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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2023

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

For the transition period from _______________ to _______________.

Commission file number: 333-191801

PRIME MERIDIAN HOLDING COMPANY

(Exact name of registrant as specified in its charter)

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

1471 Timberlane Road, Tallahassee, Florida	32312
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (850) 907-2300

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

Title of each class

Trading Symbol (s)

Name of each exchange on which registered

None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

yes ☐ No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☒ no ☐

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

yes ☐ No ☒

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ no ☐

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

Large accelerated filer: ☐	Accelerated filer: ☐
Non-accelerated filer: ☐	Smaller reporting company: ☒
	Emerging growth company: ☐

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). yes ☐ no ☒

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the $21.01 per share selling price of the common stock on June 30, 2023 was $51,513,978. As of March 12, 2024, there were 3,284,045 issued and outstanding shares of the Registrant’s common stock.

Prime Meridian Holding Company

2023 Form 10-K Annual Report

Table of Contents

	Item Number		Page

Part I	Item 1.	Business	4
	Item 1A.	Risk Factors	15
	Item 1B.	Unresolved Staff Comments	21
	Item 1C.	Cybersecurity	22
	Item 2.	Properties	23
	Item 3.	Legal Proceedings	23
	Item 4.	Mine Safety Disclosures	23


Part II	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
	Item 6.	[Reserved]	24
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38
	Item 8.	Financial Statements and Supplementary Data	39
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	73
	Item 9A.	Controls and Procedures	73
	Item 9B.	Other Information	74
	Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	74


Part III	Item 10.	Directors, Executive Officers and Corporate Governance	74
	Item 11.	Executive Compensation	78
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	84
	Item 14.	Principal Accounting Fees and Services	85


Part IV	Item 15.	Exhibits and Financial Statement Schedules	86

	Item 16.	Form 10-K Summary	88

Signatures			89

Certifications

Part I

Item 1. Business

General Description of Business

Prime Meridian Holding Company (“PMHG”) was incorporated as a Florida corporation on May 25, 2010, and is the one-bank holding company for and sole shareholder of Prime Meridian Bank (the “Bank”). 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. In this report, the terms “Company,” “we,” “us,” or “our” mean PMHG and its subsidiary. Since opening in 2008, the Bank has conducted a general banking business and has grown to 110 full-time equivalent (“FTE”) employees as of December 31, 2023. We operate under the supervision and regulations of the FDIC, the Board of Governors of the Federal Reserve System ("Federal Reserve"), and the State of Florida Office of Financial Regulation ("OFR").

History

Prime Meridian Bank, a Florida commercial bank, was chartered on February 4, 2008, with a commitment to providing a high level of client service while maintaining sound and prudent banking practices. In 2010, our holding company, PMHG, was formed and the Bank’s shareholders exchanged their shares of common stock for shares of common stock of PMHG, with the Bank becoming a wholly-owned subsidiary of PMHG. This occurred through a statutory share exchange on September 16, 2010. The Company commenced a public offering registered with the United States Securities and Exchange Commission (the “SEC”) on December 11, 2013, has voluntarily continued to file periodic reports with the SEC since that date, and became listed and publicly traded on the OTCQX marketplace on August 24, 2015.

In an effort to provide a superior level of service, we have built a culture and brand that fosters client relationships rather than simply processing customers’ transactions. A culture that supports relationship banking has served us well, with many of our clients referring others to us. In our view, there is no greater compliment than to have our existing clients share their positive banking experiences with their family and friends.

Our team developed and adopted the following five core values to support our actions and guide our decisions:

●

Passion – A level of intense excellence and commitment that goes over and above the commercial considerations and legal requirements - Never give up. Never settle for mediocrity. Never let fear hamper us from taking calculated risks. Above all, Never let a cynic stand in our way.

●

Grace - Providing a high level of service, courtesy and compassion even if seemingly undeserved. Having an awareness of how our actions, body language, and words affect others. Learning to master a mindful, calm response to any situation.

●

Integrity – Doing the right thing, simply because it is the right thing to do, based on a firm adherence to the Bank’s three-way test: (1) Is it right by the client? (2) Is it right by the Bank? (3) Is it legally, morally, and ethically correct?

●

Tenacity – A culture of consistent push through of ideas and challenges, not settling or allowing push back or roadblocks that will stifle progress. Achieving the goal however difficult the goal.

●

Accountability – Holding one's self to standing forward, stepping up and accepting full and ultimate responsibility for the situation/action at hand. A true foundation for learning to lead without authority.

These core values and the Bank’s three-way test (Is it right by the client? Is it right by the Bank? Is it legally, morally, and ethically correct?) also serve as the foundation for our motto, “Let’s think of a few good reasons why it CAN be done!” which is an overarching concept for our Company and team. We stress the question “Why?” because, while we clearly recognize that “how” is imperative, without understanding “why” something should be done, “how it can be done” does not necessarily matter. Our mission statement is also supported by our core values: “Building bankers to serve our clients and community in order to optimize shareholder value.” As a result of our efforts and culture, we have been able to increase our asset and deposit base exclusively through organic growth thus far.

Location and Service Areas

Prime Meridian Bank is headquartered in Tallahassee, Florida and offers a broad range of banking services to the Tallahassee Metropolitan Statistical Area (“MSA”) and the surrounding North and Central Florida and South Georgia areas. The Company is headquartered at 1471 Timberlane Road, Tallahassee, Florida 32312, its original office, which opened on February 4, 2008. The Bank also serves clients from full-service branch offices located at (i)1897 Capital Circle, NE, Tallahassee, Florida 32308, which opened in April, 2012; (ii) 2201 Crawfordville Highway, Crawfordville, Florida 32327, which opened in September, 2015; and (iii) 3340 South Florida Avenue, Lakeland, Florida 33830, which opened in April, 2019 as well as through its online banking platform.

A substantial portion of the Company’s market is located in the larger Tallahassee MSA. Claritas, using primarily United States Census Bureau data, estimates that the 2024 population of the Tallahassee MSA, which includes Leon, Gadsden, Jefferson, and Wakulla counties, is 395,340 and is expected to grow to 407,823, an increase of 3.16%, by 2029. Tallahassee is the state capital and is characterized by mostly small businesses in many different service industries in addition to significant governmental and educational employment. The Tallahassee MSA is furthermore home to over 70,000 college students with two state universities (Florida State University and Florida A&M University) and Tallahassee Community College, one of the largest community colleges in Florida. The region is thought to be attractive for many types of economic development, in part due to its highly educated workforce, with 49.9% of residents holding a bachelor's degree or higher in 2022 according to the U.S. Census Bureau. The Economic Development Council of Tallahassee/Leon County previously identified seven targeted industry sectors that match the region’s strengths, goals, and assets: (1) renewable energy and environment; (2) aviation and aerospace; (3) health sciences, medical education, training and research, and sports medicine; (4) information technology; (5) research and engineering; (6) transportation and logistics; and (7) advanced manufacturing.

According to the U.S. Department of Labor, the national unemployment rate and Florida’s unemployment rate were 3.5% and 2.9%, respectively, at December 31, 2023, while Leon County, Polk County, and Wakulla County's unemployment rates were reported at 3.0%, 3.8%, and 2.8%, respectively. Any future increases in unemployment rates could result in nonperforming loans and reduced asset quality.

In April 2019, the Company began serving Polk County, Florida (the 8th largest county in the state) with the opening of its office in Lakeland, Florida. Home to nearly 125,000 residents, Lakeland is located along the I-4 corridor between Orlando and Tampa. According to the Lakeland Chamber of Commerce, there are over 10 million people within a 100-mile radius of the city of Lakeland.

Banking Services

Our business strategy focuses on traditional, relationship-based banking. The Bank provides a range of consumer and commercial banking services to individuals and businesses. In addition to electronic banking services such as mobile banking, remote deposit, mobile deposit, Apple Pay, Bank-to-Bank transfers and online banking, we offer basic services which include demand interest-bearing and noninterest-bearing accounts, savings accounts, money-market deposit accounts, health savings accounts (HSA), NOW accounts, time deposits, safe deposit services, wire transfers, foreign exchange services, escrow accounts, enrollment in ICS and CDARS programs, debit cards, direct deposits, notary services, night depository, official checks, domestic collections, bank drafts, automated teller services, drive-in tellers, banking by mail, credit cards through a third party, and merchant card services with a third party. In addition, the Bank issues standby letters of credit and offers commercial real estate loans, residential real estate loans, construction loans, commercial loans, equipment loans, Small Business Administration (“SBA”) loans, and consumer loans. The Bank provides debit and automated teller machine (“ATM”) cards and is a member of the MoneyPASS and Pulse networks, thereby permitting clients to utilize the convenience of a large ATM network system including more than 400,000 member machines nationwide. The Bank does not have trust powers.

Our organizational structure focuses on a strong risk management culture. We stay abreast of our market by having our Board and management team highly involved in our communities. We believe our team's banking experience and high-quality client service distinguishes us from other banks. We believe this foundation will enable us to expand our products and services to new and existing clients, resulting in steady, long-term growth. Our culture focuses on servicing our clients and proactively exceeding their expectations, which in turn supports client retention and loyalty, increased referrals, and enhanced profitability.

Our loan target market includes owner-occupied and nonowner-occupied commercial real estate, small businesses, real estate developers, consumers, and professionals. Small business clients are typically commercial entities with sales of $25 million or less; these clients have the opportunity to generate significant revenue for banks.

Our revenues are primarily derived from interest income and fees on loans, interest and dividends from investment securities, and service charge income generated from demand accounts, ATM fees, and other services. The principal sources of funds for the Bank’s lending activities are its deposits, loan repayments, and proceeds from investment debt securities. The principal expenses of the Bank are the interest paid on deposits, salaries, and general operating expenses.

We are committed to being a successful community bank and being a good business partner within our community. We believe our active community involvement and business development strategies, in conjunction with our client relationship culture, have formed a successful foundation for developing new relationships and enhancing existing ones.

Lending Activities

The Bank offers a wide range of lending services to the community, providing loans to small to medium sized companies and their owners and not-for-profit organizations. Included in our array of commercial loan products are commercial real estate loans, equipment loans, small business loans, and business lines of credit. We also are actively engaged in SBA guaranteed financing to support local borrowers who might not otherwise qualify for conventional financing, which helps mitigate our credit risk and results in fee income if we sell the guaranteed portion. Consumer loans include residential first and second mortgage loans, home equity lines of credit, and consumer installment loans for cars, trucks, boats, and other recreational vehicles. Most of our retail lending connections are driven by our commercial and mortgage client relationships. The Bank maintains strong and disciplined credit policies and procedures and makes loans on a nondiscriminatory basis throughout its lending area. The net loan portfolio, excluding loans held for sale, constituted 75.6% of the Company's total assets at December 31, 2023.

Our lenders have the authority to extend credit under guidelines established and approved by the Board of Directors. Joint approval signatures are required for all loans. Officers may not combine their lending authority to approve a loan in an amount in excess of the lending authority of the officer with the greater authority, unless otherwise provided through the approved lending authority table. However, a loan officer may obtain the approval of another officer with a higher lending authority to grant a loan. The Loan Committee and/or Board of Directors approves all loans with an aggregate indebtedness that exceeds an officer’s or co-approving officer’s lending authority, within the Bank's legal lending limits. The voting members of the Bank’s Loan Committee consist of at least five directors, with at least two of those five being nonemployee Board members. Alternates or designates may be appointed by the Board of Directors when needed. Loan Committee generally meets at least bi-weekly to consider any loan requests which are in excess of the lending limits of individual lending officers, require approval before the disbursement of proceeds, or are exceptions to our loan policy. Liquidity and stability in the Bank’s portfolio are given the highest priority; therefore, the Board of Directors reviews the portfolio mix of loans at its monthly meetings. Actions of the Loan Committee are also reported to the Board of Directors at these monthly meetings.

We categorize our loans as follows: commercial real estate, residential real estate (first and second mortgages and home equity loans), construction loans, commercial loans, and consumer loans. Residential real estate and home equity loans, accounting for 39.1% of the loan portfolio, and commercial real estate loans, comprising 34.3% of the loan portfolio, were the two largest categories of loans at December 31, 2023.

Commercial Real Estate Loans. Secured by mortgages on commercial property, these loans are typically more complex and present a higher risk profile than our consumer real estate loans. Commercial loans that are secured by owner-occupied commercial real estate are repaid through operating cash flows of the borrower whereas nonowner-occupied commercial real estate loans are generally dependent on rental income. For both owner-occupied and nonowner-occupied commercial loans, the maturity is generally limited to three to five years; however payments may be structured on a longer amortization basis. Interest rates on our commercial real estate loans are generally fixed for five years or less after which they adjust based upon a predetermined spread over an index. At times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, we normally require personal guarantees from the principal owners of the business supported by a review of the principal owners’ personal financial statements, personal tax returns, and where applicable, business tax returns. As part of our enterprise risk management process, we understand that risks associated with commercial real estate loans include fluctuations in real estate values, the overall strength of the borrower, the overall strength of the economy, new job creation trends, tenant vacancy rates, environmental contamination, and the quality of the borrowers’ management. In order to mitigate and limit these risks, we evaluate collateral value and analyze the borrower’s, and if applicable the guarantor’s, global cash flow position. Currently, the collateral securing our commercial real estate loans includes a variety of property types, such as office, warehouse, and retail facilities, 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 Real Estate and Home Equity Loans. The Company offers first and second one-to-four family mortgage loans, multifamily residential loans, and home equity lines of credit. The collateral for these loans includes both owner-occupied residences and nonowner-occupied investment properties. The owner-occupied primary residence loans generally present lower levels of risk than commercial real estate loans; however, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers' financial condition. The nonowner-occupied investment properties are more similar in risk to commercial real estate loans, and therefore, are underwritten by assessing the property’s income potential and appraised value. In both cases, we underwrite the borrower’s financial condition and evaluate his or her global cash flow position. Borrowers may be affected by numerous factors, including job loss, illness, or other personal hardship. As part of our product mix, the Company offers both portfolio and secondary market mortgages; portfolio loans generally are based on a 3-year, 5-year, or 7-year, adjustable-rate mortgages; while 15-year or 30-year fixed-rate loans are generally sold to the secondary market. The longer-term, fixed-rate loans are sometimes retained in the Company’s loan portfolio and are evaluated on a case-by-case basis. Beginning January 1, 2023, the Company stopped offering a 10-year adjustable rate loan.

Construction Loans. Typically, these loans have a term of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans will convert to a term loan carried in the Bank’s loan portfolio with a maturity of one to ten years and an amortization period of twenty years or less, in general. This portion of our loan portfolio includes loans to small-to-medium sized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties, and loans to residential developers. This type of loan is also made to individual clients for construction of single-family homes in our market area. An independent appraisal is generally 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 the Bank’s policies. As the construction project progresses, loan proceeds are requested by the borrower to complete phases of construction, and funding is only disbursed after the project has been inspected by a third-party inspector or an experienced construction lender. Risks associated with construction loans include fluctuations in the value of real estate, project completion risk, changes in market trends, and the interest rate environment. The ability of the construction loan borrower to move to permanent financing of 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 after the initial funding of the loan.

Commercial Loans. The Company offers a wide range of commercial loans, including small business loans, equipment financing, business lines of credit, and SBA loans. Small-to-medium sized businesses, retail, and professional establishments make up our target market for commercial loans. Our lenders primarily underwrite these loans based on the borrower’s ability to service the loan from cash flow. Lines of credit and loans secured by accounts receivable and/or inventory are monitored periodically by our staff. Loans secured by “all business assets,” or a “blanket lien” are typically made to highly qualified borrowers due to the nonspecific nature of the collateral and do not require a formal valuation of the business collateral. When commercial loans are secured by specifically identified collateral, then the valuation of the collateral is generally supported by an appraisal, purchase order, or third-party physical inspection. Personal guarantees of the principals of business borrowers are usually required. Equipment loans generally have a term of five years or less and may have a fixed or variable rate. Working capital lines of credit generally do not exceed two years and typically, are secured by accounts receivable, inventory, and personal, 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 credit-worthiness include the quality of management and the ability to evaluate changes in the supply and demand characteristics affecting the business’ markets for products and services and respond effectively to such changes. These loans may be made unsecured or secured, but most are made on a secured basis. Risks associated with our commercial loan portfolio include local, regional, and national market conditions. Other risk factors could include changes in the borrower’s management and fluctuations in collateral value. Additionally, there may be refinancing risk if a commercial loan includes a balloon payment which must be refinanced or paid off at loan maturity. In reference to our risk management process, our commercial loan portfolio presents a higher risk profile than our residential 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 collateral or as otherwise justified.

Consumer and Other Loans. Our consumer portfolio is the smallest portion of our loan portfolio, representing 0.9% of our total loan portfolio at December 31, 2023. These loans are made for various consumer purposes, such as the financing of automobiles, boats, and recreational vehicles. The payment structure of these loans is normally on an installment basis. The risk associated with this category of loans stems from the reduced collateral value for a defaulted loan; it may not provide an adequate source of repayment of the principal. The underwriting on these loans is primarily based on the borrower’s financial condition. Therefore, both secured and unsecured consumer loans subject the Company to risk when the borrower’s financial condition declines or deteriorates. Based upon our current trend in consumer loans, we do not anticipate that consumer loans will become a substantial component of our loan portfolio at any time in the immediate future. Consumer loans are made at fixed-interest and variable-interest rates and are based on the appropriate amortization for the asset and purpose.

Investments

Our investments are managed in relation to loan demand and deposit growth. Available funds are placed in low-risk investments and provide liquidity to fund increases in loan demand or to offset fluctuations in deposits. The total portfolio may be invested in U.S. Treasuries, general obligations of government agencies, asset-backed securities, and bank-qualified municipal securities because such securities generally represent a relatively minimal investment risk. Occasionally, we may invest in certificates of deposit from national and state banks. We also invest in mortgage-backed securities which generally have a shorter life than the stated maturity.

We monitor changes in financial markets. In addition to portfolio investments, our daily cash position is monitored to ensure that all available funds earn interest at the earliest possible date. A portion of the investment account is designated as secondary reserves and invested in liquid securities that can be readily converted to cash with minimum risk of market loss. These investments usually consist of U.S. Treasury obligations, U.S. Government agencies and federal funds. The remainder of the investment account may be placed in investment securities of a different type and longer maturity. Whenever possible, our strategy is to stagger the maturities of our securities to produce a steady cash-flow in the event the Bank needs cash or economic conditions change to a more favorable rate environment.

Deposit Activities

Deposits are the major source of the Bank’s funds for lending and other investment purposes. Deposits are gathered principally from within our primary market areas through the offering of a broad variety of deposit products, including checking accounts, money-market accounts, regular savings accounts, term certificate of deposit accounts (including “jumbo” certificates in denominations of $250,000 or more), and retirement savings plans. We consider the majority of our regular savings, demand, NOW, and money-market deposit accounts to be core deposits. The majority of our deposits are generated within the Leon County, Florida area. Our deposits are insured up to the maximum amount allowed by law by the FDIC. The Company also offers Certificate of Deposit Account Registry Service ("CDARS"), Insured Cash Sweep ("ICS") accounts. The Bank had no brokered deposits at December 31, 2023 or 2022.

Maturity terms, service fees, and withdrawal penalties are established by the Bank on a periodic basis. The determination of rates and terms is predicated on funds acquisition and liquidity requirements, market rate competition, growth goals, and federal regulations.

We offer certificates of deposit, including time deposits of $250,000 or more, public fund deposits and other large deposit accounts. More than half our time deposits are short-term in nature and are more sensitive to changes in interest rates than other types of deposits; therefore, they may be a less stable source of funds. In the event that existing short-term deposits are not renewed, the resulting loss of the deposited funds could adversely affect our liquidity. In a rising interest rate market, short-term deposits may prove to be a costly source of funds because their short-term nature requires renewal at increasingly higher interest rates, which may adversely affect the Bank’s earnings. The opposite is true in a falling interest rate market where such short-term deposits are more favorable to the Bank.

Company Website and U.S. Securities Exchange Commission Filings

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports can be found free of charge on our website at www.primemeridianbank.com as soon as reasonably practical after such material is electronically filed with or furnished to the SEC. The SEC maintains a website, www.sec.gov, which contains reports and other information regarding issuers that file electronically with the SEC. Our charters of the Audit Committee, the Compensation Committee, and the Executive, Nominating, and Corporate Governance Committee, along with our Code of Ethics and Insider Trading Policy are available on our website at www.primemeridianbank.com. Printed copies of this information may also be obtained, without charge, by written request to the Corporate Secretary at P.O. Box 13629, Tallahassee, FL 32317.

Employees

At December 31, 2023, PMHG had 110 full-time equivalent employees (including executive officers), none of whom are represented by a union or covered by a collective bargaining agreement. Management considers employee relations to be good.

Competition

The market for banking is highly competitive. Our competition is made up of a wide range of financial institutions, including credit unions, local, regional, and national commercial banks, mortgage companies, insurance companies, and other non-traditional providers of financial services. According to the annual Summary of Deposits report produced by the FDIC, total deposits (excluding non-retail) in Leon, Polk, and Wakulla counties, Florida, shrunk slightly to $20.9 billion as of June 30, 2023. As of June 30, 2023, there were eighteen FDIC-insured financial institutions serving Leon County; only two of them, including PMHG, are headquartered in Leon County. As of June 30, 2023, according to the Summary of Deposits, the Company ranked fifth and had a 6.95% share of the FDIC-insured deposits in Leon County. As of June 30, 2023, the Summary of Deposits reported that there were sixteen FDIC-insured institutions serving Polk County and that PMHG ranked 16th with 0.24% share of the FDIC-insured deposits in Polk County. As of June 30, 2023, the Summary of Deposits reported that there were four FDIC-insured financial institutions serving Wakulla County and that PMHG ranked third, with a 15.07% share of the FDIC-insured deposits in Wakulla County.

Some of our competitors are not subject to the same level of regulation and oversight that is required of banks and bank holding companies, resulting in lower cost structures. By emphasizing our exceptional client service, knowledge of local trends and conditions, and local decision-making process, we believe the Bank has developed an effective competitive advantage in its market, thus maintaining a strong level of growth.

Some of our competitors are much larger financial institutions with greater financial resources. It is not our goal to compete on all products and services, but rather to remain client-service focused and to adhere to our core values. This strategy has yielded solid growth for the Bank thus far.

Other important competitive factors that have contributed to our success in our market area include convenient office hours, electronic banking products, community reputation, quality of our banking team, capacity and willingness to extend credit, and our ability to offer cash management and other commercial banking services. Although offering competitive rates is important, we believe that our greatest competitive advantages are our experienced management team, client relationship culture, and personal service.

Privacy, Data Protection and Cybersecurity

The regulatory framework for data privacy and cybersecurity is rapidly evolving. Current federal law requires financial institutions to periodically disclose their privacy policies and practices related to sharing client information. Such laws allow consumer clients to opt out of having their information shared with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact clients with marketing offers. Current federal law also requires financial institutions to implement a comprehensive information security program. Such programs must include administrative, procedural, and physical safeguards to ensure the security and confidentiality of client records and personal information. These security and privacy policies and procedures are in effect across the Bank.

Federal banking agencies pay close attention to the cybersecurity practices of banks. Such agencies include a review of an institution’s information technology program and its ability to prevent cyberattacks in their examinations. The FFIEC released its Architecture, Infrastructure, and Operations (AIO) Booklet in June 2021. The AIO booklet calls for a layered security approach that incorporates administrative, procedural, and physical controls to include employee, vendor, and client awareness training. The Bank’s cybersecurity and information security practices incorporate preventative, detective, corrective, compensatory, and deterrent controls. Failing to have adequate cybersecurity safeguards in place, in accordance with AIO and other applicable regulations and laws, can result in supervisory criticism, monetary penalties and reputational harm.

In November, 2021, the Federal Reserve, OCC, and FDIC adopted a new regulation. Among other things, this regulation requires a bank to notify its primary federal regulator within 36 hours after identifying a "computer-security incident" that the bank believes in good faith could: (i) materially disrupt or degrade its business or operations in a manner that would threaten the viability of its operations and result in clients being unable to access their deposit and other accounts; (ii) result in a material loss of revenue, earnings or franchise value; or (iii) pose a threat to the financial stability of the United States.

Data privacy and data protection are also areas of increasing regulatory and legislative focus. The Bank is subject to rules and regulations issued by the Federal Trade Commission, which regulates unfair or deceptive acts or practices, including those related to data privacy and cybersecurity. Like other lenders, the Bank uses credit bureaus in its underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act, which also regulates identity theft prevention programs, reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Federal law further requires financial institutions to explain their information-sharing practices to their clients and to protect sensitive client information.

In 2023, the U.S. Securities and Exchange Commission finalized a new rule for public companies requiring Form 8-K disclosure of material cybersecurity incidents as well as annual reporting in Form 10-K regarding cybersecurity risk, management, strategy, and governance. Please see section 1C "Cybersecurity" for more detail.

Government Supervision and Regulation

General

As a one-bank holding company, we are subject to an extensive collection of state and federal banking laws and regulations, which impose specific requirements and restrictions on virtually all aspects of our operations. We are affected by government monetary policy and by regulatory measures affecting the banking industry in general. These regulations are primarily intended to protect depositors, borrowers, the public, the FDIC, and the integrity of the U.S. banking system and capital markets. Future legislative enactments, changes in governmental policy, or changes in the way such laws or regulations are interpreted by regulatory agencies or courts could have a material impact on our business, operations, and earnings. Federal economic and monetary policy may also affect our ability to attract deposits, make loans, and achieve our planned operating results.

The following is a brief summary of some of the statutes, rules, and regulations that currently affect PMHG’s and the Bank’s operations. This summary is qualified in its entirety by reference to the particular statutory and regulatory provision referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to our business. Any change in applicable laws or regulations may have a material adverse effect on our business.

Prime Meridian Holding Company

As a bank holding company, PMHG is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the examination and reporting requirements of the Federal Reserve. As such, the Company is required to file semi-annual reports and other information with the Federal Reserve regarding its business operations and those of its subsidiary. Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any additional bank without prior approval of the Federal Reserve. The Company is further prohibited from merging or consolidating with another bank holding company without prior approval.

Prior to any person or company, excluding a bank holding company, acquiring control of a bank holding company, subject to certain exemptions, the BHCA and the Change in Bank Control Act, together with regulations promulgated by the Federal Reserve, require either the Federal Reserve’s stated approval or a notice be furnished to the Federal Reserve and not disapproved. Additionally, the BHCA provides that the Federal Reserve may not approve any of these transactions if it would result in a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed below. As a result of the USA PATRIOT Act, the Federal Reserve is also required to consider the record of a bank holding company and its subsidiary bank(s) in combating money laundering activities in its evaluation of bank holding company merger or acquisition transactions.

Except as authorized by the BHCA and Federal Reserve regulations or orders, a bank holding company is generally prohibited from acquiring direct or indirect control of 5% or more of the voting shares of any company engaged in any business other than the business of banking or managing and controlling banks. The primary exception allows a bank holding company to own shares in any company whose activities have been determined by the Federal Reserve to be so closely related to banking or to managing or controlling banks that ownership of shares of that company is appropriate. Activities the Federal Reserve has determined by regulation to be permissible for bank holding companies include the following:

	●	making or servicing loans and certain types of leases;
	●	engaging in certain insurance activities;
	●	performing certain data processing services;
	●	acting in certain circumstances as a fiduciary or investment or financial advisor;
	●	providing management consulting services;
	●	owning savings associations;
	●	and making investments in corporations or projects designed primarily to promote community welfare.

In accordance with Federal Reserve Policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve’s policy, we may be required to provide financial support to the Bank at a time when, absent such Federal Reserve Policy, it might not be deemed advisable to provide such assistance. Under the BHCA, the Federal Reserve may also require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition. The Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) codified the Federal Reserve’s policy on serving as a source of financial strength. Such support may be required at times when, absent this Federal Reserve policy, a holding company may not be inclined to provide it. A bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.

The Federal Reserve’s authority was expanded through the Financial Institutions Reform Recovery and Enforcement Act of 1989 (“FIRREA”) to prohibit activities of bank holding companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices, or which constitute violations of laws or regulations. FIRREA increased the amount of civil money penalties which the Federal Reserve can assess for activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues. FIRREA also expanded the scope of the individuals and entities against which such penalties may be assessed.

Under Florida law, a person or entity seeking to acquire a controlling interest in a Florida bank must also obtain permission from the OFR. The Florida Statutes define control as either (1) indirectly or directly owns, controls or has power to vote 25% of more of any class of voting securities of the bank, (2) controlling the election of a majority of the directors, trustees, or other governing body of the bank, (3) owning, controlling, or having power to vote 10% or more of the voting securities combined with exercising a controlling influence over the management or policies of the bank, or (4) as determined by the OFR.

Prime Meridian Bank

As a state-chartered commercial bank, the Bank is subject to the supervision and regulation of the OFR and the FDIC. Our deposits are insured by the FDIC for a maximum of $250,000 per account ownership category. For this protection, we must pay a quarterly statutory assessment and comply with the rules and regulations of the FDIC. The assessment levied on a bank for deposit insurance varies, depending on the capital position of each bank, and other supervisory factors. Currently, we are subject to the statutory assessment.

The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of a bank, the claims of depositors of the bank, including the claims of the FDIC as subrogee of insured depositors and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against a bank. If a bank fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors and shareholders.

	Areas regulated and monitored by the bank regulatory authorities include:

	●	security devices and procedures;
	●	adequacy of capitalization and loss reserves;
	●	loans;
	●	investments;
	●	borrowings;
	●	deposits;
	●	mergers;
	●	issuances of securities;
	●	payment of dividends;
	●	establishment of branches;
	●	corporate reorganizations;
	●	transactions with affiliates;
	●	maintenance of books and records
	●	and adequacy of staff training to carry out safe lending and deposit gathering practices.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Act provides for significant regulation and oversight of the financial services industry. The Dodd-Frank Act addresses, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, thrift charters, and changes among the banking regulatory agencies. There are many provisions in the Dodd-Frank Act mandating regulators to adopt new regulations and conduct studies upon which future regulation may be based. While many have been issued, some remain to be issued and may have unintended effects on smaller banks.

The changes resulting from the Dodd-Frank Act impact and may further impact the profitability of our business activities, require changes to some of our business practices, or otherwise adversely affect our business. These impacts also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. It may further necessitate higher levels of regulatory capital and/or liquidity and lead to a change in our business strategy. We cannot predict the effects of this legislation and the corresponding regulations on us, our competitors, or on the financial markets and economy, although it may significantly increase costs and impede efficiency of internal business processes.

Restrictions on Transactions with Affiliates and Loans to Insiders

Under Sections 23A and 23B of the Federal Reserve Act, the Bank is subject to restrictions that limit the transfer of funds or other items of value to the parent holding company, and any other non-bank affiliates in so-called “covered transactions.” The term “covered transaction” includes loans, leases, other extensions of credit, investments and asset purchases, issuance of a guarantee, as well as other transactions involving the transfer of value from the Bank to an affiliate or for the benefit of an affiliate. An affiliate of a bank is any company or entity which controls, is controlled by, or is under common control with the bank. Unless an exemption applies, covered transactions by the Bank with a single affiliate are limited to 10% of the Bank’s capital stock and surplus (tangible capital) and all such transactions are required to be on terms substantially the same, or at least as favorable to the Bank or subsidiary, as those provided to a nonaffiliate. With respect to all covered transactions with affiliates in the aggregate, they are limited to 20% of the Bank’s capital and surplus.

The Dodd-Frank Act expanded the scope of Section 23A and includes investment funds managed by an affiliate institution as well as other hurdles. In addition, the Dodd-Frank Act expanded coverage of transactions with insiders by including credit exposure arising from derivative transactions. The Dodd-Frank Act furthermore prohibits an insured depository institution from purchasing or selling an asset to an executive officer, director, or principal shareholder (or any related interest of such a person) unless the transaction is on market terms. If the transaction exceeds 10% of the institution’s capital, it must be approved in advance by a majority of the disinterested directors.

A bank’s authority to extend credit to executive officers, directors and shareholders with greater than 10% ownership, as well as entities controlled by such persons, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve. Among other things, these loans must be made on terms substantially the same as those offered to unaffiliated individuals. The amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and certain approval procedures must be followed in making loans which exceed specified amounts.

Basel III and Sarbanes-Oxley Act

The Bank is also subject to capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. Basel III and the regulations of the federal banking agencies require bank holding companies and banks to undertake significant activities to demonstrate compliance with certain capital standards. Compliance with these rules impose additional costs on the Company and the Bank.

The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, accounting obligations, and corporate reporting requirements for companies with debt or equity securities registered under the Securities Exchange Act of 1934. Compliance with this complex legislation and subsequent Securities and Exchange Commission rules is a major focus of all public corporations and will be so for the Company going forward. One of the more applicable provisions of this act is corporate responsibility for financial reports. Sarbanes-Oxley requires a public company’s principal executive officer and principal financial officer to sign quarterly and annual reports stating that they have reviewed the reports and that the reports are true.

Capital

An international body known as the Basel Committee on Banking Supervision developed regulatory capital rules to implement capital standards (referred to as Basel III) and impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations, regardless of size, and bank holding companies and savings and loan holding companies with more than $3 billion in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations which are organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted into the Basel III capital regime.

Banks are subject to regulatory capital requirements imposed by the Federal Reserve and the FDIC. Until a bank holding company’s assets reach $3 billion, the risk-based capital and leverage guidelines issued by the Federal Reserve are applied to bank holding companies on a nonconsolidated basis, unless the bank holding company is engaged in nonbank activities involving significant leverage, or it has a significant amount of outstanding debt held by the general public. Instead, a bank holding company with less than $3 billion generally applies the risk-based capital and leverage capital guidelines on a bank only basis and must only meet a debt-to-equity ratio at the holding company level. The FDIC risk-based capital guidelines apply directly to insured state banks, regardless of whether they are subsidiaries of a bank holding company. Both agencies’ requirements, which are substantially similar, establish minimum capital ratios in relation to assets, both on an aggregate basis as adjusted for credit risks and off-balance sheet exposures. The risk weights assigned to assets are based primarily on credit risks. Depending upon the riskiness of a particular asset, it is assigned to a risk category. Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, risk weights (from 0% to 150%) are applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Capital is then classified into three categories, Common Equity Tier 1, Additional Tier 1, and Tier 2. Common Equity Tier 1 Capital (“CET1”) is the sum of common stock instruments and related surplus net of treasury stock, retained earnings, Accumulated Other Comprehensive Income (“AOCI”), and qualifying minority interests, less applicable regulatory adjustments and deductions that include AOCI (if an irrevocable option to neutralize AOCI is exercised). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to an aggregate of 15% of CET1 and 10% of CET1 individually. Additional Tier 1 Capital includes noncumulative perpetual preferred stock, Tier 1 minority interests, grandfathered trust preferred securities, and Troubled Asset Relief Program instruments, less applicable regulatory adjustments and deductions. Tier 2 Capital includes subordinated debt and preferred stock, total capital minority interests not included in Tier 1, and ALLL not exceeding 1.25% percent of risk-weighted assets, less applicable regulatory adjustments and deductions.

Smaller banks, such as the Bank, are also subject to the following capital level threshold requirements under the FDIC’s Prompt Corrective Action regulations.

Threshold Ratios

Common Equity

Total

Tier 1

Capital

Risk-Based

Leverage

Category

Capital Ratio

Well capitalized

10.00%

8.00%

6.50%

5.00%

Adequately Capitalized

8.00%

6.00%

4.50%

4.00%

Undercapitalized

<8.00%

<6.00%

<4.50%

<4.00%

Significantly Undercapitalized

<6.00%

<4.00%

<3.00%

Critically Undercapitalized

Tangible Equity/Total Assets ≤ 2%

Community banks are also subject to the following minimum capital requirements:

Minimum CET1 ratio	4.50	%

Capital conversion buffer	2.50	%

Minimum tier 1 capital	6.00	%

Minimum total capital	8.00	%

Federal banking regulators’ risk-based capital guidelines also take account of interest rate risk. Interest rate risk is the adverse effect that changes in market interest rates may have on a bank’s financial condition and is inherent to the business of banking. Under the regulations, when evaluating a bank’s capital adequacy, the capital standards explicitly include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates. The exposure of a bank’s economic value generally represents the change in the present value of its assets, less the change in the value of its liabilities, plus the change in the value of its interest rate off-balance sheet contracts.

Federal bank regulatory agencies possess broad powers to take prompt corrective action as deemed appropriate for an insured depository institution and its holding company, based on the institution’s capital levels. The extent of these powers depends upon whether the institution in question is considered “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly under-capitalized,” or “critically undercapitalized.” Generally, as an institution is deemed to be less well-capitalized, the scope and severity of the agencies’ powers increase, ultimately permitting the agency to appoint a receiver for the institution. Business activities may also be influenced by an institution’s capital classification. For instance, only a “well-capitalized” depository institution may accept brokered deposits without prior regulatory approval and can engage in various expansion activities with prior notice, rather than prior regulatory approval. However, rapid growth, poor loan portfolio performance, poor earnings performance, or a combination of these factors, could change the capital position of the Bank in a relatively short period of time. Failure to meet these capital requirements could subject the Bank to prompt corrective action provisions of the FDIC, which may include filing with the appropriate bank regulatory authorities a plan describing the means and a schedule for achieving the minimum capital requirements. In addition, we would not be able to receive regulatory approval of any application that required consideration of capital adequacy, such as a branch or merger application, unless we could demonstrate a reasonable plan to meet the capital requirement within an acceptable period of time.

As of December 31, 2023, the Bank was considered to be “well capitalized” with a 10.15% Tier 1 Leverage ratio; a 13.18% Common Equity Tier 1 Risk-based Capital ratio, a 13.18% Tier 1 Risk-based Capital ratio, and a 14.03% Total Risk-based Capital ratio.

The Federal banking regulatory agencies have adopted a rule to simplify the methodology for measuring capital adequacy for smaller, uncomplicated banks. This community bank leverage ratio (“CBLR”) is calculated as the ratio of tangible equity capital divided by average total consolidated assets. CBLR tangible equity is defined as total equity capital, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carryforwards, goodwill, and other intangible assets (other than mortgage servicing assets). A qualifying organization may elect to use the CBLR framework if its CBLR is greater than 9%. The Bank has not elected to use the CBLR framework because it would not receive any material benefit with respect to compliance or reporting.

Other Safety and Soundness Regulations

The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation and benefits. The federal regulatory agencies may take action against a financial institution that does not meet such standards.

Payment of Dividends

PMHG is a legal entity separate and distinct from the Bank. The Company’s principal sources of funds to pay dividends on its common stock are capital retained from stock offerings and dividends from the Bank. Various federal and state laws and regulations limit the amount of dividends the Bank may pay to the Company without regulatory approval. The Federal Reserve Board is authorized to determine the circumstances when the payment of dividends would be an unsafe or unsound practice and to prohibit such payments. The rights of the Company, its shareholders, and creditors to participate in any distribution of the assets or earnings of the Bank are also subject to the prior claims of creditors of the Bank. Additionally, the Florida Business Corporation Act provides that the Company may only pay dividends if the dividend payment would not render the company insolvent, or unable to meet its obligations as they come due.

As a Florida state-chartered bank, the Bank is also subject to regulatory restrictions on the payment of dividends, including a prohibition of dividend payments from the Bank’s capital under certain circumstances without the prior approval of the OFR and the FDIC. Except with the prior approval of the OFR, all dividends of any Florida bank must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts.

Banks are also required to hold a capital conservation buffer of CET1 in excess of their minimum risk-based capital ratios to avoid limits on dividend payments and certain other bonus payments. Those requirements are reflected in the table below:

		Maximum Payout
		Ratio (as a % of
		the Previous Four
Capital Conservation Buffer		Quarters of Net
(as a percentage of risk weighted assets)		Income)

Greater than 2.5%		No payout limitation
Less than or equal to 2.5% and greater than 1.875%		60%
Less than or equal to 1.875% and greater than 1.25%		40%
Less than or equal to 1.25% and greater than 0.625%		20%
Less than or equal to 0.625%		0%

The Federal Reserve expects bank holding companies to serve as a source of strength to their subsidiary bank(s), which may require them to retain or obtain access to capital for investment in their subsidiary bank(s), rather than pay dividends to shareholders. As stated previously, the Bank may not pay dividends to PMHG, if after paying those dividends, the Bank would fail to meet the required minimum levels under the risk-based capital guidelines and the minimum leverage ratio requirements. Payment of dividends by the Bank may be restricted at any time at the discretion of its applicable regulatory authorities, based upon the Bank’s capital position and asset quality.

Community Reinvestment

In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and the Community Reinvestment Act (the “CRA”). The CRA requires the appropriate federal banking agency to assess the Bank's record in meeting the credit needs of the communities served by the Bank, including low and moderate-income neighborhoods. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance.” The Bank received a “satisfactory” rating in its most recent CRA evaluation.

Consumer Protection

The Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”) as an agency to centralize responsibility for consumer financial protection, including implementing, examining and enforcing compliance with federal consumer financial laws. The CFPB has focused its rulemaking in several areas, particularly in the areas of mortgage reform involving the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act. The CFPB requires lenders to verify borrowers’ income and ability to repay loans and simplify the disclosures borrowers receive when taking out a loan. In addition, pursuant to the Gramm-Leach-Bliley Act, federal banking regulators have enacted regulations limiting the ability of banks and other financial institutions to disclose nonpublic consumer information to non-affiliated third parties. The regulations require disclosure of privacy policies and allow consumers to prevent certain personal information from being shared with non-affiliated third parties.

Additional rulemakings to come under the Dodd-Frank Act will dictate compliance changes for financial institutions. Any such changes in regulations or regulatory policies applicable to the Bank make it difficult to predict the ultimate effect on our financial condition or results of operations.

Bank Secrecy Act / Anti-Money Laundering Laws

Banking regulators intensely focus on Anti-Money Laundering and Bank Secrecy Act compliance requirements, particularly the Anti-Money Laundering provisions of the USA PATRIOT Act. The USA PATRIOT Act substantially broadened the scope of U.S. anti-money laundering laws and regulations by creating new laws, regulations, and penalties, imposing significant new compliance and due diligence obligations, and expanding the extra-territorial jurisdiction of the U.S. These laws and regulations require the Bank to implement policies, procedures, and controls to detect, prevent, and report potential money laundering and terrorist financing and to verify the identity of its customers. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA PATRIOT Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and BHC acquisitions.

Interstate Banking and Branching

Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. Florida law permits a state bank to establish a branch of the bank anywhere in the state. Accordingly, with the elimination of interstate branching under the Dodd-Frank Act, a bank with its headquarters outside the State of Florida may establish branches anywhere within Florida.

Economic and Monetary Policies

The Bank’s earnings are affected by the policies of various banking regulatory authorities of the United States, especially the Federal Reserve and FDIC. The Federal Reserve, among other things, regulates the supply of money, credit and interest rates as a means of influencing general economic conditions within the United States. The instruments of monetary policy employed by the Federal Reserve for these purposes influence the overall level of investments, loans, other extensions of credit and deposits, and the interest rates paid on liabilities and received on assets.

As is generally true with all banking institutions, the Bank’s operations are materially and significantly influenced by these general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve and the FDIC. Deposit flows and the cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for real estate financing and other types of loans, which in turn, is affected by interest rates and other factors affecting local demand and availability of funds.

Enterprise Risk Management

As evidenced by many of the challenges that the financial industry has faced, we understand and place significant emphasis on risk management. We have invested resources in comprehensive software which monitors every component of the Bank. We believe that taking a global view of the Bank’s processes, down to the details of each procedure, will keep us properly focused. We recognize that enterprise risk management is an ongoing process.

Our solid asset quality statistics support our emphasis on risk management. With respect to lending, our risk management philosophy focuses on structuring credits to provide for multiple sources of repayment; this philosophy, coupled with strong underwriting policies and processes administered by experienced lenders, assists us with managing and mitigating our lending risks. As loans are reviewed, any borrowers who display deteriorating financial conditions are moved to an increased level of monitoring and a plan for implementing corrective actions is developed to minimize losses. We also have an annual independent, third-party loan review performed. In addition, our risk management software has the capability to stress test our portfolio utilizing mild and severe environments.

Our program also focuses on other specific areas of risk management including asset liability management, regulatory compliance, vendor management, policy review tracking, audit functions, and internal controls. Our asset liability management process is extensive; we use independent models by reputable third parties to run our interest rate risk model. We may utilize hedging techniques whenever our models indicate short term (net interest income) or long term (economic value of equity "EVE") risk to interest rate movements.

Our enterprise risk management program assists with monitoring operational controls and compliance control functions. We have also engaged an experienced independent public accounting firm to assist us with testing controls for operations and compliance. In addition, another experienced independent firm has been engaged to review and assess our controls with respect to technology and to perform penetration testing to assist us in managing the risks associated with information security.

Correspondent Banking

Correspondent banking gives the Bank access to services that we have determined are not economical or practical to perform ourselves. We purchase correspondent services offered by larger banks, including check collections, purchase of federal funds, security safekeeping, investment services, coin and currency supplies. We may also use correspondent banks for overline and liquidity loan participations and sales of loan participations.

Interest and Usury

The Bank is subject to numerous state and federal statutes that affect the interest rates that may be charged on loans. These laws do not, under present market conditions, deter the Bank from continuing to originate loans.

Item 1A Risk Factors

RISKS RELATED TO OUR BUSINESS OPERATIONS

Some of our borrowers will not repay their loans, and losses from loan defaults may exceed the allowance we establish for that purpose, which may have an adverse effect on our business.

Consistent with the financial institution industry, some of our borrowers inevitably will not repay loans that we make to them. This risk is inherent in the banking business. The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. If a significant number of loans are not repaid, it will have an adverse effect on our earnings and overall financial condition.

We adopted the Financial Accounting Standard's Board's Current Expected Credit Loss ("CECL") standard in the first quarter of 2023. Under the CECL model, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held to maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount and certain management judgments over the life of the loan. This initial measurement took place as of January 1, 2023 at the time of our adoption of CECL and resulted in a $2.6 million ($1.9 million tax-adjusted) decrease in the allowance for credit losses. Despite our best efforts, and particularly due to the fact that we have a limited loan loss history, the determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions and estimations.

The CECL model may result in more volatility in the level of our ACL, as compared to the “incurred loss” standard that we previously applied in determining our ACL. The CECL model requires us to estimate the lifetime “expected credit loss” with respect to loans and other applicable financial assets, which may change more rapidly than the level of “incurred losses that would have been used to determine our allowance for loan losses prior to adoption of this standard. As a result of these factors, we may experience increased expense or find that our allowance for credit losses may not be adequate to cover our actual losses, and future credit loss expense may adversely affect our earnings and capital position.

Our recent results may not be indicative of our future results.

We may not be able to sustain our historical rate of growth. In addition, our recent growth may distort some of our historical financial ratios and statistics. Various factors, such as economic conditions, regulatory and legislative considerations and limitations, and competition, may also impede or prohibit our efforts to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results from operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.

Changes in business and economic conditions, in particular those of the Florida markets in which we operate, could lead to lower asset quality and lower earnings.

Unlike larger national or regional banks that are more geographically diversified, our business and earnings are closely tied to general business and economic conditions, particularly the economy of the Tallahassee MSA. The local economy is heavily influenced by government, education, real estate, and other service-based industries. Factors that could affect the local economy include declines in government spending, higher energy costs, reduced consumer or corporate spending, natural disasters or adverse weather, health epidemics, and a significant decline in real estate values. A sustained economic downturn could adversely affect the quality of our assets, credit losses, and the demand for our products and services, which could lead to lower revenue and lower earnings.

Inflation could negatively impact our business, our profitability and our stock price.

Continued inflation may impact our profitability by adversely affecting our expenses leading to higher funding costs and higher expenses related to employee recruitment and retention. Inflation may result in a decrease in consumer purchasing power leading to lower demand for our products and services. If inflationary pressures continue, we could see higher default rates on loans, leading to diminished appetite for credit and an increase in our allowance for credit losses. This scenario would potentially have a negative impact on our business, financial condition, and results of operations.

Changes in interest rates affect our profitability and assets.

Our profitability depends to a large extent on the Bank’s net interest income, which is the difference between income on interest-earning assets such as loans, investment securities, and liquid balances and expenses on interest-bearing liabilities such as deposits and borrowings. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control including inflation, economic recession, unemployment, money supply, domestic and international events, and changes in the United States and other financial markets.

The Federal Reserve raised interest rates seven times in 2022 and four times in 2023, for a total of 525 basis points. At December 31, 2023, our one-year interest rate sensitivity position was liability sensitive, such that an immediate increase in interest rates would have a negative impact on our net interest income over the next twelve months. Our ALCO model shows that the effect would fall within Board approved limits. Our results of operations are affected by changes in interest rates and our ability to manage this risk. The difference between interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities may be affected by changes in market interest rates, changes in relationships between interest rate indices, and changes in the relationships between long-term and short-term market interest rates. Our net interest income may be reduced if: (i) more interest-earning assets than interest-bearing liabilities reprice or mature during a time when interest rates are declining; or (ii) more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising. In addition, the mix of assets and liabilities could change as varying levels of market interest rates might present our client base with more attractive options.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, and other sources, could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically, the financial services industry, or the economy in general. Factors that could negatively impact our access to liquidity sources include a decrease of our business activity as a result of a downturn in the markets in which our loans are concentrated, adverse regulatory action against us, our inability to attract and retain deposits, unrealized losses in the available-for-sale debt securities portfolio that could impact our ability to sell them without absorbing material losses, or increases in pledging requirements that could reduce our access to secured borrowing sources. Our ability to borrow could be impaired by factors that are not specific to us, such as a disruption in the financial markets and diminished expectations or growth in the financial services industry.

We may not be able to retain or grow our core deposit base, which could adversely impact our funding costs.

Like many financial institutions, we rely on client deposits as our primary source of funding for our lending activities. Our future growth will largely depend on our ability to retain and grow our deposit base. Although we have historically maintained a high deposit client retention rate, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, client perceptions of our financial health and general reputation, or a loss of confidence by clients in us or the banking sector generally. Such factors could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current client deposits or attract additional deposits. Additionally, any such loss of funds could result in lower loan originations, which could have a material adverse effect on our business, financial condition and results of operations.

Our loan portfolio includes commercial, real estate, and consumer and other loans that may have higher risks.

Commercial loans and commercial real estate loans generally carry larger balances and can involve a greater degree of financial and credit risk than other loans. As a result, banking regulators continue to give greater scrutiny to lenders with a high concentration of commercial real estate loans in their portfolios, and such lenders are expected to implement stricter underwriting standards, internal controls, risk management policies, and portfolio stress testing, as well as higher capital levels and loss allowances. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties, and the increased difficulty of evaluating and monitoring these types of loans.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and depend on our financial performance. Accordingly, there is no assurance as to our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital to support our growth, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

We may be subject to losses due to fraudulent and negligent acts on the part of loan applicants, mortgage brokers, other vendors and our employees.

When we originate loans, we rely heavily upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal, title information, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, we generally bear the risk of loss associated with the misrepresentation.

Both our industry and our primary service area are highly competitive.

There are a number of national and regional financial institutions that compete with us in our primary service areas. By virtue of their larger capital resources, such institutions have significantly greater lending limits than we have, and these financial institutions have the ability to offer a greater mix of financial products and services than we are able to provide. In addition, we are also competing with other financial institutions, such as savings and loan associations and credit unions, for deposits and loans. Most of our competitors benefit from a more established market presence, greater capital, and a larger asset and lending base. As a result, we cannot anticipate the extent to which such competition may negatively affect our ability to operate profitably.

Our lending limit per borrower will continue to be lower than many of our competitors which may discourage potential clients and limit our loan growth.

The Bank's legally mandated lending limit is lower than that of many of our larger competitors because we have less capital. At December 31, 2023, our legal lending limit for loans was approximately $21.6 million to any one borrower on a secured basis and $13.0 million on an unsecured basis. Furthermore, management has an established in-house lending limit of $8.0 million for any single secured loan or loan relationship and an in-house limit of $1.0 million for any single unsecured loan or loan relationship as of December 31, 2023. Although we have not experienced this to date, our lower lending limit may discourage potential borrowers with loan needs that exceed our limit from doing business with us. This may restrict our ability to grow. We attempt to serve the needs of these borrowers by selling loan participations to other institutions, but this strategy may not always succeed.

A significant portion of our loan portfolio is secured by real estate in our geographic markets and events that negatively impact the real estate market in our primary market could hurt our business.

Our interest-earning assets are heavily concentrated in mortgage loans secured by real estate, particularly real estate located in Leon County, Florida. As of December 31, 2023, approximately 85.9% of our gross loan portfolio (excluding loans held for sale) had real estate as a primary or secondary component of collateral. The real estate collateral, in each case, provides an alternate source of repayment in the event of default by the borrower; however, the value of the collateral may decline during the time the credit is extended. Real estate values and real estate markets are generally affected by a variety of factors including changes in economic conditions; fluctuations in interest rates; the availability of credit; changes in tax laws and other governmental statutes, regulations, and policies; and acts of nature. If we are required to liquidate the collateral securing a loan during a period of reduced real estate values to satisfy the debt, our earnings and capital could be adversely affected.

This concentration of loans subjects us to risks if there is a downturn in the economy or a recession similar to the one our country most recently experienced. A downturn could result in decreased loan originations and increased delinquencies and foreclosures, which could more greatly affect us than if our lending were more geographically diversified. In addition, since a large portion of our portfolio is secured by properties located in Leon County, Florida, the occurrence of a natural disaster, such as a hurricane, or a man-made disaster could result in a decline in loan originations, a decline in the value or destruction of mortgaged properties, and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us.

We face additional risks due to our increased mortgage banking activities that could negatively impact net income and profitability.

We sell the majority of the mortgage loans that we originate. The sale of these loans generates noninterest income and can be a source of liquidity for the Bank. Disruption in the secondary market for residential mortgage loans could result in our inability to sell mortgage loans, which could negatively impact our liquidity position and earnings. In addition, declines in real estate values or increases in interest rates could reduce the potential for robust mortgage originations, which could negatively impact our earnings. As we do sell mortgage loans, we also face the risk that such loans may have been made in breach of our representations and warranties to the buyers and we could be forced to repurchase such loans or pay other damages.

The success of our mortgage lending business depends on our ability to generate loans and attract and retain effective loan origination officers and other sources of mortgage loan referrals.

The mortgage lending business is highly dependent on being able to successfully originate a consistent volume of loans. This can be adversely affected by increases in mortgage loan interest rates or lower than typical home sales rates. The primary ways we generate loans are through the personal sales efforts of our mortgage lending officers and our development of loan referral sources, such as real estate brokers. If we are unable to attract and retain a productive team of such officers or develop an effective network of referral sources, or if demand for such loans is less than is typical, we will likely be unable to generate a volume of mortgage loans to produce sufficient revenue for this line of business to be profitable. If we cannot operate this line of business in a profitable manner, we will likely incur losses due to expenses associated with attempting to establish the line of business.

Future economic growth in our market area may be slower compared to previous years.

The State of Florida’s population growth historically has exceeded national averages. Consequently, the state has experienced substantial growth in new business formation and public works spending. Although recently home prices have increased due to a moderate economic growth and migration into our market area, growth in our market area may still be restrained in the near term. Any decrease in existing and new home sales or in the inventory of houses available for sale will limit lending opportunities and negatively affects our income. In addition, an increase in interest rates may decrease the demand for loans in our market and a decline in property values could lead to valuation adjustments on our loan portfolio.

Our business strategy depends on continued growth; therefore, our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to continue pursuing a growth strategy for our business. Our business prospects must be considered in light of the risks, expenses, and difficulties that are frequently encountered by companies in significant growth stages of development. In light of the prevailing economic conditions, we cannot assure you we will be able to expand our market presence in our existing market, successfully enter new markets, or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition, or results of operations and could negatively affect successful implementation of our business strategy.

Reputational risk and social factors may impact our results.

Our ability to originate and maintain deposit accounts and loans is highly dependent upon client and community perceptions of our business practices and our financial health. Adverse perceptions regarding those factors could damage our reputation in our markets, leading to difficulties in generating and maintaining deposit and loan client relationships. Adverse developments with respect to the consumer or other external perceptions regarding the practices of our competitors, or our industry as a whole, may also adversely impact our reputation. Adverse impacts on our reputation, or the reputation of our industry, may also result in greater regulatory or legislative scrutiny, which may lead to laws, regulations or regulatory actions that may change or constrain the manner in which we engage with our clients and the products we offer. Adverse reputational impacts or events may also increase our litigation risk. We carefully monitor internal and external developments for areas of potential reputational risk and have established governance structures to assist in evaluating such risks in our business practices and decisions.

We may face risks with respect to future expansion.

We may engage in additional de novo branch expansion, expansion through acquisitions of existing branches of other financial institutions, or the acquisition of existing financial institutions in North and Central Florida, South Georgia, or South Alabama. We may consider and enter into new lines of business or offer new products or services. Branch expansion, acquisitions, and mergers involve a number of risks, including, but not limited to: (i) the time and costs associated with identifying and evaluating potential acquisitions and merger partners; (ii) inaccurate estimates and judgments regarding credit, operations, management, and market risks of the target institutions; (iii) the time and costs of evaluating new markets, hiring experienced local management, opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; (iv) our ability to finance an acquisition and possible dilution to our existing shareholders; (v) the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses; (vi) our ability to penetrate new markets when we lack experience in those markets; (vii) the strain of growth on our infrastructure, staff, internal controls and managements, which may require additional personnel, time, and expenditures; (viii) exposure to potential asset quality issues with acquired institutions; (ix) the introduction of new products and services into our business that could prove costly; and (x) the possibility of unknown or contingent liabilities.

We may incur substantial costs to expand and we can give no assurance such expansion will result in the levels of profits we seek. There can be no guarantee that integration efforts of any future mergers or acquisitions will be successful. Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with a future acquisition, which could cause ownership and economic dilution to our current shareholders.

Our business is exposed to the possibility of technology failure and a disruption in our operations may adversely affect our business.

The Bank relies on its computer systems and the technology of outside service providers for its daily operations. We rely on these systems to accurately track and record our assets and liabilities. If our computer systems or outside technology sources become unreliable, fail, or experience a breach of security, our ability to maintain accurate financial records may be impaired, which could materially affect our business operations and financial condition. In addition, a disruption in our operations resulting from failure of transportation and telecommunication systems, loss of power, interruption of other utilities, natural disaster, fire, global climate changes, computer hacking or viruses, failure of technology, terrorist activity, or the domestic and foreign response to such activity or other events outside of our control could have an adverse impact on the financial services industry as a whole and/or on our business. Our business continuity plan and disaster recovery plan may not be adequate and may not prevent significant interruptions of our operations or substantial losses. The increased number of cyber-attacks during the past few years has further heightened our awareness of this risk. As the environment for such attacks continues to evolve, we will continue to implement additional security controls.

A failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause financial losses.

We rely heavily on communications and information systems to conduct our business. Information security risks for financial institutions such as ours have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As client, public, and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breaches. Our business, financial, accounting and data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control. For example, there could be electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and, as described below, cyber-attacks.

As noted above, our business relies on our digital technologies, computer and email systems, software, and networks to conduct its operations. Although we have information security procedures and controls in place, our technologies, systems, networks, and our clients’ devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, or otherwise disrupt our or our clients’ or other third parties’ business operations. Third parties with whom we do business or that facilitate our business activities, including financial intermediaries, or vendors that provide services or security solutions for our operations, and other third parties, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Our risk and exposure to these matters remains heightened because of the evolving nature of these threats. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support our businesses and clients, or cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

Technological changes, including online and mobile banking, have the potential of disrupting our business model, and we may have fewer resources than many competitors to invest in technological improvements.

The financial services industry is experiencing significant and rapid technological changes. Many of our bank and non-bank competitors frequently introduce new technology-driven products and services. Changes in client expectations and behaviors have increased the need to offer these options to our clients. Our future success will depend, in part, upon our ability to invest in and use technology to provide products and services that provide convenience to clients and to create additional efficiencies in operations. We will need to make significant additional capital investments in technology, and we may not be able to effectively implement new technology-driven products and services in a timely manner in response to changes in client behaviors, thus adversely affecting our operations. Many competitors have substantially greater resources to invest in technological improvements than we do.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities we engage in can be intense and we may not be able to hire people or to retain them. An inability to develop and maintain a skilled and well qualified team of employees could have a material adverse impact on our business, because they are integral to the implementation of our business strategies and the provision of service to our clients. Finding qualified replacement personnel can be time consuming and expensive and distract us from our business activities.

We are dependent on key executive officers, the loss of which may be detrimental to our operations.

We are dependent on certain executive officers of the Company and the Bank, for their leadership and oversight in all aspects of our operations and the unexpected loss of any of these personnel could adversely affect our operations. Such adverse effects may be magnified if such officers were to become employed with a competitor of ours.

If our enterprise risk management framework is not effective, we could suffer unexpected losses and our results of operations could be materially adversely affected.

Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing financial performance and stockholder value. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including credit, liquidity, operational, regulatory compliance and reputational. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and our business and results of operations could be materially adversely affected.

We operate in a geographic location that is vulnerable to hurricanes which could be detrimental to our operations.

Florida, in general, and certain of our market areas have a material risk of hurricanes and related damage. We have a disaster recovery plan in place for such events that includes among other things plans to move a team of key employees to an offsite remote location. While management believes it has a viable plan in place to keep the Bank operational, it has never been fully tested in a major natural disaster.

The effects of future widespread public health emergencies may negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Widespread health emergencies, such as the recent global COVID-19 pandemic, can disrupt our operations through their impact on our employees, clients and their businesses, and the communities in which we operate. Disruptions to our clients could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in a decline in local loan demand, loan originations and deposit availability and negatively impact the implementation of our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

LEGAL AND REGULATORY RISKS

We are subject to government regulation and monetary policy that could constrain our growth and profitability.

We are subject to extensive federal government supervision and regulations that impose substantial limitations with respect to lending activities, purchases of investment securities, the payment of dividends, and many other aspects of the banking business. Many of these regulations are intended to protect depositors, the public, and the FDIC but not our shareholders. The banking industry is heavily regulated. We are subject to examinations, supervision, and comprehensive regulation by various federal and state agencies. Our compliance with these regulations is costly and restricts certain activities of the Bank. Banking regulations are primarily intended to protect the Bank Insurance Fund and depositors, not shareholders. The burden imposed by federal and state regulations puts banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies. Federal economic and monetary policy may also affect our ability to attract deposits, make loans, and achieve our planned operating results.

Legislation and regulatory proposals enacted in response to market and economic conditions may materially adversely affect our business and results of operations.

Changes in the laws, regulations, and regulatory practices affecting the banking industry may increase our costs of doing business or otherwise adversely affect us and create competitive advantages for others. The Dodd-Frank Act in particular represents a significant overhaul of many aspects of the regulation of the financial services industry. These changes may impact the profitability of our business activities, require changes to some of our business practices, or otherwise adversely affect our business, as would other regulatory initiatives that may become effective. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. It may also require us to hold higher levels of regulatory capital and/or liquidity and it may cause us to adjust our business strategy and limit our future business opportunities. We cannot predict the effects of this legislation and the corresponding regulations on us, our competitors, or on the financial markets and economy, although it may significantly increase costs and impede efficiency of internal business processes.

Our information systems may experience an interruption or security breach.

We rely heavily on communications and information systems to conduct our business. We also provide our clients the ability to bank electronically through online banking, remote capture, mobile capture, and mobile banking. The secure transmission of confidential information over the internet is a critical element of banking online. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes, and other security problems. Any failure, interruption, or breach in the security of these systems could result in disruptions in our client relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effects of possible failure, interruption, or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption, or security breach of our information systems could damage our reputation, result in a loss of client business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability. While we do carry insurance to protect against losses resulting from such technology issues or breaches, we could be exposed to claims, