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 March 31, 2016

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 May 10, 2016: 1,980,172

 

 

 

---

Table of Contents

INDEX

 

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March  31, 2016 (unaudited) and December 31, 2015			2
Condensed Consolidated Statements of Earnings Three Months ended March  31, 2016 and 2015 (unaudited)			3
Condensed Consolidated Statements of Comprehensive Income Three Months ended March 31, 2016 and 2015 (unaudited)			4
Condensed Consolidated Statements of Stockholders’ Equity Three Months ended March 31, 2016 and 2015 (unaudited)			5
Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 2016 and 2015 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			7-23
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. Mine Safety Disclosures			32
Item 5. Other Information			32
Item 6. Exhibits			33
Signatures			34
Certifications

 

1

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

		March 31, 2016				December 31, 2015
		(Unaudited)
Assets
Cash and due from banks		$	5,269				3,528
Federal funds sold			6,382				4,657
Interest-bearing deposits			7,128				244
Total cash and cash equivalents			18,779				8,429
Securities available for sale			38,116				38,063
Loans held for sale			2,244				2,722
Loans, net of allowance for loan losses of $2,605 and $2,473			197,253				187,076
Federal Home Loan Bank stock			220				189
Premises and equipment, net			4,218				4,222
Accrued interest receivable			679				692
Bank-owned life insurance			1,675				1,662
Other assets			538				989
Total assets		$	263,722				244,044
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits			54,694				50,158
Savings, NOW and money-market deposits			161,715				144,801
Time deposits			20,502				22,614
Total deposits			236,911				217,573
Official checks			768				744
Other liabilities			502				794
Total liabilities			238,181				219,111
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, 1,976,099 and 1,975,329 issued and outstanding			20				20
Additional paid-in capital			20,425				20,415
Retained earnings			4,725				4,442
Accumulated other comprehensive income			371				56
Total stockholders’ equity			25,541				24,933
Total liabilities and stockholders’ equity		$	263,722				244,044

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

2

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

(in thousands, except per share amounts)

 

		Three Months Ended March 31,
		2016				2015
Interest income:
Loans		$	2,274				1,947
Securities			200				228
Other			25				7
Total interest income			2,499				2,182
Interest expense:
Deposits			192				162
Other borrowings			0				6
Total interest expense			192				168
Net interest income			2,307				2,014
Provision for loan losses			134				18
Net interest income after provision for loan losses			2,173				1,996
Noninterest income:
Service charges and fees on deposit accounts			48				34
Mortgage banking revenue			151				61
Income from bank-owned life insurance			13				12
Gain on sale of securities available for sale			15				42
Other income			64				40
Total noninterest income			291				189
Noninterest expenses:
Salaries and employee benefits			985				808
Occupancy and equipment			203				175
Professional fees			105				76
Marketing			159				113
FDIC Assessment			32				26
Software maintenance, amortization and other			126				108
Other			269				186
Total noninterest expenses			1,879				1,492
Earnings before income taxes			585				693
Income taxes			203				244
Net earnings		$	382				449
Basic earnings per share		$	0.19				0.23
Diluted earnings per share		$	0.19				0.23
Cash dividends per common share		$	0.05				0.00

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2016				2015
Net earnings		$	382				449
Other comprehensive income:
Change in unrealized gain on securities:
Unrealized gain arising during the period			514				389
Reclassification adjustment for realized gain			(15	)			(42	)
Net change in unrealized gain			499				347
Deferred income taxes on above change			(184	)			(128	)
Total other comprehensive income			315				219
Comprehensive income		$	697				668

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Three Months Ended March 31, 2016 and 2015

(Dollars in thousands)

 

