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

pmhg20181231_10k.htm    

Table# of# Contents

 

UNITED# STATES

SECURITIES# AND# EXCHANGE# COMMISSION

Washington,# D.C.# 20549

 

FORM# 10-K

 

 ☒

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

For# the# fiscal# year# ended# December# 31,# 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)

 

Registrant’s# telephone# number,# including# area# code:# (850)# 907-2301

 

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

 

None

  None

  (Title# of# each# class# to# be# registered)

 

(Name# of# each# exchange# on# which

each# class# is# to# be# registered)

   

Securities# registered# pursuant# to# Section# 12(g)# of# the# Act:# None

 

Indicate# by# check# mark# if# the# Registrant# is# a# well-known# seasoned# issuer,# as# defined# in# Rule# 405# of# the# Securities# Act.

YES# ☐#   # NO# ☒

 

Indicate# by# check# mark# if# the# Registrant# is# not# required# to# file# reports# pursuant# to# Section# 13# or# Section# 15(d)# of# the# Act.

YES# ☒# NO# ☐

 

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# every# Interactive# Data# File# required# to# be# submitted# pursuant# to# Rule# 405# of# Regulation# S-T# 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# if# disclosure# of# delinquent# filers# pursuant# to# Item# 405# of# Regulation# S-K# (§229.405# of# this# chapter)# is# not# contained# herein,# and# will# not# be# contained,# to# the# best# of# Registrant’s# knowledge,# in# definitive# proxy# or# information# statements# incorporated# by# reference# in# Part# III# of# this# Form# 10-K# or# any# amendment# to# this# Form# 10-K.# ☒

 

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# 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:  

Indicate# by# check# mark# whether# the# Registrant# is# a# shell# company# (as# defined# in# Rule# 12b-2# of# the# Act).# YES# ☐  # NO# ☒

 

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.# ☐

 

The# aggregate# market# value# of# the# voting# and# non-voting# common# stock# held# by# non-affiliates# of# the# Registrant,# computed# by# reference# to# the# $20.30# per# share# selling# price# of# the# common# stock# on# June# 30,# 2018# was# $50,960,085.# As# of# March# 8,# 2019,# there# were# 3,143,140# issued# and# outstanding# shares# of# the# Registrant’s# common# stock.

 

1 Table# of# Contents  

  Prime# Meridian# Holding# Company#

 

2018# Form 10-K# Annual# Report

Table# of# Contents

 

 

 

 

 

 

 

 

 

Item# Number

 

 

 

Page

 

 

 

 

 

 

 

Part I

 

Item 1.

 

Business

 

 3

 

 

Item 1A.

 

Risk# Factors

 

14

 

 

Item 1B.

 

Unresolved# Staff# Comments

 

21

 

 

Item 2.

 

Properties

 

21

 

 

Item 3.

 

Legal# Proceedings

 

21

 

 

Item# 4.

 

Mine# Safety# Disclosures

 

21

 

 

 

 

 

 

   

 

 

 

 

 

  Part II

 

Item 5.

 

Market# for# Registrant's# Common# Equity,# Related# Stockholder# Matters# and# Issuer# Purchases# of# Equity# Securities

 

21

 

 

Item 6.

 

Selected# Financial# Data

 

22

 

 

Item 7.

 

Management's# Discussion# and# Analysis# of# Financial# Condition# and# Results# of# Operations

 

23

 

 

Item 7A.

 

Quantitative# and# Qualitative# Disclosures# About# Market# Risk

 

37

 

 

Item 8.

 

Financial# Statements# and# Supplementary# Data

 

38

 

 

Item 9.

 

Changes# in# and# Disagreements# with# Accountants# on# Accounting# and# Financial# Disclosure

 

72

 

 

Item 9A.

 

Controls# and# Procedures

 

72

 

 

Item 9B.

 

Other# Information

 

73

 

 

 

 

 

 

   

 

 

 

 

 

  Part III

 

Item 10.

 

Directors,# Executive# Officers# and# Corporate# Governance

 

73

 

 

Item 11.

 

Executive# Compensation

 

77

 

 

Item 12.

 

Security# Ownership# of# Certain# Beneficial# Owners# and# Management# and# Related# Stockholder# Matters

 

83

 

 

Item 13.

 

Certain# Relationships# and# Related# Transactions,# and# Director# Independence

 

84

 

 

Item 14.

 

Principal# Accounting# Fees# and# Services

 

85

 

 

 

 

 

 

   

 

 

 

 

 

  Part IV

 

Item 15.

 

Exhibits,# Financial# Statement# Schedules

 

86

                  Item# 16.   Form# 10-K# Summary   87               Signatures           88               Certifications              

 

 

2 Table# of# Contents  

Part I

 

  Item 1.

Business

 

General# Description# of# Business

 

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”).# 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.# In# this# report,# the# terms# “Company,”# “we,”# “us,”# or# “our”# mean# PMHG# and# its# subsidiary.# Since# opening# in# 2008,# the# Bank# has# conducted# a# general# banking# business# and# has# grown# to# seventy-nine# full-time# equivalent# (“FTE”)# employees# as# of# December# 31,# 2018.

 

History

 

Prime# Meridian# Bank,# a# Florida# commercial# bank,# was# chartered# on# February# 4,# 2008,# with# a# commitment# to# providing# a# high# level# of# client# service# while# maintaining# sound# and# prudent# banking# practices.# In# 2010,# our# holding# company,# PMHG,# was# formed# and# the# Bank’s# shareholders# exchanged# their# shares# of# common# stock# for# shares# of# common# stock# of# PMHG,# with# the# Bank# becoming# a# wholly-owned# subsidiary# of# PMHG.# This# occurred# through# a# statutory# share# exchange# on# September# 16,# 2010.# The# Company# commenced# a# public# offering# registered# with# the# United# States# Securities# and# Exchange# Commission# (the# “SEC”)# on# December# 11,# 2013,# has# continued# to# file# periodic# reports# with# the# SEC# since# that# date,# and# became# listed# and# publicly# traded# on# the# OTCQX# marketplace# on# August# 24,# 2015.

 

In# an# effort# to# provide# a# superior# level# of# service,# we# are# building# a# culture# and# brand# that# fosters# client# relationships# and# creates# an# inviting# atmosphere# rather# than# simply# processing# customers’# transactions.# We# want# a# culture# that# supports# relationship# banking.# This# culture# has# served# us# well,# with# many# of# our# clients# referring# others# to# us.# In# our# view,# there# is# no# greater# compliment# than# to# have# our# existing# clients# share# their# positive# banking# experiences# with# their# family# and# friends.

 

Our# team# developed# and# adopted# the# following# five# core# principles# to# support# our# actions# and# guide# our# decisions:

 

 

Passion# –# A# level# of# intense# excellence# and# commitment# that# goes# over# and# above# merely# meeting# the# commercial# considerations# and# legal# requirements# -# Never# give# up.# Never# settle# for# mediocrity.# Never# let# fear# hamper# us# from# taking# calculated# risks.# Above# all,# Never# let# a# cynic# stand# in# our# way.

 

Grace# -# Providing# a# high# level# of# service,# with# courtesy# and# compassion.# Having# an# awareness# of# how# our# actions,# body# language,# and# words# affect# others.# Learning# to# master# a# mindful,# calm# response# to# any# situation.

 

Integrity# –# Doing# the# right# thing,# simply# because# it# is# the# right# thing# to# do,# based# on# a# firm# adherence# to# the# Bank’s# three-way# test:# (1)# Is# it# right# by# the# client?# (2)# Is# it# right# by# the# Bank?# (3)# Is# it# legally,# morally,# and# ethically# correct?

 

Tenacity# –# A# culture# of# looking# at# new# ideas,# tackling# challenges,# and# overcoming# obstacles# in# order# to# meet# our# clients’# needs.

 

Accountability# –# Accepting# full# and# ultimate# responsibility# for# the# situation# or# action# at# hand.

 

These# core# principles# and# the# Bank’s# three-way# test# also# serve# as# the# foundation# for# our# motto,# “Let’s# think# of# a# few# good# reasons# why# it# CAN# be# done!”# which# is# an# overarching# concept# for# our# Company# and# team.# We# stress# the# question# “Why?”# because,# while# we# clearly# recognize# that# “how”# is# imperative,# without# understanding# “why”# something# should# be# done,# “how# it# can# be# done”# does# not# necessarily# matter.# Our# mission# statement# is# also# supported# by# our# core# principles:# “Building# bankers# to# serve# our# clients# and# community# in# order# to# optimize# shareholder# value.”# As# a# result# of# our# efforts# and# culture,# we# have# been# able# to# increase# our# asset# and# deposit# base# exclusively# through# organic# growth# thus# far.

 

Location# and# Service# Area

 

Prime# Meridian# Bank# is# headquartered# in# Tallahassee,# Florida# and# offers# a# broad# range# of# banking# services# to# the# Tallahassee# Metropolitan# Statistical# Area# (“MSA”)# and# the# surrounding# North# Florida# and# South# Georgia# areas.# The# Company# is# headquartered# at# 1897# Capital# Circle# NE,# Second# Floor,# Tallahassee,# Florida# 32308# in# the# Bank’s# second# location,# which# opened# on# February# 21,# 2012.# The# Bank# also# serves# clients# from# a# branch# office# located# at# the# Bank’s# original# main# office# at# 1471# Timberlane# Road,# Suite# 124,# Tallahassee,# Florida# 32312# and# from# its# branch# office# located# at# 2201# Crawfordville# Highway,# Crawfordville,# Florida# 32327,# which# opened# in# September,# 2015.# On# November# 20,# 2018,# the# Company# filed# application# with,# and# subsequently# received# approval# from,# the# Federal# Deposit# Insurance# Corporation# (“FDIC”)# to# establish# a# full-service# branch# office# at# 3340# South# Florida# Avenue,# Lakeland,# Florida# 33830.# The# Company# expects# to# open# this# office# during# the# second# quarter# of# 2019.

 

3 Table# of# Contents  

A# substantial# portion# of# the# Company’s# market# is# located# in# the# larger# Tallahassee# MSA.# Claritas,# using# primarily# United# States# Census# Bureau# data,# estimates# that# the# 2019# population# of# the# Tallahassee# MSA,# which# includes# Leon,# Gadsden,# Jefferson,# and# Wakulla# counties,# is# 390,489# and# is# expected# to# grow# to# 408,083# or# 4.51%# by# 2024.# Tallahassee# is# the# state# capital# and# is# characterized# by# mostly# small# businesses# in# many# different# service# industries# in# addition# to# significant# governmental# and# educational# employment.# The# Tallahassee# MSA# is# furthermore# home# to# over# 70,000# college# students# with# two# state# universities# (Florida# State# University# and# Florida# A&M# University)# and# Tallahassee# Community# College,# one# of# the# largest# community# colleges# in# Florida.# The# region# is# thought# to# be# attractive# for# many# types# of# economic# development.# The# Economic# Development# Council# of# Tallahassee/Leon# County# previously# identified# seven# targeted# industry# sectors# that# match# the# region’s# strengths,# goals,# and# assets:# (1)# renewable# energy# and# environment;# (2)# aviation# and# aerospace;# (3)# health# sciences,# medical# education,# training# and# research,# and# sports# medicine;# (4)# information# technology;# (5)# research# and# engineering;# (6)# transportation# and# logistics;# and# (7)# advanced# manufacturing.

 

According# to# the# Bureau# of# Labor# Statistics,# the# national# unemployment# rate# and# Florida’s# unemployment# rate# were# 3.9%# and# 3.3%,# respectively,# at# December# 31,# 2018,# while# Tallahassee’s# unemployment# rate# was# reported# at# 3.3%.# Any# increases# in# unemployment# rates# could# result# in# nonperforming# loans# and# reduced# asset# quality.

 

Banking# Services

 

Our# business# strategy# focuses# on# traditional,# relationship-based# banking.# The# Bank# provides# a# range# of# consumer# and# commercial# banking# services# to# individuals# and# businesses.# In# addition# to# electronic# banking# services# such# as# mobile# banking,# remote# deposit,# mobile# deposit,# Apple# Pay,# Bank-to-Bank# transfers# and# online# banking,# we# offer# basic# services# which# include# demand# interest-bearing# and# non-interest# bearing# accounts,# savings# accounts,# money-market# deposit# accounts,# health# savings# accounts# (HSA),# NOW# accounts,# time# deposits,# safe# deposit# services,# wire# transfers,# foreign# exchange# services,# escrow# accounts,# debit# cards,# direct# deposits,# notary# services,# night# depository,# official# checks,# domestic# collections,# bank# drafts,# automated# teller# services,# drive-in# tellers,# banking# by# mail,# credit# cards# through# a# third# party,# and# merchant# card# services# with# a# third# party.# In# addition,# the# Bank# issues# standby# letters# of# credit# and# offers# commercial# real# estate# loans,# residential# real# estate# loans,# construction# loans,# commercial# loans,# equipment# loans,# Small# Business# Administration# (“SBA”)# loans,# and# consumer# loans.# The# Bank# provides# debit# and# automated# teller# machine# (“ATM”)# cards# and# is# a# member# of# the# MoneyPASS# and# Pulse# networks,# thereby# permitting# clients# to# utilize# the# convenience# of# a# large# ATM# network# system# including# more# than# 400,000# member# machines# nationwide.# As# of# December# 31,# 2018,# the# Bank# did# not# have# trust# powers.

 

Our# organizational# structure# focuses# on# a# strong# risk# management# culture.# We# stay# abreast# of# our# market# by# having# our# Board# and# management# team# highly# involved# in# our# communities.# We# believe# our# team's# banking# experience# and# high-quality# client# service# distinguishes# us# from# other# banks.# We# believe# this# foundation# will# enable# us# to# expand# our# products# and# services# to# new# and# existing# clients,# resulting# in# steady,# long-term# growth.# Our# culture# focuses# on# servicing# our# clients# and# proactively# exceeding# their# expectations,# which# in# turn# supports# client# retention# and# loyalty,# increased# referrals,# and# enhanced# profitability.

 

Our# loan# target# market# includes# owner-occupied# and# nonowner-occupied# commercial# real# estate,# small# businesses,# real# estate# developers,# consumers,# and# professionals.# Small# business# clients# are# typically# commercial# entities# with# sales# of# $25# million# or# less;# these# clients# have# the# opportunity# to# generate# significant# revenue# for# banks.

 

Our# revenues# are# primarily# derived# from# interest# income# and# fees# on# loans,# interest# and# dividends# from# investment# securities,# and# service# charge# income# generated# from# demand# accounts,# ATM# fees,# and# other# services.# The# principal# sources# of# funds# for# the# Bank’s# lending# activities# are# its# deposits,# loan# repayments,# and# proceeds# from# investment# securities.# The# principal# expenses# of# the# Bank# are# the# interest# paid# on# deposits,# salaries,# and# general# operating# expenses.

 

We# are# committed# to# being# a# successful# community# bank# and# being# a# good# business# partner# within# our# community.# We# believe# our# active# community# involvement# and# business# development# strategies,# in# conjunction# with# our# client# relationship# culture,# have# formed# a# successful# foundation# for# developing# new# relationships# and# enhancing# existing# ones.

 

Lending# Activities

 

The# Bank# offers# a# wide# range# of# lending# services# to# the# community,# providing# loans# to# small# to# medium# sized# companies# and# their# owners# and# not-for-profit# organizations.# Included# in# our# array# of# commercial# loan# products# are# commercial# real# estate# loans,# equipment# loans,# small# business# loans,# business# lines# of# credit,# and# SBA# loans.# Consumer# loans# include# residential# first# and# second# mortgage# loans,# home# equity# lines# of# credit,# and# consumer# installment# loans# for# cars,# trucks,# boats,# and# other# recreational# vehicles.# Most# of# our# retail# lending# connections# are# driven# by# our# commercial# and# mortgage# client# relationships.# The# Bank# maintains# strong# and# disciplined# credit# policies# and# procedures# and# makes# loans# on# a# nondiscriminatory# basis# throughout# its# lending# area.# The# net# loan# portfolio,# excluding# loans# held# for# sale,# constituted# 72.2%# of# the# Company's# total# assets# at# December# 31,# 2018.

 

4 Table# of# Contents  

Our# lenders# have# the# authority# to# extend# credit# under# guidelines# established# and# approved# by# the# Board# of# Directors.# With# the# exception# of# secured# consumer# loans,# joint# approval# signatures# are# required# for# all# loans.# Officers# may# not# combine# their# lending# authority# to# approve# a# loan# in# an# amount# in# excess# of# the# lending# authority# of# the# officer# with# the# greater# authority,# unless# otherwise# provided# through# the# approved# lending# authority# table.# However,# a# loan# officer# may# obtain# the# approval# of# another# officer# with# a# higher# lending# authority# to# grant# a# loan.# The# Loan# Committee# approves# all# loans# with# an# aggregate# indebtedness# that# exceeds# an# officer’s# or# co-approving# officer’s# lending# authority,# staying# within# the# Company’s# in-house# and# legal# lending# limits.# The# voting# members# of# the# Bank’s# Loan# Committee# consist# of# at# least# five# directors,# with# at# least# two# of# those# five# being# nonemployee# Board# members.# Alternates# or# designates# may# be# appointed# by# the# Board# of# Directors# when# needed.# Loan# Committee# generally# meets# at# least# bi-weekly# to# consider# any# loan# requests# which# are# in# excess# of# the# lending# limits# of# individual# lending# officers# and# require# approval# before# the# disbursement# of# proceeds# and# to# review# all# other# loans# for# compliance# with# our# loan# policy.# Liquidity# and# stability# in# the# Bank’s# portfolio# are# given# the# highest# priority;# therefore,# the# Board# of# Directors# reviews# the# portfolio# mix# of# loans# at# its# monthly# meetings.# Actions# of# the# Loan# Committee# are# also# reported# to# the# Board# of# Directors# at# these# monthly# meetings.

 

We# categorize# our# loans# as# follows:# commercial# real# estate,# residential# real# estate# (first# and# second# mortgages# and# home# equity# loans),# construction# loans,# commercial# loans,# and# consumer# loans.# Residential# real# estate# and# home# equity# loans,# accounting# for# 41.4%# of# the# loan# portfolio,# and# commercial# real# estate# loans,# comprising# 28.1%# of# the# loan# portfolio,# were# the# two# largest# categories# of# loans# at# December# 31,# 2018.

 

Commercial# Real# Estate# Loans.# # Secured# by# mortgages# on# commercial# property,# these# loans# are# typically# more# complex# and# present# a# higher# risk# profile# than# our# consumer# real# estate# loans.# Commercial# loans# that# are# secured# by# owner-occupied# commercial# real# estate# are# repaid# through# operating# cash# flows# of# the# borrower# whereas# nonowner-occupied# commercial# real# estate# loans# are# generally# dependent# on# rental# income.# The# typical# amortization# period# is# twenty# years# or# less.# Interest# rates# on# our# commercial# real# estate# loans# are# generally# fixed# for# five# years# or# less# after# which# they# adjust# based# upon# a# predetermined# spread# over# an# index.# At# times,# a# rate# may# be# fixed# for# longer# than# five# years.# As# part# of# our# credit# underwriting# standards,# we# normally# require# personal# guarantees# from# the# principal# owners# of# the# business# supported# by# a# review# of# the# principal# owners’# personal# financial# statements,# personal# tax# returns,# and# where# applicable,# business# tax# returns.# As# part# of# our# enterprise# risk# management# process,# we# understand# that# risks# associated# with# commercial# real# estate# loans# include# fluctuations# in# real# estate# values,# the# overall# strength# of# the# borrower,# the# overall# strength# of# the# economy,# new# job# creation# trends,# tenant# vacancy# rates,# environmental# contamination,# and# the# quality# of# the# borrowers’# management.# In# order# to# mitigate# and# limit# these# risks,# we# evaluate# collateral# value# and# analyze# the# borrower’s,# and# if# applicable# the# guarantor’s,# global# cash# flow# position.# Currently,# the# collateral# securing# our# commercial# real# estate# loans# includes# a# variety# of# property# types,# such# as# office,# warehouse,# and# retail# facilities,# multifamily# properties,# hotels,# mixed-use# residential# and# commercial# properties.

 

Residential# Real# Estate# and# Home# Equity# Loans.# The# Company# offers# first# and# second# one-to-four# family# mortgage# loans,# multifamily# residential# loans,# and# home# equity# lines# of# credit.# The# collateral# for# these# loans# includes# both# owner-occupied# residences# and# nonowner-occupied# investment# properties.# The# owner-occupied# primary# residence# loans# generally# present# lower# levels# of# risk# than# commercial# real# estate# loans;# however,# 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# Company# offers# both# portfolio# and# secondary# market# mortgages;# portfolio# loans# generally# are# based# on# a# 3-year,# 5-year,# or# 7-year# adjustable# rate# mortgages;# while# 15-year# or# 30-year# fixed-rate# loans# are# generally# sold# to# the# secondary# market.# The# longer-term,# fixed-rate# loans# are# sometimes# retained# in# the# Company’s# loan# portfolio# and# are# evaluated# on# a# case# by# case# basis.

 

Construction# Loans.# Typically,# these# loans# have# a# term# of# one# to# two# years# and# the# interest# is# paid# monthly.# Once# the# construction# period# terminates,# some# of# these# loans# will# convert# to# a# term# loan# carried# in# the# Bank’s# loan# portfolio# with# an# amortization# period# of# twenty# years# or# less,# in# general.# This# portion# of# our# loan# portfolio# includes# loans# to# small-to-medium# sized# businesses# to# construct# owner-user# properties,# loans# to# developers# of# commercial# real# estate# investment# properties,# and# loans# to# residential# developers.# This# type# of# loan# is# also# made# to# individual# clients# for# construction# of# single-family# homes# in# our# market# area.# An# independent# appraisal# is# generally# 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# the# Bank’s# policies.# 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# an# experienced# construction# lender.# Risks# associated# with# construction# loans# include# fluctuations# in# the# value# of# real# estate,# project# completion# risk,# changes# in# market# trends,# and# the# interest# rate# environment.# The# ability# of# the# construction# loan# borrower# to# move# to# permanent# financing# of# 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# after# the# initial# funding# of# the# loan.

 

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Commercial# Loans.# The# Company# offers# a# wide# range# of# commercial# loans,# including# small# business# loans,# equipment# financing,# business# lines# of# credit,# and# SBA# loans.# Small-to-medium# sized# businesses,# retail,# and# professional# establishments,# make# up# our# target# market# for# commercial# loans.# Our# lenders# 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.# Business# lines# of# credit# generally# do# not# exceed# two# years# and# typically,# are# secured# by# accounts# receivable# and# inventory.# Significant# factors# affecting# a# commercial# borrower’s# credit-worthiness# include# the# quality# of# management# and# the# ability# to# evaluate# changes# in# the# supply# and# demand# characteristics# affecting# the# business’# markets# for# products# and# services# and# 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# risk# factors# 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# residential# 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.

 

Consumer# and# Other# Loans.# Our# consumer# portfolio# is# the# smallest# portion# of# our# loan# portfolio,# representing# 2.3%# of# our# total# loan# portfolio# at# December# 31,# 2018.# 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;# it# 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.# Therefore,# both# secured# and# unsecured# consumer# loans# subject# the# Company# to# risk# when# the# borrower’s# financial# condition# declines# or# deteriorates.# Based# upon# our# current# trend# in# consumer# loans,# we# do# not# anticipate# that# consumer# loans# will# become# a# substantial# component# of# our# loan# portfolio# at# any# time# in# the# immediate# future.# Consumer# loans# are# made# at# fixed-interest# and# variable-interest# rates# and# are# based# on# the# appropriate# amortization# for# the# asset# and# purpose.

 

Investments 

 

Our# investments# are# managed# in# relation# to# loan# demand# and# deposit# growth.# Available# funds# are# placed# in# low# risk# investments# and# provide# liquidity# to# fund# increases# in# loan# demand# or# to# offset# fluctuations# in# deposits.# With# respect# to# our# investment# portfolio,# the# total# portfolio# may# be# invested# in# U.S.# Treasuries,# general# obligations# of# government# agencies,# and# bank-qualified# municipal# securities# because# such# securities# generally# represent# a# minimal# investment# risk.# Occasionally,# we# may# invest# in# certificates# of# deposit# from# national# and# state# banks.# We# also# invest# in# mortgage-backed# securities# which# generally# have# a# shorter# life# than# the# stated# maturity.

 

We# monitor# changes# in# financial# markets.# In# addition# to# portfolio# investments,# our# daily# cash# position# is# monitored# to# ensure# that# all# available# funds# earn# interest# at# the# earliest# possible# date.# A# portion# of# the# investment# account# is# designated# as# secondary# reserves# and# invested# in# liquid# securities# that# can# be# readily# converted# to# cash# with# minimum# risk# of# market# loss.# These# investments# usually# consist# of# U.S.# Treasury# obligations,# U.S.# Government# agencies# and# federal# funds.# The# remainder# of# the# investment# account# may# be# placed# in# investment# securities# of# a# different# type# and# longer# maturity.# Whenever# possible,# our# strategy# is# to# stagger# the# maturities# of# our# securities# to# produce# a# steady# cash-flow# in# the# event# the# Bank# needs# cash,# or# economic# conditions# change# to# a# more# favorable# rate# environment.

 

Deposit# Activities

 

Deposits# are# the# major# source# of# the# Bank’s# funds# for# lending# and# other# investment# purposes.# Deposits# are# gathered# principally# from# within# our# primary# market# area# through# the# offering# of# a# broad# variety# of# deposit# products,# including# checking# accounts,# money-market# accounts,# regular# savings# accounts,# term# certificate# of# deposit# accounts# (including# “jumbo”# certificates# in# denominations# of# $250,000# or# more),# and# retirement# savings# plans.# We# consider# the# majority# of# our# regular# savings,# demand,# NOW,# and# money-market# deposit# accounts# to# be# core# deposits.# The# majority# of# our# deposits# are# generated# within# the# Leon# County,# Florida# area.# Our# deposits# are# insured# up# to# the# maximum# amount# allowed# by# law# by# the# FDIC# and# we# operate# under# the# supervision# and# regulations# of# the# FDIC# and# the# State# of# Florida# Office# of# Financial# Regulation# (“OFR”).# The# Economic# Growth,# Regulatory# Relief,# and# Consumer# Protection# Act# enacted# on# May# 24,# 2018# amended# Section# 29# of# the# Federal# Deposit# Insurance# Act# to# except# a# capped# amount# of# reciprocal# deposits# from# treatment# as# brokered# deposits# for# certain# insured# depository# institutions.# With# this# change# in# regulation,# the# Company# set# up# and# began# testing# Certificate# of# Deposit# Account# Registry# Service# Insured# Cash# Sweep# accounts# in# the# fourth# quarter# of# 2018# with# plans# to# begin# offering# these# products# in# 2019.# The# Bank# had# no# brokered# deposits# at# December# 31,# 2018# or# 2017.

 

Maturity# terms,# service# fees,# and# withdrawal# penalties# are# established# by# the# Bank# on# a# periodic# basis.# The# determination# of# rates# and# terms# is# predicated# on# funds# acquisition# and# liquidity# requirements,# market# rate# competition,# growth# goals,# and# federal# regulations.

 

6 Table# of# Contents  

We# offer# certificates# of# deposit,# including# time# deposits# of# $250,000# or# more,# public# fund# deposits# and# other# large# deposit# accounts.# More# than# half# our# time# deposits# are# short-term# in# nature# and# are# more# sensitive# to# changes# in# interest# rates# than# other# types# of# deposits;# therefore,# they# may# be# a# less# stable# source# of# funds.# In# the# event# that# existing# short-term# deposits# are# not# renewed,# the# resulting# loss# of# the# deposited# funds# could# adversely# affect# our# liquidity.# In# a# rising# interest# rate# market,# short-term# deposits# may# prove# to# be# a# costly# source# of# funds# because# their# short-term# nature# requires# renewal# at# increasingly# higher# interest# rates,# which# may# adversely# affect# the# Bank’s# earnings.# The# opposite# is# true# in# a# falling# interest# rate# market# where# such# short-term# deposits# are# more# favorable# to# the# Bank.

 

Company# Website# and# U.S.# Securities# Exchange# Commission# Filings

 

Our# annual# reports# on# Form# 10-K,# quarterly# reports# on# Form 10-Q,# current# reports# on# Form 8-K,# and# all# amendments# to# those# reports# can# be# found# free# of# charge# on# our# website# at# www.primemeridianbank.com# as# soon# as# reasonably# practical# after# such# material# is# electronically# filed# with# or# furnished# to# the# SEC.# The# SEC# maintains# a# website,# www.sec.gov,# which# contains# reports,# proxy# and# information# statements,# and# other# information# regarding# issuers# that# file# electronically# with# the# SEC.# Our# charters# of# the# Audit# Committee# and# the# Compensation# and# Nominating# Committee,# along# with# our# Code# of# Ethics# and# Insider# Trading# Policy# are# available# on# our# website# at# www.primemeridianbank.com.# Printed# copies# of# this# information# may# also# be# obtained,# without# charge,# by# written# request# to# the# Corporate# Secretary# at# P.O.# Box# 13629,# Tallahassee,# FL# 32317.

 

Employees

 

At# December# 31,# 2018,# PMHG# had# seventy-nine# full# time# equivalent# employees# (including# executive# officers),# none# of# whom# are# represented# by# a# union# or# covered# by# a# collective# bargaining# agreement.# Management# considers# employee# relations# to# be# good.

 

Competition 

 

The# market# for# banking# is# highly# competitive.# Our# competition# is# made# up# of# a# wide# range# of# financial# institutions,# including# credit# unions,# local,# regional,# and# national# commercial# banks,# mortgage# companies,# insurance# companies,# and# other# non-traditional# providers# of# financial# services.# According# to# the# annual# Summary# of# Deposits# report# produced# by# the# FDIC,# total# deposits# (excluding# non-retail)# in# Leon# and# Wakulla# counties,# Florida,# grew# to# approximately# $7.4# billion# as# of# June# 30,# 2018.# As# of# June# 30,# 2018,# there# were# fourteen# FDIC-insured# financial# institutions# serving# Leon# County;# only# two# of# them,# including# PMHG,# are# headquartered# in# Leon# County.# As# of# June# 30,# 2018,# according# to# the# Summary# of# Deposits,# the# Company# had# a# 4.28%# share# of# the# FDIC-insured# deposits# in# Leon# County.# As# of# June# 30,# 2018,# the# Summary# of# Deposits# reported# that# there# were# four# FDIC-insured# financial# institutions# serving# Wakulla# County# and# that# PMHG# ranked# number# three,# with# a# 11.58%# share# of# the# FDIC-insured# deposits# in# Wakulla# County.

 

Some# of# our# competitors# are# not# subject# to# the# same# level# of# regulation# and# oversight# that# is# required# of# banks# and# bank# holding# companies,# resulting# in# lower# cost# structures.# By# emphasizing# our# exceptional# client# service,# knowledge# of# local# trends# and# conditions,# and# local# decision-making# process,# we# believe# the# Bank# has# developed# an# effective# competitive# advantage# in# its# market,# thus# maintaining# a# strong# level# of# growth.# We# also# are# actively# engaged# in# Small# Business# Administration# guaranteed# financing# to# support# local# borrowers# who# might# not# otherwise# qualify# for# conventional# financing,# which# helps# mitigate# our# credit# risk# and# results# in# fee# income# if# we# sell# the# guaranteed# portion.

 

Some# of# our# competitors# are# much# larger# financial# institutions# with# greater# financial# resources.# It# is# not# our# goal# to# compete# on# all# products# and# services,# but# rather# to# remain# client-service# focused# and# to# adhere# to# our# core# principles.# This# strategy# has# yielded# solid# growth# for# the# Bank# thus# far.

 

Other# important# competitive# factors# that# have# contributed# to# our# success# in# our# market# area# include# convenient# office# hours,# electronic# banking# products,# community# reputation,# quality# of# our# banking# team,# capacity# and# willingness# to# extend# credit,# and# our# ability# to# offer# cash# management# and# other# commercial# banking# services.# Although# offering# competitive# rates# is# important,# we# believe# that# our# greatest# competitive# advantages# are# our# experienced# management# team,# client# relationship# culture,# and# personal# service.

 

Government# Supervision# and# Regulation 

 

General

 

As# a# one-bank# holding# company,# we# are# subject# to# an# extensive# collection# of# state# and# federal# banking# laws# and# regulations,# which# impose# specific# requirements# and# restrictions# on# virtually# all# aspects# of# our# operations.# We# are# affected# by# government# monetary# policy# and# by# regulatory# measures# affecting# the# banking# industry# in# general.# These# regulations# are# primarily# intended# to# protect# depositors,# borrowers,# the# public,# the# FDIC,# and# the# integrity# of# the# U.S.# banking# system# and# capital# markets.# Future# legislative# enactments,# changes# in# governmental# policy,# or# changes# in# the# way# such# laws# or# regulations# are# interpreted# by# regulatory# agencies# or# courts# could# have# a# material# impact# on# our# business,# operations,# and# earnings.# Federal# economic# and# monetary# policy# may# also# affect# our# ability# to# attract# deposits,# make# loans,# and# achieve# our# planned# operating# results.#  

 

7 Table# of# Contents  

The# following# is# a# brief# summary# of# some# of# the# statutes,# rules,# and# regulations# that# currently# affect# PMHG’s# and# the# Bank’s# operations.# This# summary# is# qualified# in# its# entirety# by# reference# to# the# particular# statutory# and# regulatory# provision# referred# to# below# and# is# not# intended# to# be# an# exhaustive# description# of# the# statutes# or# regulations# applicable# to# our# business.# Any# change# in# applicable# laws# or# regulations# may# have# a# material# adverse# effect# on# our# business.

 

Prime# Meridian# Holding# Company

 

As# a# bank# holding# company,# PMHG# is# subject# to# regulation# under# the# Bank# Holding# Company# Act# of# 1956,# as# amended# (the# “BHCA”),# and# the# examination# and# reporting# requirements# of# the# Board# of# Governors# of# the# Federal# Reserve# System# (the# “Federal# Reserve”).# As# such,# the# Company# is# required# to# file# semi-annual# reports# and# other# information# with# the# Federal# Reserve# regarding# its# business# operations# and# those# of# its# subsidiary.# Under# the# BHCA,# a# bank# holding# company# may# not# directly# or# indirectly# acquire# ownership# or# control# of# more# than# 5%# of# the# voting# shares# or# substantially# all# of# the# assets# of# any# additional# bank# without# prior# approval# of# the# Federal# Reserve.# The# Company# is# further# prohibited# from# merging# or# consolidating# with# another# bank# holding# company# without# prior# approval.

 

Prior# to# any# person# or# company,# excluding# a# bank# holding# company,# acquiring# control# of# a# bank# holding# company,# subject# to# certain# exemptions,# the# BHCA# and# the# Change# in# Bank# Control# Act,# together# with# regulations# promulgated# by# the# Federal# Reserve,# require# either# the# Federal# Reserve’s# stated# approval# or# a# notice# be# furnished# to# the# Federal# Reserve# and# not# disapproved.# Control# is# conclusively# presumed# to# exist# when# an# individual# or# company# acquires# 25%# or# more# of# any# class# of# voting# securities# of# a# bank# holding# company.# Control# may# be# presumed# to# exist# if# a# person# acquires# 10%# or# more,# but# less# than# 25%,# of# any# class# of# voting# securities# and# either# the# bank# holding# company# has# registered# securities# under# Section# 12# of# the# Securities# Exchange# Act# of# 1934# or# no# other# person# owns# a# greater# percentage# of# that# class# of# voting# securities# immediately# after# the# transaction.# Additionally,# the# BHCA# provides# that# the# Federal# Reserve# may# not# approve# any# of# these# transactions# if# it# would# result# in# a# monopoly,# substantially# lessen# competition,# or# otherwise# function# as# a# restraint# of# trade,# unless# the# anti-competitive# effects# of# the# proposed# transaction# are# clearly# outweighed# by# the# public# interest# in# meeting# the# convenience# and# needs# of# the# community# to# be# served.# The# Federal# Reserve# is# also# required# to# consider# the# financial# and# managerial# resources# and# future# prospects# of# the# bank# holding# companies# and# banks# concerned# and# the# convenience# and# needs# of# the# community# to# be# served.# The# Federal# Reserve’s# consideration# of# financial# resources# generally# focuses# on# capital# adequacy,# which# is# discussed# below.# As# a# result# of# the# USA# PATRIOT# Act,# the# Federal# Reserve# is# also# required# to# consider# the# record# of# a# bank# holding# company# and# its# subsidiary# bank(s)# in# combating# money# laundering# activities# in# its# evaluation# of# bank# holding# company# merger# or# acquisition# transactions.

 

Except# as# authorized# by# the# BHCA# and# Federal# Reserve# regulations# or# orders,# a# bank# holding# company# is# generally# prohibited# from# acquiring# direct# or# indirect# control# of# 5%# or# more# of# the# voting# shares# of# any# company# engaged# in# any# business# other# than# the# business# of# banking# or# managing# and# controlling# banks.# The# primary# exception# allows# a# bank# holding# company# to# own# shares# in# any# company# whose# activities# have# been# determined# by# the# Federal# Reserve# to# be# so# closely# related# to# banking# or# to# managing# or# controlling# banks# that# ownership# of# shares# of# that# company# is# appropriate.# Activities# the# Federal# Reserve# has# determined# by# regulation# to# be# permissible# for# bank# holding# companies# include# the# following:

 

 

making# or# servicing# loans# and# certain# types# of# leases;

 

engaging# in# certain# insurance# activities;

 

performing# certain# data# processing# services;

 

acting# in# certain# circumstances# as# a# fiduciary# or# investment# or# financial# advisor;

 

providing# management# consulting# services;

 

owning# savings# associations;

 

and# making# investments# in# corporations# or# projects# designed# primarily# to# promote# community# welfare.

 

In# accordance# with# Federal# Reserve# Policy,# a# bank# holding# company# is# expected# to# act# as# a# source# of# financial# strength# to# its# subsidiary# banks.# In# adhering# to# the# Federal# Reserve’s# policy,# we# may# be# required# to# provide# financial# support# to# the# Bank# at# a# time# when,# absent# such# Federal# Reserve# Policy,# it# might# not# be# deemed# advisable# to# provide# such# assistance.# Under# the# BHCA,# the# Federal# Reserve# may# also# require# a# bank# holding# company# to# terminate# any# activity# or# relinquish# control# of# a# nonbank# subsidiary# (other# than# a# nonbank# subsidiary# of# a# bank)# upon# the# Federal# Reserve’s# determination# that# the# activity# or# control# constitutes# a# serious# risk# to# the# financial# soundness# or# stability# of# any# subsidiary# depository# institution# of# the# bank# holding# company.# Further,# federal# bank# regulatory# authorities# have# additional# discretion# to# require# a# bank# holding# company# to# divest# itself# of# any# bank# or# nonbank# subsidiary# if# the# agency# determines# that# divestiture# may# aid# the# depository# institution’s# financial# condition.# The# Dodd-Frank# Act# Wall# Street# Reform# and# Consumer# Protection# Act# (“Dodd-Frank# Act”)# codified# the# Federal# Reserve’s# policy# on# serving# as# a# source# of# financial# strength.# Such# support# may# be# required# at# times# when,# absent# this# Federal# Reserve# policy,# a# holding# company# may# not# be# inclined# to# provide# it.# A# bank# holding# company,# in# certain# circumstances,# could# be# required# to# guarantee# the# capital# plan# of# an# undercapitalized# banking# subsidiary.

 

The# Federal# Reserve’s# authority# was# expanded# through# the# Financial# Institutions# Reform# Recovery# and# Enforcement# Act# of# 1989# (“FIRREA”)# to# prohibit# activities# of# bank# holding# companies# and# their# nonbanking# subsidiaries# which# represent# unsafe# and# unsound# banking# practices,# or# which# constitute# violations# of# laws# or# regulations.# FIRREA# increased# the# amount# of# civil# money# penalties# which# the# Federal# Reserve# can# assess# for# activities# conducted# on# a# knowing# and# reckless# basis,# if# those# activities# caused# a# substantial# loss# to# a# depository# institution.# The# penalties# can# be# as# high# as# $1.0# million# for# each# day# the# activity# continues.# FIRREA# also# expanded# the# scope# of# the# individuals# and# entities# against# which# such# penalties# may# be# assessed.

 

8 Table# of# Contents  

Prime# Meridian# Bank

 

As# a# state-chartered# commercial# bank,# the# Bank# is# subject# to# the# supervision# and# regulation# of# the# OFR# and# the# FDIC.# Our# deposits# are# insured# by# the# FDIC# for# a# maximum# of# $250,000# per# account# ownership# category.# For# this# protection,# we# must# pay# a# quarterly# statutory# assessment# and# comply# with# the# rules# and# regulations# of# the# FDIC.# The# assessment# levied# on# a# bank# for# deposit# insurance# varies,# depending# on# the# capital# position# of# each# bank,# and# other# supervisory# factors.# Currently,# we# are# subject# to# the# statutory# assessment.

 

The# Federal# Deposit# Insurance# Act# provides# that,# in# the# event# of# the# “liquidation# or# other# resolution”# of# a# bank,# the# claims# of# depositors# of# the# bank,# including# the# claims# of# the# FDIC# as# subrogee# of# insured# depositors# and# certain# claims# for# administrative# expenses# of# the# FDIC# as# a# receiver,# will# have# priority# over# other# general# unsecured# claims# against# a# bank.# If# a# bank# fails,# insured# and# uninsured# depositors,# along# with# the# FDIC,# will# have# priority# in# payment# ahead# of# unsecured,# non-deposit# creditors# and# shareholders.

 

Areas# regulated# and# monitored# by# the# bank# regulatory# authorities# include:

 

 

security# devices# and# procedures;

 

adequacy# of# capitalization# and# loss# reserves;

 

loans;

 

investments;

 

borrowings;

 

deposits;

 

mergers;

 

issuances# of# securities;

 

payment# of# dividends;

 

establishment# of# branches;

 

corporate# reorganizations;

 

transactions# with# affiliates;

 

maintenance# of# books# and# records

 

and# adequacy# of# staff# training# to# carry# out# safe# lending# and# deposit# gathering# practices. 

 

Dodd-Frank# Wall# Street# Reform# and# Consumer# Protection# Act

 

The# Dodd-Frank# Act# was# signed# into# law# in# July,# 2010# and# provides# for# significant# regulation# and# oversight# of# the# financial# services# industry.# The# Dodd-Frank# Act# addresses,# among# other# things,# systemic# risk,# capital# adequacy,# deposit# insurance# assessments,# consumer# financial# protection,# interchange# fees,# derivatives,# lending# limits,# thrift# charters,# and# changes# among# the# banking# regulatory# agencies.# There# are# many# provisions# in# the# Dodd-Frank# Act# mandating# regulators# to# adopt# new# regulations# and# conduct# studies# upon# which# future# regulation# may# be# based.# While# many# have# been# issued,# some# remain# to# be# issued# and# may# have# unintended# effects# on# smaller# banks.

 

The# changes# resulting# from# the# Dodd-Frank# Act# impact# and# may# further# impact# the# profitability# of# our# business# activities,# require# changes# to# some# of# our# business# practices,# or# otherwise# adversely# affect# our# business.# These# impacts# also# require# us# to# invest# significant# management# attention# and# resources# to# evaluate# and# make# any# changes# necessary# to# comply# with# new# statutory# and# regulatory# requirements.# It# may# further# necessitate# higher# levels# of# regulatory# capital# and/or# liquidity# and# lead# to# a# change# in# our# business# strategy.# We# cannot# predict# the# effects# of# this# legislation# and# the# corresponding# regulations# on# us,# our# competitors,# or# on# the# financial# markets# and# economy,# although# it# may# significantly# increase# costs# and# impede# efficiency# of# internal# business# processes.

 

Restrictions# on# Transactions# with# Affiliates# and# Loans# to# Insiders

 

Under# Sections# 23A# and# 23B# of# the# Federal# Reserve# Act,# the# Bank# is# subject# to# restrictions# that# limit# the# transfer# of# funds# or# other# items# of# value# to# the# parent# holding# company,# and# any# other# non-bank# affiliates# in# so-called# “covered# transactions.”# The# term# “covered# transaction”# includes# loans,# leases,# other# extensions# of# credit,# investments# and# asset# purchases,# issuance# of# a# guarantee,# as# well# as# other# transactions# involving# the# transfer# of# value# from# the# Bank# to# an# affiliate# or# for# the# benefit# of# an# affiliate.# An# affiliate# of# a# bank# is# any# company# or# entity# which# controls,# is# controlled# by,# or# is# under# common# control# with# the# bank.# Unless# an# exemption# applies,# covered# transactions# by# the# Bank# with# a# single# affiliate# are# limited# to# 10%# of# the# Bank’s# capital# stock# and# surplus# (tangible# capital)# and# all# such# transactions# are# required# to# be# on# terms# substantially# the# same,# or# at# least# as# favorable# to# the# Bank# or# subsidiary,# as# those# provided# to# a# nonaffiliate.# With# respect# to# all# covered# transactions# with# affiliates# in# the# aggregate,# they# are# limited# to# 20%# of# the# Bank’s# capital# and# surplus.

 

The# Dodd-Frank# Act# expanded# the# scope# of# Section# 23A# and# includes# investment# funds# managed# by# an# affiliate# institution# as# well# as# other# hurdles.# In# addition,# the# Dodd-Frank# Act# expanded# coverage# of# transactions# with# insiders# by# including# credit# exposure# arising# from# derivative# transactions.# The# Dodd-Frank# Act# furthermore# prohibits# an# insured# depository# institution# from# purchasing# or# selling# an# asset# to# an# executive# officer,# director,# or# principal# shareholder# (or# any# related# interest# of# such# a# person)# unless# the# transaction# is# on# market# terms.# If# the# transaction# exceeds# 10%# of# the# institution’s# capital,# it# must# be# approved# in# advance# by# a# majority# of# the# disinterested# directors.

 

9 Table# of# Contents  

A# bank’s# authority# to# extend# credit# to# executive# officers,# directors# and# shareholders# with# greater# than# 10%# ownership,# as# well# as# entities# controlled# by# such# persons,# is# subject# to# Sections# 22(g)# and# 22(h)# of# the# Federal# Reserve# Act# and# Regulation# O# promulgated# thereunder# by# the# Federal# Reserve.# Among# other# things,# these# loans# must# be# made# on# terms# substantially# the# same# as# those# offered# to# unaffiliated# individuals.# The# amount# of# loans# a# bank# may# make# to# these# persons# is# based,# in# part,# on# the# bank’s# capital# position,# and# certain# approval# procedures# must# be# followed# in# making# loans# which# exceed# specified# amounts.

 

Basel# III# and# Sarbanes-Oxley# Act

 

The# Bank# is# also# subject# to# capital# adequacy# guidelines# and# prompt# corrective# action# rules# that# implement# the# revised# standards# of# the# Basel# Committee# on# Banking# Supervision,# commonly# called# Basel# III,# and# address# relevant# provisions# of# the# Dodd-Frank# Act.# Basel# III# and# the# regulations# of# the# federal# banking# agencies# require# bank# holding# companies# and# banks# to# undertake# significant# activities# to# demonstrate# compliance# with# certain# capital# standards.# Compliance# with# these# rules# impose# additional# costs# on# the# Company# and# the# Bank.

 

The# Sarbanes-Oxley# Act# of# 2002# comprehensively# revised# the# laws# affecting# corporate# governance,# accounting# obligations,# and# corporate# reporting# requirements# for# companies# with# debt# or# equity# securities# registered# under# the# Securities# Exchange# Act# of# 1934.# Compliance# with# this# complex# legislation# and# subsequent# Securities# and# Exchange# Commission# rules# is# a# major# focus# of# all# public# corporations# and# will# be# so# for# the# Company# going# forward.# One# of# the# more# applicable# provisions# of# this# act# is# corporate# responsibility# for# financial# reports.# Sarbanes-Oxley# requires# a# public# company’s# principal# executive# officer# and# principal# financial# officer# to# sign# quarterly# and# annual# reports# stating# that# they# have# reviewed# the# reports# and# that# the# reports# are# true.

 

Capital#

 

Developed# by# an# international# body# known# as# the# Basel# Committee# on# Banking# Supervision,# regulatory# capital# rules# were# released# in# July# 2013# to# implement# capital# standards# (referred# to# as# Basel# III)# and# impose# higher# minimum# capital# requirements# for# bank# holding# companies# and# banks.# The# rules# apply# to# all# national# and# state# banks# and# savings# associations,# regardless# of# size,# and# bank# holding# companies# and# savings# and# loan# holding# companies# with# more# than# $3# billion# in# total# consolidated# assets.# More# stringent# requirements# are# imposed# on# “advanced# approaches”# banking# organizations# which# are# organizations# with# $250# billion# or# more# in# total# consolidated# assets,# $10# billion# or# more# in# total# foreign# exposures,# or# that# have# opted# into# the# Basel# III# capital# regime.

 

Banks# are# subject# to# regulatory# capital# requirements# imposed# by# the# Federal# Reserve# and# the# FDIC.# Until# a# bank# holding# company’s# assets# reach# $3# billion,# the# risk-based# capital# and# leverage# guidelines# issued# by# the# Federal# Reserve# are# applied# to# bank# holding# companies# on# a# nonconsolidated# basis,# unless# the# bank# holding# company# is# engaged# in# nonbank# activities# involving# significant# leverage,# or# it# has# a# significant# amount# of# outstanding# debt# held# by# the# general# public.# Instead# a# bank# holding# company# with# less# than# $3# billion# generally# applies# the# risk-based# capital# and# leverage# capital# guidelines# on# a# bank# only# basis# and# must# only# meet# a# debt-to-equity# ratio# at# the# holding# company# level.# The# FDIC# risk-based# capital# guidelines# apply# directly# to# insured# state# banks,# regardless# of# whether# they# are# subsidiaries# of# a# bank# holding# company.# Both# agencies’# requirements,# which# are# substantially# similar,# establish# minimum# capital# ratios# in# relation# to# assets,# both# on# an# aggregate# basis# as# adjusted# for# credit# risks# and# off-balance# sheet# exposures.# The# risk# weights# assigned# to# assets# are# based# primarily# on# credit# risks.# Depending# upon# the# riskiness# of# a# particular# asset,# it# is# assigned# to# a# risk# category.# Under# the# guidelines,# capital# is# compared# to# the# relative# risk# related# to# the# balance# sheet.# To# derive# the# risk# included# in# the# balance# sheet,# risk# weights# (from# 0%# to# 150%)# are# applied# to# different# balance# sheet# and# off-balance# sheet# assets,# primarily# based# on# the# relative# credit# risk# of# the# counterparty.# The# capital# amounts# and# classification# are# also# subject# to# qualitative# judgments# by# the# regulators# about# components,# risk# weightings,# and# other# factors.

 

Capital# is# then# classified# into# three# categories,# Common# Equity# Tier# 1,# Additional# Tier# 1,# and# Tier# 2.# Common# Equity# Tier# 1# Capital# (“CET1”)# is# the# sum# of# common# stock# instruments# and# related# surplus# net# of# treasury# stock,# retained# earnings,# Accumulated# Other# Comprehensive# Income# (“AOCI”),# and# qualifying# minority# interests,# less# applicable# regulatory# adjustments# and# deductions# that# include# AOCI# (if# an# irrevocable# option# to# neutralize# AOCI# is# exercised).# Mortgage-servicing# assets,# deferred# tax# assets,# and# investments# in# financial# institutions# are# limited# to# an# aggregate# of# 15%# of# CET1# and# 10%# of# CET1# individually.# Additional# Tier# 1# Capital# includes# noncumulative# perpetual# preferred# stock,# Tier# 1# minority# interests,# grandfathered# trust# preferred# securities,# and# Troubled# Asset# Relief# Program# instruments,# less# applicable# regulatory# adjustments# and# deductions.# Tier# 2# Capital# includes# subordinated# debt# and# preferred# stock,# total# capital# minority# interests# not# included# in# Tier# 1,# and# ALLL# not# exceeding# 1.25%# percent# of# risk-weighted# assets,# less# applicable# regulatory# adjustments# and# deductions.

 

10 Table# of# Contents  

Smaller# banks,# such# as# the# Bank,# are# also# subject# to# the# following# new# 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

  CET1

Risk-Based

Capital# Ratio

  Tier# 1

Leverage

Capital# Ratio

Well# capitalized

  10%

  8%

  6.5%

  5%

Adequately

Capitalized

  8%

  6%

  4.5%

  4%

Undercapitalized

  <# 8%

  <# 6%

  <# 4.5%

  <# 4%

Significantly

Undercapitalized

  <# 6%

  <# 4%

  <# 3%

  <# 3%

Critically

Undercapitalized

  Tangible# Equity/Total# Assets# ≤# 2%

 

Community# banks# are# also# subject# to# the# following# minimum# capital# requirements:

 

Minimum# CET1# ratio

4.5%

Capital# conversion# buffer

2.50%

Minimum# tier# 1# capital

6.0%

Minimum# total# capital

8.0%

 

Federal# banking# regulators’# risk-based# capital# guidelines# also# take# account# of# interest# rate# risk.# Interest# rate# risk# is# the# adverse# effect# that# changes# in# market# interest# rates# may# have# on# a# bank’s# financial# condition# and# is# inherent# to# the# business# of# banking.# Under# the# regulations,# when# evaluating# a# bank’s# capital# adequacy,# the# capital# standards# explicitly# include# a# bank’s# exposure# to# declines# in# the# economic# value# of# its# capital# due# to# changes# in# interest# rates.# The# exposure# of# a# bank’s# economic# value# generally# represents# the# change# in# the# present# value# of# its# assets,# less# the# change# in# the# value# of# its# liabilities,# plus# the# change# in# the# value# of# its# interest# rate# off-balance# sheet# contracts.

 

Federal# bank# regulatory# agencies# possess# broad# powers# to# take# prompt# corrective# action# as# deemed# appropriate# for# an# insured# depository# institution# and# its# holding# company,# based# on# the# institution’s# capital# levels.# The# extent# of# these# powers# depends# upon# whether# the# institution# in# question# is# considered# “well-capitalized,”# “adequately# capitalized,”# “undercapitalized,”# “significantly# under-capitalized,”# or# “critically# undercapitalized.”# Generally,# as# an# institution# is# deemed# to# be# less# well-capitalized,# the# scope# and# severity# of# the# agencies’# powers# increase,# ultimately# permitting# the# agency# to# appoint# a# receiver# for# the# institution.# Business# activities# may# also# be# influenced# by# an# institution’s# capital# classification.# For# instance,# only# a# “well-capitalized”# depository# institution# may# accept# brokered# deposits# without# prior# regulatory# approval# and# can# engage# in# various# expansion# activities# with# prior# notice,# rather# than# prior# regulatory# approval.# However,# rapid# growth,# poor# loan# portfolio# performance# or# poor# earnings# performance,# or# a# combination# of# these# factors,# could# change# the# capital# position# of# the# Bank# in# a# relatively# short# period# of# time.# Failure# to# meet# these# capital# requirements# could# subject# the# Bank# to# prompt# corrective# action# provisions# of# the# FDIC,# which# may# include# filing# with# the# appropriate# bank# regulatory# authorities# a# plan# describing# the# means# and# a# schedule# for# achieving# the# minimum# capital# requirements.# In# addition,# we# would# not# be# able# to# receive# regulatory# approval# of# any# application# that# required# consideration# of# capital# adequacy,# such# as# a# branch# or# merger# application,# unless# we# could# demonstrate# a# reasonable# plan# to# meet# the# capital# requirement# within# an# acceptable# period# of# time.

 

As# of# December# 31,# 2018,# the# Bank# was# considered# to# be# “well# capitalized”# with# a# 9.28%# Tier# 1# Leverage# ratio;# a# 12.90%# Common# Equity# Tier# 1# Risk-based# Capital# ratio,# a# 12.90%# Tier# 1# Risk-based# Capital# ratio,# and# a# 14.15%# Total# Risk-based# Capital# ratio.

 

 

Other# Safety# and# Soundness# Regulations

 

The# federal# banking# agencies# also# have# adopted# guidelines# prescribing# safety# and# soundness# standards# relating# to# internal# controls# and# information# systems,# internal# audit# systems,# loan# documentation,# credit# underwriting,# interest# rate# exposure,# asset# growth# and# compensation# and# benefits.# The# federal# regulatory# agencies# may# take# action# against# a# financial# institution# that# does# not# meet# such# standards.

 

11 Table# of# Contents  

Payment# of# Dividends

 

PMHG# is# a# legal# entity# separate# and# distinct# from# the# Bank.# The# Company’s# principal# sources# of# funds# to# pay# dividends# on# its# common# stock# are# capital# retained# from# stock# offerings# and# dividends# from# the# Bank.# Various# federal# and# state# laws# and# regulations# limit# the# amount# of# dividends# the# Bank# may# pay# to# the# Company# without# regulatory# approval.# The# Federal# Reserve# Board# is# authorized# to# determine# the# circumstances# when# the# payment# of# dividends# would# be# an# unsafe# or# unsound# practice# and# to# prohibit# such# payments.# The# rights# of# the# Company,# its# shareholders,# and# creditors,# to# participate# in# any# distribution# of# the# assets# or# earnings# of# the# Bank# are# also# subject# to# the# prior# claims# of# creditors# of# the# Bank.# Additionally,# the# Florida# Business# Corporation# Act# provides# that# the# Bank# may# only# pay# dividends# if# the# dividend# payment# would# not# render# the# company# insolvent,# or# unable# to# meet# its# obligations# as# they# come# due.

 

As# a# Florida# state-chartered# bank,# the# Bank# is# also# subject# to# regulatory# restrictions# on# the# payment# of# dividends,# including# a# prohibition# of# dividend# payments# from# the# Bank’s# capital# under# certain# circumstances# without# the# prior# approval# of# the# OFR# and# the# FDIC.# Except# with# the# prior# approval# of# the# OFR,# all# dividends# of# any# Florida# bank# must# be# paid# out# of# retained# net# profits# from# the# current# period# and# the# previous# two# years,# after# deducting# expenses,# including# losses# and# bad# debts.

 

Banks# are# also# required# to# hold# a# capital# conservation# buffer# of# CET1# in# excess# of# their# minimum# risk-based# capital# ratios# to# avoid# limits# on# dividend# payments# and# certain# other# bonus# payments.# Those# requirements# are# reflected# in# the# table# below:

 

 

 

 

Capital# Conservation# Buffer

(as# a# percentage# of# risk# weighted# assets)

  Maximum# Payout

Ratio# (as# a# %# of

the# Previous# Four

Quarters# of# Net

Income)

      Greater# than# 2.5%

  No# payout# limitation

Less# than# or# equal# to# 2.5%

and# greater# than# 1.875%

   

60%

Less# than# or# equal# to# 1.875%

and# greater# than# 1.25%

   

40%

Less# than# or# equal# to# 1.25%

and# greater# than# 0.625%

   

20%

Less# than# or# equal# to# 0.625%

  0%

 

The# Federal# Reserve# expects# bank# holding# companies# to# serve# as# a# source# of# strength# to# their# subsidiary# bank(s),# which# may# require# them# to# retain# capital# for# investment# in# their# subsidiary# bank(s),# rather# than# pay# dividends# to# shareholders.# As# stated# previously,# the# Bank# may# not# pay# dividends# to# PMHG,# if# after# paying# those# dividends,# the# Bank# would# fail# to# meet# the# required# minimum# levels# under# the# risk-based# capital# guidelines# and# the# minimum# leverage# ratio# requirements.# Payment# of# dividends# by# the# Bank# may# be# restricted# at# any# time# at# the# discretion# of# its# applicable# regulatory# authorities,# based# upon# the# Bank’s# capital# position# and# asset# quality.

 

Community# Reinvestment

 

In# connection# with# its# lending# activities,# the# Bank# is# subject# to# a# number# of# federal# laws# designed# to# protect# borrowers# and# promote# lending# to# various# sectors# of# the# economy# and# population.# These# include# the# Equal# Credit# Opportunity# Act,# the# Truth-in-Lending# Act,# the# Home# Mortgage# Disclosure# Act,# the# Real# Estate# Settlement# Procedures# Act,# and# the# Community# Reinvestment# Act# (the# “CRA”).# The# CRA# requires# the# appropriate# federal# banking# agency# to# assess# the# Bank's# record# in# meeting# the# credit# needs# of# the# communities# served# by# the# Bank,# including# low# and# moderate-income# neighborhoods.# Under# the# CRA,# institutions# are# assigned# a# rating# of# “outstanding,”# “satisfactory,”# “needs# to# improve,”# or# “substantial# noncompliance.”# The# Bank# received# a# “satisfactory”# rating# in# its# most# recent# CRA# evaluation.# In# addition,# pursuant# to# the# Gramm-Leach-Bliley# Act,# federal# banking# regulators# have# enacted# regulations# limiting# the# ability# of# banks# and# other# financial# institutions# to# disclose# nonpublic# consumer# information# to# non-affiliated# third# parties.# The# regulations# require# disclosure# of# privacy# policies# and# allow# consumers# to# prevent# certain# personal# information# from# being# shared# with# non-affiliated# third# parties.

 

The# Dodd-Frank# Act# created# the# Consumer# Financial# Protection# Bureau# (the# “CFPB”)# as# an# agency# to# centralize# responsibility# for# consumer# financial# protection,# including# implementing,# examining# and# enforcing# compliance# with# federal# consumer# financial# laws.# The# CFPB# has# focused# its# rulemaking# in# several# areas,# particularly# in# the# areas# of# mortgage# reform# involving# the# Real# Estate# Settlement# Procedures# Act,# the# Truth# in# Lending# Act,# the# Equal# Credit# Opportunity# Act,# and# the# Fair# Debt# Collection# Practices# Act.# Since# 2013,# the# CFPB# has# accomplished# several# big# changes# including# requiring# lenders# to# verify# borrowers’# income# and# ability# to# repay# loans# and# simplifying# the# disclosures# borrowers# receive# when# taking# out# a# loan.

 

Additional# rulemakings# to# come# under# the# Dodd-Frank# Act# will# dictate# compliance# changes# for# financial# institutions.# Any# such# changes# in# regulations# or# regulatory# policies# applicable# to# the# Bank# make# it# difficult# to# predict# the# ultimate# effect# on# our# financial# condition# or# results# of# operations.

 

12 Table# of# Contents  

Bank# Secrecy# Act# /# Anti-Money# Laundering# Laws

 

Banking# regulators# intensely# focus# on# Anti-Money# Laundering# and# Bank# Secrecy# Act# compliance# requirements,# particularly# the# Anti-Money# Laundering# provisions# of# the# USA# PATRIOT# Act.# The# USA# PATRIOT# Act# substantially# broadened# the# scope# of# U.S.# anti-money# laundering# laws# and# regulations# by# creating# new# laws,# regulations,# and# penalties,# imposing# significant# new# compliance# and# due# diligence# obligations,# and# expanding# the# extra-territorial# jurisdiction# of# the# U.S.# These# laws# and# regulations# require# the# Bank# to# implement# policies,# procedures,# and# controls# to# detect,# prevent,# and# report# potential# money# laundering# and# terrorist# financing# and# to# verify# the# identity# of# its# customers.# Violations# of# these# requirements# can# result# in# substantial# civil# and# criminal# sanctions.# In# addition,# provisions# of# the# USA# PATRIOT# Act# require# the# federal# financial# institution# regulatory# agencies# to# consider# the# effectiveness# of# a# financial# institution’s# anti-money# laundering# activities# when# reviewing# bank# mergers# and# BHC# acquisitions.

 

Interstate# Banking# and# Branching

 

Current# federal# law# authorizes# interstate# acquisitions# of# banks# and# bank# holding# companies# without# geographic# limitation.# Furthermore,# national# banks# and# state# banks# are# able# to# establish# branches# in# any# state# if# that# state# would# permit# the# establishment# of# the# branch# by# a# state# bank# chartered# in# that# state.# Florida# law# permits# a# state# bank# to# establish# a# branch# of# the# bank# anywhere# in# the# state.# Accordingly,# with# the# elimination# of# interstate# branching# under# the# Dodd-Frank# Act,# a# bank# with# its# headquarters# outside# the# State# of# Florida# may# establish# branches# anywhere# within# Florida.


Economic# and# Monetary# Policies

 

The# Bank’s# earnings# are# affected# by# the# policies# of# various# banking# regulatory# authorities# of# the# United# States,# especially# the# Federal# Reserve# and# FDIC.# The# Federal# Reserve,# among# other# things,# regulates# the# supply# of# money,# credit# and# interest# rates# as# a# means# of# influencing# general# economic# conditions# within# the# United# States.# The# instruments# of# monetary# policy# employed# by# the# Federal# Reserve# for# these# purposes# influence# the# overall# level# of# investments,# loans,# other# extensions# of# credit# and# deposits,# and# the# interest# rates# paid# on# liabilities# and# received# on# assets.

 

As# is# generally# true# with# all# banking# institutions,# the# Bank’s# operations# are# materially# and# significantly# influenced# by# these# general# economic# conditions# and# by# related# monetary# and# fiscal# policies# of# financial# institution# regulatory# agencies,# including# the# Federal# Reserve# and# the# FDIC.# Deposit# flows# and# the# cost# of# funds# are# influenced# by# interest# rates# on# competing# investments# and# general# market# rates# of# interest.# Lending# activities# are# affected# by# the# demand# for# real# estate# financing# and# other# types# of# loans,# which# in# turn,# is# affected# by# interest# rates# and# other# factors# affecting# local# demand# and# availability# of# funds.

 

Enterprise# Risk# Management

 

As# evidenced# by# many# of# the# challenges# that# the# financial# industry# has# faced,# we# understand# and# place# significant# emphasis# on# risk# management.# We# have# invested# resources# in# comprehensive# software# which# monitors# every# component# of# the# Bank.# We# believe# that# taking# a# global# view# of# the# Bank’s# processes,# down# to# the# details# of# each# procedure,# will# keep# us# properly# focused.# We# recognize# that# enterprise# risk# management# is# an# ongoing# process.

 

Our# solid# asset# quality# statistics# support# our# emphasis# on# risk# management.# With# respect# to# lending,# our# risk# management# philosophy# focuses# on# structuring# credits# to# provide# for# multiple# sources# of# repayment;# this# philosophy,# coupled# with# strong# underwriting# policies# and# processes# administered# by# experienced# lenders,# assists# us# with# managing# and# mitigating# our# lending# risks.# As# loans# are# reviewed,# any# borrowers# who# display# deteriorating# financial# conditions# are# moved# to# an# increased# level# of# monitoring# and# a# plan# for# implementing# corrective# actions# is# developed# to# minimize# losses.# We# also# have# an# annual# independent,# third-party# loan# review# performed.# In# addition,# our# risk# management# software# has# the# capability# to# stress# test# our# portfolio# utilizing# mild# and# severe# environments.

 

Our# program# also# focuses# on# other# specific# areas# of# risk# management# including# asset# liability# management,# regulatory# compliance,# vendor# management,# policy# review# tracking,# audit# functions,# and# internal# controls.# Our# asset# liability# management# process# is# extensive;# we# use# independent# models# by# reputable# third# parties# to# run# our# interest# rate# risk# model.# We# may# utilize# hedging# techniques# whenever# our# models# indicate# short# term# (net# interest# income)# or# long# term# (economic# value# of# equity)# risk# to# interest# rate# movements.

 

Our# enterprise# risk# management# program# assists# with# monitoring# operational# controls# and# compliance# control# functions.# We# have# also# engaged# an# experienced# independent# public# accounting# firm# to# assist# us# with# testing# controls# for# operations# and# compliance.# In# addition,# another# experienced# independent# firm# has# been# engaged# to# review# and# assess# our# controls# with# respect# to# technology# and# to# perform# penetration# testing# to# assist# us# in# managing# the# risks# associated# with# information# security.

 

Correspondent# Banking#

 

Correspondent# banking# gives# the# Bank# access# to# services# that# we# have# determined# are# not# economical# or# practical# to# perform# ourselves.# We# purchase# correspondent# services# offered# by# larger# banks,# including# check# collections,# purchase# of# federal# funds,# security# safekeeping,# investment# services,# coin# and# currency# supplies.# We# may# also# use# correspondent# banks# for# overline# and# liquidity# loan# participations# and# sales# of# loan# participations.

 

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Interest# and# Usury#

 

The# Bank# is# subject# to# numerous# state# and# federal# statutes# that# affect# the# interest# rates# that# may# be# charged# on# loans.# These# laws# do# not,# under# present# market# conditions,# deter# the# Bank# from# continuing# to# originate# loans.

 

Item# 1A

Risk# Factors

 

RISKS# RELATED# TO# OUR# BUSINESS# OPERATIONS

 

Some# of# our# borrowers# will# not# repay# their# loans,# and# losses# from# loan# defaults# may# exceed# the# allowance# we# establish# for# that# purpose,# which# may# have# an# adverse# effect# on# our# business.

 

Consistent# with# the# financial# institution# industry,# some# of# our# borrowers# inevitably# will# not# repay# loans# that# we# make# to# them.# This# risk# is# inherent# in# the# banking# business.# The# risk# of# credit# losses# on# loans# varies# with,# among# other# things,# general# economic# conditions,# the# type# of# loan# being# made,# the# creditworthiness# of# the# borrower# over# the# term# of# the# loan# and,# in# the# case# of# a# collateralized# loan,# the# value# and# marketability# of# the# collateral# for# the# loan.# If# a# significant# number# of# loans# are# not# repaid,# it# will# have# an# adverse# effect# on# our# earnings# and# overall# financial# condition.

 

Like# all# financial# institutions,# we# maintain# an# allowance# for# loan# losses# to# account# for# possible# loan# defaults# and# nonperformance.# The# allowance# for# loan# losses# reflects# our# best# estimate# of# probable# losses# in# the# loan# portfolio# at# the# relevant# time.# This# evaluation# is# based# primarily# upon# the# following:# a# review# of# our# historical# loan# loss# experience# as# adjusted# for# certain# qualitative# factors;# known# risks# contained# in# the# loan# portfolio;# known# risks# for# each# segment# of# our# loan# portfolio;# composition# and# growth# of# the# loan# portfolio;# and# certain# economic# factors.# Despite# our# best# efforts,# and# particularly# due# to# the# fact# that# we# have# a# limited# loan# loss# history,# the# determination# of# an# appropriate# level# of# loan# loss# allowance# is# an# inherently# difficult# process# and# is# based# on# numerous# assumptions# and# estimations.# As# a# result,# our# allowance# for# loan# losses# may# not# be# adequate# to# cover# our# actual# losses,# and# future# provisions# for# loan# losses# may# adversely# affect# our# earnings.

 

Our# recent# results# may# not# be# indicative# of# our# future# results.

 

We# may# not# be# able# to# sustain# our# historical# rate# of# growth.# In# addition,# our# recent# growth# may# distort# some# of# our# historical# financial# ratios# and# statistics.# Various# factors,# such# as# economic# conditions,# regulatory# and# legislative# considerations# and# limitations,# and# competition,# may# also# impede# or# prohibit# our# efforts# to# expand# our# market# presence.# If# we# experience# a# significant# decrease# in# our# historical# rate# of# growth,# our# results# from# operations# and# financial# condition# may# be# adversely# affected# due# to# a# high# percentage# of# our# operating# costs# being# fixed# expenses.

 

Changes# in# business# and# economic# conditions,# in# particular# those# of# the# Florida# markets# in# which# we# operate,# could# lead# to# lower# asset# quality# and# lower# earnings.#

 

Unlike# larger# national# or# regional# banks# that# are# more# geographically# diversified,# our# business# and# earnings# are# closely# tied# to# general# business# and# economic# conditions,# particularly# the# economy# of# the# Tallahassee# MSA.# The# local# economy# is# heavily# influenced# by# government,# education,# real# estate,# and# other# service-based# industries.# Factors# that# could# affect# the# local# economy# include# declines# in# government# spending,# higher# energy# costs,# reduced# consumer# or# corporate# spending,# natural# disasters# or# adverse# weather# and# a# significant# decline# in# real# estate# values.# A# sustained# economic# downturn# could# adversely# affect# the# quality# of# our# assets,# credit# losses,# and# the# demand# for# our# products# and# services,# which# could# lead# to# lower# revenue# and# lower# earnings.

 

Changes# in# interest# rates# affect# our# profitability# and# assets.

 

Our# profitability# depends# to# a# large# extent# on# the# Bank’s# net# interest# income,# which# is# the# difference# between# income# on# interest-earning# assets# such# as# loans# and# investment# securities,# and# expenses# on# interest-bearing# liabilities# such# as# deposits# and# borrowings.# We# are# unable# to# predict# changes# in# market# interest# rates,# which# are# affected# by# many# factors# beyond# our# control# including# inflation,# economic# recession,# unemployment,# money# supply,# domestic# and# international# events,# and# changes# in# the# United# States# and# other# financial# markets.

 

At# December# 31,# 2018,# our# one-year# interest# rate# sensitivity# position# was# slightly# asset# sensitive,# such# that# a# gradual# increase# in# interest# rates# during# the# next# twelve# months# would# have# a# positive# impact# on# our# net# interest# income.# Our# results# of# operations# are# affected# by# changes# in# interest# rates# and# our# ability# to# manage# this# risk.# The# difference# between# interest# rates# charged# on# interest-earning# assets# and# interest# rates# paid# on# interest-bearing# liabilities# may# be# affected# by# changes# in# market# interest# rates,# changes# in# relationships# between# interest# rate# indices,# and# changes# in# the# relationships# between# long-term# and# short-term# market# interest# rates.# Our# net# interest# income# may# be# reduced# if:# (i)# more# interest-earning# assets# than# interest-bearing# liabilities# reprice# or# mature# during# a# time# when# interest# rates# are# declining;# or# (ii)# more# interest-bearing# liabilities# than# interest-earning# assets# reprice# or# mature# during# a# time# when# interest# rates# are# rising.# In# addition,# the# mix# of# assets# and# liabilities# could# change# as# varying# levels# of# market# interest# rates# might# present# our# client# base# with# more# attractive# options.

 

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Liquidity# risk# could# impair# our# ability# to# fund# operations# and# jeopardize# our# financial# condition.

 

Liquidity# is# essential# to# our# business.# An# inability# to# raise# funds# through# deposits,# borrowings,# and# other# sources,# could# have# a# substantial# negative# effect# on# our# liquidity.# Our# access# to# funding# sources# in# amounts# adequate# to# finance# our# activities# on# terms# that# are# acceptable# to# us# could# be# impaired# by# factors# that# affect# us# specifically,# the# financial# services# industry,# or# the# economy# in# general.# Factors# that# could# negatively# impact# our# access# to# liquidity# sources# include# a# decrease# of# our# business# activity# as# a# result# of# a# downturn# in# the# markets# in# which# our# loans# are# concentrated,# adverse# regulatory# action# against# us,# or# our# inability# to# attract# and# retain# deposits.# Our# ability# to# borrow# could# be# impaired# by# factors# that# are# not# specific# to# us,# such# as# a# disruption# in# the# financial# markets# and# diminished# expectations# or# growth# in# the# financial# services# industry.

 

We# may# not# be# able# to# retain# or# grow# our# core# deposit# base,# which# could# adversely# impact# our# funding# costs.

 

Like# many# financial# institutions,# we# rely# on# client# deposits# as# our# primary# source# of# funding# for# our# lending# activities.# Our# future# growth# will# largely# depend# on# our# ability# to# retain# and# grow# our# deposit# base.# Although# we# have# historically# maintained# a# high# deposit# client# retention# rate,# these# deposits# are# subject# to# potentially# dramatic# fluctuations# in# availability# or# price# due# to# certain# factors# outside# of# our# control,# such# as# increasing# competitive# pressures# for# deposits,# changes# in# interest# rates# and# returns# on# other# investment# classes,# client# perceptions# of# our# financial# health# and# general# reputation,# or# a# loss# of# confidence# by# clients# in# us# or# the# banking# sector# generally.# Such# factors# could# result# in# significant# outflows# of# deposits# within# short# periods# of# time# or# significant# changes# in# pricing# necessary# to# maintain# current# client# deposits# or# attract# additional# deposits.# Additionally,# any# such# loss# of# funds# could# result# in# lower# loan# originations,# which# could# have# a# material# adverse# effect# on# our# business,# financial# condition# and# results# of# operations.

 

Our# loan# portfolio# includes# commercial,# real# estate,# and# consumer# and# other# loans# that# may# have# higher# risks.

 

Our# commercial# real# estate,# residential# real# estate# and# home# equity,# construction,# commercial,# and# consumer# and# other# loans# at# December# 31,# 2018,# were# $# 82.5# million,# $# 121.5# million,# $31.6# million,# $51.0# million,# and# $6.7# million,# respectively,# or# 28.1%,# 41.4%,# 10.8%,# 17.4%,# and# 2.3%# of# total# loans.# Commercial# loans# and# commercial# real# estate# loans# generally# carry# larger# balances# and# can# involve# a# greater# degree# of# financial# and# credit# risk# than# other# loans.# As# a# result,# banking# regulators# continue# to# give# greater# scrutiny# to# lenders# with# a# high# concentration# of# commercial# real# estate# loans# in# their# portfolios,# and# such# lenders# are# expected# to# implement# stricter# underwriting# standards,# internal# controls,# risk# management# policies,# and# portfolio# stress# testing,# as# well# as# higher# capital# levels# and# loss# allowances.# The# increased# financial# and# credit# risk# associated# with# these# types# of# loans# are# a# result# of# several# factors,# including# the# concentration# of# principal# in# a# limited# number# of# loans# and# borrowers,# the# size# of# loan# balances,# the# effects# of# general# economic# conditions# on# income-producing# properties,# and# the# increased# difficulty# of# evaluating# and# monitoring# these# types# of# loans.

 

Our# continued# pace# of# growth# may# require# us# to# raise# additional# capital# in# the# future,# but# that# capital# may# not# be# available# when# it# is# needed.#

 

We# are# required# by# federal# and# state# regulatory# authorities# to# maintain# adequate# levels# of# capital# to# support# our# operations.# Our# ability# to# raise# additional# capital# will# depend# on# conditions# in# the# capital# markets# at# that# time,# which# are# outside# our# control,# and# depend# on# our# financial# performance.# Accordingly,# there# is# no# assurance# as# to# our# ability# to# raise# additional# capital# if# needed# on# terms# acceptable# to# us.# If# we# cannot# raise# additional# capital# to# support# our# growth,# our# ability# to# further# expand# our# operations# through# internal# growth# and# acquisitions# could# be# materially# impaired.

 

We# may# be# subject# to# losses# due# to# fraudulent# and# negligent# acts# on# the# part# of# loan# applicants,# mortgage# brokers,# other# vendors# and# our# employees.

 

When# we# originate# loans,# we# rely# heavily# upon# information# supplied# by# loan# applicants# and# third# parties,# including# the# information# contained# in# the# loan# application,# property# appraisal,# title# information,# and# employment# and# income# documentation# provided# by# third# parties.# If# any# of# this# information# is# misrepresented# and# such# misrepresentation# is# not# detected# prior# to# loan# funding,# we# generally# bear# the# risk# of# loss# associated# with# the# misrepresentation.

 

Both# our# industry# and# our# primary# service# area# are# highly# competitive.

 

There# are# a# number# of# national# and# regional# financial# institutions# that# compete# with# us# in# our# primary# service# area,# both# within# Tallahassee# and# Leon# County# in# general,# and# Crawfordville,# Florida.# There# are# also# numerous# competitors# in# our# new# planned# market# area,# Lakeland,# Florida.# By# virtue# of# their# larger# capital# resources,# such# institutions# have# significantly# greater# lending# limits# than# we# have,# and# these# financial# institutions# have# the# ability# to# offer# a# greater# mix# of# financial# products# and# services# than# we# are# able# to# provide.# In# addition,# we# are# also# competing# with# other# financial# institutions,# such# as# savings# and# loan# associations# and# credit# unions,# for# deposits# and# loans.# Most# of# our# competitors# benefit# from# a# more# established# market# presence,# greater# capital,# and# a# larger# asset# and# lending# base.# As# a# result,# we# cannot# anticipate# the# extent# to# which# such# competition# may# negatively# affect# our# ability# to# operate# profitably.

 

15 Table# of# Contents  

Our# lending# limit# per# borrower# will# continue# to# be# lower# than# many# of# our# competitors# which# may# discourage# potential# clients# and# limit# our# loan# growth.

 

The# Bank’s# legally# mandated# lending# limit# is# lower# than# that# of# many# of# our# larger# competitors# because# we# have# less# capital.# At# December# 31,# 2018,# our# legal# lending# limit# for# loans# was# approximately# $9.5# million# to# any# one# borrower# on# a# secured# basis# and# $5.7# million# on# an# unsecured# basis.# Furthermore,# management# has# an# established# in-house# lending# limit# of# $5.0# million# for# any# single# secured# loan# or# loan# relationship# and# an# in-house# limit# of# $1.0# million# for# any# single# unsecured# loan# or# loan# relationship# as# of# December# 31,# 2018.# Although# we# have# not# experienced# this# to# date,# our# lower# lending# limit# may# discourage# potential# borrowers# with# loan# needs# that# exceed# our# limit# from# doing# business# with# us.# This# may# restrict# our# ability# to# grow.# We# attempt# to# serve# the# needs# of# these# borrowers# by# selling# loan# participations# to# other# institutions,# but# this# strategy# may# not# always# succeed.

 

A# significant# portion# of# our# loan# portfolio# is# secured# by# real# estate# in# our# geographic# markets# and# events# that# negatively# impact# the# real# estate# market# in# our# primary# market# could# hurt# our# business.

 

Our# interest-earning# assets# are# heavily# concentrated# in# mortgage# loans# secured# by# real# estate,# particularly# real# estate# located# in# Leon# County,# Florida.# As# of# December# 31,# 2018,# approximately# 80.3%# of# our# gross# loan# portfolio# (excluding# loans# held# for# sale)# had# real# estate# as# a# primary# or# secondary# component# of# collateral.# The# real# estate# collateral,# in# each# case,# provides# an# alternate# source# of# repayment# in# the# event# of# default# by# the# borrower;# however,# the# value# of# the# collateral# may# decline# during# the# time# the# credit# is# extended.# Real# estate# values# and# real# estate# markets# are# generally# affected# by# a# variety# of# factors# including# changes# in# economic# conditions;# fluctuations# in# interest# rates;# the# availability# of# credit;# changes# in# tax# laws# and# other# governmental# statutes,# regulations,# and# policies;# and# acts# of# nature.# If# we# are# required# to# liquidate# the# collateral# securing# a# loan# during# a# period# of# reduced# real# estate# values# to# satisfy# the# debt,# our# earnings# and# capital# could# be# adversely# affected.

 

This# concentration# of# loans# subjects# us# to# risks# if# there# is# a# downturn# in# the# economy# or# a# recession# similar# to# the# one# our# country# most# recently# experienced.# A# downturn# could# result# in# decreased# loan# originations# and# increased# delinquencies# and# foreclosures,# which# could# more# greatly# affect# us# than# if# our# lending# were# more# geographically# diversified.# In# addition,# since# a# large# portion# of# our# portfolio# is# secured# by# properties# located# in# Leon# County,# Florida,# the# occurrence# of# a# natural# disaster,# such# as# a# hurricane,# or# a# man-made# disaster# could# result# in# a# decline# in# loan# originations,# a# decline# in# the# value# or# destruction# of# mortgaged# properties,# and# an# increase# in# the# risk# of# delinquencies,# foreclosures# or# loss# on# loans# originated# by# us.

 

We# face# additional# risks# due# to# our# increased# mortgage# banking# activities# that# could# negatively# impact# net# income# and# profitability.

 

We# sell# the# majority# of# the# mortgage# loans# that# we# originate.# The# sale# of# these# loans# generates# noninterest# income# and# can# be# a# source# of# liquidity# for# the# Bank.# Disruption# in# the# secondary# market# for# residential# mortgage# loans# could# result# in# our# inability# to# sell# mortgage# loans,# which# could# negatively# impact# our# liquidity# position# and# earnings.# In# addition,# declines# in# real# estate# values# or# increases# in# interest# rates# could# reduce# the# potential# for# robust# mortgage# originations,# which# could# negatively# impact# our# earnings.# As# we# do# sell# mortgage# loans,# we# also# face# the# risk# that# such# loans# may# have# been# made# in# breach# of# our# representations# and# warranties# to# the# buyers# and# we# could# be# forced# to# repurchase# such# loans# or# pay# other# damages.

 

The# development# of# our# mortgage# lending# business# will# depend# on# our# ability# to# attract# and# retain# effective# loan# origination# officers# and# other# sources# of# mortgage# loan# referrals.

 

The# mortgage# lending# business# is# highly# dependent# on# being# able# to# successfully# originate# a# consistent# volume# of# loans.# The# primary# ways# we# intend# to# do# this# is# through# the# personal# sales# efforts# of# our# mortgage# lending# officers# and# our# development# of# loan# referral# sources,# such# as# real# estate# brokers.# If# we# are# unable# to# attract# and# retain# a# productive# team# of# such# officers# or# develop# an# effective# network# of# referral# sources,# we# will# likely# be# unable# to# generate# a# volume# of# mortgage# loans# to# produce# sufficient# revenue# for# this# line# of# business# to# be# profitable.# If# we# cannot# operate# this# line# of# business# in# a# profitable# manner,# we# will# likely# incur# losses# due# to# expenses# associated# with# attempting# to# establish# the# line# of# business.

 

Future# economic# growth# in# our# market# area# may# be# slower# compared# to# previous# years.#

 

The# State# of# Florida’s# population# growth# historically# has# exceeded# national# averages.# Consequently,# the# state# has# experienced# substantial# growth# in# new# business# formation# and# public# works# spending.# Although# recently# home# prices# have# increased# due# to# a# moderate# economic# growth# and# migration# into# our# market# area,# growth# in# our# market# area# may# still# be# restrained# in# the# near# term.# Any# decrease# in# existing# and# new# home# sales# limits# lending# opportunities# and# negatively# affects# our# income.# Additionally,# a# decline# in# property# values# could# lead# to# valuation# adjustments# on# our# loan# portfolio.

 

16 Table# of# Contents  

Our# business# strategy# depends# on# continued# growth;# therefore,# our# financial# condition# and# results# of# operations# could# be# negatively# affected# if# we# fail# to# grow# or# fail# to# manage# our# growth# effectively.

 

We# intend# to# continue# pursuing# a# growth# strategy# for# our# business.# Our# business# prospects# must# be# considered# in# light# of# the# risks,# expenses,# and# difficulties# that# are# frequently# encountered# by# companies# in# significant# growth# stages# of# development.# In# light# of# the# prevailing# economic# conditions,# we# cannot# assure# you# we# will# be# able# to# expand# our# market# presence# in# our# existing# market,# successfully# enter# new# markets,# or# that# any# such# expansion# will# not# adversely# affect# our# results# of# operations.# Failure# to# manage# our# growth# effectively# could# have# a# material# adverse# effect# on# our# business,# future# prospects,# financial# condition,# or# results# of# operations# and# could# negatively# affect# successful# implementation# of# our# business# strategy.

 

Reputational# risk# and# social# factors# may# impact# our# results.

 

Our# ability# to# originate# and# maintain# deposit# accounts# and# loans# is# highly# dependent# upon# client# and# community# perceptions# of# our# business# practices# and# our# financial# health.# Adverse# perceptions# regarding# those# factors# could# damage# our# reputation# in# our# markets,# leading# to# difficulties# in# generating# and# maintaining# deposit# and# loan# client# relationships.# Adverse# developments# with# respect# to# the# consumer# or# other# external# perceptions# regarding# the# practices# of# our# competitors,# or# our# industry# as# a# whole,# may# also# adversely# impact# our# reputation.# Adverse# impacts# on# our# reputation,# or# the# reputation# of# our# industry,# may# also# result# in# greater# regulatory# or# legislative# scrutiny,# which# may# lead# to# laws,# regulations# or# regulatory# actions# that# may# change# or# constrain# the# manner# in# which# we# engage# with# our# clients# and# the# products# we# offer.# Adverse# reputational# impacts# or# events# may# also# increase# our# litigation# risk.# We# carefully# monitor# internal# and# external# developments# for# areas# of# potential# reputational# risk# and# have# established# governance# structures# to# assist# in# evaluating# such# risks# in# our# business# practices# and# decisions.

 

We# may# face# risks# with# respect# to# future# expansion.

 

We# may# engage# in# additional# de# novo# branch# expansion,# expansion# through# acquisitions# of# existing# branches# of# other# financial# institutions,# or# the# acquisition# of# existing# financial# institutions# in# North# and# Central# Florida,# South# Georgia,# or# South# Alabama.# We# may# consider# and# enter# into# new# lines# of# business# or# offer# new# products# or# services.# Branch# expansion,# acquisitions,# and# mergers# involve# a# number# of# risks,# including,# but# not# limited# to:# (i)# the# time# and# costs# associated# with# identifying# and# evaluating# potential# acquisitions# and# merger# partners;# (ii)# inaccurate# estimates# and# judgments# regarding# credit,# operations,# management,# and# market# risks# of# the# target# institutions;# (iii)# the# time# and# costs# of# evaluating# new# markets,# hiring# experienced# local# management,# opening# new# offices,# and# the# time# lags# between# these# activities# and# the# generation# of# sufficient# assets# and# deposits# to# support# the# costs# of# the# expansion;# (iv)# our# ability# to# finance# an# acquisition# and# possible# dilution# to# our# existing# shareholders;# (v)# the# diversion# of# our# management’s# attention# to# the# negotiation# of# a# transaction,# and# the# integration# of# the# operations# and# personnel# of# the# combining# businesses;# (vi)# our# ability# to# penetrate# new# markets# when# we# lack# experience# in# those# markets;# (vii)# the# strain# of# growth# on# our# infrastructure,# staff,# internal# controls# and# managements,# which# may# require# additional# personnel,# time,# and# expenditures;# (viii)# exposure# to# potential# asset# quality# issues# with# acquired# institutions;# (ix)# the# introduction# of# new# products# and# services# into# our# business# that# could# prove# costly;# and# (x)# the# possibility# of# unknown# or# contingent# liabilities.

 

We# may# incur# substantial# costs# to# expand# and# we# can# give# no# assurance# such# expansion# will# result# in# the# levels# of# profits# we# seek.# There# can# be# no# guarantee# that# integration# efforts# of# any# future# mergers# or# acquisitions# will# be# successful.# Also,# we# may# issue# equity# securities,# including# common# stock# and# securities# convertible# into# shares# of# our# common# stock# in# connection# with# a# future# acquisition,# which# could# cause# ownership# and# economic# dilution# to# our# current# shareholders.

 

Our# business# is# exposed# to# the# possibility# of# technology# failure# and# a# disruption# in# our# operations# may# adversely# affect# our# business.

 

The# Bank# relies# on# its# computer# systems# and# the# technology# of# outside# service# providers# for# its# daily# operations.# We# rely# on# these# systems# to# accurately# track# and# record# our# assets# and# liabilities.# If# our# computer# systems# or# outside# technology# sources# become# unreliable,# fail,# or# experience# a# breach# of# security,# our# ability# to# maintain# accurate# financial# records# may# be# impaired,# which# could# materially# affect# our# business# operations# and# financial# condition.# In# addition,# a# disruption# in# our# operations# resulting# from# failure# of# transportation# and# telecommunication# systems,# loss# of# power,# interruption# of# other# utilities,# natural# disaster,# fire,# global# climate# changes,# computer# hacking# or# viruses,# failure# of# technology,# terrorist# activity,# or# the# domestic# and# foreign# response# to# such# activity# or# other# events# outside# of# our# control# could# have# an# adverse# impact# on# the# financial# services# industry# as# a# whole# and/or# on# our# business.# Our# business# continuity# plan# and# disaster# recovery# plan# may# not# be# adequate# and# may# not# prevent# significant# interruptions# of# our# operations# or# substantial# losses.# The# increased# number# of# cyber-attacks# during# the# past# few# years# has# further# heightened# our# awareness# of# this# risk.# As# the# environment# for# such# attacks# continues# to# evolve,# we# will# continue# to# implement# additional# security# controls.

 

17 Table# of# Contents  

A# failure# in# or# breach# of# our# operational# or# security# systems# or# infrastructure,# or# those# of# our# third-party# vendors# and# other# service# providers,# including# as# a# result# of# cyber-attacks,# could# disrupt# our# business,# result# in# the# disclosure# or# misuse# of# confidential# or# proprietary# information,# damage# our# reputation,# increase# our# costs# and# cause# financial# losses.

 

We# rely# heavily# on# communications# and# information# systems# to# conduct# our# business.# Information# security# risks# for# financial# institutions# such# as# ours# have# generally# increased# in# recent# years# in# part# because# of# the# proliferation# of# new# technologies,# the# use# of# the# internet# and# telecommunications# technologies# to# conduct# financial# transactions,# and# the# increased# sophistication# and# activities# of# organized# crime,# hackers,# terrorists,# activists,# and# other# external# parties.# As# client,# public,# and# regulatory# expectations# regarding# operational# and# information# security# have# increased,# our# operational# systems# and# infrastructure# must# continue# to# be# safeguarded# and# monitored# for# potential# failures,# disruptions,# and# breaches.# Our# business,# financial,# accounting# and# data# processing# systems,# or# other# operating# systems# and# facilities# may# stop# operating# properly# or# become# disabled# or# damaged# as# a# result# of# a# number# of# factors,# including# events# that# are# wholly# or# partially# beyond# our# control.# For# example,# there# could# be# electrical# or# telecommunications# outages;# natural# disasters# such# as# earthquakes,# tornadoes,# and# hurricanes;# disease# pandemics;# events# arising# from# local# or# larger# scale# political# or# social# matters,# including# terrorist# acts;# and,# as# described# below,# cyber-attacks.

 

As# noted# above,# our# business# relies# on# our# digital# technologies,# computer# and# email# systems,# software,# and# networks# to# conduct# its# operations.# Although# we# have# information# security# procedures# and# controls# in# place,# our# technologies,# systems,# networks,# and# our# clients’# devices# may# become# the# target# of# cyber-attacks# or# information# security# breaches# that# could# result# in# the# unauthorized# release,# gathering,# monitoring,# misuse,# loss# or# destruction# of# our# or# our# clients’# confidential,# proprietary# and# other# information,# or# otherwise# disrupt# our# or# our# clients’# or# other# third# parties’# business# operations.# Third# parties# with# whom# we# do# business# or# that# facilitate# our# business# activities,# including# financial# intermediaries,# or# vendors# that# provide# services# or# security# solutions# for# our# operations,# and# other# third# parties,# could# also# be# sources# of# operational# and# information# security# risk# to# us,# including# from# breakdowns# or# failures# of# their# own# systems# or# capacity# constraints.

 

While# we# have# disaster# recovery# and# other# policies# and# procedures# designed# to# prevent# or# limit# the# effect# of# the# failure,# interruption# or# security# breach# of# our# information# systems,# there# can# be# no# assurance# that# any# such# failures,# interruptions# or# security# breaches# will# not# occur# or,# if# they# do# occur,# that# they# will# be# adequately# addressed.# Our# risk# and# exposure# to# these# matters# remains# heightened# because# of# the# evolving# nature# of# these# threats.# As# a# result,# cybersecurity# and# the# continued# development# and# enhancement# of# our# controls,# processes# and# practices# designed# to# protect# our# systems,# computers,# software,# data# and# networks# from# attack,# damage# or# unauthorized# access# remain# a# focus# for# us.# As# threats# continue# to# evolve,# we# may# be# required# to# expend# additional# resources# to# continue# to# modify# or# enhance# our# protective# measures# or# to# investigate# and# remediate# information# security# vulnerabilities.# Disruptions# or# failures# in# the# physical# infrastructure# or# operating# systems# that# support# our# businesses# and# clients,# or# cyber-attacks# or# security# breaches# of# the# networks,# systems# or# devices# that# our# clients# use# to# access# our# products# and# services# could# result# in# client# attrition,# regulatory# fines,# penalties# or# intervention,# reputational# damage,# reimbursement# or# other# compensation# costs,# and/or# additional# compliance# costs,# any# of# which# could# materially# adversely# affect# our# results# of# operations# or# financial# condition.

 

Technological# changes,# including# online# and# mobile# banking,# have# the# potential# of# disrupting# our# business# model,# and# we# may# have# fewer# resources# than# many# competitors# to# invest# in# technological# improvements.

 

The# financial# services# industry# is# experiencing# significant# and# rapid# technological# changes.# Many# of# our# bank# and# non-bank# competitors# frequently# introduce# new# technology-driven# products# and# services.# Changes# in# client# expectations# and# behaviors# have# increased# the# need# to# offer# these# options# to# our# clients.# Our# future# success# will# depend,# in# part,# upon# our# ability# to# invest# in# and# use# technology# to# provide# products# and# services# that# provide# convenience# to# clients# and# to# create# additional# efficiencies# in# operations.# We# will# need# to# make# significant# additional# capital# investments# in# technology,# and# we# may# not# be# able# to# effectively# implement# new# technology-driven# products# and# services# in# a# timely# manner# in# response# to# changes# in# client# behaviors,# thus# adversely# affecting# our# operations.# Many# competitors# have# substantially# greater# resources# to# invest# in# technological# improvements# than# we# do.

 

We# may# not# be# able# to# attract# and# retain# skilled# people.

 

Our# success# depends,# in# large# part,# on# our# ability# to# attract# and# retain# key# people.# Competition# for# the# best# people# in# most# activities# we# engage# in# can# be# intense# and# we# may# not# be# able# to# hire# people# or# to# retain# them.# An# inability# to# develop# and# maintain# a# skilled# and# well# qualified# team# of# employees# could# have# a# material# adverse# impact# on# our# business,# because# they# are# integral# to# the# implementation# of# our# business# strategies# and# the# provision# of# service# to# our# clients.# Finding# qualified# replacement# personnel# can# be# time# consuming# and# expensive# and# distract# us# from# our# business# activities.

 

We# are# dependent# on# key# executive# officers,# the# loss# of# which# may# be# detrimental# to# our# operations.

 

We# are# dependent# on# certain# executive# officers# of# the# Company# and# the# Bank,# for# their# leadership# and# oversight# in# all# aspects# of# our# operations# and# the# unexpected# loss# of# any# of# these# personnel# could# adversely# affect# our# operations.# Such# adverse# effects# may# be# magnified# if# such# officers# were# to# become# employed# with# a# competitor# of# ours.

 

18 Table# of# Contents  

If# our# enterprise# risk# management# framework# is# not# effective,# we# could# suffer# unexpected# losses# and# our# results# of# operations# could# be# materially# adversely# affected.

 

Our# enterprise# risk# management# framework# seeks# to# achieve# an# appropriate# balance# between# risk# and# return,# which# is# critical# to# optimizing# financial# performance# and# stockholder# value.# We# have# established# processes# and# procedures# intended# to# identify,# measure,# monitor,# report# and# analyze# the# types# of# risk# to# which# we# are# subject,# including# credit,# liquidity,# operational,# regulatory# compliance# and# reputational.# However,# as# with# any# risk# management# framework,# there# are# inherent# limitations# to# our# risk# management# strategies# as# there# may# exist,# or# develop# in# the# future,# risks# that# we# have# not# appropriately# anticipated# or# identified.# If# our# risk# management# framework# proves# ineffective,# we# could# suffer# unexpected# losses# and# our# business# and# results# of# operations# could# be# materially# adversely# affected.

 

We# operate# in# a# geographic# location# that# is# vulnerable# to# hurricanes;# a# direct# hit# could# be# detrimental# to# our# operations.#

 

In# October# 2018,# Hurricane# Michael# had# a# devastating# effect# on# the# areas# just# west# of# Tallahassee,# rendering# them# virtually# inhabitable# for# long# periods# of# time.# We# have# a# disaster# recovery# plan# in# place# for# such# events# that# includes# among# other# things# plans# to# move# a# team# of# key# employees# to# an# offsite# remote# location.# While# management# believes# it# has# a# viable# plan# in# place# to# keep# the# Bank# operational,# it# has# never# been# fully# tested# in# a# major# natural# disaster.

 

 

LEGAL# AND# REGULATORY# RISKS#

 

We# are# subject# to# government# regulation# and# monetary# policy# that# could# constrain# our# growth# and# profitability. 

 

We# are# subject# to# extensive# federal# government# supervision# and# regulations# that# impose# substantial# limitations# with# respect# to# lending# activities,# purchases# of# investment# securities,# the# payment# of# dividends,# and# many# other# aspects# of# the# banking# business.# Many# of# these# regulations# are# intended# to# protect# depositors,# the# public,# and# the# FDIC# but# not# our# shareholders.# The# banking# industry# is# heavily# regulated.# We# are# subject# to# examinations,# supervision# and# comprehensive# regulation# by# various# federal# and# state# agencies.# Our# compliance# with# these# regulations# is# costly# and# restricts# certain# activities# of# the# Bank.# Banking# regulations# are# primarily# intended# to# protect# the# Bank# Insurance# Fund# and# depositors,# not# shareholders.# The# burden# imposed# by# federal# and# state# regulations# puts# banks# at# a# competitive# disadvantage# compared# to# less# regulated# competitors# such# as# finance# companies,# mortgage# banking# companies# and# leasing# companies.# Federal# economic# and# monetary# policy# may# also# affect# our# ability# to# attract# deposits,# make# loans,# and# achieve# our# planned# operating# results.

 

 

Legislation# and# regulatory# proposals# enacted# in# response# to# market# and# economic# conditions# may# materially# adversely# affect# our# business# and# results# of# operations.

 

Changes# in# the# laws,# regulations,# and# regulatory# practices# affecting# the# banking# industry# may# increase# our# costs# of# doing# business# or# otherwise# adversely# affect# us# and# create# competitive# advantages# for# others.# The# Dodd-Frank# Act# in# particular# represents# a# significant# overhaul# of# many# aspects# of# the# regulation# of# the# financial# services# industry.# These# changes# may# impact# the# profitability# of# our# business# activities,# require# changes# to# some# of# our# business# practices,# or# otherwise# adversely# affect# our# business,# as# would# other# regulatory# initiatives# that# may# become# effective.# These# changes# may# also# require# us# to# invest# significant# management# attention# and# resources# to# evaluate# and# make# any# changes# necessary# to# comply# with# new# statutory# and# regulatory# requirements.# It# may# also# require# us# to# hold# higher# levels# of# regulatory# capital# and/or# liquidity# and# it# may# cause# us# to# adjust# our# business# strategy# and# limit# our# future# business# opportunities.# We# cannot# predict# the# effects# of# this# legislation# and# the# corresponding# regulations# on# us,# our# competitors,# or# on# the# financial# markets# and# economy,# although# it# may# significantly# increase# costs# and# impede# efficiency# of# internal# business# processes.

 

Our# information# systems# may# experience# an# interruption# or# security# breach.#

 

We# rely# heavily# on# communications# and# information# systems# to# conduct# our# business.# We# also# provide# our# clients# the# ability# to# bank# electronically# through# online# banking,# remote# capture,# mobile# capture,# and# mobile# banking.# The# secure# transmission# of# confidential# information# over# the# internet# is# a# critical# element# of# banking# online.# Our# network# could# be# vulnerable# to# unauthorized# access,# computer# viruses,# phishing# schemes,# and# other# security# problems.# Any# failure,# interruption,# or# breach# in# the# security# of# these# systems# could# result# in# disruptions# in# our# client# relationship# management,# general# ledger,# deposit,# loan,# and# other# systems.# While# we# have# policies# and# procedures# designed# to# prevent# or# limit# the# effects# of# possible# failure,# interruption,# or# security# breach# of# our# information# systems,# there# can# be# no# assurance# that# any# such# failure,# interruption# or# security# breach# will# not# occur# or,# if# they# do# occur,# that# they# will# be# adequately# addressed.# The# occurrence# of# any# failure,# interruption,# or# security# breach# of# our# information# systems# could# damage# our# reputation,# result# in# a# loss# of# client# business,# subject# us# to# additional# regulatory# scrutiny,# or# expose# us# to# civil# litigation# and# possible# financial# liability.# While# we# do# carry# insurance# to# protect# against# losses# resulting# from# such# technology# issues# or# breaches,# we# could# be# exposed# to# claims,# litigation,# and# other# possible# liabilities# that# could# exceed# the# maximum# policy# limits.

 

19 Table# of# Contents  

Florida# financial# institutions# face# a# higher# risk# of# noncompliance# and# enforcement# actions# with# the# Bank# Secrecy# Act# and# other# Anti-Money# Laundering# statutes# and# regulations.

 

Banking# regulators# focus# intensely# on# Anti-Money# Laundering# and# Bank# Secrecy# Act# compliance# requirements,# particularly# the# Anti-Money# Laundering# provisions# of# the# USA# PATRIOT# Act.# They# also# intensely# scrutinize# compliance# with# the# rules# enforced# by# the# Office# of# Foreign# Assets# Control.# Both# federal# and# state# banking# regulators# and# examiners# have# been# extremely# aggressive# in# their# supervision# and# examination# of# financial# institutions# located# in# the# State# of# Florida# with# respect# to# institutions’# Bank# Secrecy# Act# and# Anti-Money# Laundering# compliance.# Consequently,# a# number# of# formal# enforcement# actions# have# been# issued# against# Florida# financial# institutions.

 

In# order# to# comply# with# regulations,# guidelines,# and# examination# procedures# in# this# area,# the# Bank# has# been# required# to# adopt# policies# and# procedures# and# to# install# expensive# systems.# If# our# policies,# procedures,# and# systems# are# deemed# deficient,# then# we# may# be# subject# to# liability,# including# fines# and# regulatory# actions# such# as# restrictions# on# our# ability# to# pay# dividends# and# the# necessity# to# obtain# regulatory# approvals# to# proceed# with# certain# aspects# of# our# business# plan# including# acquisition# plans.

 

Higher# FDIC# deposit# insurance# premiums# and# assessments# could# adversely# affect# our# financial# condition.

 

The# deposits# of# the# Bank# are# insured# by# the# FDIC# up# to# legal# limits# and,# accordingly,# subject# the# Bank# to# the# payment# of# FDIC# deposit# insurance# assessments.# The# Bank’s# regular# assessments# are# determined# by# its# risk# classification,# which# is# based# on# its# regulatory# capital# levels# and# the# level# of# supervisory# concern# that# it# poses.# Any# increases# in# assessment# rates# or# special# assessments# which# may# occur# in# the# future# could# reduce# our# profitability# or# limit# our# ability# to# pursue# certain# business# opportunities,# which# could# materially# and# adversely# affect# our# business,# financial# condition,# results# of# operations,# and# prospects.

 

The# FASB# has# issued# an# accounting# standard# update# that# may# result# in# a# significant# change# in# how# we# recognize# credit# losses# and# may# have# a# material# impact# on# our# financial# condition# or# results# of# operations.

 

The# Financial# Accounting# Standards# Board# (“FASB”)# has# issued# an# accounting# standard# update,# “Financial# Instruments-Credit# Losses# (Topic# 326),# Measurement# of# Credit# Losses# on# Financial# Instruments,”# which# replaces# the# current# “incurred# loss”# model# for# recognizing# credit# losses# with# an# “expected# loss”# model.# This# model# is# commonly# referred# to# as# the# Current# Expected# Credit# Loss# (“CECL”).# Under# CECL,# we# will# be# required# to# present# certain# financial# assets# carried# at# amortized# cost,# such# as# loans# held# for# investment# and# held-to-maturity# debt# securities,# at# the# net# amount# expected# to# be# collected.# The# measurement# of# expected# credit# losses# is# to# be# based# on# information# about# past# events,# including# historical# experience,# current# conditions,# and# reasonable# and# supportable# forecasts# that# affect# the# collectability# of# the# reported# amount.# This# measurement# will# take# place# at# the# time# the# financial# asset# is# first# added# to# the# balance# sheet# and# periodically# thereafter.# This# differs# from# the# “incurred# loss”# model# required# under# current# generally# accepted# accounting# principles# (“GAAP”),# which# delays# recognition# until# it# is# probable# a# loss# has# been# incurred.# Accordingly,# the# adoption# of# the# CECL# model# may# affect# how# we# determine# our# allowance# for# loan# losses# and# could# require# us# to# significantly# increase# our# allowance.# Moreover,# the# CECL# model# may# create# more# volatility# in# the# level# of# our# allowance# for# loan# losses.# If# we# are# required# to# materially# increase# our# level# of# allowance# for# loan# losses# for# any# reason,# such# increase# could# adversely# affect# our# business,# financial# condition# and# results# of# operations.

 

CECL# will# become# effective# for# the# Company# for# fiscal# years# beginning# after# December# 15,# 2019. # We# continue# to# evaluate# the# impact# that# the# CECL# model# will# have# on# our# accounting,# and# plan# to# run# parallel# modeling# options# during# the# second# half# of# 2019,# in# preparation# of# the# CECL# effective# date. # We# expect# to# recognize# a# one-time# cumulative-effect# adjustment# to# our# allowance# for# loan# losses# and# retained# earnings# as# of# the# beginning# of# the# first# reporting# period# following# implementation. # We# cannot# yet# determine# the# magnitude# of# any# such# one-time# cumulative# adjustment# or# the# overall# impact# of# the# new# standard# on# our# financial# condition# or# results# of# operations.

 

RISKS# RELATED# TO# OWNERSHIP# OF# SHARES# OF# OUR# COMMON# STOCK

 

The# limited# trading# market# may# make# it# difficult# for# you# to# sell# your# shares# in# the# future.

 

Shares# of# our# common# stock# trade# on# the# OTCQX# market# under# the# symbol,# “PMHG.”# However,# there# is# limited# trading# activity# in# our# common# stock.# A# public# market# having# depth# and# liquidity# depends# on# having# enough# buyers# and# sellers# at# any# given# time.# Without# an# active# trading# market,# shareholders# may# find# it# difficult# to# find# buyers# for# their# shares.# Investors# should# be# aware# that# they# may# be# required# to# bear# the# financial# risks# of# this# investment# for# an# indefinite# period# of# time.

 

Our# Board# of# Directors# owns# a# significant# percentage# of# our# shares# and# will# be# able# to# make# decisions# to# which# you# may# be# opposed.

 

As# of# March# 8,# 2019,# the# Company’s# directors# and# executive# officers# as# a# group# owned# 650,542# shares# of# common# stock,# or# 20.7%# of# our# outstanding# common# stock.# In# addition,# the# directors# and# executive# officers# have# stock# options# to# acquire# 70,457# shares# of# common# stock,# which,# if# fully# exercised,# would# result# in# them# owning# 22.4%# of# our# outstanding# common# stock.# Our# directors# and# executive# officers# are# expected# to# exert# a# significant# influence# on# the# election# of# Board# members# and# on# the# direction# of# the# Company.# This# influence# could# negatively# affect# the# price# of# our# shares# or# be# inconsistent# with# other# shareholders’# desires.

 

20 Table# of# Contents  

We# may# face# statutory# restrictions# on# our# ability# to# pay# dividends# in# the# immediate# future.

 

In# January# 2019,# the# Board# of# Directors# declared# an# annual# dividend# of# $0.12# per# share# on# our# common# stock,# payable# on# March# 5,# 2019,# to# shareholders# of# record# on# February# 14,# 2019.# PMHG’s# ability# to# pay# dividends# to# our# shareholders# depends# on# our# retention# of# capital# from# our# stock# offerings# and# our# possible# receipt# of# dividends# from# the# Bank.# The# Bank# is# also# subject# to# restrictions# on# dividends# as# a# result# of# banking# laws,# regulations,# and# policies.# If# PMHG# has# not# retained# sufficient# capital# and# the# Bank# elects# not# to,# or# is# unable# to,# pay# dividends# to# PMHG,# it# is# unlikely# that# PMHG# will# be# able# to# pay# dividends# to# its# shareholders.

 

Item# 1B 

Unresolved# Staff# Comments

 

None.

 

Item# 2 

Properties

 

We# operated# out# of# three# facilities# during# the# year# ended# December# 31,# 2018# and# plan# to# open# our# fourth# facility# in# the# second# quarter# of# 2019.

 

Location

   

Use

   

Own# or# Lease

  Year# First

Occupied

              1897# Capital# Circle# NE

Tallahassee,# Florida# 32308

  Executive# office# and# headquarters# of# the# Company# and# main# office# and# operations# center# of# the# Bank

  Own

  2012

              1471# Timberlane# Road

Tallahassee,# Florida# 32312

  Branch# office# of# the# Bank

  Lease

  2007

              2201# Crawfordville# Highway

Crawfordville,# Florida# 32327

  Branch# office# of# the# Bank

  Own

  2016

              3340# South# Florida# Avenue

Lakeland,# Florida# 33803

  Proposed# branch# office# of# the# Bank   Own   2019(1)  

  (1)

The# Bank# purchased# this# facility# on# February# 15,# 2019.# The# Bank# is# renovating# the# office# and# is# scheduled# to# open# during# the# second# quarter# of# 2019.

 

Item# 3 

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# 4

Mine# Safety# Disclosure

 

Not# applicable.

 

Item# 5

Market# for# Registrant’s# Common# Equity,# Related# Stockholder’s# Matters# and# Issuer# Purchases# of# Equity# Securities

 

The# Company’s# common# stock# is# traded# on# the# OTCQX,# an# interdealer# quotation# system,# under# the# symbol# “PMHG.”# As# of# March# 8,# 2019,# there# were# 336# record# holders# of# common# stock.# Quotations# on# the# OTCQX# reflect# inter-dealer# prices,# without# retail# mark-up# or# commission# and# may# not# necessarily# represent# actual# transactions.

 

Share# Repurchase

 

We# did# not# repurchase# any# shares# of# our# common# stock# in# 2018.

 

Stock# Plans

 

The# equity# compensation# plan# information# presented# in# Part# III,# Item# 12# of# this# Form# 10-K# is# incorporated# herein# by# reference.

 

21 Table# of# Contents  

Item# 6:#

Selected# Financial# Data

 

The# following# table# is# a# presentation# of# summary# financial# data# for# PMHG# as# of# December# 31,# 2018,# 2017,# and# 2016# and# for# the# years# ended# December# 31,# 2018,# 2017,# and# 2016.# The# following# Selected# Financial# Data# should# be# read# in# conjunction# with# the# other# financial# disclosures# and# discussions# contained# elsewhere# in# this# report.# Our# historical# results# are# not# necessarily# indicative# of# results# to# be# expected# in# future# periods.

 

    At# or# For# the# Years# Ended# December# 31,#

  (Dollars# in# thousands,# except# per# share# amounts)

  2018

    2017

    2016

  Balance# Sheet# Data:

                        Total# assets

  $ 401,702     $ 347,180     $ 303,941   Total# loans,# net

    290,113       250,259       222,768   Total# deposits

    349,067       298,297       275,347   Total# shareholders'# equity

    50,820       46,973       27,082                             Income# Statement# Data:

                        Net# interest# income

  $ 13,927     $ 11,770     $ 9,943   Provision# for# loan# losses

    591       256       424   Noninterest# income

    1,306       1,153       1,098   Noninterest# expense

    9,380       8,115       7,180   Income# taxes

    1,220       1,735       1,217   Net# earnings

    4,042       2,817       2,220                             Per# Common# Share# Outstanding# Data:

                        Basic# net# earnings# per# common# share

  $ 1.29     $ 1.04     $ 1.12   Diluted# net# earnings# per# common# share

    1.29       1.04       1.11   Book# value# per# common# share

    16.19       15.06       13.51   Common# shares# outstanding

    3,138,945       3,118,977       2,004,707   Average# common# shares# outstanding:

                        Per# basic:

    3,125,689       2,704,382       1,982,334   Per# diluted:

    3,131,546       2,711,699       1,991,161   Performance# Ratios:

                        Return# on# average# assets

    1.07 %

    0.85 %

    0.81 % Return# on# average# equity

    8.43       7.17       8.51   Net# interest# margin

    3.81       3.68       3.74                             Asset# Quality# Ratios:

                        Allowance# to# loans

    1.25 %

    1.24 %

    1.28 % Allowance# for# loan# losses# to# nonperforming# loans

    1,070.47       2,340.30       354.62   Nonperforming# loans# to# total# loans

    0.12       0.05       0.36   Nonperforming# assets# to# total# assets

    0.09       0.04       0.27   Net# charge-offs# (recoveries)# to# average# loans

    0.02       0.00       0.01   Troubled# debt# restructurings# to# loans

    0.22       0.09       0.03                             Capital# Ratios:

                        Total# risk-based# capital# ratio# (Bank)

    14.15 %

    14.01 %

    12.95 % Tier# 1# risk-based# capital# ratio# (Bank)

    12.90       12.80       11.70   Common# equity# Tier# 1# risked-based# capital# ratio# (Bank)

    12.90       12.80       11.70   Tier# 1# leverage# capital# ratio# (Bank)

    9.28       9.48       8.73   Total# equity# to# total# assets# (Bank)

    12.65       13.53       8.91                             Other# Data:

                        Number# of# full-time# employees

    79       71       64   Number# of# full-service# branch# offices

    3       3       3    

22 Table# of# Contents  

Item# 7:#

Management’s# Discussion# and# Analysis# of# Financial# Condition# and# Results# of# Operations

 

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# actual# effect# of# future# plans# or# strategies# is# inherently# uncertain.# Factors# that# could# have# a# material# adverse# effect# on# our# operations# and# the# operations# of# our# subsidiary,# Prime# Meridian# Bank,# include,# but# are# not# limited# to,# changes# in# the# following:

 

 

local,# regional,# and# national# economic# and# business# conditions;

 

banking# laws,# compliance,# and# the# regulatory# environment;

 

unanticipated# changes# in# the# 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;

 

fraud# committed# by# our# clients# or# persons# doing# business# with# our# clients;

 

consumer# spending,# borrowing# and# savings# habits;

 

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

 

application# and# interpretation# of# accounting# principles# and# guidelines;

 

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

 

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

 

General

 

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.# The# following# discussion# should# be# read# in# conjunction# with# the# Company’s# consolidated# financial# statements.

 

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,# salaries# plus# related# employee# benefits,# and# occupancy# and# equipment.# 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.

 

Application# of# Critical# Accounting# Policies# and# Estimates 

 

Our# consolidated# financial# statements# are# prepared# in# accordance# with# accounting# principles# generally# accepted# in# the# United# States# (“GAAP”)# and# with# prevailing# practices# within# the# banking# industry.# Application# of# these# principles# requires# management# to# make# estimates# and# assumptions# that# affect# the# amounts# reported# in# the# financial# statements# and# accompanying# notes;# therefore,# our# financial# condition# and# results# of# operations# are# sensitive# to# accounting# measurements# and# estimates# of# matters# that# are# inherently# uncertain.# When# applying# accounting# policies# in# areas# that# are# subjective# in# nature,# the# Bank# must# use# its# best# judgment# to# arrive# at# the# carrying# value# of# certain# assets.# The# most# critical# accounting# policy# applied# is# the# valuation# of# our# subsidiary# bank's# loan# portfolio.# A# variety# of# estimates# impact# the# carrying# value# of# the# loan# portfolio# including# the# calculation# of# the# allowance# for# loan# losses,# the# valuation# of# underlying# collateral,# the# timing# of# loan# charge-offs,# and# the# amount# and# amortization# of# loan# fees# and# deferred# origination# costs.

 

23 Table# of# Contents  

We# base# our# estimates# on# historical# experience# and# on# various# other# assumptions# that# we# believe# to# be# reasonable# under# current# circumstances.# These# assumptions# form# the# basis# for# our# judgments# about# the# carrying# values# of# assets# and# liabilities# that# are# not# readily# available# from# independent,# objective# sources.# We# evaluate# our# estimates# on# an# ongoing# basis.# Use# of# alternative# assumptions# may# have# resulted# in# significantly# different# estimates# and# actual# results# may# differ# from# these# estimates.

 

We# have# identified# the# following# accounting# policy# and# estimate# as# critical.# In# order# to# understand# our# financial# condition# and# results# of# operations,# it# is# important# to# comprehend# how# these# assumptions# apply# to# our# financial# statements.

 

Allowance# for# Loan# Losses.# Our# allowance# for# loan# losses# (“ALLL”)# is# established# through# a# provision# for# loan# losses# charged# to# earnings# as# specific# loan# losses# are# identified# by# management# and# as# inherent# loan# losses# are# determined# to# exist.# Loan# losses# are# charged# against# the# ALLL# when# management# believes# the# uncollectability# of# a# loan# balance# is# confirmed.# Subsequent# recoveries,# if# any,# are# credited# to# the# ALLL.

 

Our# ALLL# is# evaluated# for# adequacy# by# management# on# a# monthly# basis# and# is# based# upon# management’s# periodic# review# of# the# collectability# of# the# loan# portfolio# in# light# of# historical# experience# in# the# industry,# the# nature# and# volume# of# the# loan# portfolio,# adverse# situations# that# may# affect# the# borrower’s# ability# to# repay,# estimated# value# of# any# underlying# collateral,# prevailing# economic# conditions# and# industry# standards.# This# evaluation# is# inherently# subjective# as# it# requires# estimates# that# are# susceptible# to# significant# revision# as# more# information# becomes# available.

 

Specific# loan# losses# are# identified# and# evaluated# in# accordance# with# ASC# 310-10# –# “Receivables.”# A# loan# is# considered# impaired# when,# based# on# current# information# and# events,# it# is# probable# that# we# will# be# unable# to# collect# the# scheduled# payments# of# principal# or# interest# when# due# according# to# the# contractual# terms# of# the# loan# agreement.# Factors# considered# by# management# in# determining# impairment# status# include# payment# status# and# the# probability# of# collecting# scheduled# principal# and# interest# payments# when# due.# Loans# that# experience# insignificant# payment# delays# and# payment# shortfalls# generally# are# not# considered# as# impaired.# We# look# at# the# significance# of# payment# delays# and# payment# shortfalls# on# a# case-by-case# basis,# taking# into# consideration# all# of# the# circumstances# surrounding# the# loan# and# the# borrower,# including# the# length# of# the# delay,# the# reasons# for# the# delay,# the# borrower’s# prior# payment# record,# and# the# amount# of# the# shortfall# in# relation# to# the# principal# and# interest# owed.

 

When# a# loan# is# considered# impaired,# the# amount# of# the# impairment# is# measured# on# a# loan-by-loan# basis# by# comparing# the# recorded# investment# in# the# loan# to# any# of# the# following# measurements:# the# present# value# of# expected# future# cash# flows# discounted# at# the# loan’s# effective# interest# rate,# the# loan’s# obtainable# market# price,# or# the# fair# value# of# the# collateral# if# the# loan# is# collateral# dependent.# If# the# recorded# investment# in# the# loan# is# higher# than# the# calculated# impairment# basis,# the# difference# is# maintained# as# a# specific# loan# loss# allocation,# or# it# is# charged# off# if# the# amount# is# determined# to# be# uncollectible.# As# the# Bank# grows,# management# may# elect# to# collectively# evaluate# large# groups# of# smaller# balance# homogeneous# loans# for# impairment,# instead# of# on# a# loan-by-loan# basis.

 

Inherent# loan# losses# are# evaluated# in# accordance# with# ASC# 450-20# –# “Contingencies.”# Management# currently# uses# three# years# of# historical# loan# loss# data;# however,# because# of# limited# loss# experience# we# also# take# into# account# the# following# qualitative# factors:# (i)# changes# in# lending# policies# and# procedures,# risk# selection# and# underwriting# standards;# (ii)# changes# in# national,# regional# and# local# economic# conditions# that# affect# the# collectability# of# the# loan# portfolio;# (iii)# changes# in# the# experience,# ability,# and# depth# of# lending# management# and# other# relevant# staff;# (iv)# changes# in# the# volume# and# severity# of# past# due# loans,# nonaccrual# loans# or# loans# classified# “Special# Mention,”# “Substandard,”# “Doubtful”# or# “Loss;”# (v)# the# quality# of# loan# review# and# Board# of# Directors# oversight;# (vi)# changes# in# the# nature# and# volume# of# the# loan# portfolio# and# terms# of# loans;# (vii)# the# existence# and# effect# of# any# concentrations# of# credit# and# changes# in# the# level# of# such# concentrations;# and# (viii)# the# effect# of# other# external# factors,# trends# or# uncertainties# that# could# affect# management’s# estimate# of# probable# losses,# such# as# competition# and# industry# conditions.# As# evidence# of# inherent# loan# loss# increases,# the# appropriate# qualitative# risk# factors# may# be# increased# to# support# any# additional# risk# in# the# portfolio.

 

Recent# Interest-Rate# Trends

 

Like# many# other# financial# institutions,# our# results# of# operations# are# dependent# on# net# interest# income,# which# is# the# difference# between# interest# received# on# interest-earning# assets,# such# as# loans# and# securities,# and# interest# paid# on# interest-bearing# liabilities,# namely# deposits# and# borrowings.# We# are# unable# to# predict# changes# in# market# interest# rates,# which# are# affected# by# many# factors# beyond# our# control# including# inflation,# economic# conditions,# unemployment,# money# supply,# domestic# and# international# events,# and# changes# in# the# United# States# and# other# financial# markets.# Our# net# interest# income# may# be# reduced# if# (i)# more# interest-earning# assets# than# interest-earning# liabilities# reprice# or# mature# during# a# time# when# interest# rates# are# declining,# or# (ii)# more# interest-bearing# liabilities# than# interest-earning# assets# reprice# or# mature# during# a# time# when# interest# rates# are# rising.# We# measure# the# potential# adverse# impacts# of# changing# interest# rates# by# shocking# average# interest# rates# up# or# down# 100# to# 400# basis# points# and# calculating# the# potential# impacts# on# our# net# interest# income,# liquidity,# and# economic# value# of# equity.# We# utilize# the# results# of# these# simulations# to# determine# whether# to# increase# or# decrease# our# fixed# rate# loan# portfolio,# to# adjust# our# investment# in# assets# such# as# bonds,# or# to# take# other# action# in# order# to# maintain# or# improve# our# net# interest# margin# given# the# trending# or# expected# interest# rate# changes.

 

24 Table# of# Contents  

As# of# December# 31,# 2018,# 66.0%# of# our# loan# portfolio# consisted# of# adjustable-rate# loans,# meaning# these# loans# will# adjust# with# changes# in# interest# rates# and# pose# less# interest# rate# risk# in# a# rising# interest# rate# environment.# Of# these# loans,# $55.3# million,# or# 18.8%# have# interest# rate# ceilings# in# place# which# protects# the# borrower# from# rising# interest# rates.# The# majority# of# our# loans# with# ceilings# in# place# are# residential# mortgage# loans.# Also,# as# of# December# 31,# 2018,# 42.6%# of# the# total# loan# portfolio# was# scheduled# to# mature# in# five# years# or# less,# which# helps# mitigate# the# risks# of# a# fixed-rate# loan# portfolio# in# a# rising# interest# rate# environment.# If# interest# rates# increase,# however,# borrowers# may# be# less# inclined# to# seek# new# loans.# In# addition,# higher# interest# rates# could# adversely# affect# an# adjustable# rate# borrower’s# ability# to# continue# servicing# debt.# On# the# other# hand,# loans# totaling# $156.9# million,# or# approximately# 53.5%# of# our# total# loan# portfolio,# have# interest# rate# floors# which# will# help# protect# our# net# interest# margin# in# a# decreasing# rate# environment.

 

Our# ability# to# originate# new# loans# may# be# further# impeded# by# increased# competition# for# high# quality# borrowers# which# leads# to# downward# pricing# pressure# on# loans,# a# general# consumer# and# business# bias# towards# reducing# debt# levels,# and# the# lingering# effects# of# the# economic# recession# on# the# financial# condition# of# both# consumers# and# businesses,# making# the# underwriting# of# new# loans# more# challenging. 

 

Interest# Rate# Sensitivity

 

A# principal# objective# of# the# Bank’s# asset# liability# management# strategy# is# to# manage# its# exposure# to# changes# in# interest# rates# within# Board# approved# policy# limits# by# matching# the# maturity# and# re-pricing# characteristics# of# interest-earning# assets# and# interest-bearing# liabilities.# This# strategy# is# overseen# through# the# direction# of# the# Bank’s# Asset# and# Liability# Committee# (“ALCO”),# which# establishes# policies# and# monitors# results# to# control# interest# rate# sensitivity.

 

We# model# our# current# interest# rate# exposure# in# various# rate# scenarios,# review# our# model# assumptions,# and# then# stress# test# those# assumptions.# Based# on# the# results,# we# then# formulate# strategies# regarding# asset# generation,# funding# sources# and# their# pricing# parameters,# as# well# as# evaluate# off-balance# sheet# commitments# in# order# to# maintain# interest# rate# risk# within# Board# approved# target# limits.# We# utilize# industry# recognized# Asset# Liability# models# driven# by# third-party# providers# to# analyze# the# Bank’s# interest# rate# sensitivity.# From# these# externally# generated# reports,# ALCO# can# estimate# both# the# effect# on# Net# Interest# Income# and# the# effect# on# Economic# Value# of# Equity# (“EVE”)# in# various# interest# rate# scenarios.

 

As# a# part# of# the# Bank’s# Interest# Rate# Risk# Management# Policy,# our# ALCO# examines# the# extent# to# which# the# Bank’s# assets# and# liabilities# are# “interest# rate# sensitive”# and# monitors# its# interest# rate# sensitivity.# An# asset# or# liability# is# considered# to# be# interest# rate# sensitive,# for# income# purposes,# if# its# projected# income/expense# amount# will# change# if# interest# rates# change.# Likewise,# it# is# considered# interest# rate# sensitive# for# EVE# if# its# economic# value# will# change# if# interest# rates# change.

 

In# an# asset# sensitive# portfolio,# the# Bank’s# net# income# and# EVE# will# increase# in# a# rising# rate# environment# as# assets# will# re-price# faster# than# liabilities.# Conversely,# if# the# Bank# is# liability# sensitive# and# the# liabilities# re-price# faster# than# the# assets,# net# income# and# EVE# will# fall# in# a# rising# rate# environment.

 

In# modeling# the# Bank’s# interest# rate# exposure,# the# Bank# makes# a# number# of# important# assumptions# about# the# behavior# of# assets# and# liabilities.# The# critical# assumptions# fall# into# three# main# categories,# Nonmaturity# Deposit# Assumptions,# Loan# Prepayment# Assumptions,# and# Options.# Currently,# the# most# significant# assumptions# which# affect# the# Bank’s# interest# rate# sensitivity# are# the# Nonmaturity# Deposit# Assumptions,# followed# by# the# Loan# Prepayment# Assumptions.

 

Nonmaturity# Deposit# Assumptions

 

Nonmaturity# Deposit# Betas# –# The# Beta# of# a# nonmaturity# deposit# is# a# measure# of# the# repricing# behavior# of# the# deposit.# Based# on# the# Bank’s# own# historical# experience,# the# Bank# determines# how# much# the# price# of# a# deposit# will# change# as# a# percentage# of# the# change# in# the# market# rates.# For# example,# a# 50%# Beta# means# that# the# deposit# price# will# change# by# 50%# of# the# market# rate# change.

 

Nonmaturity# Decay# –# We# determine# how# “sticky”# deposits# are# by# assigning# a# “maturity”# to# the# deposits,# e.g.# 120# months.# These# assumptions# are# based# on# our# own# experience# by# looking# at# both# the# age# of# the# current# deposit# base# and# the# historic# monthly# account# closings# experience.# The# lower# the# Beta# (more# fixed# rate# nature)# and# the# higher# the# Decay# (longer# duration),# the# less# sensitive# a# bank# becomes.

 

Loan# Prepayment# Assumptions

 

We# also# determine# how# likely# each# asset# or# liability# is# to# prepay# or# be# withdrawn# prior# to# its# contracted# maturity# date.# As# refinancing# rates# become# increasingly# attractive,# prepayment# speeds# increase# as# clients# are# able# to# prepay# loans# and# refinance# at# lower# rates.# Conversely,# prepayments# decrease# in# a# rising# rate# environment;# however,# time# deposits# will# display# the# opposite# behavior# if# clients# are# able# to# withdraw# their# CDs# without# significant# penalty# and# reinvest# at# a# higher# rate.# In# a# decreasing# rate# environment,# clients# generally# hold# their# time# deposits# to# maturity.

 

Loan# prepayment# speed# changes# are# not# linear;# they# will# continue# to# increase# as# rates# fall# but# will# plateau# as# rates# rise.# Therefore,# the# Bank’s# asset# prices# will# not# change# linearly# with# market# rate# changes.# The# higher# the# prepayment# speed# of# assets# or# withdrawal# speed# of# term# liabilities,# the# more# liability# sensitive# the# Bank# becomes.# The# Bank# monitors# its# prepayments# and# withdrawals# and# updates# the# assumptions# used# in# the# risk# models# on# a# monthly# basis.

 

25 Table# of# Contents  

In# addition,# certain# balance# sheet# instruments# such# as# interest-rate# floors# or# caps# on# loans,# be# they# periodic# or# lifetime,# and# other# optionality# on# investments,# limit# or# increase# income# and# create# value# changes# of# the# instrument# as# interest# rates# change.

 

Options

 

We# monitor# our# exposure# to# option-type# effects# and# manage# our# option# risk.# The# amount# of# option# risk,# aside# from# prepayment# risk,# is# minimal.

 

We# monitor# our# exposure# on# a# monthly# basis# under# thirteen# different# rate# scenarios,# including# rates# rising# or# declining# by# up# to# 4%# and# the# current# yield# curve# flattening# or# steepening.# We# compare# these# results# to# the# Board’s# established# limits# to# determine# if# a# limit# has# been# compromised.# If# a# limit# is# exceeded,# we# have# policies# and# strategies# in# place# to# reduce# the# exposure# back# to# acceptable# levels.# In# addition,# we# also# stress# test# all# of# our# assumptions# under# these# rate# scenarios# to# determine# at# what# point# the# Board# approved# target# limits# would# be# compromised,# even# if# they# are# not# currently# compromised# using# the# historically# determined# assumptions.# If# the# limits# are# in# danger# of# being# compromised# with# relatively# small# assumption# changes,# we# would# adjust# our# strategy# to# reduce# exposure.# All# of# these# assumptions,# reports,# stress# tests,# and# strategies# are# reviewed# by# ALCO# at# least# quarterly# and# all# limit# exceptions# are# reported# to# the# Board.

 

Currently,# we# have# not# entered# into# any# interest-rate# swaps# or# similar# off-balance# sheet# hedging# instruments# in# connection# with# our# asset# liability# management.# Further# discussion# on# off-balance# sheet# arrangements# can# be# found# in# Note# 8# of# the# Notes# to# Consolidated# Financial# Statements.

 

Our# exposure# to# credit# loss# in# the# event# of# nonperformance# by# the# other# party# to# the# financial# instrument# for# commitments# to# extend# credit,# unused# lines# of# credit,# guaranteed# accounts,# and# standby# letters# of# credit# is# represented# by# the# contractual# amount# of# those# instruments.

 

Our# strategy# is# to# maintain# an# interest# rate# risk# position# within# the# tolerance# limits# set# by# the# Board# of# Directors# in# order# to# protect# our# net# interest# margin# under# extreme# market# fluctuations.# Principal# among# our# asset# liability# management# strategies# has# been# the# emphasis# on# reducing# exposure# during# periods# of# fluctuating# interest# rates.# We# believe# that# the# type# and# amount# of# our# interest# rate# sensitive# liabilities# should# reduce# the# potential# impact# that# a# rise# in# interest# rates# might# have# on# our# net# interest# income.

 

We# look# to# maintain# a# core# deposit# base# by# providing# quality# services# to# our# clients,# without# significantly# increasing# our# cost# of# funds# or# operating# expenses.# We# anticipate# that# these# accounts# will# continue# to# comprise# a# significant# portion# of# the# Bank’s# total# deposit# base.# We# also# maintain# a# portfolio# of# liquid# assets# in# order# to# reduce# overall# exposure# to# changes# in# market# interest# rates.# Likewise,# we# maintain# a# “floor,”# or# minimum# rate,# on# certain# of# our# floating# or# published# base# rate# loans.# These# floors# allow# us# to# continue# to# earn# a# higher# rate# when# the# floating# rate# falls# below# the# established# floor# rate.# All# interest# rate# ceilings# and# floors# are# clearly# and# closely# related# to# the# loan# agreement;# therefore,# they# are# not# bifurcated# and# valued# separately.

 

26 Table# of# Contents  

RESULTS# OF# OPERATIONS 

 

Net# interest# income# constitutes# the# principal# source# of# income# for# the# Bank# and# results# from# the# excess# of# interest# income# on# interest-earning# assets# over# interest# expense# on# interest-bearing# liabilities.# The# principal# interest-earning# assets# are# investment# securities# and# loans# receivable.# Interest-bearing# liabilities# primarily# consist# of# time# deposits,# interest-bearing# checking# accounts,# savings# deposits,# money-market# accounts,# and# other# borrowings.# Funds# attracted# by# these# interest-bearing# liabilities# are# invested# in# interest-earning# assets.# Accordingly,# net# interest# income# depends# upon# the# volume# of# average# interest-earning# assets# and# average# interest-bearing# liabilities# and# the# interest# rates# earned# or# paid# on# these# assets# and# liabilities.

 

The# table# below# sets# forth# information# regarding:# (i)# the# total# dollar# amount# of# interest# and# dividend# income# of# the# Bank# from# interest-earning# assets# and# the# resultant# average# yields;# (ii)# the# total# dollar# amount# of# interest# expense# on# interest-bearing# liabilities# and# the# resultant# average# costs;# (iii)# net# interest# income;# (iv)# interest# rate# spread;# (v)# net# interest# margin;# and# (vi)# weighted-average# yields# and# rates.# Yields# and# costs# were# derived# by# dividing# annualized# income# or# expense# by# the# average# balance# of# assets# or# liabilities.# The# yields# and# costs# depicted# in# the# table# include# the# amortization# of# fees,# which# are# considered# to# constitute# adjustments# to# yields# (dollars# in# thousands).# As# shown# in# the# table# below,# year# over# year,# the# yield# on# the# average# balance# of# interest-earning# assets# increased# 39# basis# points,# while# the# average# balance# of# interest-earning# assets# increased# $45.9# million,# or# 14.3%.# This# outpaced# the# 14.3%,# or# $31.5# million,# increase# in# the# average# balance# of# total# interest-bearing# liabilities# and# the# 38# basis-point# increase# in# the# cost# of# funds.

 

    For# the# Year# Ended# December# 31,#

              2018

                    2017

              Average#

    Interest

and#

    Yield/

    Average#

    Interest and#

    Yield/

  (dollars# in# thousands)

  Balance

    Dividends

    Rate

    Balance

    Dividends

    Rate

  Interest-earning# assets:

                                                Loans(1)

  $ 283,967     $ 14,215       5.01 %

  $ 240,875     $ 11,403       4.73 %

Mortgage# loans# held# for# sale

    5,385       254       4.72       4,040       186       4.60   Securities

    46,866       1,131       2.41       43,828       983       2.24   Other(2)

    29,625       634       2.14       31,237       379       1.21   Total# interest-earning# assets

    365,843     $ 16,234       4.44       319,980     $ 12,951       4.05   Noninterest-earning# assets

    13,445                       11,702                   Total# assets

  $ 379,288                     $ 331,682                                                                     Interest-bearing# liabilities:

                                                Savings,# NOW# and# money-market# deposits

  $ 218,921     $ 1,824       0.83 %

  $ 198,642     $ 1,028       0.52 %

Time# deposits

    32,665       483       1.48       21,403       153       0.71   Total# interest-bearing# deposits

    251,586       2,307       0.92       220,045       1,181       0.54   Other# borrowings

    -       -               8       -           Total# interest-bearing# liabilities

    251,586     $ 2,307       0.92       220,053     $ 1,181       0.54   Noninterest-bearing# deposits

    78,061                       70,856                   Noninterest-bearing# liabilities

    1,709                       1,490                   Stockholders'# equity

    47,932                       39,283                   Total# liabilities# and# stockholders'# equity

  $ 379,288                     $ 331,682                                                                     Net# earning# assets

  $ 114,257                     $ 99,927                   Net# interest# income

          $ 13,927                     $ 11,770           Interest# rate# spread

                    3.52 %

                    3.51 %

Net# interest# margin(3)

                    3.81 %

                    3.68 %

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

    1.45                       1.45                    

(1)  # Includes# nonaccrual# loans

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

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

 

27 Table# of# Contents  

Comparison# of# the# years# ended# December# 31,# 2018# and# 2017

 

Year# ended# December# 31,#

                  Change# 2018# vs.# 2017

  (dollars# in# thousands)

  2018

    2017

    Amount

    Percent

  Net# Interest# Income

  $ 13,927     $ 11,770     $ 2,157       18.3 %

Provision# for# Loan# Losses

    591       256       335       130.9   Noninterest# income

    1,306       1,153       153       13.3   Noninterest# expense

    9,380       8,115       1,265       15.6   Income# Taxes

    1,220       1,735       (515 )     (29.7 ) Net# Income

  $ 4,042     $ 2,817     $ 1,225       43.5 %

 

 

Net# earnings# for# the# year# ended# December# 31,# 2018,# were# $4.0# million# or# $1.29# per# basic# and# diluted# share# compared# to# net# earnings# of# $2.8# million,# or# $1.04# per# basic# and# diluted# share# in# 2017.# The# $1.2# million,# or# 43.5%,# increase# in# net# earnings# is# primarily# attributed# to# organic# loan# growth,# higher# yields# on# interest-earning# assets,# higher# transactional# volume# of# debit# cards,# and# a# lower# corporate# income# tax# rate.

 

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# investments,# and# interest# expense# on# interest-bearing# liabilities# such# as# deposits# and# borrowings.# Net# interest# income# was# $13.9# million# for# the# year# ended# December# 31,# 2018,# compared# to# $11.8# million# for# the# year# ended# December# 31,# 2017.

 

Interest# Income.

 

Year# ended# December# 31,#

                  Change# 2018# vs.# 2017

  (dollars# in# thousands)

  2018

    2017

    Amount

    Percent

  Interest# income:

                                Loans

  $ 14,469     $ 11,589     $ 2,880       24.9 %

Securities

    1,131       983       148       15.1   Other

    634       379       255       67.3   Total# interest# income

  $ 16,234     $ 12,951     $ 3,283       25.3 %

 

 

Year# over# year,# the# Company’s# average# net# loan# portfolio# increased# $43.1# million,# or# 17.9%.# This# organic# growth,# in# conjunction# with# higher# average# loan# yields,# accounted# for# over# 85%# of# the# increase# in# total# interest# income.# Higher# rates# paid# on# federal# funds# sold# and# higher# interest# income# on# mortgage-backed# securities# also# contributed# to# the# increase.

 

Interest# Expense.

 

Year# ended# December# 31,#

                  Change# 2018# vs.# 2017

  (dollars# in# thousands)

  2018

    2017

    Amount

    Percent

  Total# interest# expense

  $ 2,307     $ 1,181     $ 1,126       95.3 %  

 

The# increase# in# the# Company’s# cost# of# funds# year# over# year# was# driven# by# growing# balances# of# time# deposits# and# money# market# accounts# and# higher# rates# paid# on# those# deposits.# For# the# year# ended# December# 31,# 2018,# the# average# balance# of# interest-bearing# deposits# increased# $31.5# million,# or# 14.3%,# while# the# average# rates# paid# on# deposits# increased# 38# basis# points.

 

Provision# for# Loan# Losses.# For# the# year# ended# December# 31,# 2018,# the# provision# for# loan# losses# increased# $335,000,# or# 130.9%,# due# to# the# Company’s# 15.9%# increase# in# net# loans# and# additional# reserves# taken# on# impaired# loans# during# the# year.

 

28 Table# of# Contents  

Noninterest# Income

 

Year# ended# December# 31,#

                  Change# 2018# vs.# 2017

  (dollars# in# thousands)

  2018

    2017

    Amount

    Percent

  Service# charges# and# fees# on# deposit# accounts

  $ 333     $ 322     $ 11       3.4 %

Mortgage# banking# revenue

    447       435     $ 12       2.8   Income# from# bank-owned# life# insurance

    66       46     $ 20       43.5   Other# income

    460       350     $ 110       31.4   Total# noninterest# income

  $ 1,306     $ 1,153     $ 153       13.3 %

 

 

Year# over# year,# the# driver# of# noninterest# income# was# the# $110,000# increase# in# other# income,# which# is# principally# due# to# a# higher# volume# of# ATM# and# debit# card# transactions.# The# income# from# bank-owned# life# insurance# increased# year# over# year# after# the# Bank# purchased# additional# life# insurance# during# the# fourth# quarter# to# expand# coverage# on# additional# key# personnel.# Growth# in# mortgage# banking# revenue# slowed# down# in# the# second# half# of# the# year# due# to# a# decline# in# FHA# loan# originations# and# a# general# slowdown# in# secondary# market# loan# production.# Management# expects# both# of# these# trends# to# continue# into# 2019.

 

 

Noninterest# Expense

 

Year# ended# December# 31,#

                  Change# 2018# vs.# 2017

  (dollars# in# thousands)

  2018

    2017

    Amount

    Percent

  Salaries# and# employee# benefits

  $ 5,106     $ 4,236     $ 870       20.5 %

Occupancy# and# equipment

    932       947     $ (15 )     (1.6 ) Professional# fees

    374       320     $ 54       16.9   Marketing

    677       574     $ 103       17.9   FDIC/State# Assessment

    163       158     $ 5       3.2   Software# maintenance,# amortization# and# other

    634       535     $ 99       18.5   Other

    1,494       1,345     $ 149       11.1   Total# noninterest# expense

  $ 9,380     $ 8,115     $ 1,265       15.6 %

 

 

Salaries# and# employee# benefits# continue# to# drive# the# increase# in# noninterest# expense.# The# Bank# has# continued# to# add# additional# personnel# as# it# positions# itself# for# organic# growth# and# possible# expansionary# activities.# Full-time# equivalent# employees# increased# from# seventy-one# at# December# 31,# 2017# to# seventy-nine# at# December# 31,# 2018.

 

Also# contributing# to# the# growth# in# noninterest# expense# were# modest# increases# in# marketing# expense,# software# maintenance,# amortization,# and# other# expense,# and# other# noninterest# expense.# The# gains# in# other# noninterest# expense# are# primarily# attributed# to# options# expense# for# directors,# increased# ATM# network# expense,# and# higher# losses# from# fraud# and# forgeries.

 

Our# operating# efficiency# ratio,# expressed# as# noninterest# expense# as# a# percent# of# net# interest# income# plus# noninterest# income# improved# slightly# from# 62.8%# in# 2017# to# 61.6%# in# 2018.

 

Income# Taxes 

 

The# provision# for# income# taxes# decreased# $515,000# for# the# year# ended# December# 31,# 2018,# compared# to# the# year# ended# December# 31,# 2017.# The# Company# benefitted# from# the# Tax# Cuts# and# Jobs# Act# of# 2017,# which# reduced# the# corporate# income# tax# from# 34%# to# 21%.

 

29 Table# of# Contents  

Rate/Volume# Analysis#

 

The# following# table# sets# forth# certain# information# regarding# changes# in# interest# income# and# interest# expense# for# the# periods# indicated.# For# each# category# of# interest-earning# assets# and# interest-bearing# liabilities,# information# is# provided# on# changes# attributable# to:# (i)# changes# in# rate# (change# in# rate# multiplied# by# prior# volume);# (ii)# changes# in# volume# (changes# in# volume# multiplied# by# prior# rate);# and# (iii)# changes# in# rate-volume# (change# in# rate# multiplied# by# change# in# volume).# As# disclosed# in# the# table# below,# the# higher# volume# of# loans# was# the# primary# driver# of# the# increase# in# net# interest# income# in# 2018.

 

    Year# Ended# December# 31,# 2018# versus# 2017

      Rate

    Volume

    Rate/Volume

    Total

                                    (in# thousands)

                                Interest-earning# assets:

                                Loans

  $ 658     $ 2,103     $ 119     $ 2,880   Securities

    75       68       5       148   Other# interest-earning# assets

    290       (20 )     (15 )     255   Total

  $ 1,023     $ 2,151     $ 109     $ 3,283                                     Interest-bearing# liabilities:

                                Savings,# NOW# and# money-market# deposits

  $ 627     $ 105     $ 64     $ 796   Time# deposits

    163       81       86       330   Total# Deposits

    790       186       150       1,126   Total# change# in# net# interest# income

  $ 233     $ 1,965     $ (41 )   $ 2,157    

FINANCIAL# CONDITION#

 

Average# interest-earning# assets# increased# $45.9# million# from# $320.0# million# at# December# 31,# 2017# to# $365.8# million# at# December# 31,# 2018,# primarily# reflecting# growth# in# our# loan# portfolio.# Year# over# year,# the# average# balance# of# portfolio# loans# grew# 17.9%# to# $284.0# million# at# December# 31,# 2018,# due# solely# to# organic# growth.

 

Investment# Securities

 

Our# investment# securities# portfolio# is# a# significant# part# of# our# operations# and# a# key# component# of# our# asset/liability# management.# Our# primary# objective# in# managing# our# investment# portfolio# is# to# maintain# a# portfolio# of# high# quality,# highly# liquid# investments# yielding# competitive# returns.# We# use# the# investment# securities# portfolio# for# several# purposes.# It# serves# as# a# vehicle# to# manage# interest# rate# and# prepayment# risk,# to# generate# interest# and# dividend# income,# to# provide# liquidity# to# meet# funding# requirements,# and# to# provide# collateral# for# pledging# of# public# funds.# We# manage# our# investment# portfolio# according# to# a# written# investment# policy# approved# by# our# Board# of# Directors# in# order# to# accomplish# these# goals.# Currently,# two# types# of# classifications# are# approved# for# investment# securities# in# our# portfolio# -# Available-for-Sale# and# Held-to-Maturity.# Adjustments# are# sometimes# necessary# in# the# portfolio# to# provide# liquidity# for# funding# loan# demand# and# deposit# fluctuations# and# to# control# interest# rate# risk.# Therefore,# from# time# to# time,# management# may# sell# certain# securities# prior# to# their# maturity.

 

At# December# 31,# 2018,# our# Available-for-Sale# investment# portfolio# included# U.S.# Treasury# notes,# municipal# securities,# and# mortgage-backed# securities# and# had# a# fair# market# value# of# $45.4# million.# At# December# 31,# 2018# and# 2017,# our# investment# securities# portfolio# represented# approximately# 11.3%# and# 14.3%# of# our# total# assets,# respectively.# The# average# balance# of# investment# securities# increased# 6.9%,# or# $3.0# million# year# over# year,# while# the# average# yield# on# investment# securities# increased# from# 2.24%# for# the# year# ended# December# 31,# 2017# to# 2.41%# for# the# year# ended# December# 31,# 2018.

 

 

The# following# table# sets# forth# the# carrying# amount# of# the# investment# portfolio# as# of# the# dates# indicated:

 

    At# December# 31,

      2018

    2017

  (in# thousands)

                Available# for# Sale:

                U.S.# Government# agency# securities

  $ 799     $ 1,249   Municipal# securities

    11,529       12,373   Mortgage-backed# securities

    33,056       36,187   Total# securities# available# for# sale

  $ 45,384     $ 49,809    

30 Table# of# Contents  

The# carrying# amount# and# weighted# average# yields# for# investments# as# of# December# 31,# 2018# are# shown# below:

 

(dollars# in# thousands)

  U.S.#

Government#

Agency#

    Municipal#

    Mortgage-

Backed#

    Total#

    Weighted-

Average# Yields#

  Due# in# one# to# five# years

  $ 799     $ 3,432     $ -     $ 4,231       2.49 % Due# in# five# to# ten# years

    -       5,496       -       5,496       2.92   Due# after# ten# years

    -       2,601       -       2,601       3.38   No# defined# maturity

    -       -       33,056       33,056       2.52   Total

  $ 799     $ 11,529     $ 33,056     $ 45,384       2.62 %

 #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #   

*# All# securities# are# listed# at# actual# yield# and# not# on# a# tax-equivalent# basis.

 

 

Cash# Surrender# Value# of# Bank-Owned# Life# Insurance

 

We# maintained# investments# of# $6.3# million# and# $1.8# million# in# Bank-Owned# Life# Insurance# policies# at# December# 31,# 2018# and# 2017,# respectively,# due# to# attractive# risk-adjusted# returns# and# for# protection# against# the# loss# of# key# executives,# including# our# Chief# Executive# Officer# Sammie# D.# Dixon# and# Senior# Lender# and# Executive# Vice# President# Chris# L.# Jensen,# Jr.# The# Company# increased# its# investment# in# bank-owned# life# insurance# increased# in# 2018# in# order# to# expand# coverage# to# additional# key# personnel.

 

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# is# divided# into# three# portfolio# segments# -# real# estate# mortgage# loans,# commercial# loans# and# consumer# and# other# loans# -# and# five# portfolio# classes# -# commercial# real# estate# loans,# residential# and# home# equity# loans,# construction# loans,# commercial# loans,# and# consumer# and# other# loans.

 

We# work# diligently# to# attract# new# lending# clients# through# direct# solicitation# by# our# loan# officers,# utilizing# relationship# networks# from# existing# clients# and# community# involvement,# competitive# pricing,# and# innovative# structure.# Evidence# of# this# effort# is# seen# in# the# organic# growth# in# our# loan# portfolio# where# we# saw# growth# across# all# portfolio# classes# in# 2018,# with# the# exception# of# consumer# loans.# As# of# December# 31,# 2018,# the# Bank’s# net# loans# were# $290.1# million,# representing# 72.2%# of# total# assets,# compared# to# net# loans# of# $250.3# million# as# of# December# 31,# 2017,# representing# 72.1%# of# total# assets.# These# loans# were# priced# based# upon# the# degree# of# risk,# collateral,# loan# amount,# and# maturity.# We# have# no# loans# to# foreign# borrowers.

 

31 Table# of# Contents  

The# composition# of# our# loan# portfolio# as# of# the# dates# indicated# was# as# follows:

 

    As# of# December# 31,

      2018

    2017

    2016

  (dollars# in# thousands)

  Amount

    %# of

Total

    Amount

    %# of#

Total

    Amount

    %# of#

Total

  Real# estate# mortgage# loans:

                                                Commercial

  $ 82,494       28.1 %

  $ 79,565       31.5 %

  $ 65,805       29.2 %

Residential# and# home# equity

    121,454       41.4       94,824       37.4       88,883       39.4   Construction

    31,601       10.8       26,813       10.6       19,991       8.9   Total# real# estate# mortgage# loans

    235,549       80.3       201,202       79.5       174,679       77.5                                                     Commercial

    51,018       17.4       44,027       17.4       46,340       20.6   Consumer# and# other# loans

    6,747       2.3       7,742       3.1       4,275       1.9   Total# loans

    293,314       100.0 %

    252,971       100.0 %

    225,294       100.0 %

Less:

                                                Net# deferred# loan# fees

    460               424               350           Allowance# for# loan# losses

    (3,661 )             (3,136 )             (2,876 )         Loans,# net

  $ 290,113             $ 250,259             $ 222,768            

 

 

Maturities# of# Loans

 

The# following# tables# show# the# contractual# maturities# of# the# Bank’s# loan# portfolio# at# December# 31,# 2018.# Loans# with# scheduled# maturities# are# reported# in# the# maturity# category# in# which# the# payment# is# due.# Demand# loans# with# no# stated# maturity# and# overdrafts# are# reported# in# the# “due# one# year# or# less”# category.# Loans# that# have# adjustable# rates# are# shown# as# amortizing# to# final# maturity# rather# than# when# the# interest# rates# are# next# subject# to# change.# The# tables# do# not# include# prepayment# or# scheduled# principal# repayments.

 

(in# thousands)

  Due# in#

One# Year#

or# Less

    Due# in

One# to

Five# Years

    Due# After#

Five# Years

    Total

  Type# of# loans

                                Real# estate# mortgage# loans:                                 Commercial

  $ 5,492     $ 22,004     $ 54,998     $ 82,494   Residential# and# home# equity

    9,799       19,294       92,361       121,454   Construction

    17,816       2,981       10,804       31,601   Total# real# estate# mortgage# loans

    33,107       44,279       158,163       235,549   Commercial

    21,713       19,140       10,165       51,018   Consumer# and# other# loans

    2,237       4,401       109       6,747   Total# loans

  $ 57,057     $ 67,820     $ 168,437     $ 293,314    

32 Table# of# Contents  

Sensitivity.# For# loans# due# after# one# year# or# more,# the# following# table# presents# the# sensitivities# to# changes# in# interest# rates# at# December# 31,# 2018:

 

(in# thousands)

  Fixed

Interest#

Rate#

    Floating#

Interest#

Rate#

    Total#

  Type# of# loans

                        Real# estate# mortgage# loans:                         Commercial

  $ 22,435     $ 54,567     $ 77,002   Residential# and# home# equity

    24,397       87,258       111,655   Construction

    2,842       10,943       13,785   Total# real# estate# mortgage# loans

    49,674       152,768       202,442   Commercial

    20,000       9,305       29,305   Consumer# and# other# loans

    1,950       2,560       4,510   Total# loans

  $ 71,624     $ 164,633     $ 236,257    

 

Nonperforming# Assets

 

Nonperforming# assets# consist# of# nonperforming# loans# and# other# real# estate# owned,# (“OREO”).# Nonperforming# loans# include# loans# that# are# on# nonaccrual# status# which# includes# nonperforming# loans# restructured# as# troubled# debt# restructurings,# where# we# have# granted# a# concession# on# the# interest# rate# or# original# repayment# terms# due# to# financial# difficulties# of# the# borrower,# and# loans# past# due# greater# than# 90# days# and# still# accruing# interest.# OREO# consists# of# real# property# acquired# through# foreclosure.# We# account# for# troubled# debt# restructurings# in# accordance# with# ASC# 310,# “Receivables.”

 

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

 

Accounting# standards# require# the# Bank# to# identify# loans# as# impaired# loans# when,# based# on# current# information# and# events,# it# is# probable# that# the# Bank# will# be# unable# to# collect# the# scheduled# payments# of# principal# or# interest# when# due# according# to# the# contractual# terms# of# the# loan# agreement.# These# standards# require# that# impaired# loans# be# valued# at# the# present# value# of# expected# future# cash# flows,# discounted# at# the# loan’s# effective# interest# rate,# using# one# of# the# following# methods:# the# observable# market# price# of# the# loan# or# the# fair# value# of# the# underlying# collateral# if# the# loan# is# collateral# dependent.# We# implement# these# standards# in# our# monthly# review# of# the# adequacy# of# the# allowance# for# loan# losses# and# identify# and# value# impaired# loans# in# accordance# with# guidance# on# these# standards.# Nine# loans# totaling# $1.2# million# were# deemed# to# be# impaired# under# the# Bank’s# policy# at# December# 31,# 2018,# while# two# loans# totaling# $134,000# and# four# loans# totaling# $811,000# were# deemed# to# be# impaired# under# the# Bank’s# policy# at# December# 31,# 2017,# and# 2016,# respectively.

 

Our# goal# is# to# maintain# a# high# quality# of# loans# through# sound# underwriting# and# lending# practices.# As# of# December# 31,# 2018,# 2017,# and,# 2016,# approximately# 80.3%,# 79.5%,# and# 77.5%,# respectively,# of# the# total# loan# portfolio# were# collateralized# by# commercial# and# residential# real# estate# mortgages.# The# level# of# nonperforming# loans# and# OREO# also# is# relevant# to# the# credit# quality# of# a# loan# portfolio.# As# of# December# 31,# 2018,# December# 31,# 2017,# and# December# 31,# 2016,# there# were# $342,000,# $134,000,# and# $811,000,# respectively,# in# nonperforming# loans.# We# had# no# OREO# at# December# 31,# 2018,# 2017,# or# 2016.

 

33 Table# of# Contents  

The# goal# of# the# loan# review# process# is# to# identify# and# address# classified# and# nonperforming# loans# as# early# as# possible.# The# following# table# sets# forth# certain# information# on# nonaccrual# loans# and# OREO,# the# ratio# of# such# loans# and# foreclosed# assets# to# total# assets# as# of# the# dates# indicated,# and# certain# other# related# information.

 

    At# December# 31,

      2018

    2017

    2016

  (dollars# in# thousands)

                        Total# nonperforming# loans

  $ 342     $ 134     $ 811   OREO

    -       -       -   Total# nonperforming# loans# and# foreclosed# assets

  $ 342     $ 134     $ 811   Total# nonperforming# loans# as# a# percentage# of# total# loans

    0.12 %

    0.05 %

    0.36 %

Total# nonperforming# assets# as# a# percentage# of# total# assets

    0.09 %

    0.04 %

    0.27 %

                          Loans# restructured# as# troubled# debt# restructurings

  $ 641     $ 221     $ 76   Troubled# debt# restructurings# to# loans

    0.22 %

    0.09 %

    0.03 %

 

Allowance# for# Loan# Losses

 

As# of# December# 31,# 2018,# our# ALLL# was# allocated# mostly# to# inherent# loan# losses# using# historical# loss# experience# and# qualitative# risk# factors,# but# we# also# had# a# $211,000# allocation# for# specific# loan# losses.# Our# ALLL# was# allocated# as# follows,# as# of# the# indicated# dates.

 

    As# of# December# 31,

      2018

    2017

    2016

      Amount

    %# of# Loans# to#

Total# Loans

    Amount

    %# of# Loans# to#

Total# Loans

    Amount

    %# of# Loans# to#

Total# Loans

  (dollars# in# thousands)

                                                Commercial# real# estate

  $ 917       28.1 %

  $ 894       31.5 %

  $ 775       29.2 %

Residential# real# estate# and# home# equity

    1,397       41.4       1,097       37.4       1,074       39.4   Construction

    391       10.8       331       10.6       258       8.9   Commercial

    876       17.4       724       17.4       714       20.6   Consumer

    80       2.3       90       3.1       55       1.9   Total# loans

  $ 3,661       100.0 %

  $ 3,136       100.0 %

  $ 2,876       100.0 %

 

 

The# following# table# sets# forth# certain# information# with# respect# to# activity# in# our# ALLL# during# the# years# indicated:

 

    Year# Ended# December# 31,

  (dollars# in# thousands)

  2018

    2017

    2016

  ALLL# at# beginning# of# year

  $ 3,136     $ 2,876     $ 2,473   Charge-offs:

                        Construction

    (3 )     -       -   Commercial

    (58 )     -       (17 ) Consumer

    (20 )     (35 )     (19 ) Total# charge-offs

    (81 )     (35 )     (36 ) Recoveries:

                        Commercial

    6       16       -   Consumer

    9       23       15   Total# recoveries

    15       39       15   Provision# for# loan# losses# charged# to# earnings

    591       256       424   ALLL# at# end# of# year

  $ 3,661     $ 3,136     $ 2,876                             Ratio# of# net# charge-offs# (recoveries)# during# the# year

    (0.02 )%

    - %

    (0.01 )% ALLL# as# a# percentage# of# total# loans# at# end# of# year

    1.25 %

    1.24 %

    1.28 %

ALLL# as# a# percentage# of# nonperforming# loans

    1,070.5 %

    2,340.3 %

    354.6 %

 

 

We# believe# that# our# ALLL# at# December# 31,# 2018,# appropriately# reflected# the# risk# inherent# in# the# portfolio# as# of# that# date.# The# methodologies# used# in# the# calculation# are# in# compliance# with# regulatory# policy# and# GAAP.

 

34 Table# of# Contents  

Deposits

 

The# major# source# of# the# Bank’s# funds# for# lending# and# other# investment# purposes# are# deposits,# in# particular# core# deposits# and# non-maturity# deposits.# Management# believes# that# substantially# all# of# our# depositors# are# residents# in# our# primary# market# area.# Total# deposits# were# $349.1# million# at# December# 31,# 2018,# compared# to# $298.3# million# at# December# 31,# 2017,# a# $50.8# million,# or# 17.0%,# increase.# Noninterest-bearing# deposits# increased# by# $3.9# million,# while# interest-bearing# deposits# increased# by# $46.9# million.

 

The# following# table# sets# forth# the# distribution# by# type# of# our# deposit# accounts# at# the# dates# indicated:

 

      As# of# December# 31,

        2018

    2017

  (dollars# in# thousands)

    Amount

    %# of

Deposits

    Amount

    %# of#

Deposits

  Deposit# Types

                                  Noninterest-bearing# deposits

    $ 80,097       22.9 %

  $ 76,216       25.5 %

Money-market# accounts

      171,219       49.1       152,921       51.3   NOW

      47,229       13.5       39,896       13.4   Savings

      9,226       2.6       7,210       2.4   Subtotal

      307,771       88.2       276,243       92.6                                       Time# deposits:

                                  0.00# -# 0.50%       1,265       0.4       7,075       2.4   0.51# -# 1.00%       5,747       1.6       7,197       2.4   1.01# -# 1.50%       3,734       1.1       5,731       1.9   1.51# -# 2.00%       7,365       2.1       2,051       0.7   2.01# -# 2.50%       18,909       5.4       -       -   2.51# -# 3.00%       4,276       1.2       -       -   Total# time# deposits

      41,296       11.8       22,054       7.4                                       Total# deposits

    $ 349,067       100.0 %

  $ 298,297       100.0 %

 

 

The# following# table# presents# the# maturities# of# our# time# deposits# of# $250,000# or# more# as# of# December# 31,# 2018:

 

(in# thousands)

        Time# Deposits# >$250,000

        Due# in# three# months# or# less

  $ 1,008