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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2015

or

 

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

For the transition period from                      to                     

Commission File Number: 333-191801

 

 

PRIME MERIDIAN HOLDING COMPANY

(Exact Name of registrant as specified in its charter)

 

 

 

Florida   27-2980805

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1897 Capital Circle NE, Second Floor, Tallahassee, Florida   32308
(Address of principal executive offices)   (Zip Code)

(850) 907-2301

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2015: 1,947,589

 

 

 


Table of Contents

INDEX

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets September 30, 2015 (unaudited) and December 31, 2014

     2   

Condensed Consolidated Statements of Earnings Three and Nine Months ended September  30, 2015 and 2014 (unaudited)

     3   

Condensed Consolidated Statement of Comprehensive Income Three and Nine Months ended September  30, 2015 and 2014 (unaudited)

     4   

Condensed Consolidated Statements of Stockholders’ Equity Nine Months ended September  30, 2015 and 2014 (unaudited)

     5   

Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 2015 and 2014 (unaudited)

     6   

Notes to Condensed Consolidated Financial Statements (unaudited)

     7-25   

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

     26-36   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4. Controls and Procedures

     36-37   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     37   

Item 1A. Risk Factors

     37   

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

     38   

Item 3. Defaults Upon Senior Securities

     38   

Item 4. Mine Safety Disclosures

     38   

Item 5. Other Information

     38   

Item 6. Exhibits

     39   

Signatures

     40   

Certifications

  

 

1


Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

     September 30,
2015
     December 31,
2014
 
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 4,972         3,757   

Federal funds sold

     12,635         3,611   

Interest-bearing deposits

     373         187   
  

 

 

    

 

 

 

Total cash and cash equivalents

     17,980         7,555   

Securities available for sale

     39,830         42,397   

Loans held for sale

     2,034         1,871   

Loans, net of allowance for loan losses of $2,429 and $2,098

     177,471         151,869   

Federal Home Loan Bank stock

     402         186   

Premises and equipment, net

     4,063         3,563   

Deferred tax asset

     446         362   

Accrued interest receivable

     608         624   

Bank-owned life insurance

     1,650         1,613   

Other assets

     252         318   
  

 

 

    

 

 

 

Total assets

   $ 244,736         210,358   
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Liabilities:

     

Noninterest-bearing demand deposits

     50,314         43,148   

Savings, NOW and money-market deposits

     141,681         122,166   

Time deposits

     22,378         18,657   
  

 

 

    

 

 

 

Total deposits

     214,373         183,971   

Federal Home Loan Bank advance

     5,000         0   

Other borrowings

     0         2,699   

Official checks

     366         368   

Other liabilities

     666         453   
  

 

 

    

 

 

 

Total liabilities

     220,405         187,491   
  

 

 

    

 

 

 

Stockholders’ equity:

     

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

     0         0   

Common stock, $.01 par value; 9,000,000 shares authorized, 1,945,472 and 1,941,617 issued and outstanding

     19         19   

Additional paid-in capital

     20,111         20,056   

Retained earnings

     3,941         2,738   

Accumulated other comprehensive income

     260         54   
  

 

 

    

 

 

 

Total stockholders’ equity

     24,331         22,867   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 244,736         210,358   
  

 

 

    

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended
September 30,
     Nine months Ended
September 30,
 
     2015      2014      2015      2014  

Interest income:

           

Loans

   $ 2,146         1,836         6,126         5,171   

Securities

     202         229         667         677   

Other

     10         13         31         57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     2,358         2,078         6,824         5,905   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     179         155         507         468   

Other borrowings

     4         7         18         29   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     183         162         525         497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     2,175         1,916         6,299         5,408   

Provision for loan losses

     124         206         333         797   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,051         1,710         5,966         4,611   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges and fees on deposit accounts

     37         32         110         107   

Mortgage banking revenue

     196         107         407         235   

Income from bank-owned life insurance

     12         13         37         39   

Gain on sale of securities available for sale

     0         18         42         18   

Other income

     45         37         130         112   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     290         207         726         511   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries and employee benefits

     959         829         2,571         2,454   

Occupancy and equipment

     331         243         893         664   

Professional fees

     69         65         306         326   

Marketing

     95         68         304         224   

FDIC Assessment

     28         34         83         94   

Other

     268         224         669         685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     1,750         1,463         4,826         4,447   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     591         454         1,866         675   

Income taxes

     213         159         663         215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 378         295         1,203         460   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.19         0.17         0.62         0.28   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.19         0.17         0.61         0.27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends per common share

   $ 0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     Three Months Ended
September 30,
    Nine months Ended
September 30,
 
     2015     2014     2015     2014  

Net earnings

   $ 378        295        1,203        460   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Change in unrealized gain on securities:

        

Unrealized gain arising during the period

     355        27        368        668   

Reclassification adjustment for realized gains

     0        (18     (42     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gain

     355        9        326        650   

Deferred income taxes on above change

     (131     (3     (120     (241
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     224        6        206        409   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 602        301        1,409        869   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Nine months Ended September 30, 2015 and 2014

(Dollars in thousands)

 

     Common Stock      Additional
Paid-In
     Retained      Accumulated
Other
Compre-
hensive
(Loss)
    Total
Stockholders’
 
     Shares      Amount      Capital      Earnings      Income     Equity  

Balance at December 31, 2013

     1,498,937       $ 15         14,929         1,732         (315     16,361   

Net earnings for the nine months ended September 30, 2014 (unaudited)

     0         0         0         460         0        460   

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

     0         0         0         0         409        409   

Common stock issued as compensation to directors (unaudited)

     2,012         0         23         0         0        23   

Sale of common stock (unaudited)

     320,456         3         3,675         0         0        3,678   

Stock-based compensation (unaudited)

     0         0         1         0         0        1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30, 2014 (unaudited)

     1,821,405       $ 18         18,628         2,192         94        20,932   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at December 31, 2014

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

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

     0         0         0         1,203         0        1,203   

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

     0         0         0         0         206        206   

Stock options exercised (unaudited)

     1,400         0         14         0         0        14   

Common stock issued as compensation to directors (unaudited)

     2,455         0         29         0         0        29   

Stock-based compensation (unaudited)

     0         0         12         0         0        12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30, 2015 (unaudited)

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

     Nine Months Ended  
     September 30,  
     2015     2014  

Cash flows from operating activities:

    

Net earnings

   $ 1,203        460   

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

    

Depreciation and amortization

     324        297   

Provision for loan losses

     333        797   

Net amortization of deferred loan fees

     (298     (7

Deferred income taxes

     (204     (89

Gain on sale of securities available for sale

     (42     (18

Amortization of premiums and discounts on securities available for sale

     326        349   

Gain on sale of loans held for sale

     (379     (207

Proceeds from the sale of loans held for sale

     23,169        10,565   

Loans originated as held for sale

     (22,953     (12,179

Stock issued as compensation

     29        23   

Stock-based compensation expense

     12        1   

Income from bank-owned life insurance

     (37     (39

Net decrease (increase) in accrued interest receivable

     16        (55

Net decrease in other assets

     66        62   

Net increase in other liabilities and official checks

     211        540   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,776        500   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Loan originations, net of principal repayments

     (25,637     (24,178

Purchase of securities available for sale

     (7,473     (8,628

Principal repayments of securities available for sale

     8,007        6,087   

Proceeds from sale of securities available for sale

     2,075        1,748   

Maturities and calls of securities available for sale

     0        1,945   

(Purchase) redemption of Federal Home Loan Bank stock

     (216     18   

Purchase of premises and equipment

     (824     (170
  

 

 

   

 

 

 

Net cash used in investing activities

     (24,068     (23,178
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     30,402        (4,092

Decrease in other borrowings

     (2,699     (3,027

Increase in Federal Home Loan Bank advances

     5,000        0   

Proceeds from stock options exercised

     14        0   

Net proceeds from sale of common stock

     0        3,678   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     32,717        (3,441
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     10,425        (26,119

Cash and cash equivalents at beginning of period

     7,555        34,166   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 17,980        8,047   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid during the period for:

    

Interest

   $ 516        498   
  

 

 

   

 

 

 

Income taxes

   $ 844        361   
  

 

 

   

 

 

 

Noncash transactions:

    

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

   $ 206        409   
  

 

 

   

 

 

 

Transfer of loans to other real estate owned

     0        872   
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1) General

Prime Meridian Holding Company (the “Holding Company”) owns 100% of the outstanding common stock of Prime Meridian Bank (the “Bank”) (collectively the “Company”). The Holding Company’s primary activity is the operation of the Bank. The Bank is a Florida state-chartered commercial bank. The deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate clients through its three banking offices located in Tallahassee and Crawfordville, Florida and through its online banking platform.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company contain all adjustments (consisting principally of normal recurring accruals) necessary to present fairly the financial position at September 30, 2015, and the results of operations for the three and nine-month periods ended September 30, 2015 and 2014. The results of operations for the three months ended September 30, 2015 and the nine months ended September 30, 2015, respectively, are not necessarily indicative of the results to be expected for the full year.

Comprehensive Income. Accounting principles generally accepted in the United States of America (“GAAP”) generally require that recognized revenue, expenses, gains and losses be included in earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the condensed consolidated balance sheet, such items along with net earnings, are components of comprehensive income. The only component of other comprehensive income is the net change in the unrealized gains on the securities available for sale.

Share-Based Compensation. The Company expenses the fair value of any stock options granted. The Company recognizes share-based compensation in earnings as the options vest.

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

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2) Securities Available for Sale

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

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

At September 30, 2015:

           

U.S. Government agency securities

   $ 9,809         133         0         9,942   

Municipal securities

     8,333         109         (22      8,420   

Mortgage-backed securities

     21,275         239         (46      21,468   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,417         481         (68      39,830   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

           

U.S. Government agency securities

     6,943         19         (99      6,863   

Municipal securities

     9,497         113         (79      9,531   

Mortgage-backed securities

     25,870         228         (95      26,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,310         360         (273      42,397   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows (in thousands):

 

     Less Than Twelve Months      Over Twelve Months  
     Gross             Gross         
     Unrealized      Fair      Unrealized      Fair  
     Losses      Value      Losses      Value  

At September 30, 2015:

           

Municipal securities

   $ (4      2,045         (18      1,253   

Mortgage-backed securities

     (5      832         (41      2,207   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (9      2,877         (59      3,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

           

U.S. Government agency securities

   $ 0         0         (99      5,945   

Municipal securities

     (2      269         (77      3,026   

Mortgage-backed securities

     (47      8,250         (48      1,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (49      8,519         (224      10,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2) Securities Available for Sale, Continued

 

The unrealized losses at September 30, 2015 on twelve securities were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired.

Securities measured at fair value on a recurring basis are summarized below (in thousands):

 

            Fair Value Measurements Using  
     Fair
Value
     Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

At September 30, 2015:

           

U.S. Government agency securities

   $ 9,942         0         9,942         0   

Municipal securities

     8,420         0         8,420         0   

Mortgage-backed securities

     21,468         0         21,468         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     39,830         0         39,830         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

           

U.S. Government agency securities

     6,863         0         6,863         0   

Municipal securities

     9,531         0         9,531         0   

Mortgage-backed securities

     26,003         0         26,003         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,397         0         42,397         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three and nine months ended September 30, 2015 and 2014, no securities were transferred in or out of Level 1, Level 2 or Level 3.

The scheduled maturities of securities are as follows (in thousands):

 

     Amortized      Fair  
     Cost      Value  

At September 30, 2015:

     

Due in less than one year

   $ 2,179       $ 2,183   

Due in one to five years

     7,771         7,828   

Due in five to ten years

     8,192         8,351   

Mortgage-backed securities

     21,275         21,468   
  

 

 

    

 

 

 

Total

   $ 39,417         39,830   
  

 

 

    

 

 

 

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans

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

 

     At September 30,      At December 31,  
     2015      2014  

Real estate mortgage loans:

     

Commercial

   $ 56,472         52,661   

Residential and home equity

     66,835         51,858   

Construction

     17,625         15,876   
  

 

 

    

 

 

 

Total real estate mortgage loans

     140,932         120,395   

Commercial loans

     35,883         30,755   

Consumer and other loans

     2,848         2,877   
  

 

 

    

 

 

 

Total loans

     179,663         154,027   

Add (deduct):

     

Net deferred loan costs (fees)

     237         (60

Allowance for loan losses

     (2,429      (2,098
  

 

 

    

 

 

 

Loans, net

   $ 177,471         151,869   
  

 

 

    

 

 

 

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

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

 

     Real Estate Mortgage Loans          

Consumer

and

Other

       
           Residential
and Home
           Commercial          
     Commercial     Equity      Construction     Loans     Loans     Total  

Three-Month Period Ended September 30, 2015:

             

Beginning balance

   $ 706        797         237        519        48        2,307   

Provision (credit) for loan losses

     (3     47         20        70        (10     124   

Net (charge-offs)

     0        0         0        0        (2     (2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 703        844         257        589        36        2,429   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Three-Month Period Ended September 30, 2014:

             

Beginning balance

   $ 1,049        523         274        478        21        2,345   

Provision (credit) for loan losses

     152        134         (26     (66     12        206   

Net (charge-offs) recoveries

     (531     0         0        10        (2     (523
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 670        657         248        422        31        2,028   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Nine-Month Period Ended September 30, 2015:

             

Beginning balance

   $ 641        594         263        562        38        2,098   

Provision (credit) for loan losses

     62        250         (6     27        0        333   

Net (charge-offs)

     0        0         0        0        (2     (2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 703        844         257        589        36        2,429   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Nine-Month Period Ended September 30, 2014:

             

Beginning balance

   $ 604        545         175        387        23        1,734   

Provision for loan losses

     598        112         73        4        10        797   

Net (charge-offs) recoveries

     (532     0         0        31        (2     (503
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 670        657         248        422        31        2,028   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2015:

             

Individually evaluated for impairment:

             

Recorded investment

   $ 0        0         0        199        0        199   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 0        0         0        105        0        105   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment:

             

Recorded investment

   $ 56,472        66,835         17,625        35,684        2,848        179,464   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 703        844         257        484        36        2,324   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2014:

             

Individually evaluated for impairment:

             

Recorded investment

   $ 0        0         0        229        8        237   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 0        0         0        92        6        98   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Collectively evaluated for impairment:

             

Recorded investment

   $ 52,661        51,858         15,876        30,526        2,869        153,790   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance in allowance for loan losses

   $ 641        594         263        470        32        2,000   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(continued)

11


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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

The Company has divided the loan portfolio into three portfolio segments and five portfolio classes, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors. The Company identifies the portfolio segments and classes as follows:

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

Commercial. Loans of this type are typically our more complex loans. This category of real estate loans is comprised of loans secured by mortgages on commercial property that are typically owner-occupied, but also includes non-owner occupied investment properties. Commercial loans that are secured by owner-occupied commercial real estate are repaid through operating cash flows of the borrower. The maturity for this type of loan is generally limited to three to five years; however, payments may be structured on a longer amortization basis. Typically, interest rates on our commercial real estate loans are fixed for five years or less after which they adjust based upon a predetermined spread over a market index rate. At times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, the Company typically requires personal guarantees from the principal owners of the business supported by a review of the principal owners’ personal financial statements and tax returns. As part of the enterprise risk management process, it is understood that risks associated with commercial real estate loans include fluctuations in real estate values, the overall strength of the borrower and the economy, new job creation trends, tenant vacancy rates, environmental contamination, and the quality of the borrowers’ management. In order to mitigate and limit these risks, we analyze the borrowers’ cash flows and evaluate collateral value. Currently, the collateral securing our commercial real estate loans includes a variety of property types, such as office, warehouse, and retail facilities. Other types include multifamily properties, hotels, mixed-use residential and commercial properties. Generally, commercial real estate loans present a higher risk profile than our consumer real estate loan portfolio.

Residential and Home Equity. The Company offers first and second one-to-four family mortgage loans and home equity lines of credit; the collateral for these loans includes both owner-occupied residences and non-owner-occupied investment properties. The owner-occupied primary residence loans generally present lower levels of risk than commercial real estate loans, however, risks still do 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 non-owner-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 Company offers both portfolio and secondary market mortgages; portfolio loans generally are based on a 1-year, 3-year or 5-year adjustable rate mortgages; while 15-year or 30-year fixed-rate loans are generally sold to the secondary market.

 

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

Construction. Typically, these loans have a term of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to a term loan with a maturity of one to five years. This portion of our loan portfolio includes loans to small and midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties, and residential developments. This type of loan is also made to individual clients for construction of single family homes in our market area. An independent appraisal is used to determine the value of the collateral and confirm that the ratio of the loan principal to the value of the collateral will not exceed policies of the Company. 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, and lines of credit to small and midsized businesses. Small-to-medium sized businesses, retail, and professional establishments, make up our target market for commercial loans. Our Relationship Managers primarily underwrite these loans based on the borrower’s ability to service the loan from cash flow. Lines of credit and loans secured by accounts receivable and/or inventory are monitored periodically by our staff. Loans secured by “all business assets,” or a “blanket lien” are typically only made to highly qualified borrowers due to the nonspecific nature of the collateral. Valuation of business collateral is generally supported by an appraisal, purchase order, or third party physical inspection. Personal guarantees of the principals of business borrowers are usually required.

Equipment loans generally have a term of five years or less and may have a fixed or variable rate; we use conservative margins when pricing these loans. Working capital loans generally do not exceed one year and typically, they are secured by accounts receivable, inventory, and personal guarantees of the principals of the business. 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.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

In reference to our risk management process, our commercial loan portfolio presents a higher risk profile than our consumer real estate and consumer loan portfolios. Therefore, we require that all loans to businesses must have a clearly stated and reasonable payment plan to allow for timely retirement of debt, unless secured by liquid collateral or as otherwise justified.

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

The following summarizes the loan credit quality (in thousands):

 

            Special                              
     Pass      Mention      Substandard      Doubtful      Loss      Total  

At September 30, 2015:

                 

Real estate mortgage loans:

                 

Commercial

   $ 51,721         2,800         1,951         0         0         56,472   

Residential and home equity

     62,384         1,228         3,223         0         0         66,835   

Construction

     17,312         87         226         0         0         17,625   

Commercial loans

     35,155         508         220         0         0         35,883   

Consumer and other loans

     2,807         32         9         0         0         2,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 169,379         4,655         5,629         0         0         179,663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

                 

Real estate mortgage loans:

                 

Commercial

     50,654         0         2,007         0         0         52,661   

Residential and home equity

     47,357         3,065         1,436         0         0         51,858   

Construction

     15,714         154         8         0         0         15,876   

Commercial loans

     30,006         520         229         0         0         30,755   

Consumer and other loans

     2,801         68         8         0         0         2,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 146,532         3,807         3,688         0         0         154,027   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Furthermore, construction loans, non-owner occupied commercial real estate loans, and commercial loan relationships in excess of $500,000 are reviewed at least annually. The Company determines the appropriate loan grade during the renewal process and reevaluates the loan grade in situations when a loan becomes past due.

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the client contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged-off. The Company uses the following definitions for risk ratings:

Pass – A Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.

Special Mention – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not necessarily preclude the potential for recovery, but rather signifies it is no longer practical to defer writing off the asset.

At September 30, 2015, there were no loans past due thirty days or more but still accruing and three loans on nonaccrual. Age analysis of past due loans is as follows (in thousands):

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

Age analysis of past-due loans is as follows (in thousands):

 

     Accruing Loans                
     30-59
Days
Past Due
     60-89
Days
Past Due
     Greater
Than 90
Days
Past Due
     Total
Past
Due
     Current      Nonaccrual
Loans
     Total
Loans
 

At September 30, 2015:

                    

Real estate mortgage loans:

                    

Commercial

   $ 0         0         0         0         56,472         0         56,472   

Residential and home equity

     0         0         0         0         66,835         0         66,835   

Construction

     0         0         0         0         17,625         0         17,625   

Commercial loans

     0         0         0         0         35,684         199         35,883   

Consumer and other loans

     0         0         0         0         2,848         0         2,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0         0         0         0         179,464         199         179,663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

                    

Real estate mortgage loans:

                    

Commercial

     0         0         0         0         52,661         0         52,661   

Residential and home equity

     0         0         0         0         51,858         0         51,858   

Construction

     0         0         0         0         15,876         0         15,876   

Commercial loans

     18         0         0         18         30,566         171         30,755   

Consumer and other loans

     0         0         0         0         2,877         0         2,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18         0         0         18         153,838         171         154,027   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following summarizes the amount of impaired loans (in thousands):

 

     With No Related
Allowance Recorded
     With an Allowance Recorded      Total  
     Recorded
Investment
     Unpaid
Contractual
Principal
Balance
     Recorded
Investment
     Unpaid
Contractual
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Contractual
Principal
Balance
     Related
Allowance
 

At September 30, 2015:

                       

Commercial loans

     0         0         199         199         105         199         199         105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0         0         199         199         105         199         199         105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

                       

Commercial loans

     0         0         229         229         92         229         229         92   

Consumer & other loans

     0         0         8         8         6         8         8         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 0         0         237         237         98         237         237         98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

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

 

     Three Months Ended September 30,  
     2015      2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 

Commercial real estate

   $ 0         0         0         1,403         0         0   

Residential and home equity

     0         0         0         35         1         1   

Commercial loans

     226         1         1         211         3         3   

Consumer & Other

     7         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 233         1         1         1,649         4         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine months Ended September 30,  
     2015      2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 

Commercial real estate

   $ 0         0         0         987         0         0   

Residential and home equity

     0         0         0         35         2         2   

Commercial loans

     273         10         9         215         9         10   

Consumer & Other

     7         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 280         10         9         1,237         11         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans measured at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014.

 

(4) Regulatory Capital

Banks are subject to regulatory capital requirements imposed by the Federal Reserve and the FDIC. Until a bank holding company’s assets reach $1 billion, the risk-based capital and leverage guidelines issued by the Federal Reserve are applied to bank holding companies on a nonconsolidated basis, unless the bank holding company is engaged in nonbank activities involving significant leverage, or it has a significant amount of outstanding debt held by the general public. Instead, a bank holding company with less than $1 billion in assets generally applies the risk-based capital and leverage capital guidelines on a bank-only basis and must only meet a debt-to-equity ratio at the holding company level. The FDIC risk-based capital guidelines apply directly to insured state banks, regardless of whether they are subsidiaries of a bank holding company. Both agencies’ requirements, which are substantially similar, establish minimum capital ratios in relation to assets, both on an aggregate basis as adjusted for credit risks and off-balance sheet exposures. The risk weights assigned to assets are based primarily on credit risks.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4) Regulatory Capital, Continued

 

A particular asset is assigned to a risk category depending upon its severity of risk. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, risk weights (from 0% to 150%) are applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The assignment of risk weightings to certain assets are also subject to qualitative judgments by our regulators.

Capital is then classified into three categories, Common Equity Tier 1, Additional Tier 1, and Tier 2. Common Equity Tier 1 Capital (“CET1”) is the sum of common stock instruments and related surplus net of treasury stock, retained earnings, Accumulated Other Comprehensive Income (“AOCI”), and qualifying minority interests, less applicable regulatory adjustments and deductions that include AOCI (if an irrevocable option to neutralize AOCI is exercised). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to an aggregate of 15% of CET1 and 10% of CET1 individually. Additional Tier 1 Capital includes noncumulative perpetual preferred stock, Tier 1 minority interests, grandfathered trust preferred securities, and Troubled Asset Relief Program instruments, less applicable regulatory adjustments and deductions. Tier 2 Capital includes subordinated debt and preferred stock, total capital minority interests not included in Tier 1, and ALLL not exceeding 1.25% percent of risk-weighted assets, less applicable regulatory adjustments and deductions.

Effective January 1, 2015, smaller banks, such as the Bank, became subject to the new Basel III capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations. These new regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.

Changes that could affect the Bank going forward include additional constraints on the inclusion of deferred tax assets in capital and increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. Under the new regulations, the Company elected an irreversible one-time opt-out to exclude AOCI from regulatory capital in the first quarter of 2015.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4) Regulatory Capital, Continued

 

The following is a summary at September 30, 2015 of the regulatory capital requirements to be considered “well-capitalized” and the Bank’s capital position.

 

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

As of September 30, 2015:

               

Tier 1 Leverage Capital Ratio

   $ 22,945         9.87   $ 9,297         4.00   $ 11,622         5.00

Common Equity Tier 1 Risk-Based Capital Ratio

     22,945         12.82        8,053         4.50        11,632         6.50   

Tier 1 Risk-Based Capital Ratio

     22,945         12.82        10,737         6.00        14,316         8.00   

Total Risk-Based Capital Ratio

     25,184         14.07        14,316         8.00        17,895         10.00   

At September 30, 2015, the Bank was well-capitalized with all capital ratios exceeding the well-capitalized requirement.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(5) Earnings Per Share

 

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three and nine months ended September 30, 2015 and 2014, outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method (dollars in thousands, except per share amounts):

 

     2015      2014  
     Earnings      Weighted-
Average
Shares
     Per
Share
Amount
     Earnings      Weighted-
Average
Shares
     Per
Share
Amount
 

Three Months Ended September 30:

  

           

Basic EPS:

                 

Net earnings

   $ 378         1,945,345       $ 0.19       $ 295         1,785,900       $ 0.17   

Effect of dilutive securities-

                 

Incremental shares from assumed conversion of options

        3,694               1,793      
     

 

 

          

 

 

    

Diluted EPS:

                 

Net earnings

   $ 378         1,949,039       $ 0.19       $ 295         1,787,693       $ 0.17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30:

                 

Basic EPS:

                 

Net earnings

   $ 1,203         1,944,313       $ 0.62       $ 460         1,671,877       $ 0.28   

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

        11,818               15,446      
     

 

 

          

 

 

    

Diluted EPS:

                 

Net earnings

   $ 1,203         1,956,131       $ 0.61       $ 460         1,687,323       $ 0.27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6) Stock-Based Compensation

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

A summary of the activity in the Company’s 2007 Stock Option Plan is as follows:

 

     Number of
Options
     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2013

     134,000       $ 10.01         
  

 

 

          

Outstanding at September 30, 2014

     134,000       $ 10.01         
  

 

 

          

Outstanding at December 31, 2014

     108,400       $ 10.01         

Options granted during the nine months ended September 30, 2015

     15,000       $ 12.50         

Options exercised during the nine months ended September 30, 2015

     (1,400    $ 10.00         
  

 

 

          

Outstanding at September 30, 2015

     122,000       $ 10.29         3.5 years      
  

 

 

    

 

 

    

 

 

    

Exercisable at September 30, 2015

     104,900       $ 10.01         3.3 years       $ 182,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2015, there was $8,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the plans. The fair value of the options granted is expected to be recognized over a weighted-average period of 10 months. The fair value of shares vested and recognized as compensation expense was $12,000 and $1,000 for the nine months ended September 30, 2015 and 2014, respectively.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6) Stock-Based Compensation, Continued

 

No options were granted during the three months ended September 30, 2015. The fair value of each option granted during the nine months ended September 30, 2015 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

Weighted-average risk-free interest rate

     0.89

Expected dividend yield

     —     

Expected stock volatility

     8.13

Expected life in years

     3   

Per share fair value of options issued during the year

   $ 0.87   

 

(7) Federal Home Loan Bank Advances

Federal Home Loan Bank (“FHLB”) advances are collateralized by a blanket lien on qualifying residential real estate, commercial real estate, home equity lines of credit and multi-family loans. Under this blanket lien, the Company could borrow up to $34.4 million at September 30, 2015. At September 30, 2015, there was one advance from the FHLB in the amount of $5.0 million, maturing November 30, 2015, with an interest rate of 0.30%. This advance reduced the Company’s borrowing capacity under the FHLB to $29.4 million at September 30, 2015. There were no outstanding FHLB advances at December 31, 2014.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(8) Fair Value of Financial Instruments

The estimated fair values and fair value measurement method with respect to the Company’s financial instruments were as follows (in thousands):

 

     At September 30, 2015      At December 31, 2014  
     Carrying
Amount
     Fair
Value
     Level      Carrying
Amount
     Fair
Value
     Level  

Financial assets:

                 

Cash and cash equivalents

   $ 17,980         17,980         1         7,555         7,555         1   

Securities available for sale

     39,830         39,830         2         42,397         42,397         2   

Loans held for sale

     2,034         2,130         3         1,871         1,923         3   

Loans, net

     177,471         176,035         3         151,869         148,588         3   

Federal Home Loan Bank stock

     402         402         3         186         186         3   

Accrued interest receivable

     608         608         3         624         624         3   

Financial liabilities:

                 

Deposits

     214,373         214,448         3         183,971         184,057         3   

Federal Home Loan Bank advance

     5,000         5,000         3         0         0         3   

Other borrowings

     0         0         3         2,699         2,699         3   

Off-balance sheet financial items

     42,790         42,790         3         34,952         34,952         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, 2014.

 

(9) Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments are commitments to extend credit, construction loans in process, unused lines of credit, standby letters of credit, and guaranteed accounts and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

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.

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(9) Off-Balance Sheet Financial Instruments, continued

 

Commitments to extend credit and unused lines of credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed-expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a client to a third party. These letters of credit are primarily issued to support third-party borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. In the event the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client. Some of the Bank’s standby letters of credit are secured by collateral and those secured letters of credit totaled $623,000 at September 30, 2015.

Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our third party credit card company, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on certain accounts plus 10%.

The maximum potential amount of future payments we could be required to make is represented by the dollar amount disclosed in the table below. Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded. A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at September 30, 2015 are as follows (in thousands):

 

Commitments to extend credit

   $ 5,706   
  

 

 

 

Construction loans in process

   $ 7,247   
  

 

 

 

Unused lines of credit

   $ 28,757   
  

 

 

 

Standby letters of credit

   $ 1,080   
  

 

 

 

Guaranteed accounts

   $ 116   
  

 

 

 

 

(continued)

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(10) Transaction with a Related Party

 

During July, 2015, the Bank purchased three acres of land in Wakulla County, Florida from a related party for $290,000 for the purpose of building a branch office. The Bank has entered into an 18-month lease contract for a modular unit for $71,000 over the term of the lease. Construction plans for a permanent branch building have not yet been completed.

 

(11) Reclassification

Certain interest income sources were reclassified from securities to other for the three and nine months ended September 30, 2014 to conform to September 30, 2015 presentation. Also, certain noninterest income sources were reclassified from gain on sale of loans and other income to mortgage banking revenue and certain noninterest expenses were reclassified from advertising and other noninterest expense to occupancy and equipment, marketing, and FDIC assessment for the three and nine months ended September 30, 2014 to conform to September 30, 2015 presentation. The reclassification of income and expenses had no effect on net earnings.

 

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Table of Contents

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, 2014. Results of operations for the three and nine months ended September 30, 2015, are not necessarily indicative of results that may be attained for any other period. The following discussion and analysis presents our financial condition and results of operations on a consolidated basis, however, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.

Certain information in this report may include “forward-looking statements” as defined by federal securities law. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that,” and similar expressions are intended to identify these forward-looking statements. These forward-looking statements involve risk and uncertainty and a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law, and silence by management over time should not be construed to mean that actual events are occurring as estimated in such forward-looking statements.

Our ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our and our subsidiary’s operations include, but are not limited to, changes in:

 

    local, regional, and national economic and business conditions;

 

    banking laws, compliance, and the regulatory environment;

 

    U.S. and global securities markets, public debt markets, and other capital markets;

 

    monetary and fiscal policies of the U.S. Government;

 

    litigation, tax, and other regulatory matters;

 

    demand for banking services, both loan and deposit products in our market area;

 

    quality and composition of our loan or investment portfolios;

 

    risks inherent in making loans such as repayment risk and fluctuating collateral values;

 

    competition;

 

    attraction and retention of key personnel, including our management team and directors;

 

    technology, product delivery channels, and end user demands and acceptance of new products;

 

    consumer spending, borrowing and savings habits;

 

    any failure or breach of our operational systems, information systems or infrastructure, or those of our third party vendors and other service providers, including cyber-attacks;

 

    application and interpretation of accounting principles and guidelines;

 

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

 

    other economic, competitive, governmental, regulatory, or technological factors affecting us.

General

Prime Meridian Holding Company (“PMHC” or the “Company”) 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”). The Bank opened for business on February 4, 2008, and was acquired by the Company on September 16, 2010. PMHC has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through three full-service offices located in Tallahassee and Crawfordville, Florida and through its online banking platform.

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

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

 

     At or for the  
     Nine months
Ended
September 30, 2015
    Year
Ended
December 31, 2014
    Nine months
Ended
September 30, 2014
 

Average equity as a percentage of average assets

     10.55     9.19     8.85

Equity to total assets at end of period

     9.94     10.87     10.24

Return on average assets(1)

     0.72     0.48     0.29

Return on average equity(1)

     6.80     5.21     3.28

Noninterest expense to average assets(1)

     2.88     2.81     2.80

Nonperforming loans to total loans at end of period

     0.11     0.11     0.00

 

(1)  Annualized for the nine months ended September 30, 2015 and September 30, 2014.

FINANCIAL CONDITION

Average assets totaled $232.4 million for the three months ended September 30, 2015, an increase of $22.4 million, or 10.7%, over the three months ended September 30, 2014. For the nine months ended September 30, 2015, average assets totaled $223.5 million, compared to $211.5 million over the same period in 2014, a $12.1 million, or 5.7% increase. In both time period comparisons, the increase in 2015 can be attributed to higher average loan balances, partially offset by lower average balances of securities and other interest-earning assets. The decline in other interest-earning assets is due primarily to an anticipated, but large, decrease in average noninterest bearing deposits which impacted our ability to invest in other interest-earning assets in 2015.

 

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Loans. Our primary earning asset is our loan portfolio and our primary source of income is the interest earned on the loan portfolio. Our loan portfolio consists of commercial real estate loans, construction loans, and commercial loans made to small-to-medium sized companies and their owners, as well as residential real estate loans, including first and second mortgages, and consumer loans. Our goal is to maintain a high quality of loans through sound underwriting and lending practices. As of September 30, 2015 and December 31, 2014, approximately 78.4% and 78.2%, respectively, of the total loan portfolio were collateralized by commercial and residential real estate mortgages.

As of September 30, 2015, the Bank’s net loan portfolio represented 72.5% of total assets, compared to 72.2% of total assets at December 31, 2014.

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

We generally place loans on nonaccrual status when they become 90 days or more past due, unless they are well secured and in the process of collection. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When a loan is placed on nonaccrual status, any interest previously accrued, but not collected, is reversed from income.

Accounting standards require the Bank to identify loans as impaired loans when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We implement these standards in our monthly review of the adequacy of the allowance for loan losses, and identify and value impaired loans in accordance with regulatory guidance on these standards. Three loans totaling $199,000 were deemed to be impaired under the Bank’s policy at September 30, 2015, compared to five loans totaling $237,000 at December 31, 2014. For the nine months ended September 30, 2015, the Bank reported a loan loss provision of $333,000 and net charge-offs of $2,000.

Deposits. Deposits are the major source of the Bank’s funds for lending and other investment purposes. Total deposits at September 30, 2015 were $214.4 million, an increase of $30.4 million, or 16.5%, from December 31, 2014. The growth in deposits came from both noninterest-bearing and interest-bearing accounts. The average balance of noninterest-bearing deposits accounted for 23.4% of the average balance of total deposits for the nine months ended September 30, 2015, compared to 29.9% for the nine months ended September 30, 2014. The change in our deposit mix year over year resulted primarily from the shrinkage of one noninterest-bearing account that was connected to a 2014 political election. Recognizing this shift in our deposit mix, the Bank continues its efforts to increase its percentage of noninterest-bearing accounts.

Borrowings. The Bank has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”) and pledges its qualified loans as collateral which would allow the Bank, as of September 30, 2015, to borrow up to $34.4 million. There was a $5.0 million advance outstanding at September 30, 2015, leaving available credit of $29.4 million. At December 31, 2014, we had a repurchase agreement with a client that required the Company to pledge securities as collateral for borrowing under the agreement. At December 31, 2014, the outstanding balance of such borrowings totaled $2.7 million and the Company pledged securities with a market value of $3.6 million as collateral for the agreement. In June 2015, the repurchase agreement contract was terminated and the funds were moved to deposits.

 

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Table of Contents

Capital Adequacy. Stockholder’s equity was $24.3 million at September 30, 2015, compared to $22.9 million at December 31, 2014. As of September 30, 2015, no dividends on shares of our common stock had been paid or declared.

At September 30, 2015, the Bank was considered to be “well capitalized” with a 9.87% Tier 1 Leverage Capital Ratio, a 12.82% Common Equity Tier 1 Risk-Based Capital Ratio, a 12.82% Tier 1 Risk-Based Capital Ratio, and a 14.07% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.” The Holding Company currently has no specific capital requirements.

 

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

As of September 30, 2015:

               

Tier 1 Leverage Capital Ratio

   $ 22,945         9.87   $ 9,297         4.00   $ 11,622         5.00

Common Equity Tier 1 Risk-Based Capital Ratio

     22,945         12.82        8,053         4.50        11,632         6.50   

Tier 1 Risk-Based Capital Ratio

     22,945         12.82        10,737         6.00        14,316         8.00   

Total Risk-Based Capital Ratio

     25,184         14.07        14,316         8.00        17,895         10.00   

As of December 31, 2014:

               

Tier 1 Capital to Average Assets

     19,589         9.52        8,227         4.00        10,284         5.00   

Tier 1 Capital to Risk-Weighted Assets

     19,589         12.84        6,102         4.00        9,154         6.00   

Total Capital to Risk-Weighted Assets

     21,498         14.09        12,206         8.00        15,257         10.00   

 

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Table of Contents

Effective January 1, 2015, smaller banks, such as the Bank, became subject to the following new capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations.

 

Capital Category    Threshold Ratios  
   Total
Risk-
Based

Capital
Ratio
    Tier 1
Risk-
Based

Capital
Ratio
    Common
Equity

Tier 1
Risk-
Based

Capital
Ratio
    Tier 1
Leverage
Capital
Ratio
 

Well capitalized

     10.00     8.00     6.50     5.00

Adequately Capitalized

     8.00     6.00     4.50     4.00

Undercapitalized

     < 8.00     <6.00     < 4.50     < 4.00

Significantly Undercapitalized

     < 6.00     <4.00     < 3.00     < 3.00

Critically Undercapitalized

     Tangible Equity/Total Assets < 2%   

Results of Operations

Net interest income constitutes the principal source of income for the Bank and is calculated by subtracting interest expense on interest-bearing liabilities from interest income on interest-earning assets. The principal interest-earning assets are investment securities and loans receivable. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts, savings deposits, money-market accounts, and other borrowings. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on these assets and liabilities.

 

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Table of Contents

The following tables sets forth information regarding: (i) the total dollar amount of interest and dividend income of the Bank from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin; and (vi) weighted-average yields and rates. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities. The yields and costs depicted in the table include the amortization of fees, which are considered to constitute adjustments to yields (dollars in thousands).

As shown in the following two tables, the decrease in yields on loans was offset by a 25.8% increase in average loan balances for the three-month period and a 25.7% increase in average loan balances for the nine-month period, which resulted in loans constituting a higher overall percentage of total interest-earning assets and led to a higher overall yield on total interest-earning assets. A higher yield on interest-earning assets in conjunction with lower rates on interest-bearing liabilities have resulted in a higher interest-rate spread and net interest margin for the three and nine months ended September 30, 2015.

 

     Three Months Ended September 30,  
     2015     2014  
     Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
 

Interest-earning assets:

              

Loans(1)

   $ 175,617      $ 2,125         4.84   $ 139,623      $ 1,819         5.21

Mortgage loans held for sale

     1,527        21         5.50        1,117        17         6.09   

Securities

     39,587        202         2.04        42,780        229         2.14   

Other (2)

     7,505        10         0.53        18,564        13         0.28   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     224,236        2,358         4.21        202,084        2,078         4.11   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets

     8,122             7,833        
  

 

 

        

 

 

      

Total assets

   $ 232,358           $ 209,917        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings, NOW and money-market deposits

     132,068        149         0.45        119,041        131         0.44   

Time deposits <$100,000

     3,998        4         0.40        3,436        4         0.47   

Time deposits >$100,000

     18,006        26         0.58        10,103        20         0.79   
  

 

 

   

 

 

      

 

 

   

 

 

    

Deposits

     154,072        179         0.46        132,580        155         0.47   

Other borrowings

     5,000        4         0.32        2,730        7         1.03   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     159,072        183         0.46        135,310        162         0.48   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing deposits

     48,281             53,771        

Noninterest-bearing liabilities

     1,065             504        

Stockholders’ equity

     23,940             20,332        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 232,358           $ 209,917        
  

 

 

        

 

 

      

Net interest income

     $ 2,175           $ 1,916      
    

 

 

        

 

 

    

Interest-rate spread

          3.75          3.63
       

 

 

        

 

 

 

Net interest margin (3)

          3.88          3.79
       

 

 

        

 

 

 

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

     140.97          149.35     
  

 

 

        

 

 

      

 

(1)  Includes nonaccrual loans.
(2)  Other interest-earning assets include federal funds sold, interest-bearing deposits and FHLB stock.
(3)  Net interest margin is net interest income divided by total average interest-earning assets, annualized.
(4)  Some average balances for the three months ended September 30, 2014 have been recalculated from the Form 10-Q for the quarterly period ended September 30, 2014 to conform to the presentation of the three months ended September 30, 2015 in the form 10-Q for the quarterly period ended September 30, 2015.

 

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     Nine months Ended September 30,  
     2015     2014  
     Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
 

Interest-earning assets:

              

Loans(1)

   $ 165,309      $ 6,074         4.90   $ 131,554      $ 5,145         5.21

Mortgage loans held for sale

     1,486        52         4.67        552        26         6.28   

Securities

     40,994        667         2.17        42,907        677         2.10   

Other (2)

     7,799        31         0.53        28,468        57         0.27   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     215,588        6,824         4.22        203,481        5,905         3.87   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets

     7,948             7,972        
  

 

 

        

 

 

      

Total assets

   $ 223,536           $ 211,453        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings, NOW and money-market deposits

     127,072        414         0.43        117,610        401         0.45   

Time deposits <$100,000

     3,843        8         0.28        3,572        9         0.34   

Time deposits >$100,000

     18,268        85         0.62        10,427        58         0.74   
  

 

 

   

 

 

      

 

 

   

 

 

    

Deposits

     149,183        507         0.45        131,609        468         0.47   

Other borrowings

     2,308        18         1.04        3,895        29         0.99   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     151,491        525         0.46        135,504        497         0.49   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing deposits

     45,604             56,263        

Noninterest-bearing liabilities

     2,855             969        

Stockholders’ equity

     23,586             18,717        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 223,536           $ 211,453        
  

 

 

        

 

 

      

Net interest income

     $ 6,299           $ 5,408      
    

 

 

        

 

 

    

Interest-rate spread

          3.76          3.38
       

 

 

        

 

 

 

Net interest margin (3)

          3.90          3.54
       

 

 

        

 

 

 

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

     142.31          150.17     
  

 

 

        

 

 

      

 

(1)  Includes nonaccrual loans.
(2)  Other interest-earning assets includes federal funds sold, interest-bearing deposits and FHLB stock.
(3)  Net interest margin is net interest income divided by total average interest-earning assets, annualized.
(4)  Some average balances for the nine months ended September 30, 2014 have been recalculated from the Form 10-Q for the quarterly period ended September 30, 2014 to conform to the presentation of the nine months ended September 30, 2015 in the Form 10-Q for the quarterly period ended September 30, 2015.

 

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Comparison of Operating Results for the Three Months Ended September 30, 2015 and 2014

Net Income. For the three months ended September 30, 2015, the Company reported net earnings of $378,000, or $0.19 per basic and diluted share, compared to net earnings of $295,000, or $0.17 per basic and diluted share, for the three months ended September 30, 2014.

Net Interest Income. Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and securities, and interest expense on interest-bearing liabilities such as deposits and borrowings. Net interest income was $2.2 million for the three months ended September 30, 2015, compared to $1.9 million for the three months ended September 30, 2014.

Interest Income. Interest income increased to $2.4 million for the three months ended September 30, 2015, a $280,000 or 13.5%, increase over the three months ended September 30, 2014. The increase was driven by an increase in average loans from $139.6 million for the quarter ended September 30, 2014 to $175.6 million for the quarter ended September 30, 2015.

Interest Expense. Interest expense was $183,000 for the three months ended September 30, 2015, compared to $162,000 for the three months ended September 30, 2014. The increase in interest expense is attributed to higher interest-bearing deposit balances.

The Bank’s net interest margin increased 9 basis points from 3.79% for the three months ended September 30, 2014, to 3.88% for the same period in 2015 due mostly to higher average loan balances.

Provision for Loan Losses. The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market area, and other factors related to the collectability of the loan portfolio. The provision for loan losses for the three months ended September 30, 2015 was $124,000, compared to $206,000 for the three months ended September 30, 2014. Management believes that the allowance for loan losses, which was $2.4 million or 1.37% of total loans, at September 30, 2015, to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest income. Noninterest income consists of revenues generated from a broad range of financial services and activities, primarily service charges and fees on deposit accounts, mortgage banking revenue, income from bank-owned life insurance and gain on sale of securities available for sale. Noninterest income for the three months ended September 30, 2015 totaled $290,000 an increase of $83,000, or 40.1%, from the three months ended September 30, 2014. The increase is primarily due to an $89,000 increase in mortgage banking revenue, partially offset by an $18,000 decline in the gain on sale of securities available for sale.

 

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Noninterest expense. Noninterest expense increased $287,000 or 19.6%, to $1.8 million for the three months ended September 30, 2015 compared to the same period a year ago. The increase was primarily due to a $130,000 increase in salaries and employee benefits and an $88,000 increase in occupancy and equipment expense. The increase in salaries and employee benefits is predominantly a function of growth in the number of employees from forty-one full time equivalents at September 30, 2014 to fifty-four full time equivalents at September 30, 2015; however the overall increase in salaries and employee benefits expense was partially offset by higher deferred loan costs on new loan originations. Higher occupancy and equipment expense is primarily attributed to additional leased space at our Timberlane location and the opening of our new office in Crawfordville, Florida.

Income Taxes. Income tax expense is based on amounts reported in the statements of earnings after adjustments for nontaxable income and nondeductible expenses, and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income tax expense was $213,000 for the three months ended September 30, 2015, compared to $159,000 for the three months ended September 30, 2014. The higher provision relates to earnings before income taxes of $591,000 for the three months ended September 30, 2015 compared to earnings before income taxes of $454,000 for the three months ended September 30, 2014.

Comparison of Operating Results for the Nine months Ended September 30, 2015 and 2014

Net Income. For the nine months ended September 30, 2015, the Company reported net earnings of $1,203,000, or $0.62 per basic and $0.61 per diluted share, compared to net earnings of $460,000, or $0.28 per basic and $0.27 per diluted share, for the nine months ended September 30, 2014.

Net Interest Income. Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets such as loans and securities, and interest expense on interest-bearing liabilities such as deposits and borrowings. Net interest income was $6.3 million for the nine months ended September 30, 2015, compared to $5.4 million for the nine months ended September 30, 2014.

Interest Income. Interest income increased to $6.8 million for the nine months ended September 30, 2015, a $919,000 or 15.6%, increase over the nine months ended September 30, 2014. The increase was driven by an increase in average loans from $131.6 million for the nine months ended September 30, 2014 to $165.3 million for the nine months ended September 30, 2015.

Interest Expense. Interest expense was $525,000 for the nine months ended September 30, 2015, compared to $497,000 for the nine months ended September 30, 2014. Despite declining rates on deposits, a shift in the deposit mix towards a higher percentage of interest-bearing deposits resulted in the modest increase. The average balance of noninterest-bearing deposits to the average balance of total deposits decreased from 29.9% for the nine months ended September 30, 2014 to 23.4% for the nine months ended September 30, 2015.

The Bank’s net interest margin increased 36 basis points from 3.54% for the nine months ended September 30, 2014, to 3.90% for the same period in 2015 due mostly to higher average loan balances.

Provision for Loan Losses. The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market area, and other factors related to the collectability of the loan portfolio. The provision for loan losses for the nine months ended September 30, 2015 was $333,000 compared to $797,000 for the nine months ended September 30, 2014. The significant decrease in the

 

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provision can be attributed to one nonaccruing commercial real estate loan that was reported in 2014. Management believes that the allowance for loan losses, which was $2.4 million or 1.37% of total loans, at September 30, 2015, to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest income. Noninterest income consists of revenues generated from a broad range of financial services and activities, primarily service charges and fees on deposit accounts, mortgage banking revenue, income from bank-owned life insurance, and gain on sale of securities available for sale. Noninterest income for the nine months ended September 30, 2015 totaled $726,000 an increase of $215,000, or 42.1%, from the nine months ended September 30, 2014. The increase is primarily due to a $172,000 increase in mortgage banking revenue in 2015.

Noninterest expense. Noninterest expense increased $379,000 or 8.5%, to $4.8 million for the nine months ended September 30, 2015 compared to the same period a year ago. The increase was primarily due to a $117,000 increase in salaries and employee benefits, a $229,000 increase in occupancy and equipment expense, and an $80,000 increase in marketing expense, partially offset by small declines in professional fees, FDIC assessment, and other noninterest expense. The increase in salaries and employee benefits is predominantly a function of growth in the number of employees from forty-one full time equivalents at September 30, 2014 to fifty-four full time equivalents at September 30, 2015; however the overall increase in salaries and employee benefits expense was partially offset by higher deferred loan costs on new loan originations. Higher occupancy and equipment expense is primarily attributed to additional leased space at our Timberlane location, the opening of our new office in Crawfordville, Florida, and higher depreciation expense on software and equipment. The increase in marketing can be attributed to higher levels of spending on sponsorships, business development and advertising.

Income Taxes. Income tax expense is based on amounts reported in the statements of operations, after adjustments for nontaxable income and nondeductible expenses, and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income tax expense was $663,000 for the nine months ended September 30, 2015, compared to income tax expense of $215,000 for the nine months ended September 30, 2014. The higher provision relates to higher earnings before taxes for the nine months ended September 30, 2015.

Liquidity

As a commercial bank, we are expected to maintain an adequate liquidity reserve. Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. The liquidity reserve may consist of cash on hand, cash on deposit with correspondent banks, other investments, and short-term marketable securities such as federal funds sold, United States securities, or securities guaranteed by the United States. Some of our securities are pledged to collateralize certain deposits through our participation in the State of Florida’s Qualified Public Deposit Program (“QPD”). We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands. The market value of securities pledged to the QPD Program as of September 30, 2015, was $7.4 million.

 

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At September 30, 2015, total deposits were $214.4 million, of which $18.1 million were in certificates of deposits of $100,000 or more. Also, as a member of the FHLB, we have access to approximately $34.4 million of available lines of credit secured by qualifying collateral as of September 30, 2015, in addition to $10.2 million in unsecured lines of credit we maintain with correspondent banks. As of September 30, 2015, we had $5,000,000 outstanding in FHLB advances, reducing our available line of credit with FHLB to $29.4 million.

Off-Balance Sheet Arrangements

Refer to footnote (9) in the notes to condensed consolidated financial statements included in our Form 10-Q for the period ending September 30, 2015 for a discussion of off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that PMHC 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 the Company 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 PMHC’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.

 

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(b) Changes in Internal Controls

We have made no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2015, 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 error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are a party to various matters incidental to the conduct of a banking business. Presently, we believe that we are not a party to any legal proceedings in which resolution would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels.

Item 1A. Risk Factors

While the Company attempts to identify, manage, and mitigate risks and uncertainties associated with its business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our cash flows, results of operations, and financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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

On July 15, 2015, the Company issued 781 shares to members of its Board of Directors in lieu of $8,650 in cash fees. The shares were issued in accordance with the intrastate exemption from registration pursuant to Section 3(a)(11) of the Securities Act of 1933, because the Company is doing business within the State of Florida and each acquirer and offeree of securities resides within the State of Florida. There were no stock options exercised during the third quarter.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

 

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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

    4.1

   Specimen Common Stock Certificate    Exhibit 4.1 to Registration Statement on Form S-1 filed on October 18, 2013

    4.2

   2010 Articles of Share Exchange    Exhibit 4.2 to Registration Statement on Form S-1 filed on October 18, 2013

  10.1

   2007 Stock Option Plan    Exhibit 10.1 to Registration Statement on Form S-1 filed on October 18, 2013

  10.2

   Form of Non-Qualified Stock Option Agreement Under 2007 Plan    Exhibit 10.2 to Registration Statement on Form S-1 filed on October 18, 2013

  10.3

   Form of Incentive Stock Option Agreement Under 2007 Plan    Exhibit 10.3 to Registration Statement on Form S-1 filed on October 18, 2013

  10.4

   2012 Directors’ Compensation Plan    Exhibit 10.4 to Registration Statement on Form S-1 filed on October 18, 2013

  10.5

   Lease for Branch Location on Timberlane Road    Exhibit 10.5 to Registration Statement on Form S-1 filed on October 18, 2013

  10.6

   Agreement for Loan Review Services with Carr, Riggs & Ingram, LLC    Exhibit 10.6 to Registration Statement on Form S-1 filed on October 18, 2013

  10.7

   2015 Stock Incentive Compensation Plan    Exhibit 10.7 to Form 8-K filed on May 26, 2015

  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 Kathleen C. Jones, 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 September 28, 2014

  99.2

   Charter of the Compensation Committee    Exhibit 99.2 to Form 10-K filed on September 28, 2014

101.INS

   XBRL Instance Document   

101.SCH

   XBRL Taxonomy Extension Schema Document   

101.CAL

   XBRL Taxonomy Extension Calculation Linkbase Document   

101.DEF

   XBRL Taxonomy Extension Definitions Linkbase Document   

101.LAB

   XBRL Taxonomy Extension Label Linkbase Document   

101.PRE

   XBRL Taxonomy Extension Presentation Linkbase Document   

 

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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 12, 2015

     
    By:  

/s/ Sammie D. Dixon, Jr.

Date       Sammie D. Dixon, Jr.
      Chief Executive Officer, President
      and Principal Executive Officer

November 12, 2015

     
    By:  

/s/ Kathleen C. Jones

Date       Kathleen C. Jones
      Chief Financial Officer, Executive Vice President,
      and Principal Financial Officer

 

40