Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 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.    ☒  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).    ☒  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		☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒No Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2016: 1,986,757

 

 

 

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Table of Contents

INDEX

 

PART I. FINANCIAL INFORMATION		PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets September  30, 2016 (unaudited) and December 31, 2015			2
Condensed Consolidated Statements of Earnings Three and Nine months ended September 30, 2016 and 2015 (unaudited)			3
Condensed Consolidated Statements of Comprehensive Income Three and Nine months ended September 30, 2016 and 2015 (unaudited)			4
Condensed Consolidated Statements of Stockholders’ Equity Nine months ended September 30, 2016 and 2015 (unaudited)			5
Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2016 and 2015 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			7-24
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25-35
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4. Controls and Procedures			35-36
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			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Mine Safety Disclosures			37
Item 5. Other Information			37
Item 6. Exhibits			38-39
Signatures			40
Certifications

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in Thousands, Except Per Share Amounts)

 

		September 30,				December 31,
		2016				2015
		(Unaudited)
Assets
Cash and due from banks		$	5,903				3,528
Federal funds sold			11,900				4,657
Interest-bearing deposits			5,274				244
Total cash and cash equivalents			23,077				8,429
Securities available for sale			32,714				38,063
Loans held for sale			3,525				2,722
Loans, net of allowance for loan losses of $2,863 and $2,473			222,768				187,076
Federal Home Loan Bank stock			220				189
Premises and equipment, net			4,653				4,222
Accrued interest receivable			705				692
Bank-owned life insurance			1,699				1,662
Other assets			603				989
Total assets		$	289,964				244,044
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits			70,102				50,158
Savings, NOW and money-market deposits			167,818				144,801
Time deposits			23,236				22,614
Total deposits			261,156				217,573
Official checks			1,093				744
Other liabilities			874				794
Total liabilities			263,123				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, 1,985,686 and 1,975,329 issued and outstanding			20				20
Additional paid-in capital			20,538				20,415
Retained earnings			5,917				4,442
Accumulated other comprehensive income			366				56
Total stockholders’ equity			26,841				24,933
Total liabilities and stockholders’ equity		$	289,964				244,044

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,
		2016				2015				2016				2015
Interest income:
Loans		$	2,573				2,146				7,294				6,126
Securities			156				202				538				667
Other			26				10				74				31
Total interest income			2,755				2,358				7,906				6,824
Interest expense:
Deposits			205				179				598				507
Other borrowings			1				4				1				18
Total interest expense			206				183				599				525
Net interest income			2,549				2,175				7,307				6,299
Provision for loan losses			108				124				412				333
Net interest income after provision for loan losses			2,441				2,051				6,895				5,966
Noninterest income:
Service charges and fees on deposit accounts			74				37				174				110
Mortgage banking revenue			260				196				637				407
Income from bank-owned life insurance			12				12				37				37
Gain on sale of securities available for sale			0				0				102				42
Other income			69				45				206				130
Total noninterest income			415				290				1,156				726
Noninterest expense:
Salaries and employee benefits			1,062				959				3,006				2,571
Occupancy and equipment			209				222				624				579
Professional fees			81				69				285				306
Marketing			94				95				361				304
FDIC assessment			36				28				102				83
Software maintenance, amortization and other			125				109				375				314
Other			304				268				863				669
Total noninterest expense			1,911				1,750				5,616				4,826
Earnings before income taxes			945				591				2,435				1,866
Income taxes			335				213				861				663
Net earnings		$	610				378				1,574				1,203
Basic earnings per share		$	0.31				0.19				0.79				0.62
Diluted earnings per share		$	0.31				0.19				0.79				0.61
Cash dividends per common share		$	0				0				0.05				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,
		2016				2015				2016				2015
Net earnings		$	610				378				1,574				1,203
Other comprehensive (loss) income:
Change in unrealized gain on securities:
Unrealized (loss) gain arising during the period			(64	)			355				593				368
Reclassification adjustment for realized gains			0				0				(102	)			(42	)
Net change in unrealized (loss) gain			(64	)			355				491				326
Deferred benefit (income taxes) on above change			24				(131	)			(181	)			(120	)
Total other comprehensive (loss) income			(40	)			224				310				206
Comprehensive income		$	570				602				1,884				1,409

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, 2016 and 2015

(Dollars in Thousands)

 

		Common Stock								Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total Stockholders’ Equity
		Shares				Amount
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
Balance at December 31, 2015			1,975,329			$	20				20,415				4,442				56				24,933
Net earnings for the nine months ended September 30, 2016 (unaudited)			0				0				0				1,574				0				1,574
Dividends 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				310				310
Stock options exercised (unaudited)			7,500				0				82				0				0				82
Common stock issued as compensation to directors (unaudited)			2,857				0				40				0				0				40
Stock-based compensation (unaudited)			0				0				1				0				0				1
Balance at September 30, 2016 (unaudited)			1,985,686			$	20				20,538				5,917				366				26,841

See Accompanying Notes to Condensed Consolidated 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,
		2016				2015
Cash flows from operating activities:
Net earnings		$	1,574				1,203
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			395				324
Provision for loan losses			412				333
Net amortization of deferred loan fees			(1	)			(298	)
Gain on sale of securities available for sale			(102	)			(42	)
Amortization of premiums and discounts on securities available for sale			332				326
Gain on sale of loans held for sale			(558	)			(379	)
Proceeds from the sale of loans held for sale			33,268				23,169
Loans originated as held for sale			(33,513	)			(22,953	)
Stock issued as compensation			40				29
Stock-based compensation expense			1				12
Income from bank-owned life insurance			(37	)			(37	)
Net (increase) decrease in accrued interest receivable			(13	)			16
Net decrease (increase) in other assets			205				(138	)
Net increase in other liabilities and official checks			429				211
Net cash provided by operating activities			2,432				1,776
Cash flows from investing activities:
Loan originations, net of principal repayments			(36,103	)			(25,637	)
Purchase of securities available for sale			(10,416	)			(7,473	)
Principal repayments of securities available for sale			6,488				8,007
Proceeds from sale of securities available for sale			8,248				2,075
Maturities and calls of securities available for sale			1,290				0
Purchase of Federal Home Loan Bank stock			(31	)			(216	)
Purchase of premises and equipment			(826	)			(824	)
Net cash used in investing activities			(31,350	)			(24,068	)
Cash flows from financing activities:
Net increase in deposits			43,583				30,402
Decrease in other borrowings			0				(2,699	)
Increase in Federal Home Loan Bank advances			0				5,000
Proceeds from stock options exercised			82				14
Cash dividends paid			(99	)			0
Net cash provided by financing activities			43,566				32,717
Net increase in cash and cash equivalents			14,648				10,425
Cash and cash equivalents at beginning of period			8,429				7,555
Cash and cash equivalents at end of period		$	23,077				17,980
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest		$	525				516
Income taxes		$	670				844
Noncash transaction-
Accumulated other comprehensive income, net change in unrealized gain on sale of securities available for sale, net of taxes		$	310				206

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 (“PMHG”) owns 100% of the outstanding common stock of Prime Meridian Bank (the “Bank”) (collectively the “Company”). PMHG’s primary activity is the operation of the Bank. The Bank is a Florida state-chartered commercial bank. 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 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, 2016, and the results of operations for the three and nine month periods ended September 30, 2016 and 2015. The results of operations for the three months ended September 30, 2016 and the nine months ended September 30, 2016, 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 (loss) 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 the condensed consolidated statements of earnings upon sale of the loans.

Recent Accounting Standards Update. In June 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-13 Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for its circumstances.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)	General, Continued

 

The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

 

(2)	Securities Available for Sale

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

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
At September 30, 2016:
U.S. Government agency securities		$	2,187				42				0				2,229
Municipal securities			11,678				297				(14	)			11,961
Mortgage-backed securities			18,268				270				(14	)			18,524
Total		$	32,133				609				(28	)			32,714
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

 

(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

 

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 September 30, 2016:
Securities Available for Sale-
Municipal Securities		$	(14	)			1,674				0				0
Mortgage-backed securities			(3	)			779				(11	)			769
Total		$	(17	)			2,453				(11	)			769
At December 31, 2015:
Securities Available for Sale:
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

The unrealized losses at September 30, 2016 on ten 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 available for sale 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, 2016:
U.S. Government agency securities		$	2,229				0				2,229				0
Municipal securities			11,961				0				11,961				0
Mortgage-backed securities			18,524				0				18,524				0
Total		$	32,714				0				32,714				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 nine months ended September 30, 2016 and 2015, no securities were transferred in or out of Level 1, Level 2 or Level 3.

 

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

 

		Amortized Cost				Fair Value
At September 30, 2016:
Due in one to five years		$	2,523				2,534
Due in five to ten years			7,312				7,562
Due after ten years			4,030				4,094
Mortgage-backed securities			18,268				18,524
Total		$	32,133				32,714

 

(3)

Loans

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

 

		At September 30, 2016				At December 31, 2015
Real estate mortgage loans:
Commercial		$	65,418				57,847
Residential and home equity			86,757				69,817
Construction			21,520				17,493
Total real estate mortgage loans			173,695				145,157
Commercial loans			47,015				40,229
Consumer and other loans			4,581				3,877
Total loans			225,291				189,263
Add (deduct):
Net deferred loan costs			340				286
Allowance for loan losses			(2,863	)			(2,473	)
Loans, net		$	222,768				187,076

 

(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
		Commercial				Residential and Home Equity				Construction				Commercial Loans				Consumer and Other Loans				Total
Three-Month Period Ended September 30, 2016:
Beginning balance		$	764				1,017				243				686				65				2,775
Provision (credit) for loan losses			11				28				32				40				(3	)			108
Net (charge-offs) recoveries			0				0				0				(17	)			(3	)			(20	)
Ending balance		$	775				1,045				275				709				59				2,863
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 recoveries			0				0				0				0				(2	)			(2	)
Ending balance		$	703				844				257				589				36				2,429
Nine-Month Period Ended September 30, 2016:
Beginning balance		$	707				868				246				596				56				2,473
Provision for loan losses			68				177				29				130				8				412
Net (charge-offs) recoveries			0				0				0				(17	)			(5	)			(22	)
Ending balance		$	775				1,045				275				709				59				2,863
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 recoveries			0				0				0				0				(2	)			(2	)
Ending balance		$	703				844				257				589				36				2,429
At September 30, 2016:
Individually evaluated for impairment:
Recorded investment		$	0				1,010				74				77				0				1,161
Balance in allowance for loan losses		$	0				0				0				65				0				65
Collectively evaluated for impairment:
Recorded investment		$	65,418				85,747				21,446				46,938				4,581				224,130
Balance in allowance for loan losses		$	775				1,045				275				644				59				2,798
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

 

(continued)

 

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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 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.

 

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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 both 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.

 

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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 September 30, 2016:
Real estate mortgage loans:
Commercial		$	60,352				5,066				0				0				0				65,418
Residential and home equity			82,546				3,165				1,046				0				0				86,757
Construction			21,255				83				182				0				0				21,520
Commercial loans			46,601				234				180				0				0				47,015
Consumer and other loans			4,527				52				2				0				0				4,581
Total		$	215,281				8,600				1,410				0				0				225,291
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.

 

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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 credit worthiness of the borrower; or (c) the client contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged-off. The Company uses the following definitions for risk ratings:

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

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

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

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

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

At September 30, 2016, there were six loans on nonaccrual.

 

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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, 2016:
Real estate mortgage loans:
Commercial		$	0				0				0				0				65,418				0				65,418
Residential and home equity			0				0				0				0				85,747				1,010				86,757
Construction			0				0				0				0				21,446				74				21,520
Commercial loans			0				0				0				0				46,938				77				47,015
Consumer and other loans			0				0				0				0				4,581				0				4,581
Total		$	0				0				0				0				224,130				1,161				225,291
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 September 30, 2016:
Residential & Home Equity		$	1,010				1,010				0				0				0				1,010				1,010				0
Construction			74				74				0				0				0				74				74				0
Commercial loans			0				0				77				77				65				77				77				65
Total		$	1,084				1,084				77				77				65				1,161				1,161				65
At December 31, 2015:
Commercial loans			0				0				137				137				62				137				137				62
Consumer & other loans			0				0				7				7				7				7				7				7
Total		$	0				0				144				144				69				144				144				69

 

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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,
		2016												2015
		Average Recorded Investment				Interest Income Recognized				Interest Income Received				Average Recorded Investment				Interest Income Recognized				Interest Income Received
Residential & Home Equity		$	361				0				0				0				0				0
Construction			1				0				0				0				0				0
Commercial loans			88				0				0				226				1				1
Consumer & Other			7				0				0				7				0				0
Total		$	457				0				0				233				1				1

 

		Nine Months Ended September 30,
		2016												2015
		Average Recorded Investment				Interest Income Recognized				Interest Income Received				Average Recorded Investment				Interest Income Recognized				Interest Income Received
Residential & Home Equity		$	119				0				0				0				0				0
Commercial loans			91				0				0				273				10				9
Consumer & Other			3				0				0				7				0				0
Total		$	213				0				0				280				10				9

There were no collateral dependent loans measured at fair value on a nonrecurring basis at September 30, 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 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.

 

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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 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.

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.

The Bank is also subject to the Basel III capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations. These regulations are intended 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 those regulations, the Company elected an irreversible one-time opt-out to exclude AOCI from regulatory capital in the first quarter of 2015.

 

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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, 2016 and December 31, 2015 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 September 30, 2016:
Tier 1 Leverage
Capital Ratio		$	25,300				9.01	%		$	11,238				4.00	%		$	14,048				5.00	%
Common Equity Tier 1
Risk-Based
Capital Ratio			25,300				11.55				9,860				4.50				14,242				6.50
Tier 1 Risk-Based
Capital Ratio			25,300				11.55				13,146				6.00				17,528				8.00
Total Risk-Based
Capital Ratio			28,040				12.80				17,528				8.00				21,911				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 September 30, 2016, the Bank was well-capitalized with all capital ratios exceeding the well-capitalized requirement.

 

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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 months and the nine months ended September 30, 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 September 30:
Basic EPS:
Net earnings		$	610				1,985,201			$	0.31			$	378				1,945,345			$	0.19
Effect of dilutive securities-
Incremental shares from assumed conversion of options							2,965												3,694
Diluted EPS:
Net earnings		$	610				1,988,166			$	0.31			$	378				1,949,039			$	0.19
Nine Months Ended September 30:
Basic EPS:
Net earnings		$	1,574				1,980,046			$	0.79			$	1,203				1,944,313			$	0.62
Effect of dilutive securities-
Incremental shares from assumed conversion of options							9,376												11,818
Diluted EPS:
Net earnings		$	1,574				1,989,422			$	0.79			$	1,203				1,956,131			$	0.61

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)	Stock Option Plans

The 2015 Stock Incentive Compensation Plan (the “2015 Plan”) was approved by the Shareholders at PMHG’s annual meeting of shareholders on May 20, 2015 and permits PMHG to grant the Company’s 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 PMHG’s common stock. As of September 30, 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.

A summary of the activity in PMHG’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, 2014			108,400			$	10.01
Options granted			15,000				12.50
Options exercised			(1,400	)			10.00
Outstanding at September 30, 2015			122,000				10.29
Outstanding at December 31, 2015			75,500				10.19
Options exercised			(7,500	)			11.00
Options forfeited			(7,500	)			10.00
Outstanding at September 30, 2016			60,500			$	10.11				2.55 years
Exercisable at September 30, 2016			59,300			$	10.10				2.48 years			$	248,900

At September 30, 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 fourteen months. The fair value of shares vested and recognized as compensation expense was $1,000 and $12,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(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 $36.4 million at September 30, 2016. At September 30, 2016, the Company had no outstanding loans under this line.

 

(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, 2016								At December 31, 2015
		Level				Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and cash equivalents			1			$	23,077				23,077				8,429				8,429
Securities available for sale			2				32,714				32,714				38,063				38,063
Loans held for sale			3				3,525				3,699				2,722				2,791
Loans, net			3				222,768				221,436				187,076				188,784
Federal Home Loan Bank stock			3				220				220				189				189
Accrued interest receivable			3				705				705				692				692
Bank-owned life insurance			3				1,699				1,699				1,662				1,662
Financial liabilities:
Deposits			3				261,156				261,225				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 PMHG’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 consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

 

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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

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit, construction loans in process, unused lines of credit, standby letters of credit, and guaranteed accounts 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.

The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a client to a third party. These letters of credit are primarily issued to support third-party borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. In the event the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client. Some of the Bank’s standby letters of credit are secured by collateral and those letters of credit totaled $406,000 at September 30, 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, Card Assets, and its issuing bank, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on certain accounts plus 10%.

The maximum potential amount of future payments we could be required to make is represented by the dollar amount disclosed in the table below. Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded. A summary of the contractual amounts of the Company’s financial instruments with off-balance-sheet risk at September 30, 2016 are as follows (in thousands):

 

Commitments to extend credit		$	1,343
Construction loans in process		$	9,335
Unused lines of credit		$	26,271
Standby letters of credit		$	1,893
Guaranteed accounts		$	1,376

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(10)	Reclassification

Certain noninterest expenses were reclassified from occupancy and equipment to software maintenance, amortization, and other for the three and nine months ended September 30, 2015 to conform to the presentation for the three and nine months ended September 30, 2016. The reclassification of expenses had no effect on net earnings.

 

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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 and nine months ended September 30, 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:

 

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local, regional, and national economic and business conditions;

 

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banking laws, compliance, and the regulatory environment;

 

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

 

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

 

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litigation, tax, and other regulatory matters;

 

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

 

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quality and composition of our loan or investment portfolios;

 

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

 

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competition;

 

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

 

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

 

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consumer spending, borrowing and savings habits;

 

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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;

 

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

 

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

 

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application and interpretation of accounting principles and guidelines.

