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

pmhg20190331_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended

       March 31, 2020

 

or

 

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

 

For the transition period from

 

to

 

 

Commission File Number:

        333-191801

 

PRIME MERIDIAN HOLDING COMPANY


(Exact Name of registrant as specified in its charter)

 

Florida

 

27-2980805                         

 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number) 

   

1471 Timberlane Road; Tallahassee, Florida

 

32312              

 

(Address of principal executive offices)

(Zip Code)           

 

(850) 907-2300


(Registrant’s telephone number, including area code)

 

Not Applicable


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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

Title of each class

None.

Trading Symbol(s)

N/A

Name of exchange on which registered

N/A

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 5, 2020: 3,116,499

 

 

 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

PAGE

   

Item 1. Financial Statements

 
   

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

2

   

Condensed Consolidated Statements of Earnings Three Months ended March 31, 2020 and 2019 (unaudited)

3

   

Condensed Consolidated Statements of Comprehensive Income Three Months ended March 31, 2020 and 2019 (unaudited)

4

   

Condensed Consolidated Statements of Stockholders’ Equity Three and Months ended March 31, 2020 and 2019 (unaudited)

5

   

Condensed Consolidated Statements of Cash Flows Months ended March 31, 2020 and 2019 (unaudited)

6

   

Notes to Condensed Consolidated Financial Statements (unaudited)

7-24

   

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

25-32

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

32

   

Item 4. Controls and Procedures

33

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

34

   

Item 1A. Risk Factors

34

   

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

34

   

Item 3. Defaults Upon Senior Securities

34

   

Item 4. Mine Safety Disclosures

34

   

Item 5. Other Information

34

   

Item 6. Exhibits

35-36

   

Signatures

37

   

Certifications

 

 

 

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
(in thousands)     (Unaudited)          

Assets

               

Cash and due from banks

  $ 5,209     $ 9,024  

Federal funds sold

    21,242       24,613  

Interest-bearing deposits

    46,226       41,445  

Total cash and cash equivalents

    72,677       75,082  

Debt securities available for sale

    70,976       61,333  

Loans held for sale

    8,946       6,193  

Loans, net of allowance for loan losses of $4,707 and $4,414

    362,436       337,710  

Federal Home Loan Bank stock

    493       404  

Premises and equipment, net

    8,072       7,744  
Right of use lease asset     3,619       3,669  

Accrued interest receivable

    1,273       1,137  

Bank-owned life insurance

    6,541       6,501  
Other real estate owned     234       -  

Other assets

    850       1,088  

Total assets

  $ 536,117     $ 500,861  
                 

Liabilities and Stockholders' Equity

               

Liabilities:

               

Noninterest-bearing demand deposits

  $ 106,176     $ 96,807  

Savings, NOW and money-market deposits

    297,991       272,283  

Time deposits

    70,116       69,174  

Total deposits

    474,283       438,264  
Other borrowings     -       1,254  

Official checks

    1,391       606  
Operating lease liability     3,714       3,758  

Other liabilities

    1,038       1,111  

Total liabilities

    480,426       444,993  

Stockholders' equity:

               

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

    -       -  

Common stock, $.01 par value; 9,000,000 shares authorized, 3,115,334 and 3,191,288 issued and outstanding

    31       32  

Additional paid-in capital

    38,336       39,456  

Retained earnings

    16,513       16,180  

Accumulated other comprehensive income

    811       200  

Total stockholders' equity

    55,691       55,868  

Total liabilities and stockholders' equity

  $ 536,117     $ 500,861  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

2

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Earnings (Unaudited)

  

   

Three Months Ended

 
   

March 31,

 

(in thousands, except per share amounts)

 

2020

   

2019

 

Interest income:

               

Loans

  $ 4,429     $ 3,856  

Securities

    384       296  

Other

    232       348  

Total interest income

    5,045       4,500  

Interest expense:

               

Deposits

    899       813  

Other borrowings

    3       -  

Total interest expense

    902       813  

Net interest income

    4,143       3,687  

Provision for loan losses

    636       165  

Net interest income after provision for loan losses

    3,507       3,522  

Noninterest income:

               

Service charges and fees on deposit accounts

    64       71  

Debit card/ATM revenue, net

    81       62  

Mortgage banking revenue

    148       106  

Income from bank-owned life insurance

    40       45  

Gain on sale of debt securities available for sale

    -       7  

Other income

    34       34  

Total noninterest income

    367       325  

Noninterest expense:

               

Salaries and employee benefits

    1,618       1,557  

Occupancy and equipment

    338       275  

Professional fees

    91       77  

Marketing

    201       199  

FDIC assessment

    52       43  

Software maintenance, amortization and other

    193       152  

Other

    445       403  

Total noninterest expense

    2,938       2,706  

Earnings before income taxes

    936       1,141  

Income taxes

    220       274  

Net earnings

  $ 716     $ 867  
                 

Earnings per common share:

               

Basic

  $ 0.22     $ 0.28  

Diluted

  $ 0.22     $ 0.28  

Cash dividends per common share(1)

  $ 0.12     $ 0.12  

 

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

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   

Three Months Ended

 
   

March 31,

 

(in thousands)

 

2020

   

2019

 

Net earnings

  $ 716     $ 867  

Other comprehensive income:

               

Change in unrealized gain on debt securities available for sale:

               

Unrealized gain arising during the period

    818       435  

Reclassification adjustment for realized gain

    -       (7 )

Net change in unrealized gain

    818       428  

Deferred income tax expense on above change

    (207 )     (108 )

Total other comprehensive income

    611       320  

Comprehensive income

  $ 1,327     $ 1,187  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three Months Ended March 31, 2020 and 2019

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Equity

 

(dollars in thousands)

                                               

Balance at December 31, 2018

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

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

    -       -       -       867       -       867  

Dividends paid (unaudited)

    -       -       -       (377 )     -       (377 )

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

    -       -       -       -       320       320  

Common stock issued as compensation to directors (unaudited)

    595       -       12       -       -       12  

Issuance of restricted stock (unaudited)

    3,600       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       42       -       -       42  

Balance at March 31, 2019 (unaudited)

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

Balance at December 31, 2019

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

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

    -       -       -       716       -       716  

Dividends paid (unaudited)

    -       -       -       (383 )     -       (383 )

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

    -       -       -       -       611       611  

Stock options exercised (unaudited)

    2,000       -       25       -       -       25  

Common stock retirement (unaudited)

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

Common stock issued as compensation to directors (unaudited)

    995       -       20       -       -       20  

Issuance of restricted stock (unaudited)

    3,835       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       51       -       -       51  

Balance at March 31, 2020 (unaudited)

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

 

5

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Cash Flow (Unaudited)

 

   

Three Months Ended

 
   

March 31,

 

(in thousands)

 

2020

   

2019

 

Cash flows from operating activities:

               

Net earnings

  $ 716     $ 867  

Adjustments to reconcile net earnings to net cash used in operating activities:

               

Depreciation and amortization

    142       153  

Provision for loan losses

    636       165  

Net amortization of deferred loan fees

    (17 )     (9 )

Gain on sale of debt securities available for sale

    -       (7 )

Amortization of premiums and discounts on debt securities available for sale

    79       73  

Gain on sale of loans held for sale

    (148 )     (106 )

Proceeds from the sale of loans held for sale

    24,238       14,170  

Loans originated as held for sale

    (26,843 )     (15,105 )
Stock issued as compensation     20       12  

Stock-based compensation expense

    51       42  

Income from bank-owned life insurance

    (40 )     (45 )

Net (increase) decrease in accrued interest receivable

    (136 )     11  

Net change in operating leases

    6       -  

Net decrease (increase) in other assets

    31       (357 )

Net increase (decrease) in other liabilities and official checks

    712       (163 )

Net cash used in operating activities

    (553 )     (299 )

Cash flows from investing activities:

               

Loan originations, net of principal repayments

    (25,579 )     57  

Purchase of debt securities available for sale

    (12,191 )     (8,238 )

Principal repayments of debt securities available for sale

    3,276       1,149  

Proceeds from sale of debt securities available for sale

    -       4,245  

Maturities and calls of debt securities available for sale

    11       385  

Purchase of Federal Home Loan Bank stock

    (89 )     (49 )

Purchase of premises and equipment

    (470 )     (2,552 )

Net cash used in investing activities

    (35,042 )     (5,003 )

Cash flows from financing activities:

               

Net increase in deposits

    36,019       24,446  
Change in other borrowings     (1,254 )     -  

Proceeds from stock options exercised

    25       -  
Common stock retirement     (1,217 )     -  

Common stock dividends paid

    (383 )     (377 )

Net cash provided by financing activities

    33,190       24,069  

Net (decrease) increase in cash and cash equivalents

    (2,405 )     18,767  

Cash and cash equivalents at beginning of period

    75,082       48,038  

Cash and cash equivalents at end of period

  $ 72,677     $ 66,805  

Supplemental disclosure of cash flow information

               

Cash paid during the period:

               

Interest

  $ 895     $ 809  

Income taxes

  $ -     $ -  

Noncash transactions:

               

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

  $ 611     $ 320  
Loans transferred to other real estate owned   $ 234     $ -  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

6

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

(1)

General

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Recent Accounting Standards Update.

 

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

 

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

 

(continued)

 

7

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(2)

Debt Securities Available for Sale

 

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

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

(in thousands)

                               

At March 31, 2020

                               

U.S. Government agency securities

  $ 275     $ 6     $ -     $ 281  

Municipal securities

    12,378       238       -       12,616  

Mortgage-backed securities

    49,649       1,232       (78 )     50,803  

Asset-backed securities

    5,647       -       (310 )     5,337  
Corporate securities     1,940       -       (1 )     1,939  

Total

  $ 69,889     $ 1,476     $ (389 )   $ 70,976  
                                 

At December 31, 2019

                               

U.S. Government agency securities

  $ 408     $ -     $ (1 )   $ 407  

Municipal securities

    9,332       81       (72 )     9,341  

Mortgage-backed securities

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

Total

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

 

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

 

   

Three Months Ended

 
   

March 31,

 

(in thousands)

 

2020

   

2019

 

Proceeds from sale of debt securities

  $ -     $ 4,245  

Gross gains

    -       27  

Gross losses

    -       (20 )

Net gain on sale of debt securities

  $ -     $ 7  

 

 

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

 

   

Less Than Twelve Months

   

Over Twelve Months

 
   

Gross

           

Gross

         
   

Unrealized

   

Fair

   

Unrealized

   

Fair

 
   

Losses

   

Value

   

Losses

   

Value

 

(in thousands)

                               

At March 31, 2020

                               

Mortgage-backed securities

  $ (30 )   $ 5,205     $ (48 )   $ 2,362  
Asset-backed securities     (310 )     5,337       -       -  
Corporate securities     (1 )     1,939       -       -  

Total

  $ (341 )   $ 12,481     $ (48 )   $ 2,362  
                                 

At December 31, 2019

                               

U.S. Government agency securities

  $ (1 )   $ 407     $ -     $ -  

Municipal securities

    (72 )     3,814       -       -  

Mortgage-backed securities

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

Asset-backed securities

    (57 )     3,901       -       -  

Total

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

 

(continued)

 

8

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(2)

Debt Securities Available for Sale, Continued

 

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

 

           

Fair Value Measurements Using

 
           

Quoted Prices

                 
           

In Active

   

Significant

         
           

Markets for

   

Other

   

Significant

 
           

Identical

   

Observable

   

Unobservable

 
   

Fair

   

Assets

   

Inputs

   

Inputs

 
   

Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

(in thousands)

                               

At March 31, 2020

                               

U.S. Government agency securities

  $ 281     $ -     $ 281     $ -  

Municipal securities

    12,616       -       12,616       -  
Mortgage-backed securities     50,803       -       50,803       -  
Asset-backed securities     5,337       -       5,337       -  
Corporate securities     1,939       -       1,939       -  

Total

  $ 70,976     $ -     $ 70,976     $ -  
                                 

At December 31, 2019

                               

U.S. Government agency securities

  $ 407     $ -     $ 407     $ -  

Municipal securities

    9,341       -       9,341       -  

Mortgage-backed securities

    45,803       -       45,803       -  

Asset-backed securities

    5,782       -       5,782       -  

Total

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

 

The scheduled maturities of debt securities are as follows:

 

   

At March 31, 2020

 
   

Amortized

   

Fair

 
   

Cost

   

Value

 

(in thousands)

               
Due in less than one year   $ 364     $ 366  

Due in one to five years

    3,172       3,181  

Due in five to ten years

    3,591       3,634  

Due after ten years

    13,113       12,992  

Mortgage-backed securities

    49,649       50,803  

Total

  $ 69,889     $ 70,976  

 

(continued)

 

9

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(3)

Loans

 

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

 

   

At March 31,

   

At December 31,

 

(in thousands)

 

2020

   

2019

 

Real estate mortgage loans:

               

Commercial

  $ 106,819     $ 94,728  

Residential and home equity

    140,103       135,913  

Construction

    38,369       33,583  

Total real estate mortgage loans

    285,291       264,224  
                 

Commercial loans

    73,733       69,770  

Consumer and other loans

    7,603       7,631  

Total loans

    366,627       341,625  
                 

Add (deduct):

               

Net deferred loan costs

    516       499  

Allowance for loan losses

    (4,707 )     (4,414 )

Loans, net

  $ 362,436     $ 337,710  

 

(continued)

 

10

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

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

 

 

   

Real Estate Mortgage Loans

                         
           

Residential

                   

Consumer

         
           

and Home

           

Commercial

   

and Other

         

(in thousands)

 

Commercial

   

Equity

   

Construction

   

Loans

   

Loans

   

Total

 

Three Month Period Ended March 31, 2020

                                               

Beginning balance

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

Provision (credit) for loan losses

    136       54       57       346       43       636  

Net (charge-offs) recoveries

    -       (15 )     -       (315 )     (13 )     (343 )

Ending balance

  $ 1,182     $ 1,612     $ 472     $ 1,315     $ 126     $ 4,707  

Three Month Period Ended March 31, 2019

                                               

Beginning balance

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

Provision (credit) for loan losses

    (70 )     32       (29 )     214       18       165  

Net (charge-offs) recoveries

    -       -       -       (22 )     (4 )     (26 )

Ending balance

  $ 847     $ 1,429     $ 362     $ 1,068     $ 94     $ 3,800  
                                                 

At March 31, 2020

                                               

Individually evaluated for impairment:

                                               

Recorded investment

  $ 490     $ 911     $ -     $ 1,308     $ 45     $ 2,754  

Balance in allowance for loan losses

  $ -     $ -     $ -     $ 217     $ 45     $ 262  

Collectively evaluated for impairment:

                                               

Recorded investment

  $ 106,329     $ 139,192     $ 38,369     $ 72,425     $ 7,558     $ 363,873  

Balance in allowance for loan losses

  $ 1,182     $ 1,612     $ 472     $ 1,098     $ 81     $ 4,445  
                                                 

At December 31, 2019

                                               

Individually evaluated for impairment:

                                               

Recorded investment

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

Balance in allowance for loan losses

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

Collectively evaluated for impairment:

                                               

Recorded investment

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

Balance in allowance for loan losses

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

 

(continued)

 

11

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

(continued)

 

12

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

 Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

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

 

 

The following summarizes the loan credit quality:

 

   

Real Estate Mortgage Loans

                         
           

Residential

                   

Consumer

         
           

and Home

           

Commercial

   

and Other

         

(in thousands)

 

Commercial

   

Equity

   

Construction

   

Loans

   

Loans

   

Total

 

At March 31, 2020:

                                               

Grade:

                                               

Pass

  $ 104,837     $ 137,753     $ 37,121     $ 70,900     $ 7,549     $ 358,160  

Special mention

    1,492       1,439       760       1,255       29       4,975  

Substandard

    490       911       488       1,578       25       3,492  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

  $ 106,819     $ 140,103     $ 38,369     $ 73,733     $ 7,603     $ 366,627  
                                                 

At December 31, 2019:

                                               

Grade:

                                               

Pass

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

Special mention

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

Substandard

    611       965       -       1,924       -       3,500  

Doubtful

    -       -       -       -       -       -  

Loss

    -       -       -       -       -       -  

Total

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

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Furthermore, construction loans, nonowner-occupied commercial real estate loans, and commercial loan relationships in excess of $500,000 are reviewed at least annually. The Company determines the appropriate loan grade during the renewal process and reevaluates the loan grade in situations when a loan becomes past due.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

(continued)

 

13

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

 

Age analysis of past due loans is as follows:

 

   

Accruing Loans

                 
                   

Greater Than

                                 
   

30-59 Days

   

60-89 Days

   

90 Days

   

Total Past

           

Nonaccrual

   

Total

 

(in thousands)

 

Past Due

   

Past Due

   

Past Due

   

Due

   

Current

   

Loans

   

Loans

 

At March 31, 2020:

                                                       

Real estate mortgage loans:

                                                       

Commercial

  $ -     $ 490     $ -     $ 490     $ 106,329     $ -     $ 106,819  

Residential and home equity

    2,153       215       -       2,368       136,824       911       140,103  

Construction

    152       -       488       640       37,729       -       38,369  

Commercial loans

    -       -       65       65       72,360       1,308       73,733  

Consumer and other loans

    19       -       -       19       7,559       25       7,603  

Total

  $ 2,324     $ 705     $ 553     $ 3,582     $ 360,801     $ 2,244     $ 366,627  
                                                         

At December 31, 2019:

                                                       

Real estate mortgage loans:

                                                       

Commercial

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

Residential and home equity

    569       -       -       569       134,379       965       135,913  

Construction

    82       -       -       82       33,501       -       33,583  

Commercial loans

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

Consumer and other loans

    -       5       -       5       7,626       -       7,631  

Total

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

 

(continued)

 

14

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The following summarizes the amount of impaired loans:

 

   

With No Related

                                                 
   

Allowance Recorded

   

With an Allowance Recorded

   

Total

 
           

Unpaid

           

Unpaid

                   

Unpaid

         
           

Contractual

           

Contractual

                   

Contractual

         
   

Recorded

   

Principal

   

Recorded

   

Principal

   

Related

   

Recorded

   

Principal

   

Related

 

(in thousands)

 

Investment

   

Balance

   

Investment

   

Balance

   

Allowance

   

Investment

   

Balance

   

Allowance

 

At March 31, 2020:

                                                               

Real estate mortgage loans:

                                                               

Commercial

  $ 490     $ 490     $ -     $ -     $ -     $ 490     $ 490     $ -  

Residential and home equity

    911       911       -       -       -       911       911       -  

Commercial loans

    348       348       960       960       217       1,308       1,308       217  

Consumer and other loans

    -       -       45       45       45       45       45       45  
Total   $ 1,749     $ 1,749     $ 1,005     $ 1,005     $ 262     $ 2,754     $ 2,754     $ 262  
                                                                 

At December 31, 2019:

                                                               

Real estate mortgage loans:

                                                               

Commercial real estate

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

Residential and home equity

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

Consumer and other loans

    -       -       13       13       13       13       13       13  

Total

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

 

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

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 
   

Average

   

Interest

   

Interest

   

Average

   

Interest

   

Interest

 
   

Recorded

   

Income

   

Income

   

Recorded

   

Income

   

Income

 

(in thousands)

 

Investment

   

Recognized

   

Received

   

Investment

   

Recognized

   

Received

 

Real estate mortgage loans:

                                               

Commercial

  $ 573     $ 7     $ 7     $ 611     $ 8     $ 8  

Residential and home equity

    882       -       -       420       4       3  

Commercial loans

    1,554       4       4       399       1       1  

Consumer

    1       -       -       6       -       -  

Total

  $ 3,010     $ 11     $ 11     $ 1,436     $ 13     $ 12  

 

 

There were no collateral dependent loans measured at fair value on a nonrecurring basis at March 31, 2020 or 2019.

 

(continued)

 

15

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(3)

Loans, Continued

 

The restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the creditor grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction in interest rate or the forgiveness of principal and/or accrued interest. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for loan losses calculation. During the period of national emergency related to the COVID-19 pandemic, the banking regulatory agencies have confirmed with FASB that certain short-term loan modifications made in response to the pandemic's effects on borrowers should not be considered to be TDRs. The Company entered no new TDRs during the three months ended March 31, 2020 and one new TDR during the three months ended March 31, 2019.

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 
           

Pre-

   

Post-

   

Current

           

Pre-

   

Post-

   

Current

 
           

Modification

   

Modification

   

Modification

           

Modification

   

Modification

   

Modification

 
   

Number

   

Outstanding

   

Outstanding

   

Outstanding

   

Number

   

Outstanding

   

Outstanding

   

Outstanding

 
   

of

   

Recorded

   

Recorded

   

Recorded

   

of

   

Recorded

   

Recorded

   

Recorded

 
   

Contracts

   

Investment

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

   

Investment

 

( dollars in thousands)

                                                               

Troubled Debt Restructurings -

                                                               

Modified principal

                                                               
Commercial     -       -       -       -       1     $ 24     $ 24     $ 24  

Total