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Prime Meridian Holding Co - Quarter Report: 2019 September (Form 10-Q)

pmhg20190331_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended

        September 30, 2019

 

or

 

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

 

For the transition period from

 

to

 

 

Commission File Number:

        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

 

Explanatory Note: Prime Meridian Holding Company has filed, on a voluntary basis, all Securities Exchange Act of 1934 reports for the preceeding 12 months.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No

 

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

Large accelerated filer:     ☐ Accelerated filer:                       ☐
Nonaccelerated filer:         ☐  Smaller reporting company:     ☒
  Emerging growth company:     ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Securities Registered pursuant to Section 12(b) of the Act:

 

Title of each class

None.

Trading Symbol(s)

N/A

Name of exchange on which registered

N/A

 

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 5, 2019: 3,191,088

 

 

 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

PAGE

   

Item 1. Financial Statements

 
   

Condensed Consolidated Balance Sheets September 30, 2019 (unaudited) and December 31, 2018

2

   

Condensed Consolidated Statements of Earnings Three and Nine Months ended September 30, 2019 and 2018 (unaudited)

3

   

Condensed Consolidated Statements of Comprehensive Income Three and Nine Months ended September 30, 2019 and 2018 (unaudited)

4

   

Condensed Consolidated Statements of Stockholders’ Equity Three and Nine Months ended September 30, 2019 and 2018 (unaudited)

5

   

Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 2019 and 2018 (unaudited)

7

   

Notes to Condensed Consolidated Financial Statements (unaudited)

8-30

   

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

31-43

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

43

   

Item 4. Controls and Procedures

44

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

45

   

Item 1A. Risk Factors

45

   

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

45

   

Item 3. Defaults Upon Senior Securities

45

   

Item 4. Mine Safety Disclosures

45

   

Item 5. Other Information

45

   

Item 6. Exhibits

46-47

   

Signatures

48

   

Certifications

 

 

 

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

(in thousands)

 

(Unaudited)

         

Assets

               

Cash and due from banks

  $ 12,519     $ 7,866  

Federal funds sold

    45,830       34,777  

Interest-bearing deposits

    25,929       5,395  

Total cash and cash equivalents

    84,278       48,038  

Securities available for sale

    55,773       45,384  

Loans held for sale

    7,907       4,767  

Loans, net of allowance for loan losses of $3,982 and $3,661

    315,807       290,113  

Federal Home Loan Bank stock

    404       355  

Premises and equipment, net

    7,787       4,656  
Right of use lease asset     3,719       -  

Accrued interest receivable

    1,073       1,034  

Bank-owned life insurance

    6,459       6,323  

Other assets

    859       1,032  

Total assets

  $ 484,066     $ 401,702  
                 

Liabilities and Stockholders' Equity

               

Liabilities:

               

Noninterest-bearing demand deposits

  $ 96,732     $ 80,097  

Savings, NOW and money-market deposits

    265,518       227,674  

Time deposits

    58,947       41,296  

Total deposits

    421,197       349,067  
Other borrowings     2,053       -  

Official checks

    900       837  
Operating lease liability     3,801       -  

Other liabilities

    1,088       978  

Total liabilities

    429,039       350,882  

Stockholders' equity:

               

Preferred stock, undesignated; 1,000,000 shares authorized, none issued or outstanding

    -       -  

Common stock, $.01 par value; 9,000,000 shares authorized, 3,190,031 and 3,138,945 issued and outstanding

    32       31  

Additional paid-in capital

    39,387       38,330  

Retained earnings

    15,233       13,015  

Accumulated other comprehensive income (loss)

    375       (556 )

Total stockholders' equity

    55,027       50,820  

Total liabilities and stockholders' equity

  $ 484,066     $ 401,702  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

2

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Earnings (Unaudited)

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands, except per share amounts)

 

2019

   

2018

   

2019

   

2018

 

Interest income:

                               

Loans

  $ 4,179     $ 3,798     $ 11,951     $ 10,615  

Securities

    338       276       967       851  

Other

    402       198       1,111       354  

Total interest income

    4,919       4,272       14,029       11,820  

Interest expense:

                               

Deposits

    934       662       2,598       1,559  
Other borrowings     5       -       5       -  
Total interest expense     939       662       2,603       1,559  

Net interest income

    3,980       3,610       11,426       10,261  

Provision for loan losses

    241       135       585       544  

Net interest income after provision for loan losses

    3,739       3,475       10,841       9,717  

Noninterest income:

                               

Service charges and fees on deposit accounts

    74       83       213       259  

Mortgage banking revenue

    151       124       454       339  

Income from bank-owned life insurance

    46       11       136       32  

Gain on sale of securities available for sale

    -       -       7       -  

Other income

    151       120       436       332  

Total noninterest income

    422       338       1,246       962  

Noninterest expense:

                               

Salaries and employee benefits

    1,575       1,341       4,711       3,787  

Occupancy and equipment

    373       237       1,075       698  

Professional fees

    79       86       262       267  

Marketing

    172       193       565       533  

FDIC assessment

    6       38       93       112  

Software maintenance, amortization and other

    188       167       507       474  

Other

    488       396       1,444       1,125  

Total noninterest expense

    2,881       2,458       8,657       6,996  

Earnings before income taxes

    1,280       1,355       3,430       3,683  

Income taxes

    316       337       835       909  

Net earnings

  $ 964     $ 1,018     $ 2,595     $ 2,774  
                                 

Earnings per common share:

                               

Basic

  $ 0.31     $ 0.33     $ 0.83     $ 0.89  

Diluted

    0.31       0.33       0.83       0.89  

Cash dividends per common share(1)

    -       -       0.12       0.10  

 

(1) Annual cash dividends were paid during the first quarters of 2018 and 2019 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2019

   

2018

   

2019

   

2018

 

Net earnings

  $ 964     $ 1,018     $ 2,595     $ 2,774  

Other comprehensive income (loss) :

                               

Change in unrealized gain (loss) on securities:

                               

Unrealized gain (loss) arising during the period

    173       (231 )     1,254       (1,069 )
Reclassification adjustment for realized gain     -       -       (7 )     -  

Net change in unrealized gain (loss)

    173       (231 )     1,247       (1,069 )

Deferred income tax (expense) benefit on above change

    (44 )     59       (316 )     271  

Total other comprehensive income (loss)

    129       (172 )     931       (798 )

Comprehensive income

  $ 1,093     $ 846     $ 3,526     $ 1,976  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months Ended September 30, 2019 and 2018

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 

(in thousands, except per share amounts)

                                               

Balance at December 31, 2017

    3,118,977     $ 31     $ 37,953     $ 9,285     $ (296 )   $ 46,973  

Net earnings for the three months ended March 31, 2018 (unaudited)

    -       -       -       754       -       754  

Dividends paid (unaudited)

    -       -       -       (312 )     -       (312 )

Net change in unrealized loss on securities available for sale, net of income tax benefit (unaudited)

    -       -       -       -       (545 )     (545 )

Stock options exercised (unaudited)

    3,000       -       30       -       -       30  

Common stock issued as compensation to directors (unaudited)

    792       -       17       -       -       17  

Stock-based compensation (unaudited)

    -       -       23       -       -       23  

Balance at March 31, 2018 (unaudited)

    3,122,769     $ 31     $ 38,023     $ 9,727     $ (841 )   $ 46,940  

Net earnings for the three months ended June 30, 2018 (unaudited)

    -       -       -       1,002       -       1,002  

Net change in unrealized loss on securities available for sale, net of income tax benefit (unaudited)

    -       -       -       -       (81 )     (81 )

Stock options exercised (unaudited)

    1,700       -       17       -       -       17  

Common stock issued as compensation to directors (unaudited)

    764       -       17       -       -       17  

Stock-based compensation (unaudited)

    -       -       41       -       -       41  

Balance at June 30, 2018 (unaudited)

    3,125,233     $ 31     $ 38,098     $ 10,729     $ (922 )   $ 47,936  

Net earnings for the three months ended September 30, 2018 (unaudited)

    -       -       -       1,018       -       1,018  

Net change in unrealized loss on securities available for sale, net of income tax benefit (unaudited)

    -       -       -       -       (172 )     (172 )

Stock options exercised (unaudited)

    2,800       -       28       -       -       28  

Common stock issued as compensation to directors (unaudited)

    638       -       12       -       -       12  

Stock-based compensation (unaudited)

    -       -       41       -       -       41  

Balance at September 30, 2018 (unaudited)

    3,128,671     $ 31     $ 38,179     $ 11,747     $ (1,094 )   $ 48,863  

 

5

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months Ended September 30, 2019 and 2018

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 

(in thousands, except per share amounts)

                                               

Balance at December 31, 2018

    3,138,945     $ 31     $ 38,330     $ 13,015     $ (556 )   $ 50,820  

Net earnings for the three months ended March 31, 2019 (unaudited)

    -       -       -       867       -       867  

Dividends paid (unaudited)

    -       -       -       (377 )     -       (377 )

Net change in unrealized loss on securities available for sale, net of income tax expense (unaudited)

    -       -       -       -       320       320  

Common stock issued as compensation to directors (unaudited)

    595       -       12       -       -       12  

Issuance of restricted stock (unaudited)

    3,600       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       42       -       -       42  

Balance at March 31, 2019 (unaudited)

    3,143,140     $ 31     $ 38,384     $ 13,505     $ (236 )   $ 51,684  

Net earnings for the three months ended June 30, 2019 (unaudited)

    -       -       -       764       -       764  

Net change in unrealized loss on securities available for sale, net of income tax expense (unaudited)

    -       -       -       -       482       482  

Stock options exercised (unaudited)

    300       -       3       -       -       3  

Common stock issued as compensation to directors (unaudited)

    1,016       -       19       -       -       19  

Stock-based compensation (unaudited)

    -       -       44       -       -       44  

Balance at June 30, 2019 (unaudited)

    3,144,456     $ 31     $ 38,450     $ 14,269     $ 246     $ 52,996  

Net earnings for the three months ended September 30, 2019 (unaudited)

    -       -       -       964       -       964  

Private Placement Offering, net of offerings costs of $19

    44,600       1       872       -       -       873  

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

    -       -       -       -       129       129  

Common stock issued as compensation to directors (unaudited)

    975       -       20       -       -       20  

Stock-based compensation (unaudited)

    -       -       45       -       -       45  

Balance at September 30, 2019 (unaudited)

    3,190,031     $ 32     $ 39,387     $ 15,233     $ 375     $ 55,027  

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flow (Unaudited)

 

   

Nine Months Ended

 
   

September 30,

 

(in thousands)

 

2019

   

2018

 

Cash flows from operating activities:

               

Net earnings

  $ 2,595     $ 2,774  

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

               

Depreciation and amortization

    499       397  

Provision for loan losses

    585       544  

Net amortization of deferred loan fees

    (68 )     23  

Gain on sale of securities available for sale

    (7 )     -  

Amortization of premiums and discounts on securities available for sale

    218       303  

Gain on sale of loans held for sale

    (454 )     (339 )

Proceeds from the sale of loans held for sale

    63,996       58,532  

Loans originated as held for sale

    (66,682 )     (59,095 )

Stock-based compensation expense

    182       151  

Income from bank-owned life insurance

    (136 )     (32 )

Net increase in accrued interest receivable

    (39 )     (50 )

Net change in operating leases

    82       -  

Net (increase) decrease in other assets

    (143 )     34  

Net increase (decrease) in other liabilities and official checks

    173       (61 )

Net cash provided by operating activities

    801       3,181  

Cash flows from investing activities:

               

Loan originations, net of principal repayments

    (26,211 )     (39,330 )

Purchase of securities available for sale

    (20,740 )     (1,003 )

Principal repayments of securities available for sale

    4,721       4,542  

Proceeds from sale of securities available for sale

    4,245       -  

Maturities and calls of securities available for sale

    2,421       539  

Purchase of Federal Home Loan Bank stock

    (49 )     (39 )

Purchase of premises and equipment

    (3,630 )     (224 )

Net cash used in investing activities

    (39,243 )     (35,515 )

Cash flows from financing activities:

               

Net increase in deposits

    72,130       56,949  
Change in other borrowings     2,053       -  

Proceeds from stock options exercised

    3       75  
Proceeds from sale of common stock, net of expenses     873       -  

Common stock dividends paid

    (377 )     (312 )

Net cash provided by financing activities

    74,682       56,712  

Net increase in cash and cash equivalents

    36,240       24,378  

Cash and cash equivalents at beginning of period

    48,038       32,397  

Cash and cash equivalents at end of period

  $ 84,278     $ 56,775  

Supplemental disclosure of cash flow information

               

Cash paid during the period:

               

Interest

  $ 2,594     $ 1,529  

Income taxes

  $ 1,065     $ 882  

Noncash transactions:

               

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

  $ 931     $ (798 )

Right of use lease assets obtained in exchange for operating lease liabilities

  $ 3,818     $ -  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

7

 

 

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, and 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. A fourth office opened in Lakeland, Florida on April 16, 2019.

 

The accounting and financial reporting policies of the Company conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the banking industry. The condensed consolidated financial statements in the Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all necessary adjustments for a fair presentation of the Company’s consolidated financial position and consolidated results of operations. All adjustments were of a normal and recurring nature. The condensed consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by GAAP for complete financial presentation and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2018, included in our Annual Report on Form 10-K filed with the SEC on March 21, 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year or any future period.

 

Comprehensive Income. GAAP generally requires 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 gain (loss) on securities available for sale.

 

Stock-Based Compensation. The Company expenses the fair value of stock options and restricted stock granted. The Company recognizes stock-based compensation expense in the condensed consolidated statements of earnings over the vesting period.

 

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

 

Reclassifications. Certain reclassifications of prior period amounts have been made to conform to the current period presentation.

 

(continued)

 

8

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1)

General, Continued

 

Recent Accounting Standards Update.

 

In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) which required lessees to recognize on the condensed consolidated balance sheet the assets and liabilities for the rights and obligations created by those leases with terms of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new ASU requires both types of leases to be recognized on the condensed consolidated balance sheet. The ASU also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the condensed consolidated financial statements. For public companies, the ASU became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The effect of this ASU increased the Company's assets and liabilities by approximately $288,000 at January 1, 2019. 

 

In June 2016, the FASB issued 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. 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 condensed consolidated financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

 

(continued)

 

9

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)

General, Continued

 

Recent Accounting Standards Update, Continued.

 

The new guidance was originally set to be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.  However, on October 16, 2019, FASB approved an Accounting Standards Update that grants private companies, non-for-profit organizations and certain small public companies until January, 2023 to implement this ASU. The Company is classified as a small reporting company who would qualify for this additional time to implement this ASU.  The Company is still in the process of determining the effect of the ASU on its condensed consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities”, to amend the amortization period for certain purchased callable debt securities held at a premium.  Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument.  The amendments in this update require the premium to be amortized to the earliest call date.  No accounting change is required for securities held at a discount.  For public business entities, the amendments in this update become effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has adhered to this practice since its inception.

 

In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718. Compensation Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Equity-Based payments to Non-Employees. The ASU is effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The ASU had no impact on the Company’s condensed consolidated financial statements.

 

 

 

(continued)

 

10

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(2)

Securities Available for Sale

 

Securities are classified according to management's intent. The amortized cost of securities and fair values are as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(in thousands)

                               

At September 30, 2019

                               

U.S. Government agency securities

  $ 409     $ -     $ (1 )   $ 408  

Municipal securities

    7,210       86       -       7,296  

Mortgage-backed securities

    45,487       517       (87 )     45,917  

Asset-backed securities

    2,164       -       (12 )     2,152  

Total

  $ 55,270     $ 603     $ (100 )   $ 55,773  
                                 

At December 31, 2018

                               

U.S. Government agency securities

  $ 815     $ -     $ (16 )   $ 799  

Municipal securities

    11,580       62       (113 )     11,529  

Mortgage-backed securities

    33,733       33       (710 )     33,056  

Total

  $ 46,128     $ 95     $ (839 )   $ 45,384  

 

The following table summarizes the sale of securities available for sale.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2019

   

2018

   

2019

   

2018

 

Proceeds from sale of securities

  $ -     $ -     $ 4,245     $ -  

Gross gains

    -       -       27       -  

Gross losses

    -       -       (20 )     -  

Net gain on sale of securities

  $ -     $ -     $ 7     $ -  

 

(continued)

 

11

 

 

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:

 

   

Less Than Twelve Months

   

Over Twelve Months

 
   

Gross

           

Gross

         
   

Unrealized

   

Fair

   

Unrealized

   

Fair

 
   

Losses

   

Value

   

Losses

   

Value

 

(in thousands)

                               

At September 30, 2019

                               
U.S. Government agency securities   $ (1 )   $ 408     $ -     $ -  

Mortgage-backed securities

    (25 )     5,469       (62 )     8,618  

Asset-backed securities

    (12 )     2,152       -       -  

Total

  $ (38 )   $ 8,029     $ (62 )   $ 8,618  
                                 

At December 31, 2018

                               

U.S. Government agency securities

  $ (2 )   $ 242     $ (14 )   $ 557  

Municipal securities

    -       -       (113 )     5,760  

Mortgage-backed securities

    (19 )     983       (691 )     30,061  

Total

  $ (21 )   $ 1,225     $ (818 )   $ 36,378  

 

(continued)

 

12

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)

Securities Available for Sale, Continued

 

The unrealized losses at September 30, 2019 and December 31, 2018 on thirteen and thirty-nine securities, respectively, 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:

 

           

Fair Value Measurements Using

 
           

Quoted Prices

                 
           

In Active

   

Significant

         
           

Markets for

   

Other

   

Significant

 
           

Identical

   

Observable

   

Unobservable

 
   

Fair

   

Assets

   

Inputs

   

Inputs

 
   

Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

(in thousands)

                               

At September 30, 2019

                               

U.S. Government agency securities

  $ 408     $ -     $ 408     $ -  

Municipal securities

    7,296       -       7,296       -  

Mortgage-backed securities

    45,917       -       45,917          

Asset-backed securities

    2,152       -       2,152       -  

Total

  $ 55,773     $ -     $ 55,773     $ -  
                                 

At December 31, 2018

                               

U.S. Government agency securities

  $ 799     $ -     $ 799     $ -  

Municipal securities

    11,529       -       11,529       -  

Mortgage-backed securities

    33,056       -       33,056       -  

Total

  $ 45,384     $ -     $ 45,384     $ -  

 

During the three and nine months ended September 30, 2019 and 2018, no securities were transferred in or out of Levels 1, 2 or 3.

 

The scheduled maturities of securities are as follows:

 

   

At September 30, 2019

 
   

Amortized

   

Fair

 
   

Cost

   

Value

 

(in thousands)

               
Due in less than one year   $ 370     $ 371  

Due in one to five years

    1,380       1,388  

Due in five to ten years

    4,090       4,111  

Due after ten years

    3,943       3,986  

Mortgage-backed securities

    45,487       45,917  

Total

  $ 55,270     $ 55,773  

 

(continued)

 

13

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(3)

Loans

 

Segments and classes of loans, excluding loans held for sale, are as follows:

 

   

At September 30,

   

At December 31,

 

(in thousands)

 

2019

   

2018

 

Real estate mortgage loans:

               

Commercial

  $ 78,024     $ 82,494  

Residential and home equity

    128,918       121,454  

Construction

    41,149       31,601  

Total real estate mortgage loans

    248,091       235,549  
                 

Commercial loans

    63,471       51,018  

Consumer and other loans

    7,699       6,747  

Total loans

    319,261       293,314  
                 

Add (deduct):

               

Net deferred loan costs

    528       460  

Allowance for loan losses

    (3,982 )     (3,661 )

Loans, net

  $ 315,807     $ 290,113  

 

(continued)

 

14

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

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

 

   

Real Estate Mortgage Loans

                         
           

Residential

                   

Consumer

         
           

and Home

           

Commercial

   

and Other

         

(in thousands)

 

Commercial

   

Equity

   

Construction

   

Loans

   

Loans

   

Total

 

Three Month Period Ended September 30, 2019

                                               

Beginning balance

  $ 813     $ 1,458     $ 425     $ 1,225     $ 85     $ 4,006  

Provision (credit) for loan losses

    48       17       76       76       24       241  

Net (charge-offs) recoveries

    -       -       -       (260 )     (5 )     (265 )

Ending balance

  $ 861     $ 1,475     $ 501     $ 1,041     $ 104     $ 3,982  

Three Month Period Ended September 30, 2018

                                               

Beginning balance

  $ 1,001     $ 1,309     $ 400     $ 749     $ 82     $ 3,541  

Provision (credit) for loan losses

    (61 )     79       (12 )     126       3       135  

Net (charge-offs) recoveries

    -       -       (3 )     1       -       (2 )

Ending balance

  $ 940     $ 1,388     $ 385     $ 876     $ 85     $ 3,674  

Nine Month Period Ended September 30, 2019

                                               

Beginning balance

  $ 917     $ 1,397     $ 391     $ 876     $ 80     $ 3,661  

Provision (credit) for loan losses

    (56 )     78       110       423       30       585  

Net (charge-offs) recoveries

    -       -       -       (258 )     (6 )     (264 )

Ending balance

  $ 861     $ 1,475     $ 501     $ 1,041     $ 104     $ 3,982  

Nine Month Period Ended September 30, 2018

                                               

Beginning balance

  $ 894     $ 1,097     $ 331     $ 724     $ 90     $ 3,136  

Provision (credit) for loan losses

    46       291       57       148       2       544  

Net (charge-offs) recoveries

    -       -       (3 )     4       (7 )     (6 )

Ending balance

  $ 940     $ 1,388     $ 385     $ 876     $ 85     $ 3,674  
                                                 

At September 30, 2019

                                               

Individually evaluated for impairment:

                                               

Recorded investment

  $ 611     $ 1,133     $ -     $ 1,482     $ 26     $ 3,252  

Balance in allowance for loan losses

  $ -     $ -     $ -     $ 229     $ 26     $ 255  

Collectively evaluated for impairment:

                                               

Recorded investment

  $ 77,413     $ 127,785     $ 41,149     $ 61,989     $ 7,673     $ 316,009  

Balance in allowance for loan losses

  $ 861     $ 1,475     $ 501     $ 812     $ 78     $ 3,727  
                                                 

At December 31, 2018

                                               

Individually evaluated for impairment:

                                               

Recorded investment

  $ 611     $ 409     $ -     $ 205     $ 6     $ 1,231  

Balance in allowance for loan losses

  $ -     $ -     $ -     $ 205     $ 6     $ 211  

Collectively evaluated for impairment:

                                               

Recorded investment

  $ 81,883     $ 121,045     $ 31,601     $ 50,813     $ 6,741     $ 292,083  

Balance in allowance for loan losses

  $ 917     $ 1,397     $ 391     $ 671     $ 74     $ 3,450  

 

(continued)

 

15

 

 

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 nonowner-occupied investment properties. Commercial loans that are secured by owner-occupied commercial real estate are repaid through operating cash flows of the borrower. The maturity for this type of loan is generally limited to three to five years; however, payments may be structured on a longer amortization basis. Typically, interest rates on our commercial real estate loans are fixed for five years or less after which they adjust based upon a predetermined spread over 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, 5-year, or 7-year adjustable rate mortgage; while 15-year or 30-year fixed-rate loans are generally sold in the secondary market.

 

(continued)

 

16

 

 

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 ten 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 Company offers a wide range of commercial loans, including business term loans, equipment financing, lines of credit, and U.S. Small Business Administration (SBA) loans. 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 and do not require a formal valuation of the business collateral. When commercial loans are secured by specifically identified collateral, then the valuation of the 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 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.

 

(continued)

 

17

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

 Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

Other factors of risk could include changes in the borrower's management and fluctuations in collateral value. Additionally, there may be refinancing risk if a commercial loan includes a balloon payment which must be refinanced or paid off at loan maturity. In reference to our risk management process, our commercial loan portfolio presents a higher risk profile than our consumer real estate and consumer loan portfolios. Therefore, we require that all loans to businesses must have a clearly stated and reasonable payment plan to allow for timely retirement of debt, unless secured by liquid collateral or as otherwise justified. 

 

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:

 

   

Real Estate Mortgage Loans

                         
           

Residential

                   

Consumer

         
           

and Home

           

Commercial

   

and Other

         

(in thousands)

 

Commercial

   

Equity

   

Construction

   

Loans

   

Loans

   

Total

 

At September 30, 2019:

                                               

Grade:

                                               

Pass

  $ 75,839     $ 125,157     $ 40,669     $ 60,357     $ 7,646     $ 309,668  

Special mention

    1,574       2,628       480       1,157       52       5,891  

Substandard

    611       1,133       -       1,957       1       3,702  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

  $ 78,024     $ 128,918     $ 41,149     $ 63,471     $ 7,699     $ 319,261  
                                                 

At December 31, 2018:

                                               

Grade:

                                               

Pass

  $ 77,650     $ 118,368     $ 31,601     $ 47,858     $ 6,657     $ 282,134  

Special mention

    4,233       2,875       -       2,184       84       9,376  

Substandard

    611       211       -       976       6       1,804  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

  $ 82,494     $ 121,454     $ 31,601     $ 51,018     $ 6,747     $ 293,314  

 

(continued)

 

18

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

 Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Furthermore, construction loans, nonowner-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.

 

 

(continued)

 

19

 

 

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:

 

   

Accruing Loans

                 
                   

Greater Than

                                 
   

30-59 Days

   

60-89 Days

   

90 Days

   

Total Past

           

Nonaccrual

   

Total

 

(in thousands)

 

Past Due

   

Past Due

   

Past Due

   

Due

   

Current

   

Loans

   

Loans

 

At September 30, 2019:

                                                       

Real estate mortgage loans:

                                                       

Commercial

  $ -     $ -     $ -     $ -     $ 78,024     $ -     $ 78,024  

Residential and home equity

    -       254       -       254       127,532       1,132       128,918  

Construction

    -       -       -       -       41,149       -       41,149  

Commercial loans

    -       -       -       -       62,001       1,470       63,471  

Consumer and other loans

    -       -       -       -       7,698       1       7,699  

Total

  $ -     $ 254     $ -     $ 254     $ 316,404     $ 2,603     $ 319,261  
                                                         

At December 31, 2018:

                                                       

Real estate mortgage loans:

                                                       

Commercial

  $ -     $ -     $ -     $ -     $ 82,494     $ -     $ 82,494  

Residential and home equity

    134       30       -       164       121,129       161       121,454  

Construction

    -       -       -       -       31,601       -       31,601  

Commercial loans

    98       -       -       98       50,745       175       51,018  

Consumer and other loans

    -       -       -       -       6,741       6       6,747  
                                                         

Total

  $ 232     $ 30     $ -     $ 262     $ 292,710     $ 342     $ 293,314  

 

(continued)

 

20

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The following summarizes the amount of impaired loans:

 

   

With No Related

                                                 
   

Allowance Recorded

   

With an Allowance Recorded

   

Total

 
           

Unpaid

           

Unpaid

                   

Unpaid

         
           

Contractual

           

Contractual

                   

Contractual

         
   

Recorded

   

Principal

   

Recorded

   

Principal

   

Related

   

Recorded

   

Principal

   

Related

 

(in thousands)

 

Investment

   

Balance

   

Investment

   

Balance

   

Allowance

   

Investment

   

Balance

   

Allowance

 

At September 30, 2019:

                                                               

Real estate mortgage loans:

                                                               

Commercial

  $ 611     $ 611     $ -     $ -     $ -     $ 611     $ 611     $ -  

Residential and home equity

    1,133       1,133       -       -       -       1,133       1,133       -  

Commercial loans

    -       -       1,482       1,482       229       1,482       1,482       229  

Consumer and other loans

    -       -       26       26       26       26       26       26  
Total   $ 1,744     $ 1,744     $ 1,508     $ 1,508     $ 255     $ 3,252     $ 3,252     $ 255  
                                                                 

At December 31, 2018:

                                                               

Real estate mortgage loans:

                                                               

Commercial real estate

  $ 611     $ 611     $ -     $ -     $ -     $ 611     $ 611     $ -  

Residential and home equity

    409       409       -       -       -       409       409       -  
Commercial loans     -       -       205       205       205       205       205       205  

Consumer and other loans

    -       -       6       6       6       6       6       6  

Total

  $ 1,020     $ 1,020     $ 211     $ 211     $ 211     $ 1,231     $ 1,231     $ 211  

 

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

 

   

Three Months Ended September 30,

 
   

2019

   

2018

 
   

Average

   

Interest

   

Interest

   

Average

   

Interest

   

Interest

 
   

Recorded

   

Income

   

Income

   

Recorded

   

Income

   

Income

 

(in thousands)

 

Investment

   

Recognized

   

Received

   

Investment

   

Recognized

   

Received

 

Real estate mortgage loans:

                                               

Commercial

  $ 611     $ 8     $ 8     $ 611     $ -     $ -  

Residential and home equity

    1,106       -       1       251       1       -  

Commercial loans

    1,362       1       6       156       -       -  

Consumer

    8       -       -       -       -       -  

Total

  $ 3,087     $ 9     $ 15     $ 1,018     $ 1     $ -  

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
   

Average

   

Interest

   

Interest

   

Average

   

Interest

   

Interest

 
   

Recorded

   

Income

   

Income

   

Recorded

   

Income

   

Income

 

(in thousands)

 

Investment

   

Recognized

   

Received

   

Investment

   

Recognized

   

Received

 

Real estate mortgage loans:

                                               

Commercial

  $ 611     $ 24     $ 24     $ 328     $ -     $ -  

Residential and home equity

    658       5       7       212       1       -  

Construction

    -       -       -       -       -       2  

Commercial loans

    616       5       12       152       -       -  
Consumer     11       -       -       -       -       -  

Total

  $ 1,896     $ 34     $ 43     $ 692     $ 1     $ 2  

 

There were no collateral dependent loans measured at fair value on a nonrecurring basis at September 30, 2019 or 2018.

 

(continued)

 

21

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the creditor grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction in interest rate or the forgiveness of principal and/or accrued interest. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for loan losses calculation. The Company entered into one new TDR and three new TDRs during the three and nine months ended September 30, 2019, respectively, and one new TDR during the three and nine months ended September 30, 2018.

 

   

Three Months Ended September 30,

 
   

2019

   

2018

 
           

Pre-

   

Post-

   

Current

           

Pre-

   

Post-

   

Current

 
           

Modification

   

Modification

   

Modification

           

Modification

   

Modification

   

Modification

 
   

Number

   

Outstanding

   

Outstanding

   

Outstanding

   

Number

   

Outstanding

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

   

Recorded

   

of

   

Recorded

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

   

Investment

 

( dollars in thousands)

                                                               

Troubled Debt Restructurings -

                                                               

Modified principal

                                                               
Commercial     1       204       204       204       -       -       -       -  

Total

    1     $ 204     $ 204     $ 204       -     $ -     $ -     $ -  

 

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 
           

Pre-

   

Post-

   

Current

           

Pre-

   

Post-

   

Current

 
           

Modification

   

Modification

   

Modification

           

Modification

   

Modification

   

Modification

 
   

Number

   

Outstanding

   

Outstanding

   

Outstanding

   

Number

   

Outstanding

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

   

Recorded

   

of

   

Recorded

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

   

Investment

 

( dollars in thousands)

                                                               

Troubled Debt Restructurings -

                                                               

Modified principal

                                                               

Commercial real estate

    -     $ -     $ -     $ -       1     $ 619     $ 611     $ 611  

Residential and home equity

    1       66       66       66       -       -       -       -  

Commercial

    2       264       264       264       -       -       -       -  

Total

    3     $ 330     $ 330     $ 330       1     $ 619     $ 611     $ 611  

 

At September 30, 2019, the Company had $952,000 in loans identified as TDRs. The TDRs entered into during the three and nine months ended September 30, 2019 and 2018 did not subsequently default during those periods.

 

 

 

(4)

Regulatory Capital

 

The Bank is subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

(continued)

 

22

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4)

Regulatory Capital, Continued

 

The Bank is subject to the Basel III capital level threshold requirements under the Prompt Corrective Action regulations. These regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.

 

The Bank is subject to the capital conservation buffer rules which place limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers. In order to avoid these limitations, a bank must hold a capital conservation buffer above its minimum risk-based capital requirements. As of September 30, 2019, the Bank’s capital conservation buffer exceeded the minimum requirement of 2.50%.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2019 that the Bank meets all capital adequacy requirements to which it is subject.

 

As of September 30, 2019, the Bank is well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage percentages as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and percentages are also presented in the following table.

 

                   

For Capital Adequacy

   

For Well Capitalized

 
   

Actual

   

Purposes

   

Purposes

 

(dollars in thousands)

 

Amount

   

Percentage

   

Amount

   

Percentage

   

Amount

   

Percentage

 

As of September 30, 2019

                                               

Tier 1 Leverage Capital

  $ 43,068       9.24 %   $ 18,636       4.00 %   $ 23,295       5.00 %

Common Equity Tier 1 Risk-based Capital

    43,068       12.95       14,968       4.50       21,620       6.50  

Tier 1 Risk-based Capital

    43,068       12.95       19,957       6.00       26,610       8.00  

Total Risk-based Capital

    47,050       14.15       26,610       8.00       33,262       10.00  
                                                 

As of December 31, 2018

                                               

Tier 1 Leverage Capital

  $ 37,805       9.28 %   $ 16,288       4.00 %   $ 20,360       5.00 %

Common Equity Tier 1 Risk-based Capital

    37,805       12.90       13,190       4.50       19,052       6.50  

Tier 1 Risk-based Capital

    37,805       12.90       17,587       6.00       23,449       8.00  

Total Risk-based Capital

    41,466       14.15       23,449       8.00       29,311       10.00  

 

(continued)

 

23

 

 

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 and nine months ended September 30, 2019 and 2018, outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method.

 

   

2019

   

2018

 
           

Weighted-

   

Per

           

Weighted-

   

Per

 
           

Average

   

Share

           

Average

   

Share

 

(dollars in thousands, except per share amounts)

 

Earnings

   

Shares

   

Amount

   

Earnings

   

Shares

   

Amount

 

Three Months Ending September 30:

                                               

Basic EPS:

                                               

Net earnings

  $ 964       3,147,696     $ 0.31     $ 1,018       3,127,038     $ 0.33  

Effect of dilutive securities-incremental shares from assumed conversion of options

            3,625                       3,133          

Diluted EPS:

                                               

Net earnings

  $ 964       3,151,321     $ 0.31     $ 1,018       3,130,171     $ 0.33  

Nine Months Ending September 30:

                                               

Basic EPS:

                                               

Net earnings

  $ 2,595       3,144,082     $ 0.83     $ 2,774       3,123,772     $ 0.89  

Effect of dilutive securities-incremental shares from assumed conversion of options

            3,685                       7,882          

Diluted EPS:

                                               

Net earnings

  $ 2,595       3,147,767     $ 0.83     $ 2,774       3,131,654     $ 0.89  

 

(continued)

 

24

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(6)

Stock Option Plans

 

2015 Stock Incentive Compensation Plan

 

The 2015 Stock Incentive Compensation Plan (the “2015 Plan”) was approved by the shareholders at the Company’s annual meeting of shareholders on May 20, 2015 and permits the Company to grant the Company’s key employees and directors stock options, stock appreciation rights, performance shares, and phantom stock. Under the 2015 Plan, the number of shares which may be issued is 500,000, but in no instance more than 15% of the issued and outstanding shares of the Company’s common stock.

 

 

As of September 30, 2019, 272,277 stock options and 3,600 restricted stock awards have been granted under the 2015 Plan and 202,628 options are available for grant. A summary of the stock option activity for the nine months ended September 30, 2019 and 2018 is as follows:

 

                   

Weighted-

         
           

Weighted-

   

Average

         
           

Average

   

Remaining

   

Aggregate

 
   

Number of

   

Exercise

   

Contractual

   

Intrinsic

 
   

Options

   

Price

   

Term (years)

   

Value

 

Outstanding at December 31, 2017

    11,540     $ 17.03                  

Options granted

    252,917       19.79                  

Outstanding at September 30, 2018

    264,457     $ 19.79                  
                                 

Outstanding at December 31, 2018

    263,457     $ 19.78                  
Options granted     22,000     $ 20.21                  

Options forfeited

    (13,180 )   $ 20.09                  

Outstanding at September 30, 2019

    272,277     $ 19.80       8.06     $ 73,000  

Exercisable at September 30, 2019

    71,837     $ 18.97       6.41     $ 73,000  

 

The fair value of shares vested and recognized as compensation expense was $38,000 and $41,000 for the three months ended September 30, 2019 and 2018, respectively, and $117,000 and $105,000 for the nine months ended September 30, 2019 and 2018, respectively. The deferred tax benefit related to stock options for the three months ended September 30, 2019 and 2018 was $6,000 in both periods. The deferred tax benefit related to stock options for the nine months ended September 30, 2019 and 2018 was $16,000 and $17,000, respectively. At September 30, 2019, there was $579,000 in unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the 2015 Plan, with an average remaining life of 3.62 years.  

(continued) 

 

25

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)

Stock Option Plans, Continued

 

The fair value of each option granted during the nine months ended September 30, 2019 and 2018  nine months ended September 30, 2018was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

   

September 30, 2019

   

September 30, 2018

 

Weighted average risk-free interest rate

    1.93 %     1.47-2.63 %

Expected dividend yield

    0.59 %     0.41-0.50 %

Expected stock volatility

    9.90 %     10.07 - 11.90 %

Expected life in years

    6.5       2.5 - 6.5  

Per share fair value of options issued during period

  $ 2.74     $ 1.49 - 3.35  

 

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

 

2007 Stock Option 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 the Company’s 2007 Stock Option Plan for the nine months ended September 30, 2019 and 2018 is as follows:

 

                   

Weighted-

         
           

Weighted-

   

Average

         
           

Average

   

Remaining

   

Aggregate

 
   

Number of

   

Exercise

   

Contractual

   

Intrinsic

 
   

Options

   

Price

   

Term (years)

   

Value

 

Outstanding at December 31, 2017

    22,200     $ 10.31                  

Options exercised

    (4,700 )     10.00                  

Outstanding at September 30, 2018

    17,500     $

10.39

                 
                                 
                                 

Outstanding at December 31, 2018

    4,700     $ 11.37                  
Options exercised     (300 )     10.00                  
Options forfeited     (2,000 )     10.72                  

Outstanding at September 30, 2019

    2,400     $ 12.08       0.63     $ 19,000  

Exercisable at September 30, 2019

    2,400     $ 12.08       0.63     $ 19,000  

 

At September 30, 2019, there was no unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the 2007 plan.

 

(continued)

 

26

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)

Stock Option Plans, Continued

 

Directors’ Plan

 

In 2012, the Company’s Board of Directors and shareholders adopted the Directors’ Plan. The Directors’ Plan permits the Company’s and the Bank’s non-employee directors to elect to receive any compensation to be paid to them in shares of the Company’s common stock. Pursuant to the Directors’ Plan, each non-employee director is permitted to make an election to receive shares of stock instead of cash. To encourage directors to elect to receive stock, the Directors’ Plan provides that if a director elects to receive stock, he or she will receive in common stock 110% of the amount of cash fees set by the Board or the Compensation and Nominating Committee. The value of stock to be awarded pursuant to the Directors’ Plan will be the closing price of a share of common stock as traded on the Over-the-Counter Bulletin Board, or a price set by the Board or its Compensation and Nominating Committee, acting in good faith, but in no case less than fair market value. The maximum number of shares to be issued pursuant to the Directors’ Plan is limited to 74,805 shares. For the three months ended September 30, 2019 and 2018, our directors received 975 and 638 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $20,000 and $12,000, respectively. For the nine months ended September 30, 2019 and 2018, our directors received 2,586 and 2,194 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $51,000 and $46,000, respectively. At September 30, 2019, 52,698 shares remained available for grant.

 

Restricted Stock

 

The Company issued 3,600 restricted common stock shares to its CEO in the first quarter of 2019 as part of his bonus incentive earned for the Company’s performance in 2018. One-third of the balance, or 1,200 shares, will vest each year beginning February 21, 2020. Holders of restricted stock have the right to vote and the right to receive dividends declared on common stock, if any. A summary of restricted stock transactions follows:

 

           

Wtd-Avg

         
           

Grant-Date

         
   

Number of

   

Fair Value

   

Grant-Date Fair

 
   

Shares

   

per Share

   

Value

 
                         

Non-vested restricted stock issued in 2019

    3,600     $ 18.52     $ 67,000  

Non-vested restricted stock outstanding at September 30, 2019

    3,600                  

 

During the three and nine months ended September 30, 2019, the Company recognized $7,000 and $14,000, respectively, as expense. At September 30, 2019, the Company had $53,000 in unrecognized expense to be recognized over a weighted-average period of 2.42 years.

 

 

(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 $61.8 million at September 30, 2019. At September 30, 2019 and December 31, 2018, the Company had no outstanding loans under this line.

 

(continued)

 

27

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(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:

 

           

At September 30, 2019

   

At December 31, 2018

 
           

Carrying

   

Fair

   

Carrying

   

Fair

 

(in thousands)

 

Level

   

Amount

   

Value

   

Amount

   

Value

 

Financial assets:

                                       

Cash and cash equivalents

    1     $ 84,278     $ 84,278     $ 48,038     $ 48,038  

Securities available for sale

    2       55,773       55,773       45,384       45,384  

Loans held for sale

    3       7,907       8,039       4,767       4,842  

Loans, net

    3       315,807       315,658       290,113       283,068  

Federal Home Loan Bank stock

    3       404       404       355       355  

Accrued interest receivable

    3       1,073       1,073       1,034       1,034  
                                         

Financial liabilities-

                                       

Deposits

    3       421,197       421,872       349,067       349,416  
Other borrowings     3       2,053       2,053       -       -  

Off-Balance Sheet Items

    3       -       -       -       -  

 

Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2018.

 

 

(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 condensed consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

 

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

 

Commitments to extend credit, construction loans in process 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.

 

28

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(9)

Off-Balance Sheet Financial Instruments, Continued

 

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 Company’s standby letters of credit are secured by collateral and those secured letters of credit totaled $640,000 at September 30, 2019.

 

Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our third-party credit card company, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on 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.

 

The maximum potential amount of future payments we could be required to make for off-balance sheet financial instruments is represented by the dollar amount disclosed in the table below.

 

   

At September 30, 2019

 

(in thousands)

       

Commitments to extend credit

  $ 12,253  

Construction loans in process

  $ 21,215  

Unused lines of credit

  $ 36,021  

Standby financial letters of credit

  $ 2,179  

Standby performance letters of credit

  $ 378  

Guaranteed accounts

  $ 1,368  

 

(continued)

 

29

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(10)

Leases

 

The Company adopted ASU 2016-02, Leases on January 1, 2019 which resulted in the recognition of operating leases on the condensed consolidated balance sheets in 2019 and forward.  Right of use assets and lease liabilities are disclosed as separate line items in the condensed consolidated balance sheet and are valued based on the present value of the future minimum lease payments at the commencement date.  As our lease does not provide an implicit rate, we used our incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense is recognized on a straight-line basis over the lease term.  

 

The Company's operating lease obligations are for the Company's office facilities located at its Timberlane Road, Tallahassee, Florida location.   The term of the Lease is 15 years, with four options to renew for five years each. The Lease is a fully net lease, with the Company separately paying real and personal property taxes, all special and third-party assessments, common area maintenance charges, maintenance costs and insurance expenses. As of September 30, 2019, the Company estimates that its portion of expenditures for tenant improvement and furniture, fixtures, and equipment will not exceed $1,000,000.

 

The components of lease expense and other lease information as of and during the three and nine months ended September 30, 2019 are as follows: 
 

(in thousands)

  Three-Month Period Ended September 30, 2019     Nine-Month Period Ended September 30, 2019  

Operating lease cost

  $ 80     $ 160  

Cash paid for amount included in the measurement of lease liabilities operating cash flows from operating leases

  $ 56     $ 77  

 

(in thousands)

 

At September 30, 2019

 

Operating lease right of use assets

  $ 3,719  

Operating lease liabilities

  $ 3,801  

Weighted average remaining lease term-operating leases (in years)

    14.8  

Weighted average discount rate

    3.17 %

 

Future minimum lease payments under non-cancellable leases as of September 30, 2019, reconciled to our operating lease liability presented on the condensed consolidated balance sheet are as follows:

 

(in thousands)

 

At September 30, 2019

 

Remainder of 2019

  $ 74  

2020

    294  

2021

    294  

2022

    294  

2023

    294  

Thereafter

    3,567  

Total future minimum lease payments

    4,817  

Less interest

    (1,016 )

Total operating lease liability

  $ 3,801  

 

 

The rent expense for the three months and nine months ended September 30, 2018 was $43,000 and $129,000, respectively.

 

30

 

 

 

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, 2018. Results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of results that may be attained for any other period. The following discussion and analysis present 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 relate 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;

 

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.

 

31

 

 

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 four full-service offices located in Tallahassee, Crawfordville, and Lakeland, 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

   

Year Ended

   

Nine Months

 
   

Ended

   

December 31,

   

Ended

 
   

September 30, 2019

   

2018

   

September 30, 2018

 
                         

Average equity as a percentage of average assets

    11.88 %     12.64 %     12.83 %

Equity to total assets at end of period

    11.37       12.65       12.04  

Return on average assets(1)

    0.78       1.07       1.00  

Return on average equity(1)

    6.60       8.43       7.80  

Noninterest expense to average assets(1)

    2.61       2.47       2.52  

Nonperforming loans to total loans at end of period

    0.82       0.12       0.06  

 

(1)Annualized for the nine months ended September 30, 2019 and 2018

 

CRITICAL ACCOUNTING POLICIES

 

Our critical accounting policies which involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities and used in preparation of the Condensed Consolidated Financial Statements as of September 30, 2019, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

FINANCIAL CONDITION 

 

Average assets totaled $441.6 million for the nine months ended September 30, 2019, an increase of $71.7 million, or 19.4%, over the comparable period in 2018. Year over year, the increase in 2019 is reflected as higher average balances of other interest-earning assets, namely federal funds sold and interest-bearing deposits at other banks, which increased $34.1 million and higher loan balances which increased $22.6 million.

 

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, 2019, our available for sale investment portfolio included U.S. government agency securities, municipal securities, mortgage-backed securities, and asset-backed securities and had a fair market value of $55.8 million and an amortized cost value of $55.3 million. At September 30, 2019 and December 31, 2018, our investment securities portfolio represented approximately 11.5% and 11.3% of our total assets, respectively. The average yield on the average balance of investment securities for the nine months ended September 30, 2019 was 2.57%, compared to 2.39% for the comparable period in 2018.   

 

32

 

 

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 portfolio 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.

 

The Company’s net loan portfolio increased $25.7 million since December 31, 2018 Although the Company originated new loans during the first nine months of 2019, the Company also experienced a higher than normal rate of loan payoffs at approximately $43.2 million, including $9.4 million in loan participations that were repurchased during the first quarter.   In total, approximately 77.7% of the total loan portfolio was collateralized by commercial and residential real estate mortgages at September 30, 2019, compared to 80.3% at December 31, 2018

 

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. At September 30, 2019, the Company had thirteen nonaccrual loans totaling approximately $2.6 million. Accounting standards require the Company to identify loans as impaired loans when, based on current information and events, it is probable that the Company 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 GAAP.  Fifteen loans totaling $3.2 million were deemed to be impaired under the Company’s policy at September 30, 2019, compared to nine loans totaling $1.2 million at December 31, 2018. The Company’s nonperforming assets represented 0.54% of total assets at September 30, 2019 and 0.09% at December 31, 2018.

 

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 $4.0 million or 1.25% of gross loans, at September 30, 2019, is adequate to cover losses inherent in the loan portfolio. Six of the fifteen impaired loans and overdrafts carried a specific reserve of $255,000 at September 30, 2019.

 

Deposits. Deposits are the major source of the Company’s funds for lending and other investment purposes. Total deposits at September 30, 2019 were $421.2 million, an increase of $72.1 million, or 20.7%, from December 31, 2018, with growth coming primarily from interest-bearing accounts. The average balance of noninterest-bearing deposits accounted for 22.9% of the average balance of total deposits for the nine months ended September 30, 2019, compared to 23.8% for the nine months ended September 30, 2018.

 

Borrowings. The Company has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”) and pledges its qualified loans as collateral which would allow the Company, as of September 30, 2019, to borrow up to $61.8  million. In addition, the Company maintains unsecured lines of credit with correspondent banks that totaled $18.8 million at September 30, 2019. There were no loans outstanding under any of these lines at September 30, 2019The Company reported $2.1 million in other borrowings at September 30, 2019, comprising of one repurchase agreement (repo) account.

 

33

 

 

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. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts, savings deposits, and money-market accounts. 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 Company 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 Company reported a higher volume of interest-earning assets and a higher overall yield for the three and nine months ended September 30, 2019, as compared to the same period a year ago. Higher funding costs resulted in margin compression and a lower net interest margin.

 

   

For the Three Months Ended September 30,

 
   

2019

   

2018

 
           

Interest

                   

Interest

         
   

Average

   

and

   

Yield/

   

Average

   

and

   

Yield/

 

(dollars in thousands)

 

Balance

   

Dividends

   

Rate(4)

   

Balance

   

Dividends

   

Rate(4)

 

Interest-earning assets:

                                               

Loans(1)

  $ 313,595     $ 4,093       5.22 %   $ 292,026     $ 3,722       5.10 %

Mortgage loans held for sale

    7,164       86       4.80       6,315       76       4.81  

Securities

    53,507       338       2.53       45,836       276       2.41  

Other(2)

    64,794       402       2.48       38,081       198       2.08  

Total interest-earning assets

    439,060     $ 4,919       4.48       382,258     $ 4,272       4.47  

Noninterest-earning assets

    26,699                       12,626                  

Total assets

  $ 465,759                     $ 394,884                  
                                                 

Interest-bearing liabilities:

                                               

Savings, NOW and money-market deposits

  $ 255,563     $ 629       0.98 %   $ 224,448     $ 499       0.89 %

Time deposits

    56,000       305       2.18       39,389       163       1.66  

Total interest-bearing deposits

    311,563     $ 934       1.20       263,837       662       1.00  
Other borrowings     1,249       5       1.60       -       -          

Total interest-bearing liabilities

    312,812     $ 939       1.20       263,837     $ 662       1.00  

Noninterest-bearing deposits

    93,981                       80,943                  

Noninterest-bearing liabilities

    4,981                       1,738                  

Stockholders' equity

    53,985                       48,366                  

Total liabilities and stockholders' equity

  $ 465,759                     $ 394,884                  
                                                 
Net earning assets   $ 126,248                     $ 118,421                  

Net interest income

          $ 3,980                     $ 3,610          

Interest rate spread

                    3.28 %                     3.47 %

Net interest margin(3)

                    3.63 %                     3.78 %
                                                 

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

    140.36 %                     144.88 %                

 

(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

(4) Annualized

 

34

 

 

   

For the Nine Months Ended September 30,

 
   

2019

   

2018

 
           

Interest

                   

Interest

         
   

Average

   

and

   

Yield/

   

Average

   

and

   

Yield/

 

(dollars in thousands)

 

Balance

   

Dividends

   

Rate(4)

   

Balance

   

Dividends

   

Rate(4)

 

Interest-earning assets:

                                               

Loans(1)

  $ 302,660     $ 11,725       5.17 %   $ 280,075     $ 10,422       4.96 %

Mortgage loans held for sale

    6,297       226       4.79       5,565       193       4.62  

Securities

    50,181       967       2.57       47,539       851       2.39  

Other(2)

    58,292       1,111       2.54       24,232       354       1.95  

Total interest-earning assets

    417,430     $ 14,029       4.48       357,411     $ 11,820       4.41  

Noninterest-earning assets

    24,174                       12,541                  

Total assets

  $ 441,604                     $ 369,952                  
                                                 

Interest-bearing liabilities:

                                               

Savings, NOW and money-market deposits

  $ 247,340     $ 1,828       0.99 %   $ 214,749     $ 1,261       0.78 %

Time deposits

    49,140       770       2.09       29,875       298       1.33  

Total interest-bearing deposits

    296,480       2,598       1.17       244,624       1,559       0.85  
Other borrowings     432       5       1.54       -       -       -  

Total interest-bearing liabilities

    296,912     $ 2,603       1.17       244,624     $ 1,559       0.85  

Noninterest-bearing deposits

    87,937                       76,387                  

Noninterest-bearing liabilities

    4,314                       1,494                  

Stockholders' equity

    52,441                       47,447                  

Total liabilities and stockholders' equity

  $ 441,604                     $ 369,952                  
                                                 
Net earning assets   $ 120,518                     $ 112,787                  

Net interest income

          $ 11,426                     $ 10,261          

Interest rate spread

                    3.31 %                     3.56 %

Net interest margin(3)

                    3.65 %                     3.83 %
                                                 

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

    140.59 %                     146.11 %                

 

(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

(4)   Annualized

 

35

 

 

Comparison of Operating Results for the Three Months Ended September 30, 2019 and 2018

 

 

Earnings Summary

                               

(dollars in thousands)

                               
                   

Change 3Q'19 vs. 3Q'18

 
   

3Q'19

   

3Q'18

   

Amount

   

Percentage

 

Net Interest Income

  $ 3,980     $ 3,610     $ 370       10.2 %

Provision for loan losses

    241       135       106       78.5  

Noninterest income

    422       338       84       24.9  

Noninterest expense

    2,881       2,458       423       17.2  

Income Taxes

    316       337       (21 )     (6.2 )

Net Income

  $ 964     $ 1,018     $ (54 )     (5.3 )%

 

Compared to the third quarter of 2018, the Company’s performance in the third quarter of 2019 benefited from the interest income earned on higher average balances of interest-earnings assets, an $84,000 increase in noninterest income and lower income taxes. These gains were offset by a higher provision for loan losses and higher noninterest expense, mainly driven by increases in salaries and employee benefits expense and occupancy and equipment expense.

 

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.

 

Interest income

                               

(dollars in thousands)

                               
                   

Change 3Q'19 vs. 3Q'18

 
   

3Q'19

   

3Q'18

   

Amount

   

Percentage

 

Interest income:

                               

Loans

  $ 4,179     $ 3,798     $ 381       10.0 %

Securities

    338       276       62       22.5  

Other

    402       198       204       103.0  

Total interest income

  $ 4,919     $ 4,272     $ 647       15.1 %

 

The increase in total interest income from the third quarter of 2018 to the third quarter of 2019 reflects growth in all categories of interest-earning assets and higher yields on loans, securities and other interest-earning assets.  Net loans have increased $26.8 million, or 9.3%, since the third quarter of 2018. The Company experienced a higher-than-normal level of loan payoffs, at $43.2 million through September 30, 2019 which was partly due to the repurchase of $9.4 million in loan participations during the first quarter of 2019.  Excess cash continues to be deployed in federal funds sold and interest-bearing accounts at other financial institutions.

 

Interest expense:

                               

(dollars in thousands)

                 

Change 3Q'19 vs. 3Q'18

 
   

3Q'19

   

3Q'18

   

Amount

   

Percentage

 

Total interest expense

  $ 939     $ 662     $ 277       41.8 %

 

 

The increase in the Company’s cost of funds for the third quarter of 2019 compared to the third quarter of 2018 was driven by growing balances of time deposits and money market accounts and higher rates paid on those deposits. For the quarter ended September 30, 2019, the average balance of total interest-bearing deposits increased $47.7 million, or 18.1%, while the average rates paid on total interest-bearing deposits increased twenty basis points, when compared to the same period a year ago.

 

36

 

 

Net Interest Margin

 

Compared to the third quarter of 2018, the decline in the net interest margin is generally attributed to two factors. The increase in rates paid on interest-bearing liabilities significantly outpaced the increase in yields earned on interest-earning assets. Moreover, the average balance of interest-bearing liabilities increased $49.0 million quarter over quarter, not far behind the $56.8 million increase in the average balance of interest-earning assets. 

 

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 areas, and other factors related to our historic loss experience and the collectibility of the loan portfolio. The provision for loan losses for the three months ended September 30, 2019 was $241,000, compared to $135,000 for the three months ended September 30, 2018.  The provision for loan losses for the third quarter of 2019 mostly reflects reserves taken on $15.9 million in net funded loan growth during the quarter.   Management believes that the allowance for loan losses, which was $4.0 million or 1.25% of total loans, at September 30, 2019, 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 examination.     

 

 

Noninterest income

                               

(dollars in thousands)

                 

Change 3Q'19 vs. 3Q'18

 
   

3Q'19

   

3Q'18

   

Amount

   

Percentage

 

Service charges and fees on deposit accounts

  $ 74     $ 83     $ (9 )     (10.8 )%

Mortgage banking revenue

    151       124       27       21.8  

Income from bank-owned life insurance

    46       11       35       318.2  

Other income

    151       120       31       25.8  

Total noninterest income

  $ 422     $ 338     $ 84       24.9 %

 

Noninterest income consists of service charges and fees on deposit accounts, mortgage banking revenue, income from bank-owned life insurance, and other income. The increase in noninterest income during the third quarter of 2019 is attributed to higher mortgage banking revenue, income from bank-owned life insurance and interchange income (before direct expenses) from ATM/debit cards.  The Company increased its investment in bank-owned life insurance during the fourth quarter of 2018  which has resulted in higher income earned on this asset.  These increases were partially offset by a decline in service charges and fees on deposit accounts due to lower volume of non-sufficient funds fees, when compared to 2018.

 

37

 

 

 

Noninterest expense

                               

(dollars in thousands)

                 

Change 3Q'19 vs. 3Q'18

 
   

3Q'19

   

3Q'18

   

Amount

   

Percentage

 

Salaries and employee benefits

  $ 1,575     $ 1,341     $ 234       17.4 %

Occupancy and equipment

    373       237       136       57.4  

Professional fees

    79       86       (7 )     (8.1 )

Marketing

    172       193       (21 )     (10.9 )

FDIC Assessment

    6       38       (32 )     (84.2 )

Software maintenance and amortization

    188       167       21       12.6  

Other

    488       396       92       23.2  

Total noninterest expense

  $ 2,881     $ 2,458     $ 423       17.2 %

 

The key driver of the increase in total noninterest expense is salaries and employee benefits. The Company had seventy-one full-time equivalent employees at September 30, 2018 compared to ninety at September 30, 2019. Approximately 72.2% of the increase in salaries and employee benefits is related to staffing  the Lakeland office. 

 

Higher occupancy and equipment expense also contributed to the growth in noninterest expense due primarily to the added expenses from the Company's new office in Lakeland, Florida and the Company's new lease at Timberlane Road that includes revised terms and additional space.  Compared to the third quarter of 2018, lease expense was up $48,000 while depreciation expense increased $56,000.


The increase in other noninterest expense is primarily attributed to higher travel and entertainment expense related to the opening of the Lakeland office and small incremental increases in numerous expense categories, all expected from a growing company. 

 

These increases were partially offset by a $7,000 decrease in professional fees, a $21,000 decrease in marketing expenses, and a $32,000 decrease in FDIC deposit insurance.  The decrease in the Company's FDIC assessment was a result of a credit toward the Bank's quarterly assessment. 

 

Income Taxes

 

Income taxes are based on amounts reported in the condensed consolidated statements of earnings after adjustments for nontaxable income and nondeductible expenses and consist of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income taxes were $316,000 for the three months ended September 30, 2019, compared to income taxes of $337,000 for the three months ended September 30, 2018, with the decrease attributed to higher pre-tax earnings in 2018.

 

38

 

 

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and 2018
 

Earnings Summary

                               

(dollars in thousands)

                               
   

Nine Months Ended

   

Change 2019 vs. 2018

 
   

September 30, 2019

   

September 30, 2018

   

Amount

   

Percentage

 

Net Interest Income

  $ 11,426     $ 10,261     $ 1,165       11.4 %

Provision for loan losses

    585       544       41       7.5  

Noninterest income

    1,246       962       284       29.5  

Noninterest expense

    8,657       6,996       1,661       23.7  

Income Taxes

    835       909       (74 )     (8.1 )

Net Income

  $ 2,595     $ 2,774     $ (179 )     (6.5 %)
 
The $179,000, or 6.5%, decline in net income for the nine-month period ended September 30, 2019 resulted from higher noninterest expense, with 45.0% of that increase attributed to our expansion in Lakeland.  Increases in net interest income and noninterest income and a decrease in income taxes were not enough to offset the growth in noninterest expense.  
 
Net Interest Income
 
The Company's operating results depend primarily on its 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.
 

Interest income

                               

(dollars in thousands)

                               
   

Nine Months Ended

   

Change 2019 vs. 2018

 
   

September 30, 2019

   

September 30, 2018

   

Amount

   

Percentage

 

Interest income:

                               

Loans

  $ 11,951     $ 10,615     $ 1,336       12.6 %

Securities

    967       851       116       13.6  

Other

    1,111       354       757       213.8  

Total interest income

  $ 14,029     $ 11,820     $ 2,209       18.7 %
 
Comparing the nine-month periods ending September 30, 2019 and 2018, total interest income benefited in 2019 from higher balances and higher yields across all categories of interest-earning assets. The $757,000 increase in other interest income reflects a short-term shift in the interest-earnings assets mix as the Company has experienced higher levels of liquidity in 2019.
 

Interest expense:

                               

(dollars in thousands)

 

Nine Months Ended

   

Change 2019 vs. 2018

 
   

September 30, 2019

   

September 30, 2018

   

Amount

   

Percentage

 

Total interest expense

  $ 2,603     $ 1,559     $ 1,044       67.0 %

 

 

Comparing the nine-month periods, the average balance of interest-bearing deposits has increased $51.9 million, or 21.2%, while the average rate paid on deposits has increased thirty-two basis points.  In light of the two recent rate cuts by the Federal Reserve Bank in July and September of 2019, the Company recently made some strategic rate reductions on certain products to stabilize its cost of funds.  

 
39

 
 
Net Interest Margin
 
Our net interest margin was 3.65% for the nine months ended September 30, 2019, a decrease of eighteen basis points over the same period in 2018. The decrease in the margin compared to 2018 reflects a temporary shift in our earning assets mix toward lower yielding interest-earning assets due to excess liquidity and an increase in the overall cost of funds.
 
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 for loan losses 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 our historic loss experience and the collectability of the loan portfolio. The provision for loan losses for the nine months ended September 30, 2019 was $585,000, compared to $544,000 for the nine months ended September 30, 2018.  The provision for loan losses in 2019 mostly reflects higher specific reserves that were predominantly taken during the second quarter and modest loan growth in the third quarter while the provision for loan losses in 2018 primarily reflects reserves taken on funded loan growth. Management believes that the allowance for loan losses, which was $4.0 million or 1.25% of total loans, at September 30, 2019, 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 examination.     
 

Noninterest income

                               

(dollars in thousands)

 

Nine Months Ended

   

Change 2019 vs. 2018

 
   

September 30, 2019

   

September 30, 2018

   

Amount

   

Percentage

 

Service charges and fees on deposit accounts

  $ 213     $ 259     $ (46 )     (17.8 %)

Mortgage banking revenue

    454       339       115       33.9  

Income from bank-owned life insurance

    136       32       104       325.0  

Gain on sale of securities available for sale

    7       -       7       N/A  

Other income

    436       332       104       31.3  

Total noninterest income

  $ 1,246     $ 962     $ 284       29.5

%

 

With the exception of service charges and fees on deposit accounts, all categories of noninterest income increased over the nine-month period in 2018. Mortgage banking revenue increased due to the increase in the number of loan originated, the average balance per loan originated, and the average profitability per loan originated.  Income from bank-owned life insurance increased from 2018 due to an increased investment in this asset during the fourth quarter of 2018.  The increases in other income from 2018 are mostly attributed to higher interchange income, before direct expenses, from ATM/debit cards due to increased transaction volume. 

 
40

 

 

Noninterest expense

                               

(dollars in thousands)

 

Nine Months Ended

   

Change 2019 vs. 2018

 
   

September 30, 2019

   

September 30, 2018

   

Amount

   

Percentage

 

Salaries and employee benefits

  $ 4,711     $ 3,787     $ 924       24.4 %

Occupancy and equipment

    1,075       698       377       54.0  

Professional fees

    262       267       (5 )     (1.9 )

Marketing

    565       533       32       6.0  

FDIC Assessment

    93       112       (19 )     (17.0 )

Software maintenance and amortization

    507       474       33       7.0  

Other

    1,444       1,125       319       28.4  

Total noninterest expense

  $ 8,657     $ 6,996     $ 1,661       23.7 %
 
Compared to the nine months ended September 30, 2018, the key drivers of the increase in total noninterest expense were higher salaries and employee benefits expense, occupancy and equipment expense, and other noninterest expense.  Nearly half of the increase in total noninterest expense is attributed to higher salaries and employee benefits expense.  The Company had seventy-one full-time equivalent employees at September 30, 2018 compared to ninety full-time equivalent employees at September 30, 2019 . The increase in employees is mostly attributed to staffing the Lakeland office.  The increase in occupancy and equipment expense is predominantly due to costs associated with the new office in Lakeland, Florida which accounted for $169,000, or 44.8%, of the year-to-date increase in occupancy expense.  Also contributing to the increase in occupancy expense is the Company's new lease at its Timberlane Road location, which included revised terms and additional space, resulting in a $98,000 increase in rent expense. Key drivers of the increase in other noninterest expense are travel expense, printing and supplies expense, board related expense and ATM network expense.  As of September 30, 2019, the year-to-date noninterest expenses attributed to the Lakeland office approximated $747,000 and accounted for approximately 45.0% of the increase in total noninterest expense.
 
Income Taxes

 

Income taxes are based on amounts reported in the condensed consolidated statements of earnings after adjustments for nontaxable income and nondeductible expenses and consist of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income taxes were $835,000 for the nine months ended September 30, 2019, compared to income taxes of $909,000 for the nine months ended September 30, 2018, with the decrease attributed to higher pre-tax earnings in 2018.
 

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 unpledged marketable securities such as United States government agency securities, municipal securities, and mortgage-backed securities.

 

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, 2019, the Bank had access to approximately $61.8 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $18.8 million in unsecured lines of credit maintained with correspondent banks. As of September 30, 2019, 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 $5.4 million at September 30, 2019 and $8.3 million at December 31, 2018.  Additionally, the value of securities pledged to a repurchase account  was $1.7 million at September 30, 2019. Our primary liquid assets, excluding assets pledged to the QPD program and the repurchase account, accounted for 27.4% and 21.2% of total assets at September 30, 2019 and December 31, 2018, respectively.

 

41

 

 

Our core deposits consist of noninterest-bearing accounts, NOW accounts, money-market accounts, time deposits $250,000 or less, and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and large deposits. At September 30, 2019, total deposits were $421.2 million, of which $24.0 million were in certificates of deposits greater than or equal to $250,000, excluding Individual Retirement Accounts (IRAs). 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 monthly 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 $55.0 million at September 30, 2019, compared to $50.8 million at December 31, 2018.  This increase was primarily attributable to a $2.2 million increase in retained earnings and $873,000 in net proceeds from private a private placement of stock.

 

At September 30, 2019, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations with a 9.24% Tier 1 Leverage Capital Ratio, a 12.95 % Equity Tier 1 Risk-Based Capital Ratio, a 12.95% Tier 1 Risk-Based Capital Ratio, and a 14.15% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.”

 

The following is a summary at September 30, 2019 and December 31, 2018 of the regulatory capital requirements to be “well capitalized” and the Bank’s capital position.

 

 

                   

For Capital Adequacy

   

For Well Capitalized

 
   

Actual

   

Purposes

   

Purposes

 

(dollars in thousands)

 

Amount

   

Percentage

   

Amount

   

Percentage

   

Amount

   

Percentage

 

As of September 30, 2019

                                               

Tier 1 Leverage Capital

  $ 43,068       9.24 %   $ 18,636       4.00 %   $ 23,295       5.00 %

Common Equity Tier 1 Risk-based Capital

    43,068       12.95       14,968       4.50       21,620       6.50  

Tier 1 Risk-based Capital

    43,068       12.95       19,957       6.00       26,610       8.00  

Total Risk-based Capital

    47,050       14.15       26,610       8.00       33,262       10.00  
                                                 

As of December 31, 2018

                                               

Tier 1 Leverage Capital

  $ 37,805       9.28 %   $ 16,288       4.00 %   $ 20,360       5.00 %

Common Equity Tier 1 Risk-based Capital

    37,805       12.90       13,190       4.50       19,052       6.50  

Tier 1 Risk-based Capital

    37,805       12.90       17,587       6.00       23,449       8.00  

Total Risk-based Capital

    41,466       14.15       23,449       8.00       29,311       10.00  

 

42

 

 

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

 

   

Threshold Ratios

 

Capital Category

  Total Risk-Based Capital Ratio     Tier 1 Risk-Based Capital Ratio     Common Equity Tier 1 Risk-Based Capital Ratio     Tier 1 Leverage Capital Ratio  
                         

Well capitalized

  10.00%     8.00%     6.50%     5.00%  
                         

Adequately Capitalized

  8.00%     6.00%     4.50%     4.00%  
                         

Undercapitalized

 

< 8.00%

   

< 6.00%

   

< 4.50%

   

< 4.00%

 
                         

Significantly Undercapitalized

 

< 6.00%

   

< 4.00%

   

< 3.00%

   

< 3.00%

 
                         

Critically Undercapitalized

 

Tangible Equity/Total Assets ≤ 2%

 

 

Until such time as PMHG has $3 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 this Form 10-Q for the period ending September 30, 2019 for a discussion of off-balance sheet arrangements

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

43

 

 

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 the Company 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 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, 2019, 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.

 

44

 

 

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, 2018 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, 2018.

 

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

 

During the third quarter of 2019, the Company issued 975 shares to members of its Board of Directors in lieu of cash fees calculated at 110% to be $20,000.  These 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.

 

Also, during the third quarter of 2019, the Company completed a private placement stock offering in the Lakeland, Florida market. The Company issued 44,600 shares and raised $873,000, net of expenses. These shares were issued pursuant to the private placement exemption contained in Rule 506(b) of Regulation D, promulgated under the Securities Act of 1933.

 

 

 

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

45

 

 

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
         
3.4   Second Amendment to Bylaws dated January 17, 2019   Exhibit 3.4 to Form 8-K filed on January 18, 2019
         

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 (“Directors’ 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 10.1 to Form 8-K filed on August 7, 2018

         
10.6   Amended and Restated Employment Agreement by and between Prime Meridian Holding Company, Inc. and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of July 19, 2018   Exhibit 10.1 to Form 8-K filed on July 19, 2018
         

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   Exhibit 10.8 to Form 10-Q filed on November 10, 2016
         
10.9  

Employment Agreement by and between Prime Meridian Holding Company, Inc. and Prime Meridian Bank, and Chris L. Jensen, dated as of November 19, 2018

  Exhibit 10.1 to Form 8-K filed on November 20, 2018
         
10.10  

Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of November 19, 2018.

 

Exhibit 10.2 to Form 8-K filed on November 20, 2018

         
10.11  

Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Chris L. Jensen, Jr., dated as of November 19, 2018.

 

Exhibit 10.3 to Form 8-K filed on November 20, 2018

 

46

 

 

Exhibit
Number
  Description of Exhibit   Incorporated by Reference From or Filed Herewith
         
10.12   Amendment to Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of December 11, 2018.   Exhibit 10.1 to Form 8-K filed on December 13, 2018.
         

10.13

 

Amendment to Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Chris L. Jensen, Jr., dated as of December 11, 2018.

 

Exhibit 10.2 to Form 8-K filed on December 13, 2018

         

10.14

 

First Amendment to Lease for Timberlane Branch

 

Filed Exhibit 10.14 to Form 10-Q filed on May 9, 2019

         

14.1

 

Code of Ethics

 

Exhibit 14.1 to Form 10-K filed on March 28, 2014

         

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 Clint F. Weber, Principal Financial Officer

 

Filed herewith

         

32.1

 

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

 

Filed herewith

         

99.1

 

Charter of the Audit Committee

 

Exhibit 99.1 to Form 10-K filed on March 28, 2014

         

99.2

 

Charter of the Compensation and Nominating Committee

 

Exhibit 99.2 to Form 10-K filed on March 21, 2018

         

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

         

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.

 

47

 

 

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 13, 2019

   

 

By:

/s/ Sammie D. Dixon

     

Date

 

Sammie D. Dixon, Jr.

 

 

Vice Chairman, Chief Executive Officer, President,

 

 

and Principal Executive Officer

November 13, 2019

   

 

By:

/s/ Clint F. Weber

     

Date

 

Clint F. Weber

 

 

Chief Financial Officer, Executive Vice President, 

and Principal Financial Officer

48