										Additional Paid-In Capital				Retained Earnings				Accumulated Other Compre- hensive Income				Total Stockholders’ Equity
		Common Stock
		Shares				Amount
Balance at December 31, 2014			1,941,617			$	19				20,056				2,738				54				22,867
Net earnings for the three months ended March 31, 2015 (unaudited)			0				0				0				449				0				449
Net change in unrealized gain on securities available for sale, net of income taxes (unaudited)			0				0				0				0				219				219
Stock options exercised (unaudited)			1,100				0				11				0				0				11
Common stock issued as compensation to directors (unaudited)			817				0				10				0				0				10
Balance at March 31, 2015 (unaudited)			1,943,534			$	19				20,077				3,187				273				23,556
Balance at December 31, 2015			1,975,329			$	20				20,415				4,442				56				24,933
Net earnings for three months ended March 31, 2016 (unaudited)			0				0				0				382				0				382
Dividend paid (unaudited)			0				0				0				(99	)			0				(99	)
Net change in unrealized gain on securities available for sale, net of income taxes (unaudited)			0				0				0				0				315				315
Common stock issued as compensation to directors (unaudited)			770				0				10				0				0				10
Balance at March 31, 2016 (unaudited)			1,976,099			$	20				20,425				4,725				371				25,541

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

5

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Three Months Ended March 31,
		2016				2015
Cash flows from operating activities:
Net earnings		$	382				449
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			89				102
Provision for loan losses			134				18
Net amortization of deferred loan fees			(26	)			133
Gain on sale of securities available for sale			(15	)			(42	)
Amortization of premiums and discounts on securities available for sale			105				108
Gain on sale of loans held for sale			(146	)			(61	)
Proceeds from the sale of loans held for sale			9,182				3,112
Loans originated as held for sale			(8,558	)			(1,993	)
Stock issued as compensation			10				10
Income from bank-owned life insurance			(13	)			(12	)
Net decrease in accrued interest receivable			13				54
Net decrease (increase) in other assets			267				(39	)
Net (decrease) increase in other liabilities and official checks			(268	)			623
Net cash provided by operating activities			1,156				2,462
Cash flows from investing activities:
Loan originations, net of principal repayments			(10,285	)			(1,929	)
Purchase of securities available for sale			(3,637	)			(3,443	)
Principal repayments of securities available for sale			1,646				2,081
Proceeds from sale of securities available for sale			2,330				2,039
Maturities and calls of securities available for sale			17				0
Purchase of Federal Home Loan Bank stock			(31	)			(3	)
Purchase of premises and equipment			(85	)			(217	)
Net cash used in investing activities			(10,045	)			(1,472	)
Cash flows from financing activities:
Net increase in deposits			19,338				8,840
Decrease in other borrowings			0				(43	)
Proceeds from stock options exercised			0				11
Common stock dividends paid			(99	)			0
Net cash provided by financing activities			19,239				8,808
Net increase in cash and cash equivalents			10,350				9,798
Cash and cash equivalents at beginning of period			8,429				7,555
Cash and cash equivalents at end of period		$	18,779				17,353
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest		$	193				164
Income taxes		$	40				100
Noncash transactions-
Accumulated other comprehensive income, net change in unrealized gain on sale of securities available for sale, net of taxes		$	315				219

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

6

---

Table of Contents

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 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 March 31, 2016, and the results of operations for the three months ended March 31, 2016 and 2015. The results of operations for the three months ended March 31, 2016 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.

Stock Based Compensation. The Company expenses the fair value of any stock options granted. The Company recognizes stock option compensation in the condensed consolidated statements of 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.

 

7		(continued)

---

Table of Contents

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):

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
At March 31, 2016:
U.S. Government agency securities		$	8,125				220				0				8,345
Municipal securities			9,465				241				(7	)			9,699
Mortgage-backed securities			19,937				179				(44	)			20,072
Total		$	37,527				640				(51	)			38,116
At December 31, 2015:
U.S. Government agency securities		$	8,376				61				(9	)			8,428
Municipal securities			9,532				130				(54	)			9,608
Mortgage-backed securities			20,065				52				(90	)			20,027
Total		$	37,973				243				(153	)			38,063

