Docoh
Loading...

PFBI Premier Financial Bancorp

Filed: 12 Aug 21, 3:27pm

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

 
3
41
62
62
63
63
63
63
63
63
63
64
65


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
5
6
7
8
9



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, 0 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 


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  0   23   0   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  0   0   1,096   0 
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 

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  0   0   (1,096)  0 
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 


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  0   5,174   0   5,174 
Other comprehensive income (loss)  0   0   (257)  (257)
Cash dividends paid ($0.15 per share)
  0   (2,221)  0   (2,221)
Stock options exercised  800   0   0   800 
Stock based compensation expense  10   0   0   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  0   5,506   0   5,506 
Other comprehensive income (loss)  0   0   1,579   1,579 
Cash dividends paid ($0.15 per share)
  0   (2,201)  0   (2,201)
Stock based compensation expense  186   0   0   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  0   11,724   0   11,724 
Other comprehensive income  0   0   (4,336)  (4,336)
Cash dividends paid ($1.30 per share)
  0   (19,132)  0   (19,132)
Stock options exercised  991   0   0   991 
Stock based compensation expense  31   0   0   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  0   10,874   0   10,874 
Other comprehensive income  0   0   7,024   7,024 
Cash dividends paid ($0.30 per share)
  0   (4,401)  0   (4,401)
Stock options exercised  31   0   0   31 
Stock based compensation expense  226   0   0   226 
Balances, June 30, 2020
 $134,052  $109,216  $10,727  $253,995 



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)  0 
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   0 
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  0   (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   0 
Loans transferred to real estate acquired through foreclosure  317   900 
Security purchases settled in subsequent period  26,000   0 
Operating right-of-use asset resulting from lease liability  (633)  78 

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.


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. 



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   0   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   0   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   0   2,626 
Obligations of states and political subdivisions  53,639   1,361   0   55,000 
Other securities  5,559   129   0   5,688 
Total available for sale $409,267  $12,215  $(292) $421,190 

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 0 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) $0  $0  $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)  0   0   11,717   (202)
Other securities  3,963   (37)  0   0   3,963   (37)
Total temporarily impaired $186,016  $(2,048) $16,525  $(144) $202,541  $(2,192)

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) $0  $0  $58,207  $(292)
Total temporarily impaired $58,207  $(292) $0  $0  $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 

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)  0   0   167 
Commercial real estate:                    
Owner occupied  2,874   (184)  (214)  3   2,479 
Non-owner occupied  5,129   964   (856)  0   5,237 
Commercial and industrial  1,538   (129)  (90)  12   1,331 
Consumer  226   (4)  (44)  18   196 
Construction and land  946   152   0   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   0   0   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)  0   38   1,233 
All other  480   113   (94)  62   561 
Total $13,542  $1,590  $(935) $191  $14,388 

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   0   0   167 
Commercial real estate:                    
Owner occupied  2,970   (279)  (214)  2   2,479 
Non-owner occupied  5,628   465   (856)  0   5,237 
Commercial and industrial  1,385   (34)  (27)  7   1,331 
Consumer  205   (5)  (18)  14   196 
Construction and land  1,022   78   0   2   1,102 
All other  540   0   (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   0   0   2,115 
Commercial real estate:                    
Owner occupied  2,220   248   0   2   2,470 
Non-owner occupied  3,642   721   (53)  0   4,310 
Commercial and industrial  1,817   (269)  (5)  11   1,554 
Consumer  241   12   (30)  7   230 
Construction and land  1,412   (180)  0   1   1,233 
All other  582   (25)  (20)  24   561 
Total $13,856  $590  $(109) $51  $14,388 


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  0   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 0t 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.
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  0   0 
Accretion of income  (137)  (59)
Loans placed on non-accrual  (19)  0 
Income recognized upon full repayment  (11)  (65)
Reclassifications to accretable difference  231   (190)
Disposals  0   0 
Balance at June 30
 $341  $305 

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   0 
Non-owner occupied  6,434   5,231   83 
Commercial and industrial  992   422   0 
Consumer  114   73   1 
Construction and land  10   8   0 
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   0 
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.
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   0   0   0   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   0   0   0   73,404 
Consumer  21,505   161   7   168   21,337 
Construction and land  103,591   963   3   966   102,625 
All other  35,561   0   0   0   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   0   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   0   0   0   61,169 
Consumer  23,984   190   38   228   23,756 
Construction and land  92,648   0   5   5   92,643 
All other  36,141   23   0   23   36,118 
Total $1,214,378  $6,482  $6,719  $13,201  $1,201,177 


