UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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, – 14,649,681 shares outstanding at November 5, 2019

PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2019

INDEX TO REPORT

Part I - Financial Information
Item 1 – Financial Statements	3
Item 2 – Management’s Discussion and Analysis	42
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	55
Item 4 – Controls and Procedures	55
Part II - Other Information	56
Item 1 – Legal Proceedings	56
Item 1A – Risk Factors	56
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3 – Defaults Upon Senior Securities	56
Item 4 – Mine Safety Disclosures	56
Item 5 – Other Information	56
Item 6 – Exhibits	56
Signatures	57

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PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2019

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, 2018 for further information in this regard.

Index to consolidated financial statements:

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

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

(DOLLARS IN THOUSANDS)

	(UNAUDITED)
	September 30, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	26,608		$	22,992
Interest bearing bank balances		80,077			39,911
Federal funds sold		15,983			17,872
Cash and cash equivalents		122,668			80,775
Time deposits with other banks		598			1,094
Securities available for sale		347,811			365,731
Loans		1,140,862			1,149,301
Allowance for loan losses		(13,811	)		(13,738	)
Net loans		1,127,051			1,135,563
Federal Home Loan Bank stock, at cost		3,538			3,628
Premises and equipment, net		36,384			29,385
Real estate acquired through foreclosure		13,924			14,024
Interest receivable		4,415			4,295
Goodwill		47,640			47,640
Other intangible assets		4,595			5,268
Other assets		1,745			2,712
Total assets	$	1,710,369		$	1,690,115
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing	$	369,034		$	391,763
Time deposits, $250,000 and over		96,117			74,161
Other interest bearing		962,089			964,203
Total deposits		1,427,240			1,430,127
Securities sold under agreements to repurchase		21,721			22,062
Other borrowed funds		-			2,500
FHLB advances		6,362			8,819
Subordinated debt		5,428			5,406
Interest payable		847			733
Other liabilities		11,963			3,739
Total liabilities		1,473,561			1,473,386
Stockholders' equity
Common stock, no par value; 30,000,000 shares authorized; 14,647,515 shares issued and outstanding at September 30, 2019, and 14,624,193 shares issued and outstanding at December 31, 2018		133,680			133,248
Retained earnings		99,047			87,333
Accumulated other comprehensive income (loss)		4,081			(3,852	)
Total stockholders' equity		236,808			216,729
Total liabilities and stockholders' equity	$	1,710,369		$	1,690,115

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019		2018
Interest income
Loans, including fees	$	16,438		$	13,731	$	48,954	$	41,449
Securities available for sale
Taxable		2,266			1,745		6,917		4,787
Tax-exempt		85			52		265		166
Federal funds sold and other		519			473		1,342		1,151
Total interest income		19,308			16,001		57,478		47,553
Interest expense
Deposits		2,367			1,355		6,702		3,583
Repurchase agreements and other		24			10		45		25
Other borrowings		-			37		31		125
FHLB advances		48			-		151		-
Subordinated debt		91			90		281		257
Total interest expense		2,530			1,492		7,210		3,990
Net interest income		16,778			14,509		50,268		43,563
Provision for loan losses		425			275		1,315		1,890
Net interest income after provision for loan losses		16,353			14,234		48,953		41,673
Non-interest income
Service charges on deposit accounts		1,216			1,183		3,432		3,343
Electronic banking income		891			968		2,640		2,677
Secondary market mortgage income		97			29		154		142
Other		267			257		768		572
		2,471			2,437		6,994		6,734
Non-interest expenses
Salaries and employee benefits		5,422			4,846		16,048		14,667
Occupancy and equipment expenses		1,700			1,570		5,241		4,660
Outside data processing		1,478			1,315		4,288		3,841
Professional fees		286			526		957		1,261
Taxes, other than payroll, property and income		235			217		734		669
Write-downs, expenses, sales of other real estate owned, net		213			26		690		(335	)
Amortization of intangibles		223			190		673		575
FDIC insurance		(5	)		171		238		443
Other expenses		1,198			1,306		3,515		3,833
		10,750			10,167		32,384		29,614
Income before income taxes		8,074			6,504		23,563		18,793
Provision for income taxes		1,807			1,483		5,261		4,264
Net income	$	6,267		$	5,021	$	18,302	$	14,529
Net income per share:
Basic	$	0.43		$	0.38	$	1.25	$	1.09
Diluted		0.43			0.37		1.24		1.08

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Net income	$	6,267	$	5,021		$	18,302	$	14,529
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period		450		(1,451	)		10,042		(6,414	)
Reclassification of realized amount		-		-			-		-
Net change in unrealized gain (loss) on securities		450		(1,451	)		10,042		(6,414	)
Less tax impact		96		(305	)		2,109		(1,347	)
Other comprehensive income (loss)		354		(1,146	)		7,933		(5,067	)
Comprehensive income	$	6,621	$	3,875		$	26,235	$	9,462

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

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

Three months ended September 30	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, July 1, 2019	$	133,597	$	94,978		$	3,727		$	232,302
Net income		-		6,267			-			6,267
Other comprehensive income (loss)		-		-			354			354
Cash dividends paid ($0.15 per share)		-		(2,198	)		-			(2,198	)
Stock options exercised		36		-			-			36
Stock based compensation expense		47		-			-			47
Balances, September 30, 2019	$	133,680	$	99,047		$	4,081		$	236,808
Balances, July 1, 2018	$	110,727	$	80,872		$	(5,994	)	$	185,605
Net income		-		5,021			-			5,021
Other comprehensive income (loss)		-		-			(1,146	)		(1,146	)
Cash dividends paid ($0.15 per share)		-		(2,005	)		-			(2,005	)
Stock options exercised		67		-			-			67
Stock based compensation expense		36		-			-			36
Balances, September 30, 2018	$	110,830	$	83,888		$	(7,140	)	$	187,578

Nine months ended September 30	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balances, January 1, 2019	$	133,248	$	87,333		$	(3,852	)	$	216,729
Net income		-		18,302			-			18,302
Other comprehensive income		-		-			7,933			7,933
Cash dividends paid ($0.45 per share)		-		(6,588	)		-			(6,588	)
Stock options exercised		176		-			-			176
Stock based compensation expense		256		-			-			256
Balances, September 30, 2019	$	133,680	$	99,047		$	4,081		$	236,808
Balances, January 1, 2018	$	110,445	$	74,983		$	(2,073	)	$	183,355
Net income		-		14,529			-			14,529
Other comprehensive income		-		-			(5,067	)		(5,067	)
Cash dividends paid ($0.42 per share)		-		(5,611	)		-			(5,611	)
Cash in lieu of fractional share for 5 for 4 stock split		-		(13	)		-			(13	)
Stock options exercised		168		-			-			168
Stock based compensation expense		217		-			-			217
Balances, September 30, 2018	$	110,830	$	83,888		$	(7,140	)	$	187,578

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PREMIER FINANCIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(UNAUDITED, DOLLARS IN THOUSANDS)

	2019			2018
Cash flows from operating activities
Net income	$	18,302		$	14,529
Adjustments to reconcile net income to net cash from operating activities
Depreciation		1,624			1,274
Provision for loan losses		1,315			1,890
Amortization (accretion), net		89			984
Writedowns (gains on the sale) of other real estate owned, net		176			(909	)
Stock compensation expense		256			217
Changes in:
Interest receivable		(120	)		(66	)
Other assets		(1,158	)		1,002
Interest payable		114			104
Other liabilities		812			(19	)
Net cash from operating activities		21,410			19,006
Cash flows from investing activities
Net change on time deposits with other banks		496			496
Purchases of securities available for sale		(39,961	)		(92,644	)
Proceeds from maturities and calls of securities available for sale		67,203			48,355
Purchase of FHLB stock		(10	)		-
Redemption of FHLB stock		100			12
Net change in loans		7,394			11,156
Purchases of premises and equipment, net		(1,211	)		(2,643	)
Proceeds from sales of other real estate acquired through foreclosure		1,254			7,562
Net cash from (used in) investing activities		35,265			(27,706	)
Cash flows from financing activities
Net change in deposits		(3,029	)		46,930
Net change in agreements to repurchase securities		(341	)		1,418
Repayment of other borrowed funds		(2,500	)		(1,650	)
Repayment of FHLB advances		(2,500	)		-
Proceeds from stock option exercises		176			168
Cash in lieu of fractional shares		-			(13	)
Common stock dividends paid		(6,588	)		(5,611	)
Net cash from (used in) financing activities		(14,782	)		41,242
Net change in cash and cash equivalents		41,893			32,542
Cash and cash equivalents at beginning of period		80,775			82,663
Cash and cash equivalents at end of period	$	122,668		$	115,205

Supplemental disclosures of cash flow information:
Cash paid during period for interest	$	7,096	$	3,886
Cash paid during period for income taxes		5,090		2,807
Loans transferred to real estate acquired through foreclosure		1,330		1,066
Operating right-of-use asset resulting from lease liability		7,412		-

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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”):

					September 30, 2019
		Year	Total		Net Income
Subsidiary	Location	Acquired	Assets		Qtr			YTD
Citizens Deposit Bank & Trust	Vanceburg, Kentucky	1991	$	475,113	$	1,574		$	4,517
Premier Bank, Inc.	Huntington, West Virginia	1998		1,227,748		5,301			15,550
Parent and Intercompany Eliminations				7,508		(608	)		(1,765	)
Consolidated Total			$	1,710,369	$	6,267		$	18,302

All significant intercompany transactions and balances have been eliminated.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires organizations that are lessees to recognize a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified property for the lease term.  The new guidance also requires lessees to disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principles. This ASU became effective for Premier for interim and annual periods beginning after December 15, 2018.  The Company leases some of its branch locations.  The Company adopted Topic 842 on January 1, 2019.  The Company applied a modified retrospective transition approach for the applicable leases. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease.  Upon adoption of this standard, the Company recorded a $7.6 million right of use asset, included in premises and equipment, determined by calculating an estimated present value of future lease payments over the extended lives of the Company’s leases.  The Company also recorded a $7.6 million finance lease liability, included in other liabilities.

