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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2014

or

 

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

For the transition period from                      to                     

Commission File Number: 333-191801

 

 

PRIME MERIDIAN HOLDING COMPANY

(Exact Name of registrant as specified in its charter)

 

 

 

Florida   27-2980805

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

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

(850) 907-2301

(Registrant’s telephone number, including area code)

Not Applicable

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

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 10, 2014: 1,821,405

 

 

 


Table of Contents

INDEX

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets
    September  30, 2014 (unaudited) and December 31, 2013

     2   

Condensed Consolidated Statements of Operations
     Three and Nine Months ended September 30, 2014 and 2013 (unaudited)

     3   

Condensed Consolidated Statement of Comprehensive Income
     Three and Nine months ended September 30, 2014 and 2013 (unaudited)

     4   

Condensed Consolidated Statements of Stockholders’ Equity
     Nine Months ended September 30, 2014 and 2013 (unaudited)

     5   

Condensed Consolidated Statements of Cash Flows
    Nine Months ended September  30, 2014 and 2013 (unaudited)

     6   

Notes to Condensed Consolidated Financial Statements (unaudited)

     7-25   

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

     26-36   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     37   

Item 4. Controls and Procedures

     37-38   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     38   

Item 1A. Risk Factors

     38   

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

     38   

Item 3. Defaults Upon Senior Securities

     38   

Item 4. Mine Safety Disclosures

     38   

Item 5. Other Information

     38   

Item 6. Exhibits

     39   

Signatures

     40   

 

1


Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

     September 30,
2014
     December 31,
2013
 
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 4,617         5,033   

Federal funds sold

     0         147   

Interest-bearing deposits

     3,430         28,986   
  

 

 

    

 

 

 

Total cash and cash equivalents

     8,047         34,166   

Securities available for sale

     43,238         44,071   

Loans held for sale

     1,971         150   

Loans, net of allowance for loan losses of $2,028 and $1,734

     143,736         121,220   

Federal Home Loan Bank stock

     186         204   

Premises and equipment, net

     3,630         3,757   

Deferred tax asset

     274         426   

Accrued interest receivable

     571         516   

Bank-owned life insurance

     1,601         1,562   

Capitalized offering costs

     0         218   

Other real estate owned

     872         0   

Other assets

     339         183   
  

 

 

    

 

 

 

Total assets

   $ 204,465         206,473   
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Liabilities:

     

Noninterest-bearing demand deposits

     45,324         59,011   

Savings, NOW and money-market deposits

     120,871         109,760   

Time deposits

     13,078         14,594   
  

 

 

    

 

 

 

Total deposits

     179,273         183,365   

Other borrowings

     2,692         5,719   

Official checks

     981         636   

Other liabilities

     587         392   
  

 

 

    

 

 

 

Total liabilities

     183,533         190,112   
  

 

 

    

 

 

 

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, 1,821,405 and 1,498,937 issued and outstanding

     18         15   

Additional paid-in capital

     18,628         14,929   

Retained earnings

     2,192         1,732   

Accumulated other comprehensive income (loss)

     94         (315
  

 

 

    

 

 

 

Total stockholders’ equity

     20,932         16,361   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 204,465         206,473   
  

 

 

    

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

2


Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

Interest income:

           

Loans

   $ 1,836         1,556         5,171         4,453   

Securities

     230         190         680         605   

Other

     12         17         54         39   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     2,078         1,763         5,905         5,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     154         150         468         491   

Other borrowings

     7         15         29         43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     161         165         497         534   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     1,917         1,598         5,408         4,563   

Provision for loan losses

     206         80         797         403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     1,711         1,518         4,611         4,160   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges and fees on deposit accounts

     32         25         107         71   

Gain on sale of SBA loans

     0         0         0         246   

Mortgage banking revenue

     107         76         235         263   

Income from bank-owned life insurance

     13         16         39         42   

Gain on sale of securities available for sale

     18         14         18         14   

Other income

     37         30         112         83   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     207         161         511         719   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries and employee benefits

     829         674         2,454         1,944   

Occupancy and equipment

     243         256         664         662   

Professional fees

     65         15         326         103   

Other

     326         297         1,003         862   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     1,463         1,242         4,447         3,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes

     455         437         675         1,308   

Income taxes

     160         150         215         457   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 295         287         460         851   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.17         0.19         0.28         0.57   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.17         0.19         0.27         0.56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends per common share

   $ 0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3


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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,
 
     2014     2013     2014     2013  

Net earnings

   $ 295        287        460        851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

        

Change in unrealized gain (loss) on securities:

        

Unrealized (loss) gain arising during the period

     27        44        668        (1,159

Reclassification adjustment for realized gains

     (18     (14     (18     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized (loss) gain

     9        30        650        (1,173

Deferred income taxes on above change

     (3     (11     (241     434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     6        19        409        (739
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     301        306        869        112   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4


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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders’ Equity

Nine Months Ended September 30, 2014 and 2013

(Dollars in thousands)

 

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

Balance at December 31, 2012

     1,496,106       $ 15         14,896         583         545        16,039   

Net earnings for the nine months ended September 30, 2013 (unaudited)

     0         0         0         851         0        851   

Net change in unrealized gain on securities available for sale (unaudited)

     0         0         0         0         (739     (739

Common stock issued as compensation to directors (unaudited)

     2,128         0         23         0         0        23   

Stock-based compensation (unaudited)

     0         0         2         0         0        2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30, 2013 (unaudited)

     1,498,234       $ 15         14,921         1,434         (194     16,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at December 31, 2013

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

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

     0         0         0         460         0        460   

Net change in unrealized loss on securities available for sale (unaudited)

     0         0         0         0         409        409   

Proceeds from sale of common stock, net of $327,000 in offering costs (unaudited)

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

Common stock issued as compensation to directors (unaudited)

     2,012         0         23         0         0        23   

Stock-based compensation (unaudited)

     0         0         1         0         0        1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at September 30, 2014 (unaudited)

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

     Nine Months Ended
September 30,
 
     2014     2013  

Cash flows from operating activities:

    

Net earnings

   $ 460        851   

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

    

