UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

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

☒

For the quarterly period ended

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

September 30, 2021

~~For the quarterly period ended September 30, 2017~~

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

~~For the transition period from~~to

~~Commission File Number:333-191801~~

For the transition period from

Commission File Number:

333-191801

PRIME MERIDIAN HOLDING COMPANY

(Exact Name of registrant as specified in its charter)

Florida

27-2980805


~~Florida~~		~~27-2980805~~
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

~~1897 Capital Circle NE, Second Floor,~~ 1471 Timberlane Road; Tallahassee, Florida		~~32308~~ 32312
(Address of principal executive offices)		(Zip Code)

(850)~~907-2301~~ 907-2300

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class

None.

Trading Symbol(s)

N/A

Name of exchange on which registered

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). ☒☑ Yes ☐ No

Indicate by check mark whether the ~~registrant~~Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See ~~the~~ definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting ~~company,”~~company” and “emerging growth company” inRule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). ☐ Yes ☒☑ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November ~~9, 2017: 3,102,127~~5, 2021: 3,129,046

INDEX


		~~PAGE~~
PART I. FINANCIAL INFORMATION				PAGE

Item 1. Financial Statements

Condensed Consolidated Balance Sheets September 30, ~~2017~~2021 (unaudited) and December 31, ~~2016~~2020	2
	2

Condensed Consolidated Statements of Earnings Three and Nine Months ended September 30, ~~2017~~2021 and ~~2016~~2020 (unaudited)	3
	3

Condensed Consolidated Statements of Comprehensive Income Three and Nine Months ended September 30, ~~2017~~2021 and ~~2016~~2020 (unaudited)	4
	4

Condensed Consolidated Statements of Stockholders’ Equity Three and Nine Months ended September 30, ~~2017~~2021 and ~~2016~~2020 (unaudited)	5-6
	5

Condensed Consolidated Statements of Cash Flows Nine Months ended September 30, ~~2017~~2021 and ~~2016~~2020 (unaudited)	7
	6

Notes to Condensed Consolidated Financial Statements (unaudited)	8-24
	~~7-28~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25-35
	~~29-41~~

Item 3. Quantitative and Qualitative Disclosures ~~about~~About Market Risk	35
	41

Item 4. Controls and Procedures	36

~~41-42~~ PART II. OTHER INFORMATION

Item 1. Legal Proceedings	37


~~PART II. OTHER INFORMATION~~Item 1A. Risk Factors				37

~~Item 1. Legal Proceedings~~			42

~~Item 1A. Risk Factors~~			42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37
	43

Item 3. Defaults Upon Senior Securities	37
	43

Item 4. Mine Safety Disclosures	37
	43

Item 5. Other Information	37
	43

Item 6. Exhibits	38-39
	~~44-45~~
Signatures	40
~~Signatures~~			46

Certifications

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets


	September 30,			December 31,			*September 30,*		*December 31,*
	2017			2016			*2021*		*2020*
(in thousands)	(Unaudited)						(Unaudited)
Assets
Cash and due from banks	$	8,930		$	4,817		$	10,336	$	5,008
Federal funds sold		19,865			25,963			135,825		22,561
Interest bearing deposits		5,528			5,385

Interest-bearing deposits								66,491		41,416
Total cash and cash equivalents		34,323			36,165			212,652		68,985
Securities available for sale		48,744			33,103
Debt securities available for sale								67,124		61,879
Loans held for sale		7,459			3,291			10,976		13,593
Loans, net of allowance for loan losses of $3,072 and $2,876		245,160			222,768
Loans, net of allowance for loan losses of $5,900 and $6,092								476,513		476,661
Federal Home Loan Bank stock		316			220			366		493
Premises and equipment, net		4,935			4,929			8,018		8,248
Right of use operating lease asset								3,310		3,466
Accrued interest receivable		875			798			1,478		1,960
Bank owned life insurance		1,746			1,711
Bank-owned life insurance								12,085		10,685
Other assets		983			956			1,952		1,324

Total assets	$	344,541		$	303,941		$	794,474	$	647,294

Liabilities and Stockholders’ Equity
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing demand deposits	$	70,704		$	61,856
Noninterest-bearing demand deposits							$	219,996	$	162,013
Savings, NOW and money-market deposits		203,131			192,768			448,528		362,147
Time deposits		22,879			20,723			49,817		56,432

Total deposits		296,714			275,347			718,341		580,592
Other borrowings								3,075		0
Official checks		566			632			1,168		1,109
Operating lease liability								3,443		3,580
Other liabilities		934			880			2,798		1,758

Total liabilities		298,214			276,859			728,825		587,039

Stockholders’ equity:
Stockholders' equity:
Preferred stock, undesignated; 1,000,000 shares authorized, none issued or outstanding		—			—			0		0
Common stock, $.01 par value; 9,000,000 shares authorized, 3,101,319 and 2,004,707 issued and outstanding		31			20
Common stock, $.01 par value; 9,000,000 shares authorized, 3,127,730 and 3,119,471 issued and outstanding								31		31
Additionalpaid-in capital		37,770			20,732			38,822		38,568
Retained earnings		8,546			6,563			26,412		20,255
Accumulated other comprehensive loss		(20	)		(233	)

Total stockholders’ equity		46,327			27,082

Total liabilities and stockholders’ equity	$	344,541		$	303,941

Accumulated other comprehensive income								384		1,401
Total stockholders' equity								65,649		60,255
Total liabilities and stockholders' equity							$	794,474	$	647,294

See Accompanying Notes to Condensed Consolidated Financial Statements.

~~PRIME~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)


	Three Months Ended				Nine Months Ended					*Three Months Ended*				*Nine Months Ended*
	September 30,				September 30,					*September 30,*				*September 30,*
(in thousands, except per share amounts)	2017		2016		2017			2016		*2021*		*2020*		*2021*			*2020*
Interest income:
Loans	$	3,025	$	2,573	$	8,498		$	7,294	$	5,819	$	5,101	$	17,256		$	14,374
Securities		252		156		709			538		283		311		794			1123
Other		114		26		271			74		78		43		192			337

Total interest income		3,391		2,755		9,478			7,906		6,180		5,455		18,242			15,834

Interest expense:
Deposits		326		205		829			598		502		710		1,539			2,346
Other borrowings		—		1		—			1		25		0		32			31

Total interest expense		326		206		829			599		527		710		1,571			2,377

Net interest income		3,065		2,549		8,649			7,307		5,653		4,745		16,671			13,457
Provision for loan losses		32		108		187			412

Net interest income after provision for loan losses		3,033		2,441		8,462			6,895

Non-interest income:
Provision (credit) for loan losses											0		621		(185	)		2,484
Net interest income after provision (credit) for loan losses											5,653		4,124		16,856			10,973
Noninterest income:
Service charges and fees on deposit accounts		80		74		241			174		61		48		170			156
Mortgage banking revenue		275		260		943			637
Income from bank owned life insurance		12		12		35			37
(Loss) gain on sale of securities available for sale		—		—		(1	)		102
Debit card/ATM revenue, net											108		91		341			251
Mortgage banking revenue, net											325		224		958			591
Income from bank-owned life insurance											73		40		203			120
Gain on sale of debt securities available for sale											0		0		108			0
Other income		88		69		258			206		46		167		125			233

Totalnon-interest income		455		415		1,476			1,156

Non-interest expense:
Total noninterest income											613		570		1,905			1,351
Noninterest expense:
Salaries and employee benefits		1,248		1,062		3,734			3,006		2,028		1,498		5,685			4,662
Occupancy and equipment		247		209		727			624		380		377		1,144			1,096
Professional fees		90		81		235			285		103		89		353			263
Advertising		129		94		440			361
Marketing											197		97		536			398
FDIC assessment		35		36		123			102		78		68		197			187
Software maintenance, amortization and other		132		125		394			375		237		205		738			599
Other		321		304		977			863		480		415		1,425			1,301

Totalnon-interest expense		2,202		1,911		6,630			5,616

Total noninterest expense											3,503		2,749		10,078			8,506
Earnings before income taxes		1,286		945		3,308			2,435		2,763		1,945		8,683			3,818
Income taxes		464		335		1,185			861		664		464		2,088			901

Net earnings	$	822	$	610	$	2,123		$	1,574	$	2,099	$	1,481	$	6,595		$	2,917

Earnings per common share:
Basic	$	0.26	$	0.31	$	0.83		$	0.79	$	0.67	$	0.47	$	2.11		$	0.92
Diluted		0.26		0.31		0.83			0.79		0.67		0.47		2.10			0.92
Cash dividends per common share⁽¹⁾		—		—		0.07			0.05
Cash dividends per common share											0		0		0.14			0.12

⁽¹⁾	~~Annual cash dividends were paid during the first quarters of 2016 and 2017~~

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

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


	Three Months Ended						Nine Months Ended						*Three Months Ended*						*Nine Months Ended*
	September 30,						September 30,						*September 30,*						*September 30,*
(in thousands)	2017			2016			2017			2016			*2021*			*2020*			*2021*			*2020*
Net earnings	$	822		$	610		$	2,123		$	1,574		$	2,099		$	1,481		$	6,595		$	2,917
Other comprehensive income (loss):
Change in unrealized (loss) gain on securities:
Other comprehensive (loss) income:
Change in unrealized gain on debt securities available for sale:
Unrealized (loss) gain arising during the period		5			(64	)		338			593			(430	)		79			(1,255	)		1,626
Reclassification adjustment for realized loss (gain)		—			—			1			(102	)

Reclassification adjustment for realized gain														0			0			(108	)		0
Net change in unrealized (loss) gain		5			(64	)		339			491			(430	)		79			(1,363	)		1,626
Deferred income (taxes) benefit on above change		(2	)		24			(126	)		(181	)

Total other comprehensive income (loss)		3			(40	)		213			310

Deferred income tax benefit (expense) on above change														109			(21	)		346			(412	)
Total other comprehensive (loss) income														(321	)		58			(1,017	)		1,214
Comprehensive income	$	825		$	570		$	2,336		$	1,884		$	1,778		$	1,539		$	5,578		$	4,131

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of ~~Stockholders’~~Stockholders' Equity

Three and Nine Months ~~Ended~~ended September 30, ~~2017~~2021 and ~~2016~~2020

            Accumulated ��
            Other
            Compre-
         Additional    hensive Total
   Common Stock    Paid-in    Retained Income Stockholders’
   Shares    Amount    Capital    Earnings (Loss) Equity
(in thousands)
Balance at December 31, 2015
   1,975,329    $ 20    $ 20,415    $ 4,442 $ 56 $ 24,933
Net earnings for the nine months ended September 30, 2016 (unaudited)
   —      —      —      1,574 —   1,574
Dividends paid (unaudited)
   —      —      —      (99 ) —   (99 )
Net change in unrealized gain on securities available for sale, net of income taxes (unaudited)
   —      —      —      —   310 310
Stock options exercised (unaudited)
   7,500    —      82    —   —   82
Common stock issued as compensation to directors (unaudited)
   2,857    —      40    —   —   40
Stock based compensation (unaudited)
   —      —      1    —   —   1








Balance at September 30, 2016 (unaudited)
   1,985,686    $ 20    $ 20,538    $ 5,917 $         366 $ 26,841








Balance at December 31, 2016
   2,004,707    $ 20    $ 20,732    $ 6,563 $ (233 ) $ 27,082
Net earnings for the nine months ended September 30, 2017 (unaudited)
   —      —      —      2,123 —   2,123
Dividends paid (unaudited)
   —      —      —      (140 ) —   (140 )
Net change in unrealized loss on securities available for sale, net of income taxes (unaudited)
   —      —      —      —   213 213
Stock options exercised (unaudited)
   2,600    —      26    —   —   26
Common stock issued as compensation to directors (unaudited)
   3,104    —      51    —   —   51
Sale of common stock (unaudited) net of stock offering costs of $1,043
   1,090,908    11    16,946    —   —   16,957
Stock based compensation (unaudited)
   —      —      15    —   —   15








Balance at September 30, 2017 (unaudited)
   3,101,319    $           31    $    37,770    $      8,546 $ (20 ) $    46,327

~~See Accompanying Notes to Condensed Consolidated Financial Statements~~

													Accumulated
							*Additional*						*Other*		*Total*
	*Common Stock*						*Paid-in*			*Retained*			*Comprehensive*		*Stockholders'*
	*Shares*			*Amount*			*Capital*			*Earnings*			*Income*		*Equity*
(dollars in thousands)
*Balance at December 31, 2019*		3,191,288		$	32		$	39,456		$	16,180		$	200	$	55,868
Net earnings for the three months ended March 31, 2020 (unaudited)		-			0			0			716			0		716
Dividends paid (unaudited)		-			0			0			(383	)		0		(383	)
Net change in unrealized gain on debt securities available for sale, net of income tax expense (unaudited)		-			0			0			0			611		611
Stock options exercised (unaudited)		2,000			0			25			0			0		25
Common stock retirement (unaudited)		(82,784	)		(1	)		(1,216	)		0			0		(1,217	)
Common stock issued as compensation to directors (unaudited)		995			0			20			0			0		20
Issuance of restricted stock (unaudited)		3,835			0			0			0			0		0
Stock-based compensation (unaudited)		-			0			51			0			0		51
*Balance at March 31, 2020 (unaudited)*		3,115,334		$	31		$	38,336		$	16,513		$	811	$	55,691
Net earnings for the three months ended June 30, 2020 (unaudited)		-			0			0			720			0		720
Net change in unrealized gain on debt securities available for sale, net of income tax expense (unaudited)		-			0			0			0			545		545
Common stock issued as compensation to directors (unaudited)		1,165			0			21			0			0		21
Stock-based compensation (unaudited)		-			0			55			0			0		55
*Balance at June 30, 2020 (unaudited)*		3,116,499		$	31		$	38,412		$	17,233		$	1,356	$	57,032
Net earnings for the three months ended September 30, 2020 (unaudited)		-		$	0		$	0		$	1,481		$	0	$	1,481
Net change in unrealized gain on debt securities available for sale, net of income tax expense (unaudited)		-			0			0			0			58		58
Common stock issued as compensation to directors (unaudited)		1,343			0			25			0			0		25
Stock-based compensation (unaudited)		-			0			55			0			0		55
*Balance at September 30, 2020 (unaudited)*		3,117,842		$	31		$	38,492		$	18,714		$	1,414	$	58,651

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders' Equity

Three and Nine Months ended September 30, 2021 and 2020

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Retained

Comprehensive

Stockholders'

Shares

Amount

Capital

Earnings

Income

Equity

(dollars in thousands)

Balance at December 31, 2020
3,119,471 $ 31 $ 38,568 $ 20,255 $ 1,401 $ 60,255
Net earnings for the three months ended March 31, 2021 (unaudited)
- 0 0 2,234 0 2,234
Dividends paid (unaudited)
- 0 0 (438 ) 0 (438 )
Net change in unrealized gain on debt securities available for sale, net of income tax benefit (unaudited)
- 0 0 0 (1,003 ) (1,003 )
Stock options exercised (unaudited)
120 0 2 0 0 2
Common stock issued as compensation to directors (unaudited)
1,122 0 22 0 0 22
Issuance of restricted stock (unaudited)
4,081 0 0 0 0 0
Stock-based compensation (unaudited)
- 0 57 0 0 57
Balance at March 31, 2021 (unaudited)
3,124,794 $ 31 $ 38,649 $ 22,051 $ 398 $ 61,129
Net earnings for the three months ended June 30, 2021 (unaudited)
- 0 0 2,262 0 2,262
Net change in unrealized gain on debt securities available for sale, net of income tax expense (unaudited)
- 0 0 0 307 307
Common stock issued as compensation to directors (unaudited)
1,680 0 33 0 0 33
Stock-based compensation (unaudited)
- 0 56 0 0 56
Balance at June 30, 2021 (unaudited)
3,126,474 $ 31 $ 38,738 $ 24,313 $ 705 $ 63,787
Net earnings for the three months ended September 30, 2021 (unaudited)
- 0 0 2,099 0 2,099
Net change in unrealized gain on debt securities available for sale, net of income tax expense (unaudited)
- 0 0 0 (321 ) (321 )
Stock options exercised (unaudited)
30 0 1 0 0 1
Common stock issued as compensation to directors (unaudited)
1,226 0 26 0 0 26
Stock-based compensation (unaudited)
- 0 57 0 0 57
Balance at September 30, 2021 (unaudited)
3,127,730 $ 31 $ 38,822 $ 26,412 $ 384 $ 65,649

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flow ~~(Unaudited)~~(Unaudited)

   Nine Months Ended
   September 30,
(in thousands)    2017 2016
Cash flows from operating activities:

Net earnings
   $ 2,123 $ 1,574
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

Depreciation and amortization
   390 395
Provision for loan losses
   187 412
Net amortization of deferred loan fees
   (118 ) (1 )
Loss (gain) on sale of securities available for sale
   1 (102 )
Amortization of premiums and discounts on securities available for sale
   310 332
Gain on sale of loans held for sale
   (822 ) (558 )
Proceeds from the sale of loans held for sale
   48,919 33,268
Loans originated as held for sale
   (52,265 ) (33,513 )
Stock issued as compensation
   51 40
Stock based compensation expense
   15 1
Income from bank owned life insurance
   (35 ) (37 )
Net increase in accrued interest receivable
   (77 ) (13 )
Net (increase) decrease in other assets
   (153 ) 205
Net (decrease) increase in other liabilities and official checks
   (12 ) 429


Net cash (used in) provided by operating activities
   (1,486 ) 2,432


Cash flows from investing activities:

Loan originations, net of principal repayments
   (22,461 ) (36,103 )
Purchase of securities available for sale
   (20,510 ) (10,416 )
Principal repayments of securities available for sale
   4,099 6,488
Proceeds from sale of securities available for sale
   750 8,248
Maturities and calls of securities available for sale
   48 1,290
Purchase of Federal Home Loan Bank stock
   (96 ) (31 )
Purchase of premises and equipment
   (396 ) (826 )


Net cash used in investing activities
   (38,566 ) (31,350 )


Cash flows from financing activities:

Net increase in deposits
   21,367 43,583
Proceeds from stock options exercised
   26 82
Proceeds from sale of common stock, net
   16,957 —
Common stock dividends paid
   (140 ) (99 )


Net cash provided by financing activities
   38,210 43,566


Net (decrease) increase in cash and cash equivalents
   (1,842 ) 14,648
Cash and cash equivalents at beginning of period
   36,165 8,429


Cash and cash equivalents at end of period
   $ 34,323 $ 23,077


Supplemental disclosure of cash flow information

Cash paid during the period for:

Interest
   $ 827 $ 525


Income taxes
   $ 1,223 $ 670


Noncash transaction-

Accumulated other comprehensive loss, net change in unrealized (loss) gain on securities available for sale, net of taxes
   $ 213 $ 310


Nine Months ended September 30,

(in thousands)

2021

2020

Cash flows from operating activities:

Net earnings
$ 6,595 $ 2,917
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

Depreciation and amortization
497 496
Provision (credit) for loan losses
(185 ) 2,484
Net accretion of deferred loan fees
(2,047 ) (179 )
Gain on sale of debt securities available for sale
(108 ) 0
Net amortization of premiums and discounts on debt securities available for sale
238 313
Gain on sale of loans held for sale
(958 ) (591 )
Proceeds from the sale of loans held for sale
155,371 107,456
Loans originated as held for sale
(151,796 ) (115,572 )
Stock-based compensation expense
251 227
Income from bank-owned life insurance
(203 ) (120 )
Net decrease (increase) in accrued interest receivable
482 (742 )
Net change in operating leases
19 19
Net increase in other assets
(282 ) (1,427 )
Net increase in other liabilities and official checks
1,099 1,423
Net cash provided by (used in) operating activities
8,973 (3,296 )
Cash flows from investing activities:

Loan originations, net of principal repayments
2,380 (130,471 )
Purchase of debt securities available for sale
(26,471 ) (13,726 )
Principal repayments of debt securities available for sale
10,815 11,963
Proceeds from sale of debt securities available for sale
5,874 0
Maturities and calls of debt securities available for sale
3,044 3,349
Repurchase (purchase) of Federal Home Loan Bank stock
127 (89 )
Purchase of bank owned life insurance
(1,197 ) 0
Purchase of premises and equipment
(267 ) (962 )
Net cash used in investing activities
(5,695 ) (129,936 )
Cash flows from financing activities:

Net increase in deposits
137,749 116,983
Change in other borrowings
3,075 (1,254 )
Proceeds from stock options exercised
3 25
Common stock retirement
0 (1,217 )
Common stock dividends paid
(438 ) (383 )
Net cash provided by financing activities
140,389 114,154
Net increase (decrease) in cash and cash equivalents
143,667 (19,078 )
Cash and cash equivalents at beginning of period
68,985 75,082
Cash and cash equivalents at end of period
$ 212,652 $ 56,004
Supplemental disclosure of cash flow information

Cash paid during the period:

Interest
$ 1,578 $ 2,399
Income taxes
$ 1,738 $ 1,025
Noncash transactions:

Accumulated other comprehensive income, net change in unrealized (loss) gain on debt securities available for sale, net of taxes
$ (1,017 ) $ 1,214
Loans transferred to other real estate owned
$ 0 $ 234

See Accompanying Notes to Condensed Consolidated Financial Statements.
~~(continued)~~

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed ~~Consolidated~~Consolidated Financial Statements ~~(unaudited)~~(unaudited)

~~(1)~~
(1)
General
Prime Meridian Holding Company (“PMHG”) owns 100% of the outstanding common stock of Prime Meridian Bank (the ~~“Bank”~~"Bank") (collectively the ~~“Company”~~"Company"). PMHG’s primary activity is the operation of the Bank. The Bank is a Florida state-chartered commercial bank, and the deposit accounts of the Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation ~~(“FDIC”~~("FDIC"). The Bank offers a variety of community banking services to individual and corporate clients through its ~~three~~four banking offices located in Tallahassee, Crawfordville, and ~~Crawfordville,~~Lakeland, Florida and its online banking platform.
The accounting and financial reporting policies of the Company ~~follows~~ conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the banking industry. The condensed consolidated financial statements in the Quarterly Report on Form~~10-Q~~10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all necessary adjustments for a fair presentation of the Company’s condensed consolidated financial position and condensed consolidated results of operations. All adjustments were of a normal and recurring nature. The condensed consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form~~10-Q~~10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by GAAP for complete financial presentation and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2016,~~2020, included in our Annual Report on Form~~10-K~~10-K filed with the SEC on March ~~21, 2017.~~22, 2021. The results of operations for the three and nine months ended September 30, ~~2017~~2021 are not necessarily indicative of the results to be expected for the full year or any future period.
Comprehensive ~~Income.~~Income. GAAP generally requires that recognized revenue, expenses, gains and losses be included in earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on~~available-for-sale~~ debt securities available for sale, are reported as a separate component of the equity section of the condensed consolidated balance sheet, such items along with net earnings, are components of comprehensive income. The only component of other comprehensive income (loss) is the net change in the unrealized gain (loss) on ~~the~~debt securities available for sale.
~~Stock~~
Stock-Based Compensation.The Company expenses the fair value of stock options and restricted stock granted. The Company recognizes ~~stock option~~stock-based compensation expense in the condensed consolidated ~~statement~~statements of earnings asover the ~~options vest.~~vesting period.
Mortgage Banking Revenue.Mortgage banking revenue includes gains and losses on the sale of mortgage loans originated for sale and wholesale brokerage ~~fees.~~fees, net of commissions and deferred loan costs. The Company recognizes mortgage banking revenue from mortgage loans originated in the condensed consolidated statements of earnings upon sale of the loans.
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes~~
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 ~~Condensed Consolidated Financial Statements (unaudited)~~the card-issuing bank through the interchange network. Interchange fees are set by the credit card associations and based on cardholder purchase volumes and purchase types. Also included in debit card/ATM revenue are ATM foreign fee income and ATM non-client ACH credits. This revenue line is shown net of debit card fees and ATM program expenses.

~~(1)~~ ~~General, Continued~~
Reclassifications. Certain reclassifications of prior period amounts have been made to conform to the current period presentation.

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.
Recent Accounting Standards Update.
In ~~January~~June 2016, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") issued Accounting Standards Update ~~(“ASU”~~("ASU")No. ~~2016-01,~~~~Financial Instruments-Overall (Subtopic825-10):~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities,~~which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings, (public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes), simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. The ASU also clarifies that the Company should evaluate the need for a valuation allowance on a deferred tax asset related to~~available-for-sale~~ debt securities in combination with the Company’s other deferred tax assets. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
~~In February~~ 2016 ~~the FASB issued ASUNo. 2016-2,~~~~Leases (Topic 842)~~ which will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with term of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. The new ASU will require both types of leases to be recognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of determining the effect of the ASU on its condensed consolidated financial statements. Early adoption is permitted.
~~In March 2016, the FASB issued ASUNo. 2016-09,~~~~Compensation-Stock Compensation (Topic 718)~~ intended to improve the accounting for employee share-based payments. The ASU affects all organizations that issue share-based payment awards to their employees. The ASU simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the consolidated statement of cash flows. For public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The effect of the ASU on the Company’s condensed consolidated financial statements was not significant.
~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(1)~~ ~~General, Continued~~
~~In September 2016, the FASB issued ASUNo. 2016-13,~~-13,Financial Instruments-Credit Losses (Topic ~~326)~~326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The Company will continue to use judgment to determine which loss estimation method is appropriate for ~~their~~its circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an ~~organization’s~~organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the condensed consolidated financial statements. Additionally, the ASU amends the accounting for credit losses on~~available-for-sale~~ debt securities available for sale and purchased financial assets with credit deterioration. The new guidance iswas originally set to be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. ~~Early adoption is permitted.~~However, on October 16, 2019, FASB approved an ASU that grants private companies, non-for-profit organizations and certain small public companies until January, 2023 to implement this ASU. The Company is classified as a small reporting company who would qualify for this additional time to implement this ASU. The Company is still in the process of determining the effect of the ASU on its condensed consolidated financial statements.
~~In January 2017, the FASB issuedASU No. 2017-01, Business~~ Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting the new guidance on the condensed consolidated financial statements, but it is not expected to have a material impact.
~~In March 2017, the FASB issued ASUNo. 2017-08,~~ “Premium Amortization on Purchased Callable Debt Securities”, to amend the amortization period for certain purchased callable debt securities held at a premium. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The amendments in this update require the premium to be amortized to the earliest call date. No accounting change is required for securities held at a discount. For public business entities, the amendments in this update become effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has adhered to this practice since its inception.

(continued)
8
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

~~(2)~~
(2)
Debt Securities Available for Sale

~~Securities~~Debt securities are classified according to ~~management’s~~management's intent. The ~~carrying amount~~amortized cost of debt securities and fair values are as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses    Fair Value
Cost

Gains

Losses

Value

(in thousands)
At September 30, 2017

At September 30, 2021

U.S. Government agency securities
   $ 1,252    $ 5    $ (1 )    $ 1,256 $ 986 $ 0 $ (4 ) $ 982
Municipal securities
   12,408    170    (68 )    12,510 16,481 346 (191 ) 16,636
Mortgage-backed securities
   35,115    52    (189 )    34,978 44,407 599 (272 ) 44,734








Asset-backed securities
4,735 42 (5 ) 4,772
Total
   $ 48,775    $ 227    $ (258 )    $   48,744 $ 66,609 $ 987 $ (472 ) $ 67,124








At December 31, 2016

At December 31, 2020

U.S. Government agency securities
   $ 2,186    $ 2    $ (17 )    $ 2,171 $ 170 $ 2 $ 0 $ 172
Municipal securities
   12,614    91    (282 )    12,423 15,500 626 0 16,126
Mortgage-backed securities
   18,673    36    (200 )    18,509 39,151 1,300 (13 ) 40,438








Asset-backed securities
5,180 9 (46 ) 5,143
Total
   $ 33,473    $ 129    $ (499 )    $ 33,103 $ 60,001 $ 1,937 $ (59 ) $ 61,879








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

   Three Months Ended
September 30,    Nine Months Ended
September 30,
(in thousands)    2017    2016    2017    2016
Proceeds from sale of securities
   $      —      $   —      $      750    $   8,248
Gross gains
   —      —      —      102
Gross losses
   —      —      (1 )    —








Net (loss) gain on sale of securities
   $ —      $ —      $ (1 )    $ 102








~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in thousands)

2021

2020

2021

2020

Proceeds from sale of debt securities
$ 0 $ 0 $ 5,874 $ 0
Gross gains
0 0 108 0
Gross losses
0 0 0 0
Net gain on sale of debt securities
$ 0 $ 0 $ 108 $ 0

~~(2)~~ ~~Securities Available for Sale, Continued~~
~~Securities~~Debt securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

Less Than Twelve Months

Over Twelve Months

Gross

Gross

   Less Than Twelve Months    Over Twelve Months
Unrealized

Fair

Unrealized

Fair

   Gross
Unrealized
Losses    Fair Value    Gross
Unrealized
Losses    Fair Value
Losses

Value

Losses

Value

(in thousands)
At September 30, 2017

Securities Available for Sale

At September 30, 2021

U.S. Government agency securities
   $ (1 )    $ 701    $ —      $ —   $ (4 ) $ 963 $ - $ -
Municipal securities
   (42 )    2,695    (26 )    898 (191 ) 7,393 - -
Mortgage-backed securities
   (181 )    21,573    (8 )    374 (272 ) 20,415 - -








Asset-backed securities
- - (5 ) 1,484
Total
   $ (224 )    $   24,969    $ (34 )    $     1,272 $ (467 ) $ 28,771 $ (5 ) $ 1,484








At December 31, 2016

Securities Available for Sale

U.S. Government agency securities
   $ (17 )    $ 1,529    $        —      $ —
Municipal securities
   (282 )    6,111    —      —
At December 31, 2020

Mortgage-backed securities
   (191 )    12,709    (9 )    501 $ (5 ) $ 992 $ (8 ) $ 767








Asset-backed securities
- - (46 ) 3,494
Total
   $ (490 )    $ 20,349    $ (9 )    $ 501 $ (5 ) $ 992 $ (54 ) $ 4,261








(continued)
9
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

~~(2)~~
(2)
Debt Securities Available for Sale, Continued
The unrealized losses at September 30, ~~2017~~2021 and December 31, ~~2016~~2020 on ~~twenty-three~~19 and ~~twenty-four~~7 securities, respectively, were caused by market conditions. It is expected that the securities would not be settled at a price less than the par value of the investments. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these investments until a market price recovery or maturity, these investments are not considered other-than-temporarily impaired. ~~Securities~~Debt securities available for sale measured at fair value on a recurring basis are summarized below:

Fair Value Measurements Using

Quoted Prices

In Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

      Fair Value Measurements Using
Fair

Assets

Inputs

Inputs

   Fair Value    Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)    Significant
Other
Observable
Inputs
(Level 2)    Significant
Unobservable
Inputs
(Level 3)
Value

(Level 1)

(Level 2)

(Level 3)

(in thousands)
At September 30, 2017

At September 30, 2021

U.S. Government agency securities
   $ 1,256    $ —      $ 1,256    $ —   $ 982 $ 0 $ 982 $ 0
Municipal securities
   12,510    —      12,510    —   16,636 0 16,636 0
Mortgage-backed securities
   34,978    —      34,978    —   44,734 0 44,734 0








Asset-backed securities
4,772 0 4,772 0
Total
   $     48,744    $ —      $ 48,744    $ —   $ 67,124 $ 0 $ 67,124 $ 0








At December 31, 2016

At December 31, 2020

U.S. Government agency securities
   $ 2,171    $ —      $ 2,171    $ —   $ 172 $ 0 $ 172 $ 0
Municipal securities
   12,423    —      12,423    —   16,126 0 16,126 0
Mortgage-backed securities
   18,509    —      18,509    —   40,438 0 40,438 0








Asset-backed securities
5,143 0 5,143 0
Total
   $ 33,103    $ —      $     33,103    $ —   $ 61,879 $ 0 $ 61,879 $ 0








~~During the three and nine months ended September 30, 2017 and 2016, no securities were transferred in or out of Level 1, Level 2 or Level 3.~~
The scheduled maturities of debt securities are as follows:

At September 30, 2021

   At September 30, 2017
Amortized

Fair

   Amortized
Cost    Fair Value
Cost

Value

(in thousands)
Due in less than one year
$ 20 $ 20
Due in one to five years
   $ 2,976    $ 2,959 324 344
Due in five to ten years
   7,899    8,048 10,752 10,714
Due after ten years
   2,785    2,759 11,106 11,312
Mortgage-backed securities
   35,115    34,978 44,407 44,734




Total
   $     48,775    $     48,744 $ 66,609 $ 67,124




(continued)
10
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(3)
Loans
Segments and classes of loans, excluding loans held for sale, are as follows:

(in thousands)

At September 30, 2021

At December 31, 2020

Real estate mortgage loans:

Commercial
$ 140,961 $ 133,473
Residential and home equity
181,031 158,120
Construction
60,395 44,466
Total real estate mortgage loans
382,387 336,059

Commercial loans
93,900 141,542
Consumer and other loans
7,347 6,312
Total loans
483,634 483,913

Add (deduct):

Net deferred loan fees
(1,221 ) (1,160 )
Allowance for loan losses
(5,900 ) (6,092 )
Loans, net
$ 476,513 $ 476,661
(continued)
11
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

~~(3)~~
(3)
Loans, Continued

~~The composition of the Company’s loan portfolio, excluding loans held for sale, was the following for the periods presented below:~~

(in thousands)        At September 30,
2017    At December 31,
2016
Real estate mortgage loans:

Commercial
   $ 77,084    $ 65,805
Residential and home equity
   94,145    88,883
Construction
   23,366    19,991




Total real estate mortgage loans
   194,595    174,679
Commercial loans
   46,193    46,340
Consumer and other loans
   6,976    4,275




Total loans
   247,764    225,294
Add (deduct):

Net deferred loan costs
   468    350
Allowance for loan losses
   (3,072 )    (2,876 )




Loans, net
   $   245,160    $   222,768




~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(3)~~ ~~Loans, Continued~~
An analysis of the change in allowance for loan losses follows:

Real Estate Mortgage Loans

Residential

Consumer

   Real Estate Mortgage Loans
and Home

Commercial

and Other

Unallocated

(in thousands)    Commercial    Residential
and Home
Equity Construction Commercial
Loans Consumer
and Other
Loans Total
Commercial

Equity

Construction

Loans

Loans

Reserves

Total

Three-Month Period Ended September 30, 2017

Three Month Period Ended September 30, 2021

Beginning balance
   $ 811    $ 1,108 $ 338 $ 712 $ 59 $ 3,028 $ 1,532 $ 1,987 $ 538 $ 1,202 $ 79 $ 561 $ 5,899
Provision (credit) for loan losses
   49    (18 ) (51 ) 28 24 32 50 118 190 (16 ) 17 (359 ) 0
Net (charge-offs) recoveries
   —      —   —   12 —   12 0 6 0 0 (5 ) 0 1




Ending balance
   $ 860    $ 1,090 $ 287 $ 752 $ 83 $ 3,072 $ 1,582 $ 2,111 $ 728 $ 1,186 $ 91 $ 202 $ 5,900




Three-Month Period Ended September 30, 2016

Three Month Period Ended September 30, 2020

Beginning balance
   $ 764    $ 1,017 $ 243 $ 686 $ 65 $ 2,775 $ 1,213 $ 1,637 $ 514 $ 1,536 $ 112 $ 236 $ 5,248
Provision (credit) for loan losses
   11    28 32 40 (3 ) 108 208 48 (63 ) 95 10 323 621
Net (charge-offs) recoveries
   —      —   —   (17 ) (3 ) (20 ) 0 0 0 8 (44 ) 0 (36 )




Ending balance
   $ 775    $ 1,045 $ 275 $ 709 $ 59 $ 2,863 $ 1,421 $ 1,685 $ 451 $ 1,639 $ 78 $ 559 $ 5,833




Nine-Month Period Ended September 30, 2017

Nine Month Period Ended September 30, 2021

Beginning balance
   $ 775    $ 1,074 $ 258 $ 714 $ 55 $ 2,876 $ 1,500 $ 1,827 $ 539 $ 1,592 $ 75 $ 559 $ 6,092
Provision (credit) for loan losses
   85    16 29 24 33 187 82 294 189 (425 ) 32 (357 ) (185 )
Net (charge-offs) recoveries
   —      —   —   14 (5 ) 9 0 (10 ) 0 19 (16 ) 0 (7 )




Ending balance
   $ 860    $ 1,090 $ 287 $ 752 $ 83 $ 3,072 $ 1,582 $ 2,111 $ 728 $ 1,186 $ 91 $ 202 $ 5,900




Nine-Month Period Ended September 30, 2016

Nine Month Period Ended September 30, 2020

Beginning balance
   $ 707    $ 868 $ 246 $ 596 $ 56 $ 2,473 $ 1,046 $ 1,573 $ 415 $ 1,284 $ 96 $ 0 $ 4,414
Provision (credit) for loan losses
   68    177 29 130 8 412 375 160 36 1,323 31 559 2,484
Net (charge-offs) recoveries
   —      —   —   (17 ) (5 ) (22 ) 0 (48 ) 0 (968 ) (49 ) 0 (1,065 )




Ending balance
   $ 775    $ 1,045 $ 275 $ 709 $ 59 $ 2,863 $ 1,421 $ 1,685 $ 451 $ 1,639 $ 78 $ 559 $ 5,833




At September 30, 2017

At September 30, 2021

Individually evaluated for impairment:

Recorded investment
   $ —      $ —   $ —   $ 137 $ —   $ 137 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0




Balance in allowance for loan losses
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Collectively evaluated for impairment:

Recorded investment
$ 140,961 $ 181,031 $ 60,395 $ 93,900 $ 7,347 $ 0 $ 483,634
Balance in allowance for loan losses
   $ —      $ —   $ —   $ 137 $ —   $ 137 $ 1,582 $ 2,111 $ 728 $ 1,186 $ 91 $ 202 $ 5,900




At December 31, 2020

Individually evaluated for impairment:

Recorded investment
$ 0 $ 666 $ 0 $ 585 $ 0 $ 0 $ 1,251
Balance in allowance for loan losses
$ 0 $ 0 $ 0 $ 179 $ 0 $ 0 $ 179
Collectively evaluated for impairment:

Recorded investment
   $ 77,084    $ 94,145 $ 23,366 $ 46,056 $ 6,976 $ 247,627 $ 133,473 $ 157,454 $ 44,466 $ 140,957 $ 6,312 $ 0 $ 482,662




Balance in allowance for loan losses
   $ 860    $ 1,090 $ 287 $ 615 $ 83 $ 2,935 $ 1,500 $ 1,827 $ 539 $ 1,413 $ 75 $ 559 $ 5,913




At December 31, 2016

Individually evaluated for impairment:

Recorded investment
   $ —      $ 662 $ 73 $ 76 $ —   $ 811




Balance in allowance for loan losses
   $ —      $ —   $ —   $ 76 $ —   $ 76




Collectively evaluated for impairment:

Recorded investment
   $     65,805    $       88,221 $     19,918 $     46,264 $       4,275 $   224,483




Balance in allowance for loan losses
   $ 775    $ 1,074 $ 258 $ 638 $ 55 $ 2,800




(continued)
12
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)
Loans, Continued

~~(3)~~ ~~Loans, Continued~~
The Company has divided the loan portfolio into three portfolio segments and five portfolio classes, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors. The Company identifies the portfolio segments and classes as follows:
Real Estate Mortgage Loans. Real estate mortgage loans are typically divided into three classes: commercial, residential and home equity, and construction loans.
Commercial.Loans of this type are typically our more complex loans. This category of real estate loans is comprised of loans secured by mortgages on commercial property that are typically owner-occupied, but also includes~~non-owner~~ ~~occupied~~ nonowner-occupied investment properties. Commercial loans that are secured by owner-occupied commercial real estate are repaid through operating cash flows of the borrower. The maturity for this type of loan is generally limited to three to five years; however, payments may be structured on a longer amortization basis. Typically, interest rates on our commercial real estate loans are fixed for five years or less after which they adjust based upon a predetermined spread over a market index rate. At times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, the Company typically requires personal guarantees from the principal owners of the business supported by a review of the principal owners’ personal financial statements and tax returns. As part of the enterprise risk management process, it is understood that risks associated with commercial real estate loans include fluctuations in real estate values, the overall strength of the borrower and the economy, new job creation trends, tenant vacancy rates, environmental contamination, and the quality of the borrowers’ management. In order to mitigate and limit these risks, we analyze the borrowers’ cash flows and evaluate collateral value. Currently, the collateral securing our commercial real estate loans includes a variety of property types, such as office, warehouse, and retail facilities. Other types include multifamily properties, hotels,mixed-use residential and commercial properties. Generally, commercial real estate loans present a higher risk profile than our consumer real estate loan portfolio.
Residential and Home Equity. The Company offers first and second~~one-to-four~~one-to-four family mortgage loans and home equity lines of credit; the collateral for these loans is generally the ~~clients’~~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’~~borrowers' financial condition. The nonowner-occupied investment properties are more similar in risk to commercial real estate loans, and therefore, are underwritten by assessing the property’s income potential and appraised value. In both cases, we underwrite the borrower’s financial condition and evaluate his or her global cash flow position. Borrowers may be affected by numerous factors, including job loss, illness, or other personal hardship. As part of our product mix, the Bank offers both portfolio and secondary market mortgages; portfolio loans generally are based on a~~1-year,3-year,5-year,~~ 1-year, 3-year, 5-year, 7-year, or~~7-year~~ 10-year adjustable rate mortgage; while15-year or30-year fixed-rate loans are generally sold in the secondary market.
~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(3)~~ ~~Loans, Continued~~

Construction. Typically, these loans have a construction period of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to a term loan with a maturity of one to ten years. This portion of our loan portfolio includes loans to small and midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties, and residential developments. This type of loan is also made to individual clients for construction of ~~single family~~single-family homes in our market area. An independent appraisal is used to determine the value of the collateral and confirm that the ratio of the loan principal to the value of the collateral will not exceed policies of the Bank. As the construction project progresses, loan proceeds are requested by the borrower to complete phases of construction and funding is only disbursed after the project has been inspected by a ~~third-party~~third-party inspector or experienced construction lender. Risks associated with construction loans include fluctuations in the value of real estate, project completion risk, and changes in market trends. The ability of the construction loan borrower to finance the loan or sell the property upon completion of the project is another risk factor that also may be affected by changes in market trends since the initial funding of the loan.
Commercial Loans. The ~~Bank~~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, including Paycheck Protection Program ("PPP") loans.Small-to-medium sized businesses, retail, and professional establishments, make up our target market for commercial loans. Our Relationship Managers primarily underwrite these loans based on the ~~borrower’s~~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~~"all business assets,”" or a ~~“blanket lien”~~"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~~-party physical inspection. Personal guarantees of the principals of business borrowers are usually required. Equipment loans generally have a term of five years or less and may have a fixed or variable rate; we use conservative margins when pricing these loans. Working capital loans generally do not exceed one year and typically, they are secured by accounts receivable, inventory, and personal guarantees of the principals of the business. The Bank currently offers SBA 504 and SBA 7A loans. SBA 504 loans provide financing for major fixed assets such as real estate and equipment while SBA 7A loans are generally used to establish a new business or assist in the acquisition, operation, or expansion of an existing business. With both SBA loan programs, there are set eligibility requirements and underwriting standards outlined by SBA that can change as the government alters its fiscal policy. Significant factors affecting a commercial ~~borrower’s~~borrower's creditworthiness include the quality of management and the ability both to evaluate changes in the supply and demand characteristics affecting the ~~business’~~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.
~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(3)~~ ~~Loans, Continued~~
Other factors of risk could include changes in the ~~borrower’s~~borrower's management and fluctuations in collateral value. Additionally, there may be refinancing risk if a commercial loan includes a balloon payment which must be refinanced or paid off at loan maturity. In reference to our risk management process, our commercial loan portfolio presents a higher risk profile than our consumer real estate and consumer loan portfolios. Therefore, we require that all loans to businesses must have a clearly stated and reasonable payment plan to allow for timely retirement of debt, unless secured by liquid collateral or as otherwise justified.
(continued)
13
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(3)
Loans, Continued
~~Consumer~~ Consumer and Other ~~Loans.~~ Loans. These loans are made for various consumer purposes, such as the financing of automobiles, boats, and recreational vehicles. The payment structure of these loans is normally on an installment basis. The risk associated with this category of loans stems from the reduced collateral value for a defaulted loan; the collateral may not provide an adequate source of repayment of the principal. The underwriting on these loans is primarily based on the ~~borrower’s~~borrower's financial condition. In many cases, these are unsecured credits that subject us to risk when the ~~borrower’s~~borrower's financial condition declines or deteriorates. Based upon our current trend in consumer loans, management does not anticipate consumer loans will become a substantial component of our loan portfolio at any time in the foreseeable future. Consumer loans are made at fixed and variable interest rates and are based on the appropriate amortization for the asset and purpose.
The following summarizes the loan credit quality:

   Real Estate Mortgage Loans
(in thousands)    Commercial    Residential
and Home
Equity    Construction    Commercial
Loans    Consumer
and Other
Loans    Total
At September 30, 2017

Grade:

Pass
   $ 72,027    $ 91,598    $ 22,909    $ 44,549    $ 6,948    $ 238,031
Special mention
   5,057    2,381    298    1,069    28    8,833
Substandard
   —      166    159    575    —      900
Doubtful
   —      —      —      —      —      —
Loss
   —      —      —      —      —      —












Total
   $ 77,084    $ 94,145    $ 23,366    $ 46,193    $ 6,976    $ 247,764












At December 31, 2016

Grade:

Pass
   $ 61,734    $ 84,695    $ 19,485    $ 45,623    $ 4,227    $ 215,764
Special mention
   4,071    3,152    333    250    46    7,852
Substandard
   —      1,036    173    467    2    1,678
Doubtful
   —      —      —      —      —      —
Loss
   —      —      —      —      —      —












Total
   $     65,805    $     88,883    $     19,991    $       46,340    $       4,275    $   225,294












~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(3)~~ ~~Loans, Continued~~

Real Estate Mortgage Loans

Residential

Consumer

and Home

Commercial

and Other

(in thousands)

Commercial

Equity

Construction

Loans

Loans

Total

At September 30, 2021

Grade:

Pass
$ 138,004 $ 179,255 $ 60,276 $ 93,739 $ 7,296 $ 478,570
Special mention
2,957 1,776 119 125 51 5,028
Substandard
0 0 0 36 0 36
Doubtful
0 0 0 0 0 0
Loss
0 0 0 0 0 0
Total
$ 140,961 $ 181,031 $ 60,395 $ 93,900 $ 7,347 $ 483,634

At December 31, 2020

Grade:

Pass
$ 130,846 $ 156,985 $ 43,622 $ 140,370 $ 6,278 $ 478,101
Special mention
2,627 469 844 405 34 4,379
Substandard
0 666 0 767 0 1,433
Doubtful
0 0 0 0 0 0
Loss
0 0 0 0 0 0
Total
$ 133,473 $ 158,120 $ 44,466 $ 141,542 $ 6,312 $ 483,913

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Furthermore, construction loans,~~non-owner~~ ~~occupied~~ nonowner-occupied commercial real estate loans, and commercial loan relationships in excess of $500,000 are reviewed at least annually. The Company determines the appropriate loan grade during the renewal process and reevaluates the loan grade in situations when a loan becomes past due.
Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the client contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or evencharged-off. The Company uses the following definitions for risk ratings:
Pass – A Pass ~~loan’s~~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~~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~~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.
~~At September 30, 2017, there was one nonaccrual loan, totaling $60,000.~~

(continued)
14
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)
Loans, Continued

~~(3)~~ ~~Loans, Continued~~
Age analysis of past due loans is as follows:

Accruing Loans

Greater Than

   Accruing Loans
30-59 Days

60-89 Days

90 Days

Total Past

Nonaccrual

Total

(in thousands)    30-59 Days
Past Due    60-89 Days
Past Due    Greater Than
90 Days
Past Due    Total Past
Due    Current    Nonaccrual
Loans    Total Loans
Past Due

Past Due

Past Due

Due

Current

Loans

Loans

At September 30, 2017:

At September 30, 2021

Real estate mortgage loans:

Commercial
   $ 626    $ —      $ —      $ 626    $ 76,458    $ —      $ 77,084 $ 0 $ 0 $ 0 $ 0 $ 140,961 $ 0 $ 140,961
Residential and home equity
   —      —      —      —      94,145    —      94,145 0 0 0 0 181,031 0 181,031
Construction
   —      —      —      —      23,366    —      23,366 0 82 0 82 60,313 0 60,395
Commercial loans
   —      —      —      —      46,133    60    46,193 444 0 0 444 93,456 0 93,900
Consumer and other loans
   —      —      —      —      6,976    —      6,976 0 0 0 0 7,347 0 7,347














Total
   $ 626    $ —      $ —      $ 626    $ 247,078    $ 60    $ 247,764 $ 444 $ 82 $ 0 $ 526 $ 483,108 $ 0 $ 483,634














At December 31, 2016:

At December 31, 2020

Real estate mortgage loans:

Commercial
   $ —      $ —      $ —      $ —      $ 65,805    $ —      $ 65,805 $ 0 $ 0 $ 0 $ 0 $ 133,473 $ 0 $ 133,473
Residential and home equity
   371    —      —      371    87,850    662    88,883 536 0 0 536 156,918 666 158,120
Construction
   —      —      —      —      19,918    73    19,991 195 0 0 195 44,271 0 44,466
Commercial loans
   —      —      —      —      46,264    76    46,340 0 0 0 0 140,957 585 141,542
Consumer and other loans
   —      —      —      —      4,275    —      4,275 0 0 0 0 6,312 0 6,312














Total
   $ 371    $ —      $ —      $ 371    $   224,112    $ 811    $   225,294 $ 731 $ 0 $ 0 $ 731 $ 481,931 $ 1,251 $ 483,913














(continued)
15
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

~~(3)~~
(3)
Loans, Continued

There were 0 impaired loans at September 30,2021.The following table summarizes the amount of impaired ~~loans:~~loans at December 31, 2020:

With No Related

Allowance Recorded

With an Allowance Recorded

Total

Unpaid

Unpaid

Unpaid

Contractual

Contractual

Contractual

   With No Related
Allowance Recorded    With an Allowance Recorded    Total
Recorded

Principal

Recorded

Principal

Related

Recorded

Principal

Related

(in thousands)    Recorded
Investment    Unpaid
Contractual
Principal
Balance    Recorded
Investment    Unpaid
Contractual
Principal
Balance    Related
Allowance    Recorded
Investment    Unpaid
Contractual
Principal
Balance    Related
Allowance
Investment

Balance

Investment

Balance

Allowance

Investment

Balance

Allowance

At September 30, 2017:

At December 31, 2020

Real estate mortgage loans-

Residential and home equity
$ 666 $ 666 $ 0 $ 0 $ 0 $ 666 $ 666 $ 0
Commercial loans
   $ —      $ —      $ 137    $ 137    $ 137    $ 137    $ 137    $ 137 0 0 585 585 179 585 585 179
















Total
   $ —      $ —      $ 137    $ 137    $ 137    $ 137    $ 137    $ 137 $ 666 $ 666 $ 585 $ 585 $ 179 $ 1,251 $ 1,251 $ 179
















At December 31, 2016:

Real estate mortgage loans:

Residential and home equity
   $ 662    $ 662    $ —      $ —      $ —      $ 662    $ 662    $ —
Construction loans
   73    73    —      —      —      73    73    —
Commercial loans
   —      —      76    76    76    76    76    76
















Total
   $ 735    $ 735    $ 76    $ 76    $ 76    $ 811    $ 811    $ 76
















There were no collateral dependent loans measured at fair value on a nonrecurring basis at September 30, 2021 and  December 31, 2020.
The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows:

   Three Months Ended September 30,
   2017    2016
(in thousands)    Average
Recorded
Investment    Interest
Income
Recognized    Interest
Income
Received    Average
Recorded
Investment    Interest
Income
Recognized    Interest
Income
Received
Real estate mortage loans:

Residential and home equity
   $ —      $ 6    $ —      $ 361    $ —      $ —
Construction
   63    1    1    88    —      —
Commercial loans
   22    —      —      1    —      —
Consumer
   —      —      —      7    —      —












Total
   $ 85    $ 7    $ 1    $ 457    $ —      $ —












Three Months Ended September 30,

2021

2020

   Nine Months Ended September 30,
Average

Interest

Interest

Average

Interest

Interest

   2017    2016
Recorded

Income

Income

Recorded

Income

Income

(in thousands)    Average
Recorded
Investment    Interest
Income
Recognized    Interest
Income
Received    Average
Recorded
Investment    Interest
Income
Recognized    Interest
Income
Received
Investment

Recognized

Received

Investment

Recognized

Received

Real estate mortgage loans:

Commercial
$ 0 $ 0 $ 0 $ 27 $ 0 $ 0
Residential and home equity
   $ 375    $ 28    $ 28    $ 119    $ —      $ —   0 0 0 933 0 0
Construction
   66    1    2    91    —      —
Commercial loans
   56    —      —      —      —      —   0 0 0 850 5 5
Consumer
   —      —      —      3    —      —   0 0 0 26 0 0












Total
   $ 497    $ 29    $ 30    $ 213    $ —      $ —   $ 0 $ 0 $ 0 $ 1,836 $ 5 $ 5












~~There were no collateral dependent loans measured at fair value on a nonrecurring basis at September 30, 2017 or September 30, 2016.~~

Nine Months Ended September 30,

2021

2020

Average

Interest

Interest

Average

Interest

Interest

Recorded

Income

Income

Recorded

Income

Income

(in thousands)

Investment

Recognized

Received

Investment

Recognized

Received

Real estate mortgage loans:

Commercial
$ 0 $ 0 $ 0 $ 322 $ 12 $ 11
Residential and home equity
436 0 0 915 0 0
Commercial loans
233 0 0 1,232 12 12
Consumer
0 0 0 17 0 0
Total
$ 669 $ 0 $ 0 $ 2,486 $ 24 $ 23

(continued)
16
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)
Loans, Continued

~~(3)~~ ~~Loans, Continued~~
The restructuring of a loan constitutes a troubled debt restructuring (“TDR”) if the creditor grants a concession to the debtor that it would not otherwise consider in the normal course of business. A concession may include an extension of repayment terms which would not normally be granted, a reduction in interest rate or the forgiveness of principal and/or accrued interest. All TDRs are evaluated individually for impairment on a quarterly basis as part of the allowance for loan losses calculation.
~~For~~ During the ~~three-month periods ended September 30, 2017 and 2016 and~~period of national emergency related to the ~~nine-month period ended September 30, 2016, there were no new loans determined~~COVID-19 pandemic, the banking regulatory agencies have confirmed with FASB that certain short-term loan modifications made in response to the pandemic's effects on borrowers should not be considered to be TDRs. ~~For~~The Company entered into no new TDRs during the ~~nine-month period~~three and nine months ended September 30,2021 and 2020. At September 30, ~~2017, there was one new loan determined to be a TDR.~~

   Nine Months Ended September 30, 2017
(in thousands)    Number of
Contracts    Pre-
Modification
Outstanding
Recorded
Investment    Post-
Modification
Outstanding
Recorded
Investment    Current
Modification
Outstanding
Recorded
Investment
Troubled Debt Restructurings -

Residential and home equity:

Modified principal
   1    $ 153    $ 169    $ 165








Total
               1    $     153    $     169    $     165








~~At September 30, 2017,~~2021, the Company had ~~$225,000 in~~no loans identified as TDRs.

~~(4)~~
(4)
Regulatory Capital
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 certainoff-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.

~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(4)~~ ~~Regulatory Capital, Continued~~
~~Effective January 1, 2015, the~~The Bank ~~became~~is subject to the ~~new~~ Basel III capital level threshold requirements under the Prompt Corrective Action ~~regulations with full compliance with all of the final rule’s requirements phased in over a multi-year schedule.~~regulations. These ~~new~~ regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.
~~Changes that could affect the~~
The Bank going forward include additional constraints on the inclusion of deferred tax assets in capital and increased risk weightings for nonperforming loans and acquisition/development loans in regulatory capital. Under the new regulations in the first quarter of 2015, the Bank elected an irreversible~~one-timeopt-out~~ ~~to exclude accumulated other comprehensive income (loss) from regulatory capital. Beginning January 1, 2016, the Bank became~~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 September 30, ~~2017,~~2021, the Bank’s capital conservation buffer ~~exceeds~~exceeded the minimum ~~requirement designated for September 30, 2017 of 1.25%. The required buffer is to be phased in over three years.~~requirement.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages (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 September 30, ~~2017~~2021, that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, ~~2017,~~2021, 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 following table.

For Capital Adequacy

For Well Capitalized

   Actual For Capital Adequacy
Purposes For Well Capitalized
Purposes
Actual

Purposes

Purposes

(dollars in thousands)    Amount    Percentage Amount    Percentage Amount    Percentage
Amount

Percentage

Amount

Percentage

Amount

Percentage

As of September 30, 2017

As of September 30, 2021

Tier 1 Leverage Capital
   $   32,345    9.38 % $   13,791    4.00 % $   17,238    5.00 % $ 68,218 8.82 % $ 30,940 4.00 % $ 38,675 5.00 %
Common Equity Tier 1 Risk-based Capital
   32,345    12.76 11,407    4.50 16,477    6.50 68,218 13.30 23,087 4.50 33,349 6.50
Tier 1 Risk-based Capital
   32,345    12.76 15,210    6.00 20,280    8.00 68,218 13.30 30,783 6.00 41,044 8.00
Total Risk-based Capital
   35,417    13.97 20,280    8.00 25,350    10.00 74,118 14.45 41,044 8.00 51,305 10.00

As of December 31, 2016

As of December 31, 2020

Tier 1 Leverage Capital
   25,994    8.73 11,906    4.00 14,883    5.00 $ 57,800 9.09 % $ 25,421 4.00 % $ 31,776 5.00 %
Common Equity Tier 1 Risk-based Capital
   25,994    11.70 9,995    4.50 14,437    6.50 57,800 13.29 19,575 4.50 28,275 6.50
Tier 1 Risk-based Capital
   25,994    11.70 13,326    6.00 17,769    8.00 57,800 13.29 26,100 6.00 34,799 8.00
Total Risk-based Capital
   28,772    12.95 17,769    8.00 22,211    10.00 63,245 14.54 34,799 8.00 43,499 10.00

(continued)
17
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

~~(5)~~
(5)
EarningsPer Share

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three and nine months ended September 30, ~~2017~~ 2021 and ~~2016,~~2020, outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method.

2021

2020

Weighted-

Per

Weighted-

Per

   2017    2016
Average

Share

Average

Share

(dollars in thousands, except per share amounts)    Earnings    Weighted-
Average
Shares    Per
Share
Amount    Earnings    Weighted-
Average
Shares    Per
Share
Amount
Earnings

Shares

Amount

Earnings

Shares

Amount

Three Months Ending September 30:

Basic EPS:

Net earnings
   $ 822    3,100,309    $ 0.26    $ 610    1,985,201    $ 0.31 $ 2,099 3,127,524 $ 0.67 $ 1,481 3,117,623 $ 0.47
Effect of dilutive securities-incremental shares from assumed conversion of options
      3,235          2,965    17,493 57





Diluted EPS:

Net earnings
   $ 822    3,103,544    $ 0.26    $ 610    1,988,166    $ 0.31 $ 2,099 3,145,017 $ 0.67 $ 1,481 3,117,680 $ 0.47












Nine Months Ending September 30:

Basic EPS:

Net earnings
   $ 2,123    2,569,375    $ 0.83    $ 1,574    1,980,046    $ 0.79 $ 6,595 3,125,777 $ 2.11 $ 2,917 3,139,183 $ 0.92
Effect of dilutive securities-incremental shares from assumed conversion of options
      9,218          9,376    8,459 73





Diluted EPS:

Net earnings
   $ 2,123    2,578,593    $ 0.83    $ 1,574    1,989,422    $ 0.79 $ 6,595 3,134,236 $ 2.10 $ 2,917 3,139,256 $ 0.92












(continued)
18
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

~~(6)~~
(6)
Stock ~~Option~~ Benefit Plans
2015 Stock Incentive Compensation Plan

The 2015 Stock Incentive Compensation Plan (the ~~“2015~~“2015 Plan”) ~~was approved by the Shareholders at the Company’s annual meeting of shareholders on May 20, 2015 and~~ permits the Company to grant the Company’s key employees and directors stock options, stock appreciation rights, performance shares, and phantom stock. Under the 2015 Plan, the number of shares which may be issued is 500,000, but in no instance more than 15% of the issued and outstanding shares of the Company’s common stock.
As of September 30, ~~2017, 11,540 stock options have been granted~~2021, 196,837 shares are available to be issued under the 2015 ~~Plan. At~~ Stock Plan as restricted stock, underlying options, or otherwise. A summary of the stock option activity for the nine months ended September 30, ~~2017, 453,658 options are available for grant.~~2021 and 2020 is as follows:

   Number
of
Options    Weighted-
Average
Exercise
Price    Weighted-
Average
Remaining
Contractual
Term    Aggregate
Intrinsic
Value
Outstanding at December 31, 2016
   —      —
Options granted
   11,540    $ 17.03



Outstanding at September 30, 2017
   11,540    $ 17.03    4.34 years    $ 6,600




Exercisable at September 30, 2017
   11,540    $ 17.03    4.34 years    $ 6,600








Weighted-

Weighted-

Average

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

Options

Price

Term (years)

Value

Outstanding at December 31, 2019
272,267 $ 19.80
Options granted
15,000 $ 20.05
Options forfeited
(170 ) 20.09
Outstanding on September 30, 2020
287,097 $ 19.82
Options forfeited
(15,040 ) $ 20.05
Outstanding at December 31, 2020
272,057 $ 19.80
Options granted
4,000 $ 22.64
Options exercised
(150 ) 20.09
Options forfeited
(15,250 ) 20.09
Outstanding at September 30, 2021
260,657 $ 19.83 6.05 $ 281,000
Exercisable at September 30, 2021
161,677 $ 19.60 5.58 $ 212,000
The fair value of shares vested and recognized as compensation expense was ~~$15,000~~$57,000 and $55,000 for the ~~nine~~three months ended September 30, ~~2017. There was no share based compensation~~2021 and 2020, and $170,000 and $161,000 for the nine months ended September 30, 2021 and 2020, respectively. These amounts include expense of $19,000 and $12,000 recognized on restricted common stock shares issued during the three months ended September 30, ~~2017~~ 2021 and 2020and $53,000 and $34,000 for the ~~three and~~ nine months ended September 30, ~~2016. At~~ 2021 and 2020, respectively. The deferred tax benefit related to stock options was $5,000 and $9,000 for the three months ended September 30, ~~2017,~~2021 and 2020, respectively, and $15,000 and $16,000 for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, there was no$252,000 in unrecognized compensation expense related to ~~nonvested~~unvested share-based compensation arrangements granted under the 2015 ~~Plan.~~ Plan, with an average remaining life of 1.9 years.
~~The fair value of each option granted during the nine months ended September 30, 2017 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:~~
(continued)

~~Weighted average risk-free interest rate~~
~~1.48~~ %
~~Expected dividend yield~~
~~0.40~~ %
~~Expected stock volatility~~
~~8.54~~ %
~~Expected life in years~~
~~3.00~~
~~Per share fair value of options issued during period~~
$   ~~1.26~~
The Company used the guidance in Staff Accounting Bulletin No. 107 to determine the estimated life of options issued. Expected volatility is based on volatility of similar companies’ common stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is based on the Company’s history and expectation of dividend payouts.
19

~~(continued)~~
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(6)
Stock Benefit Plans, Continued

~~(6)~~ ~~Stock Option Plans, Continued~~
Directors’ Plan

As of May 20, 2015, no further grants will be made under the 2007 Stock Option Plan (the “2007 Plan”). Unexercised stock options that were granted under the 2007 Plan will remain outstanding and will expire under the terms of the individual stock grant. A summary of the activity in the Company’s 2007 Stock Option Plan is as follows:

   Number of
Options    Weighted-
Average
Exercise
Price    Weighted-
Average
Remaining
Contractual
Term    Aggregate
Intrinsic
Value
Outstanding at December 31, 2015
   75,500    $ 10.19
Options exercised
   (7,500 )    11.00
Options forfeited
   (7,500 )    10.00



Outstanding at September 30, 2016
   60,500    $ 10.11





Outstanding at December 31, 2016
   42,200    $ 10.16
Options exercised
   (2,600 )    10.00
Options forfeited
   (200 )    10.00



Outstanding at September 30, 2017
   39,400    $ 10.17    1.68 years    $ 293,000








Exercisable at September 30, 2017
   38,900    $ 10.17    1.64 years    $   289,000








For the nine months ended September 30, 2017, there was no unrecognized compensation expense related to nonvested share-based compensation arrangements granted under the 2007 plan, compared to $1,000 for the nine months ended September 30, 2016. The fair value of shares vested and recognized as compensation expense was $1,000 for the nine months ended September 30, 2016, compared to less than $500 for the nine months ended September 30, 2017. The remaining expense is expected to be recognized by December 31, 2017.
In 2012, the Company’s Board of Directors and shareholders adopted the Directors’ Plan. The Directors’ Plan permits the Company’s and the Bank’s non-employee 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 non-employee director is permitted to make an election to receive shares of stock instead of cash. To encourage directors to elect to receive stock, the Directors’ Plan provides that if a director elects to receive stock, he or she will receive in common stock 110% of the amount of cash fees set by the Board or the Compensation ~~and Nominating~~ Committee. The value of stock to be awarded pursuant to the Directors’ Plan will be the closing price of a share of common stock as traded on the~~Over-the~~ ~~Counter~~ Over-the-Counter Bulletin Board, or a price set by the Board or its Compensation ~~and Nominating~~ Committee, acting in good faith, but in no case less than fair market value. The maximum number of shares to be issued pursuant to the Directors’ Plan is limited to 74,805 shares. For the three months ended September 30, ~~2017~~ 2021 and ~~2016,~~2020, our directors received ~~939~~1,226 and ~~1,014~~1,343 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be ~~$16,000~~$26,000 and ~~$15,000,~~$25,000, respectively.  For the nine months ended September 30, ~~2017~~ 2021 and ~~2016,~~2020, our directors received ~~3,104~~4,028 and ~~2,857~~3,503 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be ~~$51,000~~$81,000 and ~~$40,000,~~$66,000, respectively. At September 30, ~~2017, 58,910~~2021, 42,680 shares remained available for grant.

~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~Restricted Stock

During the nine months ended September 30, 2021 and 2020, the Company issued 4,081 and 3,835 restricted common stock shares, respectively, to its CEO as part of his bonus incentive earned for the Company’s performance in 2020 and 2019, respectively. The restricted stock awards are on a three-year vesting schedule.  Holders of 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:

Wtd-Avg

Grant-Date

Number of

Fair Value

Grant-Date Fair

Shares

per Share

Value

Non-vested restricted stock outstanding at December 31, 2019
3,600 $ 18.52 $ 67,000
Non-vested restricted stock granted in 2020
3,835 20.40 78,000
Restricted stock shares vested in 2020
(1,200 ) (18.52 ) (22,000 )
Non-vested restricted stock outstanding at December 31, 2020
6,235 $ 19.64 $ 123,000
Non-vested restricted stock granted in 2021
4,081 $ 18.04 74,000
Restricted stock shares vested in 2021
(2,478 ) 19.49 (48,000 )
Non-vested restricted stock outstanding at September 30, 2021
7,838 $ 18.88 $ 149,000
During the nine months ended September 30, 2021 and 2020, the Company recognized $53,000 and $34,000, respectively, as expense related to restricted stock grants.  At September 30, 2021, the Company had $101,000 in unrecognized expense to be recognized over a weighted-average period of 1.8 years.
~~(7)~~
(7)
Federal Home Loan Bank Advances and Other Borrowings

Federal Home Loan Bank (“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 ~~$25.2~~$68.0 million at September 30, ~~2017.~~2021. At September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, the Company had no outstanding loans under this line.

In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The initial interest rate on the line of credit is 3.25% and will adjust daily to the then-current Wall Street Journal Prime Rate. At September 30, 2021, the interest rate was 3.25%. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Company's wholly-owned subsidiary, the Bank. At September 30, 2021, the Company had a $3,075,000 outstanding loan balance and incurred $32,000 in year-to-date interest expense under this line of credit.
20
~~(8)~~
(8)
Derivative Financial Instruments
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, are included in “other assets” and “other liabilities” on the Company’s condensed consolidated balance sheets, and the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows. The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives.

September 30, 2021

December 31, 2020

dollars in thousands

Notional amount - interest rate swaps:

Stand-alone derivatives
$ 20,693 $ 21,100

Weighted-average pay rate - interest rate swaps
3.69 % 3.68 %
Weighted-average receive rate - interest rate swaps
3.00 % 3.00 %
Weighted-average maturity (in years) - interest rate swaps
13.8 14.6

Net realized fair value adjustments:

Stand-alone derivatives - interest rate swaps (other assets)
$ 642 $ 163
Stand-alone derivatives - interest rate swaps (other liabilities)
$ (642 ) $ (163 )
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.
21
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(9)
Fair Value of Financial Instruments
The estimated fair values and fair value measurement method with respect to the ~~Company’s~~Company's financial instruments were as follows:

At September 30, 2021

At December 31, 2020

      At September 30, 2017    At December 31, 2016
Carrying

Fair

Carrying

Fair

(in thousands)    Level    Carrying
Amount    Fair
Value    Carrying
Amount    Fair
Value
Level

Amount

Value

Amount

Value

Financial assets:

Cash and cash equivalents
   1    $ 34,323    $ 34,323    $ 36,165    $ 36,165 1 $ 212,652 $ 212,652 $ 68,985 $ 68,985
Securities available for sale
   2    48,744    48,744    33,103    33,103
Debt securities available for sale
2 67,124 67,124 61,879 61,879
Loans held for sale
   3    7,459    7,716    3,291    3,500 3 10,976 11,159 13,593 13,814
Loans, net
   3    245,160    243,574    222,768    221,320 3 476,513 482,875 476,661 487,652
Federal Home Loan Bank stock
   3    316    316    220    220 3 366 366 493 493
Accrued interest receivable
   3    875    875    798    798 3 1,478 1,478 1,960 1,960
Bank-owned life insurance
   3    1,746    1,746    1,711    1,711
Derivative contract assets
3 642 642 163 163

Financial liabilities-

Financial liabilities:

Deposits
   3    296,714    296,883    275,347    275,433 3 718,341 718,562 580,592 581,073
Off Balance Sheet Items
   3    —      —      —      —
Derivative contract liabilities
3 642 642 163 163

Off-Balance Sheet Items
3 0 0 0 0
Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form~~10-K~~10-K for the year ended December 31, ~~2016.~~2020.

~~(9)~~
(10)
~~Off-Balance~~ ~~Sheet~~Off-Balance Sheet Financial Instruments
The Company is a party to financial instruments with~~off-balance-sheet~~ off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments are commitments to extend credit, construction loans in process, unused lines of credit, standby letters of credit, and guaranteed accounts and may involve, to varying degrees, elements of credit andinterest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.
~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(9)~~ ~~Off-Balance~~ ~~Sheet Financial Instruments, continued~~

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~~ 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 acase-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.
22
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(10)
Off-Balance Sheet Financial Instruments, Continued
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~~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 ~~$606,000~~ $478,000 at September 30, ~~2017.~~2021.
Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our ~~third-party~~third-party credit card company, Card Assets and its issuing bank, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on certain accounts plus 10%. The maximum potential amount of future payments we could be required to make is represented by the dollar amount disclosed in the table below.
Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded.
In 2016, the Company entered into an agreement with another bank. This agreement references an interest rate swap that was transacted between the other bank and its loan client (the “Counterparty”). Should the Counterparty default on its obligations under the interest rate swap agreement with the other bank, then the Company would be liable for 13.208% of all swap liabilities. The maximum potential credit exposure under this contract at September 30, 2017 is $64,000.
~~(continued)~~
~~PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY~~
~~Notes to Condensed Consolidated Financial Statements (unaudited), Continued~~
~~(9)~~ ~~Off-Balance~~ ~~Sheet Financial Instruments, continued~~

The maximum potential amount of future payments we could be required to make foroff-balance sheet financial instruments is represented by the dollar amount disclosed in the table below.

At September 30, 2021

(in thousands)    At September 30, 2017
Commitments to extend credit
   $ 5,519 $ 13,437


Construction loans in process
   $ 9,099 $ 50,196


Unused lines of credit
   $ 41,231 $ 66,338


Standby letters of credit
   $ 1,697


Standby financial letters of credit
$ 2,733
Standby performance letters of credit
$ 100
Guaranteed accounts
   $ 967 $ 1,370


(continued)
23
PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
~~(10)~~
(11)
~~Public Stock Offering~~
Contingency
~~During~~
The COVID-19 pandemic has negatively impacted the ~~second quarter~~global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. The extent to which the COVID-19 pandemic impacts our business, results of ~~2017,~~operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, the duration of the pandemic, the effectiveness and adoption of available vaccines, and the actions taken by governmental authorities to slow the spread of the disease or to mitigate its effects. We continue to monitor and adhere to national guidelines and local safety ordinances to ensure the safety of our clients and employees. At this time, it is not known how the more contagious Delta variant and the consequential rise in cases nationally may impact the economy, safety protocols or consumer behavior.
Management believes credit quality deterioration directly related to the pandemic could materialize in the future due to continued disruption in the global supply chains, labor shortages across many industries, and the potential for new and more dangerous variants of the virus to emerge. Since March of 2020, the Company ~~completed~~had a ~~public offering~~peak of ~~1,090,908 shares~~70 payment deferrals or modifications on loans totaling $42.4 million. Approximately 91% of ~~the Company’s common stock at a price~~those were for loans secured with real estate. That number declined to ~~the public~~1 loan modification totaling $411,000 as of $16.50 per share for net proceeds to the Company of approximately $17.0 million. The Company plans to use the net proceeds to fund general corporate purposes, including maintaining liquidity and continuing support of the bank. Net proceeds may also be used for branching or acquisition opportunities in the North Florida, South Georgia, and South Alabama markets.September 30, 2021.
24
Item 2. ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Prime Meridian Holding Company, and its wholly-owned subsidiary, Prime Meridian Bank. This discussion and analysis should be read with the condensed consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form10-K for the year ~~ended~~ ended December 31, ~~2016.~~ 2020. Results of operations for ~~the~~ the three and ~~Nine~~nine months ended September 30, ~~2017, are~~2021are not necessarily indicative of results that may be attained for any other period. The following discussion and analysis ~~presents~~present our financial condition and results of operations on a consolidated basis, however, because we conduct all of our material business operations through the Bank, the discussion and analysis ~~relates~~relate to activities primarily conducted at the subsidiary level.
Certain information in this report may include “forward-looking statements” as defined by federal securities law. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that,” and similar expressions are intended to identify these forward-looking statements. These forward-looking statements involve risk and uncertainty and a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law, and silence by management over time should not be construed to mean that actual events are occurring as estimated in such forward-looking statements.
Our ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our and our subsidiary’s operations include, but are not limited to, changes in:

~~local, regional, and national economic and business conditions;~~
•
local, regional, and national economic and business conditions;
•
banking laws, compliance, and the regulatory environment;
•
U.S. and global securities markets, public debt markets, and other capital markets;
•
monetary and fiscal policies of the U.S. Government;
•
litigation, tax, and other regulatory matters;
•
demand for banking services, both loan and deposit products in our market area;
•
quality and composition of our loan or investment portfolios;
•
risks inherent in making loans such as repayment risk and fluctuating collateral values;
•
competition;
•
attraction and retention of key personnel, including our management team and directors;
•
technology, product delivery channels, and end user demands and acceptance of new products;
•
consumer spending, borrowing and savings habits;
•
any failure or breach of our operational systems, information systems or infrastructure, or those of our third-party vendors and other service providers; including cyber-attacks;
•
natural disasters, public unrest, adverse weather, pandemics, public health, and other conditions impacting our or our clients’ operations;
•
other economic, competitive, governmental, regulatory, or technological factors affecting us; and
•
application and interpretation of accounting principles and guidelines.

~~banking laws, compliance, and the regulatory environment;~~

~~U.S. and global securities markets, public debt markets, and other capital markets;~~
~~monetary and fiscal policies of the U.S. Government;~~
~~litigation, tax, and other regulatory matters;~~
~~demand for banking services, both loan and deposit products in our market area;~~
~~quality and composition of our loan or investment portfolios;~~
~~risks inherent in making loans such as repayment risk and fluctuating collateral values;~~
~~competition;~~
~~attraction and retention of key personnel, including our management team and directors;~~
~~technology, product delivery channels, and end user demands and acceptance of new products;~~
~~consumer spending, borrowing and savings habits;~~
~~any failure or breach of our operational systems, information systems or infrastructure, or those of our third-party vendors and other service providers; including cyber-attacks;~~
~~natural disasters, public unrest, adverse weather, public health, and other conditions impacting our or our clients’ operations;~~
~~other economic, competitive, governmental, regulatory, or technological factors affecting us; and~~
~~application and interpretation of accounting principles and guidelines.~~
GENERAL
Prime Meridian Holding Company (“PMHG”) was incorporated as a Florida corporation on May 25, 2010, and is theone-bank holding company for, and sole shareholder of, Prime Meridian Bank (the “Bank”) (collectively, the “Company”). The Bank opened for business on February 4, 2008 and was acquired by PMHG on September 16, 2010. PMHG has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through ~~three~~four full-service offices located in Tallahassee, Crawfordville, and ~~Crawfordville,~~Lakeland, Florida and through its online banking platform.
As a ~~one bank~~one-bank holding company, we generate most of our revenue from interest on loans and investments. Our primary source of funding for our loans is deposits. Our largest expenses are interest on those deposits and salaries and employee benefits. We measure our performance through our net interest margin, return on average assets, and return on average equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.
The following table shows selected information for the periods ended or at the dates indicated:

At or for the

Nine Months

Year

Nine Months

   At or for the
Ended

Ended

Ended

   Nine Months
Ended
September 30, 2017 Year
Ended
December 31, 2016 Nine Months
Ended
September 30, 2016
September 30, 2021

December 31, 2020

September 30, 2020

Average equity as a percentage of average assets
   11.31 % 9.47 % 9.62 % 8.60 % 9.64 % 9.76 %
Equity to total assets at end of period
   13.45 8.91 9.26 8.26 9.31 9.45
Return on average assets⁽¹⁾
   0.87 0.81 0.78 1.21 0.75 0.67
Return on average equity⁽¹⁾
   7.68 8.51 8.13 14.08 7.77 6.84
Noninterest expense to average assets⁽¹⁾
   2.71 2.80 2.79 1.85 2.01 1.95
Nonperforming loans to total loans at end of period
   0.02 0.36 0.51 - 0.26 0.33
Nonperforming assets to total assets
- 0.19 0.25

^{^{(1) Annualized for the nine months ended September 30, 2021 and 2020}}
~~Annualized for the Nine months ended September 30, 2017 and September 30, 2016~~
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies which involve significant ~~judgements~~judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities and used in preparation of the Condensed Consolidated Financial Statements as of September 30, ~~2017,~~2021, have remained unchanged from the disclosures presented in our Annual Report on Form~~10-K.~~ 10-K for the year ended December 31, 2020.
COVID-19 RESPONSE
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, and created significant volatility and disruption in financial markets. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, the duration of the pandemic, the effectiveness and adoption of available vaccines, and the actions taken by governmental authorities to slow the spread of the disease or to mitigate its effects. We continue to monitor and adhere to national guidelines and local safety ordinances to ensure the safety of our clients and employees. At this time, it is not known how the more contagious Delta variant and the consequential rise in cases nationally may impact the economy, safety protocols or consumer behavior.
Management believes credit quality deterioration directly related to the pandemic could materialize in the future due to continued disruption in the global supply chains, labor shortages across many industries, and the potential for new and more dangerous variants of the virus to emerge. Since March of 2020, the Company had a peak of 70 requests for payment deferrals or modifications on loans totaling $42.4 million. Approximately 91% of the requests weren for loans secured with real estate. That number declined to one loan modification totaling $411,000 as of September 30, 2021.
26
FINANCIAL CONDITION
Average assets totaled ~~$344.6~~$771.9 million and $726.5 million for the three ~~months ended September 30, 2017~~ and ~~$325.7 million for the~~ nine months ended September 30, ~~2017,~~2021, respectively, an increase of ~~$63.6~~$153.0 million ~~or 22.6%,~~(24.7%) and ~~$57.2~~$144.4 million ~~or 21.3%~~(24.8%), over the comparable periods in ~~2016. The~~2020. Comparing the third quarters of 2020 and 2021, 80.9% of the growth in average assets stemmed from an increase in ~~2017 can be primarily attributed~~other interest-earning assets due to ~~higher~~the continued liquidity in the economy. The average ~~loan balances~~balance of PPP loans decreased $39.1 million to $43.0 million from the third quarter of 2020 to the third quarter of 2021 and increased $12.8 million to $61.0 million from the ~~additional capital raised during~~nine-month period ended September 30, 2020 to the ~~second quarter.~~nine-month period ended September 30, 2021, illustrating the varying impacts PPP loans have had on both the income statement and balance sheet.
Investment ~~Securities.~~Securities.Our primary objective in managing our investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We use the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest and dividend income, to provide liquidity to meet funding requirements, and to provide collateral for pledging to secure the deposit of public ~~funds.~~funds at the Bank. At September 30, ~~2017,~~2021, our debt securities available for sale investment portfolio included U.S. government agency securities, municipal securities, ~~and~~ mortgage-backed securities, and asset-backed securities.  As of the same date, this portfolio had a fair market value of ~~$48.7~~$67.1 million and an amortized cost value of ~~$48.8~~$66.6 million. At September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, our investment securities portfolio represented approximately ~~14.1%~~8.4% and ~~10.9%~~9.6% of our total assets, respectively. The average yield on the average balance of investment securities for the ~~three and~~ nine months ended September 30, ~~2017~~2021 was ~~2.18% and 2.25%~~1.72%, ~~respectively,~~ compared to ~~1.82% and 1.98%~~2.30% for the comparable ~~periods~~period in ~~2016.~~2020.
Loans.Our primary earning asset is our loan portfolio and our primary source of income is the interest earned on the loan portfolio. Our loan portfolio consists of commercial real estate loans, construction loans, and commercial loans made tosmall-to-medium sized companies and their owners, as well as residential real estate loans, including first and second mortgages, and consumer loans. Our goal is to maintain a ~~high quality~~high-quality portfolio of loans through sound underwriting and lending practices. We work diligently to attract new lending clients through direct solicitation by our loan officers, utilizing relationship networks from existing clients, competitive pricing, and innovative structure. Our loans are priced based upon the degree of risk, collateral, loan amount, and maturity. ~~We have no loans to foreign borrowers.~~
The Company’s ~~net~~gross loan portfolio remained flat with December 31, 2020 as non-PPP loan originations were offset by PPP loan forgiveness. Excluding the quarter-end balance of PPP loans ($66.8 million at December 31, 2020 and $27.6 million at September 30, 2021), the Company's gross loan portfolio increased ~~$22.4~~$38.9 million ~~or 10.1% from December 31, 2016. Loan growth occurred across all categories during~~since 2020 year-end. This was following a high level ($78.8 million) of non-PPP loan payoffs in the first nine months of ~~2017, with~~2021. At September 30, 2021, PPP loans comprised $27.6 million, or 5.7%, of total loans. Management expects that the ~~exception~~majority of ~~commercial.~~these loans will be forgiven by the end of 2021. The remaining fees to be collected on this balance, net of costs, totals $1.3 million. In total, approximately ~~78.5%~~79.1% of the total loan portfolio was collateralized by commercial and residential real estate mortgages at September 30, ~~2017,~~2021 compared to ~~77.5%~~69.5% at December 31, ~~2016.~~2020. Subtracting out the PPP loans, the percentage of the total loan portfolio collateralized by commercial and residential real estate mortgages was 83.8% at September 30, 2021.
Nonperforming ~~assets.~~assets.At September 30, 2021, the Company had no nonperforming assets compared to $1.25 million of nonperforming assets at December 31, 2020. We generally place loans on nonaccrual status when they become 90 days or more past due, unless they are well secured and in the process of collection. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When a loan is placed on nonaccrual status, any interest previously accrued, but not collected, is reversed from income. At September 30, ~~2017,~~2021, the ~~Company~~Bank had ~~one~~no loans on nonaccrual ~~loan~~status, compared to five nonaccrual loans totaling ~~$60,000.~~
$1.25 million at December 31, 2020. Accounting standards require the ~~Bank~~Company to identify loans as impaired loans when, based on current information and events, it is probable that the ~~Bank~~Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan’s effective interest rate, using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We implement these standards in our monthly review of the adequacy of the allowance for loan losses and identify and value impaired loans in accordance with GAAP.  Two loans totaling $137,000 were deemed to be impaired under the Bank’s policy at September 30, 2017, compared to four loans totaling $811,000 at December 31, 2016. The Bank’s nonperforming assets represented 0.02% of total assets at September 30, 2017, compared to 0.27% at December 31, 2016.
Allowance for Loan Losses. Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. During the second quarter of 2021, the Bank reported a $185,000 credit provision for loan losses due to no specific reserve requirements, loan recoveries, and a decrease in the amount of COVID-19 unallocated reserve. The Company did not carry any aggregate specific reserves at September 30, 2021. The Company had a net recovery of $1,000 during the quarter ended September 30, 2021 compared to net charge-offs of $36,000, or 0.03% annualized of average loans, in the third quarter of 2020. Management believes ~~that~~ the allowance for loan losses, which was ~~$3.1~~$5.9 million or ~~1.24%~~1.29% of ~~total~~gross loans (excluding PPP loans) at September 30, ~~2017,~~2021 is adequate to cover losses inherent in the loan portfolio.  Two impaired loans carried a reserve of $137,000 at September 30, 2017, while one impaired loan carried a reserve of $76,000 at December 31, 2016. Other impaired loans did not require specific reserves at December 31, 2016, since collateral values less the estimated costs to sell were higher than carrying values.
Deposits. Deposits are the major source of the ~~Bank’s~~Company’s funds for lending and other investment purposes. Total deposits at September 30, ~~2017~~2021 were ~~$296.7~~$718.3 million, an increase of ~~$21.4~~$137.7 million, or ~~7.8%~~23.7%, from December 31, ~~2016,~~2020, with growth coming from both~~non-interest~~ ~~bearing~~ noninterest-bearing and ~~interest bearing accounts.~~ interest-bearing accounts and attributed to expansion of existing relationships, the addition of new clients, and to a lesser extent, due to PPP activity. The Company's PPP-sourced deposits were estimated to be $1.96 million at September 30, 2021. Despite the reduction that has already occurred in PPP-sourced deposits, management believes that the potential exists for our deposit levels to fluctuate in the near future due to the unprecedented level of liquidity in the market. The average balance of~~non-interest~~ ~~bearing~~ noninterest-bearing deposits accounted for ~~24.4%~~29.6% of the average balance of total deposits for the nine months ended September 30, ~~2017,~~2021, compared to ~~23.7%~~25.8% for the nine months ended September 30, ~~2016.~~2020.
Borrowings.The Bank has an agreement with the Federal Home Loan Bank of Atlanta (“FHLB”)and pledges its qualified loans as collateral which would allow the Bank, as of September 30, ~~2017,~~2021, to borrow up to ~~$25.2~~$68.0 million. In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled ~~$16.3~~$28.0 million at September 30, ~~2017.~~2021. There were no loans outstanding under any of these lines at September 30, ~~2017.~~
2021.
In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The initial interest rate on the line of credit is 3.25% and will adjust daily to the then-current Wall Street Journal Prime Rate. At September 30, 2021, the interest rate was 3.25%. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Company's wholly-owned subsidiary, the Bank. At September 30, 2021, the Company had a $3,075,000 outstanding loan balance and incurred $32,000 in year-to-date interest expense under this line.

RESULTS OF OPERATIONS
Net interest income constitutes the principal source of income for the Bank and results from the excess of interest income on ~~interest earning~~interest-earning assets over interest expense on ~~interest bearing~~interest-bearing liabilities. The principal ~~interest earning~~interest-earning assets are investment securities and ~~loans receivable. Interest bearing~~loans. Interest-bearing liabilities primarily consist of time deposits, ~~interest bearing~~interest-bearing checking accounts, savings deposits, and money-market ~~accounts, and other borrowings.~~accounts. Funds attracted by these interest-bearing liabilities are invested in ~~interest earning~~interest-earning assets. Accordingly, net interest income depends upon the volume of average ~~interest earning~~interest-earning assets and average interest-bearing liabilities as well as the interest rates earned or paid on these assets and liabilities. The following tables set forth information regarding: (i) the total dollar amount of interest and dividend income of the ~~Bank~~Company from ~~interest earning~~interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on ~~interest bearing~~interest-bearing liabilities and the resultant average costs; (iii) net interest income; (iv) interest-rate spread; (v) net interest margin; and (vi) weighted-average yields and rates. Yields and costs were derived by dividing annualized income or expense by the average balance of assets or liabilities. The yields and costs depicted in the table include the amortization of fees, which are considered to constitute adjustments to yields.
As shown in the following table, ~~all categories of~~there was compression in the Company's net interest ~~earning assets reported higher volumes and yields~~margin for both the three ~~months~~ and nine ~~months~~month periods ended September 30, ~~2017. However,~~2021 due to a ~~change~~shift in the ~~interest earning~~ asset mix ~~offset these increases, resulting in only a slight increase~~towards lower-yielding earning assets triggered by excess liquidity in the ~~overall average yield~~market and the resulting high level of ~~interest earning assets for~~cash balances on the three months ended September 30, 2017 and a decrease in the average yield of interest earning assets for the nine months ended September 30, 2017. This, in combination with higher deposit funding costs, resulted in a decrease in the interest-rate spread and net interest margin for the three and nine months ended September 30, 2017 when compared to the same periods a year ago.
Bank's balance sheet.

   For the Three Months Ended September 30,
   2017 2016
(dollars in thousands)    Average
Balance Interest
and
Dividends    Yield/
Rate Average
Balance Interest
and
Dividends    Yield/
Rate
Interest earning assets:

Loans⁽¹⁾
   $   248,678 $       2,972    4.78 % $   219,665 $       2,539    4.62 %
Mortgage loans held for sale
   4,646 53    4.56 3,141 34    4.33
Securities
   46,214 252    2.18 34,280 156    1.82
Other⁽²⁾
   33,202 114    1.37 14,206 26    0.73





Total interest earning assets
   332,740 $ 3,391    4.08 271,292 $ 2,755    4.06





Non-interest earning assets
   11,820    9,697





   $ 344,560    $ 280,989





Interest bearing liabilities:

Savings, NOW and money-market deposits
   $ 200,581 $ 285    0.57 % $ 165,715 $ 177    0.43 %
Time deposits
   22,365 41    0.73 22,182 28    0.50





Total interest bearing deposits
   222,946 326    0.58 187,897 205    0.44
Other borrowings
   —   —      1,217 1    0.33





Total interest bearing liabilities
   222,946 $ 326    0.58 189,114 $ 206    0.44





Non-interest bearing deposits
   74,169    63,822
Non-interest bearing liabilities
   1,583    1,358
Stockholders’ equity
   45,862    26,695





Total liabilities and stockholders’ equity
   $ 344,560    $ 280,989





Net earning assets
   $ 109,794    $ 82,178





Net interest income
   $ 3,065    $ 2,549





Interest rate spread
      3.50 %    3.62 %
Net interest margin⁽³⁾
      3.68 %    3.76 %
Ratio of interest earning assets to average interest bearing liabilities
   149.25 %    143.45 %






For the Three Months Ended September 30,

2021

2020

Interest

Interest

Average

and

Yield/

Average

and

Yield/

(dollars in thousands)

Balance

Dividends

Rate(5)

Balance

Dividends

Rate(5)

Interest-earning assets:

Loans⁽¹⁾
$ 477,322 $ 5,708 4.78 % $ 459,984 $ 5,000 4.35 %
Loans held for sale
12,437 111 3.57 11,624 101 3.48
Debt securities available for sale
65,226 283 1.74 64,032 311 1.94
Other⁽²⁾
184,525 78 0.17 60,729 43 0.28
Total interest-earning assets
739,510 $ 6,180 3.34 % 596,369 $ 5,455 3.66 %
Noninterest-earning assets
32,357 22,485
Total assets
$ 771,867 $ 618,854

Interest-bearing liabilities:

Savings, NOW and money-market deposits
$ 435,213 $ 426 0.39 % $ 336,751 $ 420 0.50 %
Time deposits
49,844 76 0.61 64,967 290 1.79
Total interest-bearing deposits
485,057 502 0.41 401,718 710 0.71
Other borrowings
3,075 25 3.25 - - -
Total interest-bearing liabilities
488,132 $ 527 0.43 % 401,718 $ 710 0.71 %
Noninterest-bearing deposits
213,570 152,026
Noninterest-bearing liabilities
5,529 7,431
Stockholders' equity
64,636 57,679
Total liabilities and stockholders' equity
$ 771,867 $ 618,854

Net earning assets
$ 251,378 $ 194,651
Net interest income
$ 5,653 $ 4,745
Interest rate spread ⁽³⁾
2.91 % 2.95 %
Net interest margin⁽⁴⁾
3.06 % 3.18 %

Ratio of interest-earning assets to average interest-bearing liabilities
151.50 % 148.45 %

⁽¹⁾
Includes nonaccrual loans
⁽²⁾
Other ~~interest earning~~interest-earning assets include federal funds sold, ~~interest bearing~~interest-bearing deposits and FHLB stock.
⁽³⁾ Interest rate spread is the difference between the total interest-earning asset yield and the rate paid on total interest-bearing liabilities.
⁽⁴⁾Net interest margin is net interest income divided by total average ~~interest earning~~interest-earning assets, annualized
⁽⁵⁾Annualized

   For the Nine Months Ended September 30,
   2017 2016
(dollars in thousands)    Average
Balance Interest
and
Dividends    Yield/
Rate Average
Balance Interest
and
Dividends    Yield/
Rate
Interest earning assets:

Loans⁽¹⁾
   $   237,240 $       8,379    4.71 % $   206,585 $       7,211    4.65 %
Mortgage loans held for sale
   3,390 119    4.68 2,720 83    4.07
Securities
   41,993 709    2.25 36,184 538    1.98
Other⁽²⁾
   31,501 271    1.15 13,812 74    0.71





Total interest earning assets
   314,124 $ 9,478    4.02 259,301 $ 7,906    4.07





Non-interest earning assets
   11,581    9,235





Total assets
   $ 325,705    $ 268,536





Interest bearing liabilities:

Savings, NOW and money-market deposits
   $ 196,340 $ 722    0.49 % $ 162,524 $ 524    0.43 %
Time deposits
   20,884 107    0.68 21,246 74    0.46





Deposits
   217,224 829    0.51 183,770 598    0.43
Other borrowings
   —   —      434 1    0.31





Total interest bearing liabilities
   217,224 $ 829    0.51 184,204 $ 599    0.43





Non-interest bearing deposits
   70,254    57,211
Non-interest bearing liabilities
   1,384    1,294
Stockholders’ equity
   36,843    25,827





Total liabilities and stockholders’ equity
   $ 325,705    $ 268,536





Net earning assets
   $ 96,900    $ 75,097





Net interest income
   $ 8,649    $ 7,307





Interest rate spread
      3.51 %    3.64 %
Net interest margin⁽³⁾
      3.67 %    3.76 %
Ratio of interest earning assets to average interest bearing liabilities
   144.61 %    140.77 %





28

For the Nine Months Ended September 30,

2021

2020

Interest

Interest

Average

and

Yield/

Average

and

Yield/

(dollars in thousands)

Balance

Dividends

Rate(5)

Balance

Dividends

Rate(5)

Interest-earning assets:

Loans⁽¹⁾
$ 481,762 $ 16,912 4.68 % $ 413,764 $ 14,108 4.55 %
Loans held for sale
13,527 344 3.39 9,163 266 3.87
Debt securities available for sale
61,690 794 1.72 65,205 1,123 2.30
Other⁽²⁾
139,017 192 0.18 70,665 337 0.64
Total interest-earning assets
695,996 $ 18,242 3.49 % 558,797 $ 15,834 3.78 %
Noninterest-earning assets
30,490 23,257
Total assets
$ 726,486 $ 582,054

Interest-bearing liabilities:

Savings, NOW and money-market deposits
$ 410,799 $ 1,243 0.40 % $ 308,518 $ 1,375 0.59 %
Time deposits
51,874 296 0.76 67,378 971 1.92
Total interest-bearing deposits
462,673 1,539 0.44 375,896 2,346 0.83
Other borrowings
1,309 32 3.26 11,425 31 0.36
Total interest-bearing liabilities
463,982 $ 1,571 0.45 % 387,321 $ 2,377 0.82 %
Noninterest-bearing deposits
194,909 130,783
Noninterest-bearing liabilities
5,128 7,116
Stockholders' equity
62,467 56,834
Total liabilities and stockholders' equity
$ 726,486 $ 582,054

Net earning assets
$ 232,014 $ 171,476
Net interest income
$ 16,671 $ 13,457
Interest rate spread ⁽³⁾
3.04 % 2.96 %
Net interest margin⁽⁴⁾
3.19 % 3.21 %

Ratio of interest-earning assets to average interest-bearing liabilities
150.00 % 144.27 %

⁽¹⁾
Includes nonaccrual loans
⁽²⁾
Other ~~interest earning~~interest-earning assets include federal funds sold, ~~interest bearing~~interest-bearing deposits and FHLB stock.
⁽³⁾ Interest rate spread is the difference between the total interest-earning asset yield and the rate paid on total interest-bearing liabilities.
⁽⁴⁾Net interest margin is net interest income divided by total average ~~interest earning~~interest-earning assets, annualized
⁽⁵⁾Annualized

Comparison of Operating Results for the Three Months Ended September 30, ~~2017 and 2016~~2021 And 2020
~~Net Earnings.~~~~Net earningsfor~~
Earnings Summary

(dollars in thousands)

Change 3Q'21 vs. 3Q'20

3Q'21

3Q'20

Amount

Percentage

Net Interest Income
$ 5,653 $ 4,745 $ 908 19.1 %
Provision (credit) for loan losses
- 621 (621 ) (100.0 )
Noninterest income
613 570 43 7.5
Noninterest expense
3,503 2,749 754 27.4
Income Taxes
664 464 200 43.1
Net earnings
$ 2,099 $ 1,481 $ 618 41.7 %
Compared to the ~~three-month~~same period ~~ended September 30, 2017 were $822,000, compared to~~a year ago, the increase in net earnings was driven by higher PPP origination fees, a larger volume of ~~$610,000 for the three-month period ended September 30, 2016. The increase in earnings is attributed to a $636,000, or 23.1%, increase in total interest income, a $76,000, or 70.4%, reduction in the~~commercial real estate and residential real estate loan originations, and no provision for loan ~~losses,~~losses. Lower funding costs on deposits and ~~a $40,000, or 9.6% increase in~~higher noninterest income ~~all partially offset by~~also contributed to higher net earnings in the third quarter of 2021 compared to the same period a ~~$120,000, or 58.3%, increase in interest expense, a $291,000, or 15.2%, increase in noninterest expense, and a $129,000, or 38.5%, increase in income taxes.~~year ago.
Net Interest ~~Income.~~Income
Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on ~~interest earning~~interest-earning assets such as loans and securities, and interest expense on ~~interest bearing~~interest-bearing liabilities such as deposits. ~~Net interest income was $3.1 million for the three months ended September 30, 2017, compared~~
Interest income

(dollars in thousands)

Change 3Q'21 vs. 3Q'20

3Q'21

3Q'20

Amount

Percentage

Interest income:

Loans
$ 5,819 $ 5,101 $ 718 14.1 %
Securities
283 311 (28 ) (9.0 )
Other
78 43 35 81.4
Total interest income
$ 6,180 $ 5,455 $ 725 13.3 %
Compared to ~~$2.5 million for the three months ended September 30, 2016.~~
~~Interest Income.~~ Total interest income increased to $3.4 million for the three months ended September 30, 2017, a $636,000 or 23.1%, increase over the three months ended September 30, 2016. The increase was driven by an increase in average loans and higher yields. Average loan balances have grown from $219.7 million for the quarter ended September 30, 2016 to $248.7 million for the quarter ended September 30, 2017, while the average yield on loans increased from 4.62% during the third quarter of ~~2016~~2020, the increase in total interest income is mostly attributed to ~~4.78% during~~fee income from forgiven PPP loans and interest and fee income earned on a higher volume of commercial real estate and residential real estate loans.
Interest expense:

(dollars in thousands)

Change 3Q'21 vs. 3Q'20

3Q'21

3Q'20

Amount

Percentage

Total interest expense
$ 527 $ 710 $
(183
) (25.8
)%
Interest expense declined $183,000, or 25.8%, from the third quarter of ~~2017. Increased income on both securities and other interest earning assets also contributed~~2020 due to the growth in total interest income as both average balances and yields increased. Average securities increased 34.8% year over year, while the average yield on securities increased 36 basis points to 2.18%.lower funding costs.  The average balance of other interest earning assets also increased year over year. Funds raised during our most recent public stock offering were invested in federal funds sold and accounted for the majority of the $19.0 million increase. Additionally, the Company has benefitted from three 25 basis point increases in the federal funds rate since September 30, 2016.
~~Interest Expense.~~ Interest expense was $326,000 for the three months ended September 30, 2017, compared to $206,000 for the three months ended September 30, 2016. The $120,000, or 58.3%, increase can be primarily attributed to higher average balances of interest bearing deposits and higher average rates paid on deposits. Year-over-year, the average balance of interest bearing deposits increased 18.7%, or $35.0 million, to $222.9 million, while the average rate paid on interest-bearing deposits ~~increased 14~~declined 30 basis points to ~~0.58%.~~
~~Net Interest Margin.~~~~The net interest margin was 3.68% for the three months ended September 30, 2017,~~0.41% when compared to ~~3.76% for~~ the same period in 2016. Compared to the same period last year, growth in lower yielding other interest earning assets, namely federal funds sold, contributed to a decrease in the net interest margin. The decrease in the net interest margin was also impacted by the higher costthird quarter of ~~funds for the quarter.~~2020.

Provision for Loan ~~Losses.~~Losses
The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market ~~area,~~areas, and other factors related to our historic loss experience and the collectability of the loan portfolio. The Company recorded no provision expense for loan losses during the third quarter of 2021. Although the Company recorded $375,000 in provision for new loan growth during the ~~three months ended September 30, 2017~~third quarter, this was ~~$32,000, compared to $108,000 for the three months ended September 30, 2016. The lower provision reflects changes~~offset by a $375,000 credit in the ~~Company’s~~unallocated reserve related to the COVID-19 pandemic for credit deterioration that has not yet materialized. Given the ongoing labor and supply chain issues, management will continue to closely evaluate the Bank's loan portfolio ~~mix~~ and ~~changes in~~market conditions before making the qualitative factors used by the Company in determining its provision, as both the Company and its peers have experienced improved asset quality trends in recent periods. Management believes that the allowance for loan losses, which was $3.1 million or 1.24% of total loans, at September 30, 2017, is adequatedecision to ~~cover losses inherent in the loan portfolio based on the~~
release more reserves.
~~assessment of the above-mentioned factors affecting the loan portfolio.~~ While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of examination.
~~Non-interest~~ ~~Income.~~~~Non-interest~~ income consists of revenues generated from a broad range of financial services and activities, primarily service charges and fees on deposit accounts, mortgage banking revenue, income from bank owned life insurance and any gains on the sale of securities available for sale.~~Non-interest~~ ~~income for the three months ended September 30, 2017 totaled $455,000 an increase of $40,000, or 9.6%, from the three months ended September 30, 2016.~~
Noninterest income

(dollars in thousands)

Change 3Q'21 vs. 3Q'20

3Q'21

3Q'20

Amount

Percentage

Service charges and fees on deposit accounts
$ 61 $ 48 $ 13 27.1 %
Debit card/ATM revenue, net
108 91 17 18.7
Mortgage banking revenue, net
325 224 101 45.1
Income from bank-owned life insurance
73 40 33 82.5
Other income
46 167 (121 ) (72.5 )
Total noninterest income
$ 613 $ 570 $ 43 7.5 %
Compared to the ~~same period a year ago,non-interest~~ ~~income increased due to an 8.1%~~third quarter of 2020, the increase in ~~service charges and fees on deposit accounts,~~noninterest income was primarily driven by a ~~5.8%~~$101,000 (45.1%) increase in mortgage banking revenue and ~~a 27.5% increase~~smaller dollar increases in debit card/ATM income, income from BOLI, and services charges and fees on deposit accounts. These increases were partially offset by the $121,000 decrease in other income ~~primarily consisting of higher credit card and debit card income.~~as the Company earned $132,000 in swap fee income in 2020 compared to $8,000 in 2021.
~~Non-interest~~ ~~Expense.~~~~Non-interest~~
Noninterest expense

(dollars in thousands)

Change 3Q'21 vs. 3Q'20

3Q'21

3Q'20

Amount

Percentage

Salaries and employee benefits
$ 2,028 $ 1,498 $ 530 35.4 %
Occupancy and equipment
380 377 3 0.8
Professional fees
103 89 14 15.7
Marketing
197 97 100 103.1
FDIC Assessment
78 68 10 14.7
Software maintenance and amortization
237 205 32 15.6
Other
480 415 65 15.7
Total noninterest expense
$ 3,503 $ 2,749 $ 754 27.4 %
Total noninterest expense increased ~~$291,000, or 15.2%, for the quarter ended September 30, 2017, compared to~~$754,000 from the same period alast year, ~~ago. Salaries, mortgage banking commissions,~~driven by salaries and employee ~~benefits were~~benefits. Marketing expense also materially increased as a result of in person events resuming in our communities. Increases across all other noninterest expense categories reflect continued investment in the ~~primary expense drivers, increasing $186,000, or 17.5%. Higher occupancy and equipment costs and higher marketing costs also contributed to the growth ofnon-interest~~ ~~expense quarter over quarter.~~Bank's infrastructure.
Income ~~Taxes.~~Taxes
Income taxes are based on amounts reported in the ~~statement~~condensed consolidated statements of earnings after adjustments for nontaxable income and nondeductible expenses and ~~consists~~consist of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income taxes were $664,000 for the three months ended September 30, 2021, compared to income taxes of $464,000 for the three months ended September 30, ~~2017, compared~~2020, with the increase attributed to ~~income taxes~~higher pre-tax earnings in 2021. The effective tax rate was 24.0% in the third quarter of ~~$335,000 for~~2021 versus 23.9% in the ~~three months ended September 30, 2016. The higher provision relates to earnings before income taxes~~third quarter of ~~$1.3 million for the three months ended September 30, 2017 compared to earnings before income taxes of $945,000 for the three months ended September 30, 2016.~~2020.
31
Comparison of Operating Results for the ~~Nine~~NINE Months Ended September 30, ~~2017 and 2016~~2021 And 2020
~~Net Earnings.~~~~For the nine-month period ended~~
Earnings Summary

(dollars in thousands)

Nine Months Ended

Change 2021 vs. 2020

September 30, 2021

September 30, 2020

Amount

Percentage

Net Interest Income
$ 16,671 $ 13,457 $ 3,214 23.9 %
Provision (credit) for loan losses
(185 ) 2,484 (2,669 ) (107.4 )
Noninterest income
1,905 1,351 554 41.0
Noninterest expense
10,078 8,506 1,572 18.5
Income Taxes
2,088 901 1,187 131.7
Net earnings
$ 6,595 $ 2,917 $ 3,678 126.1 %
Year-to-date net income through September 30, ~~2017, the Company reported net earnings of $2.1 million,~~2021 more than doubled compared to ~~$1.6~~the same period in 2020 due mostly to increased interest income and origination fees from PPP loans (totaling $2.8 million, net of costs, year-to-date in 2021 versus $922,000 for the same period in 2020) and a ~~year ago. The~~$185,000 credit provision for loan losses in 2021. Also contributing to higher profitability in 2021 was a $554,000, or 41.0%, increase in ~~net earnings~~noninterest income. Higher noninterest expense and income tax expense partially offset these income contributors.
Interest income

(dollars in thousands)

Nine Months Ended

Change 2021 vs. 2020

September 30, 2021

September 30, 2020

Amount

Percentage

Interest income:

Loans
$ 17,256 $ 14,374 $ 2,882 20.1 %
Securities
794 1,123 (329 ) (29.3 )
Other
192 337 (145 ) (43.0 )
Total interest income
$ 18,242 $ 15,834 $ 2,408 15.2 %
Comparing the nine-month periods, the increase in total interest income from loans in 2021 is primarily attributed to $2.8 million of interest income and fees (net of costs) generated from PPP loans compared to $922,000 for the first nine months of ~~2017 compared~~2020. A higher volume of commercial real estate and residential real estate loan originations in 2021 also contributed to ~~the same period a year ago is attributed to a $1.6 million, or 19.9%, increase in total~~increased interest income ~~a $225,000, or 54.6%,~~from loans.  The decrease in interest income from securities is a function of lower volume and rates while the ~~provision for loan losses, and~~decrease in interest income from other interest-earning assets is a ~~$320,000, or 27.7%,~~function of lower rates.
Interest expense:

(dollars in thousands)

Nine Months Ended

Change 2021 vs. 2020

September 30, 2021

September 30, 2020

Amount

Percentage

Total interest expense
$ 1,571 $ 2,377 $ (806 ) (33.9 %)
Comparing nine-month periods, a $76.7 million increase in ~~totalnon-interest~~ ~~income, all partially offset by a $230,000, or 38.4%, increase in total interest expense, a $1.0 million, or 18.1%, increase in totalnon-interest~~ ~~expense, and a $324,000, or 37.6%, increase in income taxes.~~
~~Net Interest Income.~~Our operating results depend primarily on our net interest income, which is the difference between interest and dividend income on interest earning assets such as loans and securities, and interest expense on interest bearing liabilities such as deposits and borrowings. Net interest income was $8.6 million for the nine months ended September 30, 2017, compared to $7.3 million for the nine months ended September 30, 2016.
~~Interest Income.~~ Total interest income increased to $9.5 million for the nine months ended September 30, 2017, a $1.6 million, or 19.9%, increase over the nine months ended September 30, 2016. Average balances and yields increased across all categories of
interest earning assets year over year, but the interest earned on higher average loan balances was the key contributor to interest income growth. For the nine months ended September 30, 2017 compared to the same period a year ago, the average balance of ~~loans increased $30.7 million, or 14.8%, while the average yield on loans increased~~interest-bearing liabilities was offset by 6 basis points. Higher interest income on both securities and other interest earning assets also contributed to the overall gain as both average balances and yields increased. Average securities increased 16.1% year over year, while the average yield increased 27a 37 basis points ~~to 2.25%. The average balance~~decrease in the cost of ~~other interest earning assets also increased year over year. Funds raised during our most recent public stock offering were invested in federal funds sold and accounted~~interest-bearing liabilities
Provision for ~~the majority of the $17.7 million increase. Additionally,~~Loan Losses
Year-to-date, the Company has ~~benefitted from three 25 basis point increases~~recorded a $185,000 credit provision for loan losses. The Company's gross loan portfolio (excluding PPP) increased $38.9 million (9.3%) since year-end 2020. The Company recorded $597,000 in provision for new loan growth which was offset by a $357,000 credit in the ~~target federal funds rate since September 30, 2016.~~
~~Interest Expense.~~ ~~Compared~~unallocated reserve related to the ~~same period~~COVID-19 pandemic ayear ago, interest expense increased 38.4%, or $230,000, for the nine months ended September 30, 2017. The increase can be mostly attributed to higher average balances of interest bearing deposits as well as higher average rates paid on deposits. For the nine months ended September 30, 2017, the average balance of interest bearing deposits increased 18.2% to $217.2 million while the average rate paid on deposits increased 8 basis points to 0.51%.
~~Net Interest Margin.~~~~For the nine months ended September 30, 2017, the net interest margin was 3.67%, compared to 3.76% for the same period~~nd a ~~year ago. Despite higher average balances of interest earning assets and higher yields in each category, a change~~$425,000 credit in the ~~interest earning assets mix led~~reserve for commercial loans due to a $7.7 million decrease in the ~~overall yield of~~commercial loan balance since year-end. Given the ~~interest earning assets portfolio. This in combination with higher average balances of interest bearing deposits~~ongoing labor and ~~higher deposit funding costs led~~supply chain issues, management will continue to closely evaluate the ~~decrease in the Company’s net interest margin.~~
~~Provision for Loan Losses.~~ The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market area, and other factors related to the collectability of the loan portfolio. The provision for loan losses for the nine months ended September 30, 2017 was $187,000, compared to $412,000 for the nine months ended September 30, 2016. The lower provision reflects changes in theBank's loan portfolio ~~mix as well as changes in~~and market conditions before making the ~~qualitative factors used by the Company in determining its provision, as both the Company and its peers have experienced improved asset quality trends in recent periods.~~decision to release more reserves.
Management believes that the allowance for loan losses, which was $3.1 million or 1.24% of total loans, at September 30, 2017, is adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.
32
Noninterest income

(dollars in thousands)

Nine Months Ended

Change 2021 vs. 2020

September 30, 2021

September 30, 2020

Amount

Percentage

Service charges and fees on deposit accounts
$ 170 $ 156 $ 14 9.0 %
Debit card/ATM revenue, net
341 251 90 35.9
Mortgage banking revenue, net
958 591 367 62.1
Income from bank-owned life insurance
203 120 83 69.2
Gain on sale of securities available for sale
108 - 108 N/A
Other income
125 233 (108 ) (46.4 )
Total noninterest income
$ 1,905 $ 1,351 $ 554 41.0 %
~~Non-interest~~ ~~Income.~~~~Non-interest~~ income consists of revenues generated from a broad range of financial services and activities, primarily service charges and fees on deposit accounts, mortgage banking revenue, income from bank owned life insurance and any gains on the sale of securities available for sale. ForComparing the nine-month ~~period, noninterest income grew $320,000, or 27.7%, to $1.5 million.~~
~~A $306,000, or 48%,~~periods, the $90,000 increase in debit card/ATM net revenue, $367,000 increase in mortgage banking net revenue, ~~a $67,000, or 38.5%,~~and $83,000 increase in ~~service charges and fees on deposit accounts, and a $52,000, or 25.2%, increase in other~~BOLI income ~~(mostly credit card and debit card income and ATM fees) were~~combined with the ~~key drivers to the overall gain innon-interest~~ ~~income in 2017, while the nine-month period ended September 30, 2016 benefitted from a $102,000~~$108,000 gain on sale of securities ~~available for sale.~~
~~Non-interest~~ ~~Expense.~~~~Non-interest~~ ~~expense increased $1.0 million or 18.1%,~~led to ~~$6.6 million for~~ the ~~nine months ended September 30, 2017~~$554,000 (41.0%) increase in noninterest income.  The Bank's investment in BOLI has nearly doubled since June 2020, resulting in higher income to offset additional compensation expense. Increases in debit card/ATM net revenue are attributed to growth in transaction deposit accounts and the number of debit cards issued. The $108,000 decline in other income relates to $132,000 in swap fee income in 2020 compared to $8,000 in 2021.
Noninterest expense

(dollars in thousands)

Nine Months Ended

Change 2021 vs. 2020

September 30, 2021

September 30, 2020

Amount

Percentage

Salaries and employee benefits
$ 5,685 $ 4,662 $ 1,023 21.9 %
Occupancy and equipment
1,144 1,096 48 4.4
Professional fees
353 263 90 34.2
Marketing
536 398 138 34.7
FDIC Assessment
197 187 10 5.3
Software maintenance and amortization
738 599 139 23.2
Other
1,425 1,301 124 9.5
Total noninterest expense
$ 10,078 $ 8,506 $ 1,572 18.5 %
Year-to-date, the ~~same period a year ago. With the exception of professional fees which reported a $50,000, or 17.5% decrease, all other categories ofnon-interest~~growth in noninterest expense ~~increased in 2017. Salaries, mortgage banking commissions,~~is mostly attributed to higher salaries and employee benefits expense in 2021. Part of this stems from a higher employee count (90 FTEs in 2020 versus 95 FTEs in 2021) and also can be attributed to a longer than normal turnover period for held-for- sale loans in the third quarter of 2020 which resulted in lower commissions and payroll taxes that period. These increases were partially offset by an increase in deferred loan costs. The increases in other noninterest expense categories can be mostly credited to the primary expense drivers, increasing $728,000, or 24.2%, for the nine-month period, as the Company continues to add employees to serve its growing client base. For the nine months ended September 30, 2017, the Company’s full-time equivalent employees (FTEs) averaged 67 compared to 58 for the same period a year ago.Bank's organic growth.
Income ~~Taxes.~~Taxes
Income taxes are based on amounts reported in the ~~statement~~condensed consolidated statements of earnings after adjustments for nontaxable income and nondeductible expenses and ~~consists~~consist of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income taxes were ~~$1.2~~$2.1 million for the nine months ended September 30, ~~2017,~~2021, compared to income taxes of ~~$861,000~~$901,000 for the nine months ended September 30, ~~2016.~~2020, with the increase attributed to higher pre-tax earnings in 2021. The ~~higher provision relates to earnings before income taxes of $3.3 million~~effective tax rate was 24.0% for the ~~nine months~~nine-month period ended September 30, ~~2017, compared to earnings before income taxes of $2.4 million~~2021 versus 23.6% for the ~~nine months~~nine-month period ended September 30, ~~2016.~~2020.

LIQUIDITY
Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s clients, as well as meet current and planned expenditures. Management monitors the liquidity position daily.
Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations, and capital. Additionally, as a commercial bank, we are expected to maintain an adequate liquidity ~~reserve.~~position. The liquidity ~~reserve~~position may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and unpledged marketable securities such as United States government agency securities, municipal securities, mortgage-backed securities, and ~~mortgage-backed~~asset-backed securities.
The Bank also has external sources of funds through the FHLB, unsecured lines of credit with correspondent banks, and the State of Florida’s Qualified Public Deposit ~~Program~~ (“QPD”) Program . At September 30, ~~2017,~~2021, the Bank had access to approximately ~~$25.2~~$68.0 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to ~~$16.3~~$28.0 million in unsecured lines of credit maintained with correspondent banks.
The Company has a $15 million revolving line of credit with TNB. As of September 30, ~~2017, we had no~~2021, the Company's outstanding borrowings under ~~any of these lines. Furthermore, some~~this line totaled $3,075,000.
Some of our securities are pledged to collateralize certain deposits through our participation in the State of Florida’s QPD program. The market value of securities pledged to the QPD program ~~was $9.2~~was $12.7 million at September 30, ~~2017 and $9.3~~2021 compared to $13.9 million at December 31, ~~2016.~~2020. Our primary liquid assets, excluding assets pledged to the QPD program, accounted for ~~21.4%~~33.6% and ~~19.7%~~18.1% of total assets at September 30, ~~2017~~2021 and December 31, ~~2016,~~2020, respectively.
Our core deposits consist of~~non-interest-bearing~~ noninterest-bearing accounts, NOW accounts, ~~money market~~money-market accounts, time deposits $250,000 or less, and savings accounts. We closely monitor our level of certificates of deposit greater than $250,000 and other large deposits. At
September 30, ~~2017,~~2021, total deposits were ~~$296.7~~$718.3 million, of which ~~$10.3~~$21.2 million ~~was~~were in certificates of deposits greater than $250,000, excluding Individual Retirement Accounts (IRAs). We maintain a Contingency Funding Plan (“CFP”) that identifies liquidity needs and weighs alternate courses of action designed to address those needs in emergency situations. We perform a monthly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands and do not know of any trends, events, or uncertainties that may result in a significant adverse effect on our liquidity position.
CAPITAL RESOURCES
Stockholders’ equity was ~~$46.3~~$65.6 million at September 30, ~~2017,~~2021 compared to ~~$27.1~~$60.3 million at December 31, ~~2016. During~~2020.  In 2020, the ~~first quarter~~Company obtained a $15 million revolving line of ~~2017,~~credit with TNB. At its discretion, the ~~Board~~Company may take draws on that line and may contribute the proceeds as capital to the Bank. At September 30, 2021, the Company had a $3,075,000 outstanding loan balance and incurred year-to-date interest expense of ~~Directors declared and PMHG paid an annual dividend~~$32,000 under this revolving line of ~~$0.07 per share~~credit. The Company contributed $2.2 million to the capital of ~~common stock. During~~the Bank during the second quarter of 2017, the Company completed a public stock offering which netted the Company approximately $17 million in additional capital to be used for general corporate purposes, maintaining liquidity and expansionary activities.2021.
At September 30, ~~2017,~~2021, the Bank was considered to be “well capitalized” under the FDIC’s Prompt Corrective Action regulations with ~~a 9.38%~~an 8.82% Tier 1 Leverage Capital Ratio, a ~~12.76%~~13.30% Equity Tier 1 Risk-Based Capital Ratio, a ~~12.76%~~13.30% Tier I1 Risk-Based Capital Ratio, and a ~~13.97%~~14.45% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered ~~“well-capitalized.~~“well capitalized.”
The following is a summary at September 30, ~~2017~~2021 and December 31, ~~2016~~2020 of the regulatory capital requirements to be “well capitalized” and the Bank’s capital position.

For Capital Adequacy

For Well Capitalized

   Actual For Capital Adequacy
Purposes For Well Capitalized
Purposes
Actual

Purposes

Purposes

(dollars in thousands)    Amount    Percentage Amount    Percentage Amount    Percentage
Amount

Percentage

Amount

Percentage

Amount

Percentage

As of September 30, 2017

As of September 30, 2021

Tier 1 Leverage Capital
   $   32,345    9.38 % $   13,791    4.00 % $   17,238    5.00 % $ 68,218 8.82 % $ 30,940 4.00 % $ 38,675 5.00 %
Common Equity Tier 1 Risk-based Capital
   32,345    12.76 11,407    4.50 16,477    6.50 68,218 13.30 23,087 4.50 33,349 6.50
Tier 1 Risk-based Capital
   32,345    12.76 15,210    6.00 20,280    8.00 68,218 13.30 30,783 6.00 41,044 8.00
Total Risk-based Capital
   35,417    13.97 20,280    8.00 25,350    10.00 74,118 14.45 41,044 8.00 51,305 10.00

As of December 31, 2016

As of December 31, 2020

Tier 1 Leverage Capital
   25,994    8.73 11,906    4.00 14,883    5.00 $ 57,800 9.09 % $ 25,421 4.00 % $ 31,776 5.00 %
Common Equity Tier 1 Risk-based Capital
   25,994    11.70 9,995    4.50 14,437    6.50 57,800 13.29 19,575 4.50 28,275 6.50
Tier 1 Risk-based Capital
   25,994    11.70 13,326    6.00 17,769    8.00 57,800 13.29 26,100 6.00 34,799 8.00
Total Risk-based Capital
   28,772    12.95 17,769    8.00 22,211    10.00 63,245 14.54 34,799 8.00 43,499 10.00

The Bank is also subject to the following capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations.

Threshold Ratios
Capital
Category
   Threshold Ratios Total Risk-Based Capital Ratio Tier 1 Risk-Based Capital Ratio Common Equity Tier 1 Risk-Based Capital Ratio Tier 1 Leverage Capital Ratio
Total
Risk-Based
Capital
Ratio Tier 1
Risk-Based
Capital
Ratio Common
Equity
Tier 1
Risk-Based
Capital Ratio Tier 1
Leverage
Capital Ratio

Well capitalized
   10.00 % 8.00 % 6.50 % 5.00 % 10.00% 8.00% 6.50% 5.00%

Adequately Capitalized
   8.00 % 6.00 % 4.50 % 4.00 % 8.00% 6.00% 4.50% 4.00%

Undercapitalized
   < 8.00 % < 6.00 % < 4.50 % < 4.00 %
< 8.00%
< 6.00%
< 4.50%
< 4.00%

Significantly Undercapitalized
   < 6.00 % < 4.00 % < 3.00 % < 3.00 %
< 6.00%
< 4.00%
< 3.00%

Critically Undercapitalized
   Tangible Equity/Total Assets£ 2%
Tangible Equity/Total Assets ≤ 2%
Until such time as PMHG has $1$3 billion in total consolidated assets, it will not be subject to any consolidated capital requirements.
OFF-BALANCE SHEET ARRANGEMENTS
Refer to Note 910 in the notes to condensed consolidated financial statements included in ~~our~~this Form10-Q for the period ending September 30, ~~2017~~2021 for a discussion ofoff-balance sheet ~~arrangements~~arrangements.
Item 3. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Quantitative and Qualitative Disclosures About Market Risk
Not applicable

Item 4. ~~CONTROLS AND PROCEDURES~~Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that ~~PMHG~~the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon management’s evaluation of those controls and procedures performed within the 90 days preceding the filing of this Report, our Principal Executive Officer and Principal Financial Officer concluded that, subject to the limitations noted below, the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by PMHG in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms.
We intend to continually review and evaluate the design and effectiveness of the Company’s disclosure controls and procedures and to improve the Company’s controls and procedures over time and to correct any deficiencies that we may discover in the
future. The goal is to ensure that senior management has timely access to all material financial and nonfinancial information concerning the Company’s business. While we believe the present design of the disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.
(b) Changes in Internal Controls
We have made no significant changes in our internal controls over financial reporting during the quarter ended September 30, ~~2017,~~2021 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
(c) Limitations on the Effectiveness of Controls
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a party to various matters incidental to the conduct of a banking business. Presently, we believe that we are not a party to any legal proceedings in which resolution would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels.
Item 1A. Risk Factors
While the Company attempts to identify, manage, and mitigate risks and uncertainties associated with its business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Item 1A of our Annual Report onForm 10-K for the year ended December 31, ~~2016~~2020 describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our cash flows, results of operations, and financial condition. ~~We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form10-K~~ ~~for the year ended December 31, 2016.~~
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the third quarter of ~~2017,~~2021, the Company issued ~~939~~1,226 shares to members of its Board of Directors in lieu of cash fees calculated at 110% to be ~~$16,000. During the third quarter, PMHG issued 2,100~~$26,000.  These shares ~~to officers and directors who exercised stock options and paid $21,000 upon such exercises. The shares~~ were all issued in accordance with the intrastate exemption from registration pursuant to Section 3(a)(11) of the Securities Act of 1933, because the Company is doing business within the State of Florida and each acquirer and offeree of securities resides within the State of Florida.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.

Item 6. Exhibits
The following exhibits are filed with or incorporated by reference into this Report.

Exhibit

Number

Description of Exhibit

Incorporated by Reference From or Filed Herewith
~~3.1~~
3.1
Articles of Incorporation

Exhibit 3.1 to Registration Statement on FormS-1 filed on October 18, 2013
~~3.2~~ ~~Bylaws~~
3.2
Bylaws
Exhibit 3.2 to Registration Statement on FormS-1 filed on October 18, 2013
3.3 First Amendment to Bylaws dated December 17, 2015 Exhibit 3.3 to Form10-Q filed on August 11, 2016
~~4.1~~
3.4 Second Amendment to Bylaws dated January 17, 2019 Exhibit 3.4 to Form 8-K filed on January 18, 2019
4.1
Specimen Common Stock Certificate

Exhibit 4.1 to Registration Statement on FormS-1 filed on October 18, 2013
~~4.2~~
4.2
2010 Articles of Share Exchange

Exhibit 4.2 to Registration Statement on FormS-1 filed on October 18, 2013
10.1
Form of Indemnification Agreement
Exhibit 10.1 to Form 8-K filed on August 20, 2020
10.2
~~2007 Stock Option Plan~~Promissory Note to Thomasville National Bank dated August 26, 2020
Exhibit ~~10.1~~10.16 to ~~Registration Statement on~~ Form~~S-1~~ 8-K filed on ~~October 18, 2013~~August 31, 2020
~~10.2~~ ~~Form ofNon-Qualified~~ ~~Stock Option Agreement Under 2007 Plan~~
10.3
Security Agreement with Thomasville National Bank dated August 26, 2020
Exhibit ~~10.2~~10.17 to ~~Registration Statement on~~ Form~~S-1~~ 8-K filed on ~~October 18, 2013~~August 31, 2020
~~10.3~~ ~~Form of Incentive Stock Option Agreement Under 2007 Plan~~ ~~Exhibit 10.3 to Registration Statement on FormS-1~~ ~~filed on October 18, 2013~~
10.4

2012 Directors’ Compensation Plan (“Directors’ Plan”)

Exhibit 10.4 to Registration Statement on FormS-1 filed on October 18, 2013
~~10.5~~
10.5
Lease for ~~Branch Location on~~ Timberlane ~~Road~~Office

Exhibit ~~10.5~~10.1 to ~~Registration Statement on~~ Form~~S-1~~ 8-K filed on ~~October 18, 2013~~August 7, 2018
10.6 Amended and Restated Employment Agreement by and between Prime Meridian Holding Company, Inc. and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of July 19, 2018 Exhibit 10.1 to Form 8-K filed on July 19, 2018
10.7
2015 Stock Incentive Compensation Plan
Exhibit 10.7 to Form 8-K filed on May 26, 2015
10.8 First Amendment to 2015 Stock Incentive Compensation Plan Exhibit 10.8 to Form 10-Q filed on November 10, 2016
10.9
Employment Agreement by and between Prime Meridian Holding Company, Inc. and Prime Meridian Bank, and Chris L. Jensen, dated as of November 19, 2018
Exhibit 10.1 to Form 8-K filed on November 20, 2018
10.10
Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of ~~July 25, 2016~~November 19, 2018.
Exhibit 10.2 to Form 8-K filed on November 20, 2018
10.11
Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Chris L. Jensen, Jr., dated as of November 19, 2018.
Exhibit 10.3 to Form 8-K filed on November 20, 2018

Exhibit
Number Description of Exhibit Incorporated by Reference From or Filed Herewith
10.12 Amendment to Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Sammie D. Dixon, Jr., dated as of December 11, 2018. Exhibit 10.1 to Form8-K filed on ~~July 27, 2016~~December 13, 2018.
~~10.7~~
10.13
Amendment to Defined Contribution Agreement by and among Prime Meridian Holding Company, Inc., and Prime Meridian Bank, and Chris L. Jensen, Jr., dated as of December 11, 2018.
Exhibit 10.2 to Form 8-K filed on December 13, 2018
10.14
First Amendment to Lease for Timberlane Branch
Filed Exhibit 10.14 to Form 10-Q filed on May 9, 2019
10.15 Defined Contribution Agreement by and between Prime Meridian Bank and Susan Payne Turner, dated as of July 14, 2021 Filed as Exhibit 10.15 to Form 8-K/A filed on August 2, 2021
10.16 Defined Contribution Agreement by and between Prime Meridian Bank and Monte Ward, dated as of July 14, 2021 Filed as Exhibit 10.16 to Form 8-K/A filed on August 2, 2021
10.17 Defined Contribution Agreement by and between Prime Meridian Bank and Clint Weber dated as of July 14, 2021 Filed as Exhibit 10.17 to Form 8-K/A filed on August 2, 2021
10.18 Amended Split Dollar Life Insurance Agreement between Prime Meridian Bank and ~~Restated 2015 Stock Incentive Compensation Plan~~ ~~Filed herewith~~
~~14.1~~ ~~Code~~Susan Payne Turner dated as of ~~Ethics~~July 1, 2021 Exhibit 10.18 to Form 10-Q filed on August 6, 2021
10.19 Amended Split Dollar Life Insurance Agreement between Prime Meridian Bank and Monte Ward dated as of July 1, 2021 Exhibit 10.19 to Form 10-Q filed on August 6, 2021
10.20 Amended Split Dollar Life Insurance Agreement between Prime Meridian Bank and Clint Weber dated as of July 1, 2021 Exhibit 10.20 to Form 10-Q filed on August 6, 2021
10.21 Split Dollar Life Insurance Agreement between Prime Meridian Bank and Sammie D. Dixon, Jr. dated as of January 1, 2019 Exhibit 10.21 to Form 10-Q filed on August 6, 2021
10.22 Split Dollar Life Insurance Agreement between Prime Meridian Bank and Chris L. Jensen, Jr. dated as of January 1, 2019 Exhibit 10.22 to Form 10-Q filed on August 6, 2021
14.1
Code of Ethics
Exhibit 14.1 to Form10-K filed on March 28, 2014
~~21.1~~
21.1
Subsidiaries of the Registrant

Exhibit 21.1 to Registration Statement on FormS-1 filed on October 18, 2013
~~31.1~~
31.1
Certification Under Section 302 of Sarbanes-Oxley by Sammie D. Dixon, Jr., Principal Executive Officer

Filed herewith
~~31.2~~
31.2
Certification Under Section 302 of Sarbanes-Oxley by ~~R. Randy Guemple,~~Clint F. Weber, Principal Financial Officer

Filed herewith
~~32.1~~
32.1
Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley

Filed herewith
99.1
Charter of the Audit Committee
Exhibit 99.1 to Form 10-K filed on March 28, 2015
99.2
Charter of the ~~Audit~~Executive, Nominating and Corporate Governance Committee
Exhibit 99.1 to Form 8-K filed on August 20, 2020
99.3 Charter of the Compensation Committee Exhibit 99.1 to Form~~10-K~~ 8-K filed on ~~March 28, 2014~~September 17, 2020
~~99.2~~ ~~Charter of the Compensation and Nominating Committee~~ ~~Exhibit 99.2 to Form10-K~~ ~~filed on March 21, 2017~~
101.INS

Inline XBRL Instance Document

Filed herewith
~~101.SCH~~
101.SCH
Inline XBRL Taxonomy Extension Schema Document

Filed herewith
~~101.CAL~~
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
~~Filed herewith~~
~~Exhibit~~
~~Number~~

~~Description of Exhibit~~Filed herewith
101.DEF

~~Incorporated by Reference From or Filed Herewith~~
~~101.DEF~~ Inline XBRL Taxonomy Extension Definitions Linkbase Document

Filed herewith
~~101.LAB~~
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document

Filed herewith
~~101.PRE~~
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*
*     Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PRIME MERIDIAN HOLDING COMPANY
November 9, ~~2017~~2021

~~By:~~
By:
/s/ Sammie D. Dixon
            ~~Date~~
Date

Sammie D. Dixon, Jr.

Vice Chairman, Chief Executive Officer, President,

and Principal Executive Officer
November 9, 2021
~~November 9, 2017~~
By:
/s/ Clint F. Weber
Date
Clint F. Weber

~~By:~~
~~/s/ R. Randy Guemple~~
            ~~Date~~ ~~R. Randy Guemple~~
Chief Financial Officer, Executive Vice President,
Principal Accounting Officer and Principal Financial Officer

46
40

Large accelerated ~~filer~~

Accelerated ~~filer~~

Non-accelerated ~~filer~~

~~☐ (Do not check if a smaller reporting company)~~

Smaller reporting ~~company~~

company: ☒

Emerging growth ~~company~~company: ☐