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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

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.

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  2 –SECURITIES

Amortized cost and fair value of investment securities, by category, at September 30, 2019 are summarized as follows:

2019	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	243,344	$	3,455	$	(277	)	$	246,522
U. S. sponsored agency CMO’s - residential		66,774		1,104		(71	)		67,807
Total mortgage-backed securities of government sponsored agencies		310,118		4,559		(348	)		314,329
U. S. government sponsored agency securities		17,967		383		(12	)		18,338
Obligations of states and political subdivisions		12,112		472		-			12,584
Other securities		2,448		112		-			2,560
Total available for sale	$	342,645	$	5,526	$	(360	)	$	347,811

Amortized cost and fair value of investment securities, by category, at December 31, 2018 are summarized as follows:

2018	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for sale
Mortgage-backed securities
U. S. sponsored agency MBS - residential	$	259,575	$	513	$	(4,846	)	$	255,242
U. S. sponsored agency CMO’s - residential		69,231		94		(782	)		68,543
Total mortgage-backed securities of government sponsored agencies		328,806		607		(5,628	)		323,785
U. S. government sponsored agency securities		24,154		196		(180	)		24,170
Obligations of states and political subdivisions		14,194		176		(43	)		14,327
Other securities		3,453		6		(10	)		3,449
Total available for sale	$	370,607	$	985	$	(5,861	)	$	365,731

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  2–SECURITIES - continued

The amortized cost and fair value of securities at September 30, 2019 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	$	7,115	$	7,123
Due after one year through five years		17,036		17,449
Due after five years through ten years		3,967		4,156
Due after ten years		4,409		4,754
Mortgage-backed securities of government sponsored agencies		310,118		314,329
Total available for sale	$	342,645	$	347,811

Securities with unrealized losses at September 30, 2019 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S government sponsored agency securities	$	-	$	-		$	6,205	$	(12	)	$	6,205	$	(12	)
U.S government sponsored agency MBS – residential		31,976		(141	)		13,629		(136	)		45,605		(277	)
U.S government sponsored agency CMO – residential		-		-			9,826		(71	)		9,826		(71	)
Total temporarily impaired	$	31,976	$	(141	)	$	29,660	$	(219	)	$	61,636	$	(360	)

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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, 2018 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	$	999	$	-		$	11,057	$	(180	)	$	12,056	$	(180	)
U.S government sponsored agency MBS – residential		50,923		(243	)		158,791		(4,603	)		209,714		(4,846	)
U.S government sponsored agency CMO’s – residential		16,359		(41	)		26,386		(741	)		42,745		(782	)
Obligations of states and political subdivisions		679		(6	)		3,454		(37	)		4,133		(43	)
Other securities		1,712		(10	)		-		-			1,712		(10	)
Total temporarily impaired	$	70,672	$	(300	)	$	199,688	$	(5,561	)	$	270,360	$	(5,861	)

The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities.  The unrealized losses at September 30, 2019 and December 31, 2018 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 September 30, 2019 and December 31, 2018 are summarized as follows:

	2019		2018
Residential real estate	$	381,310	$	381,027
Multifamily real estate		38,074		54,016
Commercial real estate:
Owner occupied		151,446		138,209
Non-owner occupied		292,879		282,608
Commercial and industrial		98,779		103,624
Consumer		25,296		27,688
Construction and land		122,464		128,926
All other		30,614		33,203
	$	1,140,862	$	1,149,301

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

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

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

Activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2018 was as follows:

Loan Class	Balance Dec 31, 2017		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2018
Residential real estate	$	2,986	$	(509	)	$	(229	)	$	30	$	2,278
Multifamily real estate		978		(504	)		(11	)		-		463
Commercial real estate:
Owner occupied		1,653		174			(21	)		1		1,807
Non-owner occupied		2,313		500			(16	)		2		2,799
Commercial and industrial		1,101		1,108			(525	)		40		1,724
Consumer		328		90			(105	)		50		363
Construction and land		2,408		651			(20	)		400		3,439
All other		337		380			(203	)		96		610
Total	$	12,104	$	1,890		$	(1,130	)	$	619	$	13,483

- 14 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

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

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

Activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018 was as follows:

Loan Class	Balance June 30, 2018		Provision (credit) for loan losses			Loans charged-off			Recoveries		Balance Sept 30, 2018
Residential real estate	$	2,254	$	100		$	(81	)	$	5	$	2,278
Multifamily real estate		557		(94	)		-			-		463
Commercial real estate:
Owner occupied		1,917		(92	)		(18	)		-		1,807
Non-owner occupied		2,437		360			-			2		2,799
Commercial and industrial		1,599		132			(21	)		14		1,724
Consumer		354		39			(42	)		12		363
Construction and land		3,253		(213	)		(1	)		400		3,439
All other		611		43			(73	)		29		610
Total	$	12,982	$	275		$	(236	)	$	462	$	13,483

- 15 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

Purchased Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows at September 30, 2019 and December 31, 2018.

	2019		2018
Residential real estate	$	2,132	$	2,665
Commercial real estate
Owner occupied		1,671		2,040
Non-owner occupied		2,694		3,434
Commercial and industrial		333		1,720
Construction and land		556		1,212
All other		233		225
Total carrying amount	$	7,619	$	11,296
Contractual principal balance	$	11,037	$	15,436
Carrying amount, net of allowance	$	7,619	$	11,296

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the nine months ended September 30, 2019 and September 30, 2018.

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

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

- 16 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at September 30, 2019 and September 30, 2018.

	2019			2018
Balance at January 1	$	642		$	754
New loans purchased		-			-
Accretion of income		(149	)		(141	)
Loans placed on non-accrual		-			(52	)
Income recognized upon full repayment		(74	)		(38	)
Reclassifications from non-accretable difference		-			-
Disposals		-			-
Balance at September 30	$	419		$	523

- 17 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

Past Due and Non-performing Loans

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2019 and December 31, 2018.  The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition and interest payments made by the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.

September 30, 2019	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	5,043	$	4,014	$	975
Multifamily real estate		4,113		3,726		-
Commercial real estate
Owner occupied		3,807		3,482		54
Non-owner occupied		3,010		1,786		447
Commercial and industrial		1,224		434		-
Consumer		235		191		-
Construction and land		483		458		-
All other		75		73		-
Total	$	17,990	$	14,164	$	1,476

December 31, 2018	Principal Owed on Non-accrual Loans		Recorded Investment in Non-accrual Loans		Loans Past Due Over 90 Days, still accruing
Residential real estate	$	4,966	$	3,708	$	954
Multifamily real estate		4,127		3,905		-
Commercial real estate
Owner occupied		3,692		3,436		56
Non-owner occupied		5,761		4,592		76
Commercial and industrial		1,303		625		-
Consumer		292		253		-
Construction and land		857		856		-
All other		75		73		-
Total	$	21,073	$	17,448	$	1,086

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

- 18 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

The following table presents the aging of the recorded investment in past due loans as of September 30, 2019 by class of loans:

Loan Class	Total Loans		30-89 Days Past Due		Greater than 90 days past due		Total Past Due		Loans Not Past Due
Residential real estate	$	381,310	$	6,108	$	2,776	$	8,884	$	372,426
Multifamily real estate		38,074		-		89		89		37,985
Commercial real estate:
Owner occupied		151,446		56		1,995		2,051		149,395
Non-owner occupied		292,879		1,787		990		2,777		290,102
Commercial and industrial		98,779		314		261		575		98,204
Consumer		25,296		255		49		304		24,992
Construction and land		122,464		285		3		288		122,176
All other		30,614		-		73		73		30,541
Total	$	1,140,862	$	8,805	$	6,236	$	15,041	$	1,125,821