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 $0  $2,209  $0  $2,209  $54  $377,689  $1,904  $379,647 
Multifamily real estate  0   167   0   167   0   37,593   0   37,593 
Commercial real estate:                                
Owner occupied  0   2,479   0   2,479   3,267   167,356   658   171,281 
Non-owner occupied  352   4,885   0   5,237   5,139   332,331   1,948   339,418 
Commercial and industrial  276   1,055   0   1,331   389   83,572   0   83,961 
SBA PPP  0   0   0   0   0   73,404   0   73,404 
Consumer  0   196   0   196   0   21,503   2   21,505 
Construction and land  0   1,102   0   1,102   0   103,257   334   103,591 
All other  0   539   0   539   0   35,522   39   35,561 
Total $628  $12,632  $0  $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 $0  $2,071  $0  $2,071  $57  $376,510  $2,092  $378,659 
Multifamily real estate  0   184   0   184   0   37,978   0   37,978 
Commercial real estate:                                
Owner occupied  240   2,634   0   2,874   1,981   161,713   1,012   164,706 
Non-owner occupied  385   4,744   0   5,129   1,843   324,831   2,357   329,031 
Commercial and industrial  374   1,164   0   1,538   548   89,498   16   90,062 
SBA PPP  0   0   0   0   0   61,169   0   61,169 
Consumer  0   226   0   226   0   23,975   9   23,984 
Construction and land  0   946   0   946   0   92,280   368   92,648 
All other  0   548   0   548   0   36,031   110   36,141 
Total $999  $12,517  $0  $13,516  $4,429  $1,203,985  $5,964  $1,214,378 

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   0   - 
   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 


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   0   - 
   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 

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  $0  $0  $62  $0  $0 
Multifamily real estate  0   0   0   3,744   0   0 
Commercial real estate:                        
Owner occupied  3,123   155   155   2,191   6   4 
Non-owner occupied  3,871   0   0   4,376   72   36 
Commercial and industrial  446   1   1   738   2   2 
Construction and land  0   0   0   353   0   0 
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  $0  $0  $61  $0  $0 
Multifamily real estate  0   0   0   3,753   0   0 
Commercial real estate:                        
Owner occupied  3,532   3   3   1,785   3   1 
Non-owner occupied  4,703   0   0   4,429   36   0 
Commercial and industrial  395   0   0   768   1   1 
Construction and land  0   0   0   314   0   0 
Total $8,685  $3  $3  $11,110  $40  $2 

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  0   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  0   195   195 
Non-owner occupied  856   0   856 
Total $875  $398  $1,273 

At June 30, 2021, 0 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 0 commitments to lend additional amounts to these borrowers.

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 0 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 0 TDR’s for which there as a payment default within twelve months following the modification.

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

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020.  Provisions of the CARES Act permit certain loan payment modifications by banks that would normally be considered TDR’s to be exempt from the TDR rules.  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  $0  $967 
Non-owner occupied  3,839   0   3,839 
Construction and land  1,920   0   1,920 
Total $6,726  $0  $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   0   667 
Commercial real estate            
Owner occupied  10,567   396   10,963 
Non-owner occupied  17,659   214   17,873 
Commercial and industrial  0   898   898 
Consumer  7   19   26 
Construction and land  2,472   3,849   6,321 
Total $31,932  $5,714  $37,646 

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.

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  $0  $379,647 
Multifamily real estate  36,526   1,067   0   0   37,593 
Commercial real estate:                    
Owner occupied  163,510   4,424   3,347   0   171,281 
Non-owner occupied  309,471   24,188   5,759   0   339,418 
Commercial and industrial  79,815   2,999   1,147   0   83,961 
SBA PPP  73,404   0   0   0   73,404 
Consumer  21,411   0   94   0   21,505 
Construction and land  98,943   4,590   58   0   103,591 
All other  35,535   26   0   0   35,561 
Total $1,187,191  $39,695  $19,075  $0  $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  $0  $378,659 
Multifamily real estate  35,412   2,566   0   0   37,978 
Commercial real estate:                    
Owner occupied  155,707   4,686   4,313   0   164,706 
Non-owner occupied  312,139   13,959   2,933   0   329,031 
Commercial and industrial  84,948   3,747   1,367   0   90,062 
SBA PPP  61,169   0   0   0   61,169 
Consumer  23,837   5   142   0   23,984 
Construction and land  88,587   3,833   228   0   92,648 
All other  36,141   0   0   0   36,141 
Total $1,163,337  $31,889  $19,152  $0  $1,214,378 

