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EX-31.1 - EXHIBIT 31.1 - Prime Meridian Holding Coex_201167.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended

  September 30, 2020

 

or

 

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

 

For the transition period from

 

to

 

 

Commission File Number:

        333-191801

 

PRIME MERIDIAN HOLDING COMPANY


(Exact Name of registrant as specified in its charter)

 

Florida

 

27-2980805                         

 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number) 

   

1471 Timberlane Road; Tallahassee, Florida

 

32312              

 

(Address of principal executive offices)

(Zip Code)           

 

(850) 907-2300


(Registrant’s telephone number, including area code)

 

Not Applicable


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

 

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

 

Explanatory Note: Prime Meridian Holding Company has filed, on a voluntary basis, all Securities Exchange Act of 1934 reports for the preceding 12 months.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No

 

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

Large accelerated filer:     ☐ Accelerated filer:                       ☐
Nonaccelerated filer:         ☐  Smaller reporting company:     ☒
  Emerging growth company:     ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Securities Registered pursuant to Section 12(b) of the Act:

 

Title of each class

None.

Trading Symbol(s)

N/A

Name of exchange on which registered

N/A

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 5, 2020: 3,119,271

 

 

 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

PAGE

   

Item 1. Financial Statements

 
   

Condensed Consolidated Balance Sheets September 30, 2020 (unaudited) and December 31, 2019

2

   

Condensed Consolidated Statements of Earnings Three and Nine Months ended September 30, 2020 and 2019 (unaudited)

3

   

Condensed Consolidated Statements of Comprehensive Income Three and Nine Months ended September 30, 2020 and 2019 (unaudited)

4

   

Condensed Consolidated Statements of Stockholders’ Equity Three and Nine Months ended September 30, 2020 and 2019 (unaudited)

5-6

   

Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 2020 and 2019 (unaudited)

7

   

Notes to Condensed Consolidated Financial Statements (unaudited)

8-26

   

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

27-38

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

38

   

Item 4. Controls and Procedures

39

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

40

   

Item 1A. Risk Factors

40

   

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

40

   

Item 3. Defaults Upon Senior Securities

40

   

Item 4. Mine Safety Disclosures

40

   

Item 5. Other Information

40

   

Item 6. Exhibits

41-42

   

Signatures

43

   

Certifications

 

 

 

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 
(in thousands)     (Unaudited)          

Assets

               

Cash and due from banks

  $ 7,540     $ 9,024  

Federal funds sold

    12,191       24,613  

Interest-bearing deposits

    36,273       41,445  

Total cash and cash equivalents

    56,004       75,082  

Debt securities available for sale

    61,060       61,333  

Loans held for sale

    14,900       6,193  

Loans, net of allowance for loan losses of $5,833 and $4,414

    465,642       337,710  

Federal Home Loan Bank stock

    493       404  

Premises and equipment, net

    8,210       7,744  
Right of use lease asset     3,517       3,669  

Accrued interest receivable

    1,879       1,137  

Bank-owned life insurance

    6,621       6,501  
Other real estate owned     234       -  

Other assets

    2,103       1,088  

Total assets

  $ 620,663     $ 500,861  
                 

Liabilities and Stockholders' Equity

               

Liabilities:

               

Noninterest-bearing demand deposits

  $ 150,494     $ 96,807  

Savings, NOW and money-market deposits

    340,931       272,283  

Time deposits

    63,822       69,174  

Total deposits

    555,247       438,264  
Other borrowings     -       1,254  

Official checks

    1,577       606  
Operating lease liability     3,625       3,758  

Other liabilities

    1,563       1,111  

Total liabilities

    562,012       444,993  

Stockholders' equity:

               

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

    -       -  

Common stock, $.01 par value; 9,000,000 shares authorized, 3,117,842 and 3,191,288 issued and outstanding

    31       32  

Additional paid-in capital

    38,492       39,456  

Retained earnings

    18,714       16,180  

Accumulated other comprehensive income

    1,414       200  

Total stockholders' equity

    58,651       55,868  

Total liabilities and stockholders' equity

  $ 620,663     $ 500,861  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

2

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Earnings (Unaudited)

  

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands, except per share amounts)

 

2020

   

2019

   

2020

   

2019

 

Interest income:

                               

Loans

  $ 5,101     $ 4,179     $ 14,374     $ 11,951  
Securities     311       338       1,123       967  
Other     43       402       337       1,111  

Total interest income

    5,455       4,919       15,834       14,029  

Interest expense:

                               
Deposits     710       934       2,346       2,598  

Other borrowings

    -       5       31       5  
Total interest expense     710       939       2,377       2,603  

Net interest income

    4,745       3,980       13,457       11,426  
Provision for loan losses     621       241       2,484       585  

Net interest income after provision for loan losses

    4,124       3,739       10,973       10,841  

Noninterest income:

                               

Service charges and fees on deposit accounts

    48       74       156       213  

Debit card/ATM revenue, net

    91       67       251       193  

Mortgage banking revenue

    224       151       591       454  

Income from bank-owned life insurance

    40       46       120       136  

Gain on sale of debt securities available for sale

    -       -       -       7  

Other income

    167       32       233       104  

Total noninterest income

    570       370       1351       1,107  

Noninterest expense:

                               

Salaries and employee benefits

    1,498       1,575       4,662       4,711  
Occupancy and equipment     377       373       1,096       1,075  

Professional fees

    89       79       263       262  

Marketing

    97       172       398       565  

FDIC assessment

    68       6       187       93  

Software maintenance, amortization and other

    205       188       599       507  
Other     415       436       1,301       1,305  

Total noninterest expense

    2,749       2,829       8,506       8,518  

Earnings before income taxes

    1,945       1,280       3,818       3,430  

Income taxes

    464       316       901       835  

Net earnings

  $ 1,481     $ 964     $ 2,917     $ 2,595  
                                 

Earnings per common share:

                               

Basic

  $ 0.47     $ 0.31     $ 0.92     $ 0.83  

Diluted

    0.47       0.31       0.92       0.83  

Cash dividends per common share(1)

    -       -       0.12       0.12  

 

(1) Annual cash dividends were paid during the first quarters of 2019 and 2020 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Net earnings

  $ 1,481     $ 964     $ 2,917     $ 2,595  

Other comprehensive income:

                               

Change in unrealized gain on debt securities available for sale:

                               

Unrealized gain arising during the period

    79       173       1,626       1,254  
Reclassification adjustment for realized gain     -       -       -       (7 )

Net change in unrealized gain

    79       173       1,626       1,247  

Deferred income tax expense on above change

    (21 )     (44 )     (412 )     (316 )

Total other comprehensive income

    58       129       1,214       931  

Comprehensive income

  $ 1,539     $ 1,093     $ 4,131     $ 3,526  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months Ended September 30, 2019

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 

(dollars in thousands)

                                               

Balance at December 31, 2018

    3,138,945     $ 31     $ 38,330     $ 13,015     $ (556 )   $ 50,820  

Net earnings for the three months ended March 31, 2019 (unaudited)

    -       -       -       867       -       867  

Dividends paid (unaudited)

    -       -       -       (377 )     -       (377 )

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

    -       -       -       -       320       320  

Common stock issued as compensation to directors (unaudited)

    595       -       12       -       -       12  

Issuance of restricted stock (unaudited)

    3,600       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       42       -       -       42  

Balance at March 31, 2019 (unaudited)

    3,143,140     $ 31     $ 38,384     $ 13,505     $ (236 )   $ 51,684  

Net earnings for the three months ended June 30, 2019 (unaudited)

    -       -       -       764       -       764  

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

    -       -       -       -       482       482  

Stock options exercised (unaudited)

    300       -       3       -       -       3  

Common stock issued as compensation to directors (unaudited)

    1,016       -       19       -       -       19  

Stock-based compensation (unaudited)

    -       -       44       -       -       44  

Balance at June 30, 2019 (unaudited)

    3,144,456     $ 31     $ 38,450     $ 14,269     $ 246     $ 52,996  

Net earnings for the three months ended September 30, 2019 (unaudited)

    -       -       -       964       -       964  

Private Placement Offering net of cost

    44,600       1       872       -       -       873  

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

    -       -       -       -       129       129  

Common stock issued as compensation to directors (unaudited)

    975       -       20       -       -       20  

Stock-based compensation (unaudited)

    -       -       45       -       -       45  

Balance at September 30, 2019 (unaudited)

    3,190,031     $ 32     $ 39,387     $ 15,233     $ 375     $ 55,027  

 

 

 

 

5

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months Ended September 30, 2020

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 

(dollars in thousands)

                                               

Balance at December 31, 2019 (unaudited)

    3,191,288     $ 32     $ 39,456     $ 16,180     $ 200     $ 55,868  

Net earnings for the three months ended March 31, 2020 (unaudited)

    -       -       -       716       -       716  

Dividends paid (unaudited)

    -       -       -       (383 )     -       (383 )

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

    -       -       -       -       611       611  

Stock options exercised (unaudited)

    2,000       -       25       -       -       25  

Common stock retirement (unaudited)

    (82,784 )     (1 )     (1,216 )     -       -       (1,217 )

Common stock issued as compensation to directors (unaudited)

    995       -       20       -       -       20  

Issuance of restricted stock (unaudited)

    3,835       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       51       -       -       51  

Balance at March 31, 2020 (unaudited)

    3,115,334     $ 31     $ 38,336     $ 16,513     $ 811     $ 55,691  

Net earnings for the three months ended June 30, 2020 (unaudited)

    -       -       -       720       -       720  

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

    -       -       -       -       545       545  

Common stock issued as compensation to directors (unaudited)

    1,165       -       21       -       -       21  

Stock-based compensation (unaudited)

    -       -       55       -       -       55  

Balance at June 30, 2020 (unaudited)

    3,116,499     $ 31     $ 38,412     $ 17,233     $ 1,356     $ 57,032  
Net earnings for the three months ended September 30, 2020 (unaudited)     -       -       -       1,481       -       1,481  

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

    -       -       -       -       58       58  

Common stock issued as compensation to directors (unaudited)

    1,343       -       25       -       -       25  

Stock-based compensation (unaudited)

    -       -       55       -       -       55  

Balance at September 30, 2020 (unaudited)

    3,117,842     $ 31     $ 38,492     $ 18,714     $ 1,414     $ 58,651  

 

 

 

 

6

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flow (Unaudited)

 

   

Nine Months Ended

 
   

September 30,

 

(in thousands)

 

2020

   

2019

 

Cash flows from operating activities:

               

Net earnings

  $ 2,917     $ 2,595  

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

               

Depreciation and amortization

    496       499  

Provision for loan losses

    2,484       585  

Net amortization of deferred loan costs (fees)

    5       (68 )

Gain on sale of debt securities available for sale

    -       (7 )

Amortization of premiums and discounts on debt securities available for sale

    313       218  

Gain on sale of loans held for sale

    (591 )     (454 )

Proceeds from the sale of loans held for sale

    107,456       63,996  

Loans originated as held for sale

    (115,572 )     (66,682 )

Stock-based compensation expense

    227       182  

Income from bank-owned life insurance

    (120 )     (136 )

Net increase in accrued interest receivable

    (742 )     (39 )

Net change in operating leases

    19       82  

Net increase in other assets

    (1,427 )     (143 )

Net increase in other liabilities and official checks

    1,423       173  

Net cash (used in) provided by operating activities

    (3,112 )     801  

Cash flows from investing activities:

               

Loan originations, net of principal repayments

    (130,655 )     (26,211 )

Purchase of debt securities available for sale

    (13,726 )     (20,740 )

Principal repayments of debt securities available for sale

    11,963       4,721  

Proceeds from sale of debt securities available for sale

    -       4,245  

Maturities and calls of debt securities available for sale

    3,349       2,421  

Purchase of Federal Home Loan Bank stock

    (89 )     (49 )

Purchase of premises and equipment

    (962 )     (3,630 )

Net cash used in investing activities

    (130,120 )     (39,243 )

Cash flows from financing activities:

               

Net increase in deposits

    116,983       72,130  
Change in other borrowings     (1,254 )     2,053  

Proceeds from stock options exercised

    25       3  
Common stock retirement     (1,217 )     873  

Common stock dividends paid

    (383 )     (377 )

Net cash provided by financing activities

    114,154       74,682  

Net (decrease) increase in cash and cash equivalents

    (19,078 )     36,240  

Cash and cash equivalents at beginning of period

    75,082       48,038  

Cash and cash equivalents at end of period

  $ 56,004     $ 84,278  

Supplemental disclosure of cash flow information

               

Cash paid during the period:

               

Interest

  $ 2,399     $ 2,594  

Income taxes

  $ 1,025     $ 1,065  

Noncash transactions:

               

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

  $ 1,214     $ 931  
Loans transferred to other real estate owned   $ 234     $ -  
Right of use lease assets obtained in exchange for operating lease liabilities   $ -     $ 3,818  
                 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

7

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

(1)

General

 

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

 

The accounting and financial reporting policies of the Company conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the banking industry. The condensed consolidated financial statements in the Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all necessary adjustments for a fair presentation of the Company’s consolidated financial position and consolidated results of operations. All adjustments were of a normal and recurring nature. The condensed consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by GAAP for complete financial presentation and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the SEC on March 24, 2020. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the full year or any future period.

