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Section 1: 10-Q (FORM 10-Q)

pmhg20180930_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended

        September 30, 2018

 

or

 

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

 

For the transition period from

 

to

 

 

   

Commission File Number:

        333-191801

 

PRIME MERIDIAN HOLDING COMPANY


(Exact Name of registrant as specified in its charter)

 

   

Florida

 

27-2980805                         

 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number) 

   

1897 Capital Circle NE, Second Floor, Tallahassee, Florida

 

32308                     

 

(Address of principal executive offices)

(Zip Code)           

 

(850) 907-2301


(Registrant’s telephone number, including area code)

 

Not Applicable


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

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☑
  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. ☑

 

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 8, 2018: 3,130,695

 

 

Table of Contents

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

PAGE

   

Item 1. Financial Statements

 
   

Condensed Consolidated Balance Sheets September 30, 2018 (unaudited) and December 31, 2017

2

   

Condensed Consolidated Statements of Earnings Three and Nine Months ended September 30, 2018 and 2017 (unaudited)

3

   

Condensed Consolidated Statements of Comprehensive Income Three and Nine Months ended September 30, 2018 and 2017 (unaudited)

4

   

Condensed Consolidated Statements of Stockholders’ Equity Nine Months ended September 30, 2018 and 2017 (unaudited)

5

   

Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 2018 and 2017 (unaudited)

6

   

Notes to Condensed Consolidated Financial Statements (unaudited)

7-28

   

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

29-39

   

 Item 3. Quantitative and Qualitative Disclosures about Market Risk

39

   

 Item 4. Controls and Procedures

40

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

41

   

Item 1A. Risk Factors

41

   

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

41

   

Item 3. Defaults Upon Senior Securities

41

   

Item 4. Mine Safety Disclosures

41

   

Item 5. Other Information

41

   

Item 6. Exhibits

42-43

   

Signatures

44

   

Certifications

 

 

 

Table of Contents

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets

 

 

   

September 30,

   

December 31,

 
   

2018

   

2017

 

(in thousands)

 

(Unaudited)

         

Assets

               

Cash and due from banks

  $ 9,086     $ 6,971  

Federal funds sold

    42,152       20,148  

Interest-bearing deposits

    5,537       5,278  

Total cash and cash equivalents

    56,775       32,397  

Securities available for sale

    44,359       49,809  

Loans held for sale

    6,782       5,880  

Loans, net of allowance for loan losses of $3,674 and $3,136

    289,022       250,259  

Federal Home Loan Bank stock

    355       316  

Premises and equipment, net

    4,699       4,872  

Accrued interest receivable

    1,028       978  

Bank-owned life insurance

    1,789       1,757  

Other assets

    1,149       912  

Total assets

  $ 405,958     $ 347,180  
                 

Liabilities and Stockholders' Equity

               

Liabilities:

               

Noninterest-bearing demand deposits

  $ 83,296     $ 76,216  

Savings, NOW and money-market deposits

    230,817       200,027  

Time deposits

    41,133       22,054  

Total deposits

    355,246       298,297  

Official checks

    865       1,146  

Other liabilities

    984       764  

Total liabilities

    357,095       300,207  

Stockholders' equity:

               

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

    -       -  

Common stock, $.01 par value; 9,000,000 shares authorized, 3,128,671 and 3,118,977 issued and outstanding

    31       31  

Additional paid-in capital

    38,179       37,953  

Retained earnings

    11,747       9,285  

Accumulated other comprehensive loss

    (1,094 )     (296 )

Total stockholders' equity

    48,863       46,973  

Total liabilities and stockholders' equity

  $ 405,958     $ 347,180  

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

2

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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)

 

2018

   

2017

   

2018

   

2017

 

Interest income:

                               

Loans

  $ 3,798     $ 3,025     $ 10,615     $ 8,498  

Securities

    276       252       851       709  

Other

    198       114       354       271  

Total interest income

    4,272       3,391       11,820       9,478  

Interest expense-

                               

Deposits

    662       326       1,559       829  

Net interest income

    3,610       3,065       10,261       8,649  

Provision for loan losses

    135       32       544       187  

Net interest income after provision for loan losses

    3,475       3,033       9,717       8,462  

Noninterest income:

                               

Service charges and fees on deposit accounts

    83       80       259       241  

Mortgage banking revenue

    124       80       339       316  

Income from bank-owned life insurance

    11       12       32       35  

Loss on sale of securities available for sale

    -       -       -       (1 )

Other income

    120       88       332       258  

Total noninterest income

    338       260       962       849  

Noninterest expense:

                               

Salaries and employee benefits

    1,341       1,053       3,787       3,107  

Occupancy and equipment

    237       247       698       727  

Professional fees

    86       90       267       235  

Marketing

    193       129       533       440  

FDIC/State assessment

    38       35       112       123  

Software maintenance, amortization and other

    167       132       474       394  

Other

    396       321       1,125       977  

Total noninterest expense

    2,458       2,007       6,996       6,003  

Earnings before income taxes

    1,355       1,286       3,683       3,308  

Income taxes

    337       464       909       1,185  

Net earnings

  $ 1,018     $ 822     $ 2,774     $ 2,123  
                                 

Earnings per common share:

                               

Basic

  $ 0.33     $ 0.26     $ 0.89     $ 0.83  

Diluted

  $ 0.33     $ 0.26     $ 0.89     $ 0.83  

Cash dividends per common share(1)

  $ -     $ -     $ 0.10     $ 0.07  

 

(1) Annual cash dividends were paid during the first quarters of 2017 and 2018

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Net earnings

  $ 1,018     $ 822     $ 2,774     $ 2,123  

Other comprehensive (loss) income:

                               

Change in unrealized (loss) gain on securities:

                               

Unrealized (loss) gain arising during the period

    (231 )     5       (1,069 )     338  

Reclassification adjustment for realized loss

    -       -       -       1  

Net change in unrealized (loss) gain

    (231 )     5       (1,069 )     339  

Deferred income tax benefit (expense) on above change

    59       (2 )     271       (126 )

Total other comprehensive (loss) income

    (172 )     3       (798 )     213  

Comprehensive income

  $ 846     $ 825     $ 1,976     $ 2,336  

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Nine Months Ended September 30, 2018 and 2017

 

                                   

Accumulated

         
                                   

Other

         
                   

Additional

           

Compre-

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

hensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

(in thousands)

                                               

Balance at December 31, 2016

    2,004,707     $ 20     $ 20,732     $ 6,563     $ (233 )   $ 27,082  
                                                 

Net earnings for the nine months ended September 30, 2017 (unaudited)

    -       -       -       2,123       -       2,123  
                                                 

Dividends paid (unaudited)

    -       -       -       (140 )     -       (140 )
                                                 

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

    -       -       -       -       213       213  
                                                 

Stock options exercised (unaudited)

    2,600       -       26       -       -       26  
                                                 

Common stock issued as compensation to directors (unaudited)

    3,104       -       51       -       -       51  
                                                 

Sale of common stock net of stock offering costs $1,043 (unaudited)

    1,090,908       11       16,946       -       -       16,957  
                                                 

Stock-based compensation (unaudited)

    -       -       15       -       -       15  
                                                 

Balance at September 30, 2017 (unaudited)

    3,101,319     $ 31     $ 37,770     $ 8,546     $ (20 )   $ 46,327  
                                                 

Balance at December 31, 2017

    3,118,977     $ 31     $ 37,953     $ 9,285     $ (296 )   $ 46,973  
                                                 

Net earnings for the nine months ended September 30, 2018 (unaudited)

    -       -       -       2,774       -       2,774  
                                                 

Dividends paid (unaudited)

    -       -       -       (312 )     -       (312 )
                                                 

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

    -       -       -       -       (798 )     (798 )
                                                 

Stock options exercised (unaudited)

    7,500       -       75       -       -       75  
                                                 

Common stock issued as compensation to directors (unaudited)

    2,194       -       46       -       -       46  
                                                 

Stock-based compensation (unaudited)

    -       -       105       -       -       105  
                                                 

Balance at September 30, 2018 (unaudited)

    3,128,671     $ 31     $ 38,179     $ 11,747     $ (1,094 )   $ 48,863  

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

 

Condensed Consolidated Statements of Cash Flow (Unaudited)

 

   

Nine Months Ended

 
   

September 30,

 

(in thousands)

 

2018

   

2017

 

Cash flows from operating activities:

               

Net earnings

  $ 2,774     $ 2,123  

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

               

Depreciation and amortization

    397       390  

Provision for loan losses

    544       187  

Net amortization of deferred loan fees

    23       (118 )

Loss on sale of securities available for sale

    -       1  

Amortization of premiums and discounts on securities available for sale

    303       310  

Gain on sale of loans held for sale

    (339 )     (316 )

Proceeds from the sale of loans held for sale

    58,532       48,413  

Loans originated as held for sale

    (59,095 )     (52,265 )

Stock issued as compensation

    46       51  

Stock-based compensation expense

    105       15  

Income from bank-owned life insurance

    (32 )     (35 )

Net increase in accrued interest receivable

    (50 )     (77 )

Net decrease (increase) in other assets

    34       (153 )

Net decrease in other liabilities and official checks

    (61 )     (12 )

Net cash provided by (used in) operating activities

    3,181       (1,486 )

Cash flows from investing activities:

               

Loan originations, net of principal repayments

    (39,330 )     (22,461 )

Purchase of securities available for sale

    (1,003 )     (20,510 )

Principal repayments of securities available for sale

    4,542       4,099  

Proceeds from sale of securities available for sale

    -       750  

Maturities and calls of securities available for sale

    539       48  

Purchase of Federal Home Loan Bank stock

    (39 )     (96 )

Purchase of premises and equipment

    (224 )     (396 )

Net cash used in investing activities

    (35,515 )     (38,566 )

Cash flows from financing activities:

               

Net increase in deposits

    56,949       21,367  

Proceeds from stock options exercised

    75       26  

Proceeds from sale of common stock, net

    -       16,957  

Common stock dividends paid

    (312 )     (140 )

Net cash provided by financing activities

    56,712       38,210  

Net increase (decrease) in cash and cash equivalents

    24,378       (1,842 )

Cash and cash equivalents at beginning of period

    32,397       36,165  

Cash and cash equivalents at end of period

  $ 56,775     $ 34,323  

Supplemental disclosure of cash flow information

               

Cash paid during the period:

               

Interest

  $ 1,529     $ 827  

Income taxes

  $ 882     $ 1,223  

Noncash transaction-

               

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

  $ (798 )   $ 213  

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

6

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PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

(1)    General

 

Prime Meridian Holding Company (“PMHG”) owns 100% of the outstanding common stock of Prime Meridian Bank (the "Bank") (collectively the "Company"). PMHG’s primary activity is the operation of the Bank. The Bank is a Florida state-chartered commercial bank, 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 three banking offices located in Tallahassee and Crawfordville, 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 financial position and 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, 2017, included in our Annual Report on Form 10-K filed with the SEC on March 20, 2018. The results of operations for the three and nine months ended September 30, 2018 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 available-for-sale securities, are reported as a separate component of the equity section of the condensed consolidated balance sheet, such items along with net earnings, are components of comprehensive income. The only component of other comprehensive (loss) income is the net change in the unrealized (loss) gain on securities available for sale.

 

Stock-Based Compensation. The Company expenses the fair value of stock options granted. The Company recognizes stock option compensation expense in the condensed consolidated statements of earnings as the options vest.

 

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.

 

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

 

(continued)

 

7

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(1)    General, Continued

 

Recent Accounting Standards Update. In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings, (public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes), simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The ASU also clarifies that the Company should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with the Company's other deferred tax assets. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company's condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) which will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with terms of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of determining the effect of the ASU on its condensed consolidated financial statements. Early adoption is permitted.

 

In June 2016, the FASB issued 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 financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

 

(continued)

 

8

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)    General, Continued

 

Recent Accounting Standards Update, Continued.

 

The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The adoption of this guidance did not have any impact on the Company’s condensed consolidated financial statements.

 

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities”, to amend the amortization period for certain purchased callable debt securities held at a premium.  Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument.  The amendments in this update require the premium to be amortized to the earliest call date.  No accounting change is required for securities held at a discount.  For public business entities, the amendments in this update become effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has adhered to this practice since its inception.

 

 

In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718. Compensation Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.

 

(continued)

 

9

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)    General, Continued

 

Recent Accounting Standards Update, Continued.

 

Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Equity-Based payments to Non-Employees. The ASU is effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating the impact of the ASU, if any, on its condensed consolidated financial statements.

 

 

(2)    Securities Available for Sale

 

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

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(in thousands)

                               

At September 30, 2018

                               

U.S. Government agency securities

  $ 815     $ -     $ (24 )   $ 791  

Municipal securities

    11,640       31       (209 )     11,462  

Mortgage-backed securities

    33,369       16       (1,279 )     32,106  

Total

  $ 45,824     $ 47     $ (1,512 )   $ 44,359  
                                 

At December 31, 2017

                               

U.S. Government agency securities

  $ 1,251     $ 6     $ (8 )   $ 1,249  

Municipal securities

    12,340       128       (95 )     12,373  

Mortgage-backed securities

    36,614       23       (450 )     36,187  

Total

  $ 50,205     $ 157     $ (553 )   $ 49,809  

 

 

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

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2018

   

2017

   

2018

   

2017

 

Proceeds from sale of securities

  $ -     $ -     $ -     $ 750  

Gross gains

    -       -       -       -  

Gross losses

    -       -       -       (1 )

Net loss on sale of securities

  $ -     $ -     $ -     $ (1 )

 

(continued)

 

10

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)    Securities Available for Sale, Continued

 

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

 

 

   

Less Than Twelve Months

   

Over Twelve Months

 
   

Gross

           

Gross

         
   

Unrealized

   

Fair

   

Unrealized

   

Fair

 
   

Losses

   

Value

   

Losses

   

Value

 

(in thousands)

                               

At September 30, 2018

                               

Securities Available for Sale

                               

U.S. Government agency securities

  $ (4 )   $ 240     $ (20 )   $ 551  

Municipal securities

    (116 )     4,807       (93 )     2,568  

Mortgage-backed securities

    (185 )     5,368       (1,094 )     26,162  

Total

  $ (305 )   $ 10,415     $ (1,207 )   $ 29,281  
                                 

At December 31, 2017

                               

Securities Available for Sale

                               

U.S. Government agency securities

  $ (8 )   $ 694     $ -     $ -  

Municipal securities

    (36 )     1,831       (59 )     1,203  

Mortgage-backed securities

    (308 )     29,742       (142 )     5,667  

Total

  $ (352 )   $ 32,267     $ (201 )   $ 6,870  

 

(continued)

 

11

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)    Securities Available for Sale, Continued

 

The unrealized losses at September 30, 2018 and December 31, 2017 on forty-one and thirty-four 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. 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, 2018

                               

U.S. Government agency securities

  $ 791     $ -     $ 791     $ -  

Municipal securities

    11,462       -       11,462       -  

Mortgage-backed securities

    32,106       -       32,106       -  

Total

  $ 44,359     $ -     $ 44,359     $ -  
                                 

At December 31, 2017

                               

U.S. Government agency securities

  $ 1,249     $ -     $ 1,249     $ -  

Municipal securities

    12,373       -       12,373       -  

Mortgage-backed securities

    36,187       -       36,187       -  

Total

  $ 49,809     $ -     $ 49,809     $ -  

 

 

During the three and nine months ended September 30, 2018 and 2017, no securities were transferred in or out of Levels 1, 2 or 3.

