Prime Meridian Holding Co - Quarter Report: 2014 March (Form 10-Q)

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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


For the quarterly period ended		March 31, 2014

[ ] 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:		333-191801

PRIME MERIDIAN HOLDING COMPANY

(Exact Name of registrant as specified in its charter)


Florida		27-2980805
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1897 Capital Circle NE, Second Floor, Tallahassee, Florida		32308
(Address of principal executive offices)		(Zip Code)

(850) 907-2301

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No

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


Large accelerated filer ¨		Accelerate filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 28, 2014: 1,692,201

INDEX

PART I – FINANCIAL INFORMATION



Item 1. Financial Statements			1

Condensed Consolidated Balance Sheets March 31, 2014 (unaudited) and December 31, 2013			2

Condensed Consolidated Statements of Earning Three months ended March 31, 2014 and 2013 (unaudited)			3

Condensed Consolidated Statement of Comprehensive Income Three months ended March 31, 2014 and 2013 (unaudited)			4

Condensed Consolidated Statements of Stockholders’ Equity Three months ended March 31, 2014 and 2013 (unaudited)			5

Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2014 and 2013 (unaudited)			6

Notes to Condensed Consolidated Financial Statements (unaudited)			7-22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23-29

Item 3. Quantitative and Qualitative Disclosures About Market Risk			29

Item 4. Controls and Procedures			29

PART II – OTHER INFORMATION

Item 1. Legal Proceedings			31

Item 1A. Risk Factors			31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31

Item 3. Defaults Upon Senior Securities			31

Item 4. Mine Safety Disclosures			31

Item 5. Other Information			31

Item 6. Exhibits			32

Signatures			33

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)


	March 31, 2014			December 31, 2013
	(Unaudited)
Assets
Cash and due from banks	$	4,148			5,033
Federal funds sold		147			147
Interest-bearing deposits		33,369			28,986

Total cash and cash equivalents		37,664			34,166
Securities available for sale		43,861			44,071
Loans held for sale		946			150
Loans, net of allowance for loan losses of $1,775 and $1,734		125,191			121,220
Federal Home Loan Bank stock		186			204
Premises and equipment, net		3,750			3,757
Deferred tax asset		343			426
Accrued interest receivable		535			516
Bank-owned life insurance		1,575			1,562
Capitalized offering costs		255			218
Other assets		215			183


Total assets	$	214,521			206,473


Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits		59,057			59,011
Savings, NOW and money-market deposits		114,120			109,760
Time deposits		14,295			14,594


Total deposits		187,472			183,365

Other borrowings		5,733			5,719
Official checks		1,735			636
Other liabilities		403			392


Total liabilities		195,343			190,112


Stockholders’ equity:
Preferred stock, undesignated; 1,000,000 shares authorized, none issued or outstanding		0			0
Common stock, $.01 par value; 9,000,000 shares authorized, 1,691,621 and 1,498,937 issued and outstanding		17			15
Additional paid-in capital		17,335			14,929
Retained earnings		1,988			1,732
Accumulated other comprehensive loss		(162	)		(315	)


Total stockholders’ equity		19,178			16,361


Total liabilities and stockholders’ equity	$	214,521			206,473

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

(in thousands, except per share amounts)


	Three Months Ended March 31,
	2014		2013
Interest income:
Loans	$	1,642		1,362
Securities		220		211
Other		25		13


Total interest income		1,887		1,586

Interest expense:
Deposits		158		181
Other borrowings		14		14


Total interest expense		172		195


Net interest income		1,715		1,391
Provision for loan losses		29		184


Net interest income after provision for loan losses		1,686		1,207

Noninterest income:
Service charges and fees on deposit accounts		41		27
Gain on sale of loans		28		229
Income from bank-owned life insurance		13		14
Other income		47		85


Total noninterest income		129		355

Noninterest expenses:
Salaries and employee benefits		812		602
Occupancy and equipment		188		203
Professional fees		86		44
Advertising		78		68
Other		264		192


Total noninterest expenses		1,428		1,109


Earnings before income taxes		387		453

Income taxes		131		159


Net earnings	$	256		294


Basic earnings per share	$	0.17		0.20


Diluted earnings per share	$	0.17		0.20


Cash dividends per common share	$	0		0

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	Three Months Ended March 31,
	2014		2013

Net earnings	$	256		294


Other comprehensive income (loss):

Net change in unrealized (loss) gain		242		(84	)

Deferred income taxes (benefit) on above change		89		(30	)


Total other comprehensive income (loss)		153		(54	)


Comprehensive income	$	409		240

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2014 and 2013

(Dollars in thousands)


	Common Stock				Additional Paid-In Capital		Retained Earnings		Accumulated Other Compre- hensive (Loss) Income			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Compre- hensive (Loss) Income			Total Stockholders’ Equity

Balance at December 31, 2012		1,496,106	$	15		14,896		583		545			16,039

Net earnings for the three months ended March 31, 2013 (unaudited)		0		0		0		294		0			294

Net change in unrealized gain on securities available for sale (unaudited)		0		0		0		0		(54	)		(54	)

Common stock issued as compensation to directors (unaudited)		618		0		7		0		0			7


Balance at March 31, 2013 (unaudited)		1,496,724	$	15		14,903		877		491			16,286


Balance at December 31, 2013		1,498,937	$	15		14,929		1,732		(315	)		16,361

Net earnings for the three months ended March 31, 2014 (unaudited)		0		0		0		256		0			256

Net change in unrealized loss on securities available for sale (unaudited)		0		0		0		0		153			153

Sale of common stock (unaudited)		192,122		2		2,400		0		0			2,402

Common stock issued as compensation to directors (unaudited)		562		0		6		0		0			6


Balance at March 31, 2014 (unaudited)		1,691,621	$	17		17,335		1,988		(162	)		19,178