Depreciation and amortization

     297        258   

Provision for loan losses

     797        403   

Net amortization of deferred loan fees

     (7     (65

Deferred income taxes

     (89     (163

Gain on sale of securities available for sale

     (18     (14

Amortization of premiums, discounts on securities available for sale

     349        349   

Gain on sale of loans held for sale

     (207     2,114   

Proceeds from the sale of loans held for sale

     10,565        (246

Loan originated as held for sale

     (12,179     (1,868

Stock issued as compensation

     23        23   

Stock-based compensation expense

     1        2   

Income from bank-owned life insurance

     (39     (42

Net increase in accrued interest receivable

     (55     (56

Net decrease in other assets and capitalized offering costs

     62        330   

Net increase (decrease) in other liabilities and official checks

     540        (221
  

 

 

   

 

 

 

Net cash provided by operating activities

     500        1,655   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Loan originations, net of principal repayments

     (24,178     (22,720

Purchase of securities available for sale

     (8,628     (8,093

Principal repayments of securities available for sale

     6,087        6,526   

Maturities and calls of securities available for sale

     1,748        0   

Proceeds from sale of securities available for sale

     1,945        1,494   

Redemption of Federal Home Loan Bank stock

     18        5   

Purchase of premises and equipment

     (170     (581
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,178     (23,369
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net (decrease) increase in deposits

     (4,092     20,993   

(Decrease) increase in other borrowings

     (3,027     44   

Net proceeds from sale of common stock

     3,678        0   
  

 

 

   

 

 

 

Net cash provided by financing activities

     (3,441     21,037   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (26,119     (677

Cash and cash equivalents at beginning of period

     34,166        26,498   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 8,047        25,821   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid during the period for:

    

Interest

   $ 498        539   
  

 

 

   

 

 

 

Income taxes

   $ 361        161   
  

 

 

   

 

 

 

Noncash transactions:

    

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

   $ 409        (739
  

 

 

   

 

 

 

Transfer of loans to other real estate owned

   $ 872        0   
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1) General

Prime Meridian Holding Company (the “Holding Company”) owns 100% of the outstanding common stock of Prime Meridian Bank (the “Bank”) (collectively the “Company”). The Holding Company’s primary activity is the operation of the Bank. The Bank is a state (Florida)-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 customers through its banking offices located in Tallahassee, Florida.

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, 2014, and the results of operations for the three and nine month periods ended September 30, 2014 and 2013. The results of operations for the three and nine months ended September 30, 2014, are not necessarily indicative of the results to be expected for the full year.

Comprehensive Income (Loss). 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 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 (loss) on the securities available for sale.

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

Other Real Estate Owned. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other real estate owned expenses.

Mortgage Banking Revenue. Mortgage banking revenue includes gains on the sale of loans originated for sale. The Company recognizes mortgage banking revenue from mortgage loans originated in the consolidated statements of earnings upon sale of the loans.

 

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1) General, Continued

 

Recent Accounting Standards Update. In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, which is intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an insubstance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. The amendments are effective beginning January 1, 2015. Upon adoption, this guidance is not expected to impact the Bank’s financial statements.

In June 2014, FASB issued ASU 2014-11, Transfers and Servicing – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 requires, among other things, two accounting changes. First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. The adoption of this guidance is not expected to have any impact on the Company’s consolidated financial statements.

In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires, among other things, that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have any impact on the Company’s consolidated financial statements.

Recent Regulatory Developments

Basel III Rules. On July 2, 2013, the Board of Governors of the Federal Reserve (“FRB”) approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by the Bank. The rules require a new common equity

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

Tier 1 capital to risk-weighted assets ratio of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the required minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments. On July 9, 2013, the FDIC also approved, as an interim final rule, the regulatory capital requirements for U.S. banks, following the actions of the FRB. The FDIC’s rule is identical in substance to the final rules issued by the FRB.

The phase-in period for the final rules will begin for the Bank on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. The Bank is currently evaluating the provisions of the final rules and their expected impact on the Bank.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2) Securities Available for Sale

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

At September 30, 2014:

          

U.S. Government agency securities

   $ 6,947         14         (133     6,828   

Municipal securities

     10,079         124         (61     10,142   

Mortgage-backed securities

     26,061         304         (97     26,268   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 43,087         442         (291     43,238   
  

 

 

    

 

 

    

 

 

   

 

 

 

At December 31, 2013:

          

U.S. Government agency securities

     7,290         8         (329     6,969   

Municipal securities

     9,139         14         (269     8,884   

Mortgage-backed securities

     26,225         253         (198     26,280   

Asset-backed securities

     1,916         22         0        1,938   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 44,570         297         (796     44,071   
  

 

 

    

 

 

    

 

 

   

 

 

 

Securities with gross unrealized losses at September 30, 2014, 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
 

Securities Available for Sale:

           

U.S. Government agency securities

   $ 0         0         133         5,915   

Municipal securities

     0         0         61         3,059   

Mortgage-backed securities

     42         12,607         55         1,794   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 42         12,607         249         10,768   
  

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses at September 30, 2014 on twenty-two 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.

 

 

(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 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, 2014:

           

U.S. Government agency securities

   $ 6,828         0         6,828         0   

Municipal securities

     10,142         0         10,142         0   

Mortgage-backed securities

     26,268         0         26,268         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 43,238         0         43,238         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013:

           

U.S. Government agency securities

     6,969         0         6,969         0   

Municipal securities

     8,884         0         8,884         0   

Mortgage-backed securities

     26,280         0         26,280         0   

Asset-backed securities

     1,938         0         1,938         0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 44,071         0         44,071         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2014 and 2013, 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, 2014:

     

Due in less than one year

   $ 1,090         1,109   

Due five to ten years

     8,667         8,583   

Due after ten years

     7,269         7,278   

Mortgage-backed securities

     26,061         26,268   
  

 

 

    

 

 

 
   $ 43,087         43,238   
  

 

 

    

 

 

 

 

(3) Loans

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

 

     At September 30,
2014
    At December 31,
2013
 

Real estate mortgage loans:

