Prime Meridian Holding Company
Annual Report 2023

Plain-text annual report

years of organic growth – the Prime Meridian Bank team met the challenges of last year despite In times like these culture matters. As we knock on the door of becoming a $1 billion bank – built on Directors Emeritus by both Boards. Other Highlights • • • • • quarter of 2022. occurring in commercial real estate and residential real estate loans. decreases in other account categories. enclosed 2023 Annual Report. Warm regards, Sammie D. Dixon, Jr. Richard A. Weidner Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors Prime Meridian Holding Company Tallahassee, Florida: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Prime Meridian Holding Company and Subsidiary (the "Company"), as of December 31, 2023 and 2022 and the related consolidated statements of earnings, comprehensive (loss) income, stockholders' equity and cash flows for the years then ended and the related notes (collectively referred to as the "consolidated 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, 2023 and 2022, 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 consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. To the Shareholders and the Board of Directors Prime Meridian Holding Company Page Two Allowance for Credit Losses ("ACL") - Loans The Company's loans portfolio totaled $651.9 million as of December 31, 2023, and the ACL on loans was $5.6 million. As more fully described in Notes 1, 3 and 4 to the Company's consolidated financial statements, the Company estimates its exposure to expected credit losses as of the statement of financial condition date for existing financial instruments held at amortized cost and off-balance sheet exposures, such as unfunded loan commitments, lines of credit and other unused commitments that are not unconditionally cancelable by the Company. The determination of the ACL-loans requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates and identifying loans requiring individual evaluation among others. As disclosed by management, different assumptions and conditions could result in a materially different amount for the estimate of the ACL-loans. We identified the ACL-loans at December 31, 2023, as a critical audit matter. Auditing the ACL - loans involved a high degree of subjectivity in evaluating management's estimates, such as evaluating management's, grouping of loans determined to be similar into pools, estimating the remaining life of loans in a pool, assessment of economic conditions and other environmental factors and evaluating the adequacy of specific allowances associated with individually evaluated loans. The primary procedures we performed as of December 31, 2023, to address this critical audit matter included: - Obtained an understanding of the Company's process for establishing the ACL-loans, including the qualitative factor adjustments of the ACL-loans - Tested the completeness and accuracy of the information utilized in the ACL-loans, including evaluating the relevance and reliability of such information - Tested the ACL-loans model's computational accuracy - Evaluated the qualitative adjustments to the ACL-loans, including assessing the basis for adjustments and the reasonableness of the significant assumptions - Evaluated the reasonableness of specific allowances on individually evaluated loans - Evaluated credit quality trends in delinquencies, non-accruals, charge-offs and loan risk ratings - Performed an independent calculation of the ACL-loans - Evaluated the accuracy and completeness of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, disclosures in the consolidated financial statements HACKER, JOHNSON & SMITH PA We have served as the Company's auditor since 2008. Tampa, Florida March 21, 2024 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 ............................................................................... Debt securities available for sale ..................................................................................... Debt securities held to maturity (fair value of $10,358 and $9,917) ............................... Loans held for sale .......................................................................................................... Loans, net of allowance for credit losses of $5,609 and $7,145 ...................................... Federal Home Loan Bank stock ...................................................................................... Premises and equipment, net ........................................................................................... Right of use lease asset .................................................................................................... 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 ........................................................................................................... Other borrowings ......................................................................................................... Federal Home Loan Bank advances ............................................................................ Official checks ............................................................................................................. Operating lease liability ............................................................................................... Other liabilities ............................................................................................................ Total liabilities ......................................................................................................... Commitments and contingencies (notes 4, 8, and 15) Stockholders' equity: December 31, 2023 2022 9,003 $ 14,856 4,557 28,416 124,475 11,850 5,288 646,127 1,283 7,476 2,823 3,529 3,114 16,921 3,226 854,528 $ 189,426 $ 476,826 82,436 748,688 - 15,000 2,377 3,013 5,474 774,552 8,119 19,259 12,410 39,788 129,436 11,805 7,058 588,715 463 8,022 3,044 4,533 2,385 16,532 3,391 815,172 197,987 493,439 40,109 731,535 4,275 - 4,090 3,208 5,011 748,119 Preferred stock, undesignated; 1,000,000 shares authorized, none issued or outstanding ................................................................................................................... - - Common stock, $.01 par value; 9,000,000 shares authorized, 3,259,881 and 3,164,491 issued and outstanding ................................................................................................. Additional paid-in capital ................................................................................................ Retained earnings ............................................................................................................ Accumulated other comprehensive loss .......................................................................... Total stockholders' equity ........................................................................................ Total liabilities and stockholders' equity .................................................................. $ 33 40,522 47,234 (7,813) 79,976 854,528 $ 32 39,718 37,278 (9,975 ) 67,053 815,172 See Accompanying Notes to Consolidated Financial Statements 1 PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Consolidated Statements of Earnings (in thousands, except per share amounts) Interest income: Year Ended December 31, 2023 2022 Loans ........................................................................................................................... $ Debt securities ............................................................................................................. Other ............................................................................................................................ Total interest income ................................................................................................ Interest expense: Deposits ....................................................................................................................... FHLB advances and other borrowings ........................................................................ Total interest expense ............................................................................................... Net interest income .................................................................................................. Credit loss expense .......................................................................................................... Net interest income after credit loss expense ........................................................... Noninterest income: Service charges and fees on deposit accounts .............................................................. Debit card/ATM revenue, net ...................................................................................... Mortgage banking revenue, net ................................................................................... Income from bank-owned life insurance ..................................................................... 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 ............................................................................................................. $ 35,291 $ 3,698 937 39,926 9,492 1,086 10,578 29,348 1,450 27,898 357 573 352 389 224 1,895 11,172 1,647 559 903 360 1,214 2,490 18,345 11,448 2,740 8,708 $ 26,221 2,938 1,581 30,740 2,579 200 2,779 27,961 890 27,071 302 540 473 379 240 1,934 9,627 1,621 514 793 360 1,162 2,191 16,268 12,737 3,056 9,681 Earnings per common share: Basic ............................................................................................................................ $ Diluted ......................................................................................................................... $ 2.71 $ 2.68 $ 3.07 3.03 See Accompanying Notes to Consolidated Financial Statements 2 PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Consolidated Statements of Comprehensive Income (Loss) (in thousands) Net earnings .................................................................................................................... $ Other comprehensive income (loss): Change in unrealized loss on debt securities available for sale: 2023 2022 8,708 $ 9,681 Unrealized gain (loss) arising during the year .......................................................... Deferred income tax (expense) benefit ............................................................................ Total other comprehensive income (loss) ........................................................................ Comprehensive income (loss) ......................................................................................... $ 2,896 (734) 2,162 10,870 $ (13,264 ) 3,362 (9,902 ) (221 ) Year Ended December 31, See Accompanying Notes to Consolidated Financial Statements. 3 PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years Ended December 31, 2023 and 2022 Common Stock Additional Paid-in Amount Capital Retained Earnings Shares Accumulated Other Compre- hensive Loss Total Stockholders' Equity 31 $ - - 38,909 $ - - 28,164 $ 9,681 (567) (73) $ - - 67,031 9,681 (567 ) (dollars in thousands) Balance at December 31, 2021 .... 3,129,046 $ - Net earnings ................................. Dividends paid.............................. - Net change in unrealized loss on debt securities available for sale, net of income tax benefit .. Stock options exercised ................ Common stock issued as - 20,240 5,002 compensation to directors ......... 10,203 Issuance of restricted stock ........... Stock-based compensation ........... - Balance at December 31, 2022 .... 3,164,491 $ Net earnings ................................. Impact of adopting ASC 326 (net of tax) ........................................ Dividends paid.............................. Net change in unrealized loss on debt securities available for sale, net of income taxes ........... Stock options exercised ................ Common stock issued as - - - - 19,217 - 1 - - - 32 $ - - - - - - 371 - - (9,902) - 131 129 178 39,718 $ - - - 37,278 $ - - - (9,975) $ - - - 8,708 1,946 (698) - - - - 341 - - 2,162 - (9,902 ) 372 131 129 178 67,053 8,708 1,946 (698 ) 2,162 341 163 244 57 79,976 6,700 compensation to directors ......... 69,473 Issuance of restricted stock ........... - Stock-based compensation ........... Balance at December 31, 2023 .... 3,259,881 $ - 1 - 33 $ 163 243 57 40,522 $ - - - 47,234 $ - - - (7,813) $ See Accompanying Notes to Consolidated Financial Statements. 4 PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Consolidated Statements of Cash Flows (in thousands) Cash flows from operating activities: Net earnings .................................................................................................................... $ Adjustments to reconcile net earnings to net cash provided by operating activities: 2023 2022 8,708 $ 9,681 Year Ended December 31, Depreciation and amortization ..................................................................................... Credit loss expense ...................................................................................................... Net amortization (accretion) of deferred loan fees ...................................................... Deferred income taxes ................................................................................................. Amortization of premiums and discounts on debt securities ....................................... 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 to directors ................................................................... Stock-based compensation expense ............................................................................. Income from bank-owned life insurance ..................................................................... Net increase in accrued interest receivable .................................................................. Net change in operating leases ..................................................................................... 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 debt securities available for sale ............................................................... Purchase of debt securities held to maturity ................................................................ Principal repayments of debt securities available for sale ........................................... Maturities and calls of debt securities available for sale .............................................. Purchase of Federal Home Loan Bank stock ............................................................... Purchase of premises and equipment ........................................................................... Net cash used in investing activities ......................................................................... Cash flows from financing activities: Net increase (decrease) in deposits .............................................................................. Net (decrease) increase in other borrowings ................................................................ Increase in Federal Home Loan Bank advances, net ................................................... Proceeds from stock options exercised ........................................................................ Common stock dividends paid ..................................................................................... Net cash provided by (used in) financing activities ................................................. Net 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: 724 1,450 276 (390) (284) (352) 60,437 (58,315) 163 301 (389) (729) 26 165 (1,250) 10,541 (56,532) (1,206) - 7,284 2,018 (820) (178) (49,434) 17,153 (4,275) 15,000 341 (698) 27,521 (11,372) 39,788 28,416 $ 683 890 (541 ) (328 ) (68 ) (473 ) 85,076 (79,893 ) 131 307 (379 ) (880 ) 25 (1,557 ) 4,923 17,597 (98,866 ) (79,322 ) (11,782 ) 10,397 33 (97 ) (743 ) (180,380 ) (31,407 ) 700 - 372 (567 ) (30,902 ) (193,685 ) 233,473 39,788 Interest ...................................................................................................................... $ Income taxes ............................................................................................................ $ 10,218 $ 3,072 $ 2,779 3,596 Noncash transactions: Accumulated other comprehensive loss, net change in unrealized loss on debt securities available for sale, net of income taxes (benefit) ....................................... $ Impact of adopting ASC 326 ....................................................................................... $ 2,162 $ 1,946 $ (9,902 ) - See Accompanying Notes to Consolidated Financial Statements 5 PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements At December 31, 2023 and 2022 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 four banking offices located in Tallahassee, Crawfordville, and Lakeland, Florida and its online banking platform. The following is a description of the significant accounting policies and practices followed by the Company, which conform to accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices within the banking industry. Use of Estimates. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit 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. On March 12, 2021, the Board of Governors of the Federal Reserve System adopted as a final rule, without change, its March 24, 2020 interim rule amending its Regulation D (Reserve Requirements of Depository Institutions) to lower reserve requirement ratios on transaction accounts maintained at depository institutions to zero percent. Debt Securities. Debt securities may be classified as either trading, held-to-maturity or available-for-sale. Trading debt securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading debt securities are included immediately in earnings. Held-to-maturity debt securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Debt securities available-for-sale consist of securities not classified as trading debt securities or as held-to-maturity debt securities. Unrealized holding gains and losses on debt securities available-for-sale are excluded from earnings and reported in accumulated other comprehensive loss. Gains and losses on the sale of debt securities are recorded on the trade date determined using the specific-identification method. Premiums and discounts on debt securities are recognized in interest income using the interest method over the period to maturity or call date, if applicable. 6 (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 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, 2023 and 2022, gains on loans held for sale are reported on the consolidated statements of earnings under noninterest income in mortgage banking revenue. At December 31, 2023, loans held for sale were $5,288,000 compared to $7,058,000 at December 31, 2022. At December 31, 2023 and 2022, fair values exceeded book values in the aggregate. The Company retains no beneficial interest in these sales and no servicing rights on the loans sold. 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 credit 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. The following is a summary of the Company's significant accounting policies with respect to ASC 326: ACL - Debt Securities Available for Sale. Management uses a systematic methodology to determine its ACL for debt securities available for sale. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis to determine whether there is a credit loss associated with the decline in fair value. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. If either one of the criteria regarding intent or requirement to sell is met, an ACL is established to reflect the difference between the debt security's amortized cost basis and its fair value. For debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which the fair value is less than the amortized cost basis, among various other factors, including the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the debt security's fair value and historical loss information for financial assets secured with similar collateral among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the debt security are compared to the amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis, an ACL is recorded, which is limited by the amount that the fair value is less than the amortized cost basis. Credit losses are calculated individually, rather than collectively. Any impairment that has not been recorded through an ACL is recognized in other comprehensive loss. Changes in the ACL are recorded as credit loss expense. Losses are charged against the ACL when management believes the uncollectability of the debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the debt securities available for sale and does not record an ACL on accrued interest receivable. As of December 31, 2023, the accrued interest receivable for debt securities available for sale included in accrued interest receivable was $523,000. ACL – Debt Securities Held to Maturity. The Company measures expected credit losses on debt securities held to maturity on a collective basis by major security type. U.S. agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Taxable municipal securities are highly rated by major credit agencies. A debt security is placed on nonaccrual status at the time any principal or interest payments become ninety days delinquent. Interest accrued but not received for a debt security placed on nonaccrual is reversed against interest income. During the year ended December 31, 2023, there were no debt securities placed on nonaccrual. As of December 31, 2023, the accrued interest receivable for debt securities held to maturity included in accrued interest receivable was $69,000. 7 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued ACL - Loans. The ACL reflects management's estimate of losses that will result from the inability of our borrowers to make required loan payments. The Company records loans charged-off against the ACL and subsequent recoveries, if any, increase the ACL when they are recognized. Management uses systematic methodologies to determine its ACL for loans and certain OBS credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the loan portfolio. Management estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as changes in the national, state and local unemployment rates, commercial real estate price index, housing price index and national retail sales index (see discussion regarding qualitative factors below). The Company's estimate of its ACL involves a high degree of judgment; therefore, management's process for determining expected credit losses may result in a range of expected credit losses. The Company's ACL recorded in the balance sheet reflects management's best estimate within the range of expected credit losses. The Company recognizes in earnings the amount needed to adjust the ACL for management's current estimate of expected credit losses. The Company's ACL is calculated using collectively evaluated and individually evaluated loans. The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk characteristics are grouped into homogenous segments for analysis. The Company’s ACL is measured based on call report segment as these types of loans exhibit similar risk characteristics. The identified loan classes are as follows: Commercial real estate Residential and home equity Construction Commercial Consumer and other The ACL for each class is measured through the use of the weighted-average remaining maturity (“WARM”) method. The FASB recognizes the WARM method as an acceptable approach for computing the ACL. In accordance with the WARM method, an annualized loss rate based on a combination of both the Company's and peers' historical loss rates ("historical loss") is applied to the amortized cost of an asset or pool of assets over the remaining expected life. Included in its systematic methodology to determine its ACL, management considers the need to qualitatively adjust model results for risk factors that are not considered within the Company’s loss estimation process but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factors ("Q-Factors") may increase or decrease management's estimate of expected credit losses by a calculated percentage based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among other things, the impact of 1) changes in lending policies and procedures, including changes in underwriting standards; 2) changes in international, national, regional and local economic conditions; 3) changes in the volume and severity of past due and nonaccrual status; 4) the effect of any concentrations of credit and changes in the levels of such concentrations; 5) changes in the experience, depth, and ability of lending management; 6) changes in nature and volume of the portfolio; 7) trends in underlying collateral values; and 8) changes in the quality of the loan review system on the level of estimated credit losses. The annual historical loss factors, adjusted for Q-Factors and management’s reasonable and supportable forecasts, are applied to the amortized loan balances over each subsequent period and aggregated to arrive at the ACL for loans collectively evaluated. The amortized loan balances are adjusted based on management’s estimate of loan repayments in future periods. Management has determined that the appropriate historical loss period is fifteen years based on the composition of the current loan portfolio. Additionally, management has determined that the Company’s reasonable and supportable forecast period is one year. 8 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued When a loan no longer shares similar risk characteristics with its segment, the asset is assessed to determine whether it should be included in another segment or should be individually evaluated. Under ASC 326-20-35-6, the Company has adopted the collateral maintenance practical expedient to measure the ACL based on the fair value of collateral. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining ACL. An ACL is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for selling costs, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. Financial assets that have been individually evaluated can be returned to a pool for purposes of estimating the expected credit loss to the extent as their credit profile improves and that the repayment terms were not considered to be unique to the asset. Management measures expected credit losses over the contractual term of a loan. When determining the contractual term, the Company considers expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: Management has a reasonable expectation at the reporting date that a restructuring will be executed with an individual borrower. The extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. The Company follows its nonaccrual policy by reversing contractual interest income in the statements of earnings when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an ACL on accrued interest receivable. As of December 31, 2023, the accrued interest receivable for loans recorded in accrued interest receivable was $2,522,000. The Company has a variety of assets that have a component that qualifies as an OBS exposure. These primarily include undrawn portions of revolving lines of credit and construction loans. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. Management used its judgement to determine funding rates. Management applied the funding rates, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments. Any adjustment to the ACL for unfunded commitments will be recognized through the ACL in the statements of earnings. As of December 31, 2023, there was no liability recorded for expected credit losses on unfunded commitments. 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. Bank-Owned Life Insurance ("BOLI"). The Company has purchased life insurance policies on certain key officers. Bank- owned life insurance is recorded at the amount that can be realized under the insurance contract at the consolidated balance sheet date, which is the cash surrender value adjusted for other charges or other amount due that are probable at settlement. 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. 9 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued 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. Revenue from Contracts with Customers. In addition to lending and related activities, the Company offers various services to customers that generate revenue, certain of which are governed by ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”). The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and include service charges and fees on deposit accounts and debit card/ATM revenue, net. Revenue is recognized upon satisfaction of our performance obligation when the transactions occur or as services are performed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur. Debit Card/ATM Revenue. Debit card/ATM revenue primarily includes interchange income from client use of consumer and business debit cards. Interchange income is paid by a merchant bank to the card-issuing bank through the interchange network. Interchange fees are set by the credit card associations and based on cardholder purchase volumes. Also included in debit card/ATM revenue is ATM foreign fee income and ATM non-client ACH credits. This revenue line is shown net of debit card fees and ATM program expenses. 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. 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, 2023, 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. 10 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued 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: Debt 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 treasury and agency securities, municipal securities, U.S. agency mortgage-backed securities, and asset-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. Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Quoted market prices are not always available for our derivatives. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. 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). Debt Securities. Fair values for debt 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). 11 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued 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). Bank Owned Life Insurance. The Company has purchased life insurance policies on certain officers. The life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement (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). Other borrowings. The fair value of other borrowings approximates carrying value due to their short-term maturity (Level 3). Federal Home Loan Bank Advances. Fair values of FHLB advances are estimated using discounted cash flow analysis based on current borrowing rates of the FHLB (Level 3). Derivatives. Fair value of the Company’s derivative contracts is based on the framework for measuring fair value (Level 2). 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 awards granted. The Company recognizes stock-based compensation in the consolidated statements of earnings as the awards vest. The market price of the Company's common stock at the date of the grant is used for restricted stock awards. For stock purchase plans, the Black-Scholes model is utilized to estimate the fair value of the award. The impact of forfeitures of share-based awards on compensation expense is recognized as forfeitures occur. Comprehensive Income (Loss). 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 debt securities available-for-sale, 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 (loss). Derivatives. The Company enters into interest rate swaps in order to provide commercial loan clients the ability to swap from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan with a client in addition to a swap agreement. This swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company then enters into a matching swap agreement with a third-party dealer in order to offset its exposure on the client swap. The Company does not use derivatives for trading purposes. The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives. Mortgage Banking Revenue. Mortgage banking revenue includes gains and losses on the sale of mortgage loans originated for sale, net of direct origination costs, 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. 12 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (1) Summary of Significant Accounting Policies, Continued Recently Adopted Accounting Standards The Company adopted Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), effective on January 1, 2023. The guidance replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and debt securities held to maturity. It also applies to certain off-balance sheet credit exposures, including loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as the credit quality and underwriting standards of a Company’s loan portfolio. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities and purchased financial assets with credit deterioration. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet (“OBS”) credit exposures. Results for reporting periods beginning after December 31, 2022 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a one-time cumulative-effect adjustment to the allowance for credit losses ("ACL") of $2.6 million which was recognized through a $1.9 million adjustment to retained earnings, net of taxes. This adjustment brought the beginning balance of the ACL to $4.5 million as of January 1, 2023. The Company determined that there was no adjustment required for unfunded commitments. The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to December 31, 2022. As of January 1, 2023, the Company did not have any other- than-temporarily impaired debt securities. Therefore, upon adoption of ASC 326, the Company determined that an ACL on debt securities was not necessary. The following table illustrates the impact of the adoption of ASC 326 on the Company’s condensed consolidated balance sheet. As Reported Under ASC 326 January 1, 2023 Pre-ASC 326 Adoption (In thousands) Impact of ASC 326 Adoption Assets: Allowance for credit losses on loans .................................................. $ Deferred tax asset ............................................................................... $ 4,539 $ - $ 7,145 $ - $ (2,606) 660 Equity: Retained earnings (impact of adopting ASC 326, net of taxes) .......... $ - $ - $ 1,946 Also on January 1, 2023, the Company adopted Accounting Standards Update "ASU" 2022-22, "Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-22 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310-40 Receivables - Troubled Debt Restructurings by Creditors, and introduces new disclosures related to modifications with borrowers that are experiencing financial difficulties. ASU 2022-02 also requires the disclosure of current-period gross write-offs by year of origination for financing receiveables held at amortized cost. Upon adoption, the Company eliminated the separate credit loss estimation process for loans classified as TDRs. The adoption did not have a material impact to the consolidated financial statements. 13 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (2) Debt Securities Debt securities have been classified according to management's intention. Our investments in U.S. agency mortgage-backed securities are with government-sponsored enterprises (GSEs) such as Federal National Mortgage Association, Government National Mortgage Association, Federal Home Loan Bank, and Federal Home Loan Mortgage Corporation. The amortized cost of debt securities and fair values are as follows: Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (in thousands) At December 31, 2023 Debt Securities Available for Sale U.S. Government treasury and agency securities...................... $ Municipal securities .................................................................. U.S. agency mortgage-backed securities .................................. Asset-backed securities ............................................................. 46,492 $ 22,259 63,165 3,024 Total ...................................................................................... $ 134,940 $ - $ - 7 - 7 $ (1,234) $ (2,151) (7,013) (74) (10,472) $ 45,258 20,108 56,159 2,950 124,475 Debt Securities Held to Maturity Municipal securities .................................................................. $ U.S. agency mortgage-backed securities .................................. Total ...................................................................................... $ 9,257 $ 2,593 11,850 $ 39 $ - 39 $ (1,378) $ (153) (1,531) $ 7,918 2,440 10,358 At December 31, 2022 Debt Securities Available for Sale U.S. Government treasury and agency securities...................... $ Municipal securities .................................................................. U.S. agency mortgage-backed securities .................................. Asset-backed securities ............................................................. 48,124 $ 22,338 68,633 3,702 Total ...................................................................................... $ 142,797 $ - $ - - - - $ (2,219) $ (2,874) (8,131) (137) (13,361) $ 45,905 19,464 60,502 3,565 129,436 Debt Securities Held to Maturity Municipal securities .................................................................. $ U.S. agency mortgage-backed securities .................................. Total ...................................................................................... $ 9,215 $ 2,590 11,805 $ - $ - - $ (1,695) $ (193) (1,888) $ 7,520 2,397 9,917 14 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (2) Debt Securities, Continued Debt 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) Fair Value Significant Other Significant Observable Unobservable Inputs (Level 2) Inputs (Level 3) (in thousands) At December 31, 2023 Debt Securities Available for Sale U.S. Government treasury and agency securities.... $ Municipal securities ................................................ U.S. agency mortgage-backed securities ................ Asset-backed securities ........................................... Total .................................................................... $ 45,258 $ 20,108 56,159 2,950 124,475 $ At December 31, 2022 Debt Securities Available for Sale U.S. Government treasury and agency securities.... $ Municipal securities ................................................ U.S. agency mortgage-backed securities ................ Asset-backed securities ........................................... Total .................................................................... $ 45,905 $ 19,464 60,502 3,565 129,436 $ The scheduled maturities of debt securities are as follows: - $ - - - - $ - $ - - - - $ 45,258 $ 20,108 56,159 2,950 124,475 $ 45,905 $ 19,464 60,502 3,565 129,436 $ - - - - - - - - - - Amortized Cost Fair Value (in thousands) At December 31, 2023 Debt Securities Available for Sale Due in less than one year..................................... $ Due in one to five years ...................................... Due in five to ten years ....................................... Due after ten years .............................................. Mortgage-backed securities ................................. Total ................................................................. $ 35,373 $ 17,831 13,236 5,335 63,165 134,940 $ Debt Securities Held to Maturity Due in five to ten years ....................................... $ Due after ten years .............................................. Mortgage backed securities ................................. Total ................................................................. $ 2,050 $ 7,207 2,593 11,850 $ 34,951 16,732 11,692 4,941 56,159 124,475 1,956 5,962 2,440 10,358 There were no debt securities available for sale sold during the years ended December 31, 2023 and 2022. 15 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (2) Debt Securities, Continued At December 31, 2023 and 2022, debt securities with a fair value of $16,410,000 and $13,284,000, respectively, were pledged as collateral for public deposits. Debt 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 Fair Value Gross Unrealized Losses Fair Value (in thousands) At December 31, 2023 Debt Securities Available for Sale U.S. Government treasury and agency securities ............. $ Municipal securities .......................................................... U.S. agency mortgage-backed securities .......................... Asset-backed securities ..................................................... Total .............................................................................. $ Debt Securities Held to Maturity Municipal securities .......................................................... $ U.S. agency mortgage-backed securities .......................... Total .............................................................................. $ At December 31, 2022 Debt Securities Available for Sale - $ (2) - - (2) $ - $ - - $ - $ 386 - - 386 $ (1,234) $ (2,149) (7,013) (74) (10,470) $ 45,258 19,722 54,987 2,950 122,917 - $ - - $ (1,378) $ (153) (1,531) $ 6,884 2,440 9,324 U.S. Government treasury and agency securities ............. $ Municipal securities .......................................................... U.S. agency mortgage-backed securities .......................... Asset-backed securities ..................................................... Total .............................................................................. $ (1,384) $ (999) (3,246) (102) (5,731) $ 40,926 $ 11,436 36,939 2,461 91,762 $ (835) $ (1,875) (4,885) (35) (7,630) $ 4,979 8,028 23,563 1,104 37,674 Debt Securities Held to Maturity Municipal securities .......................................................... $ U.S. agency mortgage-backed securities .......................... Total .............................................................................. $ (1,695) $ (193) (1,888) $ 7,520 $ 2,397 9,917 $ - $ - - $ - - - The unrealized losses at December 31, 2023 and 2022 on 103 and 106 debt securities, respectively, were caused by market conditions such as interest rate movements, and not changes in credit quality. It is expected that the debt securities would not be settled at a price less than the par value of the debt securities. 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 debt securities until a market price recovery or maturity, these debt securities are not considered other-than-temporarily impaired. Therefore, at December 31, 2023 no ACL on debt securities has been recorded. Management evaluates debt securities for impairment where there has been a decline in fair value below the amortized cost basis of a debt security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually and collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the debt security. 16 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (2) Debt Securities, Continued Any credit loss component would be recognized through a credit loss expense. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the debt securities, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the debt securities. The Company determined that the U.S. government agency and treasury securities (including mortgage-backed securities) have a zero expected credit loss. All of the government agency securities have the full faith and credit backing of the United States government or one of its agencies. Municipal securities and asset- backed securities that do not have a zero expected credit loss are evaluated quarterly by a third-party resource to determine whether there is a credit loss associated with a decline in fair value. At December 31, 2023 and 2022, all municipal and asset- backed securities were rated as investment grade. All debt securities in an unrealized loss position as of December 31, 2023 continue to perform as scheduled and we do not believe that there is a credit loss or that a credit loss expense is necessary. At December 31, 2023, no debt securities are on nonaccrual. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the debt securities within the portfolio, and it is not more-likely-than-not that we will be required to sell the debt securities. (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, 2023 2022 223,795 $ 254,574 81,640 560,009 85,983 5,936 651,928 202,263 224,211 75,151 501,625 86,308 7,698 595,631 Add (Deduct): Net deferred loan (fees) costs ............................... Allowance for credit losses .................................. Loans, net ......................................................... $ (192 ) (5,609 ) 646,127 $ 229 (7,145) 588,715 17 (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 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. 18 (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. 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 $1 million 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. 19 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (3) Loans, Continued Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the client contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged-off. The Company uses the following definitions for risk ratings: Pass – A Pass loan’s primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. Special Mention – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not necessarily preclude the potential for recovery, but rather signifies it is no longer practical to defer writing off the asset. 20 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (3) Loans, Continued Loan balances classified by credit quality indicator, loan type and based on year of origination as of December 31, 2023 are as follows: Term Loans by Origination Year Revolving Loans Total 2023 2022 (in thousands) Commercial Real Estate Loans Pass ....................................................... $ 27,756 $ 62,149 $ 32,799 $ 42,079 $ 12,492 $ 38,271 $ - 1,767 Special mention .................................... - - Substandard .......................................... Total commercial real estate loans ....... $ 27,756 $ 62,149 $ 32,799 $ 42,079 $ 12,492 $ 40,038 $ - $ Year-to-date gross charge-offs ............. $ 2019 Prior 2021 2020 - - - - - - - - - $ - $ - $ - $ - $ Residential and Home Equity Loans Pass ....................................................... $ 43,809 $ 51,060 $ 56,802 $ 29,979 $ 11,717 $ 28,188 $ 203 Special mention .................................... Substandard .......................................... - Total residential loans .......................... $ 43,809 $ 51,060 $ 58,778 $ 30,624 $ 11,717 $ 28,391 $ - $ Year-to-date gross charge-offs ............. $ - 1,391 585 - 278 367 - - - - - $ - $ - $ - $ - $ Construction Loans Pass ....................................................... $ 33,713 $ 18,797 $ 16,717 $ 1,425 $ 1,611 $ 1,837 $ - Special mention .................................... Substandard .......................................... - Total construction loans ....................... $ 33,713 $ 18,995 $ 16,717 $ 1,809 $ 1,611 $ 1,837 $ - $ Year-to-date gross charge-offs ............. $ - 198 - 384 - - - - - - 386 $ - $ - $ - $ - $ Commercial Loans Pass ....................................................... $ 12,024 $ 12,130 $ 7,247 $ 3,543 $ 4,823 $ 5,250 $ Special mention .................................... 32 - Substandard .......................................... Total commercial loans ........................ $ 12,048 $ 12,130 $ 7,247 $ 3,624 $ 4,823 $ 5,282 $ 1 $ Year-to-date gross charge-offs ............. $ 45 36 24 - - - - - - - - $ - $ - $ - $ - $ - - 6,482 $ 222,028 1,767 - 6,482 $ 223,795 - - $ 357 44 29,794 $ 251,349 2,229 996 30,195 $ 254,574 - - $ - - 6,958 $ 81,058 - 582 6,958 $ 81,640 386 - $ - 765 40,064 $ 85,081 101 801 40,829 $ 85,983 1 - $ Consumer & Other Loans Pass ....................................................... $ 1,317 $ - Special mention .................................... Substandard .......................................... - Total consumer & other loans .............. $ 1,317 $ 46 $ Year-to-date gross charge-offs ............. $ 688 $ - - 688 $ - $ 275 $ - - 275 $ - $ 122 $ - - 122 $ - $ 348 $ - - 348 $ - $ 176 $ - - 176 $ - $ 3,010 $ - - 3,010 $ - $ 5,936 - - 5,936 46 21 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (3) Loans, Continued The risk ratings of loans at December 31, 2022 are as follows: Real Estate Mortgage Loans Residential and Home Equity Consumer Commercial and Other Commercial Construction Loans Loans Total (in thousands) At December 31, 2022 Grade: Pass ........................................... $ Special mention ........................ Substandard .............................. Doubtful .................................... Loss ........................................... Total ...................................... $ 200,192 $ 221,552 $ 2,616 43 - - 202,263 $ 224,211 $ 1,794 277 - - 74,516 $ 635 - - - 75,151 $ 85,874 $ 368 66 - - 86,308 $ 7,696 $ 2 - - - 7,698 $ 589,830 5,415 386 - - 595,631 Age analysis of past-due loans at December 31, 2023 and 2022 is as follows: Accruing Loans Greater Than 90 Days 30-59 Days Total Past Past Due Past Due Past Due Due 60-89 Days Nonaccrual Total Current Loans Loans (in thousands) At December 31, 2023: Real estate mortgage loans: Commercial .............................. $ Residential and home equity ..... Construction .............................. Commercial loans ......................... Consumer and other loans ............ Total ...................................... $ 57 $ 3,792 648 18 28 4,543 $ - $ 492 - 318 - 810 $ - $ 1,110 - - - 1,110 $ 57 $ 223,738 $ 5,394 248,227 648 80,410 336 84,847 5,908 28 6,463 $ 643,130 $ - $ 223,795 953 254,574 582 81,640 800 85,983 5,936 2,335 $ 651,928 - At December 31, 2022: Real estate mortgage loans: Commercial .............................. $ Residential and home equity ..... Construction .............................. Commercial loans ......................... Consumer and other loans ............ Total ...................................... $ - $ 1,383 651 293 - 2,327 $ - $ 413 - 160 - 573 $ - $ 349 55 - - 404 $ - $ 201,986 $ 2,145 222,066 706 74,445 453 85,789 7,698 3,304 $ 591,984 $ - 277 $ 202,263 - 224,211 - 75,151 66 86,308 7,698 343 $ 595,631 - 22 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (3) Loans, Continued Loans are generally placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured. The amortized cost basis of loans in nonaccrual status and loans past due over 90 days and still on accrual by class of loans as of December 31, 2023 is as follows: (in thousands) At December 31, 2023 Residential and home equity ............... $ Construction ........................................ Commercial ........................................ Total ................................................ $ Total Nonaccrual Loans Nonaccrual Loans with No ACL Nonaccrual Loans with ACL 90+ Days Still Accruing 953 $ 582 800 2,335 $ 953 $ 582 36 1,571 $ - $ - 764 764 $ 1,110 - - 1,110 The amortized cost basis of impaired loans and their associated allowance, if any, as of December 31, 2022 is as follows: With No Related Allowance Recorded Unpaid Contractual With an Allowance Recorded Unpaid Contractual Total Unpaid Contractual Recorded Principal Recorded Principal Related Recorded Principal Related Allowance Investment Balance Allowance Investment Balance Investment Balance (in thousands) At December 31, 2022 Commercial real estate ....................... $ Commercial ................ Consumer and other loans ....................... Total ....................... $ 277 $ - 2 279 $ 277 $ - 2 279 $ - $ 66 - 66 $ - $ 66 - 66 $ - $ 14 - 14 $ 277 $ 66 2 345 $ 277 $ 66 2 345 $ - 14 - 14 The restructuring of a loan exists if the creditor grants a modification as a result of financial hardship. A loan modification 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. The Company entered into no new restructured loans to borrowers experiencing financial difficulty during the years ended December 31, 2023 and 2022. The Company grants the majority of its loans to borrowers throughout Leon County and Polk 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. 23 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (4) Allowance for Credit Losses Activity in the ACL is summarized as follows: (in thousands) Year Ended December 31, 2023 Real Estate Mortgage Loans Residential and Home Equity Commercial Construction Commercial Loans Consumer and Other Loans Total Beginning balance ........................ $ Impact of adopting ASC 326 ........ Credit loss expense ....................... Charge-offs ................................... Recoveries .................................... Ending balance.............................. $ 2,303 $ (740) 150 - - 1,713 $ 2,607 $ (892) 319 - - 2,034 $ Year Ended December 31, 2022 Beginning balance ........................ $ Provision (credit) for loan losses .. Net recoveries (charge-offs) ......... Ending balance.............................. $ 1,762 $ 541 - 2,303 $ 2,139 $ 468 - 2,607 $ 922 $ (403) 424 (386) 2 559 $ 857 $ 65 - 922 $ 1,223 $ (504) 510 (1) 44 1,272 $ 1,125 $ (201) 299 1,223 $ 90 $ (67 ) 47 (46 ) 7 31 $ 7,145 (2,606) 1,450 (433) 53 5,609 91 $ 17 (18 ) 90 $ 5,974 890 281 7,145 (5) Premises and Equipment A summary of premises and equipment follows: (in thousands) Land............................................................................... $ Buildings ....................................................................... Leasehold improvements ............................................... Furniture, fixtures and equipment ................................. Computer and software ................................................. Total, at cost .............................................................. Less accumulated depreciation and amortization .......... Premises and equipment, net ..................................... $ At December 31, 2023 1,704 $ 5,111 1,584 2,438 3,720 14,557 (7,081 ) 7,476 $ 2022 1,704 5,089 1,584 2,360 3,642 14,379 (6,357) 8,022 Right of use lease assets and operating lease liabilities are disclosed as separate line items in the consolidated balance sheets and are valued based on the present value of the future minimum lease payments at the commencement date. As our lease does not provide an implicit rate, we used our incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense is recognized on a straight-line basis over the lease term. The Company's operating lease obligation is for the Company's main office on Timberlane Road, Tallahassee, Florida. The term of the lease is 15 years, with four options to renew for five years each. 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. 24 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (5) Premises and Equipment, Continued The components of lease expense and other lease information as of and during the years ended December 31, 2023 and 2022 are as follows: (in thousands) Operating lease cost .................................................................................... $ Cash paid for amount included in the measurement of operating ............... lease liability operating cash flows from operating lease ........................... $ Years ended December 31, 2023 319 $ 2022 319 294 $ 294 At December 31, (dollars in thousands) Operating lease right of use asset ................................................................ $ Operating lease liability ............................................................................... Remaining lease term - (in years) ................................................................ Weighted average discount rate ................................................................... 2023 2,823 $ 3,013 10.6 3.17% 2022 3,044 3,208 11.6 3.17% Future minimum lease payments under non-cancellable leases as of December 31, 2023, reconciled to our operating lease liability presented on the consolidated balance sheet are as follows: (in thousands) 2024 ................................................................ $ 2025 ................................................................ 2026 ................................................................ 2027 ................................................................ 2028 ................................................................ Thereafter ........................................................ Total future minimum lease payments ........ Less interest .................................................... Total ............................................................ $ At December 31, 2023 306 323 323 323 323 1,998 3,596 (583 ) 3,013 (6) Deposits The aggregate amount of time deposits with a minimum denomination greater than $250,000 was approximately $40.5 million and $14.1 million at December 31, 2023 and 2022, respectively. A schedule of maturities for all time deposits at December 31, 2023 is as follows: (in thousands) Year Ending December 31, 2024 ............................................................................. $ 2025 ............................................................................. 2026 ............................................................................. 2027 ............................................................................. Thereafter .................................................................... Total ......................................................................... $ Amount 58,991 22,047 899 69 430 82,436 25 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (7) Federal Home Loan Bank Advances and Other Borrowings Federal Home Loan Bank of Atlanta (“FHLB”) advances are collateralized by a blanket lien on qualifying residential real estate, commercial real estate, home equity lines of credit and multi-family loans. Under this blanket lien, the Company could borrow up to $102.1 million at December 31, 2023. The Company had $15 million in FHLB advances at December 31, 2023 and no advances at December 31, 2022. FHLB advances as of December 31, 2023 are as follows: (dollars in thousands) Maturity Year 2024 ............................................................. 4.48% - 4.83% $ 4.18% 2025 ............................................................. $ Interest Rate Amount 10,000 5,000 15,000 The Company has available credit of $59.0 million in lines of credit with correspondent banks. All draws under these lines are subject to approval by the correspondent bank. There were no outstanding borrowings under these line at December 31, 2023 or 2022. The Company maintains a $15.0 million revolving line of credit with a local bank. The Company has pledged all of the Bank's common stock as collateral for the revolving line of credit which matures in August, 2025 and bears interest at the Wall Street Journal Prime Rate. There was a zero outstanding balance under this revolving line of credit at December 31, 2023 compared to $4.275 million at December 31, 2022. (8) Income Taxes The components of the income taxes are as follows: (in thousands) Current: Year Ended December 31, 2023 2022 Federal ..................................................... $ State ......................................................... Total current ......................................... Deferred: Federal ..................................................... State ......................................................... Total deferred ....................................... Total income taxes ............................ $ 2,434 $ 696 3,130 (305 ) (85 ) (390 ) 2,740 $ 2,699 685 3,384 (257) (71) (328) 3,056 26 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (9) 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, 2023 % of Pretax Earnings Amount 2022 % of Pretax Earnings Amount (dollars in thousands) Income taxes at statutory rate ................... $ Increase (decrease) resulting from: State taxes, net of federal tax benefit .... Tax-exempt income .............................. Other nondeductible expenses .............. Total .................................................. $ 2,404 21.0% $ 2,675 21.0% 483 (158) 11 2,740 4.2 (1.4) 0.1 23.9% $ 485 (105) 1 3,056 3.8 (0.8) - 24.0% 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 ....................................................... Deferred compensation ............................................................ Unrealized losses on debt securities available for sale ............ Operating lease liability ........................................................... Other ........................................................................................ Deferred tax assets ............................................................... Deferred tax liabilities: Prepaid Expenses ..................................................................... Deferred loan costs .................................................................. Premises and equipment .......................................................... Right of use lease asset ............................................................ Deferred tax liabilities .......................................................... Net deferred tax asset ........................................................... $ At December 31, 2023 2022 1,422 $ - 164 262 2,652 764 12 5,276 (143) (682) (206) (716) (1,747) 3,529 $ 1,827 2 132 201 3,386 813 13 6,374 (144) (688) (238) (771) (1,841) 4,533 The Company files consolidated income tax returns in the U.S. federal jurisdiction and the State of Florida. The Company is no longer subject to U.S. federal, or state and local income tax examinations by taxing authorities for years before 2020. 27 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (10) 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, financial and performance 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 Company’s standby letters of credit are secured by collateral and those secured letters of credit totaled $536,000 at December 31, 2023. 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, 2023 is as follows: (in thousands) Commitments to extend credit ......................................... $ Construction loans in process .......................................... Unused lines of credit ...................................................... Standby financial letters of credit .................................... Standby performance letters of credit .............................. Guaranteed accounts ........................................................ Total off-balance sheet instruments ............................. $ At December 31, 2023 2,194 46,882 85,150 2,136 89 1,276 137,727 28 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (11) Stock Compensation Plans 2015 Stock Incentive Compensation Plan 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, restricted stock 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, 2023, 322,957 stock options and 91,192 restricted stock awards have been granted under the 2015 Plan. Taking into account the 61,250 stock options that have been forfeited, 136,083 options are available for grant at December 31, 2023. A summary of the activity in the Company’s 2015 Plan is as follows: Weighted- Weighted- Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Options Value Term Price Outstanding at December 31, 2021 ................ Options granted .............................................. Options exercised ........................................... Options forfeited ............................................ Outstanding at December 31, 2022 ................ Options exercised ........................................... Options forfeited ............................................ Outstanding at December 31, 2023 ................ Exercisable at December 31, 2023 ................. 268,657 $ 3,500 (20,240) (550) 251,367 (19,217) (10,050) 222,100 $ 212,900 $ 20.23 25.37 (18.35) 20.09 19.99 (20.09) (28.40) 20.33 20.18 2.5 $ 740,000 2.4 $ 727,000 The fair value of shares vested and recognized as compensation expense was $57,000 and $178,000 for the years ended December 31, 2023 and 2022, respectively. The fair value of shares vested and recognized as stock award expense was $244,000 and $129,000 at December 31, 2023 and 2022, respectively. The Company recognized an income tax benefit with respect to share-based compensation of $6,000 and $19,000, respectively, in December 31, 2023 and 2022. At December 31, 2023, there was $48,000 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 2.4 years. No stock options were granted during 2023. The fair value of each option granted in 2022 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Weighted average risk-free interest rate .................................. Expected dividend yield .......................................................... Expected stock volatility ......................................................... Expected life in years .............................................................. Per share fair value of options issued during year ................... $ 2.91% 0.71% 33.18% 6.5 9.10 Year ended December 31, 2022 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. 29 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (11) Stock Compensation Plans, Continued Restricted Stock Issued under the 2015 Stock Incentive Plan The Company issued 69,473 restricted common stock shares (net of forfeitures) to employees in 2023. Restricted common stock shares granted are vested equally over the span of 3-5 years. Stockholders of unvested restricted stock have the right to vote and the right to receive dividends declared on common stock, if any. A summary of restricted stock transactions follows: Number of Wtd-Avg Grant-Date Fair Value Grant-Date Shares per Share Fair Value Non-vested restricted stock outstanding at December 31, 2021 ......... Non-vested restricted stock granted ................................................... Restricted stock shares vested in 2022 ............................................... Non-vested restricted stock outstanding at December 31, 2022 ......... Non-vested restricted stock granted ................................................... Forfeited ............................................................................................. Restricted stock shares vested in 2023 ............................................... Non-vested restricted stock outstanding at December 31, 2023 ......... 7,838 $ 10,203 $ (3,838) 14,203 $ 75,751 $ (6,278) $ (6,040) 77,636 $ 18.88 $ 27.85 (18.98 ) 25.30 $ 22.68 $ 23.42 $ (24.06 ) 22.99 $ 149,000 284,000 (73,000) 359,000 1,718,000 (147,000) (145,000) 1,785,000 During the years ended December 31, 2023 and 2022, the Company recognized $244,000 and $129,000, respectively, as expense and had $1,530,000 in unrecognized expense at December 31, 2023 to be recognized over a weighted-average period of 4.4 years. Directors' Plan The Directors’ Plan permits the Company’s and the Bank’s directors to elect to receive any compensation to be paid to them in shares of the Company’s common stock. Pursuant to the Directors’ Plan, each director is permitted to make an election to receive shares of stock instead of cash. To encourage directors to elect to receive stock, the Directors’ Plan provides that if a director elects to receive stock, he or she will receive in common stock 110% of the amount of cash fees set by the Board or the Compensation 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 Committee, acting in good faith, but in no case less than fair market value. In 2023 and 2022 the Board used the greater of quarter-end book value and quarter-end volume weighted average market price to determine what the fair market value of Prime Meridian common stock was for purposes of the Directors’ Plan. The maximum number of shares to be issued pursuant to the Directors’ Plan is limited to 74,805 shares. In 2023 and 2022, our directors received 6,700 and 5,002 shares of common stock, respectively, in lieu of cash, under the Directors’ Plan. The Company recognized expense of $163,000 and $131,000 during the years ended December 31, 2023 and 2022, with respect to the Director’s Plan. As of December 31, 2023, there were 29,662 shares remaining available for grant. (12) 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. Contribution expense related to the plans for the years ended December 31, 2023 and 2022 was $278,000 and $261,000, respectively. The Company has 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 $242,000 and $265,000 for the years ended December 31, 2023 and 2022, respectively. The accrued liability related to these agreements was $1,034,000 and $792,000 at December 31, 2023 and 2022, respectively. Such amounts are included in other liabilities in the accompanying consolidated balance sheets. 30 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (13) 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: Year Ended December 31, (in thousands) Loans: Beginning balance ........................................... $ Originated during the year ............................... Principal repayments ....................................... Ending balance ................................................ $ 2023 2022 7,224 $ 1,694 (1,946 ) 6,972 $ 8,468 544 (1,788) 7,224 Deposits at year-end ...................................... $ 14,690 $ 5,970 In addition, the Company purchases various insurance policies through a company that employs the spouse of a Director. The premiums paid totaled $1.6 million and $1.4 million in 2023 and 2022, respectively, and included health insurance premiums for employees. (14) 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, 2023 Fair Carrying Amount Value At December 31, 2022 Fair Carrying Amount Value Level Cash and cash equivalents ....................... Debt securities available for sale ............. Debt securities held to maturity ............... Loans held for sale .................................. Loans, net ................................................ Federal Home Loan Bank stock .............. Accrued interest receivable ..................... Bank owned life insurance ...................... Derivative contract assets ......................... Financial liabilities: Deposits ................................................... Other borrowings .................................... FHLB advances ....................................... Derivative contract liabilities .................. Off-Balance Sheet financial instruments .... 28,416 $ 124,475 11,850 5,288 646,127 1,283 3,114 16,921 2,253 28,416 $ 124,475 10,358 5,371 557,847 1,283 3,114 16,921 2,253 39,788 $ 129,436 11,805 7,058 588,715 463 2,385 16,532 2,352 39,788 129,436 9,917 7,170 548,166 463 2,385 16,532 2,352 748,688 - 15,000 2,253 749,411 - 14,848 2,253 731,535 4,275 - 2,352 731,506 4,275 - 2,352 - - - - (continued) 1 $ 2 2 3 3 3 3 3 2 3 3 3 2 3 31 PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (15) 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 2024, the Board of Directors declared an annual dividend of $0.25 per share of common stock payable on February 29, 2024 to shareholders of record as of February 9, 2024. (16) 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, 2023, and 2022, the Bank’s capital conservation buffer exceeded the minimum requirement of 2.50%. 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, 2023, that the Bank meets all capital adequacy requirements to which it is subject. 32 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (16) Regulatory Matters, Continued As of December 31, 2023, 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: Actual Adequacy Purposes For Capital For Well Capitalized Purposes Amount Percentage Amount Percentage Amount Percentage (dollars in thousands) As of December 31, 2023 Tier 1 Leverage ratio to Average Assets ............. $ 86,576 Common Equity Tier 1 Capital to Risk- 10.15% $ 34,133 4.00% $ 42,666 5.00% Weighted Assets .............................................. 86,576 Tier 1 Capital to Risk-Weighted Assets .............. 86,576 Total Capital to Risk-Weighted Assets ............... 92,185 13.18 29,566 13.18 39,421 14.03 52,561 4.50 42,706 6.00 52,561 8.00 65,702 6.50 8.00 10.00 As of December 31, 2022: Tier 1 Leverage ratio to Average Assets ............. $ 81,100 Common Equity Tier 1 Capital to Risk- Weighted Assets .............................................. 81,100 Tier 1 Capital to Risk-Weighted Assets .............. 81,100 Total Capital to Risk-Weighted Assets ............... 88,245 9.70% $ 33,461 4.00% $ 41,826 5.00% 12.90 28,290 12.90 37,720 14.04 50,294 4.50 40,863 6.00 50,294 8.00 62,867 6.50 8.00 10.00 (17) Legal Contingencies 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 consolidated financial statements. As of December 31, 2023, there is no pending or threatened litigation of which management is aware. (18) 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: 2023 Weighted- Per Average Share 2022 Weighted- Per Average Share Amount Amount Earnings Shares (dollars in thousands, except per share amounts) Earnings Shares Year Ended December 31, Basic EPS: Net earnings ......................................................... $ 8,708 3,209,924 $ Effect of dilutive securities-incremental shares from assumed conversion of options ................ 41,156 Diluted EPS: Net earnings ......................................................... $ 8,708 3,251,080 $ 2.71 $ 9,681 3,154,866 $ 3.07 38,908 2.68 $ 9,681 3,193,774 $ 3.03 33 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (19) Derivatives The Company has entered into interest rate swaps in order to provide commercial real estate loan clients the ability to swap from variable to fixed interest rates. Under these agreements, the Company enters into a variable rate loan with a client at a specified index (Wall Street Journal Prime Lending Rate) in addition to a borrower swap agreement. This swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company then enters into a matching swap agreement with a third-party dealer counterparty in order to offset its exposure on the borrower swap. These interest rate swaps are considered derivative financial instruments. These derivative instruments involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any, over the life of the contract. Such differences, which represent the fair value of the derivative instruments, is included in “other assets” and “other liabilities” on the Company’s consolidated balance sheets, and the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows. The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives. At December 31, 2023 2022 dollars in thousands Notional amount - interest rate swaps: Stand-alone derivatives ................................................................... $ 19,548 $ 20,084 Weighted-average pay rate - interest rate swaps ............................. Weighted-average receive rate - interest rate swaps........................ Weighted-average maturity (in years) - interest rate swaps ............ 3.68% 3.00% 11.6 3.68% 3.00% 12.6 Net realized fair value adjustments: Stand-alone derivatives - interest rate swaps (other assets) ............. $ Stand-alone derivatives - interest rate swaps (other liabilities) ....... $ 2,253 $ (2,253) $ 2,352 (2,352) The Company is party to a collateral support agreement with its dealer counterparty. Such agreement requires that the Company or the dealer counterparty to maintain collateral based on the fair values of derivative instruments. In the event of default by a counterparty the non-defaulting counterparty would be entitled to the collateral. The Company does not require borrower counterparties to post cash collateral based on the fair values of borrower interest rate swaps. In the event of default of a borrower counterparty wherein the fair value of the derivative instrument is owed to the Company, the fair value is collected through a real property foreclosure or liquidation. 34 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (20) Parent Company Only Financial Information The Holding Company's unconsolidated financial information follows: Condensed Balance Sheets (in thousands) Assets December 31, 2023 2022 Cash ........................................................................ $ Investment in subsidiary ......................................... Other assets ............................................................. Total assets .......................................................... $ 1,178 $ 78,763 35 79,976 $ Liabilities and Stockholders' Equity Liabilities: Other borrowings .................................................... $ Accrued interest ...................................................... Total liabilities ..................................................... - $ - - Stockholders' equity.................................................... Total liabilities and stockholders' equity ............. $ 79,976 79,976 $ 204 71,125 30 71,359 4,275 31 4,306 67,053 71,359 Condensed Statements of Earnings Year Ended December 31, 2023 2022 (in thousands) Revenues .................................................................... $ Expenses ..................................................................... Income tax benefit ...................................................... Loss before earnings of subsidiary .......................... Net earnings of subsidiary .......................................... Net earnings ............................................................ $ - $ (698) 177 (521) 9,229 8,708 $ - (756) 192 (564) 10,245 9,681 35 (continued) PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (20) Parent Company Only Financial Information, Continued Condensed Statements of Cash Flows (in thousands) Cash flows from operating activities: Net Earnings ...................................................................................................................... $ Adjustments to reconcile net earnings to net cash used in operating activities: Equity in earnings of subsidiary .................................................................................... Stock issued as compensation ........................................................................................ Net change in other assets .............................................................................................. (Decrease) increase in accrued interest .......................................................................... Net cash used in operating activities .......................................................................... Cash flows from investment activities- Year Ended December 31, 2023 2022 8,708 $ 9,681 (9,229) 163 (5) (31) (394) (10,245) 131 (3) 21 (415) Cash dividend received from bank subsidiary ............................................................... 6,000 Cash flows from financing activities: Net change in other borrowings ..................................................................................... Cash dividend paid ........................................................................................................ Proceeds from stock options exercised .......................................................................... Net cash (used in) provided by financing activities ................................................... Net increase in cash ........................................................................................................... Cash at beginning of the year ............................................................................................ Cash at end of year ............................................................................................................ $ (4,275) (698) 341 (4,632) 974 204 1,178 $ - 700 (567) 372 505 90 114 204 Supplemental disclosure of cash flow information- Noncash items: Net change in accumulated other comprehensive loss of subsidiary, net change in unrealized loss on debt securities available for sale, net of taxes ........................... $ Stock-based compensation expense of subsidiary ...................................................... $ 2,162 $ 301 $ (9,902) 307 36 NET INCOME ($ in 000s) Source: S&P Global and internal company documents 2023 BY THE NUMBERS (dollars in millions) MARKET CAPITALIZATION TOTAL ASSETS 2023 NET INCOME $8.7 $854.5 $76.8 $748.7 $651.9 GROSS LOAN BALANCES $24.53 58.7% EFFICIENCY RATIO (All data as of December 31, 2023 unless otherwise indicated) TOTAL DEPOSITS (YEAR-OVER-YEAR INCREASE OF 2.3%) (YEAR-OVER-YEAR INCREASE OF 9.5%) BOOK VALUE PER SHARE AS OF DEC. 31, 2023 (INCREASE OF 15.8% OVER Q4 2022) 

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