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:
Net earnings	$	256			294
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		95			86
Provision for loan losses		29			184
Net amortization of deferred loan fees		(13	)		(14	)
Deferred income taxes		(6	)		(293	)
Amortization of premiums, discounts on securities available for sale		120			115
Gain on sale of loans held for sale		(28	)		(229	)
Proceeds from the sale of loans held for sale		539			2,130
Loan originated as held for sale		(1,307	)		(1,901	)
Stock issued as compensation		6			7
Income from bank-owned life insurance		(13	)		(14	)
Net increase in accrued interest receivable		(19	)		(36	)
Net (increase) decrease in other assets and capitalized offering costs		(69	)		32
Net increase in other liabilities and official checks		1,110			108


Net cash provided by operating activities		700			469

Cash flows from investing activities:
Loan originations, net of principal repayments		(3,987	)		(13,083	)
Purchase of securities available for sale		(1,609	)		(3,723	)
Principal repayments of securities available for sale		1,941			2,188
Redemption of Federal Home Loan Bank stock		18			6
Purchase of premises and equipment		(88	)		(17	)


Net cash used in investing activities		(3,725	)		(14,629	)

Cash flows from financing activities:
Net increase in deposits		4,107			9,987
Increase in other borrowings		14			14
Proceeds from sale of common stock		2,402			0


Net cash provided by financing activities		6,523			10,001

Net increase in cash and cash equivalents		3,498			(4,159	)
Cash and cash equivalents at beginning of period		34,166			26,498

Cash and cash equivalents at end of period	$	37,664			22,339

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	172			197


Income taxes	$	40			0

Noncash transaction-
Accumulated other comprehensive (loss) income, net change in unrealized (loss) gain on sale of securities available for sale, net of taxes	$	153			(54	)

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

(1)

General

Prime Meridian Holding Company (the “Holding Company”) owns 100% of the outstanding common stock of Prime Meridian Bank (the “Bank”) (collectively the “Company”). The Holding Company’s primary activity is the operation of the Bank. The Bank is a state (Florida)-chartered commercial bank. The deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate customers through its banking offices located in Tallahassee, Florida.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at March 31, 2014, and the results of operations for the three-month periods ended March 31, 2014 and 2013. The results of operations for the three months ended March 31, 2014, are not necessarily indicative of the results to be expected for the full year.

Comprehensive Income. Accounting principles generally accepted in the United States of America (“GAAP”) generally require that recognized revenue, expenses, gains and losses be included in net earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items along with net earnings, are components of comprehensive income. The only component of other comprehensive income is the net change in the unrealized gains (loss) on the securities available for sale.

Share-Based Compensation. The Company expenses the fair value of any stock options granted. The Company recognizes share-based compensation in the statements of earnings as the options vest.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(1)

General, Continued

Recent Accounting Standards Update. In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective beginning January 1, 2015.

Recent Regulatory Developments

Basel III Rules. On July 2, 2013, the Federal Reserve Board (“FRB”) approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC’s rule is identical in substance to the final rules issued by the FRB.

The phase-in period for the final rules will begin for the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. The Bank is currently evaluating the provisions of the final rules and their expected impact on the Bank.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Securities Available for Sale

Securities are classified according to management’s intent. The carrying amount of securities and approximate fair values are as follows (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
*At March 31, 2014:*
U.S. Government agency securities	$	7,170		8		(259	)		6,919
Municipal securities		9,097		36		(162	)		8,971
Mortgage-backed securities		25,930		267		(155	)		26,042
Asset-backed securities		1,921		8		0			1,929

	$	44,118		319		(576	)		43,861

*At December 31, 2013:*
U.S. Government agency securities		7,290		8		(329	)		6,969
Municipal securities		9,139		14		(269	)		8,884
Mortgage-backed securities		26,225		253		(198	)		26,280
Asset-backed securities		1,916		22		0			1,938

	$	44,570		297		(796	)		44,071

Securities with gross unrealized losses at March 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):


	Less Than Twelve Months				Over Twelve Months
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Securities Available for Sale:
U.S. Government agency securities	$	222		4,989		37		964
Municipal securities		121		2,890		41		779
Mortgage-backed securities		73		8,260		82		2,151

	$	416		16,139		160		3,894

The unrealized losses at March 31, 2014 on twenty-two securities were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Securities Available for Sale, Continued

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Securities available for sale measured at fair value on a recurring basis are summarized below (in thousands):


			Fair Value Measurements Using
	Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
*At March 31, 2014:*
U.S. Government agency securities	$	6,919		0		6,919		0
Municipal securities		8,971		0		8,971		0
Mortgage-backed securities		26,042		0		26,042		0
Asset-backed securities		1,929		0		1,929		0

	$	43,861		0		43,861		0

*At December 31, 2013:*
U.S. Government agency securities		6,969		0		6,969		0
Municipal securities		8,884		0		8,884		0
Mortgage-backed securities		26,280		0		26,280		0
Asset-backed securities		1,938		0		1,938		0

	$	44,071		0		44,071		0

During the three months ended March 31, 2014 and the year ended December 31, 2013, no securities were transferred in or out of Level 1, Level 2 or Level 3.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Securities Available for Sale, Continued

The scheduled maturities of securities are as follows (in thousands):


	Amortized Cost		Fair Value
*At March 31, 2014:*
Due in less than one year	$	1,000		1,001
Due in one to five years		534		538
Due five to ten years		7,590		7,379
Due after ten years		7,143		6,972
Mortgage-backed securities		25,930		26,042
Asset-backed securities		1,921		1,929

	$	44,118		43,861

(3)

Loans

The segments of loans are as follows (in thousands):


	At March 31, 2014			At December 31, 2013
Real estate mortgage loans:
Commercial	$	45,831			44,796
Residential and home equity		41,134			38,571
Construction		11,909			12,933

Total real estate mortgage loans		98,874			96,300
Commercial loans		26,188			24,651
Consumer and other loans		1,960			2,072

Total loans		127,022			123,023
Less:
Net deferred loan fees		(56	)		(69	)
Allowance for loan losses		(1,775	)		(1,734	)

Loans, net	$	125,191			121,220

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

An analysis of the change in the allowance for loan losses follows (in thousands):


	Real Estate Mortgage Loans										Consumer and Other Loans
	Commercial		Residential and Home Equity		Construction			Commercial Loans			Consumer and Other Loans			Total
*Three-Month Period Ended March 31, 2014:*
Beginning balance	$	604		545		175			387			23			1,734
Provision (credit) for loan losses		13		30		(15	)		2			(1	)		29
Net (charge-offs) recoveries		0		0		0			12			0			12

Ending balance	$	617		575		160			401			22			1,775

*Three-Month Period Ended March 31, 2013:*
Beginning balance		352		226		237			405			23			1,243
Provision (credit) for loan losses		175		251		(118	)		(108	)		(16	)		184
Net (charge-offs) recoveries		0		0		0			0			9			9

Ending balance	$	527		477		119			297			16			1,436

*At March 31, 2014:*
Individually evaluated for impairment:
Recorded investment	$	1,403		36		0			217			0			1,656

Balance in allowance for loan losses	$	0		22		0			75			0			97

Collectively evaluated for impairment:
Recorded investment	$	44,428		41,098		11,909			25,971			1,960			125,366

Balance in allowance for loan losses	$	617		553		160			326			22			1,678

*At December 31, 2013:*
Individually evaluated for impairment:
Recorded investment	$	0		36		0			346			0			382

Balance in allowance for loan losses	$	0		23		0			82			0			105

Collectively evaluated for impairment:
Recorded investment	$	44,796		38,535		12,933			24,305			2,072			122,641

Balance in allowance for loan losses	$	604		522		175			305			23			1,629

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

The Company has divided the loan portfolio into three portfolio segments and five portfolio classes, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors. The portfolio segments and classes are identified by the Company as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are typically divided into three classes: Commercial, residential and home equity and construction loans. The real estate mortgage loans are as follows:

Commercial Real Estate Loans. Loans of this type are typically our more complex loans. This category of real estate loans is comprised of loans secured by mortgages on commercial property that is typically owner-occupied, but also includes nonowner occupied investment properties. Commercial loans that are secured by owner-occupied commercial real estate are repaid through operating cash flows of the borrower. The maturity for this type of loan is generally limited to three to five years; however, payments may be structured on a longer amortization basis. Typically, interest rates on our commercial real estate loans are fixed for five years or less after which they adjust based upon a predetermined spread over an index. At times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, the Bank typically requires personal guarantees from the principal owners of the business supported by a review of the principal owners’ personal financial statements and tax returns. As part of the enterprise risk management process, it is understood that risks associated with commercial real estate loans include fluctuations in real estate values, the overall strength of the borrower, the overall strength of the economy, new job creation trends, tenant vacancy rates, environmental contamination, and the quality of the borrowers’ management. In order to mitigate and limit these risks, we analyze the borrowers’ cash flow and evaluate collateral value. Currently, the collateral securing our commercial real estate loans include a variety of property types, such as office, warehouse, and retail facilities. Other types include multifamily properties, hotels, mixed-use residential, and commercial properties. Generally, commercial real estate loans present a higher risk profile than our consumer real estate loans portfolio.

Residential Real Estate Loans. We offer first and second one-to-four family mortgage loans and home equity lines of credit; the collateral for these loans is generally on the clients’ owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers’ financial condition. Borrowers may be affected by numerous factors, including job loss, illness, or other personal hardship. As part of our product mix, the Bank offers both portfolio and secondary market mortgages; portfolio loans generally are based on a 1-year, 3-year or 5-year adjustable rate mortgage; while 15-year or 30-year fixed-rate loans are sold to the secondary market.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Construction Loans. Typically, these loans have a term of one to two years and the interest is paid monthly. This portion of our loan portfolio includes loans to small and midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties, and residential developments. This type of loan is also made to individual clients for construction of single family homes in our market area. An independent appraisal is used to determine the value of the collateral and confirm that the ratio of the loan principal to the value of the collateral will not exceed policies of the Bank. As the construction project progresses, loan proceeds are requested by the borrower to complete phases of construction and funding is only disbursed after the project has been inspected by a third-party inspector or experienced construction lender. Risks associated with construction loans include fluctuations in the value of real estate, project completion risk, and changes in market trends. The ability of the construction loan borrower to finance the loan or sell the property upon completion of the project is another risk factor that also may be affected by changes in market trends since the initial funding of the loan.

Commercial Loans. The Bank offers a wide range of commercial loans, including business term loans, equipment financing, and lines of credit to small and midsized businesses. Small-to-medium sized businesses, retail, and professional establishments, make up our target market for commercial loans. Our Relationship Managers primarily underwrite these loans based on the borrower’s ability to service the loan from cash flow. Lines of credit and loans secured by accounts receivable and/or inventory are monitored periodically by our staff. Loans secured by “all business assets,” or a “blanket lien” are typically only made to highly qualified borrowers due to the nonspecific nature of the collateral. Valuation of business collateral is generally supported by an appraisal, purchase order, or third party physical inspection. Personal guarantees of the principals of business borrowers are usually required.

Equipment loans generally have a term of five years or less and may have a fixed or variable rate; we use conservative margins when pricing these loans. Working capital loans generally do not exceed one year and typically, they are secured by accounts receivable, inventory, and personal guarantees of the principals of the business. Significant factors affecting a commercial borrower’s creditworthiness include the quality of management and the ability both to evaluate changes in the supply and demand characteristics affecting the business’ markets for products and services and to respond effectively to such changes. These loans may be made unsecured or secured, but most are made on a secured basis. Risks associated with our commercial loan portfolio include local, regional, and national market conditions. Other factors of risk could include changes in the borrower’s management and fluctuations in collateral value. Additionally, there may be refinancing risk if a commercial loan includes a balloon payment which must be refinanced or paid off at loan maturity.

