.40%, a Total Risk-based Capital Ratio of 16.17%, and a Tier 1 Leverage Ratio of 8.24%.  Citizens Deposit Bank’s Risk-based Capital Conversation Buffer was 8.17%, well in excess of the required 2.50% at June 30, 2021.

Book value per common share was $16.84 at June 30, 2021 and $17.71 at December 31, 2020.  The decrease in book value per share was largely due to the $1.00 per share special cash dividend and the $0.30 per share in quarterly cash dividends to common shareholders declared and paid during the first six months of 2021.  Also reducing Premier’s book value per share at June 30, 2021 was the $4.3 million of other comprehensive loss for the first six months of 2021 related to the decrease in the market value of investment securities available for sale, which decreased book value by approximately $0.30 per share.  These decreases were partially offset by the $0.79 per share earned during the first six months of 2021.

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2021

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 2020 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 2020 10-K.

Item 4. Controls and Procedures

A. Disclosure Controls & Procedures

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

B. Changes in Internal Controls over Financial Reporting

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

C. Inherent Limitations on Internal Control

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

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2021

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, 2020 for disclosures with respect to Premier’s risk factors at December 31, 2020. There have been no material changes since year-end 2020 in the specified risk factors disclosed in the Annual Report on Form 10-K.

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

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2021

Item 6.          Exhibits

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

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

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

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

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

101.SCH Inline XBRL Taxonomy Extension Schema Document

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

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PREMIER FINANCIAL BANCORP, INC.

JUNE 30, 2021

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 12, 2021	/s/ Robert W. Walker
	Robert W. Walker
	President & Chief Executive Officer
Date: August 12, 2021	/s/ Brien M. Chase
	Brien M. Chase
	Senior Vice President & Chief Financial Officer

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