GENERAL

Prime Meridian Holding Company (“PMHG”) was incorporated as a Florida corporation on May 25, 2010, and is the one-bank holding company for, and sole shareholder of, Prime Meridian Bank (the “Bank”) (collectively, the “Company”). The Bank opened for business on February 4, 2008, and was acquired by PMHG on September 16, 2010. PMHG has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through 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, 2016				Year Ended December 31, 2015				Nine Months Ended September 30, 2015
Average equity as a percentage of average assets			9.62	%			10.37	%			10.55	%
Equity to total assets at end of period			9.26	%			10.22	%			9.94	%
Return on average assets(1)			0.78	%			0.74	%			0.72	%
Return on average equity(1)			8.13	%			7.15	%			6.80	%
Noninterest expense to average assets(1)			2.79	%			2.90	%			2.88	%
Nonperforming loans to total loans at end of period			0.51	%			0.07	%			0.11	%

 

(1)	Annualized for the nine months ended September 30, 2016 and September 30, 2015

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies which involve significant judgements and assumptions that have a material impact on the carrying value of certain assets and liabilities, and used in preparation of the Consolidated Financial Statements as of September 30, 2016, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K.

 

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FINANCIAL CONDITION

Average assets totaled $281.0 million for the three months ended September 30, 2016, an increase of $48.6 million, or 20.9%, over the three months ended September 30, 2015. For the nine months ended September 30, 2016, average assets totaled $268.5 million, compared to $223.5 million over the same period in 2015, a $45.0 million, or 20.1% increase. In both time period comparisons, the increase in 2016 can be primarily attributed to higher average loan balances, partially offset by lower average balances of securities.

Investment Securities. Our primary objective in managing our investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We use the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income, to provide liquidity to meet funding requirements, and to provide collateral for pledging of public funds. At September 30, 2016, our available for sale investment portfolio included U.S. Treasury notes, municipal securities, and mortgage-backed securities and had a fair market value of $32.7 million and an amortized cost value of $32.1 million. At September 30, 2016 and December 31, 2015, our investment securities portfolio represented approximately 11.3% and 15.6% of our total assets, respectively. The average yield on our investment securities for the nine months ended September 30, 2016 was 1.98%, compared to 2.17% for the nine months ended September 30, 2015.

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. We work diligently to attract new lending clients through direct solicitation by our loan officers, utilizing relationship networks from existing clients, competitive pricing, and innovative structure. Our loans are priced based upon the degree of risk, collateral, loan amount, and maturity. We have no loans to foreign borrowers.

Loans grew $9.3 million, or 4.4% when compared to the second quarter of 2016, and have grown $35.7 million, or 19.1% from December 31, 2015. While the Bank has grown all loan sectors in 2016, nearly half of the year-to-date growth came from the residential and home equity sector, which is up $16.9 million from year-end. In total, approximately 77.1% of the total loan portfolio was collateralized by commercial and residential real estate mortgages at September 30, 2016, compared to 76.7% at year-end.

Nonperforming assets. 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

 

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guidance on these standards. Six loans totaling $1,161,000 were deemed to be impaired under the Bank’s policy at September 30, 2016, compared to three loans totaling $144,000 at December 31, 2015. The Bank’s nonperforming assets represented 0.40% of total assets at September 30, 2016, compared to 0.06% at December 31, 2015.

Allowance for Loan Losses. Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. Management believes that the allowance for loan losses, which was $2.9 million or 1.27% of total loans, at September 30, 2016, is adequate to cover losses inherent in the loan portfolio. Of the $1.2 million in impaired loans at September 30, 2016, $77,000 of these loans had a reserve of $65,000 allocated in the allowance. Collateral values on the remaining impaired loans did not require specific reserves at September 30, 2016. Comparatively, of the $144,000 in impaired loans at December 31, 2015, there was a $69,000 reserve allocated on the full amount.

Deposits. Deposits are the major source of the Bank’s funds for lending and other investment purposes. Total deposits at September 30, 2016 were $261.2 million, an increase of $43.6 million, or 20.0%, from December 31, 2015. Year-to-date deposit growth in 2016 is spread fairly evenly between noninterest-bearing and interest-bearing accounts. The average balance of noninterest-bearing deposits accounted for 23.7% of the average balance of total deposits for the nine months ended September 30, 2016, compared to 23.4% for the nine months ended September 30, 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 September 30, 2016, to borrow up to $36.4 million. In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled $16.3 million at September 30, 2016. There were no loans outstanding under any of these lines at September 30, 2016.

RESULTS OF OPERATIONS

Net interest income constitutes the principal source of income for the Bank and results from the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities. The principal interest-earning assets are investment securities and loans 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 as well as the interest rates earned or paid on these assets and liabilities. The following tables set forth information regarding: (i) the total dollar amount of interest and dividend income of the 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 two tables, the 25.1% increase in average loan balances for the three month period and the 25.0% increase in average loan balances for the nine-month period were not enough to offset the decrease in the average yield on loans from 2015 to 2016. This combined with lower yields on securities led to a decline in the average yield on total interest-earning assets, interest-rate spread, and net interest margin for both the 2016 third quarter and nine month period.

 

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		Three Months Ended September 30,
		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)		$	219,665			$	2,539				4.62	%		$	175,617			$	2,125				4.84	%
Mortgage loans held for sale			3,141				34				4.33				1,527				21				5.50
Securities			34,280				156				1.82				39,587				202				2.04
Other(2)			14,206				26				0.73				7,505				10				0.53
Total interest-earning assets			271,292				2,755				4.06				224,236				2,358				4.21
Noninterest-earning assets			9,697												8,122
Total assets		$	280,989											$	232,358
Interest-bearing liabilities:
Savings, NOW and money-market deposits			165,715				177				0.43				132,068				149				0.45
Time deposits <$100,000			4,447				5				0.45				3,998				4				0.40
Time deposits >$100,000			17,735				23				0.52				18,006				26				0.58
Deposits			187,897				205				0.44				154,072				179				0.46
Other borrowings			1,217				1				0.33				5,000				4				0.32
Total interest-bearing liabilities			189,114				206				0.44				159,072				183				0.46
Noninterest-bearing deposits			63,822												48,281
Noninterest-bearing liabilities			1,358												1,065
Stockholders’ equity			26,695												23,940
Total liabilities and stockholders’ equity		$	280,989											$	232,358
Net interest income						$	2,549											$	2,175
Interest-rate spread											3.62	%											3.75	%
Net interest margin(3)											3.76	%											3.88	%
Ratio of average interest-earning assets to average interest-bearing liabilities			143.45	%											140.97	%

 

(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.

 

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		Nine Months Ended September 30,
		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)		$	206,585			$	7,211				4.65	%		$	165,309			$	6,074				4.90	%
Mortgage loans held for sale			2,720				83				4.07				1,486				52				4.67
Securities			36,184				538				1.98				40,994				667				2.17
Other(2)			13,812				74				0.71				7,799				31				0.53
Total interest-earning assets			259,301				7,906				4.07				215,588				6,824				4.22
Noninterest-earning assets			9,235												7,948
Total assets		$	268,536											$	223,536
Interest-bearing liabilities:
Savings, NOW and money-market deposits			162,524				524				0.43				127,072				414				0.43
Time deposits <$100,000			4,439				15				0.45				3,843				8				0.28
Time deposits >$100,000			16,807				59				0.47				18,268				85				0.62
Deposits			183,770				598				0.43				149,183				507				0.45
Other borrowings			434				1				0.31				2,308				18				1.04
Total interest-bearing liabilities			184,204				599				0.43				151,491				525				0.46
Noninterest-bearing deposits			57,211												45,604
Noninterest-bearing liabilities			1,294												2,855
Stockholders’ equity			25,827												23,586
Total liabilities and stockholders’ equity		$	268,536											$	223,536
Net interest income						$	7,307											$	6,299
Interest-rate spread											3.64	%											3.76	%
Net interest margin(3)											3.76	%											3.90	%
Ratio of average interest-earning assets to average interest-bearing liabilities			140.77	%											142.31	%

 

(1)	Includes nonaccrual loans.

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

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

 

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Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015

Net Earnings. For the three months ended September 30, 2016, the Company reported net earnings of $610,000, or $0.31 per basic and diluted share, compared to net earnings of $378,000, or $0.19 per basic and diluted share, for the three months ended September 30, 2015.

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 $2.5 million for the three months ended September 30, 2016, compared to $2.2 million for the three months ended September 30, 2015.

Interest Income. Interest income increased to $2.8 million for the three months ended September 30, 2016, a $397,000 or 16.8%, increase over the three months ended September 30, 2015. The increase was driven by an increase in average loans from $175.6 million for the quarter ended September 30, 2015 to $219.7 million for the quarter ended September 30, 2016.

Interest Expense. Interest expense was $206,000 for the three months ended September 30, 2016, compared to $183,000 for the three months ended September 30, 2015. The year-over-year increase resulted primarily from a 22.0%, or $33.8 million, increase in the average balance of interest-bearing deposits from the third quarter of 2015 to the third quarter of 2016.

Despite strong growth in the loan portfolio, the Company’s net interest margin declined 12 basis points to 3.76%, due primarily 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 September 30, 2016 was $108,000, compared to $124,000 for the three months ended September 30, 2015.

Management believes that the allowance for loan losses, which was $2.9 million or 1.27% of total loans, at September 30, 2016, is 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 any gains on the sale of securities available for sale. Noninterest income for the three months ended September 30, 2016 totaled $415,000 an increase of $125,000, or 43.1%, from the three months ended September 30, 2015. The increase was primarily driven by a 32.7%, or $64,000, increase in mortgage banking revenue. Increased service charges and fees on deposit accounts and gains in other income from higher merchant card services and credit card fee income also contributed to growth in noninterest income for the 2016 quarter.

 

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Noninterest expense. Noninterest expense increased $161,000 or 9.2%, to $1.9 million for the three months ended September 30, 2016 compared to the same period a year ago. The majority of the increase occurred in overall bank salaries and employee benefits as full-time equivalent employees increased from 54 at September 30, 2015 to 63 at September 30, 2016. Higher board fees and contracted services also contributed to higher noninterest expense year over year.

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 $335,000 for the three months ended September 30, 2016, compared to income tax expense of $213,000 for the three months ended September 30, 2015. The higher provision relates to earnings before income taxes of $945,000 for the three months ended September 30, 2016 compared to earnings before income taxes of $591,000 for the three months ended September 30, 2015.

Comparison of Operating Results for the Nine Months Ended September 30, 2016 and 2015

Net Earnings. For the nine months ended September 30, 2016, the Company reported net earnings of $1,574,000, or $0.79 per basic and diluted share, compared to net earnings of $1,203,000, or $0.62 per basic and $0.61 per diluted share, for the nine months ended September 30, 2015.

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 $7.3 million for the nine months ended September 30, 2016, compared to $6.3 million for the nine months ended September 30, 2015.

Interest Income. Interest income increased to $7.9 million for the nine months ended September 30, 2016, a $1.1 million or 15.9%, increase over the nine months ended September 30, 2015. The increase was driven by an increase in average loans from $165.3 million for the nine months ended September 30, 2015 to $206.6 million for the nine months ended September 30, 2016.

Interest Expense. Interest expense was $599,000 for the nine months ended September 30, 2016, compared to $525,000 for the nine months ended September 30, 2015. The year-over-year increase resulted primarily from a 23.2%, or $34.6 million, increase in the average balance of interest-bearing deposits from the first nine months of 2015 to the first nine months of 2016.

Despite strong growth in the loan portfolio, the Company’s net interest margin declined 14 basis points to 3.76%, due primarily 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 nine months ended September 30, 2016 was $412,000 compared to $333,000 for the nine months ended September 30, 2015.

 

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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 any gain on the sale of securities available for sale. Noninterest income for the nine months ended September 30, 2016 totaled $1.2 million an increase of $430,000 or 59.2%, from the nine months ended September 30, 2015. The increase is primarily due to a $230,000, or 56.5%, increase in mortgage banking revenue. Other contributing factors include higher service charges and fees on deposit accounts, a $60,000 increase in the gain on sale of securities available for sale, and a $76,000 increase in other income which was driven by higher merchant card services and credit card fee income.

Noninterest expense. Noninterest expense increased $790,000, or 16.4%, to $5.6 million for the nine months ended September 30, 2016 compared to the same period a year ago. With the exception of professional fees, noninterest expense was up across all categories, partially due to the opening of our Crawfordville office in September, 2015, and the expansion of our team. The majority of the increase in noninterest expense occurred in salaries and employee benefits as full-time equivalent employees increased from 54 at September 30, 2015 to 63 at September 30, 2016. Other major contributors to the increase in noninterest expense were higher board fees and higher contracted services in 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 $861,000 for the nine months ended September 30, 2016, compared to income tax expense of $663,000 for the nine months ended September 30, 2015. The higher provision relates to higher earnings before taxes for the period.

LIQUIDITY

Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s clients, as well as meet current and planned expenditures. Management monitors the liquidity position daily.

Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations, and capital. Additionally as a commercial bank, we are expected to maintain an adequate liquidity reserve. The liquidity reserve may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and marketable securities such as United States government agency securities, municipal securities, and mortgage-backed securities. Our primary liquid assets accounted for 19.2% and 19.1% of total assets at September 30, 2016 and December 31, 2015, respectively.

The Bank also has external sources of funds through the FHLB, unsecured lines of credit with correspondent banks, and the State of Florida’s Qualified Public Deposit Program (“QPD”). At September 30, 2016, the Bank had access to approximately $36.4 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $16.3 million in unsecured lines of credit maintained with correspondent banks. As of September 30, 2016, we had no borrowings under any of these lines. Furthermore, some of our securities are pledged to collateralize certain deposits through our participation in the State of Florida’s QPD program. The market value of securities pledged to the QPD program was $9.6 million at September 30, 2016.

 

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Our core deposits consist of noninterest bearing accounts, NOW accounts, money market accounts, time deposits and savings accounts. We closely monitor our level of certificates of deposit greater than $100,000 and large deposits. At September 30, 2016, total deposits were $261.2 million, of which $16.1 million was in certificates of deposits of $100,000 or more. We maintain a Contingency Funding Plan (“CFP”) that identifies liquidity needs and weighs alternate courses of action designed to address those needs in emergency situations. We perform a quarterly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands and do not know of any trends, events, or uncertainties that may result in a significant adverse effect on our liquidity position.

CAPITAL RESOURCES

Stockholders’ equity was $26.8 million at September 30, 2016, compared to $24.9 million at December 31, 2015. During the first quarter of 2016, the Board of Directors declared and PMHG paid its first annual dividend of $0.05 per share of common stock. At September 30, 2016, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations with a 9.01% Tier 1 Leverage Capital Ratio, a 11.55% Common Equity Tier 1 Risk-Based Capital Ratio, a 11.55% Tier 1 Risk-Based Capital Ratio, and a 12.80% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.”

The following is a summary at September 30, 2016 and December 31, 2015 of the regulatory capital requirements to be “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 September 30, 2016:
Tier 1 Leverage
Capital Ratio		$	25,300				9.01	%		$	11,238				4.00	%		$	14,048				5.00	%
Common Equity Tier 1
Risk-Based
Capital Ratio			25,300				11.55				9,860				4.50				14,242				6.50
Tier 1 Risk-Based
Capital Ratio			25,300				11.55				13,146				6.00				17,528				8.00
Total Risk-Based
Capital Ratio			28,040				12.80				17,528				8.00				21,911				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

 

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The Bank is also subject to the following 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%

Until such time as PMHG has $1 billion in total consolidated assets, it will not be subject to any consolidated capital requirements.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to Note 9 in the notes to condensed consolidated financial statements included in our Form 10-Q for the period ending September 30, 2016 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 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 PMHG in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.

We intend to continually review and evaluate the design and effectiveness of the Company’s disclosure controls and procedures and to improve the Company’s controls and procedures over time

 

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

(b) Changes in Internal Controls

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

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

 

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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 October 15, 2016, PMHG issued 1,071 shares to members of its Board of Directors in lieu of $13,575 in cash fees. During the third quarter, PMHG issued 4,200 shares to directors who exercised stock options and paid $42,000 upon such exercises. 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.

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
3.3		First Amendment to Bylaws dated December 17, 2015		Exhibit 3.3 to Form 10-Q filed on August 11, 2016
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		Employment Agreement by and between Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of July 25, 2016		Exhibit 10.1 to Form 8-K filed on July 27, 2016
10.7		2015 Stock Incentive Compensation Plan		Exhibit 10.7 to Form 8-K filed on May 26, 2015
10.8		First Amendment to 2015 Stock Incentive Compensation Plan		Filed herewith
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 June 28, 2014
99.2		Charter of the Compensation Committee, as amended on March 17, 2016 and July 21, 2016		Filed herewith
101.INS		XBRL Instance Document		Filed herewith
101.SCH		XBRL Taxonomy Extension Schema Document		Filed herewith
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document		Filed herewith

 

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Exhibit Number		Description of Exhibit		Incorporated by Reference From or Filed Herewith
101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document		Filed herewith
101.LAB		XBRL Taxonomy Extension Label Linkbase Document		Filed herewith
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document		Filed herewith

 

*	Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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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 10, 2016				By:		/s/ Sammie D. Dixon, Jr.
Date						Sammie D. Dixon, Jr. Chief Executive Officer, President and Principal Executive Officer
November 10, 2016				By:		/s/ R. Randy Guemple
Date						R. Randy Guemple Chief Financial Officer, Executive Vice President, and Principal Financial Officer

 

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