    

Commercial

   $ 49,172        44,796   

Residential and home equity

     48,189        38,571   

Construction

     18,226        12,933   
  

 

 

   

 

 

 

Total real estate mortgage loans

     115,587        96,300   

Commercial loans

     27,856        24,651   

Consumer and other loans

     2,383        2,072   
  

 

 

   

 

 

 

Total loans

     145,826        123,023   

Less:

    

Net deferred loan fees

     (62     (69

Allowance for loan losses

     (2,028     (1,734
  

 

 

   

 

 

 

Loans, net

   $ 143,736        121,220   
  

 

 

   

 

 

 

 

(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
Loans
    Consumer
and

Other
Loans
       
    Commercial     Residential
and Home
Equity
    Construction         Total  

Three-Month Period Ended September 30, 2014:

           

Beginning balance

  $ 1,049        523        274        478        21        2,345   

Provision (credit) for loan losses

    152        134        (26     (66     12        206   

Net (charge-offs) recoveries

    (531     0        0        10        (2     (523
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 670        657        248        422        31        2,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three-Month Period Ended September 30, 2013:

           

Beginning balance

  $ 549        483        163        318        21        1,534   

Provision (credit) for loan losses

    21        47        16        (1     (3     80   

Net recoveries

    0        0        0        8        0        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 570        530        179        325        18        1,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine-Month Period Ended September 30, 2014:

           

Beginning balance

    604        545        175        387        23        1,734   

Provision (credit) for loan losses

    598        112        73        4        10        797   

Net (charge-offs) recoveries

    (532     0        0        31        (2     (503
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 670        657        248        422        31        2,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine-Month Period Ended September 30, 2013:

           

Beginning balance

    352        226        237        405        23        1,243   

Provision (credit) for loan losses

    218        304        (11     (103     (5     403   

Net (charge-offs) recoveries

    0        0        (47     23        0        (24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 570        530        179        325        18        1,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

     Real Estate Mortgage Loans      Commercial
Loans
     Consumer
and
Other
Loans
     Total  
     Commercial      Residential
and Home
Equity
     Construction           

At September 30, 2014:

                 

Individually evaluated for impairment:

                 

Recorded investment

   $ 0         0         0         240         2         242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance in allowance for loan losses

   $ 0         0         0         77         2         79   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collectively evaluated for impairment:

                 

Recorded investment

   $ 49,172         48,189         18,226         27,616         2,381         145,584   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance in allowance for loan losses

   $ 670         657         248         345         29         1,949   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013:

                 

Individually evaluated for impairment:

                 

Recorded investment

   $ 0         36         0         346         0         382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance in allowance for loan losses

   $ 0         23         0         82         0         105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collectively evaluated for impairment:

                 

Recorded investment

   $ 44,796         38,535         12,933         24,305         2,072         122,641   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance in allowance for loan losses

   $ 604         522         175         305         23         1,629   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 portfolio segments and classes are identified by the Company as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are typically divided into three classes: Commercial, residential and home equity, and construction loans. The real estate mortgage loans are as follows:

Commercial Real Estate Loans. 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 is typically owner-occupied, but also includes nonowner occupied investment properties. Commercial loans that are secured by owner-occupied commercial real estate are repaid through operating cash flows of the borrower. The maturity for this type of loan is generally limited to three to five years; however, payments may be structured on a longer amortization basis. Typically, interest rates on our commercial real estate loans are fixed for five years or less after which they adjust based upon a predetermined spread over an index. At times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, the Bank 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, the overall strength of 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 flow and evaluate collateral value. Currently, the collateral securing our commercial real estate loans include 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 residential real estate loan portfolio.

Residential Real Estate Loans. We offer first and second one-to-four family mortgage loans and home equity lines of credit; the collateral for these loans is generally on the clients’ owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks still do exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers’ financial condition. 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 mortgages; while 15-year or 30-year fixed-rate loans are generally sold to the secondary market.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

Construction Loans. Typically, these loans have a term of one to two years and the interest is paid monthly. 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, and lines of credit to small and midsized businesses. Small-to-medium sized businesses, retail, and professional establishments, make up our target market for commercial loans. Our Relationship Managers primarily underwrite these loans based on the borrowers’ ability to service the loan from cash flow. Lines of credit and loans secured by accounts receivable and/or inventory are monitored periodically by our staff. Loans secured by “all business assets,” or a “blanket lien” are typically only made to highly qualified borrowers due to the nonspecific nature of the collateral. Valuation of business collateral is generally supported by an appraisal, purchase order, or third party physical inspection. Personal guarantees of the principals of business borrowers are usually required.

Equipment loans generally have a term of five years or less and may have a fixed or variable rate; we use conservative margins when pricing these loans. Working capital loans generally do not exceed one year and typically, they are secured by accounts receivable, inventory, and personal guarantees of the principals of the business. Significant factors affecting a commercial borrower’s creditworthiness include the quality of management and the ability both to evaluate changes in the supply and demand characteristics affecting the business’ markets for products and services and to respond effectively to such changes. These loans may be made unsecured or secured, but most are made on a secured basis. Risks associated with our commercial loan portfolio include local, regional, and national market conditions. Other factors of risk could include changes in the borrower’s management and fluctuations in collateral value. Additionally, there may be refinancing risk if a commercial loan includes a balloon payment which must be refinanced or paid off at loan maturity.

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

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

Consumer Loans and Other. 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 borrowers’ 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
Mentioned
     Substandard      Doubtful      Loss      Total  

At September 30, 2014:

                 

Real estate mortgage loans:

                 

Commercial

   $ 47,143         0         2,029         0         0         49,172   

Residential and home equity

     44,214         2,294         1,681         0         0         48,189   

Construction

     18,142         76         8         0         0         18,226   

Commercial loans

     26,783         421         652         0         0         27,856   

Consumer and other loans

     2,300         32         51         0         0         2,383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 138,582         2,823         4,421         0         0         145,826   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013:

                 

Real estate mortgage loans:

                 

Commercial

     40,901         1,804         2,091         0         0         44,796   

Residential and home equity

     36,461         1,346         764         0         0         38,571   

Construction

     12,528         396         9         0         0         12,933   

Commercial loans

     23,919         509         223         0         0         24,651   

Consumer and other loans

     1,914         38         120         0         0         2,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 115,723         4,093         3,207         0         0         123,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Furthermore, construction loans, nonowner occupied commercial real estate loans, and commercial loan relationships in excess of $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.