In reference to our risk management process, our commercial loan portfolio presents a higher risk profile than our consumer real estate and consumer loan portfolios. Therefore, we require that all loans to businesses must have a clearly stated and reasonable payment plan to allow for timely retirement of debt, unless secured by liquid collateral or as otherwise justified.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Consumer Loans and Other. These loans are made for various consumer purposes, such as the financing of automobiles, boats, and recreational vehicles. The payment structure of these loans is normally on an installment basis. The risk associated with this category of loans stems from the reduced collateral value for a defaulted loan; the collateral may not provide an adequate source of repayment of the principal. The underwriting on these loans is primarily based on the borrower’s financial condition. In many cases, these are unsecured credits that subject us to risk when the borrower’s financial condition declines or deteriorates. Based upon our current trend in consumer loans, management does not anticipate consumer loans will become a substantial component of our loan portfolio at any time in the foreseeable future. Consumer loans are made at fixed- and variable-interest rates and are based on the appropriate amortization for the asset and purpose.

The following summarizes the loan credit quality (in thousands):


	Pass		Special Mentioned		Substandard		Doubtful		Loss		Total
*At March 31, 2014:*
Real estate mortgage loans:
Commercial	$	41,964		393		3,474		0		0		45,831
Residential and home equity		38,628		1,777		729		0		0		41,134
Construction		11,901		0		8		0		0		11,909
Commercial loans		24,994		477		717		0		0		26,188
Consumer and other loans		1,925		35		0		0		0		1,960

Total	$	119,412		2,682		4,928		0		0		127,022

*At December 31, 2013:*
Real estate mortgage loans:
Commercial		40,901		1,804		2,091		0		0		44,796
Residential and home equity		36,461		1,346		764		0		0		38,571
Construction		12,528		396		9		0		0		12,933
Commercial loans		23,919		509		223		0		0		24,651
Consumer and other loans		1,914		38		120		0		0		2,072

Total	$	115,723		4,093		3,207		0		0		123,023

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged-off. The Company uses the following definitions for risk ratings:

Pass – A Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Special Mention – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

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

Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Age analysis of past-due loans is as follows (in thousands):


	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Nonaccrual Loans		Total Loans
*At March 31, 2014:*
Real estate mortgage loans:
Commercial	$	0		0		0		0		44,428		1,403		45,831
Residential and home equity		0		0		0		0		41,134		0		41,134
Construction		0		0		0		0		11,909		0		11,909
Commercial loans		33		0		0		33		26,155		0		26,188
Consumer and other loans		8		0		0		8		1,952		0		1,960

Total	$	41		0		0		41		125,578		1,403		127,022

*At December 31, 2013:*
Real estate mortgage loans:
Commercial		0		0		0		0		44,796		0		44,796
Residential and home equity		0		0		0		0		38,571		0		38,571
Construction		0		0		0		0		12,933		0		12,933
Commercial loans		38		0		0		38		24,613		0		24,651
Consumer and other loans		0		0		0		0		2,072		0		2,072

Total	$	38		0		0		38		122,985		0		123,023

The following summarizes the amount of impaired loans (in thousands):


	With No Related Allowance Recorded				With an Allowance Recorded						Total
	Recorded Investment		Unpaid Contractual Principal Balance		Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance		Recorded Investment		Unpaid Contractual Principal Balance		Related Allowance
*At March 31, 2014:*
Commercial real estate	$	1,403		1,403		0		0		0		1,403		1,403		0
Residential and home equity		0		0		35		35		23		35		35		23
Commercial loans		56		56		162		162		74		218		218		74

Total	$	1,459		1,459		197		197		97		1,656		1,656		97

*At December 31, 2013:*
Residential and home equity		0		0		36		36		23		36		36		23
Commercial loans		27		27		319		319		82		346		346		82

Total	$	27		27		355		355		105		382		382		105

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):


	Three Months Ended March 31,
	2014						2013
	Average Recorded Investment		Interest Income Recognized		Interest Income Received		Average Recorded Investment		Interest Income Recognized		Interest Income Received
Commercial real estate	$	140		0		0		0		0		0
Residential and home equity		35		0		0		266		0		0
Construction		0		0		0		0		0		0
Commercial loans		220		4		4		0		0		0

Total	$	395		4		4		266		0		0

There were no loans measured at fair value on a nonrecurring basis at March 31, 2014 and December 31, 2013.

There were no loans determined to be troubled debt restructuring (“TDR”) entered into during the three months ended March 31, 2013. The following is a summary of loans determined to be TDR’s entered into during the three months ended March 31, 2014:


	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Residential and home equity:
Modified interest rates		0	$	0		0
Modified payment schedule for six months		1		35		35
Commercial:
Modified interest rates		0		0		0
Modified payment schedule for six months		1		122		122

Total		2	$	157		157

The allowance for loan losses on all loans that have been restructured and are considered TDR’s is included in the Bank’s specific reserve. The specific reserve is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDR’s that have subsequently defaulted are considered collateral-dependent. There were no TDR’s that subsequently defaulted during the three months ended March 31, 2014, which were restructured during the same period.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(4)

Regulatory Capital

Banks are required to maintain certain minimum regulatory capital requirements. The Bank is considered to be well-capitalized. The following is a summary at March 31, 2014 of the regulatory capital requirements and the Bank’s capital on a percentage basis:


	Bank			Regulatory Requirement
Tier I capital to total average assets		8.68	%		6.00	%
Tier I capital to risk-weighted assets		13.67	%		8.00	%
Total capital to risk-weighted assets		14.92	%		10.00	%

(5)

Earnings Per Share

Earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. Basic earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method. (dollars in thousands, except per share amounts):


	2014						2013
	Earnings		Weighted- Average Shares		Per Share Amount		Loss		Weighted- Average Shares		Per Share Amount
*Three Months Ended March 31:*
Basic EPS:
Net earnings	$	256		1,534,868	$	0.17	$	294		1,496,621	$	0.20
Effect of dilutive securities-Incremental shares from assumed conversion of options				5,149						2,121

Diluted EPS:
Net earnings	$	256		1,540,017	$	0.17	$	294		1,498,742	$	0.20

(6)

Stock-Based Compensation

The 2007 Stock Option Plan provides for certain key employees and directors of the Company to have the option to purchase shares of the Company’s common stock. Under this Plan, the total number of shares which may be issued is 152,905. All options granted will have six to ten-year terms and vest over periods up to five years. As of March 31, 2014, there were 18,905 shares available for grant.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(6)

Stock-Based Compensation, Continued

A summary of the activity in the Company’s Stock Option Plan is as follows:


	Number of Options			Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2012		136,000		$	10.00
Options granted		2,500			10.00
Options forfeited		(1,000	)		(10.00	)

Outstanding at March 31, 2013		137,500		$	10.00

Outstanding at December 31, 2013		134,000		$	10.01

Outstanding at March 31, 2014		134,000		$	10.01			4.9 years

Exercisable at March 31, 2014		130,700		$	10.00			4.8 years	$	327,000

At March 31, 2014, there was $4,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted-average period of twenty-nine months. The total fair value of shares vesting and recognized as compensation expense was $0 and $0 for the three months ended March 31, 2014 and 2013, respectively. There was no associated income tax benefit recognized for the periods ending March 31, 2014 and March 31, 2013.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:


	Three Months Ended March 31,
	2013
Weighted-average risk-free interest rate		1.13	%
Expected dividend yield		0
Expected stock volatility		11.24	%
Expected life in years		6.5
Per share fair value of options issued during the year	$	1.17

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(6)

Stock-Based Compensation, Continued

The Company used the guidance in Staff Accounting Bulletin No. 107 to determine the estimated life of options issued. Expected volatility is based on volatility of similar companies’ common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company’s history and expectation of dividend payouts.

(7)

Fair Value of Financial Instruments

The estimated fair values and fair value measurement method with respect to the Company’s financial instruments were as follows (in thousands):


	At March 31, 2014						At December 31, 2013
	Carrying Amount		Fair Value		Level		Carrying Amount		Fair Value		Level
Financial assets:
Cash and cash equivalents	$	37,664		37,664		1		34,166		34,166		1
Securities available for sale		43,861		43,861		2		44,071		44,071		2
Loans held for sale		946		946		3		150		150		3
Loans, net		125,191		123,268		3		121,220		121,964		3
Federal Home Loan Bank stock		186		186		3		204		204		3
Accrued interest receivable		535		535		3		516		516		3
Financial liabilities:
Deposits		187,472		187,529		3		183,365		183,295		3
Other borrowings		5,733		5,733		3		5,719		5,719		3

Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

(8)

Off-Balance-Sheet Financial Instruments

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments are commitments to extend credit, construction loans in process, unused lines of credit and standby letters of credit and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for available lines of credit, construction loans in process and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(8)

Off-Balance-Sheet Financial Instruments, Continued

Commitments to extend credit and unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support third-party borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded. A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at March 31, 2014 are as follows (in thousands):


Commitments to extend credit	$	6,891

Construction loans in process	$	6,426

Unused lines of credit	$	22,323

Standby letters of credit	$	1,031

(9)

Common Stock Offering

The Company filed a Registration Statement with the Securities and Exchange Commission which was effective on December 11, 2013. The Company is offering up to 1,200,000 shares of common stock for $12.50 per share. The Registration Statement has been extended to June 30, 2014. As of March 31, 2014, the Company has sold 192,122 shares of common stock for proceeds of $2.4 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Prime Meridian Holding Company, and its wholly-owned subsidiary, Prime Meridian Bank. This discussion and analysis should be read with the condensed consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2013. Results of operations for the three month period ended March 31, 2014 are not necessarily indicative of results that may be attained for any other period. The following discussion and analysis presents our financial condition and results of operations on a consolidated basis, however, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.

Certain information in this report may include “forward-looking statements” as defined by federal securities law. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that,” and similar expressions are intended to identify these forward-looking statements. These forward-looking statements involve risk and uncertainty and a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law, and silence by management over time should not be construed to mean that actual events are occurring as estimated in such forward-looking statements.

Our ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our and our subsidiary’s operations include, but are not limited to, changes in:

•

local, regional, and national economic and business conditions;

•

banking laws, compliance, and the regulatory environment;

•

U.S. and global securities markets, public debt markets, and other capital markets;

•

monetary and fiscal policies of the U.S. Government;

•

litigation, tax, and other regulatory matters;

•

demand for banking services, both loan and deposit products in our market area;

•

quality and composition of our loan or investment portfolios;

•

risks inherent in making loans such as repayment risk and fluctuating collateral values;

•

competition;

•

attraction and retention of key personnel, including our management team and directors;

•

technology, product delivery channels, and end user demands and acceptance of new products;

•

consumer spending, borrowing and savings habits;

•

any failure or breach of our operational systems, information systems or infrastructure, or those of our third party vendors and other service providers, including cyber-attacks;

•

application and interpretation of accounting principles and guidelines;

•

natural disasters, public unrest, adverse weather, public health and other conditions impacting our or our clients’ operations; and

•

other economic, competitive, governmental, regulatory, or technological factors affecting us.

General

Prime Meridian Holding Company (“PMHC” or the “Company”) was incorporated as a Florida corporation on May 25, 2010, and is the one-bank holding company for, and sole shareholder of, Prime Meridian Bank (the “Bank”). The Bank opened for business on February 4, 2008, and was acquired by the Company on September 16, 2010. PMHC has no significant operations other than owning the stock of the Bank.

As a one bank holding company, we generate most of our revenue from interest on loans and investments. Our primary source of funding for our loans is deposits. Our largest expenses are interest on those deposits and salaries and employee benefits. We measure our performance through our net interest margin, return on average assets, and return on average equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Financial Condition

As of March 31, 2014, the Company has grown to $214.5 million in total assets, $187.5 million in deposits, and $125.2 million in portfolio net loans. This compares to $206.5 million in total assets, $183.4 million in deposits, and $121.2 million in portfolio net loans, as of December 31, 2013. We attribute our successful growth to a combination of factors including our relationship banking model, our proactive marketing efforts in the community, and our investment in our operations and systems.

The following table shows selected information for the periods ended or at the dates indicated:


	At or for the
	Three Months Ended March 31, 2014	Year Ended December 31, 2013	Three Months Ended March 31, 2013
Average equity as a percentage of average assets	7.71%	8.79%	9.20%
Equity to total assets at end of period	8.94%	7.92%	9.06%
Return on average assets⁽¹⁾	0.47%	0.62%	0.67%
Return on average equity⁽¹⁾	6.15%	7.08%	7.28%
Noninterest expenses to average assets⁽¹⁾	2.64%	2.63%	2.53%
Nonperforming loans to total loans at end of period	1.10%	0.00%	0.25%

⁽¹⁾	Annualized for the three months ended March 31, 2014 and March 31, 2013.

Results of Operations

Net interest income constitutes the principal source of income for the Bank and results from the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities. The principal interest-earning assets are investment securities and loans receivable. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts, savings deposits, money-market accounts, and other borrowings. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on these assets and liabilities.

The following table sets forth information regarding: (i) the total dollar amount of interest and dividend income of the Bank from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest income; (iv) interest rate spread; (v) net interest margin; and (vi) weighted average yields and rates. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities. The yields and costs depicted in the table include the amortization of fees, which are considered to constitute adjustments to yields (dollars in thousands). As shown in the table, the decrease in yield on interest-earning assets has been partially offset by lower rates on interest-bearing liabilities and a higher ratio of interest-earning assets to interest-bearing liabilities.


	Three Months Ended March 31,
	2014								2013
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividends		Average Yield/ Rate
Interest-earning assets:
Loans⁽¹⁾	$	124,242		$	1,642		5.36	%	$	101,099		$	1,362		5.46	%
Securities		43,673			220		2.14			44,570			211		1.98
Other ⁽²⁾		40,429			25		0.25			21,662			13		0.25

Total interest-earning assets		208,344		$	1,887		3.70			167,331		$	1,586		3.86

Noninterest-earning assets		7,724								8,289

Total assets	$	216,068							$	175,620

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	116,216			135		0.47		$	103,537			146		0.57
Time deposits <$100,000		3,674			5		0.52			3,372			7		0.78
Time deposits >$100,000		10,723			18		0.67			13,035			28		0.85

Deposits		130,613			158		0.49			119,944			181		0.61
Other borrowings		5,724			14		1.00			5,765			14		1.00

Total interest-bearing liabilities		136,337			172		0.51			125,709			195		0.63

Noninterest-bearing deposits		62,834								33,211
Noninterest-bearing liabilities		240								548
Stockholders’ equity		16,657								16,152

Total liabilities and stockholders’ equity	$	216,068							$	175,620

Net interest income				$	1,715							$	1,391

Interest rate spread							3.18	%							3.24	%

Net interest margin ⁽³⁾							3.36	%							3.39	%

Ratio of average interest-earning assets to average interest-bearing liabilities		152.82	%							133.11	%

⁽¹⁾	Includes loans held for sale.

⁽²⁾	Other interest-earning assets included Federal funds sold and Federal Home Loan Bank stock.

⁽³⁾	Net interest margin is net interest income divided by total interest-earning assets, annualized.

Comparison of the Three Months Ended March 31, 2014 and March 31, 2013

Net earnings for the three months ended March 31, 2014, were $256,000 or $0.17 per basic and diluted share compared to net earnings of $294,000, or $0.20 per basic and diluted share in the first three months of 2013. The $38,000 decrease in net earnings was driven primarily by a $229,000 gain on sale of loans that was realized in the first quarter of 2013 compared to a $28,000 gain on sale of loans recorded in the first quarter of 2014. The decrease in gain on sale of loans was partially offset by a 20.6%, or $280,000, increase in loan interest income and an 11.8%, or $23,000, decrease in total interest expense when comparing the first quarter of 2014 to the same period a year ago.

Net Interest Income

Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and investments, and interest expense on interest-bearing liabilities such as deposits and borrowings. Net interest income was $1.7 million for the three months ended March 31, 2014, compared to $1.4 million for the same period in 2013.

Interest Income. Despite generally lower yields on loans since 2011, interest income increased to $1.9 million for the three months ended March 31, 2014, compared to $1.6 million for the first quarter of 2013. The increase was driven by an increase in average loans from $101.1 million at March 31, 2013, to $124.2 million at March 31, 2014. Also contributing to the increase in total interest income was a $9,000 increase in investment interest income and a $12,000 increase in other interest income when comparing the three months ended March 31, 2014 to the same period in 2013.

Interest Expense. Interest expense decreased to $172,000 for the three months ended March 31, 2014, compared to $195,000 for the three months ended March 31, 2013. The decrease in interest expense in the first quarter of 2014 was due to a lower interest rate environment and a shift from interest-bearing to noninterest-bearing deposits. During 2014 and 2013, the Bank aggressively managed interest paid on deposits, decreasing the average rate paid on deposits from 0.63% in the first quarter of 2013 to 0.51% in the first quarter of 2014. Furthermore, the average balance of noninterest-bearing deposits to the average balance of deposits increased from 21.7% at March 31, 2013 to 32.5% at March 31, 2014.

Despite the combination of higher interest-earning asset balances, a shift in deposit mix to noninterest-bearing deposits, and decreases in deposit funding costs, the lower average yield on interest earning assets resulted in a slight decline in the Bank’s net interest margin from 3.39% for the three months ended March 31, 2013, to 3.36% for the same period in 2014.

Provision for Loan Losses. The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market area, and other factors related to the collectability of the loan portfolio. The provisions for loan losses for the three months ended March 31, 2014 and 2013 were $29,000 and $184,000, respectively. Management believes that the ALLL, which was $1.8 million, or 1.40% of gross loans, at March 31, 2014, was adequate as of that date.

Other Income

Noninterest income consists of revenues generated from a broad range of financial services and activities, primarily service charges on deposit accounts, gains on sales of loans and income from bank-owned life insurance. For the three months ended March 31, 2014, noninterest income decreased to $129,000 from $355,000 for the same period in 2013. The $226,000 decrease was primarily due to a $229,000 gain on sale of loans that was recorded during the three months ended March 31, 2013, compared to a $28,000 gain on sale of loans that was recorded during the same period in 2014. The decrease in noninterest income was partially offset, however, by a $14,000 increase in service charges and fees on deposit accounts.

Noninterest Expense

Noninterest expense increased $319,000 from $1.1 million for the three months ended March 31, 2013, to $1.4 million for the same period in 2014. The increase was primarily due to a 34.9%, or $210,000, increase in salaries and employee benefits. During the three months ended March 31, 2014, the Bank also incurred higher professional fees and higher printing costs related to the filing of its first Form 10-K, and there was a 14.7%, or $10,000, increase in advertising expenses. In addition, other noninterest expenses increased 37.5%, or $72,000, during this period, primarily driven by increases in spending for business development, new technology and software, and computer maintenance. These increases were partially offset by a 7.4%, or $15,000, decrease in occupancy and equipment costs. Full-time equivalent employees have increased from thirty-eight at December 31, 2013, to forty-one at March 31, 2014, as the Bank continues to position itself for future expansion.

Income Taxes

Income tax expense is based on amounts reported in the statement of earnings, after adjustments for nontaxable income and nondeductible expenses, and consists of taxes currently due plus deferred taxes on temporary

differences in the recognition of income and expense for tax and financial statement purposes. The income tax expense was $131,000 for the three months ended March 31, 2014, compared to $159,000 for the same period in 2013. The decrease was due to a decrease in earnings.

Deposits

The major source of the Bank’s funds for lending and other investment purposes are deposits. Total deposits were $187.5 million at March 31, 2014, compared to $183.4 million at December 31, 2013. We attribute our continued deposit growth to the strong marketing efforts of our team and our knowledge of our primary market and clients.

Loans

Our primary earning asset is our loan portfolio and our primary source of income is the interest earned on the loan portfolio. Our loan portfolio consists of commercial real estate loans, construction loans, and commercial loans made to small-to-medium sized companies and their owners, as well as residential real estate loans, including first and second mortgages, and consumer loans.

We work diligently to attract new lending clients through direct solicitation by our loan officers, utilizing relationship networks from existing clients, competitive pricing, and innovative structure. Evidence of this effort is seen in the organic growth in our loans. As of March 31, 2014, the Bank’s net loans were $125.2 million, representing 58.4% of total assets, compared to net loans of $121.2 million as of December 31, 2013, representing 58.7% of total assets. These loans were priced based upon the degree of risk, collateral, loan amount, and maturity. We have no loans to foreign entities nor do we have any highly leveraged loan transactions.

Nonperforming Assets

Nonperforming assets consist of nonperforming loans and other real estate owned (“OREO”). Nonperforming loans include loans that are on nonaccrual status and nonperforming loans restructured as trouble debt restructurings, where we have granted a concession on the interest rate or original repayment terms due to financial difficulties of the borrower. OREO consists of real property acquired through foreclosure.

We generally place loans on nonaccrual status when they become 90 days or more past due, unless they are well secured and in the process of collection. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When a loan is placed on nonaccrual status, any interest previously accrued, but not collected, is reversed from income.

Accounting standards require the Bank to identify loans as impaired loans when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due accordingly to the contractual terms of the loan agreement. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We implement these standards in our monthly review of the adequacy of the allowance for loan losses, and identify and value impaired loans in accordance with regulatory guidance on these standards. Six loans totaling $1,656,000 were deemed to be impaired under the Bank’s policy at March 31, 2014, while eight loans totaling $382,000 were deemed to be impaired under the Bank’s policy at December 31, 2013.

At March 31, 2014 and December 31, 2013, we had $1.4 million and $0 nonaccuring loans.

Our goal is to maintain a high quality of loans through sound underwriting and lending practices. As of March 31, 2014 and December 31, 2013, approximately 78.0% and 78.3%, respectively, of the total loan portfolio was collateralized by commercial and residential real estate mortgages. The level of nonperforming loans and OREO also is relevant to the credit quality of a loan portfolio. As of March 31, 2014 and December 31, 2013, there were $1.4 million and $0 nonperforming loans, respectively.

Borrowings

The Bank has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”) and pledges its qualified loans as collateral which would allow the Bank, as of March 31, 2014, to borrow up to $28.3 million. There were no advances outstanding at March 31, 2014. We have entered into a repurchase agreement with a client that requires the Company to pledge securities as collateral for borrowing under the agreement. At March 31, 2014 and December 31, 2013, the outstanding balance of such borrowings totaled $5.7 million and $5.7 million, respectively. For the same time periods, the Company pledged securities with a market value of $5.7 million as collateral for the agreement.

Capital Adequacy

Stockholder’s equity was $19.2 million at March 31, 2014, compared to $16.4 million as of December 31, 2013. We achieved profitability in our eighth quarter of operation and cumulative profitability in April 2012. Higher retained earnings in each subsequent year since 2010 were partially offset by an unrealized loss on available-for-sale-securities of $162,000 in the first quarter of 2014. As of March 31, 2014, no dividends on shares of our common stock had been paid or declared. On December 11, 2013, PMHC commenced a public offering of up to 1,200,000 shares of its common stock for $12.50 per share in order to raise additional capital. This offering is continuing on an ongoing basis through June 30, 2014. PMHC has sold 192,122 shares for proceeds of $2.4 million as of March 31, 2014.

As of March 31, 2014, the Bank was considered to be “well capitalized” with an 8.68% Tier 1 leverage capital ratio, a 13.67% Tier 1 risk-based capital ratio, and a 14.92% total risk-based capital ratio, above the minimum ratios to be considered “well capitalized.”