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 Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
At March 31, 2016:
Municipal securities		$	0				0				(7	)			1,249
Mortgage-backed securities			(15	)			2,460				(29	)			1,858
Total		$	(15	)			2,460				(36	)			3,107
At December 31, 2015:
U.S. Government agency securities		$	(9	)			1,616				0				0
Municipal securities			(14	)			1,620				(40	)			1,224
Mortgage-backed securities			(40	)			10,803				(50	)			2,018
Total		$	(63	)			14,039				(90	)			3,242

 

8		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)	Securities Available for Sale, Continued

 

The unrealized losses at March 31, 2016 on thirteen 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 March 31, 2016:
U.S. Government agency securities		$	8,345				0				8,345				0
Municipal securities			9,699				0				9,699				0
Mortgage-backed securities			20,072				0				20,072				0
Total		$	38,116				0				38,116				0
At December 31, 2015:
U.S. Government agency securities		$	8,428				0				8,428				0
Municipal securities			9,608				0				9,608				0
Mortgage-backed securities			20,027				0				20,027				0
Total		$	38,063				0				38,063				0

During the three months ended March 31, 2016 and 2015, 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 Cost				Fair Value
At March 31, 2016:
Due in one to five years		$	2,547				2,555
Due in five to ten years			11,124				11,445
Due after ten years			3,919				4,044
Mortgage-backed securities			19,937				20,072
Total		$	37,527				38,116

 

 

9		(continued)

---

Table of Contents

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 March 31,				At December 31,
		2016				2015
Real estate mortgage loans:
Commercial		$	58,239				57,847
Residential and home equity			73,439				69,817
Construction			17,559				17,493
Total real estate mortgage loans			149,237				145,157
Commercial loans			45,703				40,229
Consumer and other loans			4,605				3,877
Total loans			199,545				189,263
Add (deduct):
Net deferred loan costs			313				286
Allowance for loan losses			(2,605	)			(2,473	)
Loans, net		$	197,253				187,076

 

10		(continued)

---

Table of Contents

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																				Total
		Commercial				Residential and Home Equity				Construction				Commercial Loans				Consumer and Other Loans
Three-Month Period Ended March 31, 2016:
Beginning balance		$	707				868				246				596				56				2,473
(Credit) Provision for loan losses			(6	)			40				2				94				4				134
Net (charge-offs)			0				0				0				0				(2	)			(2	)
Ending balance		$	701				908				248				690				58				2,605
Three-Month Period Ended March 31, 2015:
Beginning balance		$	702				691				211				453				41				2,098
Provision for loan losses			0				5				0				4				9				18
Net (charge-offs) recoveries			0				0				0				0				0				0
Ending balance		$	702				696				211				457				50				2,116
At March 31, 2016:
Individually evaluated for impairment:
Recorded investment		$	0				0				0				133				0				133
Balance in allowance for loan losses		$	0				0				0				73				0				73
Collectively evaluated for impairment:
Recorded investment		$	58,239				73,439				17,559				45,570				4,605				199,412
Balance in allowance for loan losses		$	701				908				248				617				58				2,532
At December 31, 2015:
Individually evaluated for impairment:
Recorded investment		$	0				0				0				137				7				144
Balance in allowance for loan losses		$	0				0				0				62				7				69
Collectively evaluated for impairment:
Recorded investment		$	57,847				69,817				17,493				40,092				3,870				189,119
Balance in allowance for loan losses		$	707				868				246				534				49				2,404

 

11		(continued)

---

Table of Contents

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 is generally the clients’ owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers’ financial condition. The nonowner-occupied investment properties are more similar in risk to commercial real estate loans, and therefore, are underwritten by assessing the property’s income potential and appraised value. In both cases, we underwrite the borrower’s financial condition and evaluate his or her global cash flow position. Borrowers may be affected by numerous factors, including job loss, illness, or other personal hardship. As part of our product mix, the Bank offers both portfolio and secondary market mortgages; portfolio loans generally are based on a 1-year, 3-year or 5-year adjustable rate mortgage; while 15-year or 30-year fixed-rate loans are generally sold in the secondary market.

 

12		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued

 

Construction. Typically, these loans have a construction period of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to a term loan with a maturity of one to 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 Bank. As the construction project progresses, loan proceeds are requested by the borrower to complete phases of construction and funding is only disbursed after the project has been inspected by a third-party inspector or experienced construction lender. Risks associated with construction loans include fluctuations in the value of real estate, project completion risk, and changes in market trends. The ability of the construction loan borrower to finance the loan or sell the property upon completion of the project is another risk factor that also may be affected by changes in market trends since the initial funding of the loan.

Commercial Loans. The Bank offers a wide range of commercial loans, including business term loans, equipment financing, lines of credit, and U.S. Small Business Administration (SBA) loans 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. The Bank currently offers SBA 504 and SBA 7A loans. SBA 504 loans provide financing for major fixed assets such as real estate and equipment while SBA 7A loans are generally used to establish a new business or assist in the acquisition, operation, or expansion of an existing business. With both SBA loan programs, there are set eligibility requirements and underwriting standards outlined by SBA that can change as the government alters its fiscal policy. Significant factors affecting a commercial borrower’s creditworthiness include the quality of management and the ability both to evaluate changes in the supply and demand characteristics affecting the business’ markets for products and services and to respond effectively to such changes. These loans may be made unsecured or secured, but most are made on a secured basis. Risks associated with our commercial loan portfolio include local, regional, and national market conditions. Other factors of risk could include changes in the borrower’s management and fluctuations in collateral value.

 

 

13		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)	Loans, Continued

 

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

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

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

 

		Pass				Special Mention				Substandard				Doubtful				Loss				Total
At March 31, 2016:
Real estate mortgage loans:
Commercial		$	52,895				5,344				0				0				0				58,239
Residential and home equity			69,008				3,385				1,046				0				0				73,439
Construction			17,264				151				144				0				0				17,559
Commercial loans			45,366				192				145				0				0				45,703
Consumer and other loans			4,570				32				3				0				0				4,605
Total		$	189,103				9,104				1,338				0				0				199,545
At December 31, 2015:
Real estate mortgage loans:
Commercial		$	52,097				5,750				0				0				0				57,847
Residential and home equity			65,367				3,396				1,054				0				0				69,817
Construction			17,204				163				126				0				0				17,493
Commercial loans			39,607				461				161				0				0				40,229
Consumer and other loans			3,836				32				9				0				0				3,877
Total		$	178,111				9,802				1,350				0				0				189,263

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.

 

14		(continued)

---

Table of Contents

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 March 31, 2016, there was one loan past due thirty days or more but still accruing and two loans on nonaccrual.

 

15		(continued)

---

Table of Contents

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):

 

		30-59 Days Past Due				60-89 Days Past Due				Accruing Loans Greater Than 90 Days Past Due				Total Past Due				Current				Nonaccrual Loans				Total Loans
At March 31, 2016:
Real estate mortgage loans:
Commercial		$	659				0				0				0				57,580				0				58,239
Residential and home equity			0				0				0				0				73,439				0				73,439
Construction			0				0				0				0				17,559				0				17,559
Commercial loans			0				0				0				0				45,570				133				45,703
Consumer and other loans			0				0				0				0				4,605				0				4,605
Total		$	659				0				0				0				198,753				133				199,545
At December 31, 2015:
Real estate mortgage loans:
Commercial		$	0				0				0				0				57,847				0				57,847
Residential and home equity			0				0				0				0				69,817				0				69,817
Construction			0				0				0				0				17,493				0				17,493
Commercial loans			0				0				0				0				40,092				137				40,229
Consumer and other loans			0				0				0				0				3,877				0				3,877
Total		$	0				0				0				0				189,126				137				189,263

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 March 31, 2016:
Commercial loans		$	0				0				133				133				73				133				133				73
At December 31, 2015:
Commercial loans		$	0				0				137				137				62				137				137				62
Consumer and other loans			0				0				7				7				7				7				7				7
Total		$	0				0				144				144				69				144				144				69

 

16		(continued)

---

Table of Contents

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 March 31,
		2016												2015
		Average Recorded Investment				Interest Income Recognized				Interest Income Received				Average Recorded Investment				Interest Income Recognized				Interest Income Received
Commercial loans		$	146				1				1				221				1				1
Consumer & Other			0				0				0				11				0				0
Total		$	146				1				1				232				1				1

There were no collateral dependent loans measured at fair value on a nonrecurring basis at March 31, 2016 or December 31, 2015.

 

(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 not applied to bank holding companies, 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.

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 1,250%) 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.

 

17		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4)	Regulatory Capital, Continued

 

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, and qualifying minority interests, less applicable regulatory adjustments and deductions that include Accumulated Other Comprehensive Income (“AOCI”). 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.

 

18		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4)	Regulatory Capital, Continued

 

The following is a summary at March 31, 2016 of the regulatory capital requirements to be considered “well-capitalized” and the Bank’s capital position. (dollars in thousands)

 

		Actual								For Capital Adequacy Purposes								For Well Capitalized Purposes
		Amount				Percentage				Amount				Percentage				Amount				Percentage
As of March 31, 2016:
Tier 1 Leverage
Capital Ratio		$	23,970				9.36	%		$	10,246				4.00	%		$	12,807				5.00	%
Common Equity Tier 1
Risk-Based
Capital Ratio			23,970				12.25				8,804				4.50				12,717				6.50
Tier 1 Risk-Based
Capital Ratio			23,970				12.25				11,738				6.00				15,651				8.00
Total Risk-Based
Capital Ratio			26,417				13.50				15,651				8.00				19,564				10.00
As of December 31, 2015:
Tier 1 Leverage
Capital Ratio		$	23,511				9.48	%		$	9,918				4.00	%		$	12,398				5.00	%
Common Equity Tier 1
Risk-Based
Capital Ratio			23,511				12.79				8,269				4.50				11,945				6.50
Tier 1 Risk-Based
Capital Ratio			23,511				12.79				11,026				6.00				14,701				8.00
Total Risk-Based
Capital Ratio			25,810				14.05				14,701				8.00				18,377				10.00

At March 31, 2016, the Bank was well-capitalized with all capital ratios exceeding the well-capitalized requirement.

 

19		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(5)	Earnings Per Share

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months ended March 31, 2016 and 2015, 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):

 

 

		2016												2015
		Earnings				Weighted- Average Shares				Per Share Amount				Earnings				Weighted- Average Shares				Per Share Amount
Three Months Ended March 31:
Basic EPS:
Net earnings		$	382				1,975,972			$	0.19			$	449				1,943,215			$	0.23
Effect of dilutive securities-Incremental shares from assumed conversion of options							3,871												4,055
Diluted EPS:
Net earnings		$	382				1,979,843			$	0.19			$	449				1,947,270			$	0.23

 

(6)	Stock Option Plans

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 March 31, 2016, 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.

 

20		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)	Stock Option Plans, Continued

 

A summary of the activity in the 2007 Plan is as follows:

 

		Number of Options				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
Outstanding at December 31, 2014			108,400			$	10.01
Options exercised			(1,100	)			10.00
Outstanding at March 31, 2015			107,300			$	10.02
Outstanding at December 31, 2015			75,500				10.19
Outstanding at March 31, 2016			75,500			$	10.19				3.0 years
Exercisable at March 31, 2016			74,300			$	10.18				3.0 years			$	306,116

At March 31, 2016, there was $1,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the 2007 Plan. The fair value of the options granted is expected to be recognized over a weighted-average period of 19 months. The fair value of shares vested and recognized as compensation expense was $0 for the three months ended March 31, 2016 and 2015.

 

(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 $36.6 million at March 31, 2016. At March 31, 2016, the Company had no advances from the FHLB.

 

21		(continued)

---

Table of Contents

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 March 31, 2016								At December 31, 2015
		Level				Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents			1			$	18,779				18,779				8,429				8,429
Securities available for sale			2				38,116				38,116				38,063				38,063
Loans held for sale			3				2,244				2,322				2,722				2,791
Loans, net			3				197,253				194,573				187,076				188,784
Federal Home Loan Bank stock			3				220				220				189				189
Accrued interest receivable			3				679				679				692				692
Bank-owned life insurance			3				1,675				1,675				1,662				1,662
Financial liabilities-Deposits			3				236,911				236,974				217,573				217,652
Off balance-sheet financial instruments			3				0				0				0				0

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, 2015.

 

(9)	Off-Balance Sheet Financial Instruments

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

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

Commitments to extend credit 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.

 

22		(continued)

---

Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(9)	Off-Balance Sheet Financial Instruments, Continued

 

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 $592,103 at March 31, 2016.

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 March 31, 2016 are as follows (in thousands):

 

Commitments to extend credit		$	3,413
Construction loans in process		$	10,411
Unused lines of credit		$	27,276
Standby letters of credit		$	1,208
Guaranteed accounts		$	770

 

(10)	Reclassification

Certain noninterest expenses were reclassified from occupancy and equipment to software maintenance, amortization, and other for the three months ended March 31, 2015 to conform to March 31, 2016 presentation. The reclassification of expenses had no effect on net earnings.

 

23		(continued)

---

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, 2015. Results of operations for the three months ended March 31, 2016, 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;

 

24

---

Table of Contents

•

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

 

•

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

 

•

application and interpretation of accounting principles and guidelines.

General

Prime Meridian Holding Company (“PMHG” 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. PMHG has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through 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
		Three months Ended March 31, 2016				Year Ended December 31, 2015				Three months Ended March 31, 2015
Average equity as a percentage of average assets			9.87	%			10.37	%			10.83	%
Equity to total assets at end of period			9.68	%			10.22	%			10.68	%
Return on average assets(1)			0.60	%			0.74	%			0.84	%
Return on average equity(1)			6.05	%			7.15	%			7.74	%
Noninterest expense to average assets(1)			2.93	%			2.90	%			2.79	%
Nonperforming loans to total loans at end of period			0.07	%			0.07	%			0.11	%

 

(1)	Annualized for the three months ended March 31, 2016 and March 31, 2015.

FINANCIAL CONDITION

Average assets totaled $256.1 million for the three months ended March 31, 2016, an increase of $41.9 million, or 19.6%, over the three months ended March 31, 2015. The increase in 2016 can be attributed to higher average loan balances, partially offset by lower average balances of securities.

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,

 

25

---

Table of Contents

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 March 31, 2016 and December 31, 2015, approximately 74.8% and 76.7%, respectively, of the total loan portfolio were collateralized by commercial and residential real estate mortgages.

As of March 31, 2016, the Bank’s net loan portfolio represented 74.8% of total assets, compared to 76.7% of total assets at December 31, 2015. 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. Two loans totaling $133,000 were deemed to be impaired under the Bank’s policy at March 31, 2016, compared to three loans totaling $144,000 at December 31, 2015. For the three months ended March 31, 2016, the Bank reported a loan loss provision of $134,000 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 March 31, 2016 were $236.9 million, an increase of $19.3 million, or 8.9%, from December 31, 2015. The growth in deposits came from both noninterest-bearing and interest-bearing accounts. The average balance of noninterest-bearing deposits accounted for 22.2% of the average balance of total deposits for the three months ended March 31, 2016, compared to 23.1% for the three months ended March 31, 2015.

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 March 31, 2016, to borrow up to $36.6 million. We had no loans outstanding under this line as of March 31, 2016.

Capital Adequacy. Stockholder’s equity was $25.5 million at March 31, 2016, compared to $24.9 million at December 31, 2015. During the first quarter of 2016, the Board of Directors declared and the Company paid an annual dividend of $0.05 per share of common stock.

At March 31, 2016, the Bank was considered to be “well capitalized” with a 9.36% Tier 1 Leverage Capital Ratio, a 12.25% Common Equity Tier 1 Risk-Based Capital Ratio, a 12.25% Tier 1 Risk-Based Capital Ratio, and a 13.50% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.” The Holding Company currently has no specific capital requirements.

 

26

---

Table of Contents

		Actual								For Capital Adequacy Purposes								For Well Capitalized Purposes
		Amount				Percentage				Amount				Percentage				Amount				Percentage
										($ in thousands)
As of March 31, 2016:
Tier 1 Leverage
Capital Ratio		$	23,970				9.36	%		$	10,246				4.00	%		$	12,807				5.00	%
Common Equity Tier 1
Risk-Based
Capital Ratio			23,970				12.25				8,804				4.50				12,717				6.50
Tier 1 Risk-Based
Capital Ratio			23,970				12.25				11,738				6.00				15,651				8.00
Total Risk-Based
Capital Ratio			26,417				13.50				15,651				8.00				19,564				10.00
As of December 31, 2015:
Tier 1 Leverage
Capital Ratio		$	23,511				9.48	%		$	9,918				4.00	%		$	12,398				5.00	%
Common Equity Tier 1
Risk-Based
Capital Ratio			23,511				12.79				8,269				4.50				11,945				6.50
Tier 1 Risk-Based
Capital Ratio			23,511				12.79				11,026				6.00				14,701				8.00
Total Risk-Based
Capital Ratio			25,810				14.05				14,701				8.00				18,377				10.00

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%

 

27

---

Table of Contents

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.

The following table (dollars in thousands) 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.

As shown in the following table, the 24.8% increase in average loan balances for the three-month period was not enough to offset the 32 basis point decrease in the average yield of loans, which resulted in a lower overall yield on total interest-earning assets.

 

		Three Months Ended March 31,
		2016												2015
		(dollars in thousands)
		Average Balance				Interest and Dividends				Average Yield/ Rate				Average Balance				Interest and Dividends				Average Yield/ Rate
Interest-earning assets:
Loans(1)		$	193,602			$	2,260				4.67	%		$	155,147			$	1,935				4.99	%
Mortgage loans held for sale			1,808				14				3.10				1,577				12				3.04
Securities			37,769				200				2.12				41,591				228				2.19
Other (2)			13,793				25				0.73				7,911				7				0.35
Total interest-earning assets			246,972				2,499				4.05				206,226				2,182				4.23
Noninterest-earning assets			9,088												7,923
Total assets		$	256,060											$	214,149
Interest-bearing liabilities:
Savings, NOW and money-market deposits			157,467				172				0.44				122,726				130				0.42
Time deposits <$100,000			4,465				5				0.45				3,657				4				0.44
Time deposits >$100,000			16,393				15				0.37				17,529				28				0.64
Deposits			178,325				192				0.43				143,912				162				0.45
Other borrowings			0				0				0				2,656				6				0.90
Total interest-bearing liabilities			178,325				192				0.43				146,568				168				0.46
Noninterest-bearing deposits			51,003												43,166
Noninterest-bearing liabilities			1,466												1,221
Stockholders’ equity			25,266												23,194
Total liabilities and stockholders’ equity		$	256,060											$	214,149
Net interest income						$	2,307											$	2,014
Interest-rate spread											3.62	%											3.77	%
Net interest margin (3)											3.74	%											3.91	%
Ratio of average interest-earning assets to average interest-bearing liabilities			138.50	%											140.70	%

 

(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 March 31, 2015 have been recalculated from the Form 10-Q for the quarterly period ended March 31, 2015 to conform to the presentation of the three months ended March 31, 2016 in the form 10-Q for the quarterly period ended March 31, 2016.

 

28

---

Table of Contents

Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

Net Earnings. For the three months ended March 31, 2016, the Company reported net earnings of $382,000, or $0.19 per basic and diluted share, compared to net earnings of $449,000, or $0.23 per basic and diluted share, for the three months ended March 31, 2015. Overall, the growth in noninterest expenses and a higher loan loss provision outpaced the growth in net interest income and noninterest income.

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 $2.3 million for the three months ended March 31, 2016, compared to $2.0 million for the three months ended March 31, 2015.

Interest Income. Interest income increased to $2.5 million for the three months ended March 31, 2016, a $317,000 or 14.5%, increase over the three months ended March 31, 2015. The increase was mostly driven by an increase in average loans from $155.1 million for the quarter ended March 31, 2015 to $193.6 million for the quarter ended March 31, 2016.

Interest Expense. Interest expense was $192,000 for the quarter, an increase of $24,000, or 14.3% as compared to the same period in 2015. The year-over-year increase resulted primarily from a 23.9%, or $34.4 million, increase in the average balance of interest-bearing deposits from the first quarter of 2015 to the first quarter of 2016.

Despite the strong growth in loans during the first quarter of this year, the Company’s net interest margin declined 17 basis points year-over-year to 3.74%, due in part, to new loans being originated at lower yields.

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 March 31, 2016 was $134,000, compared to $18,000 for the three months ended March 31, 2015. The higher provision resulted from strong loan growth in the first quarter of this year as the Company originated (net of principal repayments) $10.3 million in new loans during the first quarter of 2016 compared to only $1.9 million in the first quarter of 2015.

Management believes that the allowance for loan losses, which was $2.6 million or 1.31% of total loans, at March 31, 2016, 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

 

29

---

Table of Contents

sale. Noninterest income for the three months ended March 31, 2016 totaled $291,000 an increase of $102,000, or 54.0%, from the three months ended March 31, 2015. The increase is primarily due to an $90,000 increase in mortgage banking revenue, partially offset by an $27,000 decline in the gain on sale of securities available for sale.

Noninterest Expense. Noninterest expense increased $387,000 or 25.9%, to $1.9 million for the three months ended March 31, 2016 compared to the same period a year ago. Noninterest expenses were up across all categories, due in part, to the operation of our Crawfordville office which opened in September, 2015. The majority of the increase occurred in salaries and employee benefits as full-time equivalent employees increased from 47 at March 31, 2015 to 56 at March 31, 2016.

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 $203,000 for the three months ended March 31, 2016, compared to $244,000 for the three months ended March 31, 2015. The lower provision relates to earnings before income taxes of $585,000 for the three months ended March 31, 2016 compared to earnings before income taxes of $693,000 for the three months ended March 31, 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 March 31, 2016, was $9.7 million.

At March 31, 2016, total deposits were $236.9 million, of which $16.0 million were in certificates of deposits of $100,000 or more. Also, as a member of the FHLB, we have access to approximately 36.6 million of available lines of credit secured by qualifying collateral as of March 31, 2016, in addition to $10.2 million in unsecured lines of credit we maintain with correspondent banks. As of March 31, 2016, we had no advances under our lines or with the FHLB.

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 March 31, 2016 for a discussion of off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

 

30

---

Table of Contents

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

(b) Changes in Internal Controls

We have made no significant changes in our internal controls over financial reporting during the quarter ended March 31, 2016, 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.

 

31

---

Table of Contents

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, 2015 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, 2015.

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

On April 15, 2016, the Company issued 1,073 shares to members of its Board of Directors in lieu of $13,950 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 first quarter.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

 

32

---

Table of Contents

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 R. Randy Guemple, Principal Financial Officer		Filed herewith
32.1		Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley		Filed herewith
99.1		Charter of the Audit Committee		Exhibit 99.1 to Form 10-K filed on March 28, 2014
99.2		Charter of the Compensation Committee		Exhibit 99.2 to Form 10-K filed on March 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

 

33

---

Table of Contents

SIGNATURES

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

 

				PRIME MERIDIAN HOLDING COMPANY
May 12, 2016				By:		/s/ Sammie D. Dixon, Jr.
Date						Sammie D. Dixon, Jr.
						Chief Executive Officer, President
						and Principal Executive Officer
May 12, 2016				By:		/s/ R. Randy Guemple
Date						R. Randy Guemple
						Chief Financial Officer, Executive Vice President,
						and Principal Financial Officer

 

34