 

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Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

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

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

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

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

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

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

 

 

(continued)

 

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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, 2014:

                    

Real estate mortgage loans:

                    

Commercial

   $ 0         0         0         0         49,172         0         49,172   

Residential and home equity

     0         0         0         0         48,189         0         48,189   

Construction

     0         0         0         0         18,226         0         18,226   

Commercial loans

     109         0         0         109         27,747         0         27,856   

Consumer and other loans

     9         0         0         9         2,372         2         2,383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 118         0         0         118         145,706         2         145,826   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013:

                    

Real estate mortgage loans:

                    

Commercial

     0         0         0         0         44,796         0         44,796   

Residential and home equity

     0         0         0         0         38,571         0         38,571   

Construction

     0         0         0         0         12,933         0         12,933   

Commercial loans

     38         0         0         38         24,613         0         24,651   

Consumer and other loans

     0         0         0         0         2,072         0         2,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 38         0         0         38         122,985         0         123,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2014:

               

Commercial loans

    0        0        240        240        77        240        240        77   

Consumer & Other

    0        0        2        2        2        2        2        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 0        0        242        242        79        242        242        79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2013:

               

Residential and home equity

    0        0        36        36        23        36        36        23   

Commercial loans

    27        27        319        319        82        346        346        82   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 27        27        355        355        105        382        382        105   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

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

 

     Three Months Ended September 30,  
     2014      2013  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 

Commercial real estate

   $ 1,403         0         0         0         0         0   

Residential and home equity

     35         1         1         0         0         0   

Commercial loans

     211         3         3         124         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,649         4         4         124         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30,  
     2014      2013  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 

Commercial real estate

   $ 987         0         0         0         0         0   

Residential and home equity

     35         2         2         37         2         2   

Construction

     0         0         0         0         0         0   

Commercial loans

     215         9         10         163         13         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,237         11         12         200         15         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans measured at fair value on a nonrecurring basis at September 30, 2014 and December 31, 2013.

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3) Loans, Continued

 

There were no loans determined to be troubled debt restructuring (“TDR”) entered into during the three months ended September 30, 2014 and 2013 and the nine months ended September 30, 2013. The following is a summary of loans determined to be TDR’s entered into during the nine months ended September 30, 2014:

 

     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Residential and home equity-

        

Modified payment schedule for six months

     1       $ 35       $ 35   
  

 

 

    

 

 

    

 

 

 

The allowance for loan losses on all loans that have been restructured and are considered TDR’s is included in the Bank’s specific reserve. The specific reserve is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDR’s that have subsequently defaulted are considered collateral-dependent. There were no TDR’s that subsequently defaulted during the nine months ended September 30, 2014, which were restructured during the same period.

 

(4) Other Real Estate Owned

Other real estate owned which is measured at fair value at September 30, 2014 on a nonrecurring basis is as follows (in thousands):

 

     At Year End      Losses
Recorded
During the
Year
 
     Total      Level I      Level 2      Level 3      Total
Losses
    

September 30, 2014

   $ 872         0         0         872         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(5) Regulatory Capital

Banks are required to maintain certain minimum regulatory capital requirements. The Bank is considered to be well-capitalized. The following is a summary at September 30, 2014 of the regulatory capital requirements to be considered “well capitalized” and the Bank’s capital on a percentage basis:

 

     Bank     Regulatory
Requirement
 

Tier I capital to total average assets

     9.05     6.00

Tier I capital to risk-weighted assets

     12.64     8.00

Total capital to risk-weighted assets

     13.84     10.00

 

(continued)

 

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6) Earnings Per Share

Earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding. Basic earnings per share has been computed on the basis of the weighted-average number of shares of common stock outstanding during the period. For the three and nine-months ended September 30, 2014 and September 30, 2013 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):

 

     2014      2013  
     Earnings      Weighted-
Average
Shares
     Per
Share
Amount
     Earnings      Weighted-
Average
Shares
     Per
Share
Amount
 

Three Months Ended September 30:

                 

Basic EPS:

                 

Net earnings (loss)

   $ 295         1,785,900       $ 0.17       $ 287         1,498,113       $ 0.19   

Effect of dilutive securities-

                 

Incremental shares from assumed conversion of options

        1,793               1,900      
     

 

 

          

 

 

    

Diluted EPS:

                 

Net earnings (loss)

   $ 295         1,787,693       $ 0.17       $ 287         1,500,013       $ 0.19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30:

                 

Basic EPS:

                 

Net earnings (loss)

   $ 460         1,671,877       $ 0.28       $ 851         1,497,490       $ 0.57   

Effect of dilutive securities-

                 

Incremental shares from assumed conversion of options

        15,446               15,618      
     

 

 

          

 

 

    

Diluted EPS:

                 

Net earnings (loss)

   $ 460         1,687,323       $ 0.27       $ 851         1,513,108       $ 0.56   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(7) Stock-Based Compensation

The 2007 Stock Option Plan provides for certain key employees and directors of the Company to have the option to purchase shares of the Company’s common stock. Under this Plan, the total number of shares which may be issued is 152,905. All options granted have ten-year terms and vest over periods up to five years. As of September 30, 2014, there were 18,905 shares available for grant.