Liquidity

As a commercial bank, we are expected to maintain an adequate liquidity reserve. Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. The liquidity reserve may consist of cash on hand, cash on demand deposit with correspondent banks, other investments, and short-term marketable securities such as federal funds sold, United States securities, or securities guaranteed by the United States. Some of our securities are pledged to collateralize certain deposits through our participation in the State of Florida’s Qualified Public Deposit Program (“QPD”). We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands. The market value of securities pledged to the QPD Program as of March 31, 2014, was $2.5 million.

At March 31, 2014, total deposits were $187.5 million, of which $10.6 million were in certificates of deposits of $100,000 or more. Also, as a member of the FHLB, we have access to approximately $28.3 million of available lines of credit secured by qualifying collateral as of March 31, 2014, in addition to $9.1 million in lines of credit we maintain with correspondent banks. As of March 31, 2014, we had no outstanding balances on such lines of credit.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions that are not included in our consolidated balance sheets. These transactions include commitments to extend credit in the ordinary course of business to approved clients, construction loans in process, unused lines of credit, and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Generally, loan commitments have been granted on a temporary basis for working capital or commercial real estate financing requirements or may be reflective of loans in various stages of funding. These commitments are recorded on our financial statements as they are funded. Commitments typically have fixed expiration dates or other termination clauses and may require payment of a fee. Loan commitments include unused commitments for open-end lines secured by one-to-four family residential properties and commercial properties, commitments to fund loans secured by commercial real estate, construction loans, business lines of credit and other unused commitments.

Standby letters of credit are written conditional commitments issued by us to guarantee the client will fulfill his or her contractual financial obligations to a third party. In the event the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client.

We minimize our exposure to loss under loan commitments and standby letters of credit by subjecting them to credit approval and monitoring procedures. The effect on our revenues, expenses, cash flows, and liquidity of the unused portions of these commitments cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.

The following is a summary of the total contractual amount of commitments outstanding as of the respective dates (dollars in thousands):


	March 31, 2014
Commitments to extend credit	$	6,891
Construction loans in process		6,426
Unused lines of credit		22,323
Standby financial letters of credit		1,031

Total of off-balance sheet instruments	$	36,671

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that PMHC files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, our Principal Executive Officer and Principal Financial Officer concluded that, subject to the limitations noted below, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

We intend to continually review and evaluate the design and effectiveness of PMHC’s disclosure controls and procedures and to improve the Company’s controls and procedures over time and to correct any deficiencies that we may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While we believe the present design of the disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

(b) Changes in Internal Controls

We have made no significant changes in our internal controls over financial reporting during the quarter ended March 31, 2014, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. 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 costs. 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 the 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. Additionally, 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.

The design of any system of controls also is 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, controls 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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are a party to various matters incidental to the conduct of a banking business. Presently, we believe that we are not a party to any legal proceedings in which resolution would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels.

Item 1A. Risk Factors.

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarter ended March 31, 2014, we sold no securities which were not registered under the Securities Act of 1933 and did not repurchase any of our securities.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

The following exhibits are filed with or incorporated by reference into this Report.


Exhibit Number		Description of Exhibit	Incorporated by Reference From or Filed Herewith

	3.1	Articles of Incorporation	Exhibit 3.1 to Registration Statement on Form S-1 filed on October 18, 2013

	3.2	Bylaws	Exhibit 3.2 to Registration Statement on Form S-1 filed on October 18, 2013

	4.1	Specimen Common Stock Certificate	Exhibit 4.1 to Registration Statement on Form S-1 filed on October 18, 2013

	4.2	2010 Articles of Share Exchange	Exhibit 4.2 to Registration Statement on Form S-1 filed on October 18, 2013

	10.1	2007 Stock Option Plan	Exhibit 10.1 to Registration Statement on Form S-1 filed on October 18, 2013

	10.2	Form of Non-Qualified Stock Option Agreement Under 2007 Plan	Exhibit 10.2 to Registration Statement on Form S-1 filed on October 18, 2013

	10.3	Form of Incentive Stock Option Agreement Under 2007 Plan	Exhibit 10.3 to Registration Statement on Form S-1 filed on October 18, 2013

	10.4	2012 Directors’ Compensation Plan	Exhibit 10.4 to Registration Statement on Form S-1 filed on October 18, 2013

	10.5	Lease for Branch Location on Timberlane Road	Exhibit 10.5 to Registration Statement on Form S-1 filed on October 18, 2013

	10.6	Agreement for Loan Review Services with Carr, Riggs & Ingram, LLC	Exhibit 10.6 to Registration Statement on Form S-1 filed on October 18, 2013

	31.1	Certification Under Section 302 of Sarbanes-Oxley by Sammie D. Dixon, Jr., Principal Executive Officer	Filed herewith

	31.2	Certification Under Section 302 of Sarbanes-Oxley by Kathleen C. Jones, Principal Financial Officer	Filed herewith

	32.1	Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley	Filed herewith

	99.1	Charter of the Audit Committee	Exhibit 99.1 to Form 10-K filed on March 28, 2014

	99.2	Charter of the Compensation Committee	Exhibit 99.2 to Form 10-K filed on March 28, 2014

	101.INS	XBRL Instance Document	*

	101.SCH	XBRL Taxonomy Extension Schema Document	*

	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	*

	101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document	*

	101.LAB	XBRL Taxonomy Extension Label Linkbase Document	*

	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	*

*	Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

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


	PRIME MERIDIAN HOLDING COMPANY

May 13, 2014	By:	/s/ Sammie D. Dixon, Jr.
Date		Sammie D. Dixon, Jr.
		Chief Executive Officer, President
		and Principal Executive Officer

May 13, 2014	By:	/s/ Kathleen C. Jones
Date		Kathleen C. Jones
		Chief Financial Officer, Executive Vice President,
		and Principal Financial Officer