 

Comprehensive Income. GAAP generally requires that recognized revenue, expenses, gains and losses be included in earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on debt securities available for sale, are reported as a separate component of the equity section of the condensed consolidated balance sheet, such items along with net earnings, are components of comprehensive income. The only component of other comprehensive income is the net change in the unrealized gain on debt securities available for sale.

 

Stock-Based Compensation. The Company expenses the fair value of stock options and restricted stock granted. The Company recognizes stock-based compensation expense in the condensed consolidated statements of earnings over the vesting period.

 

Mortgage Banking Revenue. Mortgage banking revenue includes gains and losses on the sale of mortgage loans originated for sale and wholesale brokerage fees, net of commissions and deferred loan costs. The Company recognizes mortgage banking revenue from mortgage loans originated in the condensed consolidated statements of earnings upon sale of the loans.

 

Debit Card / ATM Revenue. Debit card/ATM revenue primarily includes interchange income from client use of consumer and business debit cards. Interchange income is paid by a merchant bank to the card-issuing bank through the interchange network. Interchange fees are set by the credit card associations and based on cardholder purchase volumes and purchase types. Also included in debit card/ATM revenue are ATM foreign fee income and ATM non-client ACH credits. This revenue line is shown net of debit card fees and ATM program expenses.

 

Reclassifications. Certain reclassifications of prior period amounts have been made to conform to the current period presentation.

 

Derivatives. The Company enters into interest rate swaps in order to provide commercial loan clients the ability to swap from variable to fixed interest rates.  Under these agreements, the Company enters into a fixed-rate loan with a client in addition to a swap agreement.  This swap agreement effectively converts the client’s variable rate loan into a fixed rate.  The Company then enters into a matching swap agreement with a third-party dealer in order to offset its exposure on the client swap.  The Company does not use derivatives for trading purposes. The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives. 

 

Recent Accounting Standards Update.

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for its circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the condensed consolidated financial statements. Additionally, the ASU amends the accounting for credit losses on debt securities available for sale and purchased financial assets with credit deterioration. The new guidance was originally set to be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.  However, on October 16, 2019, FASB approved an Accounting Standards Update that grants private companies, non-for-profit organizations and certain small public companies until January, 2023 to implement this ASU. The Company is classified as a small reporting company who would qualify for this additional time to implement this ASU.  The Company is still in the process of determining the effect of the ASU on its condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 removes, modifies, and adds certain disclosure requirements associated with fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods, within those fiscal years, beginning after December 15, 2019. The removed and modified disclosures will be adopted on a prospective basis. Early adoption was permitted upon issuance of this ASU. The implementation had no significant impact on the Company's condensed consolidated Financial Statements.

 

(continued)

 

8

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(2)

Debt Securities Available for Sale

 

Debt securities are classified according to management's intent. The amortized cost of debt securities and fair values are as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(in thousands)

                               

At September 30, 2020

                               

U.S. Government agency securities

  $ 169     $ 3     $ -     $ 172  

Municipal securities

    10,959       627       -       11,586  

Mortgage-backed securities

    42,694       1,379       (28 )     44,045  

Asset-backed securities

    5,343       -       (86 )     5,257  

Total

  $ 59,165     $ 2,009     $ (114 )   $ 61,060  
                                 

At December 31, 2019

                               

U.S. Government agency securities

  $ 408     $ -     $ (1 )   $ 407  

Municipal securities

    9,332       81       (72 )     9,341  

Mortgage-backed securities

    45,499       401       (97 )     45,803  
Asset-backed securities     5,825       14       (57 )     5,782  

Total

  $ 61,064     $ 496     $ (227 )   $ 61,333  

 

The following table summarizes the sale of debt securities available for sale.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2020

   

2019

   

2020

   

2019

 

Proceeds from sale of debt securities

  $ -     $ -     $ -     $ 4,245  

Gross gains

    -       -       -       27  

Gross losses

    -       -       -       (20 )

Net gain on sale of debt securities

  $ -     $ -     $ -     $ 7  

 

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

 

   

Less Than Twelve Months

   

Over Twelve Months

 
   

Gross

           

Gross

         
   

Unrealized

   

Fair

   

Unrealized

   

Fair

 
   

Losses

   

Value

   

Losses

   

Value

 

(in thousands)

                               

At September 30, 2020

                               

Mortgage-backed securities

  $ (19 )   $ 4,234     $ (9 )   $ 1,633  
Asset-backed securities     (9 )     1,692       (77 )     3,565  

Total

  $ (28 )   $ 5,926     $ (86 )   $ 5,198  
                                 

At December 31, 2019

                               

U.S. Government agency securities

  $ (1 )   $ 407     $ -     $ -  

Municipal securities

    (72 )     3,814       -       -  

Mortgage-backed securities

    (56 )     4,629       (41 )     4,115  

Asset-backed securities

    (57 )     3,901       -       -  

Total

  $ (186 )   $ 12,751     $ (41 )   $ 4,115  

 

(continued)

 

9

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)

Debt Securities Available for Sale, Continued

 

The unrealized losses at September 30, 2020 and December 31, 2019 on ten and thirteen securities, respectively, were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. Debt securities available for sale measured at fair value on a recurring basis are summarized below:

 

           

Fair Value Measurements Using

 
           

Quoted Prices

                 
           

In Active

   

Significant

         
           

Markets for

   

Other

   

Significant

 
           

Identical

   

Observable

   

Unobservable

 
   

Fair

   

Assets

   

Inputs

   

Inputs

 
   

Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

(in thousands)

                               

At September 30, 2020

                               

U.S. Government agency securities

  $ 172     $ -     $ 172     $ -  

Municipal securities

    11,586       -       11,586       -  
Mortgage-backed securities     44,045       -       44,045       -  
Asset-backed securities     5,257       -       5,257       -  

Total

  $ 61,060     $ -     $ 61,060     $ -  
                                 

At December 31, 2019

                               

U.S. Government agency securities

  $ 407     $ -     $ 407     $ -  

Municipal securities

    9,341       -       9,341       -  

Mortgage-backed securities

    45,803       -       45,803       -  

Asset-backed securities

    5,782       -       5,782       -  

Total

  $ 61,333     $ -     $ 61,333     $ -  

 

The scheduled maturities of debt securities are as follows:

 

   

At September 30, 2020

 
   

Amortized

   

Fair

 
   

Cost

   

Value

 

(in thousands)

               

Due in one to five years

  $ 169     $ 172  

Due in five to ten years

    3,567       3,837  

Due after ten years

    12,735       13,006  

Mortgage-backed securities

    42,694       44,045  

Total

  $ 59,165     $ 61,060  

 

(continued)

 

10

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(3)

Loans

 

Segments and classes of loans, excluding loans held for sale, are as follows:

 

   

At September 30,

   

At December 31,

 

(in thousands)

 

2020

   

2019

 

Real estate mortgage loans:

               

Commercial

  $ 126,840     $ 94,728  

Residential and home equity

    145,894       135,913  

Construction

    36,996       33,583  

Total real estate mortgage loans

    309,730       264,224  
                 

Commercial loans

    156,787       69,770  

Consumer and other loans

    6,572       7,631  

Total loans

    473,089       341,625  
                 

Add (deduct):

               

Net deferred loan (fees) costs

    (1,614 )     499  

Allowance for loan losses

    (5,833 )     (4,414 )

Loans, net

  $ 465,642     $ 337,710  

 

(continued)

 

11

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

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

 

 

   

Real Estate Mortgage Loans

                                 
           

Residential

                   

Consumer

                 
           

and Home

           

Commercial

   

and Other

   

Unallocated

         

(in thousands)

 

Commercial

   

Equity

   

Construction

   

Loans

   

Loans

   

Reserves

   

Total

 

Three Month Period Ended September 30, 2020

                                                       

Beginning balance

  $ 1,213     $ 1,637     $ 514     $ 1,536     $ 112     $ 236     $ 5,248  

Provision (credit) for loan losses

    208       48       (63 )     95       10       323       621  

Net (charge-offs) recoveries

    -               -       8       (44 )     -       (36 )

Ending balance

  $ 1,421     $ 1,685     $ 451     $ 1,639     $ 78     $ 559     $ 5,833  

Three Month Period Ended September 30, 2019

                                                       

Beginning balance

  $ 813     $ 1,458     $ 425     $ 1,225     $ 85     $ -     $ 4,006  

Provision (credit) for loan losses

    48       17       76       76       24       -       241  

Net (charge-offs) recoveries

    -       -       -       (260 )     (5 )     -       (265 )

Ending balance

  $ 861     $ 1,475     $ 501     $ 1,041     $ 104     $ -     $ 3,982  
                                                         

Nine Month Period Ended September 30, 2020

                                                       

Beginning balance

  $ 1,046     $ 1,573     $ 415     $ 1,284     $ 96     $ -     $ 4,414  

Provision (credit) for loan losses

    375       160       36       1,323       31       559       2,484  

Net (charge-offs) recoveries

    -       (48 )     -       (968 )     (49 )     -       (1,065 )

Ending balance

  $ 1,421     $ 1,685     $ 451     $ 1,639     $ 78     $ 559     $ 5,833  

Nine Month Period Ended September 30, 2019

                                                       

Beginning balance

  $ 917     $ 1,397     $ 391     $ 876     $ 80     $ -     $ 3,661  

Provision (credit) for loan losses

    (56 )     78       110       423       30       -       585  

Net (charge-offs) recoveries

    -       -       -       (258 )     (6 )     -       (264 )

Ending balance

  $ 861     $ 1,475     $ 501     $ 1,041     $ 104     $ -     $ 3,982  
                                                         

At September 30, 2020

                                                       

Individually evaluated for impairment:

                                                       

Recorded investment

  $ -     $ 667     $ -     $ 648     $ -     $ -     $ 1,315  

Balance in allowance for loan losses

  $ -     $ -     $ -     $ 258     $ -     $ -     $ 258  

Collectively evaluated for impairment:

                                                       

Recorded investment

  $ 126,840     $ 145,227     $ 36,996     $ 156,139     $ 6,572     $ -     $ 471,774  

Balance in allowance for loan losses

  $ 1,421     $ 1,685     $ 451     $ 1,381     $ 78     $ 559     $ 5,575  
                                                         

At December 31, 2019

                                                       

Individually evaluated for impairment:

                                                       

Recorded investment

  $ 611     $ 965     $ -     $ 1,631     $ 13     $ -     $ 3,220  

Balance in allowance for loan losses

  $ -     $ 15     $ -     $ 386     $ 13     $ -     $ 414  

Collectively evaluated for impairment:

                                                       

Recorded investment

  $ 94,117     $ 134,948     $ 33,583     $ 68,139     $ 7,618     $ -     $ 338,405  

Balance in allowance for loan losses

  $ 1,046     $ 1,558     $ 415     $ 898     $ 83     $ -     $ 4,000  

 

 

(continued)

 

12

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

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

 

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

 

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

 

Residential and Home Equity. The Company offers first and second one-to-four family mortgage loans and home equity lines of credit; the collateral for these loans is generally the clients' owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers' financial condition. The nonowner-occupied investment properties are more similar in risk to commercial real estate loans, and therefore, are underwritten by assessing the property’s income potential and appraised value. In both cases, we underwrite the borrower’s financial condition and evaluate his or her global cash flow position. Borrowers may be affected by numerous factors, including job loss, illness, or other personal hardship. As part of our product mix, the Bank offers both portfolio and secondary market mortgages; portfolio loans generally are based on a 1-year, 3-year, 5-year, or 7-year adjustable rate mortgage; while 15-year or 30-year fixed-rate loans are generally sold in the secondary market.

 

Construction. Typically, these loans have a construction period of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to a term loan with a maturity of one to ten years. This portion of our loan portfolio includes loans to small and midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties, and residential developments. This type of loan is also made to individual clients for construction of single-family homes in our market area. An independent appraisal is used to determine the value of the collateral and confirm that the ratio of the loan principal to the value of the collateral will not exceed policies of the Bank. As the construction project progresses, loan proceeds are requested by the borrower to complete phases of construction and funding is only disbursed after the project has been inspected by a third-party inspector or experienced construction lender. Risks associated with construction loans include fluctuations in the value of real estate, project completion risk, and changes in market trends. The ability of the construction loan borrower to finance the loan or sell the property upon completion of the project is another risk factor that also may be affected by changes in market trends since the initial funding of the loan.

 

Commercial Loans. The Company offers a wide range of commercial loans, including business term loans, equipment financing, lines of credit, and U.S. Small Business Administration (SBA) loans, including Paycheck Protection Program ("PPP") loans. Small-to-medium sized businesses, retail, and professional establishments, make up our target market for commercial loans. Our Relationship Managers primarily underwrite these loans based on the borrower's ability to service the loan from cash flow. Lines of credit and loans secured by accounts receivable and/or inventory are monitored periodically by our staff. Loans secured by "all business assets," or a "blanket lien" are typically only made to highly qualified borrowers due to the nonspecific nature of the collateral and do not require a formal valuation of the business collateral. When commercial loans are secured by specifically identified collateral, then the valuation of the collateral is generally supported by an appraisal, purchase order, or third-party physical inspection. Personal guarantees of the principals of business borrowers are usually required. Equipment loans generally have a term of five years or less and may have a fixed or variable rate; we use conservative margins when pricing these loans. Working capital loans generally do not exceed one year and typically, they are secured by accounts receivable, inventory, and personal guarantees of the principals of the business. The Bank currently offers SBA 504 and SBA 7A loans. SBA 504 loans provide financing for major fixed assets such as real estate and equipment while SBA 7A loans are generally used to establish a new business or assist in the acquisition, operation, or expansion of an existing business. With both SBA loan programs, there are set eligibility requirements and underwriting standards outlined by SBA that can change as the government alters its fiscal policy. Significant factors affecting a commercial borrower's creditworthiness include the quality of management and the ability both to evaluate changes in the supply and demand characteristics affecting the business' markets for products and services and to respond effectively to such changes. These loans may be made unsecured or secured, but most are made on a secured basis. Risks associated with our commercial loan portfolio include local, regional, and national market conditions. Other factors of risk could include changes in the borrower's management and fluctuations in collateral value. Additionally, there may be refinancing risk if a commercial loan includes a balloon payment which must be refinanced or paid off at loan maturity. In reference to our risk management process, our commercial loan portfolio presents a higher risk profile than our consumer real estate and consumer loan portfolios. Therefore, we require that all loans to businesses must have a clearly stated and reasonable payment plan to allow for timely retirement of debt, unless secured by liquid collateral or as otherwise justified. 

 

 

 

(continued)

 

13

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

 Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

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

 

 

The following summarizes the loan credit quality:

 

   

Real Estate Mortgage Loans

                         
           

Residential

                   

Consumer

         
           

and Home

           

Commercial

   

and Other

         

(in thousands)

 

Commercial

   

Equity

   

Construction

   

Loans

   

Loans

   

Total

 

At September 30, 2020

                                               

Grade:

                                               

Pass

  $ 124,495     $ 144,458     $ 36,148     $ 155,502     $ 6,549     $ 467,152  

Special mention

    2,345       769       848       425       23       4,410  

Substandard

    -       667       -       860       -       1,527  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

  $ 126,840     $ 145,894     $ 36,996     $ 156,787     $ 6,572     $ 473,089  
                                                 

At December 31, 2019

                                               

Grade:

                                               

Pass

  $ 92,586     $ 133,351     $ 32,374     $ 66,649     $ 7,576     $ 332,536  

Special mention

    1,531       1,597       1,209       1,197       55       5,589  

Substandard

    611       965       -       1,924       -       3,500  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

  $ 94,728     $ 135,913     $ 33,583     $ 69,770     $ 7,631     $ 341,625  

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

(continued)

 

14

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

 

Age analysis of past due loans is as follows:

 

   

Accruing Loans

                 
                   

Greater Than

                                 
   

30-59 Days

   

60-89 Days

   

90 Days

   

Total Past

           

Nonaccrual

   

Total

 

(in thousands)

 

Past Due

   

Past Due

   

Past Due

   

Due

   

Current

   

Loans

   

Loans

 

At September 30, 2020

                                                       

Real estate mortgage loans:

                                                       

Commercial

  $ -       -     $ -     $ -     $ 126,840     $ -     $ 126,840  

Residential and home equity

    -       -       -       -       145,227       667       145,894  

Construction

    -       -       -       -       36,996       -       36,996  

Commercial loans

    -       -       -       -       156,139       648       156,787  

Consumer and other loans

    -       -       -       -       6,572       -       6,572  

Total

  $ -     $ -     $ -     $ -     $ 471,774     $ 1,315     $ 473,089  
                                                         

At December 31, 2019

                                                       

Real estate mortgage loans:

                                                       

Commercial

  $ -     $ -     $ -     $ -     $ 94,728     $ -     $ 94,728  

Residential and home equity

    569       -       -       569       134,379       965       135,913  

Construction

    82       -       -       82       33,501       -       33,583  

Commercial loans

    87       -       -       87       68,057       1,626       69,770  

Consumer and other loans

    -       5       -       5       7,626       -       7,631  

Total

  $ 738     $ 5     $ -     $ 743     $ 338,291     $ 2,591     $ 341,625  

 

(continued)

 

15

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The following summarizes the amount of impaired loans:

 

   

With No Related

                                                 
   

Allowance Recorded

   

With an Allowance Recorded

   

Total

 
           

Unpaid

           

Unpaid

                   

Unpaid

         
           

Contractual

           

Contractual

                   

Contractual

         
   

Recorded

   

Principal

   

Recorded

   

Principal

   

Related

   

Recorded

   

Principal

   

Related

 

(in thousands)

 

Investment

   

Balance

   

Investment

   

Balance

   

Allowance

   

Investment

   

Balance

   

Allowance

 

At September 30, 2020

                                                               

Real estate mortgage loans:

                                                               

Residential and home equity

  $ 667     $ 667     $ -     $ -     $ -     $ 667     $ 667     $ -  

Commercial loans

    -       -       648       648       258       648       648       258  
Total   $ 667     $ 667     $ 648     $ 648     $ 258     $ 1,315     $ 1,315     $ 258  
                                                                 

At December 31, 2019

                                                               

Real estate mortgage loans:

                                                               

Commercial real estate

  $ 611     $ 611     $ -     $ -     $ -     $ 611     $ 611     $ -  

Residential and home equity

    716       716       249       249       15       965       965       15  
Commercial loans     508       508       1,123       1,123       386       1,631       1,631       386  

Consumer and other loans

    -       -       13       13       13       13       13       13  

Total

  $ 1,835     $ 1,835     $ 1,385     $ 1,385     $ 414     $ 3,220     $ 3,220     $ 414  

 

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

 

   

Three Months Ended September 30,

 
   

2020

   

2019

 
   

Average

   

Interest

   

Interest

   

Average

   

Interest

   

Interest

 
   

Recorded

   

Income

   

Income

   

Recorded

   

Income

   

Income

 

(in thousands)

 

Investment

   

Recognized

   

Received

   

Investment

   

Recognized

   

Received

 

Real estate mortgage loans:

                                               

Commercial

  $ 27     $ -     $ -     $ 611     $ 8     $ 8  

Residential and home equity

    933       -       -       1,106       -       1  

Commercial loans

    850       5       5       1,362       1       6  

Consumer

    26       -       -       8       -       -  

Total

  $ 1,836     $ 5     $ 5     $ 3,087     $ 9     $ 15  

 

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 
   

Average

   

Interest

   

Interest

   

Average

   

Interest

   

Interest

 
   

Recorded

   

Income

   

Income

   

Recorded

   

Income

   

Income

 

(in thousands)

 

Investment

   

Recognized

   

Received

   

Investment

   

Recognized

   

Received

 

Real estate mortgage loans:

                                               

Commercial

  $ 322     $ 12     $ 11     $ 611     $ 24     $ 24  

Residential and home equity

    915       -       -       658       5       7  

Commercial loans

    1,232       12       12       616       5       12  

Consumer

    17       -       -       11       -       -  

Total

  $ 2,486     $ 24     $ 23     $ 1,896     $ 34     $ 43  

 

There were no collateral dependent loans measured at fair value on a nonrecurring basis at September 30, 2020 or 2019.

 

(continued)

 

16

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the creditor grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction in interest rate or the forgiveness of principal and/or accrued interest. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for loan losses calculation. During the period of national emergency related to the COVID-19 pandemic, the banking regulatory agencies have confirmed with FASB that certain short-term loan modifications made in response to the pandemic's effects on borrowers should not be considered to be TDRs. The Company entered into no new TDRs during the three and nine months ended September 30, 2020, one new TDR during the three months ended September 30, 2019, and three new TDRs during the nine months ended September 30, 2019. 

   

Three Months Ended September 30,

 
   

2020

   

2019

 
           

Pre-

   

Post-

   

Current

           

Pre-

   

Post-

   

Current

 
           

Modification

   

Modification

   

Modification

           

Modification

   

Modification

   

Modification

 
   

Number

   

Outstanding

   

Outstanding

   

Outstanding

   

Number

   

Outstanding

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

   

Recorded

   

of

   

Recorded

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

   

Investment

 

( dollars in thousands)

                                                               

Troubled Debt Restructurings -

                                                               

Modified principal

                                                               
Commercial     -     $ -     $ -     $ -       1     $ 204     $ 204     $ 204  

Total

  $ -     $ -     $ -     $ -       1     $ 204     $ 204     $ 204  

 

 

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 
           

Pre-

   

Post-

   

Current

           

Pre-

   

Post-

   

Current

 
           

Modification

   

Modification

   

Modification

           

Modification

   

Modification

   

Modification

 
   

Number

   

Outstanding

   

Outstanding

   

Outstanding

   

Number

   

Outstanding

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

   

Recorded

   

of

   

Recorded

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

   

Investment

 

( dollars in thousands)

                                                               

Troubled Debt Restructurings -

                                                               

Modified principal

                                                               
Construction     -     $ -     $ -     $ -       -     $ -     $ -     $ -  
Residential and Home Equity     -       -       -       -       1       66       66       66  

Commercial

    -       -       -       -       2       264       264       264  

Total

  $ -     $ -     $ -     $ -       3     $ 330     $ 330     $ 330  

 

At September 30, 2020, the Company had $66,000 in loans identified as TDRs. The TDRs entered into during the three and nine months ended September 30, 2019 did not subsequently default during those periods.

 

 

(4)

Regulatory Capital

 

The Bank is subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

(continued)

 

17

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(4)

Regulatory Capital, Continued

 

The Bank is subject to the Basel III capital level threshold requirements under the Prompt Corrective Action regulations. These regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.

 

The Bank is subject to the capital conservation buffer rules which place limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers. In order to avoid these limitations, a bank must hold a capital conservation buffer above its minimum risk-based capital requirements. As of September 30, 2020, the Bank’s capital conservation buffer exceeded the minimum requirement of 2.50%.

 

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2020, that the Bank meets all capital adequacy requirements to which it is subject.

 

As of September 30, 2020, the Bank is well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage percentages as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and percentages are also presented in the following table.

 

                   

For Capital Adequacy

   

For Well Capitalized

 
   

Actual

   

Purposes

   

Purposes

 

(dollars in thousands)

 

Amount

   

Percentage

   

Amount

   

Percentage

   

Amount

   

Percentage

 

As of September 30, 2020

                                               

Tier 1 Leverage Capital

  $ 56,120       9.06 %   $ 24,772       4.00 %   $ 30,966       5.00 %

Common Equity Tier 1 Risk-based Capital

    56,120       13.79       18,314       4.50       26,454       6.50  

Tier 1 Risk-based Capital

    56,120       13.79       24,419       6.00       32,559       8.00  

Total Risk-based Capital

    61,216       15.04       32,559       8.00       40,699       10.00  
                                                 

As of December 31, 2019

                                               

Tier 1 Leverage Capital

  $ 46,752       9.31 %   $ 20,084       4.00 %   $ 25,105       5.00 %

Common Equity Tier 1 Risk-based Capital

    46,752       13.24       15,885       4.50       22,945       6.50  

Tier 1 Risk-based Capital

    46,752       13.24       21,180       6.00       28,240       8.00  

Total Risk-based Capital

    51,165       14.49       28,240       8.00       35,300       10.00  

 

(continued)

 

18

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(5)

Earnings Per Share

 

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three and nine months ended September 30, 2020 and 2019, outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method.

 

   

2020

   

2019

 
           

Weighted-

   

Per

           

Weighted-

   

Per

 
           

Average

   

Share

           

Average

   

Share

 

(dollars in thousands, except per share amounts)

 

Earnings

   

Shares

   

Amount

   

Earnings

   

Shares

   

Amount

 

Three Months Ending September 30:

                                               

Basic EPS:

                                               

Net earnings

  $ 1,481       3,117,623     $ 0.47     $ 964       3,147,696     $ 0.31  
Effect of dilutive securities-incremental shares from assumed conversion of options             57                       3,625          

Diluted EPS:

                                               

Net earnings

  $ 1,481       3,117,680     $ 0.47     $ 964       3,151,321     $ 0.31  
Nine Months Ending September 30:                                                
Basic EPS:                                                
Net earnings   $ 2,917       3,139,183     $ 0.92     $ 2,595       3,144,082     $ 0.83  
Effect of dilutive securities-incremental shares from assumed conversion of options             73                       3,685          
Diluted EPS:                                                
Net earnings   $ 2,917       3,139,256     $ 0.92     $ 2,595       3,147,767     $ 0.83  

 

(continued)

 

19

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(6)

Stock Benefit Plans

 

2015 Stock Incentive Compensation Plan

 

The 2015 Stock Incentive Compensation Plan (the “2015 Plan”) was approved by the shareholders at the Company’s annual meeting of shareholders on May 20, 2015 and permits the Company to grant the Company’s key employees and directors stock options, stock appreciation rights, performance shares, and phantom stock. Under the 2015 Plan, the number of shares which may be issued is 500,000, but in no instance more than 15% of the issued and outstanding shares of the Company’s common stock.

 

As of September 30, 2020, 301,457 stock options and 7,435 restricted stock awards have been granted under the 2015 Plan and 173,144 shares are available to be issued as restricted stock or underlying options. A summary of the stock option activity for the nine months ended September 30, 2020 and 2019 is as follows:

 

                   

Weighted-

         
           

Weighted-

   

Average

         
           

Average

   

Remaining

   

Aggregate

 
   

Number of

   

Exercise

   

Contractual

   

Intrinsic

 
   

Options

   

Price

   

Term (years)

   

Value

 

Outstanding at December 31, 2018

    263,457     $ 19.78                  

Options granted

    22,000     $ 20.21                  
Options forfeited     (13,180 )     20.09                  
Outstanding at September 30, 2019     272,277     $ 19.80                  
Options forfeited     (10 )   $ 20.09                  

Outstanding at December 31, 2019

    272,267     $ 19.80                  
Options granted     15,000     $ 20.05                  
Options forfeited     (170 )     20.09                  

Outstanding at September 30, 2020

    287,097     $ 19.82       7.16     $ -  

Exercisable at September 30, 2020

    120,787     $ 19.43       6.29     $ -  

 

The fair value of shares vested and recognized as compensation expense was $43,000 and $38,000 for the three months ended September 30, 2020 and 2019, and $127,000 and $117,000 for the nine months ended September 30, 2020 and 2019, respectively. The deferred tax benefit related to stock options was $9,000 and $6,000 for the three months ended September 30, 2020 and 2019 and $27,000 and $16,000 for the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020, there was $459,000 in unrecognized compensation expense related to unvested share-based compensation arrangements granted under the 2015 Plan, with an average remaining life of 2.80 years.  

(continued) 

 

20

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)

Stock Benefit Plans, Continued

 

The fair value of each option granted during the nine months ended September 30, 2020 and 2019 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:  

 

    September 30,  
   

2020

   

2019

 

Weighted average risk-free interest rate

    1.46 %     1.93 %

Expected dividend yield

    0.60 %     0.39 %

Expected stock volatility

    14.69 %     9.90 %

Expected life in years

    6.5       6.5  

Per share fair value of options issued during period

  $ 3.26     $ 2.74  

 

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.    

 

2007 Stock Option Plan 

 

As of May 20, 2015, no further grants will be made under the 2007 Stock Option Plan (the “2007 Plan”). Unexercised stock options that were granted under the 2007 Plan will remain outstanding and will expire under the terms of the individual stock grant. A summary of the activity in the Company’s 2007 Stock Option Plan for the nine months ended September 30, 2020 and 2019 is as follows:

 

                   

Weighted-

         
           

Weighted-

   

Average

         
           

Average

   

Remaining

   

Aggregate

 
   

Number of

   

Exercise

   

Contractual

   

Intrinsic

 
   

Options

   

Price

   

Term (years)

   

Value

 

Outstanding at December 31, 2018

    4,700     $ 11.37                  

Options exercised

    (300 )   $ 10.00                  
Outstanding at September 30, 2019     4,400     $ 11.46                  
Options forfeited     (2,000 )   $ 10.72                  
Options exercised     (200 )     10.00                  

Outstanding at December 31, 2019

    2,200     $ 12.27                  
Options exercised     (2,000 )   $ 12.50                  

Outstanding at September 30, 2020

    200     $ 10.00       0.26     $ 1,000  

Exercisable at September 30, 2020

    200     $ 10.00       0.26     $ 1,000  

 

At September 30, 2020, there was no unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the 2007 plan.

 

(continued)

 

21

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(6)

Stock Benefit Plans, Continued

 

Directors’ Plan

 

In 2012, the Company’s Board of Directors and shareholders adopted the Directors’ Plan. The Directors’ Plan permits the Company’s and the Bank’s non-employee directors to elect to receive any compensation to be paid to them in shares of the Company’s common stock. Pursuant to the Directors’ Plan, each non-employee director is permitted to make an election to receive shares of stock instead of cash. To encourage directors to elect to receive stock, the Directors’ Plan provides that if a director elects to receive stock, he or she will receive in common stock 110% of the amount of cash fees set by the Board or the Compensation and Nominating Committee. The value of stock to be awarded pursuant to the Directors’ Plan will be the closing price of a share of common stock as traded on the Over-the-Counter Bulletin Board, or a price set by the Board or its Compensation and Nominating Committee, acting in good faith, but in no case less than fair market value. The maximum number of shares to be issued pursuant to the Directors’ Plan is limited to 74,805 shares. For the three months ended September 30, 2020 and 2019, our directors received 1,343 and 975 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $25,000 and $20,000, respectively.  For the nine months ended September 30, 2020 and 2019, our directors received 3,503 and 2,586 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $66,000 and $51,000, respectively. At September 30, 2020, 48,137 shares remained available for grant.

 

Restricted Stock

 

During the nine months ended September 30, 2020 and 2019, the Company issued 3,835 and 3,600 restricted common stock shares, respectively, to its CEO as part of his bonus incentive earned for the Company’s performance in 2019 and 2018, respectively. One-third of the balance vests each year beginning on February 21, 2020 for the shares issued in 2019 and on January 16, 2021 for the shares issued in 2020.  Holders of restricted stock have the right to vote and the right to receive dividends declared on common stock, if any. A summary of restricted stock transactions follows:

 

           

Wtd-Avg

         
           

Grant-Date

         
   

Number of

   

Fair Value

   

Grant-Date Fair

 
   

Shares

   

per Share

   

Value

 
                         

Non-vested restricted stock outstanding at December 31, 2018

    -     $ -     $ -  

Restricted stock issued in 2019

    3,600     $ 18.52     $ 67,000  

Non-vested restricted stock outstanding at September 30, 2019 and December 31, 2019

    3,600     $ 18.52     $ 67,000  

Restricted stock issued in 2020

    3,835     $ 20.40     $ 78,000  

Restricted stock shares vested in 2020

    (1,200 )     (18.52 )     (22,000 )

Non-vested restricted stock outstanding at September 30, 2020

    6,235     $ 19.64     $ 123,000  

 

During the three months ended September 30, 2020 and 2019, the Company recognized $12,000 and $7,000, respectively, as expense.  For the nine months ended September 30, 2020 and 2019, the Company recognized $34,000 and $14,000 respectively, as expense. At September 30, 2020, the Company had $92,000 in unrecognized expense to be recognized over a weighted-average period of 2.02 years.

 

 

(7)

Federal Home Loan Bank Advances and Other Borrowings

 

Federal Home Loan Bank (“FHLB”) advances are collateralized by a blanket lien on qualifying residential real estate, commercial real estate, home equity lines of credit and multi-family loans. Under this blanket lien, the Company could borrow up to $62.2 million at September 30, 2020. At September 30, 2020 and December 31, 2019, the Company had no outstanding loans under this line.

 

During the third quarter of 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The initial interest rate on the line of credit is 3.25%. The interest rate will adjust daily to the then-current Wall Street Journal Prime Rate. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Company's wholly-owned subsidiary, the Bank. From time to time, the Bank sells loan participations to TNB on market terms. There were no outstanding borrowings under this line of credit at September 30, 2020. 

 

22

 

 

(8)

Derivative Financial Instruments

 

The Company has entered into interest rate swaps in order to provide commercial real estate loan clients the ability to swap from variable to fixed interest rates.  Under these agreements, the Company enters into a variable rate loan with a client at a specified index (Wall Street Journal Prime Lending Rate) in addition to a borrower swap agreement.  This swap agreement effectively converts the client’s variable rate loan into a fixed rate.  The Company then enters into a matching swap agreement with a third-party dealer counterparty in order to offset its exposure on the borrower swap. These interest rate swaps are considered derivative financial instruments.  These derivative instruments involve both credit and market risk.  The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based.  Notional amounts do not represent direct credit exposures.  Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any, over the life of the contract.  Such differences, which represent the fair value of the derivative instruments, are included in “other assets” and “other liabilities” on the Company’s condensed consolidated balance sheets, and the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows.  The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives.   

 

   

At September 30,

 
   

2020

   

2019

 
dollars in thousands                

Notional amount - interest rate swaps:

               

Stand-alone derivatives

  $ 21,200     $ -  
                 

Weighted-average pay rate - interest rate swaps

    3.68 %     -  

Weighted-average receive rate - interest rate swaps

    3.00 %     -  

Weighted-average maturity (in years) - interest rate swaps

    14.8       -  
                 

Net realized fair value adjustments:

               

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

  $ 189       -  

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

  $ (189 )     -  

 

The Company is party to a collateral support agreement with its dealer counterparty.  Such agreement requires that the Company or the dealer counterparty to maintain collateral based on the fair values of derivative instruments.  In the event of default by a counterparty the non-defaulting counterparty would be entitled to the collateral.  At September 30, 2020, the Company maintained a $300,000 cash deposit as collateral for its derivative instruments, which is included in “interest-bearing deposits” on the Company’s condensed consolidated balance sheets.  The Company does not require borrower counterparties to post cash collateral based on the fair values of borrower interest rate swaps.  In the event of default of a borrower counterparty wherein the fair value of the derivative instrument is owed to the Company, the fair value is collected through a real property foreclosure or liquidation.     

 

23

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(9)

Fair Value of Financial Instruments

 

The estimated fair values and fair value measurement method with respect to the Company's financial instruments were as follows:

 

           

At September 30, 2020

   

At December 31, 2019

 
           

Carrying

   

Fair

   

Carrying

   

Fair

 

(in thousands)

 

Level

   

Amount

   

Value

   

Amount

   

Value

 

Financial assets:

                                       

Cash and cash equivalents

    1     $ 56,004     $ 56,004     $ 75,082     $ 75,082  

Debt securities available for sale

    2       61,060       61,060       61,333       61,333  

Loans held for sale

    3       14,900       15,137       6,193       6,296  

Loans, net

    3       465,642       481,058       337,710       342,435  

Federal Home Loan Bank stock

    3       493       493       404       404  

Accrued interest receivable

    3       1,879       1,879       1,137       1,137  
Derivative contract assets     3       189       189       -       -  
                                         

Financial liabilities:

                                       

Deposits

    3       555,247       555,988       438,624       439,208  
Other borrowings     3       -       -       1,254       1,254  
Derivative contract liabilities     3       189       189       -       -  
                                         

Off-Balance Sheet Items

    3       -       -       -       -  

 

Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.

 

During the third quarter of 2020, the Company put an interest rate swap program in place to offer its clients fixed rates on floating rate loans.  The Company's interest rate swaps are reported at fair value utilizing models provided by an independent, third-party and observable market data.  When entering into an interest rate swap agreement, the Company is exposed to fair value changes due to interest rate movements, and also to the potential nonperformance of our contract. 

 

(9)

Off-Balance Sheet Financial Instruments

 

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

 

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

 

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

 

24

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(9)

Off-Balance Sheet Financial Instruments, Continued

 

Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a client to a third party. These letters of credit are primarily issued to support third-party borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. In the event the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client. Some of the Company’s standby letters of credit are secured by collateral and those secured letters of credit totaled $648,000 at September 30, 2020.

 

Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our third-party credit card company, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on certain accounts plus 10%. The maximum potential amount of future payments we could be required to make is represented by the dollar amount disclosed in the table below.

 

Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded.

 

The maximum potential amount of future payments we could be required to make for off-balance sheet financial instruments is represented by the dollar amount disclosed in the table below.

 

   

At September 30, 2020

 

(in thousands)

       

Commitments to extend credit

  $ 20,823  

Construction loans in process

  $ 16,507  

Unused lines of credit

  $ 58,323  

Standby financial letters of credit

  $ 2,400  

Standby performance letters of credit

  $ 318  

Guaranteed accounts

  $ 1,372  

 

(continued)

 

25

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(10)

Contingency

 

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets and significantly increased unemployment levels.  The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, the duration of the pandemic, and actions taken by governmental authorities to slow the spread of the disease or to mitigate its effects.

 

The Company took action to prepare its employees, support its clients, and help its communities.  The Company has supported small business owners by making loans through the Small Business Administration Paycheck Protection Program ("PPP").  As of September 30, 2020, the Bank had originated 911 PPP loans for a total dollar amount of $82.8 million. These loans are 100% guaranteed by the Small Business Administration (the "SBA"). The Company has the option to fund PPP loans through the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility (the "PPPLF"). Loans pledged to secure PPPLF advances will be excluded from the calculations of the Bank's regulatory capital ratios.  At September 30, 2020, there were no outstanding borrowings under the PPPLF. 


Management expects that credit quality deterioration directly related to the pandemic could materialize in the future. Through September 30, 2020, the Company had received and granted 70 requests for payment deferrals on loans totaling $42.4 million. Approximately 88.9% of the forbearance requests were for loans secured by real estate. As of September 30, 2020, 62 of the 70 original loan modification requests, totaling $37.4 million, had reverted back to original pre-modification terms and are being paid as agreed.  Details of the remaining eight loans still under modification agreements are outlined in the table below. 

 

Active Loan Deferral Requests

September 30, 2020

(dollars in thousands)                                                           Percent  
                      Average       Cumulative       Cumulative       Cumulative       Weighted       of  
   

Number of

   

Dollar

   

Balance

   

Interest

   

Interest

   

Payment

   

Average

   

Total Loan

 
   

Loans

   

Amount Loans

   

Loans

   

Only

   

Only

   

Deferral

   

LTV Loans

   

Collateral

 

Collateral or Loan Type

 

Modified

   

Modified

   

Modified

   

3 Months

   

4-6 Months

   

6 Months

   

Modified

   

or Type

 

1-4 family owner occupied

    2     $ 1,468     $ 734     $ -     $ -     $ 1,468       69.0 %     29.0 %
                                                                 

CRE owner occupied

    2       1,032       516       241       -       791       54.0       21.0  
                                                                 

CRE non-owner occupied

    1       1,737       1,737       -       1,737       -       59.0       35.0  
                                                                 

Commercial & Industrial

    1       43       43       43       -       -       N/A       1.0  
                                                                 

Construction/Land

    1       712       712       -       712       -       22.0       14.0  
                                                                 

Consumer

    1       18       18       -       18       -       N/A       -  

Total

    8     $ 5,010     $ 626     $ 284     $ 2,467     $ 2,259       -       100.0 %
                                                                 

 

 

Details about the Company's PPP loan portfolio are included in the following table:

 

PPP Loans by Industry

September 30, 2020

 

                         
(dollars in thousands)   Total     Avg. Loan     % of  

Category

 

Balance

   

Balance

   

Total

 

Hospitality

  $ 6,424     $ 73       7.8 %

Real estate services and construction

    13,324       69       16.2  

Wholesale and retail trade and manufacturing

    10,920       85       13.2  

Financial, professional, and information services

    23,118       108       28.1  

Administrative, religious and other services

    16,800       80       20.4  

Healthcare services

    11,826       158       14.3  

TOTAL

  $ 82,412     $ 91       100.0 %
                         

 

 

26

 

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, 2019. Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of results that may be attained for any other period. The following discussion and analysis present our financial condition and results of operations on a consolidated basis, however, because we conduct all of our material business operations through the Bank, the discussion and analysis relate to activities primarily conducted at the subsidiary level.

 

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

 

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

 

 

local, regional, and national economic and business conditions;

 

banking laws, compliance, and the regulatory environment;

 

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

 

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

 

litigation, tax, and other regulatory matters;

 

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

 

quality and composition of our loan or investment portfolios;

 

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

 

competition;

 

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

 

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

 

consumer spending, borrowing and savings habits;

 

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

 

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

 

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

 

application and interpretation of accounting principles and guidelines.

 

27

 

 

GENERAL

 

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

 

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

 

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

 

   

At or for the

 
   

Nine Months

   

Year

   

Nine Months

 
   

Ended

   

Ended

   

Ended

 
   

September 30, 2020

   

December 31, 2019

   

September 30, 2019

 

Average equity as a percentage of average assets

    9.76 %     11.64 %     11.88 %

Equity to total assets at end of period

    9.45       11.15       11.37  

Return on average assets(1)

    0.67       0.78       0.78  

Return on average equity(1)

    6.84       6.66       6.60  

Noninterest expense to average assets(1)

    1.95       2.45       2.61  

Nonperforming loans to total loans at end of period

    0.28       0.76       0.82  
                         

 

(1) Annualized for the nine months ended September 30, 2020 and 2019

 

CRITICAL ACCOUNTING POLICIES

 

Our critical accounting policies which involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities and used in preparation of the Condensed Consolidated Financial Statements as of September 30, 2020, have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

COVID-19 RESPONSE

 

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets and significantly increased unemployment levels.  The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, the duration of the pandemic, and actions taken by governmental authorities to slow the spread of the disease or to mitigate its effects.

 

The Company took action during the first half of the year to prepare its employees, support its clients, and help its communities.  The Company is supporting small business owners by making loans through the Small Business Administration (the "SBA") Paycheck Protection Program ("PPP").  As of September 30, 2020, the Bank had originated 911 PPP loans for a total dollar amount of $82.8 million. These loans are 100% guaranteed by the SBA. The Company has the option to fund PPP loans through the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility (the "PPPLF") and loans pledged to secure PPPLF advances will be excluded from the calculations of the Bank's regulatory capital ratios.  Although the Bank initially funded a portion of its PPP loans with PPPLF advances, there were no outstanding borrowings under the facility at September 30, 2020. 


Management expects that credit quality deterioration directly related to the pandemic could materialize in the future. Through September 30, 2020, the Company had received and granted 70 requests for payment deferrals on loans totaling $42.4 million. Approximately 88.9% of the forbearance requests were for loans secured by real estate. As of September 30, 2020, 62 of the 70 original loan modification requests, totaling $37.4 million, had reverted back to original pre-modification terms and are being paid as agreed.  Details of the remaining eight loans still under modification agreements are outlined in the table below. 

 

28

 

Active Loan Deferral Requests

September 30, 2020

 

(dollars in thousands)                                                             Percent  
                      Average       Cumulative       Cumulative       Cumulative       Weighted       of  
   

Number of

   

Dollar

   

Balance

   

Interest

   

Interest

   

Payment

   

Average

   

Total Loan

 
   

Loans

   

Amount Loans

   

Loans

   

Only

   

Only

   

Deferral

   

LTV Loans

   

Collateral

 

Collateral or Loan Type

 

Modified

   

Modified

   

Modified

   

3 Months

   

4-6 Months

   

6 Months

   

Modified

   

or Type

 

1-4 family owner occupied

    2     $ 1,468     $ 734     $ -     $ -     $ 1,468       69.0 %     29.0 %
                                                                 

CRE owner occupied

    2       1,032       516       241       -       791       54.0       21.0  
                                                                 

CRE non-owner occupied

    1       1,737       1,737       -       1,737       -       59.0       35.0  
                                                                 

Commercial & Industrial

    1       43       43       43       -       -       N/A       1.0  
                                                                 

Construction/Land

    1       712       712       -       712       -       22.0       14.0  
                                                                 

Consumer

    1       18       18       -       18       -       N/A       -  

Total

    8     $ 5,010     $ 626     $ 284     $ 2,467     $ 2,259       -       100.0 %
                                                                 

 

Details about the company's PPP loan portfolio are included in the following table:

 

PPP Loans by Industry

September 30, 2020

 

                         
(dollars in thousands)   Total     Avg. Loan     % of  

Category

 

Balance

   

Balance

   

Total

 

Hospitality

  $ 6,424     $ 73       7.8 %

Real estate services and construction

    13,324       69       16.2  

Wholesale and retail trade and manufacturing

    10,920       85       13.2  

Financial, professional, and information services

    23,118       108       28.1  

Administrative, religious and other services

    16,800       80       20.4  

Healthcare services

    11,826       158       14.3  

TOTAL

  $ 82,412     $ 91       100.0 %
                         

 

 

 

 

 

 

29

 

FINANCIAL CONDITION 

 

Average assets totaled $582.1 million for the nine months ended September 30, 2020, an increase of $140.5 million, or 31.8%, over the comparable period in 2019, with the majority of growth coming from loans.  PPP loans accounted for approximately 43.3% of the growth in the average loan balance. 

 

Investment Securities. Our primary objective in managing our investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We use the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income, to provide liquidity to meet funding requirements, and to provide collateral for pledging to secure the deposit of public funds at the Bank. At September 30, 2020, our debt securities available for sale investment portfolio included U.S. government agency securities, municipal securities, mortgage-backed securities, and asset-backed securities.  As of the same date, this portfolio had a fair market value of $61.1 million and an amortized cost value of $59.2 million. At September 30, 2020 and December 31, 2019, our investment securities portfolio represented approximately 9.8% and 12.2% of our total assets, respectively. The average yield on the average balance of investment securities for the nine months ended September 30, 2020 was 2.30%, compared to 2.57% for the comparable period in 2019.   

 

Loans. Our primary earning asset is our loan portfolio and our primary source of income is the interest earned on the loan portfolio. Our loan portfolio consists of commercial real estate loans, construction loans, and commercial loans made to small-to-medium sized companies and their owners, as well as residential real estate loans, including first and second mortgages, and consumer loans. Our goal is to maintain a high-quality portfolio of loans through sound underwriting and lending practices. We work diligently to attract new lending clients through direct solicitation by our loan officers, utilizing relationship networks from existing clients, competitive pricing, and innovative structure. Our loans are priced based upon the degree of risk, collateral, loan amount, and maturity.

 

The Company’s gross loan portfolio increased $131.5 million since December 31, 2019, with approximately $82.4 million of that increase coming from PPP loans. At September 30, 2020, PPP loans comprised 17.4% of total loans.  Management expects that the majority of these loans will be forgiven, however, legislation for the forgiveness process is still being considered at the date of publication of this Form 10-Q.  In total, approximately 65.5% of the total loan portfolio was collateralized by commercial and residential real estate mortgages at September 30, 2020, compared to 77.3% at December 31, 2019. Subtracting out the PPP loans, the percentage of the total loan portfolio collateralized by commercial and residential real estate mortgages is 79.3% at September 30, 2020

 

Nonperforming assets.  Five loans totaling $1.3 million were deemed to be impaired under the Company’s policy at September 30, 2020, with reserves on impaired loans totaling $258,000. At September 30, 2020, the Company also reported $234,000 in other real estate owned. The Company’s nonperforming assets represented 0.25% of total assets at September 30, 2020 and 0.52% at December 31, 2019.  We generally place loans on nonaccrual status when they become 90 days or more past due, unless they are well secured and in the process of collection. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When a loan is placed on nonaccrual status, any interest previously accrued, but not collected, is reversed from income. At September 30, 2020, the Bank had five nonaccrual loans in the aggregate amount of $1.3 million, compared to twelve nonaccrual loans totaling $2.6 million at December 31, 2019. Accounting standards require the Company to identify loans as impaired loans when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We implement these standards in our monthly review of the adequacy of the allowance for loan losses and identify and value impaired loans in accordance with GAAP.  

 

Allowance for Loan Losses. Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. During the third quarter, the Bank allocated $621,000 to the allowance for loan losses. The current quarter's provision was impacted primarily by increase in general reserves resulting from over $23.0 million in loan growth since June 30, 2020 and potential credit deterioration related to the COVID-19 pandemic. The Company's five impaired loans carried aggregate specific reserves of $258,000 at September 30, 2020 and the Company assigned an additional $323,000 to unallocated reserves in anticipation of possible COVID-19 related credit deterioration.  The Company took $36,000 in net charge-offs during the third quarter of 2020, or 0.03% annualized of average loans, compared to $265,000, or 0.34% annualized of average loans, in the third quarter of 2019.  None of the charge-offs in 2020 relate to the COVID-19 pandemic. Management believes that the allowance for loan losses, which was $5.8 million or 1.49% of gross loans (excluding PPP loans) at September 30, 2020 is adequate to cover losses inherent in the loan portfolio.  

 

Deposits. Deposits are the major source of the Company’s funds for lending and other investment purposes. Total deposits at September 30, 2020 were $555.2 million, an increase of $117.0 million, or 26.7%, from December 31, 2019, with growth coming from both noninterest-bearing and interest-bearing accounts. The average balance of noninterest-bearing deposits accounted for 25.8% of the average balance of total deposits for the nine months ended September 30, 2020, compared to 22.8% for the nine months ended September 30, 2019. While management expects some shrinkage in deposits as PPP funds are spent, management expects the majority of the increase in total deposits will remain long-term. 

 

Borrowings. The Company has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”) and pledges its qualified loans as collateral which would allow the Company, as of September 30, 2020, to borrow up to $62.2 million. In addition, the Company maintains unsecured lines of credit with correspondent banks that totaled $21.8 million at September 30, 2020. There were no loans outstanding under any of these lines at September 30, 2020. The Company did make use of the Federal Reserve's Paycheck Protection Program Lending Facility (the "PPPLF") during the second quarter of 2020, funding $51.1 million of PPP loans through this facility. However, the Company elected to prepay the borrowings under the PPPLF with excess liquidity prior to June 30, 2020.  The Company maintains its ability to fund PPP loans through this facility should it choose to do so in the future. 

 

During the third quarter of 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The initial interest rate on the line of credit is 3.25%. The interest rate will adjust daily to the then-current Wall Street Journal Prime Rate. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Company's wholly-owned subsidiary, the Bank. From time to time, the Bank sells loan participations to TNB on market terms. There were no outstanding borrowings under this line of credit at September 30, 2020. 

 

 

 

30

 

 

RESULTS OF OPERATIONS

 

Net interest income constitutes the principal source of income for the Bank and results from the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities. The principal interest-earning assets are investment securities and loans. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts, savings deposits, and money-market accounts. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities as well as the interest rates earned or paid on these assets and liabilities. The following tables set forth information regarding: (i) the total dollar amount of interest and dividend income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin; and (vi) weighted-average yields and rates. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities. The yields and costs depicted in the table include the amortization of fees, which are considered to constitute adjustments to yields.

 

As shown in the following two tables, the Company's average yield on interest-earning assets has declined 82 basis points comparing the third quarter of 2020 to the third quarter of 2019 and 70 basis points comparing the nine months ended September 30, 2020 to the nine months ended September 30, 2019.  The Federal Reserve has cut rates five times since June 30, 2019 and the effects became fully evident in the Company's net interest margin in the second quarter of 2020.  The added volume of PPP loans, which yield 2.53% inclusive of recognized fees and costs, also contributed to the lower net interest margin.  

 

   

For the Three Months Ended September 30,

 
   

2020

   

2019

 
           

Interest

                   

Interest

         
   

Average

   

and

   

Yield/

   

Average

   

and

   

Yield/

 

(dollars in thousands)

 

Balance

   

Dividends

   

Rate(5)

   

Balance

   

Dividends

   

Rate(5)

 

Interest-earning assets:

                                               

Loans(1)

  $ 459,984     $ 5,000       4.35 %   $ 313,232     $ 4,093       5.23 %

Loans held for sale

    11,624       101       3.48       7,527       86       4.57  

Debt securities available for sale

    64,032       311       1.94       53,507       338       2.53  

Other(2)

    60,729       43       0.28       64,794       402       2.48  

Total interest-earning assets

    596,369     $ 5,455       3.66       439,060     $ 4,919       4.48  

Noninterest-earning assets

    22,485                       26,699                  

Total assets

  $ 618,854                     $ 465,759                  
                                                 

Interest-bearing liabilities:

                                               

Savings, NOW and money-market deposits

  $ 336,751     $ 420       0.50 %   $ 255,563     $ 629       0.98 %

Time deposits

    64,967       290       1.79       56,000       305       2.18  

Total interest-bearing deposits

    401,718       710       0.71       311,563       934       1.20  
Other borrowings     -       -       -       1,249       5       1.60  

Total interest-bearing liabilities

    401,718     $ 710       0.71       312,812     $ 939       1.20  

Noninterest-bearing deposits

    152,026                       93,981                  

Noninterest-bearing liabilities

    7,431                       4,981                  

Stockholders' equity

    57,679                       53,985                  

Total liabilities and stockholders' equity

  $ 618,854                     $ 465,759                  
                                                 
Net earning assets   $ 194,651                     $ 126,248                  

Net interest income

          $ 4,745                     $ 3,980          

Interest rate spread (3)

                    2.95 %                     3.28 %

Net interest margin(4)

                    3.18 %                     3.63 %
                                                 

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

    148.45 %                     140.36 %                

 

(1)   Includes nonaccrual loans

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

(3)   Interest rate spread is the difference between the total interest-earning asset yield and the rate paid on total interest-bearing liabilities. 

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

(5)   Annualized

 

 

 

31

 

 

   

For the Nine Months Ended September 30,

 
   

2020

   

2019

 
           

Interest

                   

Interest

         
   

Average

   

and

   

Yield/

   

Average

   

and

   

Yield/

 

(dollars in thousands)

 

Balance

   

Dividends

   

Rate(5)

   

Balance

   

Dividends

   

Rate(5)

 

Interest-earning assets:

                                               

Loans(1)

  $ 413,764     $ 14,108       4.55 %   $ 302,398     $ 11,725       5.17 %

Loans held for sale

    9,163       266       3.87       6,559       226       4.59  

Debt securities available for sale

    65,205       1,123       2.30       50,181       967       2.57  

Other(2)

    70,665       337       0.64       58,292       1,111       2.54  

Total interest-earning assets

    558,797     $ 15,834       3.78       417,430     $ 14,029       4.48  

Noninterest-earning assets

    23,257                       24,174                  

Total assets

  $ 582,054                     $ 441,604                  
                                                 

Interest-bearing liabilities:

                                               

Savings, NOW and money-market deposits

  $ 308,518     $ 1,375       0.59 %   $ 247,340     $ 1,828       0.99 %

Time deposits

    67,378       971       1.92       49,140       770       2.09  

Total interest-bearing deposits

    375,896       2,346       0.83       296,480       2,598       1.17  

Other borrowings

    11,425       31       0.36       432       5       1.54  

Total interest-bearing liabilities

    387,321     $ 2,377       0.82       296,912     $ 2,603       1.17  
Noninterest-bearing deposits     130,783                       87,937                  

Noninterest-bearing liabilities

    7,116                       4,314                  

Stockholders' equity

    56,834                       52,441                  

Total liabilities and stockholders' equity

  $ 582,054                     $ 441,604                  
                                                 

Net earning assets

  $ 171,476                     $ 120,518                  

Net interest income

          $ 13,457                     $ 11,426          

Interest rate spread (3)

                    2.96 %                     3.31 %

Net interest margin(4)

                    3.21 %                     3.65 %
                                                 

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

    144.27 %                     140.59 %                

 

 

(1)   Includes nonaccrual loans

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

(3)   Interest rate spread is the difference between the total interest-earning asset yield and the rate paid on total interest-bearing liabilities. 

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

(5)   Annualized

 

 

 

32

 

Comparison of Operating Results for the Three Months Ended September 30, 2020 and 2019

 

                                 

Earnings Summary

                               

(dollars in thousands)

                               
                   

Change 3Q'20 vs. 3Q'19

 
   

3Q'20

   

3Q'19

   

Amount

   

Percentage

 

Net Interest Income

  $ 4,745     $ 3,980     $ 765       19.2 %

Provision for loan losses

    621       241       380       157.7  

Noninterest income

    570       370       200       54.1  

Noninterest expense

    2,749       2,829       (80 )     (2.8 )

Income Taxes

    464       316       148       46.8  

Net Income

  $ 1,481     $ 964     $ 517       53.6 %
                                 

 

Compared to the same period a year ago, the $517,000 increase in net earnings reflects higher interest income on loans and higher noninterest income (driven by mortgage revenue and other income) and lower interest and noninterest expense.  An increase in the provision from loan losses and income tax expense partially offset these positive contributions to net income. 

 

Net Interest Income

 

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

 

                                 

Interest income

                               

(dollars in thousands)

                               
                   

Change 3Q'20 vs. 3Q'19

 
   

3Q'20

   

3Q'19

   

Amount

   

Percentage

 

Interest income:

                               

Loans

  $ 5,101     $ 4,179     $ 922       22.1 %

Securities

    311       338       (27 )     (8.0 )

Other

    43       402       (359 )     (89.3 )

Total interest income

  $ 5,455     $ 4,919     $ 536       10.9 %
                                 

 

Compared to the third quarter of 2019, the increase in net interest income reflects $146.8 million, or 46.9%, growth in average loan balances from the third quarter of 2019, with more than half of the loan growth coming from PPP loan originations in the second and third quarters of 2020.  Excluding PPP loans, the average loan balance still increased approximately $64.6 million, or 20.6%, from the same period last year, propelled mostly by the commercial real estate sector.  Volume growth was tempered by lower yields on all categories of interest-earning assets. 

 

                                 

Interest expense:

                               

(dollars in thousands)

                 

Change 3Q'20 vs. 3Q'19

 
   

3Q'20

   

3Q'19

   

Amount

   

Percentage

 

Total interest expense

  $ 710     $ 939     $

(229

)     (24.4 )%
                                 

 

Despite higher balances of interest-bearing liabilities, total interest expense declined $229,000 from the third quarter of 2019.  Management has strategically lowered interest rates on deposits resulting in a 49-basis-point decrease since the third quarter of 2019. 

 

 

 

33

 

 

Net Interest Margin

 

Compared to a year ago, dilution from PPP loans combined with lower market interest rates has negatively impacted the Company's net interest margin. Looking forward, management expects fluctuations in its net interest margin, in part, due to the uncertain timing and methods of PPP loans exiting the balance sheet and the resulting shift in the earning assets mix.

 

Provision for Loan Losses

 

The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market areas, and other factors related to our historic loss experience and the collectability of the loan portfolio. The Company reported a provision for loan losses of $621,000 for the quarter ended September 30, 2020, compared to $241,000 a year ago.  The Company took $36,000 in net charge-offs during the third quarter of 2020. These charge-offs were unrelated to the COVID-19 pandemic. The charge-offs, in conjunction with an increase in general reserves due to organic loan growth and a $323,000 addition to unallocated reserves in anticipation of possible COVID-19 related credit deterioration, all impacted the provision in the third quarter of 2020.  

 

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

 

                                 

Noninterest income

                               

(dollars in thousands)

                 

Change 3Q'20 vs. 3Q'19

 
   

3Q'20

   

3Q'19

   

Amount

   

Percentage

 

Service charges and fees on deposit accounts

  $ 48     $ 74     $ (26 )     (35.1 )%
Debit card/ATM revenue, net     91       67       24       35.8  

Mortgage banking revenue

    224       151       73       48.3  

Income from bank-owned life insurance

    40       46       (6 )     (13.0 )

Other income

    167       32       135       421.9  

Total noninterest income

  $ 570     $ 370     $ 200       54.1 %
                                 

 

Compared to the third quarter of 2019, growth in debit card/ATM net revenue, mortgage banking revenue, and other income significantly outweighed declines in income from bank-owned life insurance and service charges and fees on deposit accounts, resulting in the $200,000 increase year-over-year.  Increases in debit card/ATM net revenue largely stemmed from the Bank processing more debit card transactions, while the decline in service charges and fees from 2019 levels is attributed to slowed business activity resulting from the COVID-19 pandemic.  The mortgage team has reported strong results in 2020, already surpassing 2019 production by units, volume, and gain on sales revenue.  The increase in other income resulted primarily from the Company's addition of an interest rate hedging program which allows commercial loan clients to swap from variable to fixed interest rates. 

 

                                 

Noninterest expense

                               

(dollars in thousands)

                 

Change 3Q'20 vs. 3Q'19

 
   

3Q'20

   

3Q'19

   

Amount

   

Percentage

 

Salaries and employee benefits

  $ 1,498     $ 1,575     $ (77 )     (4.9 )%

Occupancy and equipment

    377       373       4       1.1  

Professional fees

    89       79       10       12.7  

Marketing

    97       172       (75 )     (43.6 )

FDIC Assessment

    68       6       62       1,033.3  

Software maintenance and amortization

    205       188       17       9.0  

Other

    415       436       (21 )     (4.8 )

Total noninterest expense

  $ 2,749     $ 2,829     $ (80 )     (2.8 )%
                                 

 

Deferred loan origination costs increased in the third quarter of 2020 due to portfolio loan growth and higher inventory of held-for-sale mortgage loans in the Bank's loan portfolio at quarter-end, causing a decline in salaries and employee benefits expense when compared to the third quarter of 2019.  During the quarter, the Company experienced a longer than normal holding period of held-for-sale loans, driven by a large volume of refinance activity in the general mortgage market.  In addition, the decreases in marketing expense and other noninterest expense are attributed to the COVID-19 pandemic which continues to limit travel and group activities. These savings were partially offset by the $62,000 increase in the FDIC assessment from the third quarter of 2019 when the Deposit Insurance Fund Reserve Ratio exceeded its 1.38% threshold and resulted in a credit towards the Bank's quarterly assessment. 

 

Income Taxes

 

Income taxes are based on amounts reported in the condensed consolidated statements of earnings after adjustments for nontaxable income and nondeductible expenses and consist of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income taxes were $464,000 for the three months ended September 30, 2020, compared to income taxes of $316,000 for the three months ended September 30, 2019, with the increase attributed to higher pre-tax earnings in 2020.

 

 

34

 

 

Comparison of Operating Results for the nine months ended September 30, 2020 and 2019

 

                                 

Earnings Summary

                               

(dollars in thousands)

                               
   

Nine Months Ended

   

Change 2020 vs. 2019

 
   

September 30, 2020

   

September 30, 2019

   

Amount

   

Percentage

 

Net Interest Income

  $ 13,457     $ 11,426     $ 2,031       17.8 %

Provision for loan losses

    2,484       585       1,899       324.6  

Noninterest income

    1,351       1,107       244       22.0  

Noninterest expense

    8,506       8,518       (12 )     (0.1 )

Income Taxes

    901       835       66       7.9  

Net Income

  $ 2,917     $ 2,595     $ 322       12.4 %
                                 

 

A 20.3% increase in interest income from loans, propelled by the origination of commercial real estate loans, combined with lower deposit funding costs, resulted in the 17.8% increase in net interest income for the nine months ended September 30, 2020 compared to the same period a year ago.  Offsetting this $2.0 million increase in net interest income is a $1.9 million increase in the provision for loan losses, due primarily to charge-off activity in the second quarter and $559,000 in unallocated reserves to account for potential credit deterioration associated with the COVID-19 global pandemic. 

 

                                 

Interest income

                               

(dollars in thousands)

                               
   

Nine Months Ended

   

Change 2020 vs. 2019

 
   

September 30, 2020

   

September 30, 2019

   

Amount

   

Percentage

 

Interest income:

                               

Loans

  $ 14,374     $ 11,951     $ 2,423       20.3 %

Securities

    1,123       967       156       16.1  

Other

    337       1,111       (774 )     (69.7 )

Total interest income

  $ 15,834     $ 14,029     $ 1,805       12.9 %
                                 

 

Comparing the nine-month period ended September 30, 2020 to the same period a year ago, growth in total interest income was driven by a higher volume of loans and partially offset by lower yields across most interest-earning asset categories.  Average loans increased $111.4 million from the same period year ago, with approximately 43.3% of the growth driven by PPP loan originations.  Excluding PPP loans, the average loan balance still increased 20.9%, or $63.2 million, from the nine-month period ending September 30, 2019. 

 

Interest expense:

                               

(dollars in thousands)

 

Nine Months Ended

   

Change 2020 vs. 2019

 
   

September 30, 2020

   

September 30, 2019

   

Amount

   

Percentage

 

Total interest expense

  $ 2,377     $ 2,603     $ (226 )     (8.7 %)
                                 

 

The 8.7% decrease in interest expense is mostly related to strategic decisions to reduce deposit rates given the decline in Federal funds rates during the period. Our cost of interest-bearing deposits decreased to 0.83% for the nine months ended September 30, 2020 from 1.17% for the nine months ended September 30, 2019.  

 

Net Interest Margin

 

Lower interest rates and dilution from PPP loans contributed materially to the lower net interest margin for the nine months ended September 30, 2020 Looking forward, management expects fluctuation in the net interest margin, in part, due to the uncertain timing and methods of PPP loans exiting the balance sheet and the resulting shift in the earning assets mix. 

 

Provision for Loan Losses

 

The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market areas, and other factors related to our historic loss experience and the collectability of the loan portfolio. The Company reported a provision for loan losses of $2.5 million for the nine months ended September 30, 2020, compared to $585,000 for the same period a year ago.  The Company took $1.1 million in net charge-offs (unrelated to the COVID-19 pandemic) during the nine months ended September 30, 2020 and year-to-date loan growth (excluding PPP loans) was approximately $23 million higher in 2020 than 2019. The year-to-date charge-offs, in conjunction with an increase in general and specific reserves and a $559,000 contribution to unallocated reserves in anticipation of possible COVID-19 related credit deterioration, resulted in the large increase in the provision for the nine months ended September 30, 2020.

 

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

 

   

35

 

 

                                 

Noninterest income

                               

(dollars in thousands)

 

Nine Months Ended

   

Change 2020 vs. 2019

 
   

September 30, 2020

   

September 30, 2019

   

Amount

   

Percentage

 

Service charges and fees on deposit accounts

  $ 156     $ 213     $ (57 )     (26.8 )%

Debit card/ATM revenue, net

    251       193       58       30.1  

Mortgage banking revenue

    591       454       137       30.2  

Income from bank-owned life insurance

    120       136       (16 )     (11.8 )

Gain on sale of securities available for sale

    -       7       (7 )     (100.0 )

Other income

    233       104       129       124.0  

Total noninterest income

  $ 1,351     $ 1,107     $ 244       22.0 %
                                 

 

Comparing the nine-month period ended September 30, 2020 to 2019, the $244,000 increase in noninterest income was driven by mortgage banking revenue and other income generated in the Company's new hedging program which allows commercial loan clients to swap from variable rates to fixed rates on their loans. The decrease in service charges and fees on deposit accounts reflects slower business activity in the pandemic while the $58,000 increase in debit card/ATM net revenue signifies an increased number of transactions.  

 

                                 
                                 

Noninterest expense

                               

(dollars in thousands)

 

Nine Months Ended

   

Change 2020 vs. 2019

 
   

September 30, 2020

   

September 30, 2019

   

Amount

   

Percentage

 

Salaries and employee benefits

  $ 4,662     $ 4,711     $ (49 )     (1.0 %)

Occupancy and equipment

    1,096       1,075       21       2.0  

Professional fees

    263       262       1       0.4  

Marketing

    398       565       (167 )     (29.6 )

FDIC Assessment

    187       93       94       101.1  

Software maintenance and amortization

    599       507       92       18.1  

Other

    1,301       1,305       (4 )     (0.3 )

Total noninterest expense

  $ 8,506     $ 8,518     $ (12 )     (0.1 %)
                                 

 

Noninterest expense stayed relatively flat comparing the two nine-month periods as increases in the FDIC assessment and software maintenance and amortization were offset by overall declines in salaries and employee benefits and marketing expense.  Increases in actual salaries and commissions were offset by higher deferred loan fees, in particular, deferred fees related to held-for-sale loans.  The increase in the FDIC assessment comes after the Company benefitted in 2019 from a credit toward the Bank's quarterly assessment when the Deposit Insurance Fund Reserve Ratio exceeded its 1.38% threshold.

 

Income Taxes

Income taxes are based on amounts reported in the condensed consolidated statements of earnings after adjustments for nontaxable income and nondeductible expenses and consist of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income taxes were $901,000 for the nine months ended September 30, 2020, compared to income taxes of $835,000 for the nine months ended September 30, 2019, with the increase attributed to higher pre-tax earnings in 2020.

 

36

 

 

LIQUIDITY

 

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

 

Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations, and capital. Additionally, as a commercial bank, we are expected to maintain an adequate liquidity reserve. The liquidity reserve may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and unpledged marketable securities such as United States government agency securities, municipal securities, and mortgage-backed securities.

 

The Bank also has external sources of funds through the FHLB, unsecured lines of credit with correspondent banks, a revolving line of credit, and the State of Florida’s Qualified Public Deposit Program (“QPD”). At September 30, 2020, the Bank had access to approximately $62.2 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $21.8 million in unsecured lines of credit maintained with correspondent banks and a $15 million revolving line of credit with TNB. As of September 30, 2020, we had no borrowings under any of these lines. Furthermore, some of our securities are pledged to collateralize certain deposits through our participation in the State of Florida’s QPD program. The market value of securities pledged to the QPD program was $17.1 million at September 30, 2020 compared to $8.8 million at December 31, 2019. Our primary liquid assets, excluding assets pledged to the QPD program, accounted for 16.1% and 25.5% of total assets at September 30, 2020 and December 31, 2019, respectively.

 

Our core deposits consist of noninterest-bearing accounts, NOW accounts, money-market accounts, time deposits $250,000 or less, and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and other large deposits. At September 30, 2020, total deposits were $555.2 million, of which $28.1 million were in certificates of deposits greater than $250,000, excluding Individual Retirement Accounts (IRAs). We maintain a Contingency Funding Plan (“CFP”) that identifies liquidity needs and weighs alternate courses of action designed to address those needs in emergency situations. We perform a monthly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands and do not know of any trends, events, or uncertainties that may result in a significant adverse effect on our liquidity position.

 

CAPITAL RESOURCES

 

Stockholders’ equity was $58.7 million at September 30, 2020 compared to $55.9 million at December 31, 2019.  As part of the Company's overall capital management plan, the Company initiated a share repurchase program of up to $2 million in the first quarter. As of September 30, 2020, the Company had repurchased 82,784 shares at a weighted average cost per share of $14.70 for a total of $1.2 million.  The program was suspended in late March and expired on June 30, 2020. Depending on market conditions and the Company's capital needs and planning, the Company may consider restarting a share repurchase program in the future. 

 

During the third quarter, the Company obtained a $15 million revolving line of credit with TNB. At its discretion, the Company may take draws on that line and contribute the proceeds as capital to the Bank.

 

At September 30, 2020, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations with a 9.06% Tier 1 Leverage Capital Ratio, a 13.79% Equity Tier 1 Risk-Based Capital Ratio, a 13.79% Tier 1 Risk-Based Capital Ratio, and a 15.04% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered “well capitalized.”

 

The following is a summary at September 30, 2020 and December 31, 2019 of the regulatory capital requirements to be “well capitalized” and the Bank’s capital position.

 

                   

For Capital Adequacy

   

For Well Capitalized

 
   

Actual

   

Purposes

   

Purposes

 

(dollars in thousands)

 

Amount

   

Percentage

   

Amount

   

Percentage

   

Amount

   

Percentage

 

As of September 30, 2020

                                               

Tier 1 Leverage Capital

  $ 56,120       9.06 %   $ 24,772       4.00 %   $ 30,966       5.00 %

Common Equity Tier 1 Risk-based Capital

    56,120       13.79       18,314       4.50       26,454       6.50  

Tier 1 Risk-based Capital

    56,120       13.79       24,419       6.00       32,559       8.00  

Total Risk-based Capital

    61,216       15.04       32,559       8.00       40,699       10.00  
                                                 

As of December 31, 2019

                                               

Tier 1 Leverage Capital

  $ 46,752       9.31 %   $ 20,084       4.00 %   $ 25,105       5.00 %

Common Equity Tier 1 Risk-based Capital

    46,752       13.24       15,885       4.50       22,945       6.50  

Tier 1 Risk-based Capital

    46,752       13.24       21,180       6.00       28,240       8.00  

Total Risk-based Capital

    51,165       14.49       28,240       8.00       35,300       10.00  

 

37

 

 

The Bank is also subject to the following capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations.

 

   

Threshold Ratios

 

Capital Category

  Total Risk-Based Capital Ratio     Tier 1 Risk-Based Capital Ratio     Common Equity Tier 1 Risk-Based Capital Ratio     Tier 1 Leverage Capital Ratio  
                         

Well capitalized

  10.00%     8.00%     6.50%     5.00%  
                         

Adequately Capitalized

  8.00%     6.00%     4.50%     4.00%  
                         

Undercapitalized

 

< 8.00%

   

< 6.00%

   

< 4.50%

   

< 4.00%

 
                         

Significantly Undercapitalized

 

< 6.00%

   

< 4.00%

   

< 3.00%

   

< 3.00%

 
                         

Critically Undercapitalized

 

Tangible Equity/Total Assets ≤ 2%

 

 

Until such time as PMHG has $3 billion in total consolidated assets, it will not be subject to any consolidated capital requirements.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Refer to Note 9 in the notes to condensed consolidated financial statements included in this Form 10-Q for the period ending September 30, 2020 for a discussion of off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

38

 

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

(b) Changes in Internal Controls

 

We have made no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

(c) Limitations on the Effectiveness of Controls

 

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

 

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

 

39

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

While the Company attempts to identify, manage, and mitigate risks and uncertainties associated with its business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our cash flows, results of operations, and financial condition. The Company has updated one risk factor since the publication of our Form 10-K for the year ended December 31, 2019.  

 

The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and significantly increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering-in-place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted, which could adversely affect the implementation of our growth strategy. Furthermore, the pandemic could cause the recognition of credit losses or other impairments in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more clients draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold as well as reductions in other comprehensive income. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

 

The Bank’s PPP loans carry litigation risk, possible undesirable interest rate impact, and possible credit risk.

During the term of the PPP, several banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Bank was named in one such lawsuit, but the plaintiff has dismissed its claim against the Bank. The Company and the Bank may be exposed to additional risk of additional litigation, from both clients and non-clients who approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Bank and is not resolved in a manner favorable to the Bank, it may result in financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, PPP loans are fixed, low interest rate loans that are guaranteed by the SBA and subject to numerous other regulatory requirements, and a borrower may apply to have all or a portion of the loan forgiven. If PPP borrowers fail to apply or qualify for loan forgiveness, the Bank faces a heightened risk of holding these loans at unfavorable interest rates for an extended period of time. While the PPP loans are guaranteed by the SBA, various regulatory requirements will apply to the Bank’s ability to seek recourse under the guarantees, and related procedures are currently subject to uncertainty. The Bank also has credit risk on PPP loans if a loan is not forgiven and the SBA determine that the Bank did not originate, close, or service a loan in accordance with legal standards. In the event the SBA dishonors its guarantee for one of those reasons, the Bank may be forced to hold the loan and may incur a loss if the borrower does not perform as agreed.

 

 

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

 

During the third quarter of 2020, the Company issued 1,343 shares to members of its Board of Directors in lieu of cash fees calculated at 110% to be $25,000.  These shares were issued in accordance with the intrastate exemption from registration pursuant to Section 3(a)(11) of the Securities Act of 1933, because the Company is doing business within the State of Florida and each acquirer and offeree of securities resides within the State of Florida.

 

As part of the Company's overall capital management plan, on March 11, 2020, the Company publicly announced that it had adopted a share repurchase program. Under this repurchase program, the maximum amount the Company could spend to repurchase shares of its common stock was $2 million. The program was suspended in late March and expired on June 30, 2020.  The amount of repurchases effected during each month is reflected in the table below. 

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

40

 

 

Item 6. Exhibits

 

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

 

Exhibit
Number

 

Description of Exhibit

 

Incorporated by Reference From or Filed Herewith

         

3.1

 

Articles of Incorporation

 

Exhibit 3.1 to Registration Statement on Form S-1 filed on October 18, 2013

         

3.2

 

Bylaws

 

Exhibit 3.2 to Registration Statement on Form S-1 filed on October 18, 2013

         
3.3   First Amendment to Bylaws dated December 17, 2015   Exhibit 3.3 to Form 10-Q filed on August 11, 2016
         
3.4   Second Amendment to Bylaws dated January 17, 2019   Exhibit 3.4 to Form 8-K filed on January 18, 2019
         

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 (“Directors’ 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 10.1 to Form 8-K filed on August 7, 2018

         
10.6   Amended and Restated Employment Agreement by and between Prime Meridian Holding Company, Inc. and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of July 19, 2018   Exhibit 10.1 to Form 8-K filed on July 19, 2018
         

10.7

 

2015 Stock Incentive Compensation Plan

 

Exhibit 10.7 to Form 8-K filed on May 26, 2015

         
10.8   First Amendment to 2015 Stock Incentive Compensation Plan   Exhibit 10.8 to Form 10-Q filed on November 10, 2016
         
10.9  

Employment Agreement by and between Prime Meridian Holding Company, Inc. and Prime Meridian Bank, and Chris L. Jensen, dated as of November 19, 2018

  Exhibit 10.1 to Form 8-K filed on November 20, 2018
         
10.10  

Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of November 19, 2018.

 

Exhibit 10.2 to Form 8-K filed on November 20, 2018

         
10.11  

Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Chris L. Jensen, Jr., dated as of November 19, 2018.

 

Exhibit 10.3 to Form 8-K filed on November 20, 2018

 

41

 

 

Exhibit
Number
  Description of Exhibit   Incorporated by Reference From or Filed Herewith
         
10.12   Amendment to Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of December 11, 2018.   Exhibit 10.1 to Form 8-K filed on December 13, 2018.
         

10.13

 

Amendment to Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Chris L. Jensen, Jr., dated as of December 11, 2018.

 

Exhibit 10.2 to Form 8-K filed on December 13, 2018

         

10.14

 

First Amendment to Lease for Timberlane Branch

 

Filed Exhibit 10.14 to Form 10-Q filed on May 9, 2019

         
10.15   Indemnification Agreement   Filed Exhibit 10.15 to Form 8-K filed on August 20, 2020
         
10.16   Promissory Note   Filed Exhibit 10.16 to Form 8-K filed on August 31, 2020
         
10.17   Security Agreement   Filed Exhibit 10.17 to form 8-K filed on August 31, 2020
         

14.1

 

Code of Ethics

 

Exhibit 14.1 to Form 10-K filed on March 28, 2014

         

21.1

 

Subsidiaries of the Registrant

 

Exhibit 21.1 to Registration Statement on Form S-1 filed on October 18, 2013

         

31.1

 

Certification Under Section 302 of Sarbanes-Oxley by Sammie D. Dixon, Jr., Principal Executive Officer

 

Filed herewith

         

31.2

 

Certification Under Section 302 of Sarbanes-Oxley by Clint F. Weber, Principal Financial Officer

 

Filed herewith

         

32.1

 

Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley

 

Filed herewith

         

99.1

 

Charter of the Audit Committee

 

Exhibit 99.1 to Form 10-K filed on March 28, 2015

         

99.2

  Charter of the Executive, Nominating and Corporate Governance Committee  

Exhibit 99.1 to Form 8-K filed on August 20, 2020

         
99.3   Charter of the Compensation Committee   Exhibit 99.1 to Form 8-K filed on September 17, 2020
         

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

 

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

 

42

 

 

SIGNATURES

 

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

 

 

PRIME MERIDIAN HOLDING COMPANY

   
   

November 10, 2020

   

 

By:

/s/ Sammie D. Dixon

     

Date

 

Sammie D. Dixon, Jr.

 

 

Vice Chairman, Chief Executive Officer, President,

 

 

and Principal Executive Officer

November 10, 2020    

 

By:

/s/ Clint F. Weber

     

Date

 

Clint F. Weber

 

 

Chief Financial Officer, Executive Vice President,

Principal Accounting Officer and Principal Financial Officer

 

 

 

 

43