 

(continued)

 

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Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7) Stock-Based Compensation, Continued

 

A summary of the activity in the Company’s 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, 2012

     136,000      $ 10.00         

Options granted

     2,500      $ 10.72         

Options forfeited

     (4,500   $ 10.00         

Outstanding at September 30, 2013

     134,000      $ 10.01         
  

 

 

   

 

 

       

Outstanding at December 31, 2013

     134,000      $ 10.01         
  

 

 

   

 

 

       

Outstanding at September 30, 2014

     134,000      $ 10.01         4.4 years      
  

 

 

   

 

 

    

 

 

    

Exercisable at September 30, 2014

     131,000      $ 10.00         4.3 years       $ 328,000   
  

 

 

   

 

 

    

 

 

    

 

 

 

At September 30, 2014, there was $3,000 of total unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the plans. The cost is expected to be recognized over a weighted-average period of twenty-two months. The total fair value of shares vesting and recognized as compensation expense was $1,000 and $2,000 for the nine months ended September 30, 2014 and 2013, respectively. There was no associated income tax benefit recognized for the periods ending September 30, 2014 and September 30, 2013.

The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

     Nine Months
Ended
September 30,
 
     2013  

Weighted-average risk-free interest rate

     1.13

Expected dividend yield

     0   

Expected stock volatility

     11.37

Expected life in years

     6.5   

Per share fair value of options issued during the year

   $ 1.17   
  

 

 

 

 

(continued)

 

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Table of Contents

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(7) Stock-Based Compensation, Continued

 

The Company used the guidance in Staff Accounting Bulletin No. 107 to determine the estimated life of options issued. Expected volatility is based on volatility of similar companies’ common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company’s history and expectation of dividend payouts.

 

(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, 2014      At December 31, 2013  
     Carrying
Amount
     Fair
Value
     Level      Carrying
Amount
     Fair
Value
     Level  

Financial assets:

                 

Cash and cash equivalents

   $ 8,047         8,047         1         34,166         34,166         1   

Securities available for sale

     43,238         43,238         2         44,071         44,071         2   

Loans held for sale

     1,971         1,971         3         150         150         3   

Loans, net

     143,736         140,724         3         121,220         121,964         3   

Federal Home Loan Bank stock

     186         186         3         204         204         3   

Accrued interest receivable

     571         571         3         516         516         3   

Financial liabilities:

                 

Deposits

     179,273         179,329         3         183,225         183,295         3   

Other borrowings

     2,692         2,692         3         5,719         5,719         3   

Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

(9) Common Stock Offering

The Company filed a Registration Statement with the Securities and Exchange Commission which was effective on December 11, 2013. The Company is offering up to 1,200,000 shares of common stock for $12.50 per share. The Registration Statement was amended effective June 27, 2014, and the offering has been extended to December 31, 2014. As of September 30, 2014, the Company has sold 320,456 shares of common stock for net proceeds of $3.7 million.

 

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Table of Contents

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Prime Meridian Holding Company, and its wholly-owned subsidiary, Prime Meridian Bank. This discussion and analysis should be read with the condensed consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2013. Results of operations for the three and nine month periods ended September 30, 2014, are not necessarily indicative of results that may be attained for any other period. The following discussion and analysis presents our financial condition and results of operations on a consolidated basis, however, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.

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

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

 

    local, regional, and national economic and business conditions;

 

    banking laws, compliance, and the regulatory environment;

 

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

 

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

 

    litigation, tax, and other regulatory matters;

 

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

 

    quality and composition of our loan or investment portfolios;

 

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

 

    competition;

 

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

 

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

 

    consumer spending, borrowing and savings habits;

 

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

 

    application and interpretation of accounting principles and guidelines;

 

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

 

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

General

Prime Meridian Holding Company (“PMHC” or the “Company”) was incorporated as a Florida corporation on May 25, 2010, and is the one-bank holding company for, and sole shareholder of, Prime Meridian Bank (the “Bank”). The Bank opened for business on February 4, 2008, and was acquired by the Company on September 16, 2010. PMHC has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through two full-service offices located in Tallahassee, 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, 2014
    Year
Ended
December 31, 2013
    Nine Months
Ended

September 30, 2013
 

Average equity as a percentage of average assets

     8.98     8.79     8.95

Equity to total assets at end of period

     10.24     7.92     8.50

Return on average assets(1)

     0.29     0.62     0.63

Return on average equity(1)

     3.23     7.08     7.03

Noninterest expenses to average assets

     2.10     2.63     1.98

Nonperforming loans to total loans at end of period

     0.00     0.00     0.00

 

(1)  Annualized for the nine months ended September 30, 2014 and September 30, 2013.

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

General. Total assets were $204.5 million at September 30, 2014, a decrease of $2.0 million, or 1.0%, from December 31, 2013. Total deposits at September 30, 2014 were $179.3 million, a decrease of $4.1 million, or 2.2%, from December 31, 2013. The decrease in total assets and deposits relates primarily to a political action committee account that has withdrawn over $21.0 million since December 31, 2013 in connection with campaign funding. Net loans grew to $143.7 million at September 30, 2014, a $22.5 million, or 18.6%, increase from December 31, 2013. Despite a continued and general softness in overall loan demand, we have successfully grown our loan portfolio by increasing our market share in the community.

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.

 

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Table of Contents

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. Evidence of this effort is seen in the organic growth in our loans. As of September 30, 2014, the Bank’s net loans were $143.7 million, representing 70.3% of total assets, compared to $121.2 million at December 31, 2013, or 58.7% of total assets. These loans were priced based upon the degree of risk, collateral, loan amount, and maturity. We have no loans to foreign borrowers.

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

Accounting standards require the Bank to identify loans as impaired loans when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We implement these standards in our monthly review of the adequacy of the allowance for loan losses, and identify and value impaired loans in accordance with regulatory guidance on these standards. Five loans totaling $242,000 were deemed to be impaired under the Bank’s policy at September 30, 2014, compared to eight loans totaling $382,000 at December 31, 2013. During the three months ended September 30, 2014, the Bank reported actual charge-offs of $533,000. Of this amount, $531,000 relates to an impaired commercial real estate loan in the original amount of $1.4 million. The remaining balance of $872,000 was moved to other real estate owned. Net charge-offs for the three months ended September 30, 2014 was $523,000.

Our goal is to maintain a high quality of loans through sound underwriting and lending practices. As of September 30, 2014 and December 31, 2013, approximately 79.3% and 78.3%, respectively, of the total loan portfolio was collateralized by commercial and residential real estate mortgages.

Deposits. The major source of the Bank’s funds for lending and other investment purposes are deposits. Total deposits were $179.3 million at September 30, 2014, compared to $183.4 million at December 31, 2013. Although the Bank continues to make good progress in increasing its deposit base, the decline in total deposits reflects withdrawals of more than $21.0 million from a political action committee account since the end of 2013 related to campaign funding for the November 2014 election. Our new deposit growth was not able to fully offset the effect of this one account.

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, 2014, to borrow up to $30.9 million. There were no advances outstanding at September 30, 2014. We have entered into a repurchase agreement with a client that requires the Company to pledge securities as collateral for borrowing under the agreement. At September 30, 2014 and December 31, 2013, the outstanding balance of such borrowings totaled $2.7 million and $5.7 million, respectively. For the same time periods, the Company pledged securities with a market value of $3.0 million and $5.9 million as collateral for the agreement.

Capital Adequacy. Stockholder’s equity was $20.9 million at September 30, 2014, compared to $16.4 million at December 31,

 

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Table of Contents

2013. As of September 30, 2014, no dividends on shares of our common stock had been paid or declared. On December 11, 2013, PMHC commenced a public offering of up to 1,200,000 shares of its common stock for $12.50 per share in order to raise additional capital. This offering is continuing on an ongoing basis through December 31, 2014. PMHC has sold 320,456 shares for net proceeds of $3.7 million as of September 30, 2014.

As of September 30, 2014, the Bank was considered to be “well capitalized” with a 9.05% Tier 1 leverage capital ratio, a 12.64% Tier 1 risk-based capital ratio, and a 13.84% total risk-based capital ratio, above the minimum ratios to be considered “well capitalized.”

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 and the interest rates earned or paid on these assets and liabilities.

 

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Table of Contents

The following tables sets forth information regarding: (i) the total dollar amount of interest and dividend income of the Bank from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin; and (vi) weighted-average yields and rates. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities. The yields and costs depicted in the table include the amortization of fees, which are considered to constitute adjustments to yields (dollars in thousands). As shown in the table for the three-month periods, the decrease in yield on loans was offset by higher yields on securities, resulting in a higher yield on total interest-earning assets. This combined with lower rates on interest-bearing liabilities and a higher ratio of interest-earning assets to interest-bearing liabilities have resulted in a higher interest-rate spread and net interest margin for the period.

 

     Three Months Ended September 30,  
     2014     2013  
     Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
 

Interest-earning assets:

              

Loans(1)

   $ 139,433      $ 1,820         5.22   $ 116,205      $ 1,556         5.36

Mortgage loans held for sale

     1,355        16         4.72        0        0         0   

Securities

     42,623        230         2.16        42,485        190         1.79   

Other (2)

     18,280        12         0.26        20,567        17         0.33   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     201,691        2,078         4.12        179,257        1,763         3.93   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets

     8,310             7,273        
  

 

 

        

 

 

      

Total assets

   $ 210,001           $ 186,530        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings, NOW and money-market deposits

     119,041        130         0.44        103,459        122         0.47   

Time deposits <$100,000

     3,436        4         0.47        3,738        6         0.64   

Time deposits >$100,000

     10,103        20         0.79        11,551        22         0.76   
  

 

 

   

 

 

      

 

 

   

 

 

    

Deposits

     132,580        154         0.46        118,748        150         0.51   

Other borrowings

     2,730        7         1.03        5,794        15         1.04   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     135,310        161         0.48        124,542        165         0.53   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing deposits

     53,771             45,713        

Noninterest-bearing liabilities

     254             260        

Stockholders’ equity

     20,666             16,015        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 210,001           $ 186,530        
  

 

 

        

 

 

      

Net interest income

     $ 1,917             1,598      
    

 

 

        

 

 

    

Interest-rate spread

          3.64          3.41
       

 

 

        

 

 

 

Net interest margin (3)

          3.80          3.57
       

 

 

        

 

 

 

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

     149.06          143.93     
  

 

 

        

 

 

      

 

(1)  Includes nonaccrual loans.
(2)  Other interest-earning assets included Federal funds sold and Federal Home Loan Bank stock.
(3)  Net interest margin is net interest income divided by total interest-earning assets, annualized.

 

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Table of Contents

As shown in the table for the nine-month periods, the decrease in yield on total interest earning assets was offset by lower rates on interest-bearing liabilities and a higher ratio of interest-earning assets to interest-bearing liabilities, thereby resulting in a slightly higher interest-rate spread and net interest margin for the period.

 

     Nine Months Ended September 30,  
     2014     2013  
     Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
    Average
Balance
    Interest
and
Dividends
     Average
Yield/
Rate
 

Interest-earning assets:

              

Loans(1)

   $ 131,425      $ 5,145         5.22   $ 110,048      $ 4,453         5.40

Mortgage loans held for sale

     629        26         5.51        0        0         0   

Securities

     42,955        680         2.11        43,491        605         1.85   

Other (2)

     28,355        54         0.25        18,750        39         0.28   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     203,364        5,905         3.87        172,289        5,097         3.94   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-earning assets

     8,156             8,246        
  

 

 

        

 

 

      

Total assets

   $ 211,520           $ 180,535        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Savings, NOW and money-market deposits

     117,597        400         0.45        102,897        399         0.52   

Time deposits <$100,000

     3,572        13         0.49        3,529        19         0.72   

Time deposits >$100,000

     10,428        55         0.70        12,177        73         0.80   
  

 

 

   

 

 

      

 

 

   

 

 

    

Deposits

     131,597        468         0.47        118,603        491         0.55   

Other borrowings

     3,908        29         0.99        5,780        43         0.99   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     135,505        497         0.49        124,383        535         0.57   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing deposits

     56,942             39,322        

Noninterest-bearing liabilities

     89             693        

Stockholders’ equity

     18,984             16,137        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 211,520           $ 180,535        
  

 

 

        

 

 

      

Net interest income

     $ 5,408           $ 4,562      
    

 

 

        

 

 

    

Interest-rate spread

          3.38          3.37
       

 

 

        

 

 

 

Net interest margin (3)

          3.55          3.53
       

 

 

        

 

 

 

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

     150.08          138.51     
  

 

 

        

 

 

      

 

(1)  Includes nonaccrual loans.
(2)  Other interest-earning assets included Federal funds sold and Federal Home Loan Bank stock.
(3)  Net interest margin is net interest income divided by total interest-earning assets, annualized.

 

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Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013

Net Income. For the three months ended September 30, 2014, we reported net earnings of $295,000, or $0.17 per basic and diluted share, compared to net earnings of $287,000, or $0.19 per basic and diluted share, for the three months ended September 30, 2013.

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 $1.9 million for the three months ended September 30, 2014, compared to $1.6 million for the three months ended September 30, 2013.

Interest Income. Despite generally lower yields on loans since 2011, interest income increased to $2.1 million for the three months ended September 30, 2014, a $315,000, or 17.9%, increase over the three months ended September 30, 2013. The increase was driven by an increase in average loans from $116.2 million for the quarter ended September 30, 2013 to $139.4 million for the quarter ended September 30, 2014. Higher yields on securities also contributed $40,000 to the increase in total interest income.

Interest Expense. Interest expense was $161,000 for the three months ended September 30, 2014, compared to $165,000 for the three months ended September 30, 2013. The decrease in interest expense is due to a lower interest rate environment and a shift from interest-bearing to noninterest-bearing deposits. During 2014 and 2013, the Bank aggressively managed interest paid on deposits, decreasing the average rate paid on deposits from 0.51% in the three months ended September 30, 2013 to 0.46% in the three months ended September 30, 2014. Furthermore, the average balance of noninterest-bearing deposits to the average balance of total deposits increased from 27.3% during the three months ended September 30, 2013 to 29.9% during the three months ended September 30, 2014.

The combination of higher average loan balances, a higher yield on securities, a shift in deposit mix to noninterest-bearing deposits, and a decrease in overall deposit funding costs resulted in a 24 basis point increase in the Bank’s net interest margin from 3.57% for the three months ended September 30, 2013, to 3.80% for the same period in 2014.

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, 2014 was $206,000, compared to $80,000 for the three months ended September 30, 2013. The increase in the provision relates to strong loan growth from the second quarter of 2014 to the third quarter of 2014, compared to the same periods in 2013. Management believes that the allowance for loan losses, which was $2.0 million or 1.39% of total loans, at September 30, 2014, to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

 

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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, gain on sale of SBA loans, mortgage banking revenue, gain on sale of securities available for sale, and income from bank-owned life insurance. Noninterest income for the three months ended September 30, 2014 totaled $207,000, an increase of $46,000, or 28.6%, from the three months ended September 30, 2013. The increase primarily reflects higher service charges and fees on deposit accounts and increases in mortgage banking revenue.

Noninterest expense. Noninterest expense increased $221,000 from $1.2 million for the three months ended September 30, 2013, to $1.5 million for the three months ended September 30, 2014. The increase was primarily due to a $155,000 increase in salaries and employee benefits and a $50,000 increase in professional fees. Full-time equivalent employees have increased from thirty-four at September 30, 2013 to forty-one at September 30, 2014, as the Bank continues to position itself for future expansion, while higher professional fees relates to increased legal and accounting expenses associated with SEC reporting.

Income Taxes. Income tax expense is based on amounts reported in the statements of operations, after adjustments for nontaxable income and nondeductible expenses, and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income tax expense was $160,000 for the three months ended September 30, 2014, compared to income tax expense of $150,000 for the three months ended September 30, 2013. The higher provision relates to higher earnings for the quarter.

Comparison of Operating Results for the Nine Months Ended September 30, 2014 and 2013

Net Income. For the nine months ended September 30, 2014, we reported net earnings of $460,000, or $0.28 per basic and $0.27 per diluted share, compared to net earnings of $851,000, or $0.57 per basic and $0.56 per diluted share, for the nine months ended September 30, 2013.

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 $5.4 million for the nine months ended September 30, 2014, compared to $4.6 million for the nine months ended September 30, 2013.

Interest Income. Despite generally lower yields on loans since 2011, interest income increased to $5.9 million for the nine months ended September 30, 2014, a $808,000, or 15.9%, increase over the nine months ended September 30, 2013. The increase was driven by an increase in average loans from $110.0 million for the nine months ended September 30, 2013 to $131.4 million for the nine months ended September 30, 2014. Higher yields on securities also contributed $75,000 to the increase in total interest income.

Interest Expense. Interest expense was $497,000 for the nine months ended September 30, 2014, compared to $534,000 for the nine months ended September 30, 2013. The decrease in interest expense is due to a lower interest rate environment and a shift from interest-bearing to noninterest-bearing deposits. During 2014 and 2013, the Bank aggressively managed interest paid on deposits, decreasing the average rate paid on deposits from 0.55% in the nine months ended September 30, 2013 to 0.47% in the nine months ended September 30, 2014. Furthermore, the average balance of noninterest-bearing deposits to the average balance of total deposits

 

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increased from 23.4% during the nine months ended September 30, 2013 to 31.8% during the nine months ended September 30, 2014.

The combination of higher average loan balances, a shift in deposit mix to noninterest-bearing deposits, and a decrease in overall deposit funding costs resulted in a two basis point increase in the Bank’s net interest margin from 3.53% for the nine months ended September 30, 2013, to 3.55% for the same period in 2014.

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, 2014 was $797,000, compared to $403,000 for the nine months ended September 30, 2013. The increase in the provision relates primarily to a $504,000 reserve taken during the second quarter for an impaired $1.4 million commercial real estate loan. The reserve associated with this particular loan was charged off in the most recent quarter, with the remaining balance of $872,000 moved to other real estate owned. Management believes that the allowance for loan losses, which was $2.0 million or 1.39% of total loans, at September 30, 2014, to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest income. For the nine months ended September 30, 2014, noninterest income was $511,000, a $208,000, or 28.9%, decrease from the nine months ended September 30, 2013. Increases in service charges and fees on deposit accounts and other income were offset by lower mortgage banking revenue, lower income on bank-owned life insurance, and no income from gain on sale of SBA loans compared to a gain of $246,000 on the sale of an SBA loan that was reported in 2013.

Noninterest expense. Noninterest expense increased $876,000, or 24.5%, from $3.6 million for the nine months ended September 30, 2013, to $4.4 million for the nine months ended September 30, 2014. The increase is primarily attributable to higher payroll expenses and professional fees. Full-time equivalent employees have increased from thirty-four at September 30, 2013 to forty-one at September 31, 2014, as the Bank continues to position itself for growth, while the increase in professional fees relates to increased legal and accounting expenses associated with SEC reporting.

Income Taxes. Income tax expense is based on amounts reported in the statements of operations, after adjustments for nontaxable income and nondeductible expenses, and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. The income tax expense was $215,000 for the nine months ended September 30, 2014, compared to income tax expense of $457,000 for the nine months ended September 30, 2013. The lower expense resulted from lower earnings for the nine month period.

 

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Liquidity

As a commercial bank, we are expected to maintain an adequate liquidity reserve. Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. The liquidity reserve may consist of cash on hand, cash on demand deposit with correspondent banks, other investments, and short-term marketable securities such as federal funds sold, United States securities, or securities guaranteed by the United States. Some of our securities are pledged to collateralize certain deposits through our participation in the State of Florida’s Qualified Public Deposit Program (“QPD”). We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands. The market value of securities pledged to the QPD Program as of September 30, 2014, was $2.5 million.

At September 30, 2014, total deposits were $179.3 million, of which $9.7 million were in certificates of deposits of $100,000 or more. Also, as a member of the FHLB, we have access to approximately $30.9 million of available lines of credit secured by qualifying collateral as of September 30, 2014, in addition to $8.7 million in lines of credit we maintain with correspondent banks. As of September 30, 2014, we had no outstanding balances on such lines of credit.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions that are not included in our consolidated balance sheets. These transactions include commitments to extend credit in the ordinary course of business to approved clients, construction loans in process, unused lines of credit, guaranteed accounts, and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Generally, loan commitments have been granted on a temporary basis for working capital or commercial real estate financing requirements or may be reflective of loans in various stages of funding. These commitments are recorded on our financial statements as they are funded. Commitments typically have fixed expiration dates or other termination clauses and may require payment of a fee. Loan commitments include unused commitments for open-end lines secured by one-to-four family residential properties and commercial properties, commitments to fund loans secured by commercial real estate, construction loans, business lines of credit and other unused commitments.

Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our third party credit card company, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on the particular account 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 are written conditional commitments issued by us to guarantee the client will fulfill his or her contractual financial obligations to a third party. 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.

We minimize our exposure to loss under loan commitments and standby letters of credit by subjecting them to credit approval and monitoring procedures, as well as by generally charging fees for issuing them. The effect on our revenues, expenses, cash flows,

 

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and liquidity of the unused portions of these commitments cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.

The following is a summary of the total contractual amount of commitments outstanding as of the respective dates (dollars in thousands):

 

     September 30,
2014
 

Commitments to extend credit

   $ 2,365   

Construction loans in process

     10,091   

Unused lines of credit

     23,217   

Standby financial letters of credit

     1,011   

Guaranteed accounts

     90   
  

 

 

 

Total of off-balance sheet instruments

   $ 36,774   
  

 

 

 

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

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

(b) Changes in Internal Controls

We have made no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2014, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time,

 

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controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Not Required for Smaller Reporting Companies.

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

During the quarter ended September 30, 2014, we sold no securities which were not registered under the Securities Act of 1933 and did not repurchase any of our securities.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

The following exhibits are filed with or incorporated by reference into this Report.

 

Exhibit
Number

  

Description of Exhibit

  

Incorporated by Reference From or Filed Herewith

    3.1    Articles of Incorporation    Exhibit 3.1 to Registration Statement on Form S-1 filed on October 18, 2013
    3.2    Bylaws    Exhibit 3.2 to Registration Statement on Form S-1 filed on October 18, 2013
    4.1    Specimen Common Stock Certificate    Exhibit 4.1 to Registration Statement on Form S-1 filed on October 18, 2013
    4.2    2010 Articles of Share Exchange    Exhibit 4.2 to Registration Statement on Form S-1 filed on October 18, 2013
  10.1    2007 Stock Option Plan    Exhibit 10.1 to Registration Statement on Form S-1 filed on October 18, 2013
  10.2    Form of Non-Qualified Stock Option Agreement Under 2007 Plan    Exhibit 10.2 to Registration Statement on Form S-1 filed on October 18, 2013
  10.3    Form of Incentive Stock Option Agreement Under 2007 Plan    Exhibit 10.3 to Registration Statement on Form S-1 filed on October 18, 2013
  10.4    2012 Directors’ Compensation Plan    Exhibit 10.4 to Registration Statement on Form S-1 filed on October 18, 2013
  10.5    Lease for Branch Location on Timberlane Road    Exhibit 10.5 to Registration Statement on Form S-1 filed on October 18, 2013
  10.6    Agreement for Loan Review Services with Carr, Riggs & Ingram, LLC    Exhibit 10.6 to Registration Statement on Form S-1 filed on October 18, 2013
  31.1    Certification Under Section 302 of Sarbanes-Oxley by Sammie D. Dixon, Jr., Principal Executive Officer    Filed herewith
  31.2    Certification Under Section 302 of Sarbanes-Oxley by Kathleen C. Jones, Principal Financial Officer    Filed herewith
  32.1    Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley    Filed herewith
  99.1    Charter of the Audit Committee    Exhibit 99.1 to Form 10-K filed on March 28, 2014
  99.2    Charter of the Compensation Committee    Exhibit 99.2 to Form 10-K filed on March 28, 2014
101.INS    XBRL Instance Document    Filed herewith
101.SCH    XBRL Taxonomy Extension Schema Document    Filed herewith
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document    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

 

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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 13, 2014

   

Date

 

 

By:

 

 

/s/ Sammie D. Dixon, Jr.

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

November 13, 2014

   

Date

 

 

By:

 

 

/s/ Kathleen C. Jones

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

 

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