The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 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	$	381,027	$	7,078	$	2,594	$	9,672	$	371,355
Multifamily real estate		54,016		-		110		110		53,906
Commercial real estate:
Owner occupied		138,209		124		2,601		2,725		135,484
Non-owner occupied		282,608		172		3,301		3,473		279,135
Commercial and industrial		103,624		2,235		262		2,497		101,127
Consumer		27,688		247		112		359		27,329
Construction and land		128,926		388		810		1,198		127,728
All other		33,203		546		73		619		32,584
Total	$	1,149,301	$	10,790	$	9,863	$	20,653	$	1,128,648

- 19 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2019:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total
Residential real estate	$	-	$	1,886	$	-	$	1,886	$	65	$	379,113	$	2,132	$	381,310
Multifamily real estate		1,570		229		-		1,799		3,725		34,349		-		38,074
Commercial real estate:
Owner occupied		426		1,866		-		2,292		2,699		147,076		1,671		151,446
Non-owner occupied		219		3,118		-		3,337		3,917		286,268		2,694		292,879
Commercial and industrial		192		1,551		-		1,743		386		98,060		333		98,779
Consumer		-		335		-		335		-		25,296		-		25,296
Construction and land		66		1,826				1,892		446		121,462		556		122,464
All other		-		527		-		527		-		30,381		233		30,614
Total	$	2,473	$	11,338	$	-	$	13,811	$	11,238	$	1,122,005	$	7,619	$	1,140,862

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, 2018:

	Allowance for Loan Losses								Loan Balances
Loan Class	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Acquired with Deteriorated Credit Quality		Total
Residential real estate	$	-	$	1,808	$	-	$	1,808	$	298	$	378,064	$	2,665	$	381,027
Multifamily real estate		1,281		368		-		1,649		3,905		50,111		-		54,016
Commercial real estate:
Owner occupied		692		1,428		-		2,120		2,820		133,349		2,040		138,209
Non-owner occupied		267		2,791		-		3,058		10,111		269,063		3,434		282,608
Commercial and industrial		414		1,483		-		1,897		558		101,346		1,720		103,624
Consumer		-		351		-		351		-		27,688		-		27,688
Construction and land		142		2,113		-		2,255		1,351		126,363		1,212		128,926
All other		-		600		-		600		-		32,978		225		33,203
Total	$	2,796	$	10,942	$	-	$	13,738	$	19,043	$	1,118,962	$	11,296	$	1,149,301

- 20 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

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

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2019.  The table includes $1,174,000 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	$	192	$	65	$	-
Multifamily real estate		96		89		-
Commercial real estate
Owner occupied		2,618		2,334		-
Non-owner occupied		2,527		1,776		-
Commercial and industrial		509		-		-
		5,942		4,264		-
With an allowance recorded:
Multifamily real estate		4,016		3,636		1,570
Commercial real estate
Owner occupied		1,114		1,087		426
Non-owner occupied		2,702		2,593		219
Commercial and industrial		396		386		192
Construction and land		470		446		66
		8,698		8,148		2,473
Total	$	14,640	$	12,412	$	2,473

- 21 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018.  The table includes $1,160,000 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	$	426	$	298	$	-
Multifamily real estate		110		110		-
Commercial real estate
Owner occupied		1,305		1,092		-
Non-owner occupied		8,458		7,740		-
Commercial and industrial		531		-		-
Construction and land		786		786		-
		11,616		10,026		-
With an allowance recorded:
Multifamily real estate	$	4,016	$	3,795	$	1,281
Commercial real estate
Owner occupied		2,523		2,478		692
Non-owner occupied		2,852		2,781		267
Commercial and industrial		562		558		414
Construction and land		565		565		142
		10,518		10,177		2,796
Total	$	22,134	$	20,203	$	2,796

- 22 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the nine months ended September 30, 2019 and September 30, 2018.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Nine months ended Sept 30, 2019						Nine months ended Sept 30, 2018
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	$	217	$	-	$	-	$	301	$	-	$	-
Multifamily real estate		3,823		-		-		2,192		11		11
Commercial real estate:
Owner occupied		3,779		10		10		3,163		54		54
Non-owner occupied		9,009		664		664		9,005		327		327
Commercial and industrial		517		3		3		990		21		21
Construction and land		910		123		123		4,633		12		12
All other		-		-		-		216		10		10
Total	$	18,255	$	800	$	800	$	20,500	$	435	$	435

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended September 30, 2019 and September 30, 2018.  The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

	Three months ended Sept 30, 2019						Three months ended Sept 30, 2018
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	$	170	$	-	$	-	$	299	$	-	$	-
Multifamily real estate		3,768		-		-		1,939		-		-
Commercial real estate:
Owner occupied		3,683		4		4		3,041		3		3
Non-owner occupied		7,439		478		478		7,489		86		86
Commercial and industrial		535		1		1		532		5		5
Construction and land		480		2		2		4,467		9		9
All other		-		-		-		142		6		6
Total	$	16,075	$	485	$	485	$	17,909	$	109	$	109

- 23 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

Troubled Debt Restructurings

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

The following table presents TDR’s as of September 30, 2019 and December 31, 2018:

September 30, 2019	TDR’s on Non-accrual		Other TDR’s		Total TDR’s
Residential real estate	$	36	$	161	$	197
Multifamily real estate		3,636		-		3,636
Commercial real estate
Owner occupied		1,087		210		1,297
Non-owner occupied		-		2,674		2,674
Commercial and industrial		191		-		191
Total	$	4,950	$	3,045	$	7,995

December 31, 2018	TDR’s on Non-accrual		Other TDR’s		Total TDR’s
Residential real estate	$	347	$	97	$	444
Multifamily real estate		3,795		-		3,795
Commercial real estate
Owner occupied		1,647		222		1,869
Non-owner occupied		-		5,964		5,964
Commercial and industrial		191		-		191
Total	$	5,980	$	6,283	$	12,263

At September 30, 2019, $1,956,000 in specific reserves were allocated to loans that had restructured terms resulting in a provision for loan losses of $263,000 for the three months ended September 30, 2019 and $413,000 for the nine months ended September 30, 2019.  This compares to a provision for loan losses on restructured loans of $140,000 for the three months ended September 30, 2018 and $303,000 for the nine months ended September 30, 2018.  At December 31, 2018, $1,630,000 in specific reserves were allocated to loans that had restructured terms.  There were no commitments to lend additional amounts to these borrowers.

- 24 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

There were no new TDR’s that occurred during the three and nine months ended September 30, 2019 and September 30, 2018.

During the three and nine months ended September 30, 2019 and the three and nine months ended September 30, 2018, there were no TDR’s for which there as a payment default within twelve months following the modification.

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

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.

- 25 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  3–LOANS - continued

As of September 30, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loan Class	Pass		Special Mention		Substandard		Doubtful		Total Loans
Residential real estate	$	368,996	$	3,026	$	9,288	$	-	$	381,310
Multifamily real estate		32,577		1,771		3,726		-		38,074
Commercial real estate:
Owner occupied		140,610		4,401		6,435		-		151,446
Non-owner occupied		281,887		5,426		5,566		-		292,879
Commercial and industrial		94,930		2,969		880		-		98,779
Consumer		25,059		-		237		-		25,296
Construction and land		111,764		9,798		902		-		122,464
All other		30,290		155		169		-		30,614
Total	$	1,086,113	$	27,546	$	27,203	$	-	$	1,140,862

As of December 31, 2018, 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	$	369,808	$	1,376	$	9,681	$	162	$	381,027
Multifamily real estate		45,187		4,924		3,905		-		54,016
Commercial real estate:
Owner occupied		126,422		4,840		6,947		-		138,209
Non-owner occupied		262,149		7,647		12,812		-		282,608
Commercial and industrial		96,066		5,280		2,278		-		103,624
Consumer		27,344		31		313		-		27,688
Construction and land		107,196		19,728		2,002				128,926
All other		32,749		381		73		-		33,203
Total	$	1,066,921	$	44,207	$	38,011	$	162	$	1,149,301

- 26 -

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 2019 the Banks could, without prior approval, declare dividends to the Company of approximately $8.4 million plus any 2019 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.

These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following tables).  The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule by January 1, 2019.  The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.  Management believes, as of September 30, 2019, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.

- 27 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  4- STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS - continued

Shown below is a summary of regulatory capital ratios, exclusive of the capital conservation buffer, for the Company:

	September 30, 2019			December 31, 2018			Regulatory Minimum Requirements			To Be Considered Well Capitalized
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		15.4	%		14.2	%		4.5	%		6.5	%
Tier 1 Capital (to Risk-Weighted Assets)		15.9	%		14.7	%		6.0	%		8.0	%
Total Capital (to Risk-Weighted Assets)		17.1	%		15.9	%		8.0	%		10.0	%
Tier 1 Capital (to Average Assets)		11.4	%		10.7	%		4.0	%		5.0	%

Beginning on January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over a four year period from 2016 thru 2019.  As of January 1, 2019, the capital conservation buffer is 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company.  The capital ratios of the Affiliate Banks and the Company exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50%, and a Total Capital to risk weighted assets ratio of at least 10.50%.  The Company’s capital conservation buffer was 9.07% at September 30, 2019 and 7.88% at December 31, 2018, well in excess of the fully phased-in 2.50% required by January 1, 2019.

- 28 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  5 – PREMISES AND EQUIPMENT

The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed monthly payments over periods generally ranging from two to sixteen years, including renewal options.  Certain leases contain renewal options and rent escalation clauses calling for rent increases during the term of the lease.  Short-term leases of equipment are recognized on a straight-line basis over the lease term.  As of September 30, 2019, the weighted average remaining lease term for operating leases was 9.59 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.22%.

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

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

2019	$	268
2020		1,059
2021		1,013
2022		995
2023		779
2024 and thereafter		4,172
Total undiscounted cash flows		8,286
Discounted cash flows		(874	)
Total lease liability	$	7,412

- 29 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  6 – STOCK COMPENSATION EXPENSE

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

On March 20, 2019, 72,075 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $15.57, the closing market price of Premier’s common stock on the grant date.  These options vest in three equal annual installments ending on March 20, 2022.  On March 21, 2018, 67,875 incentive stock options were granted under the 2012 Long Term Incentive Plan at an exercise price of $15.12, the closing market price of Premier’s common stock on the grant date adjusted for the 5 for 4 stock split issued by the Company on June 8, 2018.  These options vest in three equal annual installments ending on March 21, 2021.

On April 17, 2019, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $16.78 per share based upon the closing price of Premier’s stock on the date of grant and $126,000 of stock-based compensation was recorded as a result.  On April 25, 2018, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation under the 2012 Long-term Incentive Plan.  The fair value of the stock at the time of the grant was $15.82 per share based upon the closing price of Premier’s stock on the date of grant and $119,000 of stock-based compensation was recorded as a result.

Compensation expense of $256,000 was recorded for the first nine months of 2019 while $217,000 was recorded for the first nine months of 2018.  Stock-based compensation expense related to incentive stock option grants is recognized ratably over the requisite vesting period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $175,000 at September 30, 2019. This unrecognized expense is expected to be recognized over the next 29 months based on the vesting periods of the options.

- 30 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  7 – EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for the three and nine months ended September 30, 2019 and 2018 is presented below:

	Three Months Ended Sept 30,				Nine Months Ended Sept 30,
	2019		2018		2019		2018
Basic earnings per share
Income available to common stockholders	$	6,267	$	5,021	$	18,302	$	14,529
Weighted average common shares outstanding		14,645,002		13,368,782		14,636,004		13,356,998
Earnings per share	$	0.43	$	0.38	$	1.25	$	1.09
Diluted earnings per share
Income available to common stockholders	$	6,267	$	5,021	$	18,302	$	14,529
Weighted average common shares outstanding		14,645,002		13,368,782		14,636,004		13,356,998
Add dilutive effects of potential additional common stock		75,513		123,624		76,136		102,578
Weighted average common and dilutive potential common shares outstanding		14,720,515		13,492,406		14,712,140		13,459,576
Earnings per share assuming dilution	$	0.43	$	0.37	$	1.24	$	1.08

There were no stock options considered antidilutive for the three or nine months ended September 30, 2019 and 2018.

- 31 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE

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

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

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

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

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

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

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

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

- 32 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE - continued

The carrying amounts and estimated fair values of financial instruments at September 30, 2019 were as follows:

				Fair Value Measurements at September 30, 2019 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	106,685		$	106,685		$	-		$	-	$	106,685
Time deposits with other banks		598			-			599			-		599
Federal funds sold		15,983			15,983			-			-		15,983
Securities available for sale		347,811			-			347,811			-		347,811
Loans, net		1,127,051			-			-			1,118,758		1,118,758
Federal Home Loan Bank stock		3,538			n/a			n/a			n/a		n/a
Interest receivable		4,415			5			990			3,420		4,415
Financial liabilities
Deposits	$	(1,427,240	)	$	(1,025,301	)	$	(399,595	)	$	-	$	(1,424,896	)
Securities sold under agreements to repurchase		(21,721	)		-			(21,721	)		-		(21,721	)
FHLB advances		(6,362	)		-			(6,401	)		-		(6,401	)
Subordinated debt		(5,428	)		-			(5,424	)		-		(5,424	)
Interest payable		(847	)		(16	)		(831	)		-		(847	)

The carrying amounts and estimated fair values of financial instruments at December 31, 2018 were as follows:

				Fair Value Measurements at December 31, 2018 Using
	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets
Cash and due from banks	$	62,903		$	62,903		$	-		$	-	$	62,903
Time deposits with other banks		1,094			-			1,085			-		1,085
Federal funds sold		17,872			17,872			-			-		17,872
Securities available for sale		365,731			-			365,231			500		365,731
Loans, net		1,135,563			-			-			1,121,517		1,121,517
Federal Home Loan Bank stock		3,628			n/a			n/a			n/a		n/a
Interest receivable		4,295			-			1,032			3,263		4,295
Financial liabilities
Deposits	$	(1,430,127	)	$	(1,039,430	)	$	(384,496	)	$	-	$	(1,423,926	)
Securities sold under agreements to repurchase		(22,062	)		-			(22,062	)		-		(22,062	)
FHLB advances		(8,819	)		-			(8,688	)		-		(8,688	)
Other borrowed funds		(2,500	)		-			(2,478	)		-		(2,478	)
Subordinated debt		(5,406	)		-			(5,509	)		-		(5,509	)
Interest payable		(733	)		(22	)		(711	)		-		(733	)

- 33 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE - continued

Assets and Liabilities Measured on a Recurring Basis

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

			Fair Value Measurements at September 30, 2019 Using:
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale
Mortgage-backed securities
U. S. agency MBS - residential	$	246,522	$	-	$	246,522	$	-
U. S. agency CMO’s - residential		67,807		-		67,807		-
Total mortgage-backed securities of government sponsored agencies		314,329		-		314,329		-
U. S. government sponsored agency securities		18,338		-		18,338		-
Obligations of states and political subdivisions		12,584		-		12,584		-
Other securities		2,560		-		2,560		-
Total securities available for sale	$	347,811	$	-	$	347,811	$	-

			Fair Value Measurements at December 31, 2018 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	$	255,242	$	-	$	255,242	$	-
U. S. agency CMO’s		68,543		-		68,543		-
Total mortgage-backed securities of government sponsored agencies		323,785		-		323,785		-
U. S. government sponsored agency securities		24,170		-		24,170		-
Obligations of states and political subdivisions		14,327		-		14,327		-
Other securities		3,449		-		2,949		500
Total securities available for sale	$	365,731	$	-	$	365,231	$	500

There were no transfers between Level 1 and Level 2 during 2019 or 2018.

- 34 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE - continued

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2019:

	Securities Available-for-sale
	Nine Months Ended September 30, 2019
Balance of recurring Level 3 assets at beginning of period	$	500
Total gains or losses (realized/unrealized):
Included in earnings – realized		-
Included in earnings – unrealized		-
Included in other comprehensive income		-
Purchases, sales, issuances and settlements, net		(500	)
Transfers in and/or out of Level 3		-
Balance of recurring Level 3 assets at period-end	$	-

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.

- 35 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 - FAIR VALUE - continued

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.

- 36 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2019 are summarized below:

			Fair Value Measurements at September 30, 2019 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	2,066	$	-	$	-	$	2,066
Commercial real estate
Owner occupied		661		-		-		661
Non-owner occupied		2,374		-		-		2,374
Commercial and industrial		194		-		-		194
Construction and land		380		-		-		380
Total impaired loans	$	5,675	$	-	$	-	$	5,675
Other real estate owned:
Residential real estate	$	1,149	$	-	$	-	$	1,149
Multifamily real estate		10,307		-		-		10,307
Commercial real estate
Owner occupied		291		-		-		291
Construction and land		829		-		-		829
Total OREO	$	12,576	$	-	$	-	$	12,576

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $8,148,000 at September 30, 2019 with a valuation allowance of $2,473,000 and a carrying amount of $10,177,000 at December 31, 2018 with a valuation allowance of $2,796,000.  The change resulted in a provision for loan losses of $324,000 for the nine-months ended September 30, 2019, compared to a $868,000 provision for loan losses for the nine-months ended September 30, 2018 and a $98,000 increase in provision for loans losses for the three months ended September 30, 2019, compared to a $348,000 increase in provision for loan losses for the three months ended September 30, 2018.  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 $12,576,000, which is made up of the outstanding balance of $13,455,000 net of a valuation allowance of $879,000 at September 30, 2019.  There were $311,000 of writedowns during the nine months ended September 30, 2019, compared to $120,000 of writedowns during the nine months ended September 30, 2018. For the three months ended September 30, 2019 there were $180,000 of additional writedowns compared to no additional writedowns during the three months ended September 30, 2018.  At December 31, 2018, other real estate owned had a net carrying amount of $11,766,000, made up of the outstanding balance of $12,769,000, net of a valuation allowance of $1,003,000.

- 37 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at September 30, 2019 are summarized below:

	September 30, 2019		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	2,066	sales comparison	adjustment for estimated realizable value	55.2%-55.2% (55.2%)
Commercial real estate
Owner occupied		661	sales comparison	adjustment for estimated realizable value	68.4%-68.4% (68.4%)
Non-owner occupied		2,374	income approach	adjustment for differences in net operating income expectations	23.4%-67.4% (56.4%)
Commercial and industrial		194	sales comparison	adjustment for estimated realizable value	0.0%-0.0% (0.0%)
Construction and land		380	sales comparison	adjustment for estimated realizable value	56.5%-56.5% (56.5%)
Total impaired loans	$	5,675
Other real estate owned:
Residential real estate	$	1,149	sales comparison	adjustment for estimated realizable value	0.2%-59.8% (20.2%)
Multifamily real estate		10,307	income approach	adjustment for differences in net operating income expectations	20.0%-20.0% (20.0%)
Commercial real estate
Owner occupied		291	sales comparison	adjustment for estimated realizable value	14.6%-83.2% (39.0%)
Construction and land		829	sales comparison	adjustment for estimated realizable value	37.5%-69.9% (64.1%)
Total OREO	$	12,576

- 38 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE - continued

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below:

			Fair Value Measurements at December 31, 2018 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Multifamily real estate	$	2,514	$	-	$	-	$	2,514
Commercial real estate
Owner occupied		1,786		-		-		1,786
Non-owner occupied		2,514		-		-		2,514
Commercial and industrial		144		-		-		144
Construction and land		423		-		-		423
Total impaired loans	$	7,381	$	-	$	-	$	7,381
Other real estate owned:
Residential real estate	$	984	$	-	$	-	$	984
Multifamily real estate		10,307		-		-		10,307
Commercial real estate
Owner occupied		125		-		-		125
Non-owner occupied		200		-		-		200
Construction and land		150		-		-		150
Total OREO	$	11,766	$	-	$	-	$	11,766

- 39 -

PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  8 – FAIR VALUE - continued

The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below:

	December 31, 2018		Valuation Techniques	Unobservable Inputs	Range (Weighted Avg)
Impaired loans:
Multifamily real estate	$	2,514	sales comparison	adjustment for estimated realizable value	45.3%-45.3% (45.3%)
Commercial real estate
Owner occupied		1,786	sales comparison	adjustment for estimated realizable value	31.5%-50.6% (35.5%)
Non-owner occupied		2,514	income approach	adjustment for differences in net operating income expectations	16.1%-67.2% (54.1%)
Commercial and industrial		144	sales comparison	adjustment for estimated realizable value	0.0%-0.0% (0.0%)
Construction and land		423	sales comparison	adjustment for estimated realizable value	53.2%-83.6% (54.5%)
Total impaired loans	$	7,381
Other real estate owned:
Residential real estate	$	984	sales comparison	adjustment for estimated realizable value	19.2%-59.8% (21.9%)
Multifamily real estate		10,307	income approach	adjustment for differences in net operating income expectations	20.0%-20.0% (20.0%)
Commercial real estate
Owner occupied		125	sales comparison	adjustment for estimated realizable value	42.4%-42.4% (42.4%)
Non-owner occupied		200	sales comparison	adjustment for estimated realizable value	57.9%-57.9% (57.9%)
Construction and land		150	sales comparison	adjustment for estimated realizable value	50.3%-50.3% (50.3%)
Total OREO	$	11,766

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PREMIER FINANCIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  9 - SUBSEQUENT EVENT

Effective with the close of business on October 25, 2019, Premier completed its purchase of The First National Bank of Jackson (“Jackson”), a $103.6 million national bank (as of September 30, 2019) headquartered in Jackson, Kentucky whereby Citizens Deposit Bank and Trust, Inc., Premier’s wholly owned subsidiary, purchased Jackson for $14,560,000 in cash.  Under terms of the Merger Agreement, Citizens purchased all the shares of Jackson common stock for an amount equal to Jackson’s total shareholder equity at the effective time plus certain adjustments and subsequently merged Jackson with and into Citizens.  Management has not yet completed all of the analyses needed to estimate the fair value of the assets and liabilities acquired, both tangible and intangible.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Item 2.  Management’s Discussion and Analysis

   of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, 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), 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, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier.  The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “predict,” “continue” and similar expressions are intended to identify forward-looking statements.

A.Results of Operations

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

Net income for the nine months ended September 30, 2019 was $18,302,000, or $1.24 per diluted share, compared to net income of $14,529,000, or $1.08 per diluted share, for the nine months ended September 30, 2018.  The increase in income in the first nine months of 2019 is largely due to an increase in interest income, an increase in non-interest income,  and a decrease in the provision for loan losses all of which more than offset increases in interest expense and non-interest expense.  The comparative increases in interest income and expense as well as non-interest income and expense are, in large part, attributable to the operations of the First Bank of Charleston acquired on October 12, 2018, which are not included in the first nine months of 2018 income statement results.  The increase in non-interest expense was also partially due to an increase in OREO expense resulting from $1,080,000 of net gains on the sale of OREO properties in the first three months of 2018.  OREO expenses and writedowns are traditionally included in Premier’s total non-interest expenses, so the net gains from these sales reduced non-interest expense in the first quarter of 2018.  The annualized returns on average common shareholders’ equity and average assets were approximately 10.67% and 1.43% for the nine months ended September 30, 2019 compared to 10.38% and 1.28% for the same period in 2018.

Net income for the three months ended September 30, 2019 was $6,267,000, or $0.43 per diluted share, compared to net income of $5,021,000, or $0.37 per diluted share for the three months ended September 30, 2018.  The increase in net income during the third quarter of 2019 is largely due to increases in interest income and non-interest income, all of which more than offset increases in the provision for loan losses, interest expense, and non-interest expense.  The annualized returns on average common shareholders’ equity and average assets were approximately 10.61% and 1.46% for the three months ended September 30, 2019 compared to 10.65% and 1.32% for the same period in 2018.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Net interest income for the nine months ended September 30, 2019 totaled $50.268 million, an increase of $6,705,000, or 15.4%, from the $43.563 million of net interest income earned in the first nine months of 2018.  Interest income in 2019 increased by $9,925,000, or 20.9%, largely due to a $7,505,000 increase in interest income on loans, a $2,229,000 increase in interest income on investments, and a $191,000 increase in interest income on federal funds sold and other interest-bearing bank balances.  Interest income on loans in the first nine months of 2019 included approximately $1,619,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the first nine months of 2019 compared to $843,000 of interest income of this kind recognized during the first nine months of 2018.  The loan payoffs included both non-accrual loans and performing loans that were once on non-accrual status.  Otherwise, interest income on loans increased by $6,729,000, or 16.6%, in the first nine months of 2019, largely due to a higher average yield on a higher average balance of loans outstanding during 2019 when compared to the first nine months of 2018.  Interest income on investment securities in the first nine months of 2019 increased by $2,229,000, or 45.0%, largely due to higher average yields and a higher average balance of investments outstanding.  The higher average balance of investments and loans is largely due to the investment and loan portfolios from the First Bank of Charleston acquisition in the fourth quarter of 2018.  Interest income from interest-bearing bank balances and federal funds sold increased by $191,000, or 16.6%, largely due to an increase in the average yield earned on these balances in 2019 as a result of increases in the short-term interest rate policy of the Federal Reserve Board of Governors during 2018.

