E X E C U T I V E
MA N AG E M E N T
B OA R D O F
D I R E C TO R S
P R I M E M E R I D I A N B A N K
P R I M E M E R I D I A N
A N N UA L R E P O R T | 2017
H O L D I N G C O M PA N Y
Sammie D. Dixon, Jr.
Vice Chairman, President,
Chief Executive Officer
R. Randy Guemple
Executive Vice President
Chief Financial Officer
Chris L. Jensen, Jr.
Executive Vice President
Richard A. Weidner
Chairman
William D. Crona
Steven L. Evans
Kathleen C. Jones
Robert H. Kirby
Frank L. Langston
Todd A. Patterson, D.O.
L. Collins Proctor
Garrison A. Rolle, M.D.
Steven D. Smith
Marjorie R. Turnbull
Sammie D. Dixon, Jr.
Vice Chairman, President,
Chief Executive Officer
R. Randy Guemple
Executive Vice President
Chief Financial Officer
Chris L. Jensen, Jr.
Executive Vice President
Senior Lender
Susan Payne Turner
Executive Vice President
Chief Risk Officer
M E M B E R
Celebrating
10 Years of
Service to
Our Clients
and
Community
MAIN OFFICE
1897 Capital Circle NE
Tallahassee, FL 32308
Telephone: (850) 907-2301
TIMBERLANE
1471 Timberlane Road, Suite 124
Tallahassee, FL 32312
Telephone: (850) 907-2300
CRAWFORDVILLE
2201 Crawfordville Hwy.
Crawfordville, FL 32327
Telephone: (850) 926-4320
Dear Fellow Shareholders,
As Prime Meridian Bank rounded the corner toward its ten-year anniversary, several factors made 2017 pivotal for
the Bank and the Company.
The Company completed a capital offering in the second quarter of 2017 that netted approximately $17 million and
strategically positioned the Company for future growth and expansion.
Responding to enactment of the Tax Cuts and Job Act on December 22, 2017, the Company revalued its deferred
tax asset position to reflect a reduction in its federal corporate income tax rate from 34% to 21%.
This revaluation resulted in a one-time, non-cash charge of $155,000 recorded in income tax expense during the
fourth quarter of 2017. Going forward the reduction in the corporate income tax rate is expected to benefit the
Company.
The Company also declared an annual cash dividend of $0.10 per share on the Company’s common stock.
This dividend was payable March 6, 2018, to shareholders of record on February 15, 2018.
Prime Meridian Bank maintains its commitment to asset quality and margins in a highly competitive market. We
will not compromise the way we structure loans. Building relationships and maintaining our credit standards are as
important now as they have ever been.
As we build our Bank we filter everything through the lens of what is right. Decisions about possible expansion, the
people we hire, and how we operate must be a good fit for our culture as we move forward.
The continued strength of the Bank’s team plays a significant role in our growth. At 71 full-time equivalent
employees as of December 31, 2017, the team maintains its ability to operate efficiently with a 65.01% Efficiency
Ratio for the year. In September, the team was, again, recognized as one of the nation’s Best Banks to Work
For (#22) by American Banker magazine.
The Bank maintained an important role in the community by providing financial and volunteer support to dozens
of non-profits, schools and programs. We hosted a cybersecurity workshop for clients in the accounting profession
to educate them on best practices to protect their business and clients from emerging threats.
The Mortgage Department continues to build its sales and loan operations team. According to Metro Market
Trends reporting service, Prime Meridian Bank ranked third in the Leon County market in mortgage dollar volume
for 2017.
Other highlights include:
• Net income increased 26.9% to $2.8 million from 2016 to 2017, boosted by solid growth in both net interest
income and noninterest income.
• Year over year, the Company reported steady growth in its net loan portfolio. Net loans grew 12.3%, or $27.5
million, to $250.3 million, with approximately half of that growth coming from the commercial real estate sector.
• Mortgage banking revenue continues to be a growing contributor to net earnings, accounting for 63.6% of
noninterest income in 2017, compared to 57.4% in 2016.
On behalf of the Company’s shareholders, we are proud of Prime Meridian’s accomplishments over the previous
year. It is with great pleasure that we present the enclosed 2017 Annual Report.
Warm regards,
Sammie D. Dixon, Jr.
Vice Chairman, President and Chief Executive Officer
Richard A. Weidner, CPA
Chairman
Vote your shares
online or by phone.
See enclosed Proxy
Card for instructions.
Prime Meridian Holding Company (PMHG)
NET INCOME & TOTAL ASSETS (2010-2017)
Net Income (000s)
Total Assets (In Millions)
$244
$1,704
$206
$210
$1,149
$1,006
$170
$1,018
$347
$2,817
$304
$2,220
$139
$616
$103
$201
2010
2011
2012
2013
2014
2015
2016
2017
2017 BY THE NUMBERS
$347.2
$74.4
TOTAL ASSETS (IN MILLIONS) OF
THE COMPANY AS OF DEC. 31, 2017
MARKET CAPITALIZATION
(IN MILLIONS) AS OF DEC. 31, 2017
26.9% INCREASE IN NET INCOME
FROM 2016 TO 2017
$250.3 LOANS, NET OF ALLOWANCE
(IN MILLIONS) AS OF DEC. 31, 2017
63.6% 2017 MORTGAGE BANKING REVENUE
AS A PERCENT OF NON-INTEREST INCOME
19
22
OTCQX RANK AS A TOP PERFORMER BASED ON 2017 TOTAL
RETURN & GROWTH IN AVERAGE DAILY DOLLAR VOLUME
NATIONAL RANKING BY AMERICAN BANKER MAGAZINE
OF BEST BANKS TO WORK FOR
RATED 5-STARS BauerFinancial.com
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
Prime Meridian Holding Company
Tallahassee, Florida:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Prime Meridian Holding Company and
Subsidiary (the "Company"), as of December 31, 2017 and 2016 and the related consolidated statements of
earnings, comprehensive income, stockholders' equity and cash flows for the years then ended and the related
notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company's financial statements based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud, the Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are
required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
HACKER, JOHNSON & SMITH PA
We have served as the Company's auditor since 2008.
Tampa, Florida
March 20, 2018
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Consolidated Balance Sheets
December 31,
2017
2016
$
$
$
6,971
20,148
5,278
32,397
49,809
5,880
250,259
316
4,872
339
978
1,757
573
347,180
76,216
200,027
22,054
298,297
1,146
764
300,207
$
$
$
4,817
25,963
5,385
36,165
33,103
3,291
222,768
220
4,929
533
798
1,711
423
303,941
61,856
192,768
20,723
275,347
632
880
276,859
-
31
37,953
9,285
(296)
-
20
20,732
6,563
(233)
46,973
347,180
$
27,082
$ 303,941
(dollars in thousands, except per share amounts)
Assets
Cash and due from banks
Federal funds sold
Interest-bearing deposits
Total cash and cash equivalents
Securities available for sale
Loans held for sale
Loans, net of allowance for loan losses of $3,136 and $2,876
Federal Home Loan Bank stock
Premises and equipment, net
Deferred tax asset
Accrued interest receivable
Bank-owned life insurance
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Noninterest-bearing demand deposits
Savings, NOW and money-market deposits
Time deposits
Total deposits
Official checks
Other liabilities
Total liabilities
Commitments and contingencies (notes 4, 8, and 15)
Stockholders’ equity:
Preferred stock, undesignated; 1,000,000 shares authorized, none issued
or outstanding
Common stock, $.01 par value; 9,000,000 shares authorized, 3,118,977
and 2,004,707 issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Accompanying Notes to Consolidated Financial Statements
2
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Earnings
Year Ended December 31,
2017
2016
$
11,589
983
379
12,951
$
9,956
700
117
10,773
1,181
-
1,181
11,770
256
11,514
322
1,255
46
(1)
351
1,973
5,056
947
320
574
158
535
1,345
8,935
4,552
1,735
2,817
1.04
1.04
$
$
$
829
1
830
9,943
424
9,519
250
935
49
102
294
1,630
4,131
907
346
487
152
501
1,188
7,712
3,437
1,217
2,220
1.12
1.11
$
$
$
(in thousands, except per share amounts)
Interest income:
Loans
Securities
Other
Total interest income
Interest expense:
Deposits
Other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges and fees on deposit accounts
Mortgage banking revenue
Income from bank-owned life insurance
(Loss) gain on sale of securities available for sale
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment
Professional fees
Advertising
FDIC assessment
Software maintenance, amortization and other
Other
Total noninterest expense
Earnings before income taxes
Income taxes
Net earnings
Earnings per common share:
Basic
Diluted
See Accompanying Notes to Consolidated Financial Statements
3
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(in thousands)
Net earnings
Other comprehensive loss:
Change in unrealized loss on securities:
Unrealized loss arising during the year
Reclassification adjustment for realized loss (gain)
Net change in unrealized loss
Deferred income tax benefit on above change
One-time reclassification for newly enacted corporate tax rate
Total other comprehensive loss
Comprehensive income
Year Ended December 31,
2017
2016
$
2,817
$
2,220
(27)
1
(26)
8
(45)
(63)
$
2,754
$
(358)
(102)
(460)
171
-
(289)
1,931
See Accompanying Notes to Consolidated Financial Statements.
4
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2017 and 2016
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Compre-
hensive
Income
(Loss)
(dollars in thousands)
Balance at December 31, 2015
Net earnings
Dividends paid
Net change in unrealized loss on securities available for sale, net of income tax
benefit of $171
Stock options exercised
Common stock issued as compensation to directors
Stock-based compensation
Balance at December 31, 2016
Net earnings
Dividends paid
Net change in unrealized loss on securities available for sale, net of income tax
benefit of $8 and one-time reclassification for newly enacted corporate tax rate
Stock options exercised
Common stock issued as compensation to directors
Sale of common stock, net of stock offering costs of $1,043
Stock-based compensation
Balance at December 31, 2017
1,975,329
$
20
$
20,415
$
4,442
$
-
-
-
25,450
3,928
-
-
-
-
-
-
-
-
-
-
261
55
1
2,220
(99)
-
-
-
-
$
$
2,004,707
$
20
$
20,732
$
6,563
$
-
-
-
19,450
3,912
1,090,908
-
$
-
-
-
-
-
11
-
-
-
-
195
65
16,946
15
$
2,817
(140)
45
-
-
-
-
Total
Stockholders’
Equity
$
24,933
2,220
(99)
56
-
-
(289)
(289)
-
-
-
261
55
1
(233)
$
27,082
-
-
(63)
-
-
-
-
$
2,817
(140)
(18)
195
65
16,957
15
3,118,977
$
31
$
37,953
$
9,285
$
(296)
$
46,973
See Accompanying Notes to Consolidated Financial Statements.
5
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Provision for loan losses
Net amortization of deferred loan fees
Deferred income taxes
Loss (gain) on sale of securities available for sale
Amortization of premiums and discounts on securities available for sale
Gain on sale of loans held for sale
Proceeds from the sale of loans held for sale
Loans originated as held for sale
Stock issued as compensation
Stock-based compensation expense
Income from bank-owned life insurance
Net increase in accrued interest receivable
Net (increase) decrease in other assets
Net increase (decrease) in other liabilities and official checks
Net cash provided by operating activities
Cash flows from investing activities:
Loan originations, net of principal repayments
Purchase of securities available for sale
Principal repayments of securities available for sale
Proceeds from the sale of securities available for sale
Maturities and calls of securities available for sale
Purchase of Federal Home Loan Bank stock
Purchase of premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Proceeds from stock options exercised
Proceeds from sale of common stock, net
Dividends paid
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest
Income taxes
Noncash transactions:
Accumulated other comprehensive loss, net change in unrealized loss on securities available for
sale, net of tax benefit
One-time reclassification for newly enacted corporate tax rate
See Accompanying Notes to Consolidated Financial Statements
Year Ended December 31,
2017
2016
$
2,817
$
2,220
519
256
(74)
202
1
425
(1,101)
65,905
(67,393)
65
15
(46)
(180)
(150)
398
1,659
(27,673)
(23,524)
5,553
750
63
(96)
(462)
(45,389)
528
424
(64)
6
(102)
430
(813)
49,739
(49,495)
55
1
(49)
(106)
198
(26)
2,946
(36,052)
(13,425)
7,892
8,248
1,457
(31)
(1,235)
(33,146)
22,950
195
16,957
(140)
39,962
(3,768)
36,165
$ 32,397
57,774
261
-
(99)
57,936
27,736
8,429
$ 36,165
$
$
$
$
1,179
1,698
$
$
830
1,030
(18)
(45)
$
$
(289)
-
6
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 2017 and 2016 and for the Years Then Ended
(1)
Summary of Significant Accounting Policies
Organization. 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. The deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance
Corporation (“FDIC”). The Bank offers a variety of community banking services to individual and corporate clients through its three
banking offices located in Tallahassee and Crawfordville, Florida and its online banking platform.
The following is a description of the significant accounting policies and practices followed by the Company, which conform to
accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the banking
industry.
Use of Estimates. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that
is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.
Principles of Consolidation. The consolidated financial statements include the accounts of PMHG and the Bank. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and
balances due from banks, federal funds sold and interest-bearing deposits due from banks, all of which have original maturities of less
than ninety days.
At December 31, 2017 and 2016, the Company was required by law or regulation to maintain cash reserves with the Federal Reserve
Bank, in noninterest-bearing accounts with other banks or in the vault in the amounts of $2,618,000 and $1,799,000 respectively.
Securities. Securities may be classified as either trading, held-to-maturity or available-for-sale. Trading securities are held principally
for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in earnings.
Held-to-maturity securities are those which the Company has the positive intent and ability to hold to maturity and are reported at
amortized cost. Available-for-sale securities consist of securities not classified as trading securities or as held-to-maturity securities.
Unrealized holding gains and losses on available-for-sale securities are excluded from operations and reported in accumulated other
comprehensive loss. Gains and losses on the sale of available-for-sale securities are recorded on the trade date determined using the
specific-identification method. Premiums and discounts on securities available for sale are recognized in interest income using the
interest method over the period to maturity or call date, if applicable.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic
or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
(continued)
7
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, Continued
Loans Held for Sale. Loans held for sale includes mortgage loans and Small Business Administration (“SBA”) loans which are
intended for sale in the secondary market and are carried at the lower of book value or estimated fair value in the aggregate. For the
years ended December 31, 2017 and 2016, gains on loans held for sale are reported on the Consolidated Statements of Earnings under
noninterest income in mortgage banking revenue, as there were no SBA loans sold during 2017 or 2016. At December 31, 2017 loans
held for sale were $5,880,000 compared to $3,291,000 at December 31, 2016. At December 31, 2017 and 2016, market values exceeded
book values in the aggregate.
Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs.
Commitment and loan origination fees are deferred and certain direct origination costs are capitalized. Both are recognized as an
adjustment of the yield of the related loan.
The accrual of interest on all portfolio classes is discontinued at the time the loan is ninety-days delinquent unless the loan is well
collateralized and in the process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection
of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or loans that
are charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery
method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts
contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision
for loan losses charged to earnings. Loan losses are charged against the allowance when management confirms that a loan balance
cannot be collected. Subsequent recoveries, if any, are credited to the allowance. There were no changes in the Company’s accounting
policies or methodology during the years ended December 31, 2017 and 2016.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the
collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect
the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are considered impaired. For
such loans, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the
carrying value of that loan.
The general component covers all other loans and is based on the following factors. The historical loss component of the allowance is
determined by losses recognized by portfolio segment over the preceding thirty-six months. This is supplemented by the risks for each
portfolio segment. Risk factors impacting loans in each of the portfolio segments include any deterioration of property values, reduced
consumer and business spending as a result of unemployment and reduced credit availability, and a lack of confidence in the economy.
The historical experience is adjusted for the following qualitative factors: (1) changes in lending policies and procedures, risk selection
and underwriting standards; (2) changes in national, regional and local economic conditions that affect the collectability of the loan
portfolio; (3) changes in the experience, ability and depth of lending management and other relevant staff; (4) changes in the volume
and severity of past due loans, nonaccrual loans or loans classified special mention, substandard, doubtful or loss; (5) quality of loan
review and Board of Directors oversight; (6) changes in the nature and volume of the loan portfolio and terms of loans; (7) the existence
and effect of any concentrations of credit and changes in the level of such concentrations; (8) changes in collateral dependent loans; and
(9) the effect of other external factors, trends or uncertainties that could affect management’s estimate of probable losses, such as
competition and industry conditions.
(continued)
8
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, Continued
Allowance for Loan Losses, Continued. A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis for all loans by either the present value of expected future
cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral-dependent.
Premises and Equipment. Land is stated at cost. Buildings, leasehold improvements, furniture, fixtures and equipment, computer and
software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are computed using
the straight-line method over the estimated useful life of each type of asset, or the lease term if shorter.
Transfer of Financial Assets. Transfers of financial assets or a participating interest in an entire financial asset are accounted for as
sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity. A participating interest is a portion of an entire financial asset
that (1) conveys proportionate ownership rights with equal priority to each participating interest holder (2) involves no recourse (other
than standard representations and warranties) to, or subordination by, any participating interest holder, and (3) does not entitle any
participating interest holder to receive cash before any other participating interest holder.
Off-Balance Sheet Financial Instruments. In the ordinary course of business, the Company has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit, construction loans in process, unused lines of credit, standby financial and
performance letters of credit and guaranteed accounts. Such financial instruments are recorded in the consolidated financial statements
when they are funded.
Income Taxes. There are two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be
paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions
over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net
deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and
enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from
changes in deferred tax assets and liabilities between periods.
Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or
sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms examined and upon
examination also include resolution of the related appeals or litigation processes, if any.
(continued)
9
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, Continued
Income Taxes, Continued. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a
taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the
more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is
subject to management’s judgment. As of December 31, 2017, management is not aware of any uncertain tax positions that would have
a material effect on the Company’s consolidated financial statements. Deferred tax assets are reduced by a valuation allowance if, based
on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns. Income taxes are allocated to the Holding Company and Bank as if separate
income tax returns were filed.
Fair Value Measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. GAAP has established a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to
measure fair value:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and
model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained
from, or corroborated by, third-party pricing services.
Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the
measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are
available without undue cost and effort.
The following describes valuation methodologies used for assets measured at fair value:
Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the
valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded
equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities
with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within
Level 2 of the valuation hierarchy, include U.S. Government agency securities, municipal securities and mortgage-backed securities. In
certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of
the valuation hierarchy.
Impaired Loans. Estimates of fair value for impaired loans is based on the estimated value of the underlying collateral which is
determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers
or local real estate brokers and the knowledge and experience of the Bank’s management related to values of equipment or properties in
the Bank’s market areas. Management takes into consideration the type, location or occupancy of the equipment or property as well as
current economic conditions in the area the property is located in assessing estimates of fair value. Accordingly, fair value estimates for
impaired loans are classified as Level 3.
(continued)
10
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, Continued
Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values of
financial instruments:
Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate their fair value (Level 1).
Securities. Fair values for securities are based on the framework for measuring fair value (Level 2).
Loans Held for Sale. Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices.
Fair values are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality Level 3).
Loans. Fair values for variable rate loans, fixed-rate mortgage loans (e.g. one-to-four family residential), commercial real estate loans
and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow
analysis or underlying collateral values, where applicable (Level 3).
Federal Home Loan Bank Stock. The fair value of the Company’s investment in Federal Home Loan Bank stock is based on its
redemption value (Level 3).
Accrued Interest Receivable. The carrying amounts of accrued interest approximate their fair values (Level 3).
Deposits. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount
payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a
discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected
monthly maturities of time deposits (Level 3).
Off-Balance Sheet Instruments. Fair values for off-balance sheet lending commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing (Level 3).
Advertising. The Company expenses all media advertising as incurred.
Stock-Based Compensation. The Company expenses the fair value of any stock options granted. The Company recognizes stock option
compensation in the consolidated statements of earnings as the options vest.
Comprehensive Income. GAAP requires that recognized revenue, expenses, gains and losses be included in earnings. Although certain
changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the consolidated balance sheets, such items, along with net earnings, are components of
comprehensive income.
Mortgage Banking Revenue. Mortgage banking revenue includes gains and losses on the sale of mortgage loans originated for sale and
wholesale brokerage fees. The Company recognizes mortgage banking revenue from mortgage loans originated in the consolidated
statements of earnings upon sale of the loans.
(continued)
11
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, Continued
Recent Accounting Standards Update. In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial
statements with more decision-useful information. The ASU requires equity investments to be measured at fair value with changes in
fair values recognized in net earnings, (public entities to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes), simplifies the impairment assessment of equity investments without readily determinable fair values by
requiring a qualitative assessment to identify impairment and eliminates the requirement to disclose fair values, the methods and
significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The ASU also clarifies that
the Company should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in
combination with the Company’s other deferred tax assets. For public business entities, the ASU is effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The adoption of this guidance did not have any impact on
the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) which will require lessees to recognize on the consolidated
balance sheet the assets and liabilities for the rights and obligations created by those leases with term of more than twelve months.
Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a
lessee primarily will depend on its classification as a finance or operating lease. The new ASU will require both types of leases to be
recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better
understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative
requirements, providing additional information about the amounts recorded in the consolidated financial statements. For public
companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The
Company is in the process of determining the effect of the ASU on its consolidated financial statements. Early adoption is permitted.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) intended to improve the
accounting for employee share-based payments. The ASU affects all organizations that issue share-based payment awards to their
employees. The ASU simplifies several aspects of the accounting for share-based payment award transactions, including the income tax
consequences, classification of awards as either equity or liabilities, and classification on the consolidated statement of cash flows. For
public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods
within those annual periods. The adoption of this guidance did not have any impact on the Company’s consolidated financial
statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU improves financial
reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU
requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience,
current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be
permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will
continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced
disclosures to help investors and other financial statement users better understand significant estimates and judgments used in
estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures
include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial
statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial
assets with credit deterioration. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. Early adoption is permitted. The Company is in the process of determining the effect of the ASU on its
consolidated financial statements.
(continued)
12
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1)
Summary of Significant Accounting Policies, Continued
Recent Accounting Standards Update, Continued. In January 2017, the FASB issued ASU No. 2017-01, Business Combinations
(Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in
determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can
be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit
the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application,
and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim
periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting
the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities”, to amend the
amortization period for certain purchased callable debt securities held at a premium. Under current GAAP, entities generally amortize
the premium as an adjustment of yield over the contractual life of the instrument. The amendments in this update require the premium
to be amortized to the earliest call date. No accounting change is required for securities held at a discount. For public business entities,
the amendments in this update become effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an
interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
should apply the amendments in this update on a modified retrospective basis through a cumulative-effect adjustment directly to
retained earnings as of the beginning of the period of adoption. The Company has adhered to this practice since its inception.
In February 2018, the FASB issued ASU No. 2018-02), Income Statement Reporting Comprehensive Income (Topic 220). The ASU
requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the
newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical
corporate income tax rate and the newly enacted 21% corporate income tax rate. The Company early adopted the ASU. The impact of
the ASU was to increase retained earnings and other comprehensive loss by $45,000.
(2)
Securities Available for Sale
Securities have been classified according to management’s intention. The carrying amount of securities and their fair values are
summarized as follows:
(in thousands)
At December 31, 2017
U.S. Government agency securities
Municipal securities
Mortgage-backed securities
Total
At December 31, 2016
U.S. Government agency securities
Municipal securities
Mortgage-backed securities
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
1,251
12,340
36,614
50,205
2,186
12,614
18,673
33,473
$
$
$
$
6
128
23
157
2
91
36
129
$
$
$
$
(8)
(95)
(450)
(553)
(17)
(282)
(200)
(499)
$
$
$
$
1,249
12,373
36,187
49,809
2,171
12,423
18,509
33,103
(continued)
13
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2)
Securities Available for Sale, Continued
Securities available for sale measured at fair value on a recurring basis are summarized below:
(in thousands)
At December 31, 2017
U.S. Government agency securities
Municipal securities
Mortgage-backed securities
Total
At December 31, 2016
U.S. Government agency securities
Municipal securities
Mortgage-backed securities
Total
Fair Value Measurements Using
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
$
$
$
$
1,249
12,373
36,187
49,809
2,171
12,423
18,509
33,103
$
$
$
$
-
-
-
-
-
-
-
-
$
$
$
$
1,249
12,373
36,187
49,809
2,171
12,423
18,509
33,103
$
$
$
$
-
-
-
-
-
-
-
-
During the years ended December 31, 2017 and 2016, no securities were transferred in or out of Level 1, Level 2 or Level 3.
The scheduled maturities of securities are as follows:
Amortized
Cost
Fair
Value
(in thousands)
At December 31, 2017
Due in less than one year
Due in one to five years
Due in five to ten years
Due after ten years
Mortgage-backed securities
Total
The following summarizes sales of securities available for sale:
(in thousands)
Proceeds from sale of securities
Gross gains
Gross losses
Net (loss) gain on sale of securities
$
$
14
$
511 $
511
2,417
7,951
2,743
36,187
$ 50,205 $ 49,809
2,452
7,863
2,765
36,614
Year Ended December 31,
2017
2016
750
-
$
(1)
(1)
$
8,248
102
-
102
(continued)
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2)
Securities Available for Sale, Continued
At December 31, 2017 and 2016, securities with a fair value of $9,090,302 and $9,279,000, respectively, were pledged as collateral for
public deposits and for other borrowings with clients.
Securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, are as follows:
(in thousands)
At December 31, 2017
Securities Available for Sale
U.S. Government agency securities
Municipal securities
Mortgage-backed securities
Total
At December 31, 2016
Securities Available for Sale
U.S. Government agency securities
Municipal securities
Mortgage-backed securities
Total
Less Than Twelve Months
More Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
(8)
(36)
(308)
(352)
(17)
(282)
(191)
(490)
$
$
$
$
694 $
1,831
29,742
32,267
$
1,529 $
6,111
12,709
20,349
$
-
(59)
(142)
(201)
-
-
(9)
(9)
$
$
$
$
-
1,203
5,667
6,870
-
-
501
501
The unrealized losses on thirty-four and twenty-four securities at December 31, 2017 and 2016, 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.
(continued)
15
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3)
Loans
The segments and classes of loans are as follows:
(in thousands)
Real estate mortgage loans:
Commercial
Residential and home equity
Construction
Total real estate mortgage loans
Commercial loans
Consumer and other loans
Total loans
Add (Less):
Net deferred loan costs
Allowance for loan losses
Loans, net
At December 31,
2017
2016
$
79,565 $
94,824
26,813
201,202
44,027
7,742
252,971
65,805
88,883
19,991
174,679
46,340
4,275
225,294
424
(3,136)
350
(2,876)
$ 250,259 $ 222,768
(continued)
16
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, 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 portfolio segments and classes are identified by the Company as follows:
Real Estate Mortgage Loans. Real estate mortgage loans are typically divided into three classes: commercial, residential and
home equity, and construction. The real estate mortgage loans are as follows:
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 flow 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 an index. At
times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, the Bank 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,
the overall strength of the economy, new job creation trends, tenant vacancy rates, environmental contamination, and the
quality of the borrowers’ management. In order to mitigate and limit these risks, we analyze the borrowers’ cash flow 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, multifamily
residential loans, and home equity lines of credit. The collateral for these loans is generally on 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 to 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, generally 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.
(continued)
17
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3)
Loans, Continued
Commercial Loans. The Bank offers a wide range of commercial loans, including business term loans, equipment financing,
lines of credit, and U.S. Small Business Administration (SBA) loans to small and midsized businesses. 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.
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; it may not provide an adequate source of
repayment of the principal. The underwriting on these loans is primarily based on the borrower’s financial condition. Therefore,
both secured and unsecured consumer loans subject the Company to risk when the borrower’s financial condition declines or
deteriorates. Based upon our current trend in consumer loans, 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.
(continued)
18
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3)
Loans, Continued
An analysis of the change in the allowance for loan losses follows:
Real Estate Mortgage Loans
Residential
and Home
Equity
Commercial
Construction
Commercial
Loans
Consumer
and Other
Loans
(in thousands)
Year Ended December 31, 2017
Beginning balance
Provision (credit) for loan losses
Net (charge-offs) recoveries
Ending balance
At December 31, 2017
Individually evaluated for impairment:
Recorded investment
Balance in allowance for loan losses
Collectively evaluated for impairment:
Recorded investment
Balance in allowance for loan losses
Year Ended December 31, 2016
Beginning balance
Provision (credit) for loan losses
Net (charge-offs) recoveries
Ending balance
At December 31, 2016
Individually evaluated for impairment:
Recorded investment
Balance in allowance for loan losses
Collectively evaluated for impairment:
Recorded investment
Balance in allowance for loan losses
Total
2,876
256
4
3,136
134
134
55
47
(12)
90
-
-
$
$
$
$
7,742
$ 252,837
90
$
3,002
56
3
(4)
55
-
-
$
$
$
$
2,473
424
(21)
2,876
811
76
4,275
$ 224,483
55
$
2,800
(continued)
$
$
$
$
$
$
$
$
$
$
$
$
775
119
-
894
-
-
79,565
894
707
68
-
775
-
-
$
$
$
$
$
$
$
$
$
$
1,074
23
-
1,097
-
-
94,824
1,097
868
206
-
1,074
662
-
65,805
775
$
$
88,221
1,074
$
$
$
$
$
$
$
$
$
$
$
$
258
73
-
331
-
-
26,813
331
246
12
-
258
73
-
19,918
258
$
$
$
$
$
$
$
$
$
$
$
$
714
(6)
16
724
134
134
43,893
590
596
135
(17)
714
76
76
46,264
638
$
$
$
$
$
$
$
$
$
$
$
$
19
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3)
Loans, Continued
The following summarizes the loan credit quality:
(in thousands)
At December 31, 2017
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Total
At December 31, 2016
Grade:
Pass
Special mention
Substandard
Doubtful
Loss
Total
Real Estate Mortgage Loans
Residential
and Home
Equity
Commercial
Construction
Commercial
Loans
Consumer
and Other
Loans
Total
$
$
$
$
74,560
4,382
623
-
-
79,565
$
$
92,282
2,122
420
-
-
94,824
61,734
4,071
-
-
-
65,805
$ 84,695
3,152
1,036
-
-
88,883
$
$
$
$
$
26,356
298
159
-
-
26,813
$
$
42,874
591
562
-
-
44,027
19,485
333
173
-
-
19,991
$
$
45,623
250
467
-
-
46,340
$
$
$
$
7,715
27
-
-
-
7,742
$
$
243,787
7,420
1,764
-
-
252,971
4,227
46
2
-
-
4,275
$ 215,764
7,852
1,678
-
-
225,294
$
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. Further, construction and nonowner-occupied commercial
real estate loans and commercial 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.
(continued)
20
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3)
Loans, Continued
Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or
of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the
deficiencies are not corrected.
Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added
characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable.
Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not
warranted. This classification does not necessarily preclude the potential for recovery, but rather signifies it is no longer
practical to defer writing off the asset.
At December 31, 2017, there were two loans over sixty days past due and accruing, no loans past due ninety days or more but
still accruing and two loans on nonaccrual. Age analysis of past-due loans at December 31, 2017 and 2016 is as follows:
(in thousands)
At December 31, 2017:
Real estate mortgage loans:
Commercial
Residential and home equity
Construction
Commercial loans
Consumer and other loans
Total
At December 31, 2016:
Real estate mortgage loans:
Commercial
Residential and home equity
Construction
Commercial loans
Consumer and other loans
30-59 Days
Past Due
60-89 Days
Past Due
Accruing Loans
Greater Than
90 Days
Past Due
Total Past
Due
Current
Nonaccrual
Loans
Total
Loans
$
$
$
$
$
$
-
-
-
-
-
-
-
371
-
-
-
$
$
$
623
255
-
-
-
878
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
623 $
255
-
-
-
878 $ 251,959 $
78,942 $
94,569
26,813
43,893
7,742
$
79,565
-
94,824
-
26,813
-
44,027
134
7,742
-
134 $ 252,971
-
371
-
-
-
$
65,805 $
87,850
19,918
46,264
4,275
-
662
73
76
-
$
65,805
88,883
19,991
46,340
4,275
$
371 $ 224,112 $
811 $ 225,294
(continued)
Total
$
371 $
-
$
21
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3)
Loans, Continued
The following summarizes the amount of impaired loans:
(in thousands)
At December 31, 2017:
Commercial loans
Total
At December 31, 2016:
Real estate mortgage loans:
Residential and home equity
Construction loans
Commercial loans
Total
With No Related
Allowance Recorded
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With an Allowance Recorded
Unpaid
Contractual
Principal
Balance
Recorded
Investment
Related
Allowance
Total
Unpaid
Contractual
Principal
Balance
Related
Allowance
Recorded
Investment
$
$
$
$
-
-
$
$
-
-
$
$
134 $
134 $
134 $
134 $
134 $
134 $
134 $
134 $
134 $
134 $
134
134
662 $
73
-
735 $
662 $
73
-
735 $
$
-
-
76
76 $
$
-
-
76
76 $
$
-
-
76
76 $
662 $
73
76
811 $
662 $
73
76
811 $
-
-
76
76
The average net investment in impaired loans and interest income recognized and received on impaired loans by loan class is as
follows:
(in thousands)
Year Ended December 31, 2017
Residential & Home Equity
Construction
Commercial
Total
Year Ended December 31, 2016
Residential & Home Equity
Construction
Commercial
Total
Average
Recorded
Investment
Interest
Income
Recognized
Interest
Income
Received
$
$
$
$
277
42
64
383
354
19
107
480
$
$
$
$
28
1
-
29
-
-
7
7
$
$
$
$
28
4
-
32
14
-
6
20
There were no collateral dependent impaired loans measured at fair value on a nonrecurring basis at December 31, 2017 or 2016.
(continued)
22
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, 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.
The Company entered into a new troubled debt restructured loan during the year ended December 31, 2017. The troubled debt
restricting entered into in 2017 did not subsequently default during that year. The Company did not enter into any new troubled debt
restructurings during the year ended December 31, 2016.
(in thousands)
Troubled Debt Restructurings -
Residential and home equity:
Modified principal
Total
Year Ended December 31,
2017
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Current
Modification
Outstanding
Recorded
Investment
Number
of
Contracts
1
1
$
$
153
153
$
$
169
169
$
$
164
164
The Company grants the majority of its loans to borrowers throughout Leon County, Florida. Although the Company has a diversified
loan portfolio, a significant portion of its borrowers’ ability to honor their contracts is dependent upon the economy of this area. The
Company does not have any significant concentrations to any one industry or client.
(continued)
23
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4)
Premises and Equipment
A summary of premises and equipment follows:
(in thousands)
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Computer and software
Construction in progress
Total, at cost
At December 31,
2017
2016
$
690
3,736
416
1,160
2,140
-
8,142
$
690
2,461
411
993
1,943
1,181
7,679
Less accumulated depreciation and amortization
Premises and equipment, net
(3,270)
$ 4,872
(2,750)
$ 4,929
Construction in progress relates to the construction of the Company’s branch office in Crawfordville, FL, which was substantially
complete at December 31, 2016.
The Company leases an office facility under an operating lease which expires in 2022, but has one 5-year option to extend. This lease
requires monthly lease payments and common area maintenance charges and contains escalation clauses during the term of the lease.
The Company also had an operating lease that expired in November, 2017, with no options to renew. Rent expense under these
operating leases during the years ended December 31, 2017 and 2016 was $155,000 and $147,000, respectively. Future minimum rental
commitments, including renewal options, under the current operating lease are indicated in the following table.
(in thousands)
Year Ending December 31,
2018
2019
2020
2021
2022
Total
$
Amount
90
90
90
90
90
450
$
(continued)
24
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5)
Deposits
The aggregate amount of time deposits with a minimum denomination of $250,000 was approximately $10.7 million and $9.0 million at
December 31, 2017 and 2016, respectively.
A schedule of maturities of time deposits at December 31, 2017 follows:
(in thousands)
Year Ending December 31,
2018
2019
2020
2021
2022
Total
(6)
Other Borrowings
Amount
$ 16,942
2,457
538
21
2,096
$ 22,054
The Company has pledged collateral to the Federal Home Loan Bank of Atlanta (“FHLB”) for future advances which will be
collateralized by a blanket lien on qualifying residential real estate, commercial real estate, home equity lines of credit and multi-family
loans. The Company may borrow up to $41.7 million as of December 31, 2017 from the FHLB. There were no advances outstanding at
December 31, 2017 or 2016. The Company also has available credit of $16.3 million in lines of credit with correspondent banks. All
draws under these lines are subject to approval by the correspondent bank.
(7)
Income Taxes
The components of the income taxes are as follows:
(in thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total income taxes
Year Ended December 31,
2016
2017
$
$
1,309
224
1,533
193
9
202
1,735
$
$
1,031
180
1,211
1
5
6
1,217
(continued)
25
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7)
Income Taxes, Continued
The reasons for the difference between the statutory Federal income tax rate of 34% and the effective tax rates are summarized as
follows:
(dollars in thousands)
Income taxes at statutory rate
Increase (decrease) resulting from:
State taxes, net of federal tax benefit
Tax-exempt income
Stock-based compensation
Change in federal rate
Other nondeductible expenses
Total
Year Ended December 31,
2017
2016
% of
Pretax
Earnings
% of
Pretax
Earnings
Amount
Amount
$
1,548
34.0 % $
1,169
34.0 %
154
(97)
(60)
155
35
$ 1,735
3.4
(2.1)
(1.3)
3.4
0.7
8
38.1 % $ 1,217
122
(82)
-
-
3.5
(2.4)
-
-
0.3
35.4 %
Tax effects of temporary differences that give rise to the deferred tax assets and liabilities are as follows:
(in thousands)
Deferred tax assets:
Allowance for loan losses
Organizational and start-up costs
Stock-based compensation
Unrealized losses on securities available for sale
Other
Deferred tax assets
Deferred tax liabilities:
Prepaid Expenses
Deferred loan costs
Premises and equipment
Deferred tax liabilities
Net deferred tax asset
At December 31,
2017
2016
$
$
744
49
12
100
23
928
(70)
(317)
(202)
(589)
339
$
$
1,008
87
18
137
16
1,266
(69)
(392)
(272)
(733)
533
The Company files consolidated income tax returns in the U.S. federal jurisdiction and the State of Florida. The Company is no longer
subject to U.S. federal, or state and local income tax examinations by taxing authorities for years before 2014.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. The Act, among other provisions, reduced the corporate tax
rate from 35% to 21%. As a result, the Company recorded additional tax expense of $155,000 to measure the net Deferred Tax Asset at
the new enacted tax rate. An election was also made to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated
other comprehensive loss to retained earnings.
(continued)
26
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8)
Off-Balance Sheet Financial Instruments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs
of its clients. These financial instruments are commitments to extend credit, construction loans in process, unused lines of credit,
standby letters of credit, and guaranteed accounts and may involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments reflect the extent of
involvement the Company has in these financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for available lines
of credit, construction loans in process and standby letters of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit, construction loans in process and unused lines of credit are agreements to lend to a client as long as
there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is
based on management’s credit evaluation of the counterparty. Standby letters of credit are written conditional commitments issued by
the Company to guarantee the performance of a client to a third party. These letters of credit are primarily issued to support third-party
borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to clients. In the event the client does not perform in accordance with
the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of
future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is
funded, we would be entitled to seek recovery from the client. Some of the Bank’s standby letters of credit are secured by collateral and
those secured letters of credit totaled $413,000 at December 31, 2017.
Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our third-party credit
card company, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on certain
accounts plus 10%. The maximum potential amount of future payments we could be required to make is represented by the dollar
amount disclosed in the table below.
Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded.
In 2016, the Company entered into an agreement with another bank. This agreement references an interest rate swap that was transacted
between the other bank and its loan client (the “Counterparty”). Should the Counterparty default on its obligations under the interest
rate swap agreement with the other bank, then the Company would be liable for 13.208% of all swap liabilities. The maximum potential
credit exposure under this contract at December 31, 2017 is $45,000.
(continued)
27
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8)
Off-Balance Sheet Financial Instruments, Continued
A summary of the contractual amounts of the Company’s financial instruments with off-balance sheet risk at December 31, 2017 is as
follows:
(in thousands)
Commitments to extend credit
Construction loans in process
Unused lines of credit
Standby financial letters of credit
Standby performance letters of credit
Guaranteed accounts
(9)
Stock Compensation Plans
At December 31, 2017
$
$
$
$
$
$
1,108
15,681
37,959
1,812
104
1,220
The 2015 Stock Incentive Compensation Plan (the “2015 Plan”) was approved by Shareholders at the Company’s annual meeting of
shareholders on May 20, 2015, and permits the Company to grants its key employees and directors stock options, stock appreciation
rights, performance shares, and phantom stock. Under the 2015 Plan, the number of shares which may be issued is 500,000, but in no
instance more than 15% of the issued and outstanding shares of the Company’s common stock. As of December 31, 2017, 11,540 stock
options have been granted under the 2015 plan. At December 31, 2017, 456,307 options are available for grant.
A summary of the activity in the Company’s 2015 Plan is as follows:
Outstanding at December 31, 2016
Options granted
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Number of
Options
-
11,540
11,540
11,540
Weighted-
Average
Exercise
Price
-
17.03
17.03
17.03
$
$
$
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
4.1 years
4.1 years
$
$
16,000
16,000
The fair value of shares vested and recognized as compensation expense was $15,000 for the year ended December 31, 2017. There was
no share-based compensation expense during the year ended December 31, 2016. At December 31, 2017, there was no unrecognized
compensation expense related to non-vested share-based compensation arrangements granted under the 2015 Plan.
(continued)
28
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9)
Stock Compensation Plans, Continued
The fair value of each option granted during the year ended December 31, 2017 was estimated on the date of grant using the Black-
Scholes option-pricing model with the following assumptions:
Weighted average risk-free interest rate
Expected dividend yield
Expected stock volatility
Expected life in years
Per share fair value of options issued during period
1.48 %
0.40 %
8.54 %
3.00
$ 1.26
The Company used the guidance in Staff Accounting Bulletin No. 107 to determine the estimated life of options issued. Expected
volatility is based on volatility of similar companies’ common stock. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company’s history and
expectation of dividend payouts.
As of May 20, 2015, no further grants will be made under the 2007 Stock Option Plan (the “2007 Plan”). Unexercised stock options that
were granted under the 2007 Plan will remain outstanding and will expire under the terms of the individual stock grant. A summary of
the activity in the Company’s 2007 Plan is as follows:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Number of
Options
Outstanding at December 31, 2015
Options exercised
Options forfeited
Outstanding at December 31, 2016
Options exercised
Options forfeited
Outstanding at December 31, 2017
Exercisable at December 31, 2017
75,500
(25,450)
(7,850)
42,200
(19,450)
(550)
22,200
21,700
$
$
$
$
10.19
10.29
10.00
10.16
10.00
10.00
10.31
10.30
1.7 years
1.7 years
$
$
180,000
176,000
At December 31, 2017, there was no unrecognized compensation expense related to non-vested, share-based compensation
arrangements granted under the 2007 plan.
(continued)
29
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9)
Stock Compensation Plans, Continued
In 2012, the Company’s Board of Directors and shareholders adopted the Directors’ Plan. The Directors’ Plan permits the Company’s
and the Bank’s directors to elect to receive any compensation to be paid to them in shares of the Company’s common stock. Pursuant to
the Directors’ Plan, each director is permitted to make an election to receive shares of stock instead of cash. To encourage directors to
elect to receive stock, the Directors’ Plan provides that if a director elects to receive stock, he or she will receive in common stock
110% of the amount of cash fees set by the Board or the Compensation and Nominating Committee. The value of stock to be awarded
pursuant to the Directors’ Plan will be the closing price of a share of common stock as traded on the Over-the- Counter Bulletin Board,
or a price set by the Board or its Compensation and Nominating Committee, acting in good faith, but in no case less than fair market
value. The maximum number of shares to be issued pursuant to the Directors’ Plan is limited to 74,805 shares. In 2017 and 2016, our
directors received 3,912 and 3,928 shares of common stock, respectively, in lieu of cash, under the Directors’ Plan. At December 31,
2017, 58,102 shares remained available for grant.
(10)
Profit Sharing Plan
The Company sponsors a 401(k)-profit sharing plan available to all employees electing to participate after meeting certain
length-of-service requirements. The Company’s contributions to the profit sharing plan are discretionary and determined annually.
Contributions to the plan for the years ended December 31, 2017 and 2016 were $142,000 and $128,000, respectively.
(11)
Related Party Transactions
The Company enters into transactions during the ordinary course of business with officers and directors of the Company and entities in
which they hold a significant financial interest. The following table summarizes these transactions:
(in thousands)
Loans:
Beginning balance
Originated during the year
Principal repayments
Ending balance
Deposits at year-end
Year Ended December 31,
2017
2016
$
$
$
5,942
634
(706)
5,870
$
$
6,082
1,216
(1,356)
5,942
10,008
$
13,947
From the Bank’s formation until February, 2016, the Company leased an office facility from a related party. In February, 2016, the
building was purchased by a non-related party. Rent expense under this operating lease from the related party during the years ended
December 31, 2017 and 2016 was $0 and $10,000 respectively. In addition, the Bank purchases various insurance policies through a
company that employs the spouse of one of our directors and former CFO. The premiums paid totaled $740,000 in 2017 and $523,000
in 2016 and included health insurance premiums for employees.
(continued)
30
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12)
Fair Value of Financial Instruments
The approximate carrying amounts and estimated fair values of the Company’s financial instruments are as follows:
(in thousands)
Financial assets:
Cash and cash equivalents
Securities available for sale
Loans held for sale
Loans, net
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities-
Deposits
Off-Balance Sheet financial instruments
(13)
Dividend Restrictions
Level
At December 31, 2017
At December 31, 2016
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
1
2
3
3
3
3
3
3
$
32,397
49,809
5,880
250,259
316
978
$
32,397
49,809
6,039
249,628
316
978
$
36,165
33,103
3,291
222,768
220
798
$
36,165
33,103
3,500
221,320
220
798
298,297
-
298,403
-
275,347
-
275,433
-
The Holding Company is limited in the amount of cash dividends it may declare and pay by the amount of capital is has retained and
the amount of dividends it can receive from the Bank. The Bank is limited in the amount of cash dividends that may be paid. The
amount of cash dividends that may be paid is based on the Bank’s net earnings of the current year combined with the Bank’s retained
earnings of the preceding two years, as defined by state banking regulations. However, for any dividend declaration, the Bank must
consider additional factors such as the amount of current period net earnings, liquidity, asset quality, capital adequacy and economic
conditions. It is likely that these factors would further limit the amount of dividends which the Bank could declare. In addition, bank
regulators have the authority to prohibit banks from paying dividends if they deem such payment to be an unsafe or unsound practice.
(14)
Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts
and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Bank is subject to the Basel III capital level threshold requirements under the Prompt Corrective Action regulations which phase in
full compliance over a multi-year schedule. These regulations were designed to ensure that banks maintain strong capital positions even
in the event of severe economic downturns or unforeseen losses.
(continued)
31
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14)
Regulatory Matters, Continued
Changes that could affect the Bank going forward include additional constraints on the inclusion of deferred tax assets in capital and
increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. In the first quarter of 2015,
the Bank elected an irreversible one-time opt-out to exclude accumulated other comprehensive income (loss) from regulatory capital.
Beginning January 1, 2016, the Bank became subject to the capital conservation buffer rules which place limitations on distributions,
including dividend payments, and certain discretionary bonus payments to executive officers. In order to avoid these limitations, a bank
must hold a capital conservation buffer above its minimum risk-based capital requirements. As of December 31, 2017 and 2016, the
Bank’s capital conservation buffer exceeds the minimum requirement of 1.25% and 0.625%, respectively. The required conservation
buffer of 2.5% is to be phased in over two years. Each January 1st, the buffer will increase by 0.625%.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and
percentage (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2017, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 2017, the Bank is well capitalized under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage percentages as set
forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and percentages are also presented in the table:
(dollars in thousands)
As of December 31, 2017
Tier 1 Leverage ratio to Average Assets
Common Equity Tier 1 Capital to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
As of December 31, 2016:
Tier 1 Leverage ratio to Average Assets
Common Equity Tier 1 Capital to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
(15)
Legal Contingencies
Actual
For Capital Adequacy
Purposes
For Well Capitalized
Purposes
Amount
Percentage
Amount
Percentage
Amount
Percentage
$ 33,146
33,146
33,146
36,282
$
25,994
25,994
25,994
28,772
9.48 %
12.80
12.80
14.01
$ 13,983
11,654
15,539
20,718
4.00 %
4.50
6.00
8.00
$ 17,479
16,834
20,718
25,898
$
8.73 %
11.70
11.70
12.95
11,906
9,995
13,326
17,769
$
4.00 %
4.50
6.00
8.00
14,883
14,437
17,769
22,211
5.00 %
6.50
8.00
10.00
5.00 %
6.50
8.00
10.00
Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will not have a
material effect on the Company’s financial statements. As of December 31, 2017, there is no pending or threatened litigation of which
management is aware.
(continued)
32
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16)
Earnings Per Share
Earnings per share (“EPS”) has been computed on the basis of the weighted-average number of shares of common stock outstanding.
Outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the
treasury stock method:
(dollars in thousands, except per share amounts)
Year Ended December 31,
Basic EPS:
Net earnings
Effect of dilutive securities-incremental shares from assumed
conversion of options
Diluted EPS:
Net earnings
2017
Weighted-
Average
Shares
Per
Share
Amount
Earnings
2016
Weighted-
Average
Shares
Per
Share
Amount
Earnings
$
2,817
2,704,382
$
1.04
$
2,220
1,982,334
$
1.12
7,317
8,827
$
2,817
2,711,699
$
1.04
$
2,220
1,991,161
$
1.11
(17)
Parent Company Only Financial Information
The Holding Company’s unconsolidated financial information follows:
(in thousands)
Assets
Cash
Investment in subsidiary
Other assets
Total assets
Stockholders’ Equity
Stockholders’ equity
Total liabilities and stockholders’ equity
At December 31,
2017
2016
14,103
32,850
20
46,973
$
1,301
25,761
20
$ 27,082
46,973
46,973
$
$
27,082
27,082
$
$
$
$
(continued)
33
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17)
Parent Company Only Financial Information, Continued
Condensed Statements of Earnings
(in thousands)
Revenues
Expenses
Income tax benefit
Loss before earnings of subsidiary
Net earnings of subsidiary
Net earnings
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net Earnings
Adjustments to reconcile net earnings to net cash used in operating activities:
Equity in earnings of subsidiary
Stock issued as compensation
Net decrease in other assets
Net cash used in operating activities
Cash flows from financing activities:
Proceeds from sale of common stock
Proceeds from stock options exercised
Net cash provided by financing activities
Cash flows from investment activities:
Cash dividend paid
Cash infusion to subsidiary
Net cash used by investing activities
Net increase in cash
Cash at beginning of the year
Cash at end of year
Supplemental disclosure of cash flow information-
Noncash items:
Net change in accumulated other comprehensive loss of subsidiary, net of change
in unrealized loss on securities available for sale, net of tax
Stock-based compensation expense of subsidiary
Year Ended December 31,
2016
2017
$
$
-
(440)
165
(275)
3,092
2,817
$
$
-
(421)
159
(262)
2,482
2,220
Year Ended December 31,
2016
2017
$
2,817
$
2,220
(3,092)
65
-
(210)
16,957
195
17,152
(140)
(4,000)
(4,140)
12,802
1,301
14,103
(18)
15
$
$
$
(2,482)
55
207
-
-
261
261
(99)
-
(99)
162
1,139
1,301
(289)
1
$
$
$
34
Dear Fellow Shareholders,
the Bank and the Company.
As Prime Meridian Bank rounded the corner toward its ten-year anniversary, several factors made 2017 pivotal for
The Company completed a capital offering in the second quarter of 2017 that netted approximately $17 million and
strategically positioned the Company for future growth and expansion.
Responding to enactment of the Tax Cuts and Job Act on December 22, 2017, the Company revalued its deferred
tax asset position to reflect a reduction in its federal corporate income tax rate from 34% to 21%.
This revaluation resulted in a one-time, non-cash charge of $155,000 recorded in income tax expense during the
fourth quarter of 2017. Going forward the reduction in the corporate income tax rate is expected to benefit the
Company.
The Company also declared an annual cash dividend of $0.10 per share on the Company’s common stock.
This dividend was payable March 6, 2018, to shareholders of record on February 15, 2018.
Prime Meridian Bank maintains its commitment to asset quality and margins in a highly competitive market. We
will not compromise the way we structure loans. Building relationships and maintaining our credit standards are as
important now as they have ever been.
As we build our Bank we filter everything through the lens of what is right. Decisions about possible expansion, the
people we hire, and how we operate must be a good fit for our culture as we move forward.
The continued strength of the Bank’s team plays a significant role in our growth. At 71 full-time equivalent
employees as of December 31, 2017, the team maintains its ability to operate efficiently with a 65.01% Efficiency
Ratio for the year. In September, the team was, again, recognized as one of the nation’s Best Banks to Work
For (#22) by American Banker magazine.
The Bank maintained an important role in the community by providing financial and volunteer support to dozens
of non-profits, schools and programs. We hosted a cybersecurity workshop for clients in the accounting profession
to educate them on best practices to protect their business and clients from emerging threats.
The Mortgage Department continues to build its sales and loan operations team. According to Metro Market
Trends reporting service, Prime Meridian Bank ranked third in the Leon County market in mortgage dollar volume
for 2017.
Other highlights include:
• Net income increased 26.9% to $2.8 million from 2016 to 2017, boosted by solid growth in both net interest
income and noninterest income.
• Year over year, the Company reported steady growth in its net loan portfolio. Net loans grew 12.3%, or $27.5
million, to $250.3 million, with approximately half of that growth coming from the commercial real estate sector.
• Mortgage banking revenue continues to be a growing contributor to net earnings, accounting for 63.6% of
noninterest income in 2017, compared to 57.4% in 2016.
On behalf of the Company’s shareholders, we are proud of Prime Meridian’s accomplishments over the previous
year. It is with great pleasure that we present the enclosed 2017 Annual Report.
Warm regards,
Sammie D. Dixon, Jr.
Richard A. Weidner, CPA
Vice Chairman, President and Chief Executive Officer
Chairman
Vote your shares
online or by phone.
See enclosed Proxy
Card for instructions.
$347
$2,817
$304
$2,220
Prime Meridian Holding Company (PMHG)
NET INCOME & TOTAL ASSETS (2010-2017)
Net Income (000s)
Total Assets (In Millions)
$206
$210
$1,149
$1,006
$170
$1,018
$139
$616
$244
$1,704
$103
$201
2010
2011
2012
2013
2014
2015
2016
2017
2017 BY THE NUMBERS
TOTAL ASSETS (IN MILLIONS) OF
THE COMPANY AS OF DEC. 31, 2017
MARKET CAPITALIZATION
(IN MILLIONS) AS OF DEC. 31, 2017
$347.2
$74.4
26.9% INCREASE IN NET INCOME
$250.3 LOANS, NET OF ALLOWANCE
FROM 2016 TO 2017
(IN MILLIONS) AS OF DEC. 31, 2017
63.6% 2017 MORTGAGE BANKING REVENUE
AS A PERCENT OF NON-INTEREST INCOME
19
22
OTCQX RANK AS A TOP PERFORMER BASED ON 2017 TOTAL
RETURN & GROWTH IN AVERAGE DAILY DOLLAR VOLUME
NATIONAL RANKING BY AMERICAN BANKER MAGAZINE
OF BEST BANKS TO WORK FOR
RATED 5-STARS BauerFinancial.com
A N N UA L R E P O R T | 2017
E X E C U T I V E
MA N AG E M E N T
P R I M E M E R I D I A N B A N K
Sammie D. Dixon, Jr.
Vice Chairman, President,
Chief Executive Officer
R. Randy Guemple
Executive Vice President
Chief Financial Officer
Chris L. Jensen, Jr.
Executive Vice President
Senior Lender
Susan Payne Turner
Executive Vice President
Chief Risk Officer
M E M B E R
B OA R D O F
D I R E C TO R S
P R I M E M E R I D I A N
H O L D I N G C O M PA N Y
Sammie D. Dixon, Jr.
Vice Chairman, President,
Chief Executive Officer
R. Randy Guemple
Executive Vice President
Chief Financial Officer
Chris L. Jensen, Jr.
Executive Vice President
Richard A. Weidner
Chairman
William D. Crona
Steven L. Evans
Kathleen C. Jones
Robert H. Kirby
Frank L. Langston
Todd A. Patterson, D.O.
L. Collins Proctor
Garrison A. Rolle, M.D.
Steven D. Smith
Marjorie R. Turnbull
Celebrating
10 Years of
Service to
Our Clients
and
Community
MAIN OFFICE
1897 Capital Circle NE
Tallahassee, FL 32308
Telephone: (850) 907-2301
TIMBERLANE
1471 Timberlane Road, Suite 124
Tallahassee, FL 32312
Telephone: (850) 907-2300
CRAWFORDVILLE
2201 Crawfordville Hwy.
Crawfordville, FL 32327
Telephone: (850) 926-4320