Prime Meridian Holding Co - Quarter Report: 2015 March (Form 10-Q)

Prime Meridian Holding Co - Quarter Report: 2015 March (Form 10-Q)

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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, 2015

¨	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. x 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). x 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.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 10, 2015: 1,944,391

INDEX

PART I. FINANCIAL INFORMATION


	PAGE

Item 1. Financial Statements

Condensed Consolidated Balance Sheets March 31, 2015 (unaudited) and December 31, 2014		2

Condensed Consolidated Statements of Earnings Three Months ended March 31, 2015 and 2014 (unaudited)		3

Condensed Consolidated Statement of Comprehensive Income Three Months ended March 31, 2015 and 2014 (unaudited)		4

Condensed Consolidated Statements of Stockholders’ Equity Three Months ended March 31, 2015 and 2014 (unaudited)		5

Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 2015 and 2014 (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		23-31

Item 3. Quantitative and Qualitative Disclosures About Market Risk		32

Item 4. Controls and Procedures		32-33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		33

Item 1A. Risk Factors		33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33

Item 3. Defaults Upon Senior Securities		33

Item 4. Mine Safety Disclosures		33

Item 5. Other Information		33

Item 6. Exhibits		34
Signatures		35

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)


	March 31,		December 31,
	2015		2014
	(Unaudited)
Assets
Cash and due from banks	$	4,642		3,757
Federal funds sold		12,524		3,611
Interest-bearing deposits		187		187

Total cash and cash equivalents		17,353		7,555
Securities available for sale		42,001		42,397
Loans held for sale		813		1,871
Loans, net of allowance for loan losses of $2,116 and $2,098		153,647		151,869
Federal Home Loan Bank stock		189		186
Premises and equipment, net		3,678		3,563
Deferred tax asset		367		362
Accrued interest receivable		570		624
Bank-owned life insurance		1,625		1,613
Other assets		224		318

Total assets	$	220,467		210,358

Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits		44,626		43,148
Savings, NOW and money-market deposits		125,380		122,166
Time deposits		22,805		18,657

Total deposits		192,811		183,971
Other borrowings		2,656		2,699
Official checks		811		368
Other liabilities		633		453

Total liabilities		196,911		187,491

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, 1,943,534 and 1,941,617 issued and outstanding		19		19
Additional paid-in capital		20,077		20,056
Retained earnings		3,187		2,738
Accumulated other comprehensive income		273		54

Total stockholders’ equity		23,556		22,867

Total liabilities and stockholders’ equity	$	220,467		210,358

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,
	2015		2014
Interest income:
Loans	$	1,947		1,642
Securities		228		220
Other		7		25

Total interest income		2,182		1,887

Interest expense:
Deposits		162		158
Other borrowings		6		14

Total interest expense		168		172

Net interest income		2,014		1,715
Provision for loan losses		18		29

Net interest income after provision for loan losses		1,996		1,686

Noninterest income:
Service charges and fees on deposit accounts		34		41
Mortgage banking revenue		61		39
Income from bank-owned life insurance		12		13
Gain on sale of securities available for sale		42		0
Other income		40		36

Total noninterest income		189		129

Noninterest expenses:
Salaries and employee benefits		808		812
Occupancy and equipment		283		230
Professional fees		76		86
Marketing		113		78
FDIC assessment		26		27
Other		186		195

Total noninterest expenses		1,492		1,428

Earnings before income taxes		693		387
Income taxes		244		131

Net earnings	$	449		256

Basic earnings per share	$	0.23		0.17

Diluted earnings per share	$	0.23		0.17

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,
	2015			2014
Net earnings	$	449			256

Other comprehensive income:
Change in unrealized gain (loss) on securities:
Unrealized gain arising during the period		389			242
Reclassification adjustment for realized gains		(42	)		(0	)

Net change in unrealized gain (loss)		347			242
Deferred income taxes on above change		128			89

Total other comprehensive income		219			153

Comprehensive income	$	668			409

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, 2015 and 2014

(Dollars in thousands)


					Additional				Accumulated Other Compre- hensive			Total
	Common Stock				Paid-In		Retained		(Loss)			Stockholders’
	Shares		Amount		Capital		Earnings		Income			Equity
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 gain on securities available for sale, net of income taxes (unaudited)		0		0		0		0		153			153
Common stock issued as compensation to directors (unaudited)		562		0		6		0		0			6
Sale of common stock (unaudited)		192,122		2		2,400		0		0			2,402
Stock-based compensation (unaudited)		0		0		0		0		0			0

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

Balance at December 31, 2014		1,941,617	$	19		20,056		2,738		54			22,867
Net earnings for the three months ended March 31, 2015 (unaudited)		0		0		0		449		0			449
Net change in unrealized gain on securities available for sale, net of income taxes (unaudited)		0		0		0		0		219			219
Stock options exercised (unaudited)		1,100		0		11		0		0			11
Common stock issued as compensation to directors (unaudited)		817		0		10		0		0			10
Stock-based compensation (unaudited)		0		0		0		0		0			0

Balance at March 31, 2015 (unaudited)		1,943,534	$	19		20,077		3,187		273			23,556

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,
	2015			2014
Cash flows from operating activities:
Net earnings	$	449			256
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		102			95
Provision for loan losses		18			29
Net amortization of deferred loan fees		133			(13	)
Deferred income taxes		(133	)		(6	)
Gain on sale of securities available for sale		(42	)		0
Amortization of premiums and discounts on securities available for sale		108			120
Gain on sale of loans held for sale		(61	)		(28	)
Proceeds from the sale of loans held for sale		3,112			539
Loan originated as held for sale		(1,993	)		(1,307	)
Stock issued as compensation		10			6
Income from bank-owned life insurance		(12	)		(13	)
Net decrease (increase) in accrued interest receivable		54			(19	)
Net decrease (increase) in other assets and capitalized offering costs		94			(69	)
Net increase in other liabilities and official checks		623			1,110

Net cash provided by operating activities		2,462			700

Cash flows from investing activities:
Loan originations, net of principal repayments		(1,929	)		(3,987	)
Purchase of securities available for sale		(3,443	)		(1,609	)
Principal repayments of securities available for sale		2,081			1,941
Proceeds from sale of securities available for sale		2,039			0
(Purchase) redemption of Federal Home Loan Bank stock		(3	)		18
Purchase of premises and equipment		(217	)		(88	)

Net cash used in investing activities		(1,472	)		(3,725	)

Cash flows from financing activities:
Net increase in deposits		8,840			4,107
(Decrease) increase in other borrowings		(43	)		14
Proceeds from stock options exercised		11			0
Net proceeds from sale of common stock		0			2,402

Net cash provided by financing activities		8,808			6,523

Net increase in cash and cash equivalents		9,798			3,498
Cash and cash equivalents at beginning of period		7,555			34,166

Cash and cash equivalents at end of period	$	17,353			37,664

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	164			172

Income taxes	$	100			40

Noncash transactions:
Accumulated other comprehensive income, net change in unrealized gain on sale of securities available for sale, net of taxes	$	219			153

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 clients through its two 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, 2015, and the results of operations for the three month periods ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015, 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 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 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.

Mortgage Banking Revenue. Mortgage banking revenue includes gains on the sale of mortgage loans originated for sale. The Company recognizes mortgage banking revenue from mortgage loans originated in the consolidated statements of earnings upon sale of the loans.

(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, 2015:*
U.S. Government agency securities	$	8,641		55		(17	)		8,679
Municipal securities		8,451		159		(26	)		8,584
Mortgage-backed securities		24,475		328		(65	)		24,738

Total	$	41,567		542		(108	)		42,001

*At December 31, 2014:*
U.S. Government agency securities		6,943		19		(99	)		6,863
Municipal securities		9,497		113		(79	)		9,531
Mortgage-backed securities		25,870		228		(95	)		26,003

Total	$	42,310		360		(273	)		42,397

Securities with gross unrealized losses, 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
*At March 31, 2015:*
Securities Available for Sale:
U.S. Government agency securities	$	(12	)		898		(5	)		1,995
Municipal securities		(2	)		806		(24	)		1,263
Mortgage-backed securities		(23	)		3,662		(42	)		2,885

Total	$	(37	)		5,366		(71	)		6,143

*At December 31, 2014:*
Securities Available for Sale:
U.S. Government agency securities	$	0			0		(99	)		5,945
Municipal securities		(2	)		269		(77	)		3,026
Mortgage-backed securities		(47	)		8,250		(48	)		1,705

Total	$	(49	)		8,519		(224	)		10,676

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Securities Available for Sale, Continued

The unrealized losses at March 31, 2015 on seventeen 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.

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, 2015:*
U.S. Government agency securities	$	8,679		0		8,679		0
Municipal securities		8,584		0		8,584		0
Mortgage-backed securities		24,738		0		24,738		0

Total		42,001		0		42,001		0

*At December 31, 2014:*
U.S. Government agency securities		6,863		0		6,863		0
Municipal securities		9,531		0		9,531		0
Mortgage-backed securities		26,003		0		26,003		0

Total	$	42,397		0		42,397		0

During the three months ended March 31, 2015 and 2014, no securities were transferred in or out of Level 1, Level 2 or Level 3.

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


	Amortized Cost		Fair Value
*At March 31, 2015:*
Due in one to five years	$	1,306		1,319
Due five to ten years		9,043		9,082
Due after ten years		6,743		6,862
Mortgage-backed securities		24,475		24,738

Total	$	41,567		42,001

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans

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


	At March 31,			At December 31,
	2015			2014
Real estate mortgage loans:
Commercial	$	52,283			52,661
Residential and home equity		54,284			51,858
Construction		17,008			15,876

Total real estate mortgage loans		123,575			120,395
Commercial loans		28,987			30,755
Consumer and other loans		3,128			2,877

Total loans		155,690			154,027
Add (deduct):
Net deferred loan costs		73			(60	)
Allowance for loan losses		(2,116	)		(2,098	)

Loans, net	$	153,647			151,869

(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
	Commercial		Residential and Home Equity		Construction			Commercial Loans		and Other Loans			Total
*Three-Month Period Ended March 31, 2015:*
Beginning balance	$	702		691		211			453		41			2,098
Provision for loan losses		0		5		0			4		9			18
Net (charge-offs) recoveries		0		0		0			0		0			0

Ending balance	$	702		696		211			457		50			2,116

*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 recoveries		0		0		0			12		0			12

Ending balance	$	617		575		160			401		22			1,775

*At March 31, 2015:*
Individually evaluated for impairment:
Recorded investment	$	0		0		0			213		17			230

Balance in allowance for loan losses	$	0		0		0			96		15			111

Collectively evaluated for impairment:
Recorded investment	$	52,283		54,284		17,008			28,774		3,111			155,460

Balance in allowance for loan losses	$	702		696		211			361		35			2,005

*At December 31, 2014:*
Individually evaluated for impairment:
Recorded investment	$	0		0		0			229		8			237

Balance in allowance for loan losses	$	0		0		0			92		6			98

Collectively evaluated for impairment:
Recorded investment	$	52,661		51,858		15,876			30,526		2,869			153,790

Balance in allowance for loan losses	$	702		691		211			361		35			2,000

(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. 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 non-owner 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 flows and evaluate collateral value. Currently, the collateral securing our commercial real estate loans includes 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 loan portfolio.

Residential and Home Equity. 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 still do 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 mortgages; while 15-year or 30-year fixed-rate loans are generally sold to the secondary market.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Construction. Typically, these loans have a term of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to term loans with a maturity of one to five years. 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 and Other Loans. 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, 2015:*
Real estate mortgage loans:
Commercial	$	47,936		2,362		1,985		0		0		52,283
Residential and home equity		49,837		3,017		1,430		0		0		54,284
Construction		16,913		87		8		0		0		17,008
Commercial loans		28,217		557		213		0		0		28,987
Consumer and other loans		3,058		53		17		0		0		3,128

Total	$	145,961		6,076		3,653		0		0		155,690

*At December 31, 2014:*
Real estate mortgage loans:
Commercial		50,654		0		2,007		0		0		52,661
Residential and home equity		47,357		3,065		1,436		0		0		51,858
Construction		15,714		154		8		0		0		15,876
Commercial loans		30,006		520		229		0		0		30,755
Consumer and other loans		2,801		68		8		0		0		2,877

Total	$	146,532		3,807		3,688		0		0		154,027

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 loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Furthermore, construction loans, non-owner occupied commercial real estate loans, and commercial loan relationships in excess of $500,000 are reviewed at least annually. The Company determines the appropriate loan grade during the renewal process and reevaluates the loan grade in situations when a loan becomes past due.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of 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.

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 necessarily preclude the potential for recovery, but rather signifies it is no longer practical to defer writing off the asset.

At March 31, 2015, there was no loans over thirty days past due, no loans past due ninety days or more but still accruing and three loans on nonaccrual. Age analysis of past due loans at March 31, 2015 and December 31, 2014 is as follows (in thousands):

(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, 2015:*
Real estate mortgage loans:
Commercial	$	0		0		0		0		52,283		0		52,283
Residential and home equity		0		0		0		0		54,284		0		54,284
Construction		0		0		0		0		17,008		0		17,008
Commercial loans		0		0		0		0		28,811		176		28,987
Consumer and other loans		0		0		0		0		3,128		0		3,128

Total	$	0		0		0		0		155,514		176		155,690

*At December 31, 2014:*
Real estate mortgage loans:
Commercial		0		0		0		0		52,661		0		52,661
Residential and home equity		0		0		0		0		51,858		0		51,858
Construction		0		0		0		0		15,876		0		15,876
Commercial loans		18		0		0		18		30,566		171		30,755
Consumer and other loans		0		0		0		0		2,877		0		2,877

Total	$	18		0		0		18		153,838		171		154,027

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, 2015:*
Commercial loans		0		0		213		213		96		213		213		96
Consumer & other loans		0		0		17		17		15		17		17		15

Total	$	0		0		230		230		111		230		230		111

*At December 31, 2014:*
Commercial loans		0		0		229		229		92		229		229		92
Consumer & other loans		0		0		8		8		6		8		8		6

Total	$	0		0		237		237		98		237		237		98

(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,
	2015						2014
	Average Recorded Investment		Interest Income Recognized		Interest Income Received		Average Recorded Investment		Interest Income Recognized		Interest Income Received
Commercial real estate	$	0		0		0		140		0		0
Residential and home equity		0		0		0		35		0		0
Commercial loans		221		1		1		220		4		4
Consumer & Other		11		0		0		0		0		0

Total	$	232		1		1		395		4		4

There were no loans measured at fair value on a nonrecurring basis at March 31, 2015 and December 31, 2014.

(4)

Regulatory Capital

Banks are subject to regulatory capital requirements imposed by the Federal Reserve and the FDIC. Until a bank holding company’s assets reach $500 million, the risk-based capital and leverage guidelines issued by the Federal Reserve are applied to bank holding companies on a nonconsolidated basis, unless the bank holding company is engaged in nonbank activities involving significant leverage, or it has a significant amount of outstanding debt held by the general public. Instead, a bank holding company with less than $500 million in assets generally applies the risk-based capital and leverage capital guidelines on a bank only basis and must only meet a debt-to-equity ratio at the holding company level. The FDIC risk-based capital guidelines apply directly to insured state banks, regardless of whether they are subsidiaries of a bank holding company. Both agencies’ requirements, which are substantially similar, establish minimum capital ratios in relation to assets, both on an aggregate basis as adjusted for credit risks and off balance sheet exposures. The risk weights assigned to assets are based primarily on credit risks. Depending upon the riskiness of a particular asset, it is assigned to a risk category. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, risk weights (from 0% to 150%) are applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(4)

Regulatory Capital, Continued

Capital is then classified into three categories, Common Equity Tier 1, Additional Tier 1, and Tier 2. Common Equity Tier 1 Capital (“CET1”) is the sum of common stock instruments and related surplus net of treasury stock, retained earnings, Accumulated Other Comprehensive Income (“AOCI”), and qualifying minority interests, less applicable regulatory adjustments and deductions that include AOCI (if an irrevocable option to neutralize AOCI is exercised). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to an aggregate of 15% of CET1 and 10% of CET1 individually. Additional Tier 1 Capital includes noncumulative perpetual preferred stock, Tier 1 minority interests, grandfathered trust preferred securities, and Troubled Asset Relief Program instruments, less applicable regulatory adjustments and deductions. Tier 2 Capital includes subordinated debt and preferred stock, total capital minority interests not included in Tier 1, and ALLL not exceeding 1.25% percent of risk-weighted assets, less applicable regulatory adjustments and deductions.

Effective January 1, 2015, smaller banks, such as the Bank, became subject to the new Basel III capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations. These new regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.

Changes that could affect the Bank going forward include additional constraints on the inclusion of deferred tax assets in capital and increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. Under the new regulations, the Company elected an irreversible one-time opt-out to exclude AOCI from regulatory capital in the first quarter of 2015.

The following is a summary at March 31, 2015 of the regulatory capital requirements to be considered “well-capitalized” and the Bank’s capital position.


	Actual					For Capital Adequacy Purposes					For Well Capitalized Purposes
	Amount		Percentage			Amount		Percentage			Amount		Percentage
*As of March 31, 2015:*
Tier 1 Leverage Capital Ratio	$	22,046		10.29	%	$	8,569		4.00	%		10,711		5.00	%
Common Equity Tier 1 Risk-Based Capital Ratio	$	22,046		13.83			7,172		4.50			10,359		6.50
Tier 1 Risk-Based Capital Ratio	$	22,046		13.83			9,562		6.00			12,750		8.00
Total Risk-Based Capital Ratio	$	24,039		15.08			12,750		8.00			15,937		10.00

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(4)

Regulatory Capital, Continued

As of March 31, 2015, the Bank was well-capitalized with all capital ratios exceeding the well-capitalized requirement.

(5)

Earnings Per Share

Earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. 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):


	2015						2014
	Earnings		Weighted- Average Shares		Per Share Amount		Earnings		Weighted- Average Shares		Per Share Amount
*Three Months Ended March 31:*
Basic EPS:
Net earnings (loss)	$	449		1,943,215	$	0.23	$	256		1,534,868	$	0.17
Effect of dilutive securities-incremental shares from assumed conversion of options				4,055						5,149

Diluted EPS:
Net earnings (loss)	$	449		1,947,270	$	0.23	$	256		1,540,017	$	0.17

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(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 remaining number of shares which may be issued was 30,305 at March 31, 2015. All options granted have ten-year terms and vest over periods up to five years. As of March 31, 2015, there were 30,305 shares available for grant.

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, 2013		134,000		$	10.01

Outstanding at March 31, 2014		134,000		$	10.01

Outstanding at December 31, 2014		108,400		$	10.01

Options exercised		(1,100	)	$	10.00

Outstanding at March 31, 2015		107,300		$	10.02		3.91 years

Exercisable at March 31, 2015		105,200		$	10.01		3.84 years	$	261,948

At March 31, 2015, there was $4,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the plan. The cost is expected to be recognized over a weighted-average period of twenty-five months. The fair value of shares vested and recognized as compensation expense was $0 for the three months ended March 31, 2015 and 2014.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(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, 2015						At December 31, 2014
	Carrying Amount		Fair Value		Level		Carrying Amount		Fair Value		Level
Financial assets:
Cash and cash equivalents	$	17,353		17,353		1		7,555		7,555		1
Securities available for sale		42,001		42,001		2		42,397		42,397		2
Loans held for sale		813		849		3		1,871		1,923		3
Loans, net		153,647		153,233		3		151,869		148,588		3
Federal Home Loan Bank stock		189		189		3		186		186		3
Accrued interest receivable		570		570		3		624		624		3
Financial liabilities:
Deposits		192,811		192,903		3		183,971		184,057		3
Other borrowings		2,656		2,656		3		2,699		2,699		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, 2014.

(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, standby letters of credit, and guaranteed accounts 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 instruments for unused 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.

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 client’s credit worthiness on a case-by-case basis.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

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 written conditional commitments issued by the Company to guarantee the performance of a client 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. 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. The Bank may hold collateral supporting those commitments, and at December 31, 2014 such collateral amounted to $945,000.

The maximum potential amount of future payments we could be required to make is represented by the dollar amount disclosed in the table below. 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, 2015 are as follows (in thousands):


Commitments to extend credit	$	6,399

Construction loans in process	$	7,570

Unused lines of credit	$	26,512

Standby letters of credit	$	1,310

Guaranteed accounts	$	107

(9)

Reclassification

Certain noninterest income sources were reclassified from gain on sale of loans and other income to mortgage banking revenue and certain noninterest expenses were reclassified from advertising and other noninterest expense to occupancy and equipment, marketing, and FDIC assessment for the quarter ended March 31, 2014 to conform to March 31, 2015 presentation. The reclassification of income and expenses had no effect on net earnings.

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

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, 2014. Results of operations for the three months ended March 31, 2015, 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. The Bank offers a broad array of commercial and retail banking services through two full-service offices located in Tallahassee, Florida and through its online banking platform.

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.

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


	At or for the
	Three Months Ended March 31, 2015			Year Ended December 31, 2014			Three Months Ended March 31, 2014
Average equity as a percentage of average assets		10.83	%		9.19	%		7.71	%
Equity to total assets at end of period		10.68	%		10.87	%		8.94	%
Return on average assets⁽¹⁾		0.84	%		0.48	%		0.47	%
Return on average equity⁽¹⁾		7.74	%		5.21	%		6.15	%
Noninterest expense to average assets		2.79	%		2.81	%		2.64	%
Nonperforming loans to total loans at end of period		0.11	%		0.11	%		1.10	%

⁽¹⁾	Annualized for the three months ended March 31, 2015 and March 31, 2014.

FINANCIAL CONDITION

Average assets totaled $214.1 million for the first quarter of 2015, an increase of $3.9 million, or 1.9%, over the fourth quarter of 2014 and a decrease of $1.9 million, or 0.89%, from the first quarter of 2014. The increase compared to the fourth quarter of 2014 can be attributed to higher average loan balances, partially offset by lower average balances of securities and other interest-earning assets. The decline from the same prior year period is due primarily to a reduction in other interest-earnings assets, as we experienced an anticipated, but large, decrease in average noninterest bearing deposits which impacted our investment in other interest-earning assets. This effect was only partially offset by higher average balances of loans and securities.

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. Our goal is to maintain a high quality of loans through sound underwriting and lending practices. As of March 31, 2015 and December 31, 2014, approximately 78.0% and 78.2%, respectively, of the total loan portfolio was collateralized by commercial and residential real estate mortgages.

Although we originated $7.8 million in new loans during the first quarter of 2015, we also experienced loan payoffs of just over $7 million during that same period. As a result of this and the fluctuating balances of our Lines of Credit, net loans grew to $153.6 million at March 31, 2015, a $1.8 million, or 1.1%, increase from December 31, 2014. As of March 31, 2015, the Bank’s net loan portfolio represented 69.7% of total assets, compared to 72.2% of total assets at December 31, 2014.

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. These loans were priced based upon the degree of risk, collateral, loan amount, and maturity. We have no loans to foreign borrowers.

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 according 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. Five loans totaling $230,000 were deemed to be impaired under the Bank’s policy at March 31, 2015, compared to five loans totaling $237,000 at December 31, 2014. During the three months ended March 31, 2015, the Bank reported a loan loss provision of $18,000 and there were no net charge-offs or recoveries taken during this period.

Deposits. Deposits are the major source of the Bank’s funds for lending and other investment purposes. Total deposits at March 31, 2015 were $192.8 million, an increase of $8.8 million, or 4.8%, from December 31, 2014. The majority of deposit growth occurred in interest-bearing accounts. Although the first quarter growth in deposits came mostly from interest-bearing accounts, the Bank’s senior management team recognizes the importance of growing core noninterest-bearing accounts and believes strong relationship-building efforts will lead to more growth in this area. The average balance of noninterest-bearing deposits accounted for 23.1% of the average balance of total deposits for the three months ended March 31, 2015, compared to 32.5% for the three months ended March 31, 2014. This noticeable change in deposit mix resulted primarily from the shrinkage of one noninterest-bearing account that was connected to a 2014 political election.

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, 2015, to borrow up to $31.5 million. There were no advances outstanding at March 31, 2015. 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, 2015 and December 31, 2014, the outstanding balance of such borrowings totaled $2.7 million and $2.7 million, respectively. For the same time periods, the Company pledged securities with a market value of $2.7 million and $3.6 million as collateral for the agreement.

Capital Adequacy. Stockholder’s equity was $23.6 million at March 31, 2015, compared to $22.9 million at December 31, 2014. As of March 31, 2015, 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 concluded on December 31, 2014. The Company sold 425,619 shares of common stock and raised $4.96 million, net of expenses.

As of March 31, 2015, the Bank was considered to be “well capitalized” with a 10.29% Tier 1 Leverage Capital Ratio, a 13.83% Common Equity Tier 1 Risk-Based Capital Ratio, a 13.83% Tier 1 Risk-Based Capital Ratio, and a 15.08% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.”


											For Well
						For Capital					Capitalized
	Actual					Adequacy Purposes					Purposes
	Amount		Percentage			Amount		Percentage			Amount		Percentage
*As of March 31, 2015:*
Tier 1 Leverage Capital Ratio	$	22,046		10.29	%	$	8,569		4.00	%		10,711		5.00	%
Common Equity Tier 1 Risk-Based Capital Ratio	$	22,046		13.83			7,172		4.50			10,359		6.50
Tier 1 Risk-Based Capital Ratio	$	22,046		13.83			9,562		6.00			12,750		8.00
Total Risk-Based Capital Ratio	$	24,039		15.08			12,750		8.00			15,937		10.00
*As of December 31, 2014:*
Tier 1 Capital to Average Assets		19,589		9.52			8,227		4.00			10,284		5.00
Tier 1 Capital to Risk-Weighted Assets		19,589		12.84			6,102		4.00			9,154		6.00
Total Capital to Risk-Weighted Assets		21,498		14.09			12,206		8.00			15,257		10.00

Effective January 1, 2015, smaller banks, such as the Bank, became subject to the following new capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations.


Capital Category	Threshold Ratios
Capital Category	Total Risk-Based Capital Ratio			Tier 1 Risk-Based Capital Ratio			Common Equity Tier 1 Risk-Based Capital Ratio			Tier 1 Leverage Capital Ratio
Well capitalized		10.00	%		8.00	%		6.50	%		5.00	%
Adequately Capitalized		8.00	%		6.00	%		4.50	%		4.00	%
Undercapitalized		< 8.00	%		< 6.00	%		< 4.50	%		< 4.00	%
Significantly Undercapitalized		< 6.00	%		< 4.00	%		< 3.00	%		< 3.00	%
Critically Undercapitalized		Tangible Equity/Total Assets £ 2%

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 tables 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 for the three-month periods, the decrease in yield on loans was offset by a 24.9% increase in average loan balances, resulting in a higher overall yield on total interest-earning assets. This combined with lower rates on interest-bearing liabilities have resulted in a higher interest-rate spread and net interest margin for the three months ended March 31, 2015.


	Three Months Ended March 31,
	2015								2014
	Average Balance			Interest and Dividends		Average Yield/ Rate			Average Balance			Interest and Dividends		Average Yield/ Rate
Interest-earning assets:
Loans⁽¹⁾	$	155,197		$	1,935		4.99	%	$	124,242		$	1,642		5.36	%
Mortgage loans held for sale		1,577			12		3.04			0			0		0
Securities		41,592			228		2.19			43,673			220		2.14
Other ⁽²⁾		7,724			7		0.36			40,429			25		0.25

Total interest-earning assets		206,090			2,182		4.24			208,344			1,887		3.70

Noninterest-earning assets		8,059								7,724

Total assets	$	214,149							$	216,068

Interest-bearing liabilities:
Savings, NOW and money-market deposits		122,726			130		0.42			116,216			135		0.47
Time deposits <$100,000		3,657			4		0.44			3,674			5		0.52
Time deposits >$100,000		17,529			28		0.64			10,723			18		0.67

Deposits		143,912			162		0.45			130,613			158		0.49
Other borrowings		2,656			6		0.90			5,724			14		1.00

Total interest-bearing liabilities		146,568			168		0.46			136,337			172		0.51

Noninterest-bearing deposits		43,181								62,834
Noninterest-bearing liabilities		1,206								240
Stockholders’ equity		23,194								16,657

Total liabilities and stockholders’ equity	$	214,149							$	216,068

Net interest income				$	2,014								1,715

Interest-rate spread							3.78	%							3.18	%

Net interest margin ⁽³⁾							3.89	%							3.36	%

Ratio of average interest-earning assets to average interest-bearing liabilities		140.61	%							152.82	%

⁽¹⁾	Includes nonaccrual loans.

⁽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 Operating Results for the Three Months Ended March 31, 2015 and 2014

Net Income. For the three months ended March 31, 2015, the Company reported net earnings of $449,000, or $0.23 per basic and diluted share, compared to net earnings of $256,000, or $0.17 per basic and diluted share, for the three months ended March 31, 2014.

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 securities, and interest expense on interest-bearing liabilities such as deposits and borrowings. Net interest income was $2.0 million for the three months ended March 31, 2015, compared to $1.7 million for the three months ended March 31, 2014.

Interest Income. Interest income increased to $2.2 million for the three months ended March 31, 2015, a $295,000, or 15.6%, increase over the three months ended March 31, 2014. The increase was driven by an increase in average loans from $124.2 million for the quarter ended March 31, 2014 to $155.2 million for the quarter ended March 31, 2015.

Interest Expense. Interest expense was $168,000 for the three months ended March 31, 2015, compared to $172,000 for the three months ended March 31, 2014. The slight decrease in interest expense is due to a lower interest rate environment, but this effect was mostly offset by a shift in our deposit mix towards a higher percentage of interest-bearing liabilities. The average balance of noninterest-bearing deposits to the average balance of total deposits decreased from 32.5% for the three months ended March 31, 2014 to 23.1% for the three months ended March 31, 2015.

The Bank’s net interest margin increased 53 basis points from 3.36% for the three months ended March 31, 2014, to 3.89% for the same period in 2015 due mostly to higher average loan balances.

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 provision for loan losses for the three months ended March 31, 2015 was $18,000, compared to $29,000 for the three months ended March 31, 2014. The decrease in the provision quarter over quarter can be attributed to slower net loan growth in the first quarter of 2015. Management believes that the allowance for loan losses, which was $2.1 million or 1.36% of total loans, at March 31, 2015, to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest income. Noninterest income consists of revenues generated from a broad range of financial services and activities, primarily service charges and fees on deposit accounts, mortgage banking revenue, gain on sale of securities available for sale, and income from bank-owned life insurance. Noninterest income for the three months ended March 31, 2015 totaled $189,000, an increase of $60,000, or 46.5%, from the three months ended March 31, 2014. The increase is primarily due to a $22,000 increase in mortgage banking revenue and a $42,000 gain on sale of securities available for sale for the first quarter of 2015 compared to a zero gain on sale of securities available for sale for the same period in 2014. These gains were partially offset by small decreases in service charges and fees on deposit accounts and income from bank-owned life insurance.

Noninterest expense. Noninterest expense increased $64,000, or 4.5%, to $1.5 million for the three months ended March 31, 2015 compared to the same period a year ago. The increase was primarily due to a $53,000 increase in occupancy and equipment expense and a $35,000 increase in marketing. Higher occupancy and equipment expense is primarily attributed to additional leased space at our Timberlane location, while the increase in marketing can be attributed to higher levels of spending on sponsorships, business development and advertising. Salaries and employee benefits show a $4,000 decrease from the three months ended March 31, 2014 to the three months ended March 31, 2015, despite growth in the number of employees. The decrease is explained by a change in our estimated standard deferred loan costs related to loan originations. The Bank’s new estimates more specifically allocate loan costs according to loan type. This resulted in a $141,000 increase in deferred loans costs for the period ended March 31, 2015 compared to the same period a year ago, which offset a $133,000 increase in salaries and employee benefits for the same time periods.

Income Taxes. Income tax expense is based on amounts reported in the statements of operations, 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. Income tax expense was $244,000 for the three months ended March 31, 2015, compared to income tax expense of $131,000 for the three months ended March 31, 2014. The higher provision relates to higher earnings for the quarter.

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, 2015, was $8.0 million.

At March 31, 2015, total deposits were $192.8 million, of which $19.2 million were in certificates of deposits of $100,000 or more. Also, as a member of the FHLB, we have access to approximately $31.5 million of available lines of credit secured by qualifying collateral as of March 31, 2015, in addition to $8.7 million in unsecured lines of credit we maintain with correspondent banks. As of March 31, 2015, 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, guaranteed accounts, 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.

Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our third party credit card company, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on the particular account plus 10%. The maximum potential amount of future payments we could be required to make is represented by the dollar amount disclosed in the table below.

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, as well as by generally charging fees for issuing them. 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 (in thousands):


	March 31, 2015
Commitments to extend credit	$	6,399
Construction loans in process		7,570
Unused lines of credit		26,512
Standby financial letters of credit		1,310
Guaranteed accounts		107

Total of off-balance sheet instruments	$	41,898

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 nonfinancial 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, 2015, 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

While the Company attempts to identify, manage, and mitigate risks and uncertainties associated with its business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our cash flows, results of operations, and financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

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

On January 15, 2015, the Company issued 817 shares to members of its Board of Directors in lieu of $9,625 in cash fees. On January 15, 2015, the Company issued 1,100 shares to directors who exercised stock options and paid $11,000 upon such exercises. The shares were issued in accordance with the intrastate exemption from registration pursuant to Section 3(a)(11) of the Securities Act of 1933, because the Company is doing business within the State of Florida and each acquirer and offeree of securities resides within the State of Florida.

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

21.1	Subsidiaries of the Registrant	Exhibit 21.1 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 12, 2015	By:	/s/ Sammie D. Dixon, Jr.
Date		Sammie D. Dixon, Jr.
		Chief Executive Officer, President
		and Principal Executive Officer

May 12, 2015	By:	/s/ Kathleen C. Jones
Date		Kathleen C. Jones
		Chief Financial Officer, Executive Vice President,
		and Principal Financial Officer

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