Prime Meridian Holding Company Annual Report 2018

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FY2018 Annual Report · Prime Meridian Holding Company

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A N N UA L R E P O R T | 2018

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

TALLAHASSEE (MAIN OFFICE)

1897 Capital Circle NE

Tallahassee, FL 32308

Telephone: 850.907.2301

TALLAHASSEE (TIMBERLANE)

1471 Timberlane Road, Suite 124

Tallahassee, FL 32312

Telephone: 850.907.2300

CRAWFORDVILLE

2201 Crawfordville Hwy.

Crawfordville, FL 32327

Telephone: 850.926.4320

$450

$400

$350

$300

$250

$200

$150

$100

$50

Prime Meridian Holding Company (PMHG)
NET INCOME & TOTAL ASSETS (2010-2018)

Net Income (000s)

Total Assets (In Millions)

$244

$1,704

$206

$210

$1,149

$1,006

$170

$1,018

$139

$616

$103

$201

$402

$4,042

$347

$2,817

$304

$2,220

2010

2011

2012

2013

2014

2015

2016

2017

2018

2018 BY THE NUMBERS

TOTAL ASSETS (IN MILLIONS) OF
THE COMPANY AS OF DEC. 31, 2018

$402
$57.7
43.5% YEAR-OVER-YEAR INCREASE IN NET INCOME

MARKET CAPITALIZATION
(IN MILLIONS) AS OF DEC. 31, 2018

INCLUSIVE OF THE BENEFICIAL EFFECT OF 2017 TAX REDUCTION LEGISLATION

$290.1 LOANS, NET OF ALLOWANCE

(IN MILLIONS) AS OF DEC. 31, 2018

LEON COUNTY, BOTH IN MORTGAGE DOLLAR VOLUME
AND NUMBER OF MORTGAGE LOAN ORIGINATIONS

# 3 2018 RANK AMONG FINANCIAL SERVICE PROVIDERS IN
.02%
24

NATIONAL RANKING BY AMERICAN BANKER MAGAZINE
OF BEST BANKS TO WORK FOR

NET CHARGE OFFS TO AVERAGE LOANS

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

L. Collins Proctor, Sr.

Garrison A. Rolle, M.D.

Steven D. Smith

Marjorie R. Turnbull

Ranked #19 on the OTCQX Best 50:

the top performing companies on the OTCQX

Best Market based on 2017 total return and growth in

average daily dollar volume

5 Star Rating

(35 consecutive quarters by Bauer Financial, the

nation’s leading bank rating and research firm)

Annually since 2015

Seminole 100 recognizes the 100 fastest-growing FSU alumni-owned

businesses as recognized by The Jim Moran Institute

For Global Entrepreneurship at FSU’s College of Business,

the FSU Alumni Association and EY

Voted by readers of Tallahassee Magazine

Dear Fellow Shareholders,
Our tenth year was record-breaking for Prime Meridian Holding Company (the Company). We surpassed $400 million in
assets with a year-over-year increase in net income of 43.5%, inclusive of the beneficial effect of the 2017 tax reduction
legislation.

We did so amid continued consolidation of competitors, both in the immediate area and throughout Florida. We view
these market changes as growth opportunities. Our reputation and culture of relationship banking stand in contrast to the
ongoing changes. Consolidation also often precipitates a shift in loyalties. Prime Meridian Bank has benefited from this
and welcomed new clients and team members.

Preparing for growth has long been part of our strategy. At the end of 2018 our preparation turned to action when in
November, 2018, the Bank filed application with – and subsequently received approval from – the FDIC to establish a
full-service bank in Lakeland, Florida. Experienced banker Michael A. Micallef, Jr. joined our team and serves as Market
President.

The Board of Directors declared an annual cash dividend of $0.12 per share on the Company’s common stock. This
dividend was payable March 5, 2019, to shareholders of record on February 14, 2019.

Other Highlights include:
•

The Company reported record net earnings for year ended December 31, 2018, boosted by organic loan growth and a
lower corporate tax rate.

•

At December 31, 2018, the Company reported $401.7 million in total assets, $349.1 million in deposits, and $290.1
million in portfolio net loans. This compares to $347.2 million in total assets, $298.3 million in deposits, and $250.3
million in portfolio net loans at December 31, 2017.

In 2018, Prime Meridian Bank ranked third in both mortgage dollar volume and number of mortgage originations in
Leon County among all financial service providers.

The Company’s total stockholders’ equity was $50.8 million, or 12.7% of total assets, at December 31, 2018, compared
to $47.0 million, or 13.5% of total assets, at December 31, 2017.

The Company’s book value per share increased from $15.06 at December 31, 2017 to $16.19 at December 31, 2018,
with 3,138,945 common shares outstanding.

Final preparations for renovation of our Timberlane bank are complete and work is underway. The building and
surrounding property are part of the overall redevelopment of the Market Square district in which the Bank is located.

The following promotions and retirement were approved and announced at the February 21, 2019 board meeting:

• R. Randy Guemple retires as Executive Vice President and Chief Financial Officer on March 31, 2019. He will remain

on the Boards of Directors.

• Michael A. Micallef, Jr. joins our Boards of Directors as of March 1, 2019.

• Clint F. Weber becomes Executive Vice President and Chief Financial Officer as of April 1, 2019. He succeeds

Mr. Guemple in these roles.

• Monté L. Ward becomes Executive Vice President and Chief Information Officer as of April 1, 2019.

We are proud of the Company’s accomplishments over the previous year, especially as we extend our footprint into the
Lakeland, Florida market. It is with great pleasure that we present the enclosed 2018 Annual Report.

Warm regards,

Sammie D. Dixon, Jr.
Vice Chairman, President and Chief Executive Officer

Richard A. Weidner, CPA
Chairman

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, 2018 and 2017 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, 2018 and 2017, 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 21, 2019

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Balance Sheets

(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 $3,661 and $3,136 ........................................
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:

December 31,

2018

2017

7,866 $
34,777
5,395
48,038
45,384
4,767
290,113
355
4,656
502
1,034
6,323
530
401,702 $

80,097 $
227,674
41,296
349,067

837
978
350,882

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

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

outstanding ...............................................................................................................

Common stock, $.01 par value; 9,000,000 shares authorized, 3,138,945 and

3,118,977 issued and outstanding ............................................................................
Additional paid-in capital ............................................................................................
Retained earnings .........................................................................................................
Accumulated other comprehensive loss .......................................................................
Total stockholders' equity .....................................................................................
Total liabilities and stockholders' equity .............................................................. $

31
38,330
13,015
(556 )
50,820
401,702 $

31
37,953
9,285
(296)
46,973
347,180

See Accompanying Notes to Consolidated Financial Statements

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Earnings

(in thousands, except per share amounts)
Interest income:

Year Ended December 31,

2018

2017

Loans ........................................................................................................................ $
Securities ..................................................................................................................
Other ........................................................................................................................
Total interest income ............................................................................................

Interest expense:

Deposits ....................................................................................................................
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 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 .......................................................................................................... $

14,469 $
1,131
634
16,234

2,307
2,307
13,927

591
13,336

333
447
66
-
460
1,306

5,106
932
374
677
163
634
1,494
9,380
5,262
1,220
4,042 $

Earnings per common share:

Basic ......................................................................................................................... $
Diluted ...................................................................................................................... $

1.29 $
1.29 $

See Accompanying Notes to Consolidated Financial Statements

11,589
983
379
12,951

1,181
1,181
11,770

256
11,514

322
435
46
(1)
351
1,153

4,236
947
320
574
158
535
1,345
8,115
4,552
1,735
2,817

1.04
1.04

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Comprehensive Income

Year Ended December 31,

(in thousands)
Net earnings .................................................................................................................... $
Other comprehensive loss:

2018

2017

4,042 $

2,817

Change in unrealized loss on securities:

Unrealized loss arising during the year ....................................................................
Reclassification adjustment for realized loss ...........................................................
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 ................................................................................................... $

(348 )
-
(348 )
88
-
(260 )
3,782 $

(27)
1
(26)
8
(45)
(63)
2,754

See Accompanying Notes to Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2018 and 2017

Common Stock

Additional
Paid-in
Amount Capital

Retained
Earnings

Accumulated
Other
Compre-
hensive
Loss

Total
Stockholders'
Equity

(dollars in thousands)
Balance at December 31, 2016 ..... 2,004,707 $

20 $

20,732 $

6,563 $

(233) $

27,082

Net earnings .................................

2,817

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 ............................................

Dividends paid..............................

Stock options exercised ................

19,450

Common stock issued as

compensation to directors .........

3,912

Stock-based compensation ...........

Sale of Common Stock .................
Net of Stock Offering Costs of

(63)

(140 )

195

(18)

(140)

195

$1,043 .................................... 1,090,908

16,946

16,957

Balance at December 31, 2017 ..... 3,118,977 $

31 $

37,953 $

9,285 $

(296) $

46,973

Net earnings .................................

Dividends paid..............................

Net change in unrealized loss on
securities available for sale, net
of income tax benefit of $88 .....

- $

Stock options exercised ................

17,150

Common stock issued as

compensation to directors .........

2,818

Stock-based compensation ...........

- $

4,042 $

(312 )

- $

4,042

(312)

172

145

(260)

172

145

Balance at December 31, 2018 ..... 3,138,945 $

31 $

38,330 $

13,015 $

(556) $

50,820

See Accompanying Notes to Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Cash Flows

(in thousands)
Cash flows from operating activities:

Year Ended December 31,
2018

2017

Net earnings .................................................................................................... $
Adjustments to reconcile net earnings to net cash provided by operating

4,042 $

2,817

activities:

Depreciation and amortization .................................................................
Provision for loan losses ..........................................................................
Net amortization of deferred loan fees ....................................................
Deferred income taxes .............................................................................
Loss 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 decrease (increase) in other assets ....................................................
Net (decrease) increase 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 bank-owned life insurance ..........................................................
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 increase (decrease) 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:

520
591
(36)
(75)
-

390
(447)
77,713
(76,153)
60
145
(66)
(56)
43
(95)
6,576

(40,409)
(2,474)
5,612
-
549
(39)
(4,500)
(304)
(41,565)

50,770
172
-
(312)
50,630
15,641
32,397
48,038 $

519
256
(74 )
202
1

425
(435 )
65,905
(68,059 )
65
15
(46 )
(180 )
(150 )
398
1,659

(27,673 )
(23,524 )
5,553
750
63
(96 )
-
(462 )
(45,389 )

22,950
195
16,957
(140 )
39,962
(3,768 )
36,165
32,397

Interest ..................................................................................................... $
Income taxes ............................................................................................ $

2,276 $
1,217 $

1,179
1,698

Noncash transactions:

Accumulated other comprehensive loss, net change in unrealized loss

on securities available for sale, net of tax benefit ................................ $

(260) $

One-time reclassification for newly enacted corporate tax rate ............... $

- $

(18 )

(45 )

See Accompanying Notes to Consolidated Financial Statements

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

At December 31, 2018 and 2017 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. In February 2019, the Company acquired a new branch office in Lakeland, Florida that is expected to open in the
second quarter of 2019.

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 in banks, all of which have original
maturities of less than ninety days.

At December 31, 2018 and 2017, 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 $3,901,000 and $2,618,000
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 earnings 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)

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, 2018 and 2017, 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 2018 or 2017.
At December 31, 2018 loans held for sale were $4,767,000 compared to $5,880,000 at December 31, 2017. At December 31,
2018 and 2017, fair 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, 2018 and 2017.

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)

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)

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, 2018, 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)

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)

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 was 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 estimates that the effect of this ASU
will increase assets and liabilities by approximately $288,000.

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)

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 adoption of this guidance had no impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-
Based Payment Accounting. The ASU is intended to reduce the cost and complexity and to improve financial reporting for
nonemployee share-based payments. The ASU expands the scope of Topic 718 (which currently only includes share-based
payments to employees) to include share-based payments issued to nonemployees for goods and services. Consequently, the
accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes
Subtopic 505-50, Equity-Equity-Based payments to Non-Employees. The ASU is effective for the Company for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The
Company is currently evaluating the impact of the ASU, if any, on its consolidated financial statements.

(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:

Gross

Amortized Unrealized Unrealized

Cost

Gains

Losses

Fair
Value

(in thousands)
At December 31, 2018

U.S. Government agency securities .................................. $
Municipal securities ..........................................................
Mortgage-backed securities ..............................................
Total .................................................................................. $

815 $
11,580
33,733
46,128 $

At December 31, 2017

1,251 $
12,340
36,614
50,205 $

- $
62
33
95 $

6 $
128
23
157 $

(16) $
(113)
(710)
(839) $

(8) $
(95)
(450)
(553) $

799
11,529
33,056
45,384

1,249
12,373
36,187
49,809

(continued)

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:

Fair Value Measurements Using

Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)

Significant
Other

Significant

Observable Unobservable

Inputs
(Level 2)

Inputs
(Level 3)

Fair
Value

(in thousands)
At December 31, 2018

U.S. Government agency securities ................... $
Municipal securities ...........................................
Mortgage-backed securities ...............................
Total ................................................................... $

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

At December 31, 2017

1,249 $
12,373
36,187
49,809 $

- $
-
-
- $

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

1,249 $
12,373
36,187
49,809 $

-
-
-
-

During the years ended December 31, 2018 and 2017, 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, 2018

Due in one to five years .............................................. $
Due in five to ten years ...............................................
Due after ten years ......................................................
Mortgage-backed securities ........................................
Total ........................................................................ $

4,233 $
5,465
2,697
33,733
46,128 $

4,231
5,496
2,601
33,056
45,384

The following summarizes sales of securities available for sale:

(in thousands)
Proceeds from sale of securities ..................................... $
Gross gains .....................................................................
Gross losses ....................................................................
Net loss on sale of securities ........................................... $

2018

2017

- $
-
-
- $

750
-
(1)
(1)

Year Ended December 31,

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(2) Securities Available for Sale, Continued

At December 31, 2018 and 2017, securities with a fair value of $8,310,825 and $9,090,302, 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:

Less Than Twelve Months More Than Twelve Months
Gross
Unrealized
Losses

Gross
Unrealized
Losses

Fair
Value

(in thousands)
At December 31, 2018

Securities Available for Sale

U.S. Government agency securities .............................. $
Municipal securities ......................................................
Mortgage-backed securities...........................................
Total .............................................................................. $

(2) $
-
(19)
(21) $

242 $
-
983
1,225 $

(14) $
(113)
(691)
(818) $

557
5,760
30,061
36,378

At December 31, 2017

Securities Available for Sale

(8) $
(36)
(308)
(352) $

694 $
1,831
29,742
32,267 $

- $
(59)
(142)
(201) $

-
1,203
5,667
6,870

The unrealized losses on thirty-nine and thirty-four securities at December 31, 2018 and 2017, 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)

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 ...............................................................

At December 31,

2018

2017

82,494 $
121,454
31,601
235,549

51,018
6,747
293,314

79,565
94,824
26,813
201,202

44,027
7,742
252,971

Add (Less):

Net deferred loan costs ................................................
Allowance for loan losses ...........................................
Loans, net ................................................................ $

460
(3,661)
290,113 $

424
(3,136)
250,259

(continued)

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 Company typically requires personal guarantees from
the principal owners of the business supported by a review of the principal owners’ personal financial statements
and tax returns. As part of the enterprise risk management process, it is understood that risks associated with
commercial real estate loans include fluctuations in real estate values, the overall strength of the borrower, 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 Company 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 Company. 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)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(3) Loans, Continued

Commercial Loans. The Company offers a wide range of commercial loans, including business term loans,
equipment financing, lines of credit, and U.S. Small Business Administration (SBA) loans 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 Company 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)

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

Consumer
Commercial and Other

Commercial Equity

Construction Loans

Loans

Total

(in thousands)
Year Ended December 31, 2018

Beginning balance .................... $
Provision (credit) for loan

losses .....................................
Net (charge-offs) recoveries .....
Ending balance.......................... $

At December 31, 2018
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, 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 ..................................... $

894 $

1,097 $

331 $

724 $

90 $

3,136

23
-
917 $

300
-
1,397 $

63
(3)
391 $

204
(52)
876 $

1
(11 )
80 $

591
(66)
3,661

611 $

409 $

- $

205 $

6 $

1,231

205 $

6 $

211

81,883 $ 121,045 $

31,601 $

50,813 $

6,741 $

292,083

917 $

1,397 $

391 $

671 $

74 $

3,450

775 $

1,074 $

258 $

714 $

55 $

2,876

119
-
894 $

23
-
1,097 $

73
-
331 $

(6)
16
724 $

47
(12 )
90 $

256
4
3,136

- $

134 $

- $

134

79,565 $

94,824 $

26,813 $

43,893 $

7,742 $

252,837

894 $

1,097 $

331 $

590 $

90 $

3,002

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(3) Loans, Continued

The following summarizes the loan credit quality:

Residential
and Home

Consumer
Commercial and Other

Commercial Equity

Construction Loans

Loans

Total

(in thousands)
At December 31, 2018
Grade:

Pass ................................ $
Special mention ..............
Substandard ....................
Doubtful .........................
Loss ................................
Total ............................... $

77,650 $ 118,368 $
2,875
211
-
-
82,494 $ 121,454 $

4,233
611
-
-

31,601 $
-
-
-
-
31,601 $

47,858 $
2,184
976
-
-
51,018 $

6,657 $
84
6
-
-
6,747 $

282,134
9,376
1,804
-
-
293,314

At December 31, 2017
Grade:

74,560 $
4,382
623
-
-
79,565 $

92,282 $
2,122
420
-
-
94,824 $

26,356 $
298
159
-
-
26,813 $

42,874 $
591
562
-
-
44,027 $

7,715 $
27
-
-
-
7,742 $

243,787
7,420
1,764
-
-
252,971

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)

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, 2018, there were five loans over thirty days past due and accruing, no loans past due ninety days
or more but still accruing and six loans on nonaccrual. Age analysis of past-due loans at December 31, 2018 and
2017 is as follows:

Accruing Loans
Greater
Than 90
Days

30-59
Days

Total
Past
Past Due Past Due Past Due Due

60-89
Days

Current Loans

Nonaccrual Total
Loans

(in thousands)
At December 31, 2018:
Real estate mortgage loans:

Commercial .................................. $
Residential and home equity .........
Construction ..................................
Commercial loans .............................
Consumer and other loans ................
Total .......................................... $

- $
134
-
98
-
232 $

- $
30
-
-
-
30 $

At December 31, 2017:
Real estate mortgage loans:

- $
-
-
-
-
- $

623 $
255
-
-
-
878 $

- $
-
-
-
-
- $

- $ 82,494 $
164 121,129
- 31,601
98 50,745
6,741
262 $ 292,710 $

- $ 82,494
161 121,454
- 31,601
175 51,018
6,747
342 $ 293,314

623 $ 78,942 $
255 94,569
- 26,813
- 43,893
7,742
-
878 $ 251,959 $

- $ 79,565
- 94,824
- 26,813
134 44,027
7,742
134 $ 252,971

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(3) Loans, Continued

The following summarizes the amount of impaired loans:

With No Related
Allowance Recorded With an Allowance Recorded

Unpaid
Contractual

Total
Unpaid
Contractual

Recorded Principal Recorded Principal Related Recorded Principal Related
Investment Balance Investment Balance Allowance Investment Balance Allowance

(in thousands)
At December 31,

2018:

Commercial real

estate .............. $

611 $

Residential and

home equity ...

409

- $

611 $

409

205

-
1,020 $

6
211 $

6
1,231 $

205

6
211

Commercial

loans ...............

Consumer and

other loans ......
Total .................. $

At December 31,

2017:
Commercial

loans ............... $
Total .................. $

- $
- $

134 $
134 $

134
134

The average net investment in impaired loans and interest income recognized and received on impaired loans by loan class
is as follows:

Average
Recorded
Investment

Interest
Income

Recognized

Interest
Income
Received

(in thousands)
Year Ended December 31, 2018
Commercial real estate ................................................................. $
Residential and home equity ........................................................
Commercial ..................................................................................
Consumer and other loans ............................................................
Total ............................................................................................. $

(in thousands)
Year Ended December 31, 2017
Residential and home equity ........................................................ $
Construction .................................................................................
Commercial ..................................................................................
Total ............................................................................................. $

471 $
234
172
2
879 $

277 $
42
64
383 $

16 $
7
2
-
25 $

28 $
1
-
29 $

16
6
7
-
29

28
4
-
32

There were no collateral dependent impaired loans measured at fair value on a nonrecurring basis at December 31, 2018 or
2017.

(continued)

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.

As shown in the table below, the Company entered into one new TDR during the year ended December 31, 2018 and 2017.

Year Ended December 31, 2018

Year Ended December 31, 2017

Post-
Modification Modification Modification
Number Outstanding Outstanding Outstanding Number Outstanding Outstanding Outstanding

Post-
Modification Modification Modification

Current

Pre-

Recorded

Contracts Investment Investment Investment Contracts Investment Investment Investment

(in thousands)
Troubled Debt

Restructurings -
Residential and

home equity:

Modified

principal ....
Total ...........

1 $
1 $

619 $
619 $

611 $
611 $

611
611

1 $
1 $

153 $
153 $

169 $
169 $

164
164

The TDRs entered into during the year ended December 31, 2018 and 2017 did not subsequently default during those years.
At December 31, 2018, the Company had $641,000 in loans identified as TDRs.

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)

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,

2018

2017

690 $
3,736
421
1,168
2,372
40
8,427

690
3,736
416
1,160
2,140
-
8,142

Less accumulated depreciation and amortization ..........
Premises and equipment, net ...................................... $

(3,771)
4,656 $

(3,270)
4,872

Effective August 6, 2018, the Company entered into a Retail Lease (the “Lease”) for its Timberlane location with the owner
of the property. The term of the Lease is 15 years, with four options to renew for five years each and includes additional
square footage. The Lease is a fully net lease, with the Company separately paying real and personal property taxes, all special
and third-party assessments, common area maintenance charges, maintenance costs and insurance expenses. The Lease
required the landlord to seek approval from the City of Tallahassee for a lot line adjustment which was dated September 28,
2018. The landlord has six months from this approval date to deliver notice and proof of a Certificate of Completion (the
“Delivery Date”), certifying that the landlord’s improvement obligations are complete. The Delivery Date is expected to be
on or before March 28, 2019. Pursuant to the Lease, the landlord will reimburse the Company in the amount of up to $1.2
million for the Company’s costs for permanent improvements to this location. As of December 31, 2018, the Company
anticipates that its portion of the tenant improvement expenditures will not exceed $500,000.

The new rent obligations will commence 120 days after the Delivery Date (the “Rent Commencement Date”) and are as
follows:

(in thousands)

Years
1-5 .............................................................................................................. $
6-10 ............................................................................................................
11-15 ..........................................................................................................
Total ....................................................................................................... $

Annual Rent
Amount

294
323
356
4,865

Prior to the Rent Commencement Date, the Company will pay rent in accordance with its prior lease as shown in the table
below:

(in thousands)
Year Ending December 31,
2019 ........................................................................................................... $
2020 ...........................................................................................................
2021 ...........................................................................................................
2022 ...........................................................................................................
Total ....................................................................................................... $

Amount

85
85
85
49
304

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(4) Premises and Equipment, continued.

Rent expense under operating leases was $172,000 and $155,000 during the years ended December 31, 2018 and 2017,
respectively.

On February 15, 2019, the Company purchased a new branch office location, located at 3340 South Florida Avenue, Lakeland,
Florida. This office will undergo renovations and is scheduled to open during the second quarter of 2019. The purchase price
of the property was $2.1 million and the Company’s renovation expenditures are not expected to exceed $400,000.

(5) Deposits

The aggregate amount of time deposits with a minimum denomination of $250,000 was approximately $20.7 million and
$10.7 million at December 31, 2018 and 2017, respectively.

A schedule of maturities for all time deposits at December 31, 2018 is as follows:

(in thousands)
Year Ending December 31,

Amount

2019 ..................................................................................... $
2020 .....................................................................................
2021 .....................................................................................
2022 .....................................................................................
2023 .....................................................................................
Total ..................................................................................... $

27,140
8,066
1,534
2,531
2,025
41,296

(6) Other Borrowings

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 $35.8 million as of December 31, 2018 from the FHLB. There were no
advances outstanding at December 31, 2018 or 2017. The Company also has available credit of $18.8 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:

Year Ended December 31,

2018

2017

Federal .................................................................... $
State ........................................................................
Total current ........................................................

Deferred:

Federal ....................................................................
State ........................................................................
Total deferred ......................................................
Total income taxes .............................................. $

1,003 $
292
1295

(65)
(10)
(75)
1,220 $

1,309
224
1,533

193
9
202
1,735

(continued)

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 and the effective tax rates are summarized as
follows:

Year Ended December 31,

2018

% of
Pretax

2017

% of
Pretax

Amount

Earnings

Amount

Earnings

(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 ...................................................................... $

1,105

21.0% $

1,548

34.0%

223
(62)
(29)
-
(17)
1,220

4.2
(1.2)
(0.6)
-
(0.2)
23.2% $

154
(97)
(60)
155
35
1,735

3.4
(2.1)
(1.3)
3.4
0.7
38.1%

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,

2018

2017

894 $
40
27
188
12
1,161

(59)
(380)
(220)
(659)
502 $

744
49
12
100
23
928

(70)
(317)
(202)
(589)
339

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 2015.

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)

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 consolidated 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 $606,000 at December 31, 2018.

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.

A summary of the contractual amounts of the Company’s financial instruments with off-balance sheet risk at December 31,
2018 is as follows:

At December 31,
2018

(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 ............................................................................
Total off-balance sheet instruments ..................................................... $

6,365
15,023
43,719
1,934
378
1,330
68,749

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(9) Stock Compensation Plans

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, 2018, 263,457 stock options have been granted under the 2015 plan and 207,385 options are available
for grant.

During the first quarter of 2018, the Company issued 15,667 Incentive Stock Options (“ISO”) to its CEO. These options vest
100% at the date of issuance, and therefore, were expensed immediately.

During the second quarter of 2018, the Company issued 120,000 Non-Qualified Stock Options (“NSO”) to its Board of
Directors. These options vest over 5 years and expire in increments beginning April 1, 2024 and concluding April 1, 2028.

During the second quarter of 2018, the Company issued ISOs to its employees. The Company issued 25,000 ISOs to its CEO
and 92,250 ISOs to its remaining employees. These options vest over 5 years and expire in increments beginning April 1,
2024 and concluding April 1, 2028. The NSOs and the ISOs issued during the second quarter of 2018 were issued in
recognition of the Company’s 10-year anniversary.

A summary of the activity in the Company’s 2015 Plan is as follows:

Weighted-
Weighted- Average
Average
Number of Exercise
Options

Remaining Aggregate
Contractual
Term (years)

Intrinsic
Value

Price

Outstanding at December 31, 2016 ........................................
Options granted ......................................................................
Outstanding at December 31, 2017 ........................................
Options granted ......................................................................
Forfeited .................................................................................
Outstanding at December 31, 2018 ........................................
Exercisable at December 31, 2018 .........................................

- $
11,540
11,540 $
252,917
(1,000)
263,457 $
37,207 $

-
17.03
17.03
19.91
20.09
19.78
17.93

8.4 $
2.8 $

323,000
115,000

The fair value of shares vested and recognized as compensation expense was $145,000 for the year ended December 31, 2018
and $15,000 for the year ended December 31, 2017. The Company recognized an income tax benefit of $20,000 with respect
to share-based compensation in 2018. At December 31, 2018, there was $646,000 of total unrecognized compensation
expense related to non-vested share-based compensation arrangements granted under the 2015 Plan. The cost is expected to
be recognized over a weighted-average period of 4.2 years.

The fair value of each option granted during the year ended December 31, 2018 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 ...................................................................... 10.07 - 11.90%
Expected life in years ...........................................................................
Per share fair value of options issued during year ................................ $1.08 - $3.35

1.47 - 2.63%
0.41 - 0.50%

1.0 - 6.5

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.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(9) Stock Compensation Plans, Continued

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-
Weighted- Average
Average
Number of Exercise
Options

Remaining Aggregate
Contractual
Term (years)

Intrinsic
Value

Price

Outstanding at December 31, 2016 ...............................
Options exercised ..........................................................
Options forfeited ...........................................................
Outstanding at December 31, 2017 ...............................
Options exercised ..........................................................
Options forfeited ...........................................................
Outstanding at December 31, 2018 ...............................
Exercisable at December 31, 2018 ................................

42,200 $
(19,450)
(550)
22,200 $
(17,150)
(350)
4,700 $
4,700 $

10.16
10.00
10.00
10.31
10.02
10.00
11.37
11.37

2.4 $
2.4 $

45,000
45,000

At December 31, 2018, there was no unrecognized compensation expense related to non-vested, share-based compensation
arrangements granted under the 2007 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 OTCQX 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 2018 and 2017, our directors received 2,818 and 3,912
shares of common stock, respectively, in lieu of cash, under the Directors’ Plan. At December 31, 2018, 55,284 shares
remained available for grant. The Company recognized expense of $60,000 and $65,000 during the years ended December
31, 2018 and 2017, respectively, with respect to the Director’s Plan.

(10) Employee Benefit Plans

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, 2018 and 2017 were $160,000 and $142,000,
respectively.

In November 2018, the Company established non-qualified account balance deferred compensation plans to provide
retirement benefits for certain officers of the Company. The Company is recognizing the expense of these plans as services
are rendered using a discount rate of four percent and a retirement age of sixty-five. The Company’s expense in connection
with these plans was $18,000 for the year ended December 31, 2018 and is included in other liabilities in the accompanying
consolidated balance sheets.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(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:

Year Ended December 31,

2018

2017

Beginning balance ...................................................... $
Originated during the year ..........................................
Remove retired Director .............................................
Principal repayments ..................................................
Ending balance ........................................................... $

5,870 $
2,048
(400)
(230)
7,288 $

5,942
634
-
(706)
5,870

Deposits at year-end .................................................... $

9,989 $

10,008

In addition, the Company purchases various insurance policies through a company that employs the spouse of one of our
directors and former CFO. The premiums paid totaled $739,000 in 2018 and $740,000 in 2017 and included health insurance
premiums for employees.

(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:

At December 31, 2018
Carrying
Fair
Amount Value

At December 31, 2017
Carrying
Fair
Amount Value

Level

Cash and cash equivalents .........................
Securities available for sale .......................
Loans held for sale .....................................
Loans, net ..................................................
Federal Home Loan Bank stock ................
Accrued interest receivable ........................

1 $
2
3
3
3
3

48,038 $
45,384
4,767
290,113
355
1,034

48,038 $
45,384
4,842
283,068
355
1,034

32,397 $
49,809
5,880
250,259
316
978

32,397
49,809
6,039
249,628
316
978

Financial liabilities-

Deposits .....................................................
Off-Balance Sheet financial instruments ..............

3
3

349,067
-

349,416
-

298,297
-

298,403
-

(13) Dividend Restrictions

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.

In January 2019, the Board of Directors declared an annual dividend of $0.12 per share of common stock payable on March
5, 2019 to shareholders of record as of February 14, 2019.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(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 phased 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.

The Bank is 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, 2018, and 2017,
the Bank’s capital conservation buffer exceeded the minimum requirement of 1.875% and 1.25%, respectively. The
conservation buffer increased to the final amount of 2.50% on January 1, 2019.

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, 2018,
that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2018, 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, 2018

Actual

For Capital Adequacy
Purposes

For Well Capitalized
Purposes

Amount

Percentage Amount

Percentage

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, 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 ...................

(15) Legal Contingencies

37,805

9.28% $

16,288

4.00% $

20,360

5.00%

37,805
37,805
41,466

12.90
12.90
14.15

13,190
17,587
23,449

4.50
6.00
8.00

19,052
23,449
29,311

6.50
8.00
10.00

33,146

9.48% $

13,983

4.00% $

17,479

5.00%

33,146
33,146
36,282

12.80
12.80
14.01

11,654
15,539
20,718

4.50
6.00
8.00

16,834
20,718
25,898

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, 2018, there is no pending or threatened
litigation of which management is aware.

(continued)

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

2018
Weighted-
Per
Average Share

2017
Weighted-
Per
Average Share

amounts)

Year Ended December 31,
Basic EPS:

Earnings Shares

Amount Earnings Shares

Amount

Net earnings ................................... $

4,042 3,125,689 $

1.29 $

2,817 2,704,382 $

1.04

Effect of dilutive securities-

incremental shares from assumed
conversion of options .........................

Diluted EPS:

5,857

7,317

Net earnings ................................... $

4,042 3,131,546 $

1.29 $

2,817 2,711,699 $

1.04

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(17) Parent Company Only Financial Information

The Holding Company's unconsolidated financial information follows:

(in thousands)

Assets

At December 31,

2018

2017

Cash ................................................................................................................................. $
Investment in subsidiary ..................................................................................................
Other assets .....................................................................................................................
Total assets .................................................................................................................. $

13,551 $
37,249
20
50,820 $

14,103
32,850
20
46,973

Stockholders' Equity

Stockholders' equity ........................................................................................................ $
Total liabilities and stockholders' equity ...................................................................... $

50,820 $
50,820 $

46,973
46,973

Condensed Statements of Earnings

Year Ended December 31,

2018

2017

(in thousands)
Revenues ......................................................................................................................... $
Expenses ..........................................................................................................................
Income tax benefit ...........................................................................................................
Loss before earnings of subsidiary ..............................................................................
Net earnings of subsidiary ...............................................................................................
Net earnings ................................................................................................................. $

- $
(632 )
160
(472 )
4,514
4,042 $

-
(440)
165
(275)
3,092
2,817

Condensed Statements of Cash Flows

(in thousands)
Cash flows from operating activities:

Year Ended December 31,

2018

2017

Net Earnings ................................................................................................................ $
Adjustments to reconcile net earnings to net cash used in operating activities:

Equity in earnings of subsidiary ...............................................................................
Stock issued as compensation ..................................................................................
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 (decrease) 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 ........................................................... $

4,042 $

2,817

(4,514 )
60
(412 )

-
172
172

(312 )
-
(312 )
(552 )
14,103
13,551 $

(3,092)
65
(210)

16,957
195
17,152

(140)
(4,000)
(4,140)
12,802
1,301
14,103

(260 ) $
145 $

(18)
15

(continued)

$450

$400

$350

$300

$250

$200

$150

$100

$50

Prime Meridian Holding Company (PMHG)

NET INCOME & TOTAL ASSETS (2010-2018)

Net Income (000s)

Total Assets (In Millions)

$402

$4,042

$304

$347

$2,817

$206

$210

$2,220

$244

$1,704

$1,149

$1,006

$170

$1,018

$139

$616

$103

$201

2010

2011

2012

2013

2014

2015

2016

2017

2018

2018 BY THE NUMBERS

$402

$57.7

TOTAL ASSETS (IN MILLIONS) OF

THE COMPANY AS OF DEC. 31, 2018

MARKET CAPITALIZATION

(IN MILLIONS) AS OF DEC. 31, 2018

43.5% YEAR-OVER-YEAR INCREASE IN NET INCOME

INCLUSIVE OF THE BENEFICIAL EFFECT OF 2017 TAX REDUCTION LEGISLATION

$290.1 LOANS, NET OF ALLOWANCE

(IN MILLIONS) AS OF DEC. 31, 2018

# 3 2018 RANK AMONG FINANCIAL SERVICE PROVIDERS IN

LEON COUNTY, BOTH IN MORTGAGE DOLLAR VOLUME

AND NUMBER OF MORTGAGE LOAN ORIGINATIONS

.02%

NET CHARGE OFFS TO AVERAGE LOANS

NATIONAL RANKING BY AMERICAN BANKER MAGAZINE

OF BEST BANKS TO WORK FOR

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

L. Collins Proctor, Sr.

Garrison A. Rolle, M.D.

Steven D. Smith

Marjorie R. Turnbull

Ranked #19 on the OTCQX Best 50:
the top performing companies on the OTCQX
Best Market based on 2017 total return and growth in
average daily dollar volume

5 Star Rating
(35 consecutive quarters by Bauer Financial, the
nation’s leading bank rating and research firm)

Annually since 2015

Seminole 100 recognizes the 100 fastest-growing FSU alumni-owned
businesses as recognized by The Jim Moran Institute
For Global Entrepreneurship at FSU’s College of Business,
the FSU Alumni Association and EY

Voted by readers of Tallahassee Magazine

A N N UA L R E P O R T | 2018

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

TALLAHASSEE (MAIN OFFICE)
1897 Capital Circle NE
Tallahassee, FL 32308
Telephone: 850.907.2301

TALLAHASSEE (TIMBERLANE)
1471 Timberlane Road, Suite 124
Tallahassee, FL 32312
Telephone: 850.907.2300

CRAWFORDVILLE
2201 Crawfordville Hwy.
Crawfordville, FL 32327
Telephone: 850.926.4320