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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

 September 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 November 8, 2022: 3,164,491

 

 
 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

PAGE
   

Item 1. Financial Statements

  
   

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

2
   

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

3
   

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

4
   

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

5-6
   

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

7
   

Notes to Condensed Consolidated Financial Statements (unaudited)

8-23
   

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

24-34
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

34
   

Item 4. Controls and Procedures

35
 

PART II. OTHER INFORMATION
 

Item 1. Legal Proceedings

36
   

Item 1A. Risk Factors

36
   

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

36
   

Item 3. Defaults Upon Senior Securities

36
   

Item 4. Mine Safety Disclosures

36
   

Item 5. Other Information

36
   

Item 6. Exhibits

37-39
   

Signatures

40
   

Certifications

  

 

 
 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets

 

  

September 30,

  

December 31,

 
  

2022

  

2021

 

(in thousands)

 

(Unaudited)

     

Assets

        

Cash and due from banks

 $8,152  $8,897 

Federal funds sold

  8,738   53,969 

Interest-bearing deposits

  59,127   170,607 

Total cash and cash equivalents

  76,017   233,473 

Debt securities available for sale

  131,668   73,763 

Debt securities held to maturity (fair value of $10,180 in 2022)

  11,794   - 

Loans held for sale

  8,911   11,768 

Loans, net of allowance for loan losses of $6,861 and $5,974

  565,877   490,198 

Federal Home Loan Bank stock

  463   366 

Premises and equipment, net

  8,169   7,962 

Right of use operating lease asset

  3,098   3,258 

Accrued interest receivable

  2,132   1,505 

Bank-owned life insurance

  16,438   16,153 

Other assets

  7,748   2,677 

Total assets

 $832,315  $841,123 
         

Liabilities and Stockholders' Equity

        

Liabilities:

        

Noninterest-bearing demand deposits

 $216,533  $209,351 

Savings, NOW and money-market deposits

  500,263   503,759 

Time deposits

  38,618   49,832 

Total deposits

  755,414   762,942 

Other borrowings

  4,125   3,575 

Official checks

  1,277   1,141 

Operating lease liability

  3,256   3,397 

Other liabilities

  4,339   3,037 

Total liabilities

  768,411   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, 3,162,975 and 3,129,046 issued and outstanding

  31   31 

Additional paid-in capital

  39,597   38,909 

Retained earnings

  34,636   28,164 

Accumulated other comprehensive loss

  (10,360)  (73)

Total stockholders' equity

  63,904   67,031 

Total liabilities and stockholders' equity

 $832,315  $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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(in thousands, except per share amounts)

 

2022

  

2021

  

2022

  

2021

 

Interest income:

                

Loans

 $6,755  $5,819  $18,568  $17,256 

Debt securities

  878   283   2,000   794 

Other

  649   78   1,104   192 

Total interest income

  8,282   6,180   21,672   18,242 

Interest expense:

                

Deposits

  624   502   1,442   1,539 

Other borrowings

  56   25   127   32 

Total interest expense

  680   527   1,569   1,571 

Net interest income

  7,602   5,653   20,103   16,671 

Provision (credit) for loan losses

  241   -   601   (185)

Net interest income after provision (credit) for loan losses

  7,361   5,653   19,502   16,856 

Noninterest income:

                

Service charges and fees on deposit accounts

  78   61   219   170 

Debit card/ATM revenue, net

  132   108   404   341 

Mortgage banking revenue, net

  116   325   420   958 

Income from bank-owned life insurance

  96   73   285   203 

Gain on sale of debt securities available for sale

  -   -   -   108 

Other income

  61   46   177   125 

Total noninterest income

  483   613   1,505   1,905 

Noninterest expense:

                

Salaries and employee benefits

  2,367   2,028   6,765   5,685 

Occupancy and equipment

  413   380   1,217   1,144 

Professional fees

  124   103   400   353 

Marketing

  195   197   575   536 

FDIC assessment

  95   78   303   197 

Software maintenance, amortization and other

  310   237   837   738 

Other

  581   480   1,650   1,425 

Total noninterest expense

  4,085   3,503   11,747   10,078 

Earnings before income taxes

  3,759   2,763   9,260   8,683 

Income taxes

  928   664   2,221   2,088 

Net earnings

 $2,831  $2,099  $7,039  $6,595 
                 

Earnings per common share:

                

Basic

 $0.90  $0.67  $2.23  $2.11 

Diluted

  0.89   0.67   2.21   2.10 

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

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Net earnings

 $2,831  $2,099  $7,039  $6,595 

Other comprehensive loss:

                

Change in unrealized loss on debt securities available for sale:

                

Unrealized loss arising during the period

  (5,018)  (430)  (13,780)  (1,255)

Reclassification adjustment for realized gain

  -   -   -   (108)

Net change in unrealized loss

  (5,018)  (430)  (13,780)  (1,363)

Deferred income tax benefit on above change

  1,272   109   3,493   346 

Total other comprehensive loss

  (3,746)  (321)  (10,287)  (1,017)

Comprehensive (loss) income

 $(915) $1,778  $(3,248) $5,578 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4
 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months ended September 30, 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 gain 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 gain on debt securities available for sale, net of income taxes (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 

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

  -   -   -   2,099   -   2,099 

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

  -   -   -   -   (321)  (321)

Stock options exercised (unaudited)

  30   -   1   -   -   1 

Common stock issued as compensation to directors (unaudited)

  1,226   -   26   -   -   26 

Stock-based compensation (unaudited)

  -   -   57   -   -   57 

Balance at September 30, 2021 (unaudited)

  3,127,730  $31  $38,822  $26,412  $384  $65,649 
                         

 

 

5
 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months ended September 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, 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 gain on debt securities available for sale, net of income taxes (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 

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

  -   -   -   2,831   -   2,831 

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

  -   -   -   -   (3,746)  (3,746)

Stock options exercised (unaudited)

  4,000   -   80   -   -   80 

Common stock issued as compensation to directors (unaudited)

  1,250   -   32   -   -   32 

Issuance of restricted stock (unaudited)

  2,417   -   -   -   -   - 

Stock-based compensation (unaudited)

  -   -   78   -   -   78 

Balance at September 30, 2022 (unaudited)

  3,162,975  $31  $39,597  $34,636  $(10,360) $63,904 

 

 

6
 
 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flow (Unaudited)

 

  

Nine Months Ended September 30,

 

(in thousands)

 

2022

  

2021

 

Cash flows from operating activities:

        

Net earnings

 $7,039  $6,595 

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

        

Depreciation and amortization

  504   497 

Provision (credit) for loan losses

  601   (185)

Net accretion of deferred loan fees

  (604)  (2,047)

Gain on sale of debt securities available for sale

  -   (108)

Net amortization of premiums and discounts on debt securities

  (3)  238 

Gain on sale of loans held for sale

  (420)  (958)

Proceeds from the sale of loans held for sale

  71,336   155,371 

Loans originated as held for sale

  (68,059)  (151,796)

Stock issued as compensation to directors

  92   81 

Stock-based compensation expense

  226   170 

Income from bank-owned life insurance

  (285)  (203)

Net (increase) decrease in accrued interest receivable

  (627)  482 

Net change in operating leases

  19   19 

Net increase in other assets

  (1,578)  (282)

Net increase in other liabilities and official checks

  1,438   1,099 

Net cash provided by operating activities

  9,679   8,973 

Cash flows from investing activities:

        

Loan originations, net of principal repayments

  (75,676)  2,380 

Purchase of debt securities available for sale

  (80,188)  (26,471)

Purchase of debt securities held to maturity

  (12,677)  - 

Principal repayments of debt securities available for sale

  9,383   10,815 

Proceeds from sale of debt securities available for sale

  -   5,874 

Maturities and calls of debt securities available for sale

  6   3,044 

(Purchase) repurchase of Federal Home Loan Bank stock

  (97)  127 

Purchase of bank owned life insurance

  -   (1,197)

Purchase of premises and equipment

  (711)  (267)

Net cash used in investing activities

  (159,960)  (5,695)

Cash flows from financing activities:

        

Net (decrease) increase in deposits

  (7,528)  137,749 

Change in other borrowings

  550   3,075 

Proceeds from stock options exercised

  370   3 

Common stock dividends paid

  (567)  (438)

Net cash (used in) provided by financing activities

  (7,175)  140,389 

Net (decrease) increase in cash and cash equivalents

  (157,456)  143,667 

Cash and cash equivalents at beginning of period

  233,473   68,985 

Cash and cash equivalents at end of period

 $76,017  $212,652 

Supplemental disclosure of cash flow information

        

Cash paid during the period:

        

Interest

 $1,559  $1,578 

Income taxes

 $2,641  $1,738 

Noncash transactions:

        

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

 $(10,287) $(1,017)

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

7
 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

(1)

General

 

Prime Meridian Holding Company (“PMHG”) owns 100% of the outstanding common stock of Prime Meridian Bank (the "Bank") (collectively the "Company"). PMHG’s primary activity is the operation of the Bank. The Bank is a Florida state-chartered commercial bank, and the deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). The Bank offers a variety of community banking services to individual and corporate clients through its 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 nine months ended September 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 is the net change in the unrealized loss 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.

 

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)

 

8
 
 

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. Our investments in U.S. agency mortgage-backed securities are with government-sponsored enterprises (GSEs) such as Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, and Federal Home Loan Mortgage Corporation. 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 September 30, 2022

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $48,034  $-  $(2,215) $45,819 

Municipal securities

  22,356   -   (3,000)  19,356 

U.S. agency mortgage-backed securities

  71,176   -   (8,564)  62,612 

Asset-backed securities

  3,979   -   (98)  3,881 

Total

 $145,545  $-  $(13,877) $131,668 
                 

Debt Securities Held to Maturity

                

Municipal securities

 $9,205  $-  $(1,529) $7,676 

U.S. agency mortgage-backed securities

  2,589   -   (85)  2,504 

Total

 $11,794  $-  $(1,614) $10,180 
                 

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

  

Nine Months Ended

 
  

September 30,

  

September 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 September 30, 2022

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $(1,997) $45,068  $(218) $751 

Municipal securities

  (1,541)  13,261   (1,459)  6,095 

U.S. agency mortgage-backed securities

  (4,781)  44,408   (3,783)  16,770 

Asset-backed securities

  (60)  2,679   (38)  1,202 

Total

 $(8,379) $105,416  $(5,498) $24,818 
                 

Debt Securities Held to Maturity

                

Municipal securities

 $(1,529) $7,676  $-  $- 

U.S. agency mortgage-backed securities

  (85)  2,504   -   - 

Total

 $(1,614) $10,180  $-  $- 
                 

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)

9
 

 

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 September 30, 2022 and December 31, 2021 on 105 and 7 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 September 30, 2022

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $45,819  $-  $45,819  $- 

Municipal securities

  19,356   -   19,356   - 

U.S. agency mortgage-backed securities

  62,612   -   62,612   - 

Asset-backed securities

  3,881   -   3,881   - 

Total

 $131,668  $-  $131,668  $- 
                 

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 September 30, 2022

 
  

Amortized

  

Fair

 
  

Cost

  

Value

 

(in thousands)

        

Debt Securities Available for Sale

        

Due in one to five years

 $49,249  $47,383 

Due in five to ten years

  17,824   15,110 

Due after ten years

  7,296   6,563 

U.S. agency mortgage-backed securities

  71,176   62,612 

Total

 $145,545  $131,668 
    

Debt Securities Held to Maturity

        

Due in five to ten years

 $2,017  $1,927 

Due after ten years

  7,188   5,749 

U.S. agency mortgage-backed securities

  2,589   2,504 

Total

 $11,794  $10,180 

 

 

(continued)

 

10
 
 

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 September 30, 2022

  

At December 31, 2021

 

Real estate mortgage loans:

        

Commercial

 $199,044  $156,306 

Residential and home equity

  218,909   183,536 

Construction

  70,815   71,164 

Total real estate mortgage loans

  488,768   411,006 
         

Commercial loans

  76,672   78,584 

Consumer and other loans

  7,199   7,283 

Total loans

  572,639   496,873 
         

Add (deduct):

        

Net deferred loan costs (fees)

  99   (701)

Allowance for loan losses

  (6,861)  (5,974)

Loans, net

 $565,877  $490,198 

 

(continued)

 

11
 
 

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, segregated by loan type, is as 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 September 30, 2022

                            

Beginning balance

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

Provision (credit) for loan losses

  227   110   4   (57)  (43)  -   241 

Net recoveries (charge-offs)

  -   -   -   -   9   -   9 

Ending balance

 $2,278  $2,540  $871  $1,086  $86  $-  $6,861 

Three Month Period Ended September 30, 2021

                            

Beginning balance

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

Provision (credit) for loan losses

  50   118   190   (16)  17   (359)  - 

Net recoveries (charge-offs)

  -   6   -   0   (5)  -   1 

Ending balance

 $1,582  $2,111  $728  $1,186  $91  $202  $5,900 
                             

Nine Month Period Ended September 30, 2022

                            

Beginning balance

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

Provision (credit) for loan losses

  516   401   14   (338)  8   -   601 

Net recoveries (charge-offs)

  -   -   -   299   (13)  -   286 

Ending balance

 $2,278  $2,540  $871  $1,086  $86  $-  $6,861 

Nine Month Period Ended September 30, 2021

                            

Beginning balance

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

Provision (credit) for loan losses

  82   294   189   (425)  32   (357)  (185)

Net (charge-offs) recoveries

  -   (10)  -   19   (16)  -   (7)

Ending balance

 $1,582  $2,111  $728  $1,186  $91  $202  $5,900 
                             
                             

At September 30, 2022

                            

Individually evaluated for impairment:

                            

Recorded investment

 $277  $663  $-  $66  $2  $-  $1,008 

Balance in allowance for loan losses

 $-  $-  $-  $14  $-  $-  $14 

Collectively evaluated for impairment:

                            

Recorded investment

 $198,767  $218,246  $70,815  $76,606  $7,197  $-  $571,631 

Balance in allowance for loan losses

 $2,278  $2,540  $871  $1,072  $86  $-  $6,847 
                             

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)

 

12
 

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. During 2020 and 2021, the Company also made 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)

 

13
 
 

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 September 30, 2022

                        

Grade:

                        

Pass

 $196,948  $216,068  $70,278  $76,200  $7,197  $566,691 

Special mention

  1,819   2,178   537   406   2   4,942 

Substandard

  277   663   -   66   -   1,006 

Doubtful

  -   -   -   -   -   - 

Loss

  -   -   -   -   -   - 

Total

 $199,044  $218,909  $70,815  $76,672  $7,199  $572,639 
                         

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)

 

14
 
 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

 

Age analysis of past due loans is as follows:

 

  

Accruing Loans

         
          

Greater Than

                 
  

30-59 Days

  

60-89 Days

  

90 Days

  

Total Past

      

Nonaccrual

  

Total

 

(in thousands)

 

Past Due

  

Past Due

  

Past Due

  

Due

  

Current

  

Loans

  

Loans

 

At September 30, 2022

                            

Real estate mortgage loans:

                            

Commercial

 $-  $-  $-  $-  $198,767  $277  $199,044 

Residential and home equity

  398   297   -   695   217,551   663   218,909 

Construction

  -   -   -   -   70,815   -   70,815 

Commercial loans

  329   -   -   329   76,277   66   76,672 

Consumer and other loans

  -   -   -   -   7,199   -   7,199 

Total

 $727  $297  $-  $1,024  $570,609  $1,006  $572,639 
                             

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)

 

15
 
 

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  September 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 September 30, 2022

                                

Real estate mortgage loans:

                                

Commercial

 $277  $277  $-  $-  $-  $277   277  $- 

Residential and home equity

  663   663   -   -   -   663   663   - 

Commercial loans

  -   -   66   66   14   66   66   14 

Consumer and other loans

  2   2   -   -   -   2   2   - 

Total

 $942  $942  $66  $66  $14  $1,008  $1,008  $14 
                                 

At December 31, 2021

                                

Consumer and other loans

 $4  $4  $-  $-  $-  $4  $4  $- 

Total

 $4  $4  $-  $-  $-  $4  $4  $- 

 

 

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

 

  

Three Months Ended September 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

 $281  $-  $-  $-  $-  $- 

Residential and home equity

  19   -   -   -   -   - 

Commercial loans

  66   -   -   -   -   - 

Consumer

  2   -   -   -   -   - 

Total

 $368  $-  $-  $-  $-  $- 

 

  

Nine Months Ended September 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

 $97  $-  $-  $-  $-  $- 

Residential and home equity

  6   -   -   436   -   - 

Commercial loans

  23   -   -   233   -   - 

Consumer

  1   -   -   -   -   - 

Total

 $127  $-  $-  $669  $-  $- 

 

 

 

 

(continued)

 

16
 
 

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 nine months ended September 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 September 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  September 30, 2022, that the Bank meets all capital adequacy requirements to which it is subject.

 

As of September 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 September 30, 2022

                        

Tier 1 Leverage Capital

 $78,221   9.07% $34,510   4.00% $43,137   5.00%

Common Equity Tier 1 Risk-based Capital

  78,221   12.62   27,894   4.50   40,291   6.50 

Tier 1 Risk-based Capital

  78,221   12.62   37,192   6.00   49,589   8.00 

Total Risk-based Capital

  85,082   13.73   49,589   8.00   61,986   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)

 

17
 
 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(5)

Earnings Per Share

 

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

                        

Basic EPS:

                        

Net earnings

 $2,831   3,159,526  $0.90  $2,099   3,127,524  $0.67 

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

      37,756           17,493     

Diluted EPS:

                        

Net earnings

 $2,831   3,197,282  $0.89  $2,099   3,145,017  $0.67 
                         

Nine Months Ending September 30:

                        

Basic EPS:

                        

Net earnings

 $7,039   3,151,689  $2.23  $6,595   3,125,777  $2.11 

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

      39,904           8,459     

Diluted EPS:

                        

Net earnings

 $7,039   3,191,593  $2.21  $6,595   3,134,236  $2.10 

 

 

 

 

 

(continued)

 

18
 
 

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, restricted stock, stock appreciation rights, performance shares, and phantom stock. Under the 2015 Plan, the number of shares which may be issued is 500,000, but in no instance more than 15% of the issued and outstanding shares of the Company’s common stock.

 

As of September 30, 2022 180,570 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 nine months ended September 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 granted

  4,000  $22.64         

Options exercised

  (150)  (20.09)        

Options forfeited

  (15,250)  20.09         

Outstanding at September 30, 2021

  260,657  $19.83         

Options granted

  14,000  $28.40         

Options forfeited

  (6,000)  21.83         

Outstanding at December 31, 2021

  268,657  $20.23         

Options granted

  3,500  $25.37         

Options exercised

  (20,240)  (18.35)        

Options forfeited

  (150)  (20.09)        

Outstanding at September 30, 2022

  251,767  $20.46   5.55  $1,555,000 

Exercisable at September 30, 2022

  182,887  $19.85   5.14  $1,222,000 

 

The fair value of shares vested and recognized as compensation expense was $78,000 and $57,000 for the three months ended September 30, 2022 and 2021, and $226,000 and $170,000 for the nine months ended September 30, 2022 and 2021, respectively. These amounts include expense recognized on restricted common stock shares of $33,000 and $19,000 for the three months ended September 30, 2022 and 2021 and $93,000 and $53,000 for the nine months ended September 30, 2022 and 2021, respectively. The deferred tax benefit related to stock options was $5,000 for the three months ended September 30, 2022 and 2021, and $14,000 and $15,000, respectively, for the nine months ended September 30, 2022 and 2021. At September 30, 2022, there was $226,000 in unrecognized compensation expense related to unvested share-based compensation arrangements granted under the 2015 Plan, with an average remaining vesting period of 2.88 years.  

(continued) 

 

19
 
 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)

Stock Benefit Plans, Continued

 

Restricted Stock   

 

During the nine months ended September 30, 2022 and 2021, the Company issued 10,203 and 4,081 restricted common stock shares, respectively, to some of its executives. 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 September 30, 2021 and December 31, 2021

  7,838  $18.88  $149,000 

Non-vested restricted stock granted in 2022

  10,203  $27.85  $284,000 

Restricted stock shares vested in 2022

  (3,838)  (18.98)  (73,000)

Non-vested restricted stock outstanding at September 30, 2022

  14,203  $25.30  $360,000 

 

During the nine months ended September 30, 2022 and 2021, the Company recognized $93,000 and $53,000, respectively, as expense related to restricted stock grants.  At September 30, 2022, the Company had $275,000 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 September 30, 2022 and 2021  our directors received 1,250 and 1,226 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $32,000 and $26,000, respectively.  For the nine months ended September 30, 2022 and 2021, our directors received 3,486 and 4,028 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $92,000 and $81,000, respectively. At  September 30, 2022, 37,878 shares remained available for grant.  
 
 

(7)

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 $88.6 million at  September 30, 2022. At  September 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 interest rate on the line of credit adjusts daily to the then-current Wall Street Journal Prime Rate. At September 30, 2022, the interest rate was 6.25%. 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 September 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 $56,000 and $127,000 in interest expense for the three and nine months ended September 30, 2022, respectively, compared to $25,000 and $32,000 for the three and nine months ended September 30, 2021, respectively. 

20
 

 

 

(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 September 30, 2022

  

At December 31, 2021

 

(dollars in thousands)

        

Notional amount - interest rate swaps:

        

Stand-alone derivatives

 $20,173  $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

  12.8   13.6 
         

Net realized fair value adjustments:

        

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

 $2,385  $630 

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

 $(2,385) $(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.     

 

21
 
 

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 September 30, 2022

  

At December 31, 2021

 
      

Carrying

  

Fair

  

Carrying

  

Fair

 

(in thousands)

 

Level

  

Amount

  

Value

  

Amount

  

Value

 

Financial assets:

                    

Cash and cash equivalents

  1  $76,017  $76,017  $233,473  $233,473 

Debt securities available for sale

  2   131,688   131,688   73,763   73,763 

Debt securities held to maturity

  2   11,794   10,180   -   - 

Loans held for sale

  3   8,911   9,054   11,768   11,964 

Loans, net

  3   565,877   538,085   490,198   495,209 

Federal Home Loan Bank stock

  3   463   463   366   366 

Accrued interest receivable

  3   2,132   2,132   1,505   1,505 

Bank-owned life insurance

  3   16,438   16,438   16,153   16,153 

Derivative contract assets

  3   2,385   2,385   630   630 
                     

Financial liabilities:

                    

Deposits

  3   755,414   755,243   762,942   763,147 

Other borrowings

  3   4,125   4,125   3,575   3,575 

Derivative contract liabilities

  3   2,385   2,385   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.

 

 

22
 

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial 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 $703,000 at  September 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 September 30, 2022

 

(in thousands)

    

Commitments to extend credit

 $19,311 

Construction loans in process

 $60,177 

Unused lines of credit

 $79,993 

Standby financial letters of credit

 $3,226 

Guaranteed accounts

 $1,419 

 

(continued)

 

23
 
 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
 

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 nine months ended September 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.

 

24
 

GENERAL

 

Prime Meridian Holding Company (“PMHG”) was incorporated as a Florida corporation on May 25, 2010, and is the one-bank holding company for, and sole shareholder of, Prime Meridian Bank (the “Bank”) (collectively, the “Company”). The Bank opened for business on February 4, 2008 and was acquired by PMHG on September 16, 2010. PMHG has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through four full-service offices located in Tallahassee, Crawfordville, and Lakeland, Florida and through its online banking platform. 

 

As a one-bank holding company, we generate most of our revenue from interest on loans and investments. Our primary source of funding for our loans is deposits. Our largest expenses are interest on those deposits and salaries and employee benefits. We measure our performance through our net interest margin, return on average assets, and return on average equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.

 

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

 

   

At or for the

  
   

Nine Months

    

Year

    

Nine Months

  
   

Ended

    

Ended

    

Ended

  
   

September 30, 2022

    

December 31, 2021

    

September 30, 2021

  

Average equity as a percentage of average assets

     7.66 %     8.67 %     8.60 %

Equity to total assets at end of period

     7.68       7.97       8.26  

Return on average assets(1)

     1.09       1.11       1.21  

Return on average equity(1)

     14.25       12.81       14.08  

Noninterest expense to average assets(1)

     1.82       1.87       1.85  

Nonperforming loans to total loans at end of period

     0.18       -       -  

Nonperforming assets to total assets at end of period

     0.12       -       -  

 

(1) Annualized for the nine months ended September 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 September 30, 2022, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2021.

 

 

25
 

 

FINANCIAL CONDITION

 

Average assets totaled $857.9 million and $860.4 million for the three and nine months ended September 30, 2022 respectively, increases of $86.1 million (11.1%) and $133.9 million (18.4%), over the comparable periods in 2021. The growth in average assets stemmed mostly from increases in loans and securities (comparing three-month periods) and loans, cash and securities (comparing nine-month periods), funded by deposit inflows through the first half of the year. Loan production in 2022 has helped offset the runoff of PPP loans.   

 

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 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 September 30, 2022 our debt securities available for sale and held to maturity investment portfolios included highly rated U.S. government treasury and 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 $141.8 million and an amortized cost value of $157.3 million. At September 30, 2022 and December 31, 2021, our investment securities portfolio represented approximately 17.2% and 8.8% of our total assets, respectively. The average yield on the average balance of investment securities for the nine months ended September 30, 2022 was 2.21%, compared to 1.72% for the comparable period in 2021.   

 

Loans. Our primary interest-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 nearly $15.0 million in PPP loan forgiveness during the first nine months of 2022, the Company's gross loan portfolio increased $90.7 million, or 18.3%, since 2021 year-end. 

 

Nonperforming assets.  At September 30, 2022, the Company had $1.0 million 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 September 30, 2022, the four nonperforming loans totaling $1.0 million are also 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. The Bank reported provision expense of $241,000 for the quarter ended September 30, 2022, and $601,000 year-to-date, incurred primarily from funded loan growth during the periods. Also contributing to the volume of provision expense for the nine months ended September 30, 2022 is $286,000 in year-to-date net recoveries, combined with a marginal reduction in the general reserve requirement for commercial loans. The Company is not required to implement the provisions of the Current Expected Credit Losses ("CECL") accounting standard until January 1, 2023 and is continuing to account for the allowance for loan losses under the incurred loss model.  Management believes the allowance for loan losses, which was $6.9 million, or 1.20%, of gross loans at September 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 September 30, 2022 were $755.4 million, a decrease of $7.5 million, or 1.0%, from December 31, 2021. The decrease is attributed to several factors - seasonal outflows of public funds, net outflows from attorney trust accounts due to less real estate closing activity and the movement of personal interest-bearing accounts to higher yielding investment options outside of the Bank. The average balance of noninterest-bearing deposits accounted for 27.1% of the average balance of total deposits for the nine months ended September 30, 2022, compared to 29.6% for the nine months ended September 30, 2021.  Given the current interest rate environment, management is monitoring potential volatility in deposit balances closely. 

 

Borrowings. The Bank has an agreement with FHLB and pledges its qualified loans as collateral which would allow the Bank, as of September 30, 2022, to borrow up to $88.6 million. In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled $59.0 million at September 30, 2022. There were no outstanding balances under any of these lines at September 30, 2022. 

 

In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with 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 6.25% at September 30, 2022. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Bank.  At September 30, 2022, the Company had a $4,125,000 outstanding loan balance and incurred $127,000 in year-to-date interest expense under this line.  

 

26
 

 

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 65 basis points for the three-month period comparison due primarily to higher interest rates combined with growth in loan and investment balances and a reduction of cash balances, partially offset by the near completion of the PPP loan program and the related fees earned by the Bank. Furthermore, the yield on interest-earning assets improved 70 basis points compared to a 5-basis-points increase in the average cost of interest-bearing liabilities, reflecting a lag in the rising cost of deposits. Comparing the nine-month periods, the net interest margin increased 8 basis points to 3.27%. The average balance of interest-earnings assets increased 17.9%, or $124.6 million, and was a primary driver of the increase in net interest income along with higher yields on loans (excluding the impact of PPP) and other interest-earning assets.  There was a $2.0 million decrease in interest and fee income from PPP loans as the Bank moved through the forgiveness process of these loans which has impacted average loan yields and the net interest margin for multiple quarters.  The yield on the average balance of interest-earning assets improved slightly to 3.52% while the average cost of funds decreased 9 basis points to 0.36%. 

 

   

For the Three Months Ended September 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)

   $ 555,764     $ 6,646       4.78 %   $ 477,322     $ 5,708       4.78 %

Loans held for sale

     9,869       109       4.42       12,437       111       3.57  

Debt securities

     144,710       878       2.43       65,226       283       1.74  

Other(2)

     108,875       649       2.38       184,525       78       0.17  

Total interest-earning assets

     819,218     $ 8,282       4.04 %     739,510     $ 6,180       3.34 %

Noninterest-earning assets

     38,699                       32,357                  

Total assets

   $ 857,917                     $ 771,867                  
                                                 

Interest-bearing liabilities:

                                                

Savings, NOW and money-market deposits

   $ 527,408     $ 570       0.43 %   $ 435,213     $ 426       0.39 %

Time deposits

     38,244       54       0.56       49,844       76       0.61  

Total interest-bearing deposits

     565,652       624       0.44       485,057       502       0.41  

Other borrowings

     4,125       56       5.43       3,075       25       3.25  

Total interest-bearing liabilities

     569,777     $ 680       0.48 %     488,132     $ 527       0.43 %

Noninterest-bearing deposits

     214,462                       213,570                  

Noninterest-bearing liabilities

     7,787                       5,529                  

Stockholders' equity

     65,891                       64,636                  

Total liabilities and stockholders' equity

   $ 857,917                     $ 771,867                  
                                                 

Net earning assets

   $ 249,441                     $ 251,378                  

Net interest income

           $ 7,602                     $ 5,653          

Interest rate spread (3)

                     3.56 %                     2.91 %

Net interest margin(4)

                     3.71 %                     3.06 %
                                                 

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

     143.78 %                     151.50 %                

 

(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
 

 

   

For the Nine Months Ended September 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)

   $ 519,975     $ 18,242       4.68 %   $ 481,762     $ 16,912       4.68 %

Loans held for sale

     10,529       326       4.13       13,527       344       3.39  

Debt securities

     120,675       2,000       2.21       61,690       794       1.72  

Other(2)

     169,402       1,104       0.87       139,017       192       0.18  

Total interest-earning assets

     820,581     $ 21,672       3.52 %     695,996     $ 18,242       3.49 %

Noninterest-earning assets

     39,792                       30,490                  

Total assets

   $ 860,373                     $ 726,486                  
                                                 

Interest-bearing liabilities:

                                                

Savings, NOW and money-market deposits

   $ 527,077     $ 1,263       0.32 %   $ 410,799     $ 1,243       0.40 %

Time deposits

     43,552       179       0.55       51,874       296       0.76  

Total interest-bearing deposits

     570,629       1,442       0.34       462,673       1,539       0.44  

Other borrowings

     3,960       127       4.28       1,309       32       3.26  

Total interest-bearing liabilities

     574,589     $ 1,569       0.36 %     463,982     $ 1,571       0.45 %

Noninterest-bearing deposits

     212,507                       194,909                  

Noninterest-bearing liabilities

     7,401                       5,128                  

Stockholders' equity

     65,876                       62,467                  

Total liabilities and stockholders' equity

   $ 860,373                     $ 726,486                  
                                                 

Net earning assets

   $ 245,992                     $ 232,014                  

Net interest income

           $ 20,103                     $ 16,671          

Interest rate spread (3)

                     3.16 %                     3.04 %

Net interest margin(4)

                     3.27 %                     3.19 %
                                                 

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

     142.81 %                     150.00 %                

 

 

(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

 

28
 

 

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

 

Earnings Summary

                                

(dollars in thousands)

                                
                   

Change 3Q'22 vs. 3Q'21

  
   

3Q'22

    

3Q'21

    

Amount

    

Percentage

  

Net Interest Income

   $ 7,602     $ 5,653     $ 1,949       34.5 %

Provision for loan losses

     241       -       241       N/A  

Noninterest income

     483       613       (130 )     (21.2 )

Noninterest expense

     4,085       3,503       582       16.6  

Income Taxes

     928       664       264       39.8  

Net earnings

   $ 2,831     $ 2,099     $ 732       34.9 %

 

Compared to 3Q21, larger loan and investment balances combined with higher yields on interest-earning assets drove the 34.5% increase in net interest income, partially offset by lower noninterest income, higher noninterest expense and higher income taxes. 

 

Net Interest Income

 

Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and securities, and interest expense on interest-bearing liabilities such as deposits.

 

Interest income

                                

(dollars in thousands)

                                
                   

Change 3Q'22 vs. 3Q'21

  
   

3Q'22

    

3Q'21

    

Amount

    

Percentage

  

Interest income:

                                

Loans

   $ 6,755     $ 5,819     $ 936       16.1 %

Securities

     878       283       595       210.2  

Other

     649       78       571       732.1  

Total interest income

   $ 8,282     $ 6,180     $ 2,102       34.0 %

Interest expense:

                                

Deposits

     624       502     $ 122       24.3 %

Other borrowings

     56       25       31       124.0  

Total interest expense

     680       527       153       29.0  

Net interest income

   $ 7,602     $ 5,653     $ 1,949       34.5 %

 

Net interest income of $7.6 million for the third quarter of 2022 represented a $1.9 million increase over the third quarter of 2021. Compared to the third quarter of 2021, larger loan and investment balances combined with higher interest rates  led to the improvement in interest income, partially offset by the near completion of the PPP loan program and its fees. An $81.6 million increase in the average balance of interest-bearing liabilities combined with a 5-basis-points increase in the cost of interest-bearing liabilities resulted in the $153,000, or 29.0%, increase in total interest expense. The Company's net interest margin ("NIM") was 3.71% in the third quarter of 2022, an increase of 65 basis points over the third quarter of 2021. The yield on interest-earning assets improved 70 basis points, outpacing a 5-basis-points increase in the average cost of interest-bearing liabilities and reflecting a lag in the rising cost of deposits. 

 

 

29
 

 

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.  Provision expense was $241,000 for the quarter, incurred primarily from funded loan growth during the period.

 

While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of examination.     

 

Noninterest income

                                

(dollars in thousands)

                  

Change 3Q'22 vs. 3Q'21

  
   

3Q'22

    

3Q'21

    

Amount

    

Percentage

  

Service charges and fees on deposit accounts

   $ 78     $ 61     $ 17       27.9 %

Debit card/ATM revenue, net

     132       108       24       22.2  

Mortgage banking revenue, net

     116       325       (209 )     (64.3 )

Income from bank-owned life insurance

     96       73       23       31.5  

Other income

     61       46       15       32.6  

Total noninterest income

   $ 483     $ 613     $ (130 )     (21.2 %)

 

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 3Q'22 vs. 3Q'21

  
   

3Q'22

    

3Q'21

    

Amount

    

Percentage

  

Salaries and employee benefits

   $ 2,367     $ 2,028     $ 339       16.7 %

Occupancy and equipment

     413       380       33       8.7  

Professional fees

     124       103       21       20.4  

Marketing

     195       197       (2 )     (1.0 )

FDIC Assessment

     95       78       17       21.8  

Software maintenance and amortization

     310       237       73       30.8  

Other

     581       480       101       21.0  

Total noninterest expense

   $ 4,085     $ 3,503     $ 582       16.6 %

 

An increase in compensation costs is the primary driver of higher noninterest expense due to a larger employee base (106 FTEs at September 30, 2022 versus 95 at September 30, 2021), annual raises, higher incentive accrual, and lower deferred loan costs. The increase in FDIC assessment expense is explained by changing assessment rates and higher deposit balances while higher software maintenance, amortization and other expense reflects the expanding information technology needs of a growing company. Increases in other noninterest expense are largely attributed to higher travel and entertainment and board related expenses. 

 

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 $928,000 for the three months ended September 30, 2022, compared to income taxes of $664,000 for the three months ended September 30, 2021 with the increase attributed to higher pre-tax earnings. 

 

30
 

 

Comparison of Operating Results for the nine months ended September 30, 2022 and 2021

 

Earnings Summary

                                

(dollars in thousands)

                                
   

Nine Months Ended

    

Change 2022 vs. 2021

  
   

September 30, 2022

    

September 30, 2021

    

Amount

    

Percentage

  

Net Interest Income

   $ 20,103     $ 16,671     $ 3,432       20.6 %

Provision (credit) for loan losses

     601       (185 )     786       424.9  

Noninterest income

     1,505       1,905       (400 )     (21.0 )

Noninterest expense

     11,747       10,078       1,669       16.6  

Income Taxes

     2,221       2,088       133       6.4  

Net earnings

   $ 7,039     $ 6,595     $ 444       6.7 %

 

Comparing the nine-month periods, a $3.4 million, or 20.6%, increase in net interest income was partially offset by lower noninterest income and higher provision for loan losses, noninterest and income tax expense. 

 

 

Interest income

                                

(dollars in thousands)

                                
   

Nine Months Ended

    

Change 2022 vs. 2021

  
   

September 30, 2022

    

September 30, 2021

    

Amount

    

Percentage

  

Interest income:

                                

Loans

   $ 18,568     $ 17,256     $ 1,312       7.6 %

Securities

     2,000       794       1,206       151.9  

Other

     1,104       192       912       475.0  

Total interest income

   $ 21,672     $ 18,242     $ 3,430       18.8 %

Interest expense:

                                

Deposits

     1,442       1,539     $ (97 )     (6.3 %)

Other borrowings

     127       32       95       296.9  

Total interest expense

     1,569       1,571       (2 )     (0.1 )

Net interest income

   $ 20,103     $ 16,671     $ 3,432       20.6 %

 

Comparing the nine-month periods, the average balance of interest-earnings assets increased 17.9%, or $124.6 million, and was a primary driver of the increase in net interest income along with higher yields on loans (excluding the impact of PPP), investments, and other interest-earning assets.  There was a $2.0 million decrease in interest and fee income from PPP loans as the Bank moved through the forgiveness process of these loans which has impacted average loan yields and the net interest margin for multiple quarters.  The yield on the average balance of interest-earning assets improved slightly to 3.52% while the average cost of funds decreased 9 basis points to 0.36%. Total interest expense for the nine-month period stayed essentially flat despite an increase in the average balance of interest-earning liabilities of $110.6 million.  The Company’s net interest margin for the nine-month period improved 8 basis points to 3.27%.

 

Provision for Loan Losses

 

Provision expense was $601,000 for the nine months ended September 30, 2022, compared to a $185,000 credit for the loan losses for the same period in 2021. Provision expense in 2022 is mostly attributed to funded loan growth. Also contributing to the volume of provision expense during the period is $286,000 in year-to-date net recoveries, combined with a marginal reduction in the general reserve requirement for commercial loans. For the nine-month period in 2021, the Company recorded $597,000 in provision expense for new loan growth which was offset by a $357,000 credit in the unallocated reserve related to the COVID-19 pandemic and a $425,000 credit in the reserve for commercial loans due to a decrease in the commercial loan balance for that period.

 

 

 

31
 

 

Noninterest income

                                

(dollars in thousands)

  

Nine Months Ended

    

Change 2022 vs. 2021

  
   

September 30, 2022

    

September 30, 2021

    

Amount

    

Percentage

  

Service charges and fees on deposit accounts

   $ 219     $ 170     $ 49       28.8 %

Debit card/ATM revenue, net

     404       341       63       18.5  

Mortgage banking revenue, net

     420       958       (538 )     (56.2 )

Income from bank-owned life insurance

     285       203       82       40.4  

Gain on sale of debt securities available for sale

     -       108       (108 )     N/A  

Other income

     177       125       52       41.6  

Total noninterest income

   $ 1,505     $ 1,905     $ (400 )     (21.0 %)

 

The decline in noninterest income is predominantly due to lower mortgage banking revenue, given the rising rate environment and the high level of refinancing activity that occurred in 2021, and also due to an absence of a gain on sale of securities as was reported in 2021. Increases in BOLI income and fees on deposit accounts partially offset the decrease in mortgage banking revenue, along with fee income from merchant cards, debit cards, and ATM transactions.

 

Noninterest expense

                                

(dollars in thousands)

  

Nine Months Ended

    

Change 2022 vs. 2021

  
   

September 30, 2022

    

September 30, 2021

    

Amount

    

Percentage

  

Salaries and employee benefits

   $ 6,765     $ 5,685     $ 1,080       19.0 %

Occupancy and equipment

     1,217       1,144       73       6.4  

Professional fees

     400       353       47       13.3  

Marketing

     575       536       39       7.3  

FDIC Assessment

     303       197       106       53.8  

Software maintenance and amortization

     837       738       99       13.4  

Other

     1,650       1,425       225       15.8  

Total noninterest expense

   $ 11,747     $ 10,078     $ 1,669       16.6 %

 

An increase in compensation costs is the primary driver of higher noninterest expense due to a larger employee base (106 FTEs at September 30, 2022 versus 95 at September 30, 2021), annual raises, higher incentive accrual, and lower deferred loan costs. The increase in FDIC assessment expense is explained by changing assessment rates and higher deposit balances, while higher software maintenance, amortization and other expense reflects the expanding information technology needs of a growing company. Higher occupancy costs reflect higher taxes, increases to furniture, fixtures and equipment, and higher depreciation, utilities, and maintenance contract expense. Increases in other noninterest expense are largely attributed to higher travel and entertainment, fraud, and board related expenses. 

 

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 $2.2 million for the nine months ended September 30, 2022, compared to income taxes of $2.1 million for the nine months ended September 30, 2021, with the increase attributed to higher pre-tax earnings. The effective tax rate was 24.0% for the nine months ended September 30, 2022 and the  nine months ended September 30, 2021.
 
32
 

 

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 treasury and 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 September 30, 2022, the Bank had access to approximately $88.6 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $59.0 million in unsecured lines of credit maintained with correspondent banks.  There were no outstanding balances under any of these lines at September 30, 2022.

 

The Company has a $15 million revolving line of credit with TNB. As of September 30, 2022, the Company's outstanding borrowings under this line totaled $4,125,000 and interest expense incurred year-to-date totaled $127,000.   

 

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 $13.4 million at September 30, 2022 compared to $11.9 million at December 31, 2021. Our primary liquid assets, excluding assets pledged to the QPD program, accounted for 23.3% and 35.1% of total assets at September 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 September 30, 2022, total deposits were $755.4 million, of which $11.8 million were in certificates of deposits greater than $250,000, excluding Individual Retirement Accounts (IRAs). Deposit balances decreased $7.5 million since December 31, 2021.  Management observed several trends including a seasonal outflow of public funds, lower balances maintained in attorney trust accounts (due to a reduction in real estate closing activity), and a shift in some consumer interest-bearing deposits to higher yielding investments outside of the Bank. 

 

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 $63.9 million at September 30, 2022 compared to $67.0 million at December 31, 2021. The $3.1 million decrease in equity is mostly attributed to the $10.3 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 September 30, 2022, the Company had a $4,125,000 outstanding loan balance and incurred year-to-date interest expense of $127,000 under this revolving line of credit.  

 

At September 30, 2022, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations.

 

The following is a summary at September 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 September 30, 2022

                                                

Tier 1 Leverage Capital

   $ 78,221       9.07 %   $ 34,510       4.00 %   $ 43,137       5.00 %

Common Equity Tier 1 Risk-based Capital

     78,221       12.62       27,894       4.50       40,291       6.50  

Tier 1 Risk-based Capital

     78,221       12.62       37,192       6.00       49,589       8.00  

Total Risk-based Capital

     85,082       13.73       49,589       8.00       61,986       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  

 

33
 

 

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 September 30, 2022 for a discussion of off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

34
 

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, our Principal Executive Officer and Principal Financial Officer concluded that, subject to the limitations noted below, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by PMHG in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

 

We intend to continually review and evaluate the design and effectiveness of the Company’s disclosure controls and procedures and to improve the Company’s controls and procedures over time and to correct any deficiencies that we may discover in the future. The goal is to ensure that senior management has timely access to all material financial and nonfinancial information concerning the Company’s business. While we believe the present design of the disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

 

(b) Changes in Internal Controls

 

We have made no significant changes in our internal controls over financial reporting during the quarter ended September 30, 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.

 

35
 

 

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 third quarter of 2022, the Company issued 1,250 shares to members of its Board of Directors in lieu of cash fees calculated at 110% to be $32,000.  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.

 

36
 

 

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
         

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

  

Amended and Restated Directors’ Compensation Plan, dated as of October 20, 2022

  

Exhibit 10.3 to Form 8-K filed on October 20, 2022
         

10.5

  

Lease for Timberlane Office

  

Exhibit 10.1 to Form 8-K filed on August 7, 2018
         
10.6   Second 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

  

Amended and Restated 2015 Stock Incentive Compensation Plan, dated as of October 20, 2022

  

Exhibit 10.1 to Form 8-K filed on October 20, 2022
         
10.8   Amendment to Restricted Stock Awards for Sammie D. Dixon, Jr., dated as of October 20, 2022   Exhibit 10.2 to Form 8-K filed on October 20, 2022
         
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

 

37
 

 

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   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
         
10.24   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
         
10.25   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
         
10.26   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
38
 

 

         

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.

 

39
 

 

SIGNATURES

 

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

 

 

PRIME MERIDIAN HOLDING COMPANY
   
   

November 10, 2022

    

 

By:

/s/ Sammie D. Dixon
     

Date

  

Sammie D. Dixon, Jr.

 

  

Vice Chairman, Chief Executive Officer, President,

 

  

and Principal Executive Officer
November 10, 2022    

 

By:

/s/ Clint F. Weber
     

Date

 

Clint F. Weber

 

  

Chief Financial Officer, Executive Vice President,

Principal Accounting Officer and Principal Financial Officer

 

 

 

 

 

 

 

 

40
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