 

The scheduled maturities of securities are as follows:

 

   

At September 30, 2018

 
   

Amortized

   

Fair

 
   

Cost

   

Value

 

(in thousands)

         

Due in one to five years

  $ 3,871     $ 3,829  

Due in five to ten years

    5,873       5,859  

Due after ten years

    2,711       2,565  

Mortgage-backed securities

    33,369       32,106  

Total

  $ 45,824     $ 44,359  

 

(continued)

 

12

 

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)

 

2018

   

2017

 

Real estate mortgage loans:

               

Commercial

  $ 84,161     $ 79,565  

Residential and home equity

    120,545       94,824  

Construction

    31,001       26,813  

Total real estate mortgage loans

    235,707       201,202  
                 

Commercial loans

    49,563       44,027  

Consumer and other loans

    6,980       7,742  

Total loans

    292,250       252,971  
                 

Add (deduct):

               

Net deferred loan costs

    446       424  

Allowance for loan losses

    (3,674 )     (3,136 )

Loans, net

  $ 289,022     $ 250,259  

 

(continued)

 

13

 

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

         

(in thousands)

 

Commercial

   

Equity

   

Construction

   

Loans

   

Loans

   

Total

 

Three-Month Period Ended September 30, 2018

                                               

Beginning balance

  $ 1,001     $ 1,309     $ 400     $ 749     $ 82     $ 3,541  

Provision (credit) for loan losses

    (61 )     79       (12 )     126       3       135  

Net (charge-offs) recoveries

    -       -       (3 )     1       -       (2 )

Ending balance

  $ 940     $ 1,388     $ 385     $ 876     $ 85     $ 3,674  
                                                 

Three-Month Period Ended September 30, 2017

                                               

Beginning balance

  $ 811     $ 1,108     $ 338     $ 712     $ 59     $ 3,028  

Provision (credit) for loan losses

    49       (18 )     (51 )     28       24       32  

Net (charge-offs) recoveries

    -       -       -       12       -       12  

Ending balance

  $ 860     $ 1,090     $ 287     $ 752     $ 83     $ 3,072  
                                                 

Nine-Month Period Ended September 30, 2018

                                               

Beginning balance

  $ 894     $ 1,097     $ 331     $ 724     $ 90     $ 3,136  

Provision (credit) for loan losses

    46       291       57       148       2       544  

Net (charge-offs) recoveries

    -       -       (3 )     4       (7 )     (6 )

Ending balance

  $ 940     $ 1,388     $ 385     $ 876     $ 85     $ 3,674  
                                                 

Nine-Month Period Ended September 30, 2017

                                               

Beginning balance

  $ 775     $ 1,074     $ 258     $ 714     $ 55     $ 2,876  

Provision (credit) for loan losses

    85       16       29       24       33       187  

Net (charge-offs) recoveries

    -       -       -       14       (5 )     9  

Ending balance

  $ 860     $ 1,090     $ 287     $ 752     $ 83     $ 3,072  
                                                 

At September 30, 2018

                                               

Individually evaluated for impairment:

                                               

Recorded investment

  $ 611     $ 247     $ -     $ 208     $ 8     $ 1,074  

Balance in allowance for loan losses

  $ -     $ -     $ -     $ 208     $ 8     $ 216  
                                                 

Collectively evaluated for impairment:

                                               

Recorded investment

  $ 83,550     $ 120,298     $ 31,001     $ 49,355     $ 6,972     $ 291,176  

Balance in allowance for loan losses

  $ 940     $ 1,388     $ 385     $ 668     $ 77     $ 3,458  
                                                 

At December 31, 2017

                                               

Individually evaluated for impairment:

                                               

Recorded investment

  $ -     $ -     $ -     $ 134     $ -     $ 134  

Balance in allowance for loan losses

  $ -     $ -     $ -     $ 134     $ -     $ 134  
                                                 

Collectively evaluated for impairment:

                                               

Recorded investment

  $ 79,565     $ 94,824     $ 26,813     $ 43,893     $ 7,742     $ 252,837  

Balance in allowance for loan losses

  $ 894     $ 1,097     $ 331     $ 590     $ 90     $ 3,002  

 

(continued)

 

14

 

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.

