Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended

March 31, 2021

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

For the transition period from

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)

1471 Timberlane Road; Tallahassee, Florida	32312
(Address of principal executive offices)	(Zip Code)

(850) 907-2300

(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 preceding 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 May 5, 2021: 3,126,474

INDEX

PART I. FINANCIAL INFORMATION	PAGE

Item 1. Financial Statements

Condensed Consolidated Balance Sheets March 31, 2021 (unaudited) and December 31, 2020	2

Condensed Consolidated Statements of Earnings Three Months ended March 31, 2021 and 2020 (unaudited)	3

Condensed Consolidated Statements of Comprehensive Income Three Months ended March 31, 2021 and 2020 (unaudited)	4

Condensed Consolidated Statements of Stockholders’ Equity Three Months ended March 31, 2021 and 2020 (unaudited)	5

Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 2021 and 2020 (unaudited)	6

Notes to Condensed Consolidated Financial Statements (unaudited)	7-24

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25-32

Item 3. Quantitative and Qualitative Disclosures About Market Risk	32

Item 4. Controls and Procedures	33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	34

Item 1A. Risk Factors	34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3. Defaults Upon Senior Securities	34

Item 4. Mine Safety Disclosures	34

Item 5. Other Information	34

Item 6. Exhibits	35-36

Signatures	37

Certifications

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

	March 31,		December 31,
	2021		2020
(in thousands)		(Unaudited)
Assets
Cash and due from banks	$	12,430	$	5,008
Federal funds sold		70,257		22,561
Interest-bearing deposits		59,100		41,416
Total cash and cash equivalents		141,787		68,985
Debt securities available for sale		58,915		61,879
Loans held for sale		12,532		13,593
Loans, net of allowance for loan losses of $6,097 and $6,092		480,772		476,661
Federal Home Loan Bank stock		366		493
Premises and equipment, net		8,200		8,248
Right of use lease asset		3,415		3,466
Accrued interest receivable		1,797		1,960
Bank-owned life insurance		10,748		10,685
Other assets		2,371		1,324
Total assets	$	720,903	$	647,294

Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing demand deposits	$	193,061	$	162,013
Savings, NOW and money-market deposits		406,413		362,147
Time deposits		51,955		56,432
Total deposits		651,429		580,592
Other borrowings		750		-
Official checks		1,257		1,109
Operating lease liability		3,535		3,580
Other liabilities		2,803		1,758
Total liabilities		659,774		587,039
Stockholders' equity:
Preferred stock, undesignated; 1,000,000 shares authorized, none issued or outstanding		-		-
Common stock, $.01 par value; 9,000,000 shares authorized, 3,124,794 and 3,119,471 issued and outstanding		31		31
Additional paid-in capital		38,649		38,568
Retained earnings		22,051		20,255
Accumulated other comprehensive income		398		1,401
Total stockholders' equity		61,129		60,255
Total liabilities and stockholders' equity	$	720,903	$	647,294

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

	Three Months Ended
	March 31,
(in thousands, except per share amounts)	2021		2020
Interest income:
Loans	$	5,805	$	4,429
Securities		249		384
Other		49		232
Total interest income		6,103		5,045
Interest expense:
Deposits		537		899
Other borrowings		-		3
Total interest expense		537		902
Net interest income		5,566		4,143
Provision for loan losses		-		636
Net interest income after provision for loan losses		5,566		3,507
Noninterest income:
Service charges and fees on deposit accounts		53		64
Debit card/ATM revenue, net		109		81
Mortgage banking revenue		301		148
Income from bank-owned life insurance		63		40
Gain on sale of debt securities available for sale		108		-
Other income		38		34
Total noninterest income		672		367
Noninterest expense:
Salaries and employee benefits		1,852		1,618
Occupancy and equipment		386		338
Professional fees		130		91
Marketing		140		201
FDIC assessment		70		52
Software maintenance, amortization and other		250		193
Other		469		445
Total noninterest expense		3,297		2,938
Earnings before income taxes		2,941		936
Income taxes		707		220
Net earnings	$	2,234	$	716

Earnings per common share:
Basic	$	0.72	$	0.22
Diluted		0.71		0.22
Cash dividends per common share		0.14		0.12

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2021			2020
Net earnings	$	2,234		$	716
Other comprehensive income:
Change in unrealized gain on debt securities available for sale:
Unrealized (loss) gain arising during the period		(1,236	)		818
Reclassification adjustment for realized gain		(108	)		-
Net change in unrealized (loss) gain		(1,344	)		818
Deferred income tax benefit (expense) on above change		341			(207	)
Total other comprehensive (loss) income		(1,003	)		611
Comprehensive income	$	1,231		$	1,327

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders' Equity

Three Months ended March 31, 2021 and 2020

													Accumulated
							Additional						Other			Total
	Common Stock						Paid-in			Retained			Comprehensive			Stockholders'
	Shares			Amount			Capital			Earnings			Income			Equity
(dollars in thousands)
*Balance at December 31, 2019*		3,191,288		$	32		$	39,456		$	16,180		$	200		$	55,868
Net earnings for the three months ended March 31, 2020 (unaudited)		-			-			-			716			-			716
Dividends paid (unaudited)		-			-			-			(383	)		-			(383	)
Net change in unrealized gain on debt securities available for sale, net of income tax expense (unaudited)		-			-			-			-			611			611
Stock options exercised (unaudited)		2,000			-			25			-			-			25
Common stock retirement (unaudited)		(82,784	)		(1	)		(1,216	)		-			-			(1,217	)
Common stock issued as compensation to directors (unaudited)		995			-			20			-			-			20
Issuance of restricted stock (unaudited)		3,835			-			-			-			-			-
Stock-based compensation (unaudited)		-			-			51			-			-			51
*Balance at March 31, 2020 (unaudited)*		3,115,334		$	31		$	38,336		$	16,513		$	811		$	55,691

*Balance at December 31, 2020*		3,119,471		$	31		$	38,568		$	20,255		$	1,401		$	60,255
Net earnings for the three months ended March 31, 2021 (unaudited)		-			-			-			2,234			-			2,234
Dividends paid (unaudited)		-			-			-			(438	)		-			(438	)
Net change in unrealized loss on debt securities available for sale, net of income tax benefit (unaudited)		-			-			-			-			(1,003	)		(1,003	)
Stock options exercised (unaudited)		120			-			2			-			-			2
Common stock issued as compensation to directors (unaudited)		1,122			-			22			-			-			22
Issuance of restricted stock (unaudited)		4,081			-			-			-			-			-
Stock-based compensation (unaudited)		-			-			57			-			-			57
*Balance at March 31, 2021 (unaudited)*		3,124,794		$	31		$	38,649		$	22,051		$	398		$	61,129

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flow (Unaudited)

	Three Months Ended
	March 31,
(in thousands)	2021			2020
Cash flows from operating activities:
Net earnings	$	2,234		$	716
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		170			142
Provision for loan losses		-			636
Net (accretion) amortization of deferred loan (fees) and costs		(776	)		137
Gain on sale of debt securities available for sale		(108	)		-
Net amortization of premiums and discounts on debt securities available for sale		93			79
Gain on sale of loans held for sale		(301	)		(148	)
Proceeds from the sale of loans held for sale		54,593			24,238
Loans originated as held for sale		(53,231	)		(26,843	)
Stock issued as compensation		22			20
Stock-based compensation expense		57			51
Income from bank-owned life insurance		(63	)		(40	)
Net decrease (increase) in accrued interest receivable		163			(136	)
Net change in operating leases		6			6
Net (increase) decrease in other assets		(706	)		31
Net increase in other liabilities and official checks		1,193			712
Net cash provided by (used in) operating activities		3,346			(399	)
Cash flows from investing activities:
Loan originations, net of principal repayments		(3,335	)		(25,733	)
Purchase of debt securities available for sale		(12,335	)		(12,191	)
Principal repayments of debt securities available for sale		5,075			3,276
Proceeds from sale of debt securities available for sale		5,874			-
Maturities and calls of debt securities available for sale		3,021			11
Repurchase (purchase) of Federal Home Loan Bank stock		127			(89	)
Purchase of premises and equipment		(122	)		(470	)
Net cash used in investing activities		(1,695	)		(35,196	)
Cash flows from financing activities:
Net increase in deposits		70,837			36,019
Change in other borrowings		750			(1,254	)
Proceeds from stock options exercised		2			25
Common stock retirement		-			(1,217	)
Common stock dividends paid		(438	)		(383	)
Net cash provided by financing activities		71,151			33,190
Net increase (decrease) in cash and cash equivalents		72,802			(2,405	)
Cash and cash equivalents at beginning of period		68,985			75,082
Cash and cash equivalents at end of period	$	141,787		$	72,677
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$	548		$	895
Income taxes	$	-		$	-
Noncash transactions:
Accumulated other comprehensive income, net change in unrealized (loss) gain on debt securities available for sale, net of taxes	$	(1,003	)	$	611
Loans transferred to other real estate owned	$	-		$	234

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

(1)

General

Prime Meridian Holding Company (“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 four banking offices located in Tallahassee, Crawfordville, and Lakeland, Florida and its online banking platform.

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 condensed consolidated financial position and condensed 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, 2020, included in our Annual Report on Form 10-K filed with the SEC on March 22, 2021. The results of operations for the three months ended March 31, 2021 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 debt securities available for sale, 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 (loss) income is the net change in the unrealized (loss) gain on debt 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.

Debit Card / ATM Revenue. Debit card/ATM revenue primarily includes interchange income from client use of consumer and business debit cards. Interchange income is paid by a merchant bank to the card-issuing bank through the interchange network. Interchange fees are set by the credit card associations and based on cardholder purchase volumes and purchase types. Also included in debit card/ATM revenue are ATM foreign fee income and ATM non-client ACH credits. This revenue line is shown net of debit card fees and ATM program expenses.

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

Derivatives. The Company enters into interest rate swaps in order to provide commercial loan clients the ability to swap from variable to fixed interest rates. Under these agreements, the Company enters into a variable rate loan with a client in addition to a swap agreement. This swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company then enters into a matching swap agreement with a third-party dealer in order to offset its exposure on the client swap. The Company does not use derivatives for trading purposes. The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives.

Recent Accounting Standards Update.

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for its circumstances. 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 debt securities available for sale and purchased financial assets with credit deterioration. The new guidance was originally set to be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Debt Securities Available for Sale

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
(in thousands)
*At March 31, 2021*
U.S. Government agency securities	$	87	$	1	$	-		$	88
Municipal securities		16,560		227		(305	)		16,482
Mortgage-backed securities		36,689		774		(211	)		37,252
Asset-backed securities		5,045		53		(5	)		5,093
Total	$	58,381	$	1,055	$	(521	)	$	58,915

*At December 31, 2020*
U.S. Government agency securities	$	170	$	2	$	-		$	172
Municipal securities		15,500		626		-			16,126
Mortgage-backed securities		39,151		1,300		(13	)		40,438
Asset-backed securities		5,180		9		(46	)		5,143
Total	$	60,001	$	1,937	$	(59	)	$	61,879

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

	Three Months Ended
	March 31,
(in thousands)	2021		2020
Proceeds from sale of debt securities	$	5,874	$	-
Gross gains		108		-
Gross losses		-		-
Net gain on sale of debt securities	$	108	$	-

Debt 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 March 31, 2021*
Municipal securities	$	(305	)	$	6,289	$	-		$	-
Mortgage-backed securities		(211	)		7,140		-			-
Asset-backed securities		-			-		(5	)		1,593
Total	$	(516	)	$	13,429	$	(5	)	$	1,593

*At December 31, 2020*
Mortgage-backed securities	$	(5	)	$	992	$	(8	)	$	767
Asset-backed securities		-			-		(46	)		3,494
Total	$	(5	)	$	992	$	(54	)	$	4,261

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Debt Securities Available for Sale, Continued

The unrealized losses at March 31, 2021 and December 31, 2020 on nine and seven 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. Debt 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 March 31, 2021*
U.S. Government agency securities	$	88	$	-	$	88	$	-
Municipal securities		16,482		-		16,482		-
Mortgage-backed securities		37,252		-		37,252		-
Asset-backed securities		5,093		-		5,093		-
Total	$	58,915	$	-	$	58,915	$	-

*At December 31, 2020*
U.S. Government agency securities	$	172	$	-	$	172	$	-
Municipal securities		16,126		-		16,126		-
Mortgage-backed securities		40,438		-		40,438		-
Asset-backed securities		5,143		-		5,143		-
Total	$	61,879	$	-	$	61,879	$	-

The scheduled maturities of debt securities are as follows:

	At March 31, 2021
	Amortized		Fair
	Cost		Value
(in thousands)
Due in one to five years	$	413	$	436
Due in five to ten years		9,178		8,969
Due after ten years		12,101		12,258
Mortgage-backed securities		36,689		37,252
Total	$	58,381	$	58,915

(continued)

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:


(in thousands)	At March 31, 2021			At December 31, 2020
Real estate mortgage loans:
Commercial	$	133,240		$	133,473
Residential and home equity		160,622			158,120
Construction		45,175			44,466
Total real estate mortgage loans		339,037			336,059

Commercial loans		143,748			141,542
Consumer and other loans		6,010			6,312
Total loans		488,795			483,913

Add (deduct):
Net deferred loan fees		(1,926	)		(1,160	)
Allowance for loan losses		(6,097	)		(6,092	)
Loans, net	$	480,772		$	476,661

(continued)

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			Unallocated
(in thousands)	Commercial			Equity			Construction		Loans			Loans			Reserves		Total
*Three Month Period Ended March 31, 2021*
Beginning balance	$	1,500		$	1,827		$	539	$	1,592		$	75		$	559	$	6,092
(Credit) provision for loan losses		(2	)		30			11		(170	)		-			131		-
Net (charge-offs) recoveries		-			-			-		8			(3	)		-		5
Ending balance	$	1,498		$	1,857		$	550	$	1,430		$	72		$	690	$	6,097
*Three Month Period Ended March 31, 2020*
Beginning balance	$	1,046		$	1,573		$	415	$	1,284		$	96		$	-	$	4,414
Provision (credit) for loan losses		136			54			57		346			43			-		636
Net (charge-offs) recoveries		-			(15	)		-		(315	)		(13	)		-		(343	)
Ending balance	$	1,182		$	1,612		$	472	$	1,315		$	126		$	-	$	4,707

*At March 31, 2021*
Individually evaluated for impairment:
Recorded investment	$	-		$	471		$	-	$	326		$	-		$	-	$	797
Balance in allowance for loan losses	$	-		$	49		$	-	$	180		$	-		$	-	$	229
Collectively evaluated for impairment:
Recorded investment	$	133,240		$	160,151		$	45,175	$	143,422		$	6,010		$	-	$	487,998
Balance in allowance for loan losses	$	1,498		$	1,808		$	550	$	1,250		$	72		$	690	$	5,868

*At December 31, 2020*
Individually evaluated for impairment:
Recorded investment	$	-		$	666		$	-	$	585		$	-		$	-	$	1,251
Balance in allowance for loan losses	$	-		$	-		$	-	$	179		$	-		$	-	$	179
Collectively evaluated for impairment:
Recorded investment	$	133,473		$	157,454		$	44,466	$	140,957		$	6,312		$	-	$	482,662
Balance in allowance for loan losses	$	1,500		$	1,827		$	539	$	1,413		$	75		$	559	$	5,913

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

The Company has divided the loan portfolio into three portfolio segments and five portfolio classes, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors. The 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, 7-year, or 10-year adjustable rate mortgage; while 15-year or 30-year fixed-rate loans are generally sold in the secondary market.

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

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)	Loans, Continued

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

The following summarizes the loan credit quality:

	Real Estate Mortgage Loans
			Residential						Consumer
			and Home				Commercial		and Other
(in thousands)	Commercial		Equity		Construction		Loans		Loans		Total
*At March 31, 2021*
Grade:
Pass	$	129,813	$	158,222	$	44,372	$	143,122	$	5,972	$	481,501
Special mention		3,427		1,929		803		138		38		6,335
Substandard		-		471		-		488		-		959
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	133,240	$	160,622	$	45,175	$	143,748	$	6,010	$	488,795

*At December 31, 2020*
Grade:
Pass	$	130,846	$	156,985	$	43,622	$	140,370	$	6,278	$	478,101
Special mention		2,627		469		844		405		34		4,379
Substandard		-		666		-		767		-		1,433
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Total	$	133,473	$	158,120	$	44,466	$	141,542	$	6,312	$	483,913

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)

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 March 31, 2021*
Real estate mortgage loans:
Commercial	$	-	$	-	$	-	$	-	$	133,240	$	-	$	133,240
Residential and home equity		1,178		-		-		1,178		158,973		471		160,622
Construction		106		-		-		106		45,069		-		45,175
Commercial loans		506		-		-		506		142,916		326		143,748
Consumer and other loans		5		-		-		5		6,005		-		6,010
Total	$	1,795	$	-	$	-	$	1,795	$	486,203	$	797	$	488,795

*At December 31, 2020*
Real estate mortgage loans:
Commercial	$	-	$	-	$	-	$	-	$	133,473	$	-	$	133,473
Residential and home equity		536		-		-		536		156,918		666		158,120
Construction		195		-		-		195		44,271		-		44,466
Commercial loans		-		-		-		-		140,957		585		141,542
Consumer and other loans		-		-		-		-		6,312		-		6,312
Total	$	731	$	-	$	-	$	731	$	481,931	$	1,251	$	483,913

(continued)

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 March 31, 2021*
Real estate mortgage loans-
Residential and home equity	$	422	$	422	$	49	$	49	$	49	$	471	$	471	$	49
Commercial loans		-		-		326		326		180		326		326		180
Total	$	422	$	422	$	375	$	375	$	229	$	797	$	797	$	229

*At December 31, 2020*
Real estate mortgage loans-
Residential and home equity	$	666	$	666	$	-	$	-	$	-	$	666	$	666	$	-
Commercial loans		-		-		585		585		179		585		585		179
Total	$	666	$	666	$	585	$	585	$	179	$	1,251	$	1,251	$	179

There were no collateral dependent loans measured at fair value on a nonrecurring basis at March 31, 2021 or December 31, 2020.

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

	Three Months Ended March 31,
	2021						2020
	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	$	-	$	-	$	-	$	573	$	7	$	7
Residential and home equity		556		-		-		882		-		-
Commercial loans		510		-		-		1,554		4		4
Consumer		-		-		-		1		-		-
Total	$	1,066	$	-	$	-	$	3,010	$	11	$	11

(continued)

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. During the period of national emergency related to the COVID-19 pandemic, the banking regulatory agencies have confirmed with FASB that certain short-term loan modifications made in response to the pandemic's effects on borrowers should not be considered to be TDRs. The Company entered into no new TDRs during the three months ended March 31, 2021 and 2020. At March 31, 2021, the Company had $66,000 in loans identified as TDRs.

(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.

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 March 31, 2021, 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 March 31, 2021, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2021, 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 March 31, 2021
Tier 1 Leverage Capital	$	61,289		9.07	%	$	27,017		4.00	%	$	33,771		5.00	%
Common Equity Tier 1 Risk-based Capital		61,289		13.72			20,096		4.50			29,028		6.50
Tier 1 Risk-based Capital		61,289		13.72			26,795		6.00			35,727		8.00
Total Risk-based Capital		66,878		14.98			35,727		8.00			44,659		10.00

As of December 31, 2020
Tier 1 Leverage Capital	$	57,800		9.09	%	$	25,421		4.00	%	$	31,776		5.00	%
Common Equity Tier 1 Risk-based Capital		57,800		13.29			19,575		4.50			28,275		6.50
Tier 1 Risk-based Capital		57,800		13.29			26,100		6.00			34,799		8.00
Total Risk-based Capital		63,245		14.54			34,799		8.00			43,499		10.00

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(5)	Earnings Per Share

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months ended March 31, 2021 and 2020, outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method.

	2021						2020
			Weighted-		Per				Weighted-		Per
			Average		Share				Average		Share
(dollars in thousands, except per share amounts)	Earnings		Shares		Amount		Earnings		Shares		Amount
*Three Months Ending March 31:*
Basic EPS:
Net earnings	$	2,234		3,123,565	$	0.72	$	716		3,183,857	$	0.22
Effect of dilutive securities-incremental shares from assumed conversion of options				1,684						1,701
Diluted EPS:
Net earnings	$	2,234		3,125,249	$	0.71	$	716		3,185,558	$	0.22

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(6)	Stock Benefit 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 March 31, 2021,185,446 shares are available to be issued as restricted stock or underlying options. A summary of the stock option activity for the three months ended March 31, 2021 and 2020 is as follows:

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price		Term (years)		Value
Outstanding at December 31, 2019		272,267		$	19.80
Options granted		15,000		$	20.05
Outstanding on March 31, 2020		287,267		$	19.82
Options forfeited		(15,210	)		20.05
Outstanding at December 31, 2020		272,057		$	19.80
Options exercised		(120	)	$	20.09
Options forfeited		(180	)	$	20.09
Outstanding at March 31, 2021		271,757		$	19.80		6.54	$	40,000
Exercisable at March 31, 2021		120,627		$	19.43		5.79	$	40,000

The fair value of shares vested and recognized as compensation expense was $57,000 and $51,000 for the three months ended March 31, 2021 and 2020, respectively. These amounts include expense of $16,000 and $10,000 recognized on restricted common stock shares issued during the three months ended March 31, 2021 and 2020. The deferred tax benefit related to stock options was $5,000 for both the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021, there was $333,000 in unrecognized compensation expense related to unvested share-based compensation arrangements granted under the 2015 Plan, with an average remaining life of 2.1 years.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(6)	Stock Benefit Plans, Continued

The fair value of each option granted during the three months ended March 31, 2020 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	March 31, 2020
Weighted average risk-free interest rate		1.46	%
Expected dividend yield		0.60	%
Expected stock volatility		14.69	%
Expected life in years		6.5
Per share fair value of options issued during period	$	3.26

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.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(6)	Stock Benefit 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 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 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 March 31, 2021 and 2020, our directors received 1,122 and 995 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $22,000 and $20,000, respectively. At March 31, 2021, 45,586 shares remained available for grant.

Restricted Stock

During the three months ended March 31, 2021 and 2020, the Company issued 4,081 and 3,835 restricted common stock shares, respectively, to its CEO as part of his bonus incentive earned for the Company’s performance in 2020 and 2019, respectively. The restricted stock awards are on a three-year vesting schedule. 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 outstanding at December 31, 2019		3,600		$	18.52		$	67,000
Non-vested restricted stock granted in 2020		3,835			20.40		$	78,000
Restricted stock shares vested in 2020		(1,200	)		(18.52	)		(22,000	)
Non-vested restricted stock outstanding at December 31, 2020		6,235		$	19.64		$	123,000
Non-vested restricted stock granted in 2021		4,081		$	18.04			74,000
Restricted stock shares vested in 2021		(2,478	)		19.49			(48,000	)
Non-vested restricted stock outstanding at March 31, 2021		7,838		$	18.88		$	149,000

During the three months ended March 31, 2021 and 2020, the Company recognized $16,000 and $10,000, respectively, as expense. At March 31, 2021, the Company had $138,000 in unrecognized expense to be recognized over a weighted-average period of 2.2 years.

(7)

Federal Home Loan Bank Advances and Other Borrowings

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 $58.4 million at March 31, 2021. At March 31, 2021 and December 31, 2020, the Company had no outstanding loans under this line.

In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The initial interest rate on the line of credit is 3.25% and will adjust daily to the then-current Wall Street Journal Prime Rate. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Company's wholly-owned subsidiary, the Bank. From time to time, the Bank sells loan participations to TNB on market terms. At March 31, 2021, the Company had a $750,000 outstanding balance on this line of credit.

(8)

Derivative Financial Instruments

The Company has entered into interest rate swaps in order to provide commercial real estate loan clients the ability to swap from variable to fixed interest rates. Under these agreements, the Company enters into a variable rate loan with a client at a specified index (Wall Street Journal Prime Lending Rate) in addition to a borrower swap agreement. This swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company then enters into a matching swap agreement with a third-party dealer counterparty in order to offset its exposure on the borrower swap. These interest rate swaps are considered derivative financial instruments. These derivative instruments involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any, over the life of the contract. Such differences, which represent the fair value of the derivative instruments, are included in “other assets” and “other liabilities” on the Company’s condensed consolidated balance sheets, and the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows. The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives.


	March 31, 2021			December 31, 2020
dollars in thousands
Notional amount - interest rate swaps:
Stand-alone derivatives	$	21,034		$	21,100

Weighted-average pay rate - interest rate swaps		3.68	%		3.68	%
Weighted-average receive rate - interest rate swaps		3.00	%		3.00	%
Weighted-average maturity (in years) - interest rate swaps		14.3			14.6

Net realized fair value adjustments:
Stand-alone derivatives - interest rate swaps (other assets)	$	1,004			163
Stand-alone derivatives - interest rate swaps (other liabilities)	$	(1,004	)		(163	)

The Company is party to a collateral support agreement with its dealer counterparty. Such agreement requires that the Company or the dealer counterparty to maintain collateral based on the fair values of derivative instruments. In the event of default by a counterparty the non-defaulting counterparty would be entitled to the collateral. The Company does not require borrower counterparties to post cash collateral based on the fair values of borrower interest rate swaps. In the event of default of a borrower counterparty wherein the fair value of the derivative instrument is owed to the Company, the fair value is collected through a real property foreclosure or liquidation.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(9)

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 March 31, 2021				At December 31, 2020
			Carrying		Fair		Carrying		Fair
(in thousands)	Level		Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents		1	$	141,787	$	141,787	$	68,985	$	68,985
Debt securities available for sale		2		58,915		58,915		61,879		61,879
Loans held for sale		3		12,532		12,742		13,593		13,814
Loans, net		3		480,772		491,498		476,661		487,652
Federal Home Loan Bank stock		3		366		366		493		493
Accrued interest receivable		3		1,797		1,797		1,960		1,960
Derivative contract assets		3		1,004		1,004		163		163

Financial liabilities:
Deposits		3		651,429		651,745		580,592		581,073
Other borrowings		3		750		750		-		-
Derivative contract liabilities		3		1,004		1,004		163		163

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, 2020.

(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.

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 $654,000 at March 31, 2021.

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 March 31, 2021
(in thousands)
Commitments to extend credit	$	8,242
Construction loans in process	$	23,016
Unused lines of credit	$	71,181
Standby financial letters of credit	$	2,481
Standby performance letters of credit	$	263
Guaranteed accounts	$	1,372

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(10)

Contingency

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets and significantly increased unemployment levels. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, the duration of the pandemic, the effectiveness and adoption of available vaccines, and the actions taken by governmental authorities to slow the spread of the disease or to mitigate its effects. At this time, we continue to monitor and adhere to national guidelines and local safety ordinances to ensure the safety of our clients and employees.

Management expects that credit quality deterioration directly related to the pandemic could materialize in the future. Since March of 2020, the Company has reported a peak of 70 requests for payment deferrals or modifications on loans totaling $42.4 million. Approximately 91% of the requests have been for loans secured with real estate. That number has declined to eight active loan modification requests totaling $11.2 million as of March 31, 2021. The table below gives more detail on loan modification activity at March 31, 2021.

Active Loan Deferral Requests

March 31, 2021

Dollars in thousands

Collateral or Loan Type	Number of Loans Modified		Dollar Amount Loans Modified		Average Balance Loans Modified		Interest Only Cumulative 3-Months		Interest Only Cumulative 6-12 Months		Payment Deferral Cumulative 12 Months		Weighted Average LTV Loans Modified			Percent of Total Loan Collateral or Type
1-4 family owner occupied		1	$	42	$	42	$	42	$	-	$	-		33.0	%		0.4	%
1-4 family non-owner occupied		2		1,048		524		1,048		-		-		73.5			9.4
CRE owner occupied		4		3,073		768		-		3,073		-		62.4			27.6
CRE non-owner occupied		1		6,987		6,987		-		6,987		-		62.4			62.6
Total		8	$	11,150	$	1,394	$	1,090	$	10,060	$	-		-			100.0	%

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, 2020. Results of operations for the three months ended March 31, 2021 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, pandemics, public health, and other conditions impacting our or our clients’ operations;

•

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

•

application and interpretation of accounting principles and guidelines.

GENERAL

Prime Meridian Holding Company (“PMHG”) was incorporated as a Florida corporation on May 25, 2010, and is the one-bank holding company for, and sole shareholder of, Prime Meridian Bank (the “Bank”) (collectively, the “Company”). The Bank opened for business on February 4, 2008 and was acquired by PMHG on September 16, 2010. PMHG has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through 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
	Three Months			Year			Three Months
	Ended			Ended			Ended
	March 31, 2021			December 31, 2020			March 31, 2020
Average equity as a percentage of average assets		9.00	%		9.64	%		11.02	%
Equity to total assets at end of period		8.48			9.31			10.39
Return on average assets⁽¹⁾		1.32			0.75			0.56
Return on average equity⁽¹⁾		14.72			7.77			5.09
Noninterest expense to average assets⁽¹⁾		1.95			2.01			2.30
Nonperforming loans to total loans at end of period		0.16			0.26			0.61
Nonperforming assets to total assets		0.11			0.19			0.57

^{(1) Annualized for the three months ended March 31, 2021 and 2020}

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 March 31, 2021, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2020.

COVID-19 RESPONSE

Management expects that credit quality deterioration directly related to the pandemic could materialize in the future. Since March of 2020, the Company has reported a peak of 70 requests for payment deferrals or modifications on loans totaling $42.4 million. Approximately 91% of the requests have been for loans secured with real estate. That number has declined to eight current loan modification requests totaling $11.2 million as of March 31, 2021. The table below gives more detail on loan modification activity at March 31, 2021.

Active Loan Deferral Requests

March 31, 2021

Dollars in thousands

Collateral or Loan Type	Number of Loans Modified		Dollar Amount Loans Modified		Average Balance Loans Modified		Interest Only Cumulative 3-Months		Interest Only Cumulative 6-12 Months		Payment Deferral Cumulative 12 Months		Weighted Average LTV Loans Modified			Percent of Total Loan Collateral or Type
1-4 family owner occupied		1	$	42	$	42	$	42	$	-	$	-		33.0	%		0.4	%
1-4 family non-owner occupied		2		1,048		524		1,048		-		-		73.5			9.4
CRE owner occupied		4		3,073		768		-		3,073		-		62.4			27.6
CRE non-owner occupied		1		6,987		6,987		-		6,987		-		62.4			62.6
Total		8	$	11,150	$	1,394	$	1,090	$	10,060	$	-		-			100.0	%

FINANCIAL CONDITION

Average assets totaled $674.8 million for the three months ended March 31, 2021, an increase of $164.6 million, or 32.3%, over the comparable period in 2020, with the majority of growth coming from loans. PPP loans accounted for approximately 53.7% of the growth in the average loan balance.

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 to secure the deposit of public funds at the Bank. At March 31, 2021, our debt securities available for sale investment portfolio included U.S. government agency securities, municipal securities, mortgage-backed securities, and asset-backed securities. As of the same date, this portfolio had a fair market value of $58.9 million and an amortized cost value of $58.4 million. At March 31, 2021 and December 31, 2020, our investment securities portfolio represented approximately 8.2% and 9.6% of our total assets, respectively. The average yield on the average balance of investment securities for the three months ended March 31, 2021 was 1.67%, compared to 2.42% for the comparable period in 2020.

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 gross loan portfolio increased $4.9 million since December 31, 2020, as a large number of non-PPP loan pay-offs and round one PPP loan forgiveness offset round two PPP originations and non-PPP loan production. Driving this reduction was a large volume ($31.4 million) of non-PPP loan payoffs, partially offset by the funding of $25.0 million in new non-PPP loans during the first quarter. At March 31, 2021, PPP loans comprised $78.6 million, or 16.1%, of total loans. Management expects that the majority of these loans will be forgiven by the end of 2021. In total, approximately 69.4% of the total loan portfolio was collateralized by commercial and residential real estate mortgages at March 31, 2021 and December 31, 2020. Subtracting out the PPP loans, the percentage of the total loan portfolio collateralized by commercial and residential real estate mortgages was 82.7% at March 31, 2021.

Nonperforming assets. Four loans totaling $797,000 were deemed to be impaired under the Company’s policy at March 31, 2021 with reserves on impaired loans totaling $229,000. The Company’s nonperforming assets represented 0.11% of total assets at March 31, 2021 and 0.19% at December 31, 2020. 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 March 31, 2021, the Bank had four nonaccrual loans in the aggregate amount of $797,000, compared to five nonaccrual loans totaling $1.3 million at December 31, 2020. 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.

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. During the first quarter of 2021, the Bank did not take any additional provision for loan losses as the total portfolio loan balance (excluding PPP loans) decreased by $7.0 million. The Company's four impaired loans carried aggregate specific reserves of $229,000 at March 31, 2021. The Company reported $5,000 in net recoveries during the quarter ended March 31, 2021 compared to net charge-off's of $343,000, or 0.39% annualized of average loans, in the first quarter of 2020. Management believes that the allowance for loan losses, which was $6.1 million or 1.49% of gross loans (excluding PPP loans) at March 31, 2021 is adequate to cover losses inherent in the loan portfolio.

Deposits. Deposits are the major source of the Company’s funds for lending and other investment purposes. Total deposits at March 31, 2021 were $651.4 million, an increase of $70.8 million, or 12.2%, from December 31, 2020, with growth coming from both noninterest-bearing and interest-bearing accounts and split almost equally between growth of existing client accounts and PPP-sourced deposits. The average balance of noninterest-bearing deposits accounted for 28.6% of the average balance of total deposits for the three months ended March 31, 2021, compared to 22.3% for the three months ended March 31, 2020. While management expects some shrinkage in deposits as PPP funds are spent, management expects the majority of the increase in total deposits will remain long-term.

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 March 31, 2021, to borrow up to $58.4 million. In addition, the Company maintains unsecured lines of credit with correspondent banks that totaled $28.0 million at March 31, 2021. There were no loans outstanding under any of these lines at March 31, 2021.

In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The initial interest rate on the line of credit is 3.25% and will adjust daily to the then-current Wall Street Journal Prime Rate. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Company's wholly-owned subsidiary, the Bank. From time to time, the Bank sells loan participations to TNB on market terms. The Company had $750,000 outstanding under this line at March 31, 2021.

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 table, the Company's average yield on interest-earning assets declined 40 basis points comparing the three months ended March 31, 2021 to the three months ended March 31, 2020. Declines in market interest rates were offset by a decrease in funding costs, thus leading to a steady net interest margin when comparing the two periods.

	For the Three Months Ended March 31,
	2021								2020
				Interest								Interest
	Average			and		Yield/			Average			and		Yield/
(dollars in thousands)	Balance			Dividends		Rate⁽⁵⁾			Balance			Dividends		Rate⁽⁵⁾
Interest-earning assets:
Loans⁽¹⁾	$	484,455		$	5,699		4.71	%	$	352,421		$	4,363		4.95	%
Loans held for sale		13,370			106		3.17			6,051			66		4.36
Debt securities available for sale		59,629			249		1.67			63,583			384		2.42
Other⁽²⁾		89,646			49		0.22			62,157			232		1.49
Total interest-earning assets		647,100		$	6,103		3.77	%		484,212		$	5,045		4.17	%
Noninterest-earning assets		27,743								26,021
Total assets	$	674,843							$	510,233

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	379,031		$	401		0.42	%	$	277,254		$	544		0.78	%
Time deposits		54,456			136		1.00			69,906			355		2.03
Total interest-bearing deposits		433,487			537		0.50			347,160			899		1.04
Other borrowings		17			-		-			1,273			3		0.94
Total interest-bearing liabilities		433,504		$	537		0.50			348,433		$	902		1.04
Noninterest-bearing deposits		173,997								99,857
Noninterest-bearing liabilities		6,638								5,690
Stockholders' equity		60,704								56,253
Total liabilities and stockholders' equity	$	674,843							$	510,233

Net earning assets	$	213,596							$	135,779
Net interest income				$	5,566							$	4,143
Interest rate spread ⁽³⁾							3.27	%							3.13	%
Net interest margin⁽⁴⁾							3.44	%							3.42	%

Ratio of interest-earning assets to average interest-bearing liabilities		149.27	%							138.97	%

⁽¹⁾ Includes nonaccrual loans

⁽²⁾Other interest-earning assets include federal funds sold, interest-bearing deposits and FHLB stock.

⁽³⁾ Interest rate spread is the difference between the total interest-earning asset yield and the rate paid on total interest-bearing liabilities.

⁽⁴⁾Net interest margin is net interest income divided by total average interest-earning assets, annualized

⁽⁵⁾Annualized

Comparison of Operating Results for the Three Months Ended March 31, 2021and 2020


Earnings Summary
(dollars in thousands)
					Change 1Q'21 vs. 1Q'20
	1Q'21		1Q'20		Amount			Percentage
Net Interest Income	$	5,566	$	4,143	$	1,423			34.3	%
Provision for loan losses		-		636		(636	)		(100.0	)
Noninterest income		672		367		305			83.1
Noninterest expense		3,297		2,938		359			12.2
Income Taxes		707		220		487			221.4
Net Income	$	2,234	$	716	$	1,518			212.0	%

Compared to the same period a year ago, the increase in net earnings was driven by PPP origination fees and the absence of a provision for loan losses. Lower funding costs on deposits and higher noninterest income also contributed to higher net earnings in the first quarter of 2021.

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 1Q'21 vs. 1Q'20
	1Q'21		1Q'20		Amount			Percentage
Interest income:
Loans	$	5,805	$	4,429	$	1,376			31.1	%
Securities		249		384		(135	)		(35.2	)
Other		49		232		(183	)		(78.9	)
Total interest income	$	6,103	$	5,045	$	1,058			21.0	%

Compared to the first quarter of 2020, the increase in total interest income is mostly attributed to a higher volume of loans and origination fees on first and second round PPP loans. Average loan balances increased $132.0 million, or 37.5%, from the first quarter of 2020, with more than half of the loan growth coming from PPP loan originations. Excluding PPP loans, the average loan balance still increased approximately $61.2 million, or 17.4%, from the same period last year, boosted primarily by commercial, construction, and residential real estate loan originations. Decreases in interest income from securities and other interest-earning assets since the first quarter of 2020 is primarily a function of lower rates.


Interest expense:
(dollars in thousands)					Change 1Q'21 vs. 1Q'20
	1Q'21		1Q'20		Amount			Percentage
Total interest expense	$	537	$	902	$	(365	)		(40.5	)%

Despite higher balances of interest-bearing liabilities, total interest expense declined $91,000 from the fourth quarter of 2020 and $365,000 from the first quarter of 2020 due to lower funding costs. The average rate paid on deposits declined 11 basis points from the fourth quarter of 2020 and 54 basis points when compared to the first quarter of 2020.

Net Interest Margin

The Company's net interest margin remained level in the first quarter of 2021 as unfavorable asset pricing was offset by the increased volume of interest-earnings assets and PPP origination fees and a continued reduction in the cost of deposits.

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 collectability of the loan portfolio. The Company did not record any provision for loan losses during the first quarter of 2021 due to the $7.0 million reduction in total portfolio loan balances (excluding PPP loans) during the first quarter of this year. Driving the $7.0 million reduction was a large volume ($31.4 million) of non-PPP loan payoffs, partially offset by the funding of $25.0 million in new non-PPP loans during the first quarter.

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 1Q'21 vs. 1Q'20
	1Q'21		1Q'20		Amount			Percentage
Service charges and fees on deposit accounts	$	53	$	64	$	(11	)		(17.2	)%
Debit card/ATM revenue, net		109		81		28			34.6
Mortgage banking revenue		301		148		153			103.4
Income from bank-owned life insurance		63		40		23			57.5
Gain on sale of debt securities		108		-		108			-
Other income		38		34		4			11.8
Total noninterest income	$	672	$	367	$	305			83.1	%

On a linked quarter basis and compared to the first quarter of 2020, the increase in noninterest income was driven by the $108,000 gain on sale of debt securities and mortgage banking revenue which has more than doubled since the first quarter of 2020. The gain on sale of debt securities related to a $6 million portfolio bond transaction which was executed in the first quarter while the mortgage team continues to report strong production by units, volume, and gain on sales revenue. Growth in debit card/ATM revenue also continues to contribute positively to the bottom line.


Noninterest expense
(dollars in thousands)					Change 1Q'21 vs. 1Q'20
	1Q'21		1Q'20		Amount			Percentage
Salaries and employee benefits	$	1,852	$	1,618	$	234			14.5	%
Occupancy and equipment		386		338		48			14.2
Professional fees		130		91		39			42.9
Marketing		140		201		(61	)		(30.3	)
FDIC Assessment		70		52		18			34.6
Software maintenance and amortization		250		193		57			29.5
Other		469		445		24			5.4
Total noninterest expense	$	3,297	$	2,938	$	359			12.2	%

Compared to the first quarter of 2020, a $234,000 increase in salaries and employee benefits expense was the primary driver of the $359,000 increase in noninterest expense. This combined with modest increases in other categories was only partially offset by a $61,000 decrease in marketing expense which is attributed to the continued limitations on gatherings imposed by COVID-19 restrictions.

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 $707,000 for the three months ended March 31, 2021, compared to income taxes of $220,000 for the three months ended March 31, 2020, with the increase attributed to higher pre-tax earnings in 2021.

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, mortgage-backed securities, and asset-backed securities.

The Bank also has external sources of funds through the FHLB, unsecured lines of credit with correspondent banks, a revolving line of credit, and the State of Florida’s Qualified Public Deposit Program (“QPD”). At March 31, 2021, the Bank had access to approximately $58.4 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $28.0 million in unsecured lines of credit maintained with correspondent banks and a $15 million revolving line of credit with TNB. As of March 31, 2021, the Company's outstanding borrowings under these lines totaled $750,000. 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 $12.4 million at March 31, 2021 compared to $13.9 million at December 31, 2020. Our primary liquid assets, excluding assets pledged to the QPD program, accounted for 26.1% and 18.1% of total assets at March 31, 2021 and December 31, 2020, respectively.

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 other large deposits. At March 31, 2021, total deposits were $651.4 million, of which $22.5 million were in certificates of deposits greater than $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 $61.1 million at March 31, 2021 compared to $60.3 million at December 31, 2020. In 2020, the Company obtained a $15 million revolving line of credit with TNB. At its discretion, the Company may take draws on that line and may contribute the proceeds as capital to the Bank. The Company had $750,000 outstanding under this line at March 31, 2021 The Company contributed $1.1 million to the capital of the Bank during the first quarter of 2021.

At March 31, 2021, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations with a 9.07% Tier 1 Leverage Capital Ratio, a 13.72% Equity Tier 1 Risk-Based Capital Ratio, a 13.72% Tier 1 Risk-Based Capital Ratio, and a 14.98% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.”

The following is a summary at March 31, 2021 and December 31, 2020 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 March 31, 2021
Tier 1 Leverage Capital	$	61,289		9.07	%	$	27,017		4.00	%	$	33,771		5.00	%
Common Equity Tier 1 Risk-based Capital		61,289		13.72			20,096		4.50			29,028		6.50
Tier 1 Risk-based Capital		61,289		13.72			26,795		6.00			35,727		8.00
Total Risk-based Capital		66,878		14.98			35,727		8.00			44,659		10.00

As of December 31, 2020
Tier 1 Leverage Capital	$	57,800		9.09	%	$	25,421		4.00	%	$	31,776		5.00	%
Common Equity Tier 1 Risk-based Capital		57,800		13.29			19,575		4.50			28,275		6.50
Tier 1 Risk-based Capital		57,800		13.29			26,100		6.00			34,799		8.00
Total Risk-based Capital		63,245		14.54			34,799		8.00			43,499		10.00

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%

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 March 31, 2021 for a discussion of off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that 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 March 31, 2021 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.

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, 2020 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.

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

During the first quarter of 2021, the Company issued 1,122 shares to members of its Board of Directors in lieu of cash fees calculated at 110% to be $22,000 and issued 4,081 shares of restricted stock to its Chief Executive Officer, at a total valuation of $57,000, as part of his incentive package for 2020. Also during the first quarter, employees exercised stock options to acquire 120 shares for aggregate proceeds of $2,000. These shares were all issued in accordance with the intrastate exemption from registration pursuant to Section 3(a)(11) of the Securities Act of 1933, because the Company is doing business within the State of Florida and each acquirer and offeree of securities resides within the State of Florida.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

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

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

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

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

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	Form of Indemnification Agreement	Exhibit 10.1 to Form 8-K filed on August 20, 2020

10.2	Promissory Note to Thomasville National Bank dated August 26, 2020	Exhibit 10.16 to Form 8-K filed on August 31, 2020

10.3	Security Agreement with Thomasville National Bank dated August 26, 2020	Exhibit 10.17 to Form 8-K filed on August 31, 2020

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 Timberlane Office	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

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, 2015

99.2	Charter of the Executive, Nominating and Corporate Governance Committee	Exhibit 99.1 to Form 8-K filed on August 20, 2020

99.3	Charter of the Compensation Committee	Exhibit 99.1 to Form 8-K filed on September 17, 2020

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.

SIGNATURES

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

	PRIME MERIDIAN HOLDING COMPANY


May 11, 2021
	By:	/s/ Sammie D. Dixon

Date		Sammie D. Dixon, Jr.
		Vice Chairman, Chief Executive Officer, President,
		and Principal Executive Officer
May 11, 2021
	By:	/s/ Clint F. Weber

Date		Clint F. Weber
		Chief Financial Officer, Executive Vice President, Principal Accounting Officer and Principal Financial Officer