10-Q 1 pmhg20230930_10q.htm FORM 10-Q pmhg20230930_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended

 September 30, 2023

 

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)

 

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 (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.

Large accelerated filer:     ☐Accelerated filer:                       ☐
Non-accelerated 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.    ☐

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 1, 2023: 3,259,281

 

 

 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

PAGE

   

Item 1. Financial Statements

 
   

Condensed Consolidated Balance Sheets September 30, 2023 (unaudited) and December 31, 2022

2

   

Condensed Consolidated Statements of Earnings Three and Nine Months ended September 30, 2023 and 2022 (unaudited)

3

   

Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months ended September 30, 2023 and 2022 (unaudited)

4

   

Condensed Consolidated Statements of Stockholders’ Equity Three and Nine Months ended September 30, 2023 and 2022 (unaudited)

5-6

   

Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, 2023 and 2022 (unaudited)

7

   

Notes to Condensed Consolidated Financial Statements (unaudited)

8-28

   

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

29-39

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

   

Item 4. Controls and Procedures

40

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

41

   

Item 1A. Risk Factors

41

   

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

41

   

Item 3. Defaults Upon Senior Securities

41

   

Item 4. Mine Safety Disclosures

41

   

Item 5. Other Information

41

   

Item 6. Exhibits

42

   

Signatures

43

   

Certifications

 

 

 

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

(in thousands)

 

(Unaudited)

     

Assets

        

Cash and due from banks

 $9,839  $8,119 

Federal funds sold

  8,257   19,259 

Interest-bearing deposits

  4,308   12,410 

Total cash and cash equivalents

  22,404   39,788 

Debt securities available for sale at fair value (amortized cost of $138,607 and $142,797)

  123,838   129,436 

Debt securities held to maturity (fair value of $9,662 and $9,917)

  11,838   11,805 

Loans held for sale

  5,182   7,058 

Loans, net of allowance for credit losses of $4,899 and $7,145

  628,974   588,715 

Federal Home Loan Bank stock

  1,758   463 

Premises and equipment, net

  7,613   8,022 

Right of use operating lease asset

  2,879   3,044 

Accrued interest receivable

  2,671   2,385 

Bank-owned life insurance

  16,822   16,532 

Other real estate owned

  117   - 

Other assets

  7,889   7,924 

Total assets

 $831,985  $815,172 
         

Liabilities and Stockholders' Equity

        

Liabilities:

        

Noninterest-bearing demand deposits

 $193,439  $197,987 

Savings, NOW and money-market deposits

  451,492   493,439 

Time deposits

  77,876   40,109 

Total deposits

  722,807   731,535 

Other borrowings

  -   4,275 

Federal Home Loan Bank advances

  25,000   - 

Official checks

  717   4,090 

Operating lease liability

  3,062   3,208 

Other liabilities, net

  5,612   5,011 

Total liabilities

  757,198   748,119 

Stockholders' equity:

        

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

  -   - 

Common stock, $.01 par value; 9,000,000 shares authorized, 3,263,733 and 3,164,491 issued and outstanding

  33   32 

Additional paid-in capital

  40,376   39,718 

Retained earnings

  45,404   37,278 

Accumulated other comprehensive loss

  (11,026)  (9,975)

Total stockholders' equity

  74,787   67,053 

Total liabilities and stockholders' equity

 $831,985  $815,172 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

2

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Earnings (Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands, except per share amounts)

 

2023

   

2022

   

2023

   

2022

 

Interest income:

                               

Loans

  $ 9,019     $ 6,755     $ 25,633     $ 18,568  

Debt securities

    919       878       2,777       2,000  

Other

    244       649       650       1,104  

Total interest income

    10,182       8,282       29,060       21,672  

Interest expense:

                               

Deposits

    2,691       624       6,141       1,442  

Other borrowings and FHLB advances

    304       56       824       127  

Total interest expense

    2,995       680       6,965       1,569  

Net interest income

    7,187       7,602       22,095       20,103  

Credit loss expense

    175       241       743       601  

Net interest income after credit loss expense

    7,012       7,361       21,352       19,502  

Noninterest income:

                               

Service charges and fees on deposit accounts

    92       78       261       219  

Debit card/ATM revenue, net

    137       132       437       404  

Mortgage banking revenue, net

    121       116       250       420  

Income from bank-owned life insurance

    100       96       290       285  

Other income

    49       61       165       177  

Total noninterest income

    499       483       1,403       1,505  

Noninterest expense:

                               

Salaries and employee benefits

    2,864       2,367       8,359       6,765  

Occupancy and equipment

    427       413       1,235       1,217  

Professional fees

    149       124       416       400  

Marketing

    215       195       688       575  

FDIC assessment

    104       95       275       303  

Software maintenance, amortization and other

    341       310       912       837  

Other

    623       581       1,814       1,650  

Total noninterest expense

    4,723       4,085       13,699       11,747  

Earnings before income taxes

    2,788       3,759       9,056       9,260  

Income taxes

    668       928       2,178       2,221  

Net earnings

  $ 2,120     $ 2,831     $ 6,878     $ 7,039  
                                 

Earnings per common share:

                               

Basic

  $ 0.66     $ 0.90     $ 2.15     $ 2.23  

Diluted

    0.66       0.89       2.13       2.21  

Cash dividends per common share

    -       -       0.22       0.18  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

3

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 

(in thousands)

 

2023

   

2022

   

2023

   

2022

 

Net earnings

  $ 2,120     $ 2,831     $ 6,878     $ 7,039  

Other comprehensive loss:

                               

Change in unrealized loss on debt securities available for sale-

                               

Unrealized loss arising during the period

    (2,172 )     (5,018 )     (1,408 )     (13,780 )

Deferred income tax benefit on above change

    551       1,272       357       3,493  

Total other comprehensive loss

    (1,621 )     (3,746 )     (1,051 )     (10,287 )

Comprehensive income (loss)

  $ 499     $ (915 )   $ 5,827     $ (3,248 )

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

4

 

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months ended September 30, 2023 and 2022

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

(dollars in thousands)

                                               

Balance at December 31, 2021

    3,129,046     $ 31     $ 38,909     $ 28,164     $ (73 )   $ 67,031  

Net earnings for the three months ended March 31, 2022 (unaudited)

    -       -       -       2,241       -       2,241  

Dividends paid (unaudited)

    -       -       -       (567 )     -       (567 )

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

    -       -       -       -       (3,258 )     (3,258 )

Stock options exercised (unaudited)

    12,240       -       210       -       -       210  

Common stock issued as compensation to directors (unaudited)

    1,189       -       31       -       -       31  

Issuance of restricted stock (unaudited)

    7,786       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       73       -       -       73  

Balance at March 31, 2022 (unaudited)

    3,150,261     $ 31     $ 39,223     $ 29,838     $ (3,331 )   $ 65,761  

Net earnings for the three months ended June 30, 2022 (unaudited)

    -       -       -       1,967       -       1,967  

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

    -       -       -       -       (3,283 )     (3,283 )

Stock options exercised (unaudited)

    4,000       -       80       -       -       80  

Common stock issued as compensation to directors (unaudited)

    1,047       -       29       -       -       29  

Stock-based compensation (unaudited)

    -       -       75       -       -       75  

Balance at June 30, 2022 (unaudited)

    3,155,308     $ 31     $ 39,407     $ 31,805     $ (6,614 )   $ 64,629  

Net earnings for the three months ended September 30, 2022 (unaudited)

    -       -       -       2,831       -       2,831  

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

    -       -       -       -       (3,746 )     (3,746 )

Stock options exercised (unaudited)

    4,000       -       80       -       -       80  

Common stock issued as compensation to directors (unaudited)

    1,250       -       32       -       -       32  

Issuance of restricted stock (unaudited)

    2,417       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       78       -       -       78  

Balance at September 30, 2022 (unaudited)

    3,162,975     $ 31     $ 39,597     $ 34,636     $ (10,360 )   $ 63,904  

 

 

5

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Condensed Consolidated Statements of Stockholders' Equity

 

Three and Nine Months ended September 30, 2023 and 2022

 

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

Balance at December 31, 2022

    3,164,491     $ 32     $ 39,718     $ 37,278     $ (9,975 )   $ 67,053  

Impact of adopting ASC 326 (net of tax)

    -       -       -       1,946       -       1,946  

Net earnings for the three months ended March 31, 2023 (unaudited)

    -       -       -       2,501       -       2,501  

Dividends paid (unaudited)

    -       -       -       (698 )     -       (698 )

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

    -       -       -       -       1,478       1,478  

Stock options exercised (unaudited)

    15,867       -       273       -       -       273  

Common stock issued as compensation to directors (unaudited)

    1,573       -       40       -       -       40  

Issuance of restricted stock (unaudited)

    3,834       -       -       -       -       -  

Stock-based compensation (unaudited)

    -       -       83       -       -       83  

Balance at March 31, 2023 (unaudited)

    3,185,765     $ 32     $ 40,114     $ 41,027     $ (8,497 )   $ 72,676  

Net earnings for the three months ended June 30, 2023 (unaudited)

    -       -       -       2,257       -       2,257  

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

    -       -       -       -       (908 )     (908 )

Stock options exercised (unaudited)

    2,750       -       56       -       -       56  

Common stock issued as compensation to directors (unaudited)

    1,537       -       40       -       -       40  

Stock-based compensation (unaudited)

    -       -       49       -       -       49  

Balance at June 30, 2023 (unaudited)

    3,190,052     $ 32     $ 40,259     $ 43,284     $ (9,405 )   $ 74,170  

Net earnings for the three months ended September 30, 2023 (unaudited)

    -       -       -       2,120       -       2,120  

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

    -       -       -       -       (1,621 )     (1,621 )

Common stock issued as compensation to directors (unaudited)

    1,764       -       40       -       -       40  

Issuance of restricted stock (unaudited)

    71,917       1       (1 )     -       -       -  

Stock-based compensation (unaudited)

    -       -       78       -       -       78  

Balance at September 30, 2023 (unaudited)

    3,263,733     $ 33     $ 40,376     $ 45,404     $ (11,026 )   $ 74,787  

 

 

6

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY 

Condensed Consolidated Statements of Cash Flow (Unaudited)

 

   

Nine Months Ended September 30,

 

(in thousands)

 

2023

   

2022

 

Cash flows from operating activities:

               

Net earnings

  $ 6,878     $ 7,039  

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

               

Depreciation and amortization

    540       504  

Credit loss expense

    743       601  

Net amortization (accretion) of deferred loan fees

    207       (604 )

Net amortization of discounts on debt securities

    (208 )     (3 )

Gain on sale of loans held for sale

    (250 )     (420 )

Proceeds from the sale of loans held for sale

    48,454       71,336  

Loans originated as held for sale

    (46,328 )     (68,059 )

Stock issued as compensation to directors

    120       92  

Stock-based compensation expense

    210       226  

Income from bank-owned life insurance

    (290 )     (285 )

Net increase in accrued interest receivable

    (286 )     (627 )

Net change in operating leases

    19       19  

Net increase in other assets

    (268 )     (1,578 )

Net (decrease) increase in other liabilities and official checks

    (2,776 )     1,438  

Net cash provided by operating activities

    6,765       9,679  

Cash flows from investing activities:

               

Loan originations, net of principal repayments

    (38,716 )     (75,676 )

Purchase of debt securities available for sale

    (1,206 )     (80,188 )

Purchase of debt securities held to maturity

    -       (12,677 )

Principal repayments of debt securities available for sale

    5,559       9,383  

Maturities and calls of debt securities available for sale

    12       6  

Purchase of Federal Home Loan Bank stock

    (1,295 )     (97 )

Purchase of premises and equipment

    (131 )     (711 )

Net cash used in investing activities

    (35,777 )     (159,960 )

Cash flows from financing activities:

               

Net decrease in deposits

    (8,728 )     (7,528 )

Change in other borrowings

    (4,275 )     550  

Increase in Federal Home Loan Bank advances

    25,000       -  

Proceeds from stock options exercised

    329       370  

Common stock dividends paid

    (698 )     (567 )

Net cash provided by (used in) financing activities

    11,628       (7,175 )

Net decrease in cash and cash equivalents

    (17,384 )     (157,456 )

Cash and cash equivalents at beginning of period

    39,788       233,473  

Cash and cash equivalents at end of period

  $ 22,404     $ 76,017  

Supplemental disclosure of cash flow information

               

Cash paid during the period:

               

Interest

  $ 6,719     $ 1,559  

Income taxes

  $ 2,387     $ 2,641  

Noncash transactions:

               

Accumulated other comprehensive loss, net change in unrealized loss on debt securities available for sale, net of income tax benefit

  $ (1,051 )   $ (10,287 )

Impact of adopting ASC 326 (net of tax)

  $ 1,946     $ -  

Loans transferred to other real estate owned

  $ 117     $ -  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

7

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

(1)

General

 

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

 

The accounting and financial reporting policies of the Company conform, in all material respects, to accounting principles generally accepted in the United States of America (“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 condensed consolidated financial position and condensed 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, 2022, included in our Annual Report on Form 10-K filed with the SEC on March 9, 2023. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year or any future period.

 

Comprehensive Income (Loss). 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 (loss). The only component of other comprehensive loss is the net change in the unrealized loss 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.

 

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

 

Other Real Estate Owned. Foreclosed assets acquired through or in lieu of loan foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell.  Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for credit losses.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Costs of improvements are capitalized up to the fair value of the property, whereas costs relating to holding foreclosed assets and subsequent adjustments to the value are charged to operations in credit resolution-related expenses in the consolidated statements of income. 

 

(continued)

 

8

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(1)

General, Continued

 

Adoption of New Accounting Standard

 

The Company adopted ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective on January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and debt securities held to maturity. It also applies to certain off-balance sheet credit exposures, including loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a Company’s loan portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities and purchased financial assets with credit deterioration.

 

The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after December 31, 2022 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses ("ACL") of $2.6 million which was recognized through a $1.9 million adjustment to retained earnings, net of taxes. This adjustment brought the beginning balance of the ACL to $4.5 million as of January 1, 2023.  The Company determined that there was no adjustment required for unfunded commitments. 

 

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to December 31, 2022. As of January 1, 2023, the Company did not have any other-than-temporarily impaired debt securities. Therefore, upon adoption of ASC 326, the Company determined that an ACL on debt securities was not necessary. The following table illustrates the impact of the adoption of ASC 326 on the Company’s condensed consolidated balance sheet.

 

 

 

  

January 1, 2023

 
  

As Reported Under ASC 326

  

Pre-ASC 326 Adoption

  

Impact of ASC 326 Adoption

 
  

(In thousands)

 

Assets:

            

Allowance for credit losses on loans

 $4,539  $7,145  $(2,606)

Deferred tax asset (other assets)

 $-  $-  $660 
             

Equity:

            

Retained earnings (impact of adopting ASC 326, net of taxes)

 $-  $-  $1,946 

 

 

 

(continued)

 

9

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)

General, Continued

 


Summary of Significant Accounting Policies

 

The following is a summary of the Company's significant accounting policies with respect to ASC 326:

 

ACL - Debt Securities Available for Sale. Management uses a systematic methodology to determine its ACL for debt securities available for sale. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis to determine whether there is a credit loss associated with the decline in fair value. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. If either one of the criteria regarding intent or requirement to sell is met, an ACL is established to reflect the difference between the debt security's amortized cost basis and its fair value. For debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which the fair value is less than the amortized cost basis, among various other factors, including the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the debt security's fair value and historical loss information for financial assets secured with similar collateral among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the debt security are compared to the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded, which is limited by the amount that the fair value is less than the amortized cost basis. Credit losses are calculated individually, rather than collectively. Any impairment that has not been recorded through an ACL is recognized in other comprehensive loss.

 

Changes in the ACL are recorded as credit loss expense. Losses are charged against the ACL when management believes the collectability of the debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

 

Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the debt securities available for sale and does not record an ACL on accrued interest receivable. As of September 30, 2023, the accrued interest receivable for debt securities available for sale recognized in accrued interest receivable was $554,000.

 

ACL Debt Securities Held to Maturity. The Company measures expected credit losses on debt securities held to maturity on a collective basis by major security type. U.S. agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Taxable municipal securities are highly rated by major credit agencies. A debt security is placed on nonaccrual status at the time any principal or interest payments become ninety days delinquent. Interest accrued but not received for a debt security placed on nonaccrual is reversed against interest income. During the three and nine-month periods ended  September 30, 2023, there were no debt securities placed on nonaccrual.  The accrued interest receivable for debt securities held to maturity recognized in accrued interest receivable was $81,000.

 

ACL - Loans. The ACL reflects management's estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company records loans charged-off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized.

 

Management uses systematic methodologies to determine its ACL for loans and certain OBS credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national, state and local unemployment rates, commercial real estate price index, housing price index and national retail sales index (see discussion regarding qualitative factors below).

 

The Company's estimate of its ACL involves a high degree of judgment; therefore, management's process for determining expected credit losses may result in a range of expected credit losses. The Company's ACL recorded in the balance sheet reflects management's best estimate within the range of expected credit losses. The Company recognizes in earnings the amount needed to adjust the ACL for management's current estimate of expected credit losses. The Company's ACL is calculated using collectively evaluated and individually evaluated loans.

 

The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments for analysis. The Company’s ACL is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan classes are as follows:

 

 

Commercial real estate

 

Residential and home equity

 

Construction

 

Commercial

 

Consumer and other

 

The ACL for each class is measured through the use of the weighted-average remaining maturity (“WARM”) method. The FASB recognizes the WARM method as an acceptable approach for computing the ACL. In accordance with the WARM method, an annualized loss rate based on a combination of both the Company's and peers' historical loss rates ("historical loss") is applied to the amortized cost of an asset or pool of assets over the remaining expected life. Included in its systematic methodology to determine its ACL, management considers the need to qualitatively adjust model results for risk factors that are not considered within the Company’s loss estimation process but are nonetheless relevant in assessing the expected credit losses within our loan pools.

 

(continued)

10

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

(1)

General, Continued

 

These qualitative factors ("Q-Factors") may increase or decrease management's estimate of expected credit losses by a calculated percentage based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among other things, the impact of 1) changes in lending policies and procedures, including changes in underwriting standards; 2) changes in international, national, regional and local economic conditions; 3) changes in the volume and severity of past due and nonaccrual status; 4) the effect of any concentrations of credit and changes in the levels of such concentrations; 5) changes in the experience, depth, and ability of lending management; 6) changes in nature and volume of the portfolio; 7) trends in underlying collateral values; and 8) changes in the quality of the loan review system on the level of estimated credit losses.

 

The annual historical loss factors, adjusted for Q-Factors and management’s reasonable and supportable forecasts, are applied to the amortized loan balances over each subsequent period and aggregated to arrive at the ACL for loans collectively evaluated. The amortized loan balances are adjusted based on management’s estimate of loan repayments in future periods. Management has determined that the appropriate historical loss period is fifteen years based on the composition of the current loan portfolio. Additionally, management has determined that the Company’s reasonable and supportable forecast period is one year.

 

When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another segment or should be individually evaluated. Under ASC 326-20-35-6, the Company has adopted the collateral maintenance practical expedient to measure the ACL based on the fair value of collateral. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining ACL. An ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for selling costs, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss to the extent as their credit profile improves and that the repayment terms were not considered to be unique to the asset.

 

Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies:

 

 

Management has a reasonable expectation at the reporting date that a restructuring will be executed with an individual borrower.

 

The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.

 

The Company follows its nonaccrual policy by reversing contractual interest income in the statements of earnings when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an ACL on accrued interest receivable. As of September 30, 2023, the accrued interest receivable for loans recorded in accrued interest receivable was $2,036,000.

 

The Company has a variety of assets that have a component that qualifies as an OBS exposure. These primarily include undrawn portions of revolving lines of credit and construction loans. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. Management used its judgement to determine funding rates. Management applied the funding rates, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments. Any adjustment to the ACL for unfunded commitments will be recognized through the ACL in the statements of earnings. As of September 30, 2023, a liability of $4,000 was recorded for expected credit losses on unfunded commitments. 

 

 

 

(continued)

 

11

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

 

 

(2)

Debt Securities 

 

Debt securities are classified according to management's intent. Our investments in U.S. agency mortgage-backed securities are with government-sponsored enterprises (GSEs) such as Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, and Federal Home Loan Mortgage Corporation. The amortized cost of debt securities and fair values are as follows:

 

      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

(in thousands)

                

At September 30, 2023

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $48,398  $-  $(1,872) $46,526 

Municipal securities

  22,278   -   (2,971)  19,307 

U.S. agency mortgage-backed securities

  64,786   6   (9,885)  54,907 

Asset-backed securities

  3,145   -   (47)  3,098 

Total

 $138,607  $6  $(14,775) $123,838 
                 

Debt Securities Held to Maturity

                

Municipal securities

 $9,246  $-  $(1,922) $7,324 

U.S. agency mortgage-backed securities

  2,592   -   (254)  2,338 

Total

 $11,838  $-  $(2,176) $9,662 
                 

At December 31, 2022

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $48,124  $-  $(2,219) $45,905 

Municipal securities

  22,338   -   (2,874)  19,464 

U.S. agency mortgage-backed securities

  68,633   -   (8,131)  60,502 

Asset-backed securities

  3,702   -   (137)  3,565 

Total

 $142,797  $-  $(13,361) $129,436 
                 

Debt Securities Held to Maturity

                

Municipal securities

 $9,215  $-  $(1,695) $7,520 

U.S. agency mortgage-backed securities

  2,590   -   (193)  2,397 

Total

 $11,805  $-  $(1,888) $9,917 

 

There were no debt securities available for sale sold during the three and nine months ended September 30, 2023 and 2022.

 

 

(continued)

12

 

 

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Debt Securities, Continued

 

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

  

More Than Twelve Months

 
  

Gross

      

Gross

     
  

Unrealized

  

Fair

  

Unrealized

  

Fair

 
  

Losses

  

Value

  

Losses

  

Value

 

(in thousands)

                

At September 30, 2023

                

Debt Securities Available for Sale

                

U.S. Government treasury and agency securities

 $-  $-  $(1,872) $46,526 

Municipal securities

  (7)  380   (2,964)  18,927 

U.S. agency mortgage-backed securities

  -   -   (9,885)  53,695 

Asset-backed securities

  -   -   (47)  3,098 

Total

 $(7) $380  $(14,768) $122,246 
                 

Debt Securities Held to Maturity

                

Municipal securities

 $(79) $916  $(1,843) $6,408 

U.S. agency mortgage-backed securities

  -   -   (254)  2,338 

Total

 $(79) $