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Prime Meridian Holding Co - Quarter Report: 2016 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2016

or

 

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

For the transition period from                      to                     

Commission File Number: 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.    ☒  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).    ☒  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      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒No Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2016: 1,986,757

 

 

 


Table of Contents

INDEX

 

PART I. FINANCIAL INFORMATION    PAGE  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets
September  30, 2016 (unaudited) and December 31, 2015

     2   

Condensed Consolidated Statements of Earnings
Three and Nine months ended September 30, 2016 and 2015 (unaudited)

     3   

Condensed Consolidated Statements of Comprehensive Income
Three and Nine months ended September 30, 2016 and 2015 (unaudited)

     4   

Condensed Consolidated Statements of Stockholders’ Equity
Nine months ended September 30, 2016 and 2015 (unaudited)

     5   

Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2016 and 2015 (unaudited)

     6   

Notes to Condensed Consolidated Financial Statements (unaudited)

     7-24   

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

     25-35   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     35   

Item 4. Controls and Procedures

     35-36   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     37   

Item 1A. Risk Factors

     37   

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

     37   

Item 3. Defaults Upon Senior Securities

     37   

Item 4. Mine Safety Disclosures

     37   

Item 5. Other Information

     37   

Item 6. Exhibits

     38-39   
Signatures      40   
Certifications   

 

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Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in Thousands, Except Per Share Amounts)

 

     September 30,      December 31,  
     2016      2015  
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 5,903         3,528   

Federal funds sold

     11,900         4,657   

Interest-bearing deposits

     5,274         244   
  

 

 

    

 

 

 

Total cash and cash equivalents

     23,077         8,429   

Securities available for sale

     32,714         38,063   

Loans held for sale

     3,525         2,722   

Loans, net of allowance for loan losses of $2,863 and $2,473

     222,768         187,076   

Federal Home Loan Bank stock

     220         189   

Premises and equipment, net

     4,653         4,222   

Accrued interest receivable

     705         692   

Bank-owned life insurance

     1,699         1,662   

Other assets

     603         989   
  

 

 

    

 

 

 

Total assets

   $ 289,964         244,044   
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Liabilities:

     

Noninterest-bearing demand deposits

     70,102         50,158   

Savings, NOW and money-market deposits

     167,818         144,801   

Time deposits

     23,236         22,614   
  

 

 

    

 

 

 

Total deposits

     261,156         217,573   

Official checks

     1,093         744   

Other liabilities

     874         794   
  

 

 

    

 

 

 

Total liabilities

     263,123         219,111   
  

 

 

    

 

 

 
     

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, 1,985,686 and 1,975,329 issued and outstanding

     20         20   

Additional paid-in capital

     20,538         20,415   

Retained earnings

     5,917         4,442   

Accumulated other comprehensive income

     366         56   
  

 

 

    

 

 

 

Total stockholders’ equity

     26,841         24,933   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 289,964         244,044   
  

 

 

    

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

(In Thousands, Except Per Share Amounts)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Interest income:

           

Loans

   $ 2,573         2,146         7,294         6,126   

Securities

     156         202         538         667   

Other

     26         10         74         31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     2,755         2,358         7,906         6,824   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     205         179         598         507   

Other borrowings

     1         4         1         18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     206         183         599         525   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     2,549         2,175         7,307         6,299   

Provision for loan losses

     108         124         412         333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,441         2,051         6,895         5,966   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges and fees on deposit accounts

     74         37         174         110   

Mortgage banking revenue

     260         196         637         407   

Income from bank-owned life insurance

     12         12         37         37   

Gain on sale of securities available for sale

     0         0         102         42   

Other income

     69         45         206         130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     415         290         1,156         726   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense:

           

Salaries and employee benefits

     1,062         959         3,006         2,571   

Occupancy and equipment

     209         222         624         579   

Professional fees

     81         69         285         306   

Marketing

     94         95         361         304   

FDIC assessment

     36         28         102         83   

Software maintenance, amortization and other

     125         109         375         314   

Other

     304         268         863         669   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     1,911         1,750         5,616         4,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     945         591         2,435         1,866   

Income taxes

     335         213         861         663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 610         378         1,574         1,203   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.31         0.19         0.79         0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.31         0.19         0.79         0.61   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends per common share

   $ 0         0         0.05         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In Thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  

Net earnings

   $ 610        378        1,574        1,203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income:

        

Change in unrealized gain on securities:

        

Unrealized (loss) gain arising during the period

     (64     355        593        368   

Reclassification adjustment for realized gains

     0        0        (102     (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized (loss) gain

     (64     355        491        326   

Deferred benefit (income taxes) on above change

     24        (131     (181     (120
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (40     224        310        206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 570        602        1,884        1,409   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2016 and 2015

(Dollars in Thousands)

 

     Common Stock      Additional
Paid-In
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Total
Stockholders’
Equity
 
     Shares      Amount             

Balance at December 31, 2014

     1,941,617       $ 19         20,056         2,738        54         22,867   

Net earnings for the nine months ended September 30, 2015 (unaudited)

     0         0         0         1,203        0         1,203   

Net change in unrealized gain on securities available for sale, net of income taxes (unaudited)

     0         0         0         0        206         206   

Stock options exercised (unaudited)

     1,400         0         14         0        0         14   

Common stock issued as compensation to directors (unaudited)

     2,455         0         29         0        0         29   

Stock-based compensation (unaudited)

     0         0         12         0        0         12   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance at September 30, 2015 (unaudited)

     1,945,472       $ 19         20,111         3,941        260         24,331   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance at December 31, 2015

     1,975,329       $ 20         20,415         4,442        56         24,933   

Net earnings for the nine months ended September 30, 2016 (unaudited)

     0         0         0         1,574        0         1,574   

Dividends paid (unaudited)

     0         0         0         (99     0         (99

Net change in unrealized gain on securities available for sale, net of income taxes (unaudited)

     0         0         0         0        310         310   

Stock options exercised (unaudited)

     7,500         0         82         0        0         82   

Common stock issued as compensation to directors (unaudited)

     2,857         0         40         0        0         40   

Stock-based compensation (unaudited)

     0         0         1         0        0         1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance at September 30, 2016 (unaudited)

     1,985,686       $ 20         20,538         5,917        366         26,841   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

See Accompanying Notes to Condensed Consolidated Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In Thousands)

 

     Nine Months Ended
September 30,
 
     2016     2015  

Cash flows from operating activities:

    

Net earnings

   $ 1,574        1,203   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Depreciation and amortization

     395        324   

Provision for loan losses

     412        333   

Net amortization of deferred loan fees

     (1     (298

Gain on sale of securities available for sale

     (102     (42

Amortization of premiums and discounts on securities available for sale

     332        326   

Gain on sale of loans held for sale

     (558     (379

Proceeds from the sale of loans held for sale

     33,268        23,169   

Loans originated as held for sale

     (33,513     (22,953

Stock issued as compensation

     40        29   

Stock-based compensation expense

     1        12   

Income from bank-owned life insurance

     (37     (37

Net (increase) decrease in accrued interest receivable

     (13     16   

Net decrease (increase) in other assets

     205        (138

Net increase in other liabilities and official checks

     429        211   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,432        1,776   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Loan originations, net of principal repayments

     (36,103     (25,637

Purchase of securities available for sale

     (10,416     (7,473

Principal repayments of securities available for sale

     6,488        8,007   

Proceeds from sale of securities available for sale

     8,248        2,075   

Maturities and calls of securities available for sale

     1,290        0   

Purchase of Federal Home Loan Bank stock

     (31     (216

Purchase of premises and equipment

     (826     (824
  

 

 

   

 

 

 

Net cash used in investing activities

     (31,350     (24,068
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     43,583        30,402   

Decrease in other borrowings

     0        (2,699

Increase in Federal Home Loan Bank advances

     0        5,000   

Proceeds from stock options exercised

     82        14   

Cash dividends paid

     (99     0   
  

 

 

   

 

 

 

Net cash provided by financing activities

     43,566        32,717   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     14,648        10,425   

Cash and cash equivalents at beginning of period

     8,429        7,555   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 23,077        17,980   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid during the period for:

    

Interest

   $ 525        516   
  

 

 

   

 

 

 

Income taxes

   $ 670        844   
  

 

 

   

 

 

 

Noncash transaction-

    

Accumulated other comprehensive income, net change in unrealized gain on sale of securities available for sale, net of taxes

   $ 310        206   
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1) General

Prime Meridian Holding Company (“PMHG”) owns 100% of the outstanding common stock of Prime Meridian Bank (the “Bank”) (collectively the “Company”). PMHG’s primary activity is the operation of the Bank. The Bank is a Florida state-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 three banking offices located in Tallahassee and Crawfordville, Florida and its online banking platform.

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 September 30, 2016, and the results of operations for the three and nine month periods ended September 30, 2016 and 2015. The results of operations for the three months ended September 30, 2016 and the nine months ended September 30, 2016, respectively, 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 condensed consolidated balance sheet, such items along with net earnings, are components of comprehensive income. The only component of other comprehensive income (loss) is the net change in the unrealized gains on the securities available for sale.

Stock-Based Compensation. The Company expenses the fair value of any stock options granted. The Company recognizes stock option compensation in the condensed consolidated statements of earnings as the options vest.

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

Recent Accounting Standards Update. In June 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-13 Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for its circumstances.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1) General, Continued

 

The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

 

(2) Securities Available for Sale

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

At September 30, 2016:

           

U.S. Government agency securities

   $ 2,187         42         0         2,229   

Municipal securities

     11,678         297         (14      11,961   

Mortgage-backed securities

     18,268         270         (14      18,524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,133         609         (28      32,714   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2015:

           

U.S. Government agency securities

     8,376         61         (9      8,428   

Municipal securities

     9,532         130         (54      9,608   

Mortgage-backed securities

     20,065         52         (90      20,027   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 37,973         243         (153      38.063   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2) Securities Available for Sale, Continued

 

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 September 30, 2016:

           

Securities Available for Sale-

           

Municipal Securities

   $ (14      1,674         0         0   

Mortgage-backed securities

     (3      779         (11      769   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (17      2,453         (11      769   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2015:

           

Securities Available for Sale:

           

U.S. Government agency securities

     (9      1,616         0         0   

Municipal securities

     (14      1,620         (40      1,224   

Mortgage-backed securities

     (40      10,803         (50      2,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (63      14,039         (90      3,242   
  

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses at September 30, 2016 on ten 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 September 30, 2016:

           

U.S. Government agency securities

   $ 2,229         0         2,229         0   

Municipal securities

     11,961         0         11,961         0   

Mortgage-backed securities

     18,524         0         18,524         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,714         0         32,714         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2015:

           

U.S. Government agency securities

     8,428         0         8,428         0   

Municipal securities

     9,608         0         9,608         0   

Mortgage-backed securities

     20,027         0         20,027         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 38,063         0         38,063         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2016 and 2015, no securities were transferred in or out of Level 1, Level 2 or Level 3.

 

(continued)

 

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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 September 30, 2016:

     

Due in one to five years

   $ 2,523         2,534   

Due in five to ten years

     7,312         7,562   

Due after ten years

     4,030         4,094   

Mortgage-backed securities

     18,268         18,524   
  

 

 

    

 

 

 

Total

   $ 32,133         32,714   
  

 

 

    

 

 

 

 

(3) Loans

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

 

     At
September 30,
2016
     At
December 31,
2015
 

Real estate mortgage loans:

     

Commercial

   $ 65,418         57,847   

Residential and home equity

     86,757         69,817   

Construction

     21,520         17,493   
  

 

 

    

 

 

 

Total real estate mortgage loans

     173,695         145,157   

Commercial loans

     47,015         40,229   

Consumer and other loans

     4,581         3,877   
  

 

 

    

 

 

 

Total loans

     225,291         189,263   

Add (deduct):

     

Net deferred loan costs

     340         286   

Allowance for loan losses

     (2,863      (2,473
  

 

 

    

 

 

 

Loans, net

   $ 222,768         187,076   
  

 

 

    

 

 

 

 

(continued)

 

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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                    
     Commercial     Residential
and Home
Equity
     Construction     Commercial
Loans
    Consumer
and Other
Loans
    Total  

Three-Month Period Ended September 30, 2016:

             

Beginning balance

   $ 764        1,017         243        686        65        2,775   

Provision (credit) for loan losses

     11        28         32        40        (3     108   

Net (charge-offs) recoveries

     0        0         0        (17     (3     (20
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 775        1,045         275        709        59        2,863   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Three-Month Period Ended September 30, 2015:

             

Beginning balance

   $ 706        797         237        519        48        2,307   

Provision (credit) for loan losses

     (3     47         20        70        (10     124   

Net recoveries

     0        0         0        0        (2     (2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 703        844         257        589        36        2,429   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Nine-Month Period Ended September 30, 2016:

             

Beginning balance

   $ 707        868         246        596        56        2,473   

Provision for loan losses

     68        177         29        130        8        412   

Net (charge-offs) recoveries

     0        0         0        (17     (5     (22
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 775        1,045         275        709        59        2,863   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Nine-Month Period Ended September 30, 2015:

             

Beginning balance

   $ 641        594         263        562        38        2,098   

Provision (credit) for loan losses

     62        250         (6     27        0        333   

Net recoveries

     0        0         0        0        (2     (2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 703        844         257        589        36        2,429   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2016:

             

Individually evaluated for impairment:

             

Recorded investment

   $ 0        1,010         74        77        0        1,161   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 0        0         0        65        0        65   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment:

             

Recorded investment

   $ 65,418        85,747         21,446        46,938        4,581        224,130   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 775        1,045         275        644        59        2,798   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2015:

             

Individually evaluated for impairment:

             

Recorded investment

   $ 0        0         0        137        7        144   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 0        0         0        62        7        69   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment:

             

Recorded investment

   $ 57,847        69,817         17,493        40,092        3,870        189,119   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 707        868         246        534        49        2,404   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(continued)

 

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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 Company identifies the portfolio segments and classes as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are typically divided into three classes: commercial, residential and home equity and construction loans.

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 are 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 a market index rate. At times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, the Company 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 and 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. The Company offers first and second one-to-four family mortgage loans and home equity lines of credit; the collateral for these loans is generally 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. The nonowner-occupied investment properties are more similar in risk to commercial real estate loans, and therefore, are underwritten by assessing the property’s income potential and appraised value. In both cases, we underwrite the borrower’s financial condition and evaluate his or her global cash flow position. 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 generally sold in the secondary market.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

Construction. Typically, these loans have a construction period of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to a term loan 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, lines of credit, and U.S. Small Business Administration (SBA) loans 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. The Bank currently offers both SBA 504 and SBA 7A loans. SBA 504 loans provide financing for major fixed assets such as real estate and equipment while SBA 7A loans are generally used to establish a new business or assist in the acquisition, operation, or expansion of an existing business. With both SBA loan programs, there are set eligibility requirements and underwriting standards outlined by SBA that can change as the government alters its fiscal policy. 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.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

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.

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
Mention
     Substandard      Doubtful      Loss      Total  

At September 30, 2016:

                 

Real estate mortgage loans:

                 

Commercial

   $ 60,352         5,066         0         0         0         65,418   

Residential and home equity

     82,546         3,165         1,046         0         0         86,757   

Construction

     21,255         83         182         0         0         21,520   

Commercial loans

     46,601         234         180         0         0         47,015   

Consumer and other loans

     4,527         52         2         0         0         4,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 215,281         8,600         1,410         0         0         225,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2015:

                 

Real estate mortgage loans:

                 

Commercial

     52,097         5,750         0         0         0         57,847   

Residential and home equity

     65,367         3,396         1,054         0         0         69,817   

Construction

     17,204         163         126         0         0         17,493   

Commercial loans

     39,607         461         161         0         0         40,229   

Consumer and other loans

     3,836         32         9         0         0         3,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 178,111         9,802         1,350         0         0         189,263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

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.

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 client 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 September 30, 2016, there were six loans on nonaccrual.