As of June 30, 2021 and December 31, 2020, there were 0 loans with payment deferrals under the CARES Act that were delinquent or on nonaccrual status. As of June 30, 2021, 1 non-owner occupied loan totaling $3,839,000 was risk rated special mention.  As of December 31, 2020, 1 non-owner occupied loan totaling $3,839,000 was risk rated special mention and 1 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.

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. 
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%


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 

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 0 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.

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).

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  $0  $148,788 
Federal funds sold  16,047   16,047   0   0   16,047 
Securities available for sale  572,785   0   572,785   0   572,785 
Loans, net  1,232,701   0   0   1,233,412   1,233,412 
Interest receivable  6,011   0   1,878   4,133   6,011 
                     
Financial liabilities                    
Deposits $1,726,782  $1,425,037  $302,090  $0  $1,727,127 
Securities sold under agreements to repurchase  62,256   0   62,256   0   62,256 
Subordinated debt  5,495   0   5,383   0   5,383 
Interest payable  225   4   221   0   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  $0  $199,170 
Federal funds sold  11,306   11,306   0   0   11,306 
Securities available for sale  421,190   0   421,190   0   421,190 
Loans, net  1,200,862   0   0   1,209,579   1,209,579 
Interest receivable  5,991   0   1,301   4,690   5,991 
                     
Financial liabilities                    
Deposits $1,633,740  $1,308,188  $327,448  $0  $1,635,636 
Securities sold under agreements to repurchase  33,827   0   33,827   0   33,827 
Subordinated debt  5,475   0   5,366   0   5,366 
Interest payable  360   4   356   0   360 

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  $0�� $222,494  $0 
U. S. agency CMO’s - residential  18,204   0   18,204   0 
Total mortgage-backed securities of government sponsored agencies  240,698   0   240,698   0 
U. S. government sponsored agency securities  272,251   0   272,251   0 
Obligations of states and political subdivisions  54,818   0   54,818   0 
Other securities  5,018   0   5,018   0 
Total securities available for sale $572,785  $0  $572,785  $0 

     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  $0  $327,800  $0 
U. S. agency CMO’s  30,076   0   30,076   0 
Total mortgage-backed securities of government sponsored agencies  357,876   0   357,876   0 
U. S. government sponsored agency securities  2,626   0   2,626   0 
Obligations of states and political subdivisions  55,000   0   55,000   0 
Other securities  5,688   0   5,688   0 
Total securities available for sale $421,190  $0  $421,190  $0 

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

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.


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  $0  $0  $2,502 
Commercial and industrial  113   0   0   113 
Total impaired loans $2,615  $0  $0  $2,615 
                 
Other real estate owned:                
Residential real estate $297  $0  $0  $297 
Multifamily real estate  10,070   0   0   10,070 
Commercial real estate                
Owner occupied  817   0   0   817 
Construction and land  400   0   0   400 
Total OREO $11,584  $0  $0  $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.

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      


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  $0  $0  $250 
Non-owner occupied  1,080   0   0   1,080 
Commercial and industrial  174   0   0   174 
Total impaired loans $1,504  $0  $0  $1,504 
                 
Other real estate owned:                
Residential real estate $206  $0  $0  $206 
Multifamily real estate  10,838   0   0   10,838 
Commercial real estate                
Owner occupied  829   0   0   829 
Construction and land  400   0   0   400 
Total OREO $12,273  $0  $0  $12,273 


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      

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 $11,000,000The 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.



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 lossesThese 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.

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.

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.


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.

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.

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%


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%


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.

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.

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.

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.

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.


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.


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.

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.

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.

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.

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.

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.

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.

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.
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.

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

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

31.2

32

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.SCHInline XBRL Taxonomy Extension Schema Document

101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.

101.LABInline XBRL Taxonomy Extension Label Linkbase Document

101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document

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


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


65