Partially offsetting the increase in interest income in the first nine months of 2019 was a $3,220,000, or 80.7%, increase in interest expense, driven by an increase in interest expense on deposits.  Interest expense on deposits increased by $3,119,000, or 87.1% in the first nine months of 2019 due to increases in the average rate paid on certificates of deposit, savings deposits, and NOW and money market deposits during the first nine months of 2019 compared to the same period in 2018.  Average interest-bearing deposit balances were up $107.2 million, or 11.3%, in the first nine months of 2019 compared to the same period of 2018, largely due to the acquisition of the First Bank of Charleston in the fourth quarter of 2018. The average interest rate paid on interest-bearing deposits was up 34 basis points in 2019, from 0.51% in 2018 to 0.85% in 2019.  Increases in short-term rates have increased competition for deposits and time deposits in particular. The related rates of interest paid on time deposits increased by 70 basis points, driving the overall increase in interest expense on deposits in the first nine months of 2019 when compared to the same period of 2018.  Interest expense on customer repurchase agreements and other short-term borrowings increased by $20,000 in the first nine months of 2019, largely due to an increase in the average rate paid on a slightly higher average balance outstanding.  Adding to the interest expense increase in 2019 was $151,000 of interest expense on the remaining Federal Home Loan Bank (“FHLB”) borrowings of First Bank of Charleston assumed by Premier as part of the acquisition, while there was no such interest in the first nine months of 2018.  Partially offsetting the increase in interest expense on FHLB borrowings, interest expense on other borrowings in the first nine months of 2019 decreased by $94,000, or 75.2%, largely due to a decrease in outstanding borrowings from scheduled and accelerated principal payments on the long-term borrowing at the parent company.  This borrowing was fully repaid during the first half of 2019.  Also, adding to the overall increase in interest expense during 2019 was a $24,000, or 9.3%, increase in interest expense on Premier’s subordinated debt due to an increase in the variable rate interest rate paid in 2019.  The variable interest rate is indexed to the three month London Interbank Offered Rate (“LIBOR”), which has increased over the past twelve months in conjunction with increases in the short-term interest rate policy by the Federal Reserve Board of Governors.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Premier’s net interest margin during the first nine months of 2019 was 4.22% compared to 4.13% for the same period in 2018.  A portion of the interest income on loans in both 2019 and 2018 was the result of recognizing deferred interest income and discounts on loans that paid-off during the period.  Excluding this income, Premier’s net interest margin during the first nine months of 2019 would have been 4.09% compared to 4.05% for the same period in 2018.  As shown in the table below, Premier’s yield earned on federal funds sold and interest bearing bank balances increased to 2.37% in the first nine months of 2019, from the 1.90% earned in the first nine months of 2018.  The average yield earned on securities available for sale also increased when compared to the first nine months of 2018.  Similarly, the average yield earned on total loans outstanding increased to 5.68% in 2019 from the 5.35% earned during the first nine months of 2018.  Earning asset yields have increased generally in response to increases in short-term interest rate policy as new loans have been made with higher interest rates and new investment purchases have been at higher market yields.  Similar to the increase in earning asset yields, the average rate paid on interest-bearing liabilities increased by 34 basis points during the first nine months of 2019.  As noted above, the average rates paid on interest-bearing deposits increased from 0.51% in the first nine months to 2018 to 0.85% during the first nine months of 2019, largely due to higher rates paid on certificates of deposit.  The average rate paid on short-term borrowings and other borrowings increased slightly.  Furthermore, the average rate paid on Premier’s variable rate subordinated debentures increased from 6.38% in the first nine months of 2018 to 6.94% in the first nine months of 2019 due to increases in short-term interest rate policy.  These increases in average rates paid, plus the average interest rate on the FHLB borrowings assumed in the acquisition of First Bank of Charleston, resulted in an increase in the average rate paid on total interest-bearing liabilities to 0.89% in the first nine months of 2019 compared to 0.55% in the first nine months of 2018. The overall effect was a decrease to Premier’s net interest spread by 2 basis points to 3.94%.  However, due to a greater increase in average interest-earning assets than the increase in average interest-bearing liabilities funded from non-interest-bearing sources, such as the $40.7 million, or 11.9%, increase in non-interest bearing deposits and the $42.2 million, or 22.6% increase in average stockholders’ equity, Premier’s net interest margin did not decrease but increased by 9 basis points to 4.22% in the first nine months of 2019 when compared to the first nine months of 2018.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Additional information on Premier’s net interest income for the nine months of 2019 and nine months of 2018 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS
	Nine Months Ended Sept 30, 2019								Nine Months Ended Sept 30, 2018
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	75,694		$	1,342		2.37	%	$	80,960		$	1,151		1.90	%
Securities available for sale
Taxable		351,783			6,917		2.62			284,136			4,787		2.25
Tax-exempt		13,058			265		3.43			9,362			166		3.01
Total investment securities		364,841			7,182		2.65			293,498			4,953		2.27
Total loans		1,151,855			48,954		5.68			1,035,634			41,449		5.35
Total interest-earning assets		1,592,390			57,478		4.83	%		1,410,092			47,553		4.51	%
Allowance for loan losses		(13,780	)							(12,843	)
Cash and due from banks		22,935								25,967
Other assets		109,325								86,392
Total assets	$	1,710,870							$	1,509,608
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,053,876			6,702		0.85		$	946,718			3,583		0.51
Short-term borrowings		21,864			45		0.28			21,769			25		0.15
FHLB advances		6,837			151		2.95			-			-		0.00
Other borrowings		949			31		4.37			4,080			125		4.10
Subordinated debt		5,416			281		6.94			5,386			257		6.38
Total interest-bearing liabilities		1,088,942			7,210		0.89	%		977,953			3,990		0.55	%
Non-interest bearing deposits		381,655								340,922
Other liabilities		11,479								4,121
Stockholders’ equity		228,794								186,612
Total liabilities and equity	$	1,710,870							$	1,509,608
Net interest earnings				$	50,268							$	43,563
Net interest spread							3.94	%							3.96	%
Net interest margin							4.22	%							4.13	%

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Additional information on Premier’s net interest income for the third quarter of 2019 and third quarter of 2018 is contained in the following table.

PREMIER FINANCIAL BANCORP, INC.
AVERAGE CONSOLIDATED BALANCE SHEETS
AND NET INTEREST INCOME ANALYSIS
	Three Months Ended Sept 30, 2019								Three Months Ended Sept 30, 2018
	Balance			Interest		Yield/Rate			Balance			Interest		Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and other	$	93,796		$	519		2.20	%	$	89,644		$	473		2.09	%
Securities available for sale
Taxable		346,444			2,266		2.62			297,367			1,745		2.35
Tax-exempt		12,600			85		3.42			8,555			52		3.14
Total investment securities		359,044			2,351		2.64			305,922			1,797		2.37
Total loans		1,146,275			16,438		5.69			1,032,099			13,731		5.28
Total interest-earning assets		1,599,115			19,308		4.81	%		1,427,665			16,001		4.46	%
Allowance for loan losses		(13,837	)							(13,252	)
Cash and due from banks		21,296								22,410
Other assets		108,150								85,166
Total assets	$	1,714,724							$	1,521,989
Liabilities and Equity
Interest-bearing liabilities
Interest-bearing deposits	$	1,055,037			2,367		0.89		$	947,588			1,355		0.57
Short-term borrowings		21,490			24		0.44			23,233			10		0.17
FHLB advances		6,354			48		3.00			-			-		0.00
Other borrowings		-			-		0.00			3,592			37		4.09
Subordinated debentures		5,424			91		6.66			5,394			90		6.62
Total interest-bearing liabilities		1,088,305			2,530		0.92	%		979,807			1,492		0.60	%
Non-interest bearing deposits		378,757								349,028
Other liabilities		11,500								4,634
Stockholders’ equity		236,162								188,520
Total liabilities and equity	$	1,714,724							$	1,521,989
Net interest earnings				$	16,778							$	14,509
Net interest spread							3.89	%							3.86	%
Net interest margin							4.17	%							4.04	%

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Net interest income for the quarter ended September 30, 2019 totaled $16.778 million, up $2,269,000, or 15.6%, from the $14.509 million of net interest income earned in the third quarter of 2018.  Interest income in 2019 increased by $3,307,000, or 20.7%, largely due to a $2,707,000, or 19.7%, increase in interest income on loans.  Interest income on loans in the third quarter of 2019 included approximately $607,000 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter compared to only $141,000 of interest income of this kind recognized during the third quarter of 2018.  Otherwise, interest income on loans increased by $2,241,000, or 16.5%, in the third quarter of 2019, partially due to a higher average balance of loans outstanding during the quarter when compared to the third quarter of 2018, largely due to the loans acquired via the purchase of The First Bank of Charleston late in 2018, as well as a higher average yield on the loans outstanding.  Interest income on investment securities in the third quarter of 2019 increased by $554,000, or 30.8%, largely due to higher average yields on a higher average balance of investments outstanding during the third quarter of 2019, primarily due to the investment portfolio added from the acquisition of The First Bank of Charleston in the fourth quarter of 2018.  Interest income from interest-bearing bank balances and federal funds sold increased by $46,000, or 9.7%, due to an increase in the average yield on these balances in 2019 resulting from increases in the short-term interest rate policy of the Federal Reserve Board of Governors during 2018 on a higher average balance outstanding during the third quarter of 2019 when compared to the third quarter of 2018.

Partially offsetting the increase in interest income in the third quarter of 2019 was a $1,038,000, or 69.6%, increase in interest expense.  Interest expense on deposits increased by $1,012,000, or 74.7%, in the third quarter of 2019, due to increases in the average rate paid on certificates of deposit, savings deposits, and NOW and money market deposits during the quarter, when compared to the third quarter of 2018.  Adding to the increase in interest expense on deposits, average interest-bearing deposit balances were up $107.4 million, or 11.3%, compared to the third quarter of 2018, while the average interest rate paid on interest-bearing deposits was up 32 basis points in 2019, from 0.57% in the third quarter of 2018 to 0.89% in the third quarter of 2019.  Increases in short-term rates have increased competition for deposits and time deposits in particular. The related rates of interest paid on time deposits increased by 70 basis points, driving the overall increase in interest expense on deposits in the third quarter of 2019 when compared to the third quarter of 2018.  Interest expense on customer repurchase agreements and other short-term borrowings increased by $14,000 in the third quarter of 2019, largely due to an increase in the average rate paid on a slightly lower average balance outstanding.  Adding to the interest expense increase in 2019 was $48,000 of interest expense on the remaining Federal Home Loan Bank (“FHLB”) borrowings of First Bank of Charleston assumed by Premier as part of the acquisition, while there was no such interest in the third quarter of 2018.  Partially offsetting the increase in interest expense on FHLB borrowings, interest expense on other borrowings by the parent company decreased by $37,000, in the third quarter of 2019, due to the full repayment of this borrowing prior to the end of June 2019.

Premier’s net interest margin during the third quarter of 2019 was 4.17% compared to 4.04% for the same period in 2018.  A portion of the interest income on loans in 2019 was the result of recognizing deferred interest income and discounts on loans that paid-off during the period.  Excluding this income, Premier’s net interest margin during the third quarter of 2019 would have been 4.02% compared to 4.00% for the same period in 2018.  As shown in the table above, Premier’s yield earned on federal funds sold and interest bearing bank balances increased to 2.20% in the third quarter of 2019, from the 2.09% earned in the third quarter of 2018.  The average yield earned on securities available for sale increased to 2.64% when compared to 2.37% earned during the third quarter of 2018.  The average yield earned on the loan portfolio increased to 5.69% in 2019 from the

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

5.28% average yield earned in the third quarter of 2018.  Earning asset yields have increased generally in response to increases in short-term interest rate policy as new loans have been made with higher interest rates and new investment purchases have been at higher market yields.  Similar to the increase in earning asset yields, the average rate paid on interest bearing liabilities increased in the third quarter of 2019.  The average rates paid on interest-bearing deposits increased from 0.57% in the third quarter of 2018 to 0.89% during the third quarter of 2019, largely due to higher rates paid on certificates of deposit.  The average rate paid on short-term borrowings and other borrowings also increased although on lower combined average balance outstanding due to the repayment of other borrowings at the parent company.  Furthermore, the average rate paid on Premier’s variable rate subordinated debentures increased from 6.62% in the third quarter of 2018 to 6.66% in the third quarter of 2019 due to increases in short-term interest rate policy.  These increases in the average rates paid, plus the average interest rate on the FHLB borrowings assumed in the acquisition of First Bank of Charleston, resulted in an increase in the average rate paid on total interest-bearing liabilities to 0.92% in the third quarter of 2019 compared to 0.60% in the third quarter of 2018.  The overall effect was an increase to Premier’s net interest spread by 3 basis points to 3.89% and its net interest margin by 13 basis point to 4.17% in the third quarter of 2019 when compared to the third quarter of 2018.

Non-interest income increased by $260,000, or 3.9%, to $6,994,000 for the first nine months of 2019 compared to the same period of 2018.  Service charges on deposit accounts increased by $89,000, or 2.7%, other non-interest income increased by $196,000, or 34.3.%, and secondary market mortgage income increased by $12,000, or 8.5%.  Service charges on deposit accounts increased largely due to an increase in customer overdraft activity, while other non-interest income increased largely due to an increase in proportional income from an investment in a start-up insurance agency in 2018, and secondary market mortgage income increased largely due to an increase in the level of home purchasing and refinancing activity in Premier’s markets.  Partially offsetting these increases was a decrease in electronic banking income by $37,000, or 1.4%, primarily due to a decrease in income from debit card transaction activity and non-customer ATM fees.

For the quarter ending September 30, 2019, non-interest income increased by $34,000, or 1.4%, to $2,471,000 compared to $2,437,000 recognized during the same quarter of 2018.  Service charges and fees on deposit accounts increased by $33,000, or 2.8%, secondary market mortgage income increased by $68,000, or 234.5%, and other non-interest income increased by $10,000.  These increases were partially offset by a $77,000, or 8.0%, decrease in electronic banking income primarily due to a decrease in income from debit card transaction activity and non-customer ATM fees.

Non-interest expenses for the first nine months of 2019 totaled $32.38 million, or 2.53% of average assets on an annualized basis, compared to $29.61 million, or 2.62% of average assets for the same period of 2018.  The $2,770,000, or 9.4%, increase in non-interest expenses in 2019 when compared to the first nine months of 2018 is due in part to the $1,080,000 of net gains on the sale of OREO during the first quarter of 2018 discussed above. Otherwise, non-interest expense increased by $1,690,000, or 5.5% in the first nine months of 2019 compared to the first nine months of 2018, largely due to the inclusion of the newly acquired First Bank of Charleston location.  Increases in operating costs include a $1,381,000, or 9.4%, increase in staff costs, a $581,000, or 12.5%, increase in occupancy and equipment expenses, a $447,000, or 11.6%, increase in data processing, a $98,000, or 17.0%, increase in core deposit amortization, and a $65,000, or 9.7%, increase in taxes not on income.  The $447,000 increase in occupancy and equipment expenses included an $185,000 building impairment charge related to a branch location that is in the process of being liquidated.  These increases in non-interest expense were partially offset by a $400,000, or 61.7%, decrease in collection related expenses incurred, a $304,000, or 24.1%, decrease in professional fees, a $205,000, or 46.3%, decrease in FDIC insurance, and a $55,000, or 7.4%, decrease in expenses and writedowns on OREO properties (after excluding the $1,080,000 of net gains on sales in 2018 discussed above).

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Non-interest expenses for the third quarter of 2019 totaled $10.75 million, or 2.49%, of average assets on an annualized basis, compared to $10.17 million, or 2.65%, of average assets for the same period of 2018.  The $583,000, or 5.7%, increase in non-interest expenses in the third quarter of 2019 when compared to the third quarter of 2018 is largely due to a $576,000, or 11.9%, increase in staff costs, a $187,000 increase in OREO expenses, a $163,000, or 12.4%, increase in data processing, and a $130,000, or 8.3%, increase in occupancy and equipment expense.  These increases were partially offset by a $240,000, or 45.6%, decrease in professional fees, a $47,000, or 41.2%, decrease in loan collection expenses, a $176,000, or 103%, decrease in FDIC insurance premiums, and a $67,000, or 6.4%, decrease in other operating expenses, when compared to the third quarter of 2018.  The increase in OREO expense was largely due to $180,000 of writedowns on the carrying value of the properties in the third quarter of 2019.  The decrease in FDIC insurance premium was due to the application of FDIC premium credits for community banks used to offset the third quarter assessment.

Income tax expense was $5,261,000 for the first nine months of 2019 compared to $4,264,000 for the first nine months of 2018.  The effective tax rate for the nine months ended September 30, 2019 was 22.3% compared to 22.7% for the same period in 2018.  For the quarter ended September 30, 2019, income tax expense was $1,807,000, a 22.4% effective tax rate, compared to $1,483,000 (a 22.8% effective tax rate) for the same period in 2018.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

B.Financial Position

Total assets at September 30, 2018 increased by $20.3 million to $1.710 billion from the $1.690 billion at December 31, 2018.  The increase in total assets since year-end is largely due to a $40.2 million increase in interest-bearing bank balances, a $3.6 million increase in cash and due from banks, and a $7.0 million increase in premises and equipment, partially offset by a $17.9 million decrease in the investment portfolio, an $8.4 million decrease in total loans, and a $1.9 million decrease in federal funds sold.  Earning assets increased by $11.3 million from the $1.578 billion at year-end 2018 to end the quarter at $1.589 billion.

Cash and due from banks at September 30, 2019 was $26.6 million, a $3.6 million increase from the $23.0 million at December 31, 2018.  Interest-bearing bank balances increased by $40.2 million from $39.9 million reported at December 31, 2018 but federal funds sold decreased by $1.9 million  from $17.9 million at December 31, 2018.  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 $347.8 million at September 30, 2019, a $17.9 million decrease from the $365.7 million at December 31, 2018.  The decrease was largely due to $59.9 million of securities that matured or were called during the first nine months of 2019 and proceeds from monthly principal payments on Premier’s mortgage backed securities and the sale of $7.3 million of investment securities which more than offset the $40.0 million increase from new purchases and the $10.0 million increase in market value of securities available for sale.  The investment portfolio is predominately high quality residential mortgage backed securities backed by the U.S. Government or Government sponsored agencies.  Any unrealized losses on securities within the portfolio at September 30, 2019 and December 31, 2018 are believed to be price changes resulting from changes in the long-term interest rate environment and management anticipates receiving all principal and interest on these investments as they come due.  Additional details on investment activities can be found in the Consolidated Statements of Cash Flows.

Total loans at September 30, 2019 were $1.141 billion compared to $1.149 billion at December 31, 2018, a decrease of approximately $8.4 million, or 0.7%. The slight decrease is largely due to regular principal payments, loan payoffs, and transfers of loans to OREO upon foreclosure, which was partially offset by internal loan growth.  Loan payoffs during the first nine months of 2019 resulted in recognizing approximately $894,000 of interest income deferred while the loans were on non-accrual status and $725,000 of remaining fair value discounts associated with the loans.

Premises and equipment increased by $7.0 million, largely due to the recording of a $7.4 million Finance Lease Right to Use Asset in accordance with the adoption of Accounting Standards Update (“ASU”) 2016-02 on January 1, 2019.  Otherwise, premises and equipment decreased by $400,000, largely due to the $185,000 building impairment charge related to a branch location that is in the process of being liquidated as well as regular depreciation.  Goodwill and other intangible assets decreased by $673,000, due to the amortization of core deposit intangibles.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Deposits totaled $1.427 billion as of September 30, 2019, a $2.9 million, or 0.2%, decrease from the $1.430 billion in deposits at December 31, 2018.  The overall decrease in deposits is largely due to a $22.7 million, or 5.8%, decrease in non-interest bearing deposits.  The decrease was partially offset by a $9.0 million, or 2.3%, increase in certificates of deposits, a $6.1 million, or 1.7%, increase in savings deposits, and a $4.7 million, or 1.6%, increase in interest bearing deposits.  Repurchase agreements with corporate and public entity customers decreased in the first nine months of 2019 by $341,000, or 1.5%.  FHLB borrowings decreased by $2.5 million, or 28.0%, since year-end 2018 due to planned repayment of borrowings upon maturity.  Other borrowings decreased by $2.5 million since year-end 2018 due to scheduled principal payments plus additional principal payments on Premier’s existing borrowings.  Subordinated debentures increased by $22,000, due to amortization of the purchase accounting fair value adjustments applied to the $6.186 million face value of the subordinated debentures from previous acquisitions.

The following table sets forth information with respect to the Company’s nonperforming assets at September 30, 2019 and December 31, 2018.

	(In Thousands)
	2019			2018
Non-accrual loans	$	14,164		$	17,448
Accruing loans which are contractually past due 90 days or more		1,476			1,086
Accruing restructured loans		3,045			6,283
Total non-performing loans		18,685			24,817
Other real estate acquired through foreclosure (OREO)		13,924			14,024
Total non-performing assets	$	32,609		$	38,841
Non-performing loans as a percentage of total loans		1.64	%		2.16	%
Non-performing assets as a percentage of total assets		1.91	%		2.30	%

Total non-performing loans have decreased by $6.1 million since year-end, due to a $3.3 million decrease in non-accrual loans and a $3.2 million decrease in accruing restructured loans.  These decreases in non-performing loans were partially offset by a $390,000 increase in loans past due 90 days or more.  Total non-performing assets have decreased since year-end, largely due to the $6.1 million reduction in non-performing loans plus a $100,000 decrease in other real estate acquired through foreclosure (“OREO”).  Other real estate owned decreased by $100,000, or 0.7%, as foreclosures during the year, including one commercial real estate property that also resulted in a $450,000 loan charge-off, were more than offset by $1.1 million of OREO sales and $296,000 of writedowns of existing properties during the year.

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

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

Gross charge-offs totaled $1.5 million during the first nine months of 2019, largely due to the foreclosure on one commercial real estate property from a previously identified impaired loan relationship that also resulted in a $450,000 loan charge-off and one commercial and industrial impaired loan that resulted in a $250,000 loan charge-off.  Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance.  Recoveries recorded during the first nine months of 2019 totaled $222,000, resulting in net charge-offs for the first nine months of 2019 of $1.2 million.  This compares to $511,000of net charge-offs recorded in the first nine months of 2018.  The allowance for loan losses at September 30, 2019 was 1.21% of total loans compared to 1.20% at December 31, 2018.  The increase in the ratio is largely due to a decrease in total loans and a slight increase in the total amount of allowance for loan losses.

During the first nine months of 2019, Premier recorded $1,315,000 of provision for loan losses.  This provision compares to $1,890,000 of provision for loan losses recorded during the same nine months of 2018.  The provision for loan losses recorded during the first nine months of 2019 was primarily to provide for new loans recorded and additional identified credit risk in Premier’s multifamily residential real estate loan, owner occupied real estate loan, non-owner occupied real estate loan, and commercial and industrial loan portfolios partially offset by a decrease in the allowance for construction loans that transferred to repayment status.  The provision for loan losses recorded during the first nine months of 2018 was primarily to provide for additional identified credit risk in Premier’s commercial and industrial loan, commercial real estate loan, and construction loan portfolios.  The level of provision expense is determined under Premier’s internal analyses of evaluating credit risk.  The provisions for loan losses recorded in 2018 and 2019 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.  Management updated its policies regarding estimation of probable incurred losses in the first quarter of 2018.  The updates included incorporating a common estimated loss ratio for all pass credits within a given loan classification, addingan additional qualitative factor for document exceptions on collectively evaluated impaired loans, and reallocating the qualitative portion of the allowance to align more closely to the inputs used to determine the qualitative portion.  The result was a reduction in the amount of the allowance attributed to collectively impaired residential real estate and multifamily real estate loans and an increase in the amount of allowance attributed to collectively impaired commercial and industrial loans, consumer, construction, and all other loans. 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 writedowns to net realizable values. These factors are considered in determining the adequacy of the allowance for loan losses.  For additional details on the activity in the allowance for loan losses, impaired loans, past due and non-accrual loans and restructured loans, see Note 3 to the consolidated financial statements.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

C.Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America.  These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2018.  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, 2018.  There have been no significant changes in the application of these accounting policies since December 31, 2018.

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 $347.8 million of securities at fair value as of September 30, 2019.

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PREMIER FINANCIAL BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SEPTEMBER 30, 2019

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

E.Capital

At September 30, 2019, total stockholders’ equity of $236.8 million was 13.8% of total assets.  This compares to total stockholders’ equity of $216.7 million, or 12.8% of total assets on December 31, 2018.  The increase in stockholders’ equity was largely due to the $18.3 million of net income earned during the first nine months of 2019 and a $7.9 million, net of tax, increase in the market value of the investment portfolio available for sale.  These increases in stockholders’ equity were partially offset by the $0.45 per share cash dividends declared and paid during the first nine months of 2019.

Tier 1 capital totaled $189.9 million at September 30, 2019, which represents a Tier 1 leverage ratio of 11.4%.  This ratio is up from the 10.7% Tier 1 leverage ratio and $177.0 million of Tier 1 capital at December 31, 2018.  The increase in the Tier 1 leverage ratio is largely due to the growth in Tier 1 capital exceeding the proportional growth in average total assets at September 30, 2019.

Beginning on January 1, 2016 an additional capital conservation buffer has been added to the minimum regulatory capital ratios under the regulatory framework for prompt corrective action.  The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over a four year period from 2016 thru 2019.  As of January 1 2019, the capital conservation buffer is 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company.  The capital ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted asset ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%.  At September 30, 2019, the Company’s capital conservation buffer was 9.07%, well in excess of the fully phased-in 2.50% required by January 1, 2019.

Book value per common share was $16.17 at September 30, 2019 and $14.82 at December 31, 2018.  Adding to Premier’s book value per share in the first nine months of 2019 was the $1.25 per share earned during the period partially offset by the $0.45 per share in total quarterly cash dividends to common shareholders declared and paid during the first nine months of 2019.  Also adding to Premier’s book value per share at September 30, 2019 was the $7.9 million of other comprehensive income for the first nine months of 2019 related to the increase in the market value of investment securities available for sale, which increased book value by approximately $0.54 per share.

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PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2019

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 2018 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 2018 10-K.

Item 4. Controls and Procedures

A.Disclosure Controls & Procedures

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

B.Changes in Internal Controls over Financial Reporting

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

C.Inherent Limitations on Internal Control

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

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PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2019

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	None
Item 1A.	Risk Factors
Please refer to Premier's Annual Report on Form 10-K for the year ended December 31, 2018 for disclosures with respect to Premier's risk factors at December 31, 2018. There have been no material changes since year-end 2018 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 Disclosures	Not Applicable
Item 5.	Other Information	None
Item 6.	Exhibits

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

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

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

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

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PREMIER FINANCIAL BANCORP, INC.

SEPTEMBER 30, 2019

SIGNATURES

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

PREMIER FINANCIAL BANCORP, INC.

Date: November 7, 2019/s/ Robert W. Walker                                       

Robert W. Walker

President & Chief Executive Officer

Date: November 7, 2019/s/ Brien M. Chase                                            

Brien M. Chase

Senior Vice President & Chief Financial Officer

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