 

(continued)

 

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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 September 30, 2016:

                    

Real estate mortgage loans:

                    

Commercial

   $ 0         0         0         0         65,418         0         65,418   

Residential and home equity

     0         0         0         0         85,747         1,010         86,757   

Construction

     0         0         0         0         21,446         74         21,520   

Commercial loans

     0         0         0         0         46,938         77         47,015   

Consumer and other loans

     0         0         0         0         4,581         0         4,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0         0         0         0         224,130         1,161         225,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2015:

                    

Real estate mortgage loans:

                    

Commercial

     0         0         0         0         57,847         0         57,847   

Residential and home equity

     0         0         0         0         69,817         0         69,817   

Construction

     0         0         0         0         17,493         0         17,493   

Commercial loans

     0         0         0         0         40,092         137         40,229   

Consumer and other loans

     0         0         0         0         3,877         0         3,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0         0         0         0         189,126         137         189,263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2016:

                       

Residential & Home Equity

   $ 1,010         1,010         0         0         0         1,010         1,010         0   

Construction

     74         74         0         0         0         74         74         0   

Commercial loans

     0         0         77         77         65         77         77         65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,084         1,084         77         77         65         1,161         1,161         65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2015:

                       

Commercial loans

     0         0         137         137         62         137         137         62   

Consumer & other loans

     0         0         7         7         7         7         7         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0         0         144         144         69         144         144         69   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

 

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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 September 30,  
     2016      2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 

Residential & Home Equity

   $ 361         0         0         0         0         0   

Construction

     1         0         0         0         0         0   

Commercial loans

     88         0         0         226         1         1   

Consumer & Other

     7         0         0         7         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 457         0         0         233         1         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2016      2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 

Residential & Home Equity

   $ 119         0         0         0         0         0   

Commercial loans

     91         0         0         273         10         9   

Consumer & Other

     3         0         0         7         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 213         0         0         280         10         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no collateral dependent loans measured at fair value on a nonrecurring basis at September 30, 2016 or December 31, 2015.

 

(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 $1 billion, 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 $1 billion 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.

 

(continued)

 

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Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4) Regulatory Capital, Continued

 

A particular asset is assigned to a risk category depending upon its severity of risk. 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 1,250%) are applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The assignment of risk weightings to certain assets are also subject to qualitative judgments by our regulators.

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, and qualifying minority interests, less applicable regulatory adjustments and deductions that include Accumulated Other Comprehensive Income (“AOCI”). 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.

The Bank is also subject to the Basel III capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations. These regulations are intended 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 those regulations, the Company elected an irreversible one-time opt-out to exclude AOCI from regulatory capital in the first quarter of 2015.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4) Regulatory Capital, Continued

 

The following is a summary at September 30, 2016 and December 31, 2015 of the regulatory capital requirements to be considered “well-capitalized” and the Bank’s capital position (dollars in thousands).

 

     Actual     For Capital
Adequacy Purposes
    For Well
Capitalized Purposes
 
     Amount      Percentage     Amount      Percentage     Amount      Percentage  

As of September 30, 2016:

               

Tier 1 Leverage

               

Capital Ratio

   $ 25,300         9.01   $ 11,238         4.00   $ 14,048         5.00

Common Equity Tier 1

               

Risk-Based

               

Capital Ratio

     25,300         11.55        9,860         4.50        14,242         6.50   

Tier 1 Risk-Based

               

Capital Ratio

     25,300         11.55        13,146         6.00        17,528         8.00   

Total Risk-Based

               

Capital Ratio

     28,040         12.80        17,528         8.00        21,911         10.00   

As of December 31, 2015:

               

Tier 1 Leverage

               

Capital Ratio

   $ 23,511         9.48   $ 9,918         4.00   $ 12,398         5.00

Common Equity Tier 1

               

Risk-Based

               

Capital Ratio

     23,511         12.79        8,269         4.50        11,945         6.50   

Tier 1 Risk-Based

               

Capital Ratio

     23,511         12.79        11,026         6.00        14,701         8.00   

Total Risk-Based

               

Capital Ratio

     25,810         14.05        14,701         8.00        18,377         10.00   

At September 30, 2016, the Bank was well-capitalized with all capital ratios exceeding the well-capitalized requirement.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(5) Earnings Per Share

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months and the nine months ended September 30, 2016 and 2015, 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):

 

     2016      2015  
     Earnings      Weighted-
Average
Shares
     Per
Share
Amount
     Earnings      Weighted-
Average
Shares
     Per
Share
Amount
 

Three Months Ended September 30:

  

           

Basic EPS:

                 

Net earnings

   $ 610         1,985,201       $ 0.31       $ 378         1,945,345       $ 0.19   

Effect of dilutive securities-

                 

Incremental shares from assumed conversion of options

        2,965               3,694      
     

 

 

          

 

 

    

Diluted EPS:

                 

Net earnings

   $ 610         1,988,166       $ 0.31       $ 378         1,949,039       $ 0.19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30:

                 

Basic EPS:

                 

Net earnings

   $ 1,574         1,980,046       $ 0.79       $ 1,203         1,944,313       $ 0.62   

Effect of dilutive securities-

                 

Incremental shares from assumed conversion of options

        9,376               11,818      
     

 

 

          

 

 

    

Diluted EPS:

                 

Net earnings

   $ 1,574         1,989,422       $ 0.79       $ 1,203         1,956,131       $ 0.61   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6) Stock Option Plans

The 2015 Stock Incentive Compensation Plan (the “2015 Plan”) was approved by the Shareholders at PMHG’s annual meeting of shareholders on May 20, 2015 and permits PMHG to grant the Company’s key employees and directors stock options, stock appreciation rights, performance shares, and phantom stock. Under the 2015 Plan, the amount of shares which may be issued is 500,000, but in no instance more than 15% of the issued and outstanding shares of PMHG’s common stock. As of September 30, 2016, no stock options, stock appreciation rights, performance shares, or phantom stock shares have been issued under the 2015 Plan. As of May 20, 2015, no further grants will be made under the 2007 Stock Option Plan (the “2007 Plan”). Unexercised stock options that were granted under the 2007 Plan will remain outstanding and will expire under the terms of the individual stock grant.

A summary of the activity in PMHG’s 2007 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, 2014

     108,400       $ 10.01         

Options granted

     15,000         12.50         

Options exercised

     (1,400      10.00         
  

 

 

          

Outstanding at September 30, 2015

     122,000         10.29         
  

 

 

    

 

 

       

Outstanding at December 31, 2015

     75,500         10.19         

Options exercised

     (7,500      11.00         

Options forfeited

     (7,500      10.00         
  

 

 

          

Outstanding at September 30, 2016

     60,500       $ 10.11         2.55 years      
  

 

 

    

 

 

    

 

 

    

Exercisable at September 30, 2016

     59,300       $ 10.10         2.48 years       $ 248,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2016, there was $1,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the 2007 Plan. The fair value of the options granted is expected to be recognized over a weighted-average period of fourteen months. The fair value of shares vested and recognized as compensation expense was $1,000 and $12,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7) Federal Home Loan Bank Advances

Federal Home Loan Bank (“FHLB”) advances are collateralized by a blanket lien on qualifying residential real estate, commercial real estate, home equity lines of credit and multi-family loans. Under this blanket lien, the Company could borrow up to $36.4 million at September 30, 2016. At September 30, 2016, the Company had no outstanding loans under this line.

 

(8) 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
September 30, 2016
     At
December 31, 2015
 
     Level      Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets:

              

Cash and cash equivalents

     1       $ 23,077         23,077         8,429         8,429   

Securities available for sale

     2         32,714         32,714         38,063         38,063   

Loans held for sale

     3         3,525         3,699         2,722         2,791   

Loans, net

     3         222,768         221,436         187,076         188,784   

Federal Home Loan Bank stock

     3         220         220         189         189   

Accrued interest receivable

     3         705         705         692         692   

Bank-owned life insurance

     3         1,699         1,699         1,662         1,662   

Financial liabilities:

              

Deposits

     3         261,156         261,225         217,573         217,652   

Off balance-sheet financial instruments

     3         0         0         0         0   

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 PMHG’s annual report on Form 10-K for the year ended December 31, 2015.

 

(9) 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 clients. 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.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(9) Off-Balance Sheet Financial Instruments, continued

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit, construction loans in process, unused lines of credit, standby letters of credit, and guaranteed accounts 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 client 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. 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 clients. 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. Some of the Bank’s standby letters of credit are secured by collateral and those letters of credit totaled $406,000 at September 30, 2016.

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, Card Assets, and its issuing bank, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on certain accounts 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 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 September 30, 2016 are as follows (in thousands):

 

Commitments to extend credit

   $ 1,343   
  

 

 

 

Construction loans in process

   $ 9,335   
  

 

 

 

Unused lines of credit

   $ 26,271   
  

 

 

 

Standby letters of credit

   $ 1,893   
  

 

 

 

Guaranteed accounts

   $ 1,376   
  

 

 

 

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(10) Reclassification

Certain noninterest expenses were reclassified from occupancy and equipment to software maintenance, amortization, and other for the three and nine months ended September 30, 2015 to conform to the presentation for the three and nine months ended September 30, 2016. The reclassification of expenses had no effect on net earnings.

 

(continued)

 

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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, 2015. Results of operations for the three and nine months ended September 30, 2016, 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;

 

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

 

    other economic, competitive, governmental, regulatory, or technological factors affecting us; and

 

    application and interpretation of accounting principles and guidelines.

GENERAL

Prime Meridian Holding Company (“PMHG”) 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”) (collectively, the “Company”). The Bank opened for business on February 4, 2008, and was acquired by PMHG on September 16, 2010. PMHG 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 three full-service offices located in Tallahassee and Crawfordville, 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  
     Nine Months
Ended
September 30,
2016
    Year
Ended
December 31,
2015
    Nine Months
Ended
September 30,
2015
 

Average equity as a percentage of average assets

     9.62     10.37     10.55

Equity to total assets at end of period

     9.26     10.22     9.94

Return on average assets(1)

     0.78     0.74     0.72

Return on average equity(1)

     8.13     7.15     6.80

Noninterest expense to average assets(1)

     2.79     2.90     2.88

Nonperforming loans to total loans at end of period

     0.51     0.07     0.11

 

(1)  Annualized for the nine months ended September 30, 2016 and September 30, 2015

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies which involve significant judgements and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in preparation of the Consolidated Financial Statements as of September 30, 2016, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K.

 

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FINANCIAL CONDITION

Average assets totaled $281.0 million for the three months ended September 30, 2016, an increase of $48.6 million, or 20.9%, over the three months ended September 30, 2015. For the nine months ended September 30, 2016, average assets totaled $268.5 million, compared to $223.5 million over the same period in 2015, a $45.0 million, or 20.1% increase. In both time period comparisons, the increase in 2016 can be primarily attributed to higher average loan balances, partially offset by lower average balances of securities.

Investment Securities. Our primary objective in managing our investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We use the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income, to provide liquidity to meet funding requirements, and to provide collateral for pledging of public funds. At September 30, 2016, our available for sale investment portfolio included U.S. Treasury notes, municipal securities, and mortgage-backed securities and had a fair market value of $32.7 million and an amortized cost value of $32.1 million. At September 30, 2016 and December 31, 2015, our investment securities portfolio represented approximately 11.3% and 15.6% of our total assets, respectively. The average yield on our investment securities for the nine months ended September 30, 2016 was 1.98%, compared to 2.17% for the nine months ended September 30, 2015.

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

Loans grew $9.3 million, or 4.4% when compared to the second quarter of 2016, and have grown $35.7 million, or 19.1% from December 31, 2015. While the Bank has grown all loan sectors in 2016, nearly half of the year-to-date growth came from the residential and home equity sector, which is up $16.9 million from year-end. In total, approximately 77.1% of the total loan portfolio was collateralized by commercial and residential real estate mortgages at September 30, 2016, compared to 76.7% at year-end.

Nonperforming assets. 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

 

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guidance on these standards. Six loans totaling $1,161,000 were deemed to be impaired under the Bank’s policy at September 30, 2016, compared to three loans totaling $144,000 at December 31, 2015. The Bank’s nonperforming assets represented 0.40% of total assets at September 30, 2016, compared to 0.06% at December 31, 2015.

Allowance for Loan Losses. Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. Management believes that the allowance for loan losses, which was $2.9 million or 1.27% of total loans, at September 30, 2016, is adequate to cover losses inherent in the loan portfolio. Of the $1.2 million in impaired loans at September 30, 2016, $77,000 of these loans had a reserve of $65,000 allocated in the allowance. Collateral values on the remaining impaired loans did not require specific reserves at September 30, 2016. Comparatively, of the $144,000 in impaired loans at December 31, 2015, there was a $69,000 reserve allocated on the full amount.

Deposits. Deposits are the major source of the Bank’s funds for lending and other investment purposes. Total deposits at September 30, 2016 were $261.2 million, an increase of $43.6 million, or 20.0%, from December 31, 2015. Year-to-date deposit growth in 2016 is spread fairly evenly between noninterest-bearing and interest-bearing accounts. The average balance of noninterest-bearing deposits accounted for 23.7% of the average balance of total deposits for the nine months ended September 30, 2016, compared to 23.4% for the nine months ended September 30, 2015.

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 September 30, 2016, to borrow up to $36.4 million. In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled $16.3 million at September 30, 2016. There were no loans outstanding under any of these lines at September 30, 2016.

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 as well as the interest rates earned or paid on these assets and liabilities. The following tables set 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.

As shown in the following two tables, the 25.1% increase in average loan balances for the three month period and the 25.0% increase in average loan balances for the nine-month period were not enough to offset the decrease in the average yield on loans from 2015 to 2016. This combined with lower yields on securities led to a decline in the average yield on total interest-earning assets, interest-rate spread, and net interest margin for both the 2016 third quarter and nine month period.

 

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Table of Contents
     Three Months Ended September 30,  
     2016     2015  
(Dollars in Thousands)    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
 

Interest-earning assets:

              

Loans(1)

   $ 219,665      $ 2,539         4.62   $ 175,617      $ 2,125         4.84

Mortgage loans held for sale

     3,141        34         4.33        1,527        21         5.50   

Securities

     34,280        156         1.82        39,587        202         2.04   

Other(2)

     14,206        26         0.73        7,505        10         0.53   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     271,292        2,755         4.06        224,236        2,358         4.21   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets

     9,697             8,122        
  

 

 

        

 

 

      

Total assets

   $ 280,989           $ 232,358        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings, NOW and money-market deposits

     165,715        177         0.43        132,068        149         0.45   

Time deposits <$100,000

     4,447        5         0.45        3,998        4         0.40   

Time deposits >$100,000

     17,735        23         0.52        18,006        26         0.58   
  

 

 

   

 

 

      

 

 

   

 

 

    

Deposits

     187,897        205         0.44        154,072        179         0.46   

Other borrowings

     1,217        1         0.33        5,000        4         0.32   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     189,114        206         0.44        159,072        183         0.46   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing deposits

     63,822             48,281        

Noninterest-bearing liabilities

     1,358             1,065        

Stockholders’ equity

     26,695             23,940        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 280,989           $ 232,358        
  

 

 

        

 

 

      

Net interest income

     $ 2,549           $ 2,175      
    

 

 

        

 

 

    

Interest-rate spread

          3.62          3.75
       

 

 

        

 

 

 

Net interest margin(3)

          3.76          3.88
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

     143.45          140.97     
  

 

 

        

 

 

      

 

(1)  Includes nonaccrual loans.
(2)  Other interest-earning assets include federal funds sold, interest-bearing deposits and FHLB stock.
(3)  Net interest margin is net interest income divided by total average interest-earning assets, annualized.

 

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Table of Contents
     Nine Months Ended September 30,  
     2016     2015  
(Dollars in Thousands)    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
 

Interest-earning assets:

              

Loans(1)

   $ 206,585      $ 7,211         4.65   $ 165,309      $ 6,074         4.90

Mortgage loans held for sale

     2,720        83         4.07        1,486        52         4.67   

Securities

     36,184        538         1.98        40,994        667         2.17   

Other(2)

     13,812        74         0.71        7,799        31         0.53   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     259,301        7,906         4.07        215,588        6,824         4.22   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets

     9,235             7,948        
  

 

 

        

 

 

      

Total assets

   $ 268,536           $ 223,536        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings, NOW and money-market deposits

     162,524        524         0.43        127,072        414         0.43   

Time deposits <$100,000

     4,439        15         0.45        3,843        8         0.28   

Time deposits >$100,000

     16,807        59         0.47        18,268        85         0.62   
  

 

 

   

 

 

      

 

 

   

 

 

    

Deposits

     183,770        598         0.43        149,183        507         0.45   

Other borrowings

     434        1         0.31        2,308        18         1.04   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     184,204        599         0.43        151,491        525         0.46   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing deposits

     57,211             45,604        

Noninterest-bearing liabilities

     1,294             2,855        

Stockholders’ equity

     25,827             23,586        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 268,536           $ 223,536        
  

 

 

        

 

 

      

Net interest income

     $ 7,307           $ 6,299      
    

 

 

        

 

 

    

Interest-rate spread

          3.64          3.76
       

 

 

        

 

 

 

Net interest margin(3)

          3.76          3.90
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

     140.77          142.31     
  

 

 

        

 

 

      

 

(1)  Includes nonaccrual loans.
(2)  Other interest-earning assets include federal funds sold and FHLB stock.
(3)  Net interest margin is net interest income divided by total average interest-earning assets, annualized.

 

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Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015

Net Earnings. For the three months ended September 30, 2016, the Company reported net earnings of $610,000, or $0.31 per basic and diluted share, compared to net earnings of $378,000, or $0.19 per basic and diluted share, for the three months ended September 30, 2015.

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 $2.5 million for the three months ended September 30, 2016, compared to $2.2 million for the three months ended September 30, 2015.

Interest Income. Interest income increased to $2.8 million for the three months ended September 30, 2016, a $397,000 or 16.8%, increase over the three months ended September 30, 2015. The increase was driven by an increase in average loans from $175.6 million for the quarter ended September 30, 2015 to $219.7 million for the quarter ended September 30, 2016.

Interest Expense. Interest expense was $206,000 for the three months ended September 30, 2016, compared to $183,000 for the three months ended September 30, 2015. The year-over-year increase resulted primarily from a 22.0%, or $33.8 million, increase in the average balance of interest-bearing deposits from the third quarter of 2015 to the third quarter of 2016.

Despite strong growth in the loan portfolio, the Company’s net interest margin declined 12 basis points to 3.76%, due primarily to new loans being originated at lower yields.

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 September 30, 2016 was $108,000, compared to $124,000 for the three months ended September 30, 2015.

Management believes that the allowance for loan losses, which was $2.9 million or 1.27% of total loans, at September 30, 2016, is 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, income from bank-owned life insurance and any gains on the sale of securities available for sale. Noninterest income for the three months ended September 30, 2016 totaled $415,000 an increase of $125,000, or 43.1%, from the three months ended September 30, 2015. The increase was primarily driven by a 32.7%, or $64,000, increase in mortgage banking revenue. Increased service charges and fees on deposit accounts and gains in other income from higher merchant card services and credit card fee income also contributed to growth in noninterest income for the 2016 quarter.

 

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Noninterest expense. Noninterest expense increased $161,000 or 9.2%, to $1.9 million for the three months ended September 30, 2016 compared to the same period a year ago. The majority of the increase occurred in overall bank salaries and employee benefits as full-time equivalent employees increased from 54 at September 30, 2015 to 63 at September 30, 2016. Higher board fees and contracted services also contributed to higher noninterest expense year over year.

Income Taxes. Income tax expense is based on amounts reported in the statements 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. Income tax expense was $335,000 for the three months ended September 30, 2016, compared to income tax expense of $213,000 for the three months ended September 30, 2015. The higher provision relates to earnings before income taxes of $945,000 for the three months ended September 30, 2016 compared to earnings before income taxes of $591,000 for the three months ended September 30, 2015.

Comparison of Operating Results for the Nine Months Ended September 30, 2016 and 2015

Net Earnings. For the nine months ended September 30, 2016, the Company reported net earnings of $1,574,000, or $0.79 per basic and diluted share, compared to net earnings of $1,203,000, or $0.62 per basic and $0.61 per diluted share, for the nine months ended September 30, 2015.

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 $7.3 million for the nine months ended September 30, 2016, compared to $6.3 million for the nine months ended September 30, 2015.

Interest Income. Interest income increased to $7.9 million for the nine months ended September 30, 2016, a $1.1 million or 15.9%, increase over the nine months ended September 30, 2015. The increase was driven by an increase in average loans from $165.3 million for the nine months ended September 30, 2015 to $206.6 million for the nine months ended September 30, 2016.

Interest Expense. Interest expense was $599,000 for the nine months ended September 30, 2016, compared to $525,000 for the nine months ended September 30, 2015. The year-over-year increase resulted primarily from a 23.2%, or $34.6 million, increase in the average balance of interest-bearing deposits from the first nine months of 2015 to the first nine months of 2016.

Despite strong growth in the loan portfolio, the Company’s net interest margin declined 14 basis points to 3.76%, due primarily to new loans being originated at lower yields.

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 nine months ended September 30, 2016 was $412,000 compared to $333,000 for the nine months ended September 30, 2015.

 

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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, income from bank-owned life insurance, and any gain on the sale of securities available for sale. Noninterest income for the nine months ended September 30, 2016 totaled $1.2 million an increase of $430,000 or 59.2%, from the nine months ended September 30, 2015. The increase is primarily due to a $230,000, or 56.5%, increase in mortgage banking revenue. Other contributing factors include higher service charges and fees on deposit accounts, a $60,000 increase in the gain on sale of securities available for sale, and a $76,000 increase in other income which was driven by higher merchant card services and credit card fee income.

Noninterest expense. Noninterest expense increased $790,000, or 16.4%, to $5.6 million for the nine months ended September 30, 2016 compared to the same period a year ago. With the exception of professional fees, noninterest expense was up across all categories, partially due to the opening of our Crawfordville office in September, 2015, and the expansion of our team. The majority of the increase in noninterest expense occurred in salaries and employee benefits as full-time equivalent employees increased from 54 at September 30, 2015 to 63 at September 30, 2016. Other major contributors to the increase in noninterest expense were higher board fees and higher contracted services in 2016.

Income Taxes. Income tax expense is based on amounts reported in the statements 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. Income tax expense was $861,000 for the nine months ended September 30, 2016, compared to income tax expense of $663,000 for the nine months ended September 30, 2015. The higher provision relates to higher earnings before taxes for the period.

LIQUIDITY

Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s clients, as well as meet current and planned expenditures. Management monitors the liquidity position daily.

Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations, and capital. Additionally as a commercial bank, we are expected to maintain an adequate liquidity reserve. The liquidity reserve may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and marketable securities such as United States government agency securities, municipal securities, and mortgage-backed securities. Our primary liquid assets accounted for 19.2% and 19.1% of total assets at September 30, 2016 and December 31, 2015, respectively.

The Bank also has external sources of funds through the FHLB, unsecured lines of credit with correspondent banks, and the State of Florida’s Qualified Public Deposit Program (“QPD”). At September 30, 2016, the Bank had access to approximately $36.4 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $16.3 million in unsecured lines of credit maintained with correspondent banks. As of September 30, 2016, we had no borrowings under any of these lines. Furthermore, some of our securities are pledged to collateralize certain deposits through our participation in the State of Florida’s QPD program. The market value of securities pledged to the QPD program was $9.6 million at September 30, 2016.

 

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Table of Contents

Our core deposits consist of noninterest bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of certificates of deposit greater than $100,000 and large deposits. At September 30, 2016, total deposits were $261.2 million, of which $16.1 million was in certificates of deposits of $100,000 or more. We maintain a Contingency Funding Plan (“CFP”) that identifies liquidity needs and weighs alternate courses of action designed to address those needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands and do not know of any trends, events, or uncertainties that may result in a significant adverse effect on our liquidity position.

CAPITAL RESOURCES

Stockholders’ equity was $26.8 million at September 30, 2016, compared to $24.9 million at December 31, 2015. During the first quarter of 2016, the Board of Directors declared and PMHG paid its first annual dividend of $0.05 per share of common stock. At September 30, 2016, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations with a 9.01% Tier 1 Leverage Capital Ratio, a 11.55% Common Equity Tier 1 Risk-Based Capital Ratio, a 11.55% Tier 1 Risk-Based Capital Ratio, and a 12.80% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.”

The following is a summary at September 30, 2016 and December 31, 2015 of the regulatory capital requirements to be “well capitalized” and the Bank’s capital position (dollars in thousands).

 

     Actual     For Capital
Adequacy Purposes
    For Well
Capitalized Purposes
 
     Amount      Percentage     Amount      Percentage     Amount      Percentage  

As of September 30, 2016:

               

Tier 1 Leverage

               

Capital Ratio

   $ 25,300         9.01   $ 11,238         4.00   $ 14,048         5.00

Common Equity Tier 1

               

Risk-Based

               

Capital Ratio

     25,300         11.55        9,860         4.50        14,242         6.50   

Tier 1 Risk-Based

               

Capital Ratio

     25,300         11.55        13,146         6.00        17,528         8.00   

Total Risk-Based

               

Capital Ratio

     28,040         12.80        17,528         8.00        21,911         10.00   

As of December 31, 2015:

               

Tier 1 Leverage

               

Capital Ratio

   $ 23,511         9.48   $ 9,918         4.00   $ 12,398         5.00

Common Equity Tier 1

               

Risk-Based

               

Capital Ratio

     23,511         12.79        8,269         4.50        11,945         6.50   

Tier 1 Risk-Based

               

Capital Ratio

     23,511         12.79        11,026         6.00        14,701         8.00   

Total Risk-Based

               

Capital Ratio

     25,810         14.05        14,701         8.00        18,377         10.00   

 

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The Bank is also subject to the following capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations.

 

Capital

Category

   Threshold Ratios  
   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%   

Until such time as PMHG has $1 billion in total consolidated assets, it will not be subject to any consolidated capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to Note 9 in the notes to condensed consolidated financial statements included in our Form 10-Q for the period ending September 30, 2016 for a discussion of off-balance sheet arrangements.

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 PMHG 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 PMHG 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 the Company’s disclosure controls and procedures and to improve the Company’s controls and procedures over time

 

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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 September 30, 2016, 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 errors 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.

 

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Table of Contents

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, 2015 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, 2015.

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

On October 15, 2016, PMHG issued 1,071 shares to members of its Board of Directors in lieu of $13,575 in cash fees. During the third quarter, PMHG issued 4,200 shares to directors who exercised stock options and paid $42,000 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.

 

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Table of Contents

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
    3.3    First Amendment to Bylaws dated December 17, 2015    Exhibit 3.3 to Form 10-Q filed on August 11, 2016
    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    Employment Agreement by and between Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of July 25, 2016    Exhibit 10.1 to Form 8-K filed on July 27, 2016
  10.7    2015 Stock Incentive Compensation Plan    Exhibit 10.7 to Form 8-K filed on May 26, 2015
  10.8   

First Amendment to 2015 Stock Incentive

Compensation Plan

   Filed herewith
  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 R. Randy Guemple, 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 June 28, 2014
  99.2    Charter of the Compensation Committee, as amended on March 17, 2016 and July 21, 2016    Filed herewith
101.INS    XBRL Instance Document    Filed herewith
101.SCH    XBRL Taxonomy Extension Schema Document    Filed herewith
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document    Filed herewith

 

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Table of Contents

Exhibit
Number

  

Description of Exhibit

  

Incorporated by Reference From or Filed Herewith

101.DEF    XBRL Taxonomy Extension Definitions Linkbase Document    Filed herewith
101.LAB    XBRL Taxonomy Extension Label Linkbase Document    Filed herewith
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document    Filed herewith

 

* 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.

 

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Table of Contents

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
November 10, 2016     By:   /s/ Sammie D. Dixon, Jr.
Date      

Sammie D. Dixon, Jr.

Chief Executive Officer, President and Principal Executive Officer

November 10, 2016     By:   /s/ R. Randy Guemple
Date      

R. Randy Guemple

Chief Financial Officer, Executive Vice President, and Principal Financial Officer

 

40