(continued)

 

15

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)    Loans, Continued 

 

Construction. Typically, these loans have a construction period of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to a term loan with a maturity of one to 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 Bank offers a wide range of commercial loans, including business term loans, equipment financing, lines of credit, and U.S. Small Business Administration (SBA) loans. 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.

 

(continued)

 

16

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

 Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 (3)    Loans, Continued 

 

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. 

 

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, 2018

                                               

Grade:

                                               

Pass

  $ 78,766     $ 117,523     $ 31,001     $ 45,524     $ 6,886     $ 279,700  

Special mention

    4,784       2,861       -       3,042       86       10,773  

Substandard

    611       161       -       997       8       1,777  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

  $ 84,161     $ 120,545     $ 31,001     $ 49,563     $ 6,980     $ 292,250  
                                                 

At December 31, 2017

                                               

Grade:

                                               

Pass

  $ 74,560     $ 92,282     $ 26,356     $ 42,874     $ 7,715     $ 243,787  

Special mention

    4,382       2,122       298       591       27       7,420  

Substandard

    623       420       159       562       -       1,764  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

  $ 79,565     $ 94,824     $ 26,813     $ 44,027     $ 7,742     $ 252,971  

 

(continued)

 

17

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

 Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 (3)    Loans, Continued 

 

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.

 

At September 30, 2018, there were four nonaccrual loans, totaling $179,000.

(continued)

 

18

 

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, 2018:

                                                       

Real estate mortgage loans:

                                                       

Commercial

  $ -     $ -     $ -     $ -     $ 84,161     $ -     $ 84,161  

Residential and home equity

    135       -       -       135       120,410       -       120,545  

Construction

    -       -       -       -       31,001       -       31,001  

Commercial loans

    16       -       -       16       49,376       171       49,563  

Consumer and other loans

    -       -       -       -       6,972       8       6,980  

Total

  $ 151     $ -     $ -     $ 151     $ 291,920     $ 179     $ 292,250  
                                                         

At December 31, 2017:

                                                       

Real estate mortgage loans:

                                                       

Commercial

  $ -     $ 623     $ -     $ 623     $ 78,942     $ -     $ 79,565  

Residential and home equity

    -       255       -       255       94,569       -       94,824  

Construction

    -       -       -       -       26,813       -       26,813  

Commercial loans

    -       -       -       -       43,893       134       44,027  

Consumer and other loans

    -       -       -       -       7,742       -       7,742  

Total

  $ -     $ 878     $ -     $ 878     $ 251,959     $ 134     $ 252,971  

 

(continued)

 

19

 

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, 2018:

                                                               

Real estate mortgage loans:

                                                               

Commercial

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

Residential and home equity

    247       247       -       -       -       247       247       -  

Commercial loans

    -       -       208       208       208       208       208       208  

Consumer and other loans

    -       -       8       8       8       8       8       8  
    $ 858     $ 858     $ 216     $ 216     $ 216     $ 1,074     $ 1,074     $ 216  
                                                                 

At December 31, 2017:

                                                               

Commercial loans

  $ -     $ -     $ 134     $ 134     $ 134     $ 134     $ 134     $ 134  

Total

  $ -     $ -     $ 134     $ 134     $ 134     $ 134     $ 134     $ 134  

 

 

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

 

   

Three Months Ended September 30,

 
   

2018

   

2017

 
   

Average

   

Interest

   

Interest

   

Average

   

Interest

   

Interest

 
   

Recorded

   

Income

   

Income

   

Recorded

   

Income

   

Income

 

(in thousands)

 

Investment

   

Recognized

   

Received

   

Investment

   

Recognized

   

Received

 

Real estate mortgage loans: