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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

 June 30, 2022

 

or

 

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

 

For the transition period from

 

to

 

 

Commission File Number:

        333-191801

 

PRIME MERIDIAN HOLDING COMPANY

(Exact Name of registrant as specified in its charter)

 

Florida

 

27-2980805                         

 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number) 

  

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)

 

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 (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.

Large accelerated filer:     ☐Accelerated filer:                       ☐
Non-accelerated 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.    ☐

 

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 August 8, 2022: 3,156,558.

 

 
 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

PAGE
   

Item 1. Financial Statements

  
   

Condensed Consolidated Balance Sheets June 30, 2022 (unaudited) and December 31, 2021

2
   

Condensed Consolidated Statements of Earnings Three and Six Months ended June 30, 2022 and 2021 (unaudited)

3
   

Condensed Consolidated Statements of Comprehensive (Loss) Income Three and Six Months ended  June 30, 2022 and 2021 (unaudited)

4
   

Condensed Consolidated Statements of Stockholders’ Equity Three and Six Months ended June 30, 2022 and 2021 (unaudited)

5
   

Condensed Consolidated Statements of Cash Flows Six Months ended June 30, 2022 and 2021 (unaudited)

6
   

Notes to Condensed Consolidated Financial Statements (unaudited)

7-22
   

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

23-33
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

33
   

Item 4. Controls and Procedures

34
 

PART II. OTHER INFORMATION
 

Item 1. Legal Proceedings

35
   

Item 1A. Risk Factors

35
   

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

35
   

Item 3. Defaults Upon Senior Securities

35
   

Item 4. Mine Safety Disclosures

35
   

Item 5. Other Information

35
   

Item 6. Exhibits

36-38
   

Signatures

39
   

Certifications

  

 

 
 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 

(in thousands)

 

(Unaudited)

     

Assets

        

Cash and due from banks

 $12,704  $8,897 

Federal funds sold

  16,485   53,969 

Interest-bearing deposits

  104,933   170,607 

Total cash and cash equivalents

  134,122   233,473 

Debt securities available for sale

  133,382   73,763 

Debt securities held to maturity

  8,777   - 

Loans held for sale

  10,725   11,768 

Loans, net of allowance for loan losses of $6,611 and $5,974

  537,566   490,198 

Federal Home Loan Bank stock

  463   366 

Premises and equipment, net

  8,228   7,962 

Right of use operating lease asset

  3,151   3,258 

Accrued interest receivable

  1,933   1,505 

Bank-owned life insurance

  16,342   16,153 

Other assets

  6,148   2,677 

Total assets

 $860,837  $841,123 
         

Liabilities and Stockholders' Equity

        

Liabilities:

        

Noninterest-bearing demand deposits

 $210,685  $209,351 

Savings, NOW and money-market deposits

  535,359   503,759 

Time deposits

  38,545   49,832 

Total deposits

  784,589   762,942 

Other borrowings

  4,125   3,575 

Official checks

  776   1,141 

Operating lease liability

  3,303   3,397 

Other liabilities

  3,415   3,037 

Total liabilities

  796,208   774,092 

Stockholders' equity:

        

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

  -   - 

Common stock, $.01 par value; 9,000,000 shares authorized, 3,155,308 and 3,129,046 issued and outstanding

  31   31 

Additional paid-in capital

  39,407   38,909 

Retained earnings

  31,805   28,164 

Accumulated other comprehensive loss

  (6,614)  (73)

Total stockholders' equity

  64,629   67,031 

Total liabilities and stockholders' equity

 $860,837  $841,123 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

2
 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Earnings (Unaudited)

 

   

Three Months Ended

    

Six Months Ended

  
   

June 30,

    

June 30,

  

(in thousands, except per share amounts)

  

2022

    

2021

    

2022

    

2021

  

Interest income:

                                

Loans

   $ 6,029     $ 5,632     $ 11,813     $ 11,437  

Securities

     737       262       1,122       511  

Other

     331       65       455       114  

Total interest income

     7,097       5,959       13,390       12,062  

Interest expense:

                                

Deposits

     415       500       818       1,037  

Other borrowings

     40       7       71       7  

Total interest expense

     455       507       889       1,044  

Net interest income

     6,642       5,452       12,501       11,018  

Provision (credit) for loan losses

     731       (185 )     360       (185 )

Net interest income after provision (credit) for loan losses

     5,911       5,637       12,141       11,203  

Noninterest income:

                                

Service charges and fees on deposit accounts

     73       56       141       109  

Debit card/ATM revenue, net

     143       124       272       233  

Mortgage banking revenue, net

     139       332       304       633  

Income from bank-owned life insurance

     94       67       189       130  

Gain on sale of debt securities available for sale

     -       -       -       108  

Other income

     55       41       116       79  

Total noninterest income

     504       620       1,022       1,292  

Noninterest expense:

                                

Salaries and employee benefits

     2,238       1,805       4,398       3,657  

Occupancy and equipment

     396       378       804       764  

Professional fees

     130       120       276       250  

Marketing

     213       199       380       339  

FDIC assessment

     84       49       208       119  

Software maintenance, amortization and other

     285       251       527       501  

Other

     536       476       1,069       945  

Total noninterest expense

     3,882       3,278       7,662       6,575  

Earnings before income taxes

     2,533       2,979       5,501       5,920  

Income taxes

     566       717       1,293       1,424  

Net earnings

   $ 1,967     $ 2,262     $ 4,208     $ 4,496  
                                 

Earnings per common share:

                                

Basic

   $ 0.62     $ 0.72     $ 1.34     $ 1.44  

Diluted

     0.62       0.72       1.32       1.44  

Cash dividends per common share

     -       -       0.18       0.14  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3
 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

 

   

Three Months Ended

    

Six Months Ended

  
   

June 30,

    

June 30,

  

(in thousands)

  

2022

    

2021

    

2022

    

2021

  

Net earnings

   $ 1,967     $ 2,262     $ 4,208     $ 4,496  

Other comprehensive (loss) income:

                                

Change in unrealized (loss) gain on debt securities available for sale:

                                

Unrealized (loss) gain arising during the period

     (4,397 )     411       (8,762 )     (825 )

Reclassification adjustment for realized gain

     -       -       -       (108 )

Net change in unrealized (loss) gain

     (4,397 )     411       (8,762 )     (933 )

Deferred income tax benefit (expense) on above change

     1,114       (104 )     2,221       237  

Total other comprehensive (loss) income

     (3,283 )     307       (6,541 )     (696 )

Comprehensive (loss) income

   $ (1,316 )   $ 2,569     $ (2,333 )   $ 3,800  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4
 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Six Months ended June 30, 2022 and 2021

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Equity

 

(dollars in thousands)

                        

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 

Net earnings for the three months ended June 30, 2021 (unaudited)

  -  $-  $-  $2,262  $-  $2,262 

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

  -   -   -   -   307   307 

Common stock issued as compensation to directors (unaudited)

  1,680   -   33   -   -   33 

Stock-based compensation (unaudited)

  -   -   56   -   -   56 

Balance at June 30, 2021 (unaudited)

  3,126,474  $31  $38,738  $24,313  $705  $63,787 
                         

Balance at December 31, 2021

  3,129,046  $31  $38,909  $28,164  $(73) $67,031 

Net earnings for the three months ended March 31, 2022 (unaudited)

  -   -   -   2,241   -   2,241 

Dividends paid (unaudited)

  -   -   -   (567)  -   (567)

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

  -   -   -   -   (3,258)  (3,258)

Stock options exercised (unaudited)

  12,240   -   210   -   -   210 

Common stock issued as compensation to directors (unaudited)

  1,189   -   31   -   -   31 

Issuance of restricted stock (unaudited)

  7,786   -   -   -   -   - 

Stock-based compensation (unaudited)

  -   -   73   -   -   73 

Balance at March 31, 2022 (unaudited)

  3,150,261  $31  $39,223  $29,838  $(3,331) $65,761 

Net earnings for the three months ended June 30, 2022 (unaudited)

  -  $-  $-  $1,967  $-  $1,967 

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

  -   -   -   -   (3,283)  (3,283)

Stock options exercised (unaudited)

  4,000   -   80   -   -   80 

Common stock issued as compensation to directors (unaudited)

  1,047   -   29   -   -   29 

Stock-based compensation (unaudited)

  -   -   75   -   -   75 

Balance at June 30, 2022 (unaudited)

  3,155,308  $31  $39,407  $31,805  $(6,614) $64,629 

 

 

5
 
 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flow (Unaudited)

 

   

Six Months Ended June 30,

  

(in thousands)

  

2022

    

2021

  

Cash flows from operating activities:

                

Net earnings

   $ 4,208     $ 4,496  

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

                

Depreciation and amortization

     327       335  

Provision (credit) for loan losses

     360       (185 )

Net accretion of deferred loan fees

     (606 )     (1,382 )

Gain on sale of debt securities

     -       (108 )

Net amortization of premiums and discounts on debt securities

     51       168  

Gain on sale of loans held for sale

     (304 )     (633 )

Proceeds from the sale of loans held for sale

     50,917       108,180  

Loans originated as held for sale

     (49,570 )     (107,690 )

Stock issued as compensation to directors

     60       55  

Stock-based compensation expense

     148       113  

Income from bank-owned life insurance

     (189 )     (130 )

Net (increase) decrease in accrued interest receivable

     (428 )     209  

Net change in operating leases

     13       12  

Net increase in other assets

     (1,250 )     (278 )

Net increase in other liabilities and official checks

     13       41  

Net cash provided by operating activities

     3,750       3,203  

Cash flows from investing activities:

                

Loan originations, net of principal repayments

     (47,122 )     7,740  

Purchase of debt securities available for sale

     (74,891 )     (18,903 )

Purchase of debt securities held to maturity

     (8,772 )     -  

Principal repayments of debt securities available for sale

     6,454       7,594  

Proceeds from sale of debt securities available for sale

     -       5,874  

Maturities and calls of debt securities available for sale

     -       3,015  

(Purchase) repurchase of Federal Home Loan Bank stock

     (97 )     127  

Purchase of bank owned life insurance

     -       (1,197 )

Purchase of premises and equipment

     (593 )     (246 )

Net cash (used in) provided by investing activities

     (125,021 )     4,004  

Cash flows from financing activities:

                

Net increase in deposits

     21,647       102,768  

Change in other borrowings

     550       3,075  

Proceeds from stock options exercised

     290       2  

Common stock dividends paid

     (567 )     (438 )

Net cash provided by financing activities

     21,920       105,407  

Net (decrease) increase in cash and cash equivalents

     (99,351 )     112,614  

Cash and cash equivalents at beginning of period

     233,473       68,985  

Cash and cash equivalents at end of period

   $ 134,122     $ 181,599  

Supplemental disclosure of cash flow information

                

Cash paid during the period:

                

Interest

   $ 904     $ 1,058  

Income taxes

   $ 1,825     $ 1,470  

Noncash transactions:

                

Accumulated other comprehensive loss, net change in unrealized loss on debt securities available for sale, net of income tax benefit

   $ (6,541 )   $ (696 )

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

6
 

 

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 of America (“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, 2021, included in our Annual Report on Form 10-K filed with the SEC on March 10, 2022. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year or any future period.

 

Comprehensive (Loss) 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 (loss) 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 ASU 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 currently running trial models and is still in the process of determining the effect of the ASU on its condensed consolidated financial statements.

 

 

(continued)

 

7
 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(2)

Debt Securities 

 

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 June 30, 2022

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $47,950  $-  $(1,012) $46,938 

Municipal securities

  22,378   15   (2,081)  20,312 

U.S. agency mortgage-backed securities

  67,742   2   (5,660)  62,084 

Asset-backed securities

  4,171   -   (123)  4,048 

Total

 $142,241  $17  $(8,876) $133,382 
                 

Debt Securities Held to Maturity

                

Municipal securities

 $6,189  $-  $(960) $5,229 

U.S. agency mortgage-backed securities

  2,588   -   -   2,588 

Total

 $8,777  $-  $(960) $7,817 
                 

At December 31, 2021

                

Debt Securities Available for Sale

                

U.S. Government agency securities

 $2,933  $-  $(14) $2,919 

Municipal securities

  17,721   288   (240)  17,769 

U.S. agency mortgage-backed securities

  48,614   379   (528)  48,465 

Asset-backed securities

  4,592   25   (7)  4,610 

Total

 $73,860  $692  $(789) $73,763 

 

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

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

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

  

More Than Twelve Months

 
  

Gross

      

Gross

     
  

Unrealized

  

Fair

  

Unrealized

  

Fair

 
  

Losses

  

Value

  

Losses

  

Value

 

(in thousands)

                

At June 30, 2022

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $(1,012) $46,938  $-  $- 

Municipal securities

  (1,709)  15,313   (372)  1,634 

U.S. agency mortgage-backed securities

  (4,623)  56,208   (1,037)  5,651 

Asset-backed securities

  (85)  2,771   (38)  1,277 

Total

 $(7,429) $121,230  $(1,447) $8,562 
                 

Debt Securities Held to Maturity

                

Municipal securities

 $(960) $5,229  $-  $- 
                 

At December 31, 2021

                

Debt Securities Available for Sale

                

U.S. Government Agencies

 $(14) $2,919  $-  $- 

Municipal securities

  (240)  8,429   -   - 

U.S. agency mortgage-backed securities

  (528)  28,207   -   - 

Asset-backed securities

  -   -   (7)  1,430 

Total

 $(782) $39,555  $(7) $1,430 

 

 

(continued)

 

8
 

 

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 June 30, 2022 and December 31, 2021 on ninety-three 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 June 30, 2022

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $46,938  $-  $46,938  $- 

Municipal securities

  20,312   -   20,312   - 

U.S. agency mortgage-backed securities

  62,084   -   62,084   - 

Asset-backed securities

  4,048   -   4,048   - 

Total

 $133,382  $-  $133,382  $- 
                 

At December 31, 2021

                

Debt Securities Available for Sale

                

U.S. Government agency securities

 $2,919  $-  $2,919  $- 

Municipal securities

  17,769   -   17,769   - 

U.S. agency mortgage-backed securities

  48,465   -   48,465   - 

Asset-backed securities

  4,610   -   4,610   - 

Total

 $73,763  $-  $73,763  $- 

 

The scheduled maturities of debt securities are as follows:

 

  

At June 30, 2022

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 

(in thousands)

        

Debt Securities Available for Sale

        

Due in less than one year

 $6  $6 

Due in one to five years

  49,150   48,459 

Due in five to ten years

  16,841   15,084 

Due after ten years

  8,502   7,749 

U.S. agency mortgage-backed securities

  67,742   62,084 

Total

 $142,241  $133,382 
    

Debt Securities Held to Maturity

        

Due after ten years

 $6,189  $5,229 

U.S. agency mortgage-backed securities

  2,588   2,588 
  $8,777  $7,817 

 

 

(continued)

 

9
 

 

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 June 30, 2022

  

At December 31, 2021

 

Real estate mortgage loans:

        

Commercial

 $179,976  $156,306 

Residential and home equity

  208,769   183,536 

Construction

  71,382   71,164 

Total real estate mortgage loans

  460,127   411,006 
         

Commercial loans

  75,996   78,584 

Consumer and other loans

  7,961   7,283 

Total loans

  544,084   496,873 
         

Add (deduct):

        

Net deferred loan costs (fees)

  93   (701)

Allowance for loan losses

  (6,611)  (5,974)

Loans, net

 $537,566  $490,198 

 

(continued)

 

10
 

 

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 June 30, 2022

                            

Beginning balance

 $1,701  $2,203  $798  $1,074  $111  $-  $5,887 

Provision (credit) for loan losses

  350   227   69   65   20   -   731 

Net recoveries (charge-offs)

  -   -   -   4   (11)  -   (7)

Ending balance

 $2,051  $2,430  $867  $1,143  $120  $-  $6,611 

Three Month Period Ended June 30, 2021

                            

Beginning balance

 $1,498  $1,857  $550  $1,430  $72  $690  $6,097 

Provision (credit) for loan losses

  34   146   (12)  (239)  15   (129)  (185)

Net (charge-offs) recoveries

  -   (16)  -   11   (8)  -   (13)

Ending balance

 $1,532  $1,987  $538  $1,202  $79  $561  $5,899 
                             

Six Month Period Ended June 30, 2022

                            

Beginning balance

 $1,762  $2,139  $857  $1,125  $91  $-  $5,974 

Provision (credit) for loan losses

  289   291   10   (281)  51   -   360 

Net recoveries (charge-offs)

  -   -   -   299   (22)  -   277 

Ending balance

 $2,051  $2,430  $867  $1,143  $120  $-  $6,611 

Six Month Period Ended June 30, 2021

                            

Beginning balance

 $1,500  $1,827  $539  $1,592  $75  $559  $6,092 

Provision (credit) for loan losses

  32   176   (1)  (409)  15   2   (185)

Net (charge-offs) recoveries

  -   (16)  -   19   (11)  -   (8)

Ending balance

 $1,532  $1,987  $538  $1,202  $79  $561  $5,899 
                             
                             

At June 30, 2022

                            

Individually evaluated for impairment:

                            

Recorded investment

 $283  $-  $-  $66  $19  $-  $368 

Balance in allowance for loan losses

 $-  $-  $-  $14  $16  $-  $30 

Collectively evaluated for impairment:

                            

Recorded investment

 $179,693  $208,769  $71,382  $75,930  $7,942  $-  $543,716 

Balance in allowance for loan losses

 $2,051  $2,430  $867  $1,129  $104  $-  $6,581 
                             

At December 31, 2021

                            

Individually evaluated for impairment:

                            

Recorded investment

 $-  $-  $-  $-  $-  $-  $- 

Balance in allowance for loan losses

 $-  $-  $-  $-  $-  $-  $- 

Collectively evaluated for impairment:

                            

Recorded investment

 $156,306  $183,536  $71,164  $78,584  $7,283  $-  $496,873 

Balance in allowance for loan losses

 $1,762  $2,139  $857  $1,125  $91  $-  $5,974 

 

 

(continued)

 

11
 

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)

 

12
 

 

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 June 30, 2022

                        

Grade:

                        

Pass

 $177,850  $206,161  $71,308  $75,851  $7,953  $539,123 

Special mention

  1,843   2,608   74   79   8   4,612 

Substandard

  283   -   -   66   -   349 

Doubtful

  -   -   -   -   -   - 

Loss

  -   -   -   -   -   - 

Total

 $179,976  $208,769  $71,382  $75,996  $7,961  $544,084 
                         

At December 31, 2021

                        

Grade:

                        

Pass

 $153,404  $181,770  $71,051  $78,462  $7,233  $491,920 

Special mention

  2,902   1,766   113   118   50   4,949 

Substandard

  -   -   -   4   -   4 

Doubtful

  -   -   -   -   -   - 

Loss

  -   -   -   -   -   - 

Total

 $156,306  $183,536  $71,164  $78,584  $7,283  $496,873 

 

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 $1 million 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)

 

13
 

 

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 June 30, 2022

                            

Real estate mortgage loans:

                            

Commercial

 $-  $-  $-  $-  $179,693  $283  $179,976 

Residential and home equity

  571   670   -   1,241   207,528   -   208,769 

Construction

  -   -   -   -   71,382   -   71,382 

Commercial loans

  356   -   -   356   75,574   66   75,996 

Consumer and other loans

  -   -   -   -   7,961   -   7,961 

Total

 $927  $670  $-  $1,597  $542,138  $349  $544,084 
                             

At December 31, 2021

                            

Real estate mortgage loans:

                            

Commercial

 $-  $-  $-  $-  $156,306  $-  $156,306 

Residential and home equity

  710   -   -   710   182,826   -   183,536 

Construction

  -   -   -   -   71,164   -   71,164 

Commercial loans

  411   -   -   411   78,173   -   78,584 

Consumer and other loans

  -   -   -   -   7,283   -   7,283 

Total

 $1,121  $-  $-  $1,121  $495,752  $-  $496,873 

 

(continued)

 

14
 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The following table summarizes the amount of impaired loans at  June 30, 2022 and  December 31, 2021.

 

  

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 June 30, 2022

                                

Real estate mortgage loans:

                                

Commercial

 $283  $283  $-  $-  $-  $283   283  $- 

Commercial loans

  -   -   66   66   14   66   66   14 

Consumer and other loans

  3   3   16   16   16   19   19   16 

Total

 $286  $286  $82  $82  $30  $368  $368  $30 
                                 

At December 31, 2021

                                

Consumer and other loans

 $4  $4  $-  $-  $-  $4  $4  $- 

Total

 $4  $4  $-  $-  $-  $4  $4  $- 

 

There were no collateral dependent loans measured at fair value on a nonrecurring basis at  June 30, 2022 and  December 31, 2021.

 

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

 

  

Three Months Ended June 30,

 
  

2022

  

2021

 
  

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

 $6  $-  $-  $-  $-  $- 

Residential and home equity

  -   -   -   471   1   - 

Commercial loans

  2   -   -   510   -   - 

Total

 $8  $-  $-  $981  $1  $- 

 

  

Six Months Ended June 30,

 
  

2022

  

2021

 
  

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

 $3  $-  $-  $-  $-  $- 

Residential and home equity

  -   -   -   449   1   - 

Commercial loans

  1   -   -   351   -   - 

Total

 $4  $-  $-  $800  $1  $- 

 

 

 

 

 

(continued)

 

15
 

 

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 and six months ended June 30, 2022 and 2021.

 

(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 June 30, 2022, the Bank’s capital conservation buffer exceeded the minimum requirement.

 

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  June 30, 2022, that the Bank meets all capital adequacy requirements to which it is subject.

 

As of June 30, 2022, 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 June 30, 2022

                        

Tier 1 Leverage Capital

 $75,165   8.61% $34,934   4.00% $43,668   5.00%

Common Equity Tier 1 Risk-based Capital

  75,165   12.61   26,829   4.50   38,753   6.50 

Tier 1 Risk-based Capital

  75,165   12.61   35,772   6.00   47,696   8.00 

Total Risk-based Capital

  81,776   13.72   47,696   8.00   59,621   10.00 
                         

As of December 31, 2021

                        

Tier 1 Leverage Capital

 $70,548   8.53% $33,071   4.00% $41,338   5.00%

Common Equity Tier 1 Risk-based Capital

  70,548   13.45   23,596   4.50   34,083   6.50 

Tier 1 Risk-based Capital

  70,548   13.45   31,461   6.00   41,948   8.00 

Total Risk-based Capital

  76,522   14.59   41,948   8.00   52,435   10.00 

 

(continued)

 

16
 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(5)

Earnings Per Share

 

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three and six months ended June 30, 2022 and 2021, outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method.

 

  

2022

  

2021

 
      

Weighted-

  

Per

      

Weighted-

  

Per

 
      

Average

  

Share

      

Average

  

Share

 

(dollars in thousands, except per share amounts)

 

Earnings

  

Shares

  

Amount

  

Earnings

  

Shares

  

Amount

 

Three Months Ending June 30:

                        

Basic EPS:

                        

Net earnings

 $1,967   3,151,760  $0.62  $2,262   3,126,197  $0.72 

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

      37,559           12,982     

Diluted EPS:

                        

Net earnings

 $1,967   3,189,319  $0.62  $2,262   3,139,179  $0.72 
                         

Six Months Ending June 30:

                        

Basic EPS:

                        

Net earnings

 $4,208   3,147,428  $1.34  $4,496   3,124,889  $1.44 

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

      41,374           3,296     

Diluted EPS:

                        

Net earnings

 $4,208   3,188,802  $1.32  $4,496   3,128,185  $1.44 

 

 

 

 

 

(continued)

 

17
 

 

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”) 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 June 30, 2022 185,237 shares are available to be issued under the 2015 Stock Plan as restricted stock, underlying options, or otherwise. A summary of the stock option activity for the six months ended June 30, 2022 and 2021 is as follows:

 

          

Weighted-

     
      

Weighted-

  

Average

     
      

Average

  

Remaining

  

Aggregate

 
  

Number of

  

Exercise

  

Contractual

  

Intrinsic

 
  

Options

  

Price

  

Term (years)

  

Value

 

Outstanding at December 31, 2020

  272,057  $19.80         

Options exercised

  (120) $(20.09)        

Options forfeited

  (6,000)  (20.09)        

Outstanding at June 30, 2021

  265,937  $19.80         

Options granted

  18,000  $27.12         

Options exercised

  (30)  (20.09)        

Options forfeited

  (15,250)  (20.58)        

Outstanding at December 31, 2021

  268,657  $20.23         

Options exercised

  (16,240)  (17.92)        

Options forfeited

  (50)  (20.09)        

Outstanding at June 30, 2022

  252,367  $20.38   5.75  $1,635,000 

Exercisable at June 30, 2022

  184,887  $19.85   5.39  $1,279,000 

 

The fair value of shares vested and recognized as compensation expense was $75,000 and $56,000 for the three months ended June 30, 2022 and 2021, and $148,000 and $113,000 for the six months ended June 30, 2022 and 2021, respectively. These amounts include expense of $31,000 and $18,000 recognized on restricted common stock shares and $60,000 and $34,000 for the six months ended June 30, 2022 and 2021, respectively. The deferred tax benefit related to stock options was $5,000 for the three months ended June 30, 2022 and 2021, and $10,000 for the six months ended June 30, 2022 and 2021. At June 30, 2022, there was $240,000 in unrecognized compensation expense related to unvested share-based compensation arrangements granted under the 2015 Plan, with an average remaining vesting period of 2.6 years.  

(continued) 

 

18
 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)

Stock Benefit Plans, Continued

 

Restricted Stock   

 

During the six months ended June 30, 2022 and 2021, the Company issued 7,786 and 4,081 restricted common stock shares, respectively, to its CEO as part of his bonus incentive earned for the Company’s performance in 2021 and 2020, 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, 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 June 30, 2021 and December 31, 2021

  7,838  $18.88  $149,000 

Non-vested restricted stock granted in 2022

  7,786  $28.31  $220,000 

Restricted stock shares vested in 2022

  (3,838)  (18.98)  (73,000)

Non-vested restricted stock outstanding at June 30, 2022

  11,786  $25.08  $296,000 

 

During the six months ended June 30, 2022 and 2021, the Company recognized $60,000 and $34,000, respectively, as expense related to restricted stock grants.  At June 30, 2022, the Company had $244,000 in unrecognized expense to be recognized over a weighted-average period of 2.3 years.

 

Director s’ 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 June 30, 2022 and 2021  our directors received 1,047 and 1,680 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $29,000 and $33,000, respectively.  For the six months ended June 30, 2022 and 2021, our directors received  2,236 and 2,802 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $60,000 and $55,000, respectively. At  June 30, 2022, 39,128 shares remained available for grant.
 
 

(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 $92.7 million at  June 30, 2022. At  June 30, 2022 and December 31, 2021, 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. At June 30, 2022, the interest rate was 4.75%. 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. At June 30, 2022 and December 31, 2021, the Company had an outstanding loan balance of $4,125,000 and $3,575,000, respectively.  The Company incurred $40,000 and $71,000 in interest expense for the three and six months ended June 30, 2022, respectively, compared to $7,000 for both the three and six months ended June 30, 2021, respectively. 

19
 

 

 

(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.   

 

         
  

At June 30, 2022

  

At December 31, 2021

 

(dollars in thousands)

        

Notional amount - interest rate swaps:

        

Stand-alone derivatives

 $20,434  $20,606 
         

Weighted-average pay rate - interest rate swaps

  3.68%  3.69%

Weighted-average receive rate - interest rate swaps

  3.00%  3.00%

Weighted-average maturity (in years) - interest rate swaps

  13.1   13.6 
         

Net realized fair value adjustments:

        

Stand-alone derivatives - interest rate swaps (other assets)

 $1,801  $630 

Stand-alone derivatives - interest rate swaps (other liabilities)

 $(1,801) $(630)

 

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.     

 

20
 

 

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 June 30, 2022

  

At December 31, 2021

 
      

Carrying

  

Fair

  

Carrying

  

Fair

 

(in thousands)

 

Level

  

Amount

  

Value

  

Amount

  

Value

 

Financial assets:

                    

Cash and cash equivalents

  1  $134,122  $134,122  $233,473  $233,473 

Debt securities available for sale

  2   133,382   133,382   73,763   73,763 

Debt securities held to maturity

  2   8,777   7,817   -   - 

Loans held for sale

  3   10,725   10,896   11,768   11,964 

Loans, net

  3   537,566   531,454   490,198   495,209 

Federal Home Loan Bank stock

  3   463   463   366   366 

Accrued interest receivable

  3   1,933   1,933   1,505   1,505 

Bank-owned life insurance

  3   16,342   16,342   16,153   16,153 

Derivative contract assets

  3   1,801   1,801   630   630 
                     

Financial liabilities:

                    

Deposits

  3   784,589   784,682   762,942   763,147 

Other borrowings

  3   4,125   4,125   3,575   3,575 

Derivative contract liabilities

  3   1,801   1,801   630   630 
                     

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, 2021.

 

 

21
 

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Fin

ancial Statements (unaudited), Continued

 

(10)

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.

 

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 $454,000 at  June 30, 2022.

 

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

 

Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded.

 

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 June 30, 2022

 

(in thousands)

    

Commitments to extend credit

 $20,060 

Construction loans in process

 $60,787 

Unused lines of credit

 $82,204 

Standby financial letters of credit

 $2,945 

Standby performance letters of credit

 $- 

Guaranteed accounts

 $1,612 

 

(continued)

 

22
 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

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, 2021. Results of operations for the three and six months ended June 30, 2022 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.

 

23
 

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

  
   

Six Months

    

Year

    

Six Months

  
   

Ended

    

Ended

    

Ended

  
   

June 30, 2022

    

December 31, 2021

    

June 30, 2021

  

Average equity as a percentage of average assets

     7.65 %     8.67 %     8.78 %

Equity to total assets at end of period

     7.51       7.97       8.43  

Return on average assets(1)

     0.98       1.11       1.28  

Return on average equity(1)

     12.78       12.81       14.55  

Noninterest expense to average assets(1)

     1.78       1.87       1.87  

Nonperforming loans to total loans at end of period

     0.06       -       -  

Nonperforming assets to total assets

     0.04       -       -  

 

(1) Annualized for the six months ended June 30, 2022 and 2021.

 

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 June 30, 2022, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2021.

 

 

24
 

 

FINANCIAL CONDITION

 

Average assets totaled $869.6 million and $861.3 million for the three and six months ended June 30, 2022 respectively, an increase of $137.9 million (18.9%) and $157.9 million (22.4%), over the comparable periods in 2021. The growth in average assets stemmed mostly from increases in securities (comparing three-month periods) and cash and securities (comparing six-month periods), funded by deposit inflows. The average balance of loans grew more modestly as the average balance of PPP loans decreased $66.4 million comparing 2Q21 to 2Q22 and $63.8 million, comparing the first six months of 2022 to the first six months of 2021.  

 

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 June 30, 2022 our debt securities available for sale and held to maturity investment portfolios included highly rated U.S. government agency securities, municipal securities, U.S. agency mortgage-backed securities, and asset-backed securities.  As of the same date, this portfolio had a fair market value of $141.2 million and an amortized cost value of $151.0 million. At June 30, 2022 and December 31, 2021, our investment securities portfolio represented approximately 16.5% and 8.8% of our total assets, respectively. The average yield on the average balance of investment securities for the six months ended June 30, 2022 was 2.07%, compared to 1.71% for the comparable period in 2021.   

 

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. 

 

Excluding $14.1 million in PPP loan forgiveness during the first half of 2022, the Company's gross loan portfolio increased $61.3 million, or 12.3%, since 2021 year-end. 

 

Nonperforming assets.  At June 30, 2022, the Company had $349,000 in nonperforming assets compared to none at December 31, 2021.  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 June 30, 2022 the Bank had two loans totaling $349,000 on nonaccrual status, compared to none at December 31, 2021. 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 second quarter of 2022, the Bank reported a $731,000 provision for loan losses due to loan production during the quarter.  This compared to a $185,000 credit for loan losses in the second quarter of 2021 due mostly to a decrease in the amount of COVID-19 unallocated reserve. The Company had net charge-offs of $7,000 during the three months ended June 30, 2022 compared to net charge-offs of $13,000 in the three months ended June 30, 2021.  For the six-month period ended June 30, 2022, the Company reported $277,000 in net recoveries compared to net charge-offs of $8,000 for the same period in 2021. Management believes the allowance for loan losses, which was $6.6 million, or 1.22%, of gross loans at June 30, 2022 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 June 30, 2022 were $784.6 million, an increase of $21.6 million, or 2.8%, from December 31, 2021. The average balance of noninterest-bearing deposits accounted for 26.9% of the average balance of total deposits for the six months ended June 30, 2022, compared to 29.2% for the six months ended June 30, 2021.  Given the current interest rate environment, management is monitoring potential volatility in deposit balances closely. 

 

Borrowings. The Bank has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”) and pledges its qualified loans as collateral which would allow the Bank, as of June 30, 2022, to borrow up to $92.7 million. In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled $47.0 million at June 30, 2022. There were no loans outstanding under any of these lines at June 30, 2022. 

 

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 interest rate adjusts daily to the then-current Wall Street Journal Prime Rate and was 4.75% at June 30, 2022. 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.  At June 30, 2022, the Company had a $4,125,000 outstanding loan balance and incurred $71,000 in year-to-date interest expense under this line.  

 

25
 

 

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 net interest margin improved for the three-month period due primarily to volume and rate increases in loans and securities.  Comparing the six- month periods, the impact of PPP forgiveness is more dominant and resulted in the lower net interest margin in 2022.   

 

   

For the Three Months Ended June 30,

  
   

2022

    

2021

  
           

Interest

                    

Interest

          
   

Average

    

and

    

Yield/

    

Average

    

and

    

Yield/

  

(dollars in thousands)

  

Balance

    

Dividends

    

Rate(5)

    

Balance

    

Dividends

    

Rate(5)

  

Interest-earning assets:

                                                

Loans(1)

   $ 514,166     $ 5,912       4.60 %   $ 483,587     $ 5,505       4.55 %

Loans held for sale

     11,174       117       4.19       14,784       127       3.44  

Debt securities available for sale

     132,562       737       2.22       60,155       262       1.74  

Other(2)

     170,320       331       0.78       141,842       65       0.18  

Total interest-earning assets

     828,222     $ 7,097       3.43 %     700,368     $ 5,959       3.40 %

Noninterest-earning assets

     41,391                       31,313                  

Total assets

   $ 869,613                     $ 731,681                  
                                                 

Interest-bearing liabilities:

                                                

Savings, NOW and money-market deposits

   $ 536,209     $ 357       0.27 %   $ 413,859     $ 410       0.40 %

Time deposits

     43,611       58       0.53       51,372       90       0.70  

Total interest-bearing deposits

     579,820       415       0.29       465,231       500       0.43  

Other borrowings

     4,034       40       3.97       802       7       3.49  

Total interest-bearing liabilities

     583,854     $ 455       0.31 %     466,033     $ 507       0.44 %

Noninterest-bearing deposits

     213,521                       196,726                  

Noninterest-bearing liabilities

     7,345                       6,085                  

Stockholders' equity

     64,893                       62,837                  

Total liabilities and stockholders' equity

   $ 869,613                     $ 731,681                  
                                                 

Net earning assets

   $ 244,368                     $ 234,335                  

Net interest income

           $ 6,642                     $ 5,452          

Interest rate spread (3)

                     3.12 %                     2.96 %

Net interest margin(4)

                     3.21 %                     3.11 %
                                                 

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

     141.85 %                     150.28 %                

 

(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

 

 

26
 

 

 

   

For the Six Months Ended June 30,

  
   

2022

    

2021

  
           

Interest

                    

Interest

          
   

Average

    

and

    

Yield/

    

Average

    

and

    

Yield/

  

(dollars in thousands)

  

Balance

    

Dividends

    

Rate(5)

    

Balance

    

Dividends

    

Rate(5)

  

Interest-earning assets:

                                                

Loans(1)

   $ 501,783     $ 11,596       4.62 %   $ 483,586     $ 11,204       4.63 %

Loans held for sale

     10,864       217       3.99       14,081       233       3.31  

Debt securities available for sale

     108,459       1,122       2.07       59,893       511       1.71  

Other(2)

     200,167       455       0.45       115,888       114       0.20  

Total interest-earning assets

     821,273     $ 13,390       3.26 %     673,448     $ 12,062       3.58 %

Noninterest-earning assets

     40,004                       29,971                  

Total assets

   $ 861,277                     $ 703,419                  
                                                 

Interest-bearing liabilities:

                                                

Savings, NOW and money-market deposits

   $ 526,909     $ 693       0.26 %   $ 396,541     $ 811       0.41 %

Time deposits

     46,251       125       0.54       52,906       226       0.85  

Total interest-bearing deposits

     573,160       818       0.29       449,447       1,037       0.46  

Other borrowings

     3,877       71       3.66       411       7       3.41  

Total interest-bearing liabilities

     577,037     $ 889       0.31 %     449,858     $ 1,044       0.46 %

Noninterest-bearing deposits

     211,170                       185,424                  

Noninterest-bearing liabilities

     7,202                       6,361                  

Stockholders' equity

     65,868                       61,776                  

Total liabilities and stockholders' equity

   $ 861,277                     $ 703,419                  
                                                 

Net earning assets

   $ 244,236                     $ 223,590                  

Net interest income

           $ 12,501                     $ 11,018          

Interest rate spread (3)

                     2.95 %                     3.12 %

Net interest margin(4)

                     3.04 %                     3.27 %
                                                 

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

     142.33 %                     149.70 %                

 

 

(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

 

 

27
 

 

Comparison of Operating Results for the THREE MONTHS ENDED JUNE 30, 2022 AND 2021

 

Earnings Summary

                                

(dollars in thousands)

                                
                   

Change 2Q'22 vs. 2Q'21

  
   

2Q'22

    

2Q'21

    

Amount

    

Percentage

  

Net Interest Income

   $ 6,642     $ 5,452     $ 1,190       21.8 %

Provision (credit) for loan losses

     731       (185 )     916       495.1  

Noninterest income

     504       620       (116 )     (18.7 )

Noninterest expense

     3,882       3,278       604       18.4  

Income Taxes

     566       717       (151 )     (21.1 )

Net earnings

   $ 1,967     $ 2,262     $ (295 )     (13.0 )%

 

Compared to 2Q21, the decrease in net earnings is primarily attributed to the provision for loan losses (compared to a credit in 2021), partially offset by higher net interest income and lower income taxes.  Lower income from mortgage banking activities and increases in noninterest expense (mostly attributed to higher salaries and employee benefits) also contributed to the decline in net earnings. 

 

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 2Q'22 vs. 2Q'21

  
   

2Q'22

    

2Q'21

    

Amount

    

Percentage

  

Interest income:

                                

Loans

   $ 6,029     $ 5,632     $ 397       7.0 %

Securities

     737       262       475       181.3  

Other

     331       65       266       409.2  

Total interest income

   $ 7,097     $ 5,959     $ 1,138       19.1 %

Interest expense:

                                

Deposits

     415       500     $ (85 )     (17.0 %)

Other borrowings

     40       7       33       471.4  

Total interest expense

     455       507       (52 )     (10.3 )

Net interest income

   $ 6,642     $ 5,452     $ 1,190       21.8 %

 

Compared to the second quarter of 2021, the volume increase in loans and securities is the biggest driver of the increase in net interest income, followed by rate increases.  Average interest-earning assets totaled $828.2 million for 2Q22, compared to $700.4 million for 2Q21. Partially offsetting this was a $637,000 reduction in PPP fee and interest income when compared to 2Q21. Compared to 2Q21, interest expense decreased $52,000 as volume increases were offset by a strategic reduction of deposit rates made in the first quarter of 2022.  The Company's 2Q22 net interest margin of 3.21% compared favorably to the Company's 2Q21 net interest margin of 3.11%. 

 

 

28
 

 

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's strong loan production in the second quarter of 2022 resulted in a $731,000 provision for loan losses.  This compared to a $185,000 credit to loan losses during the second quarter of 2021 due primarily to a decrease in the amount of the COVID-19 unallocated reserve. 

 

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 2Q'22 vs. 2Q'21

  
   

2Q'22

    

2Q'21

    

Amount

    

Percentage

  

Service charges and fees on deposit accounts

   $ 73     $ 56     $ 17       30.4 %

Debit card/ATM revenue, net

     143       124       19       15.3  

Mortgage banking revenue, net

     139       332       (193 )     (58.1 )

Income from bank-owned life insurance

     94       67       27       40.3  

Other income

     55       41       14       34.1  

Total noninterest income

   $ 504     $ 620     $ (116 )     (18.7 %)

 

The decline in noninterest income is predominantly due to lower mortgage banking revenue which was anticipated given the rising rate environment and the high level of refinancing activity that occurred in 2021.  Increases in bank-owned life insurance ("BOLI") income, service charges and fees on deposit accounts, and fee income from merchant cards, debit cards, and ATM transactions partially offset the decrease in mortgage banking revenue.  

 

Noninterest expense

                                

(dollars in thousands)

                  

Change 2Q'22 vs. 2Q'21

  
   

2Q'22

    

2Q'21

    

Amount

    

Percentage

  

Salaries and employee benefits

   $ 2,238     $ 1,805     $ 433       24.0 %

Occupancy and equipment

     396       378       18       4.8  

Professional fees

     130       120       10       8.3  

Marketing

     213       199       14       7.0  

FDIC Assessment

     84       49       35       71.4  

Software maintenance and amortization

     285       251       34       13.5  

Other

     536       476       60       12.6  

Total noninterest expense

   $ 3,882     $ 3,278     $ 604       18.4 %

 

An increase in salaries and employee benefits is the primary driver of higher noninterest expense due to a larger employee base (100 FTEs at June 30, 2022 versus 95 at June 30, 2021) and annual raises that went in effect in March of 2022.  The increase in the quarterly FDIC assessment is attributed to an increased assessment rate and higher deposit balances. The $60,000 increase in other noninterest expense from 2021 to 2022 is attributed to modest fluctuations in various miscellaneous expense categories. 

 

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 $566,000 for the three months ended June 30, 2022, compared to income taxes of $717,000 for the three months ended June 30, 2021 with the decrease attributed to lower pre-tax earnings and a lower effective tax rate in 2022.  In the second quarter of 2022, the Company received a $65,000 state income tax refund that led to a lower effective tax rate of 22.3% in the second quarter of 2022 versus 24.1% in the second quarter of 2021.

 

29
 

 

Comparison of Operating Results for the six months ended June 30, 2022 and 2021

 

Earnings Summary

                                

(dollars in thousands)

                                
   

Six Months Ended

    

Change 2022 vs. 2021

  
   

June 30, 2022

    

June 30, 2021

    

Amount

    

Percentage

  

Net Interest Income

   $ 12,501     $ 11,018     $ 1,483       13.5 %

Provision (credit) for loan losses

     360       (185 )     545       294.6  

Noninterest income

     1,022       1,292       (270 )     (20.9 )

Noninterest expense

     7,662       6,575       1,087       16.5  

Income Taxes

     1,293       1,424       (131 )     (9.2 )

Net earnings

   $ 4,208     $ 4,496     $ (288 )     (6.4 )%

 

Comparing the six-month periods, higher net interest income and lower taxes were offset primarily by higher noninterest expense and secondarily by the provision for loan losses and lower noninterest income.

 

 

Interest income

                                

(dollars in thousands)

                                
   

Six Months Ended

    

Change 2022 vs. 2021

  
   

June 30, 2022

    

June 30, 2021

    

Amount

    

Percentage

  

Interest income:

                                

Loans

   $ 11,813     $ 11,437     $ 376       3.3 %

Securities

     1,122       511       611       119.6  

Other

     455       114       341       299.1  

Total interest income

   $ 13,390     $ 12,062     $ 1,328       11.0 %

Interest expense:

                                

Deposits

     818       1,037     $ (219 )     (21.1 %)

Other borrowings

     71       7       64       914.3  

Total interest expense

     889       1,044       (155 )     (14.8 )

Net interest income

   $ 12,501     $ 11,018     $ 1,483       13.5 %

 

Comparing the six-month periods, the average balance of interest-earnings assets increased 22.0%, or $147.8 million, and was the primary driver of the increase in net interest income.  Partially offsetting this was a $1.2 million decrease in interest and fee income from PPP Loans as the Bank moved through the forgiveness process of these loans which impacted average loan yields and the net interest margin.  The yield on the average balance of interest-earning assets declined from 3.58% for the six months ended June 30, 2021 to 3.26% for the six months ended June 30, 2022 while the net interest margin dipped from 3.27% to 3.04% for the same time period.  Despite higher deposit balances, year-to-date interest expense declined from 2021 to 2022 due to strategic rate reductions made in the first quarter of 2022.

 

Provision for Loan Losses

 

Through June 30, 2022, the Company recorded a $360,000 provision for loan losses compared to a 185,000 credit for loan losses for the same time period in 2021. The Company recorded a credit in 2021 primarily due to a decrease in the amount of COVID-19 unallocated reserve.  Loan production in the second quarter of 2022 led to a $731,000 provision which offset the $371,000 credit taken in the first quarter of 2022 due to flat loan growth (net PPP) and a $284,000 net recovery which reduced the historical loss factor on commercial loans by 19 basis points. 

 

30
 

 

Noninterest income

                                

(dollars in thousands)

  

Six Months Ended

    

Change 2022 vs. 2021

  
   

June 30, 2022

    

June 30, 2021

    

Amount

    

Percentage

  

Service charges and fees on deposit accounts

   $ 141     $ 109     $ 32       29.4 %

Debit card/ATM revenue, net

     272       233       39       16.7  

Mortgage banking revenue, net

     304       633       (329 )     (52.0 )

Income from bank-owned life insurance

     189       130       59       45.4  

Gain on sale of securities available for sale

     -       108       (108 )     N/A  

Other income

     116       79       37       46.8  

Total noninterest income

   $ 1,022     $ 1,292     $ (270 )     (20.9 %)

 

The decline in noninterest income is predominantly due to lower mortgage banking revenue which was anticipated given the rising rate environment and the high level of refinancing activity that occurred in 2021.  Increases in BOLI income, service charges and fees on deposit accounts, and fee income on merchant cards, debit cards, and ATM transactions helped offset the year-to-date decline in mortgage banking revenue.

 

Noninterest expense

                                

(dollars in thousands)

  

Six Months Ended

    

Change 2022 vs. 2021

  
   

June 30, 2022

    

June 30, 2021

    

Amount

    

Percentage

  

Salaries and employee benefits

   $ 4,398     $ 3,657     $ 741       20.3 %

Occupancy and equipment

     804       764       40       5.2  

Professional fees

     276       250       26       10.4  

Marketing

     380       339       41       12.1  

FDIC Assessment

     208       119       89       74.8  

Software maintenance and amortization

     527       501       26       5.2  

Other

     1,069       945       124       13.1  

Total noninterest expense

   $ 7,662     $ 6,575     $ 1,087       16.5 %

 

Year-to-date, the growth in noninterest expense is mostly attributed to higher salaries and employee benefits expense due to a larger employee base (100 FTEs at June 30, 2022 versus 95 at June 30, 2021) and annual raises that went in effect in March of 2022.  An increased assessment rate and higher deposit balances led to the $89,000 increase in the FDIC assessment in 2022.  The $124,000 increase in other noninterest expense from the first half of 2021 to the first half of 2022 is attributed to modest fluctuations in various miscellaneous expense categories and can be mostly credited to the Bank's organic growth.

 

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 $1.3 million for the six months ended June 30, 2022, compared to income taxes of $1.4 million for the six months ended June 30, 2021, with the decrease attributed to lower pre-tax earnings and a lower effective tax rate in 2022. The effective tax rate was 23.5% for the six months ended June 30, 2022 versus 24.1% for the  six months ended June 30, 2021.
 
31
 

 

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 position. The liquidity position 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, U.S. agency 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, and the State of Florida’s Qualified Public Deposit (“QPD”) Program. At June 30, 2022, the Bank had access to approximately $92.7 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $47.0 million in unsecured lines of credit maintained with correspondent banks.

 

The Company has a $15 million revolving line of credit with TNB. As of June 30, 2022, the Company's outstanding borrowings under this line totaled $4,125,000.   

 

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 $14.3 million at June 30, 2022 compared to $11.9 million at December 31, 2021. Our primary liquid assets, excluding assets pledged to the QPD program, accounted for 29.4% and 35.1% of total assets at June 30, 2022 and December 31, 2021, 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 June 30, 2022, total deposits were $784.6 million, of which $11.7 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 $64.6 million at June 30, 2022 compared to $67.0 million at December 31, 2021. The $2.4 million decrease in equity is mostly attributed to the $6.5 million increase in the unrealized losses of our investment portfolio, partially offset by retention of earnings.  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.  At June 30, 2022, the Company had a $4,125,000 outstanding loan balance and incurred year-to-date interest expense of $71,000 under this revolving line of credit.  

 

At June 30, 2022, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations with an 8.61% Tier 1 Leverage Capital Ratio, a 12.61% Common Equity Tier 1 Risk-Based Capital Ratio, a 12.61% Tier 1 Risk-Based Capital Ratio, and a 13.72% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.”

 

The following is a summary at June 30, 2022 and December 31, 2021 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 June 30, 2022

                                                

Tier 1 Leverage Capital

   $ 75,165       8.61 %   $ 34,934       4.00 %   $ 43,668       5.00 %

Common Equity Tier 1 Risk-based Capital

     75,165       12.61       26,829       4.50       38,753       6.50  

Tier 1 Risk-based Capital

     75,165       12.61       35,772       6.00       47,696       8.00  

Total Risk-based Capital

     81,776       13.72       47,696       8.00       59,621       10.00  
                                                 

As of December 31, 2021

                                                

Tier 1 Leverage Capital

   $ 70,548       8.53 %   $ 33,071       4.00 %   $ 41,338       5.00 %

Common Equity Tier 1 Risk-based Capital

     70,548       13.45       23,596       4.50       34,083       6.50  

Tier 1 Risk-based Capital

     70,548       13.45       31,461       6.00       41,948       8.00  

Total Risk-based Capital

     76,522       14.59       41,948       8.00       52,435       10.00  

 

32
 

 

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

 

 

Threshold Ratios

Capital Category

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

Well capitalized

 10.00% 8.00% 6.50% 5.00%
         

Adequately Capitalized

 8.00% 6.00% 4.50% 4.00%
         

Undercapitalized

< 8.00%

< 6.00%

< 4.50%

< 4.00%
         

Significantly Undercapitalized

< 6.00%

< 4.00%

< 3.00%

< 3.00%
         

Critically Undercapitalized

Tangible Equity/Total Assets ≤ 2%

 

Until such time as PMHG has $3 billion in total consolidated assets, it will not be subject to any consolidated capital requirements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Refer to Note 10 in the notes to condensed consolidated financial statements included in this Form 10-Q for the period ending June 30, 2022 for a discussion of off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

33
 

 

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 June 30, 2022 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.

 

34
 

 

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, 2021 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 second quarter of 2022, the Company issued 1,047 shares to members of its Board of Directors in lieu of cash fees calculated at 110% to be $29,000.  These shares were all issued in accordance with SEC Rule 701 and 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 is a director of the Company and 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.

 

35
 

 

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
         
    3.5   Third Amendment to Bylaws dated February 19, 2021   Exhibit 3.5 to Form 8-K filed on February 18, 2021
         

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 and Exhibit 10.7 to Form 8-K filed on August 2, 2022
         

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 August 1, 2022   Exhibit 10.1 to Form 8-K filed on August 2, 2022
         

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  

Amended and Restated Employment Agreement by and between Prime Meridian Holding Company, Inc. and Prime Meridian Bank, and Chris L. Jensen, Jr., dated as of August 1, 2022

   Exhibit 10.2 to Form 8-K filed on August 2, 2022
         
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

 

36
 

 

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
         
10.15   Defined Contribution Agreement by and between Prime Meridian Bank and Susan Payne Turner, dated as of July 14, 2021   Filed as Exhibit 10.15 to Form 8-K/A filed on August 2, 2021
         
10.16   Defined Contribution Agreement by and between Prime Meridian Bank and Monte Ward, dated as of July 14, 2021   Filed as Exhibit 10.16 to Form 8-K/A filed on August 2, 2021
         
10.17   Defined Contribution Agreement by and between Prime Meridian Bank and Clint Weber dated as of July 14, 2021   Filed as Exhibit 10.17 to Form 8-K/A filed on August 2, 2021
         
   10.18   Amended Split Dollar Life Insurance Agreement between Prime Meridian Bank and Susan Payne Turner dated as of July 1, 2021   Exhibit 10.18 to Form 10-Q filed on August 6, 2021
         
   10.19   Amended Split Dollar Life Insurance Agreement between Prime Meridian Bank and Monte Ward dated as of July 1, 2021   Exhibit 10.19 to Form 10-Q filed on August 6, 2021
         
   10.20   Amended Split Dollar Life Insurance Agreement between Prime Meridian Bank and Clint Weber dated as of July 1, 2021   Exhibit 10.20 to Form 10-Q filed on August 6, 2021
         
   10.21   Split Dollar Life Insurance Agreement between Prime Meridian Bank and Sammie D. Dixon, Jr. dated as of January 1, 2019   Exhibit 10.21 to Form 10-Q filed on August 6, 2021
         
10.22   Split Dollar Life Insurance Agreement between Prime Meridian Bank and Chris L. Jensen, Jr. dated as of January 1, 2019   Exhibit 10.22 to Form 10-Q filed on August 6, 2021
         
    10.23   Second Amendment to 2015 Stock Incentive Compensation Plan   Exhibit 10.15 to Form 8-K filed on January 20, 2022
         
10.24   Employment Agreement by and between Prime Meridian Holding Company, Inc., Prime Meridian Bank, and Kyle D. Phelps dated as of August 1, 2022   Exhibit 10.3 to Form 8-K filed on August 2, 2022
         
10.25   Employment Agreement by and between Prime Meridian Holding Company, Inc., Prime Meridian Bank, and Susan Payne Turner dated as of August 1, 2022   Exhibit 10.4 to Form 8-K filed on August 2, 2022
         
10.26   Employment Agreement by and between Prime Meridian Holding Company, Inc., Prime Meridian Bank, and Monte L. Ward dated as of August 1, 2022   Exhibit 10.5 to Form 8-K filed on August 2, 2022
         
10.27   Employment Agreement by and between Prime Meridian Holding Company, Inc., Prime Meridian Bank, and Clint F. Weber dated as of August 1, 2022   Exhibit 10.6 to Form 8-K filed on August 2, 2022
           

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
37
 

 

         

101.INS

  

Inline XBRL Instance Document

  

Filed herewith
         

101.SCH

  

Inline XBRL Taxonomy Extension Schema Document

  

Filed herewith
         

101.CAL

  

Inline XBRL Taxonomy Extension Calculation Linkbase Document

  

Filed herewith
         

101.DEF

  

Inline XBRL Taxonomy Extension Definitions Linkbase  Document

  

Filed herewith
         

101.LAB

  

Inline XBRL Taxonomy Extension Label Linkbase Document

  

Filed herewith
         

101.PRE

  

Inline XBRL Taxonomy Extension Presentation Linkbase  Document

  

Filed herewith
         
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).    

 

*     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.

 

38
 

 

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
   
   

August 9, 2022

    

 

By:

/s/ Sammie D. Dixon
     

Date

  

Sammie D. Dixon, Jr.

 

  

Vice Chairman, Chief Executive Officer, President,

 

  

and Principal Executive Officer
August 9, 2022    

 

By:

/s/ Clint F. Weber
     

Date

 

Clint F. Weber

 

  

Chief Financial Officer, Executive Vice President,

Principal Accounting Officer and Principal Financial Officer

 

 

 

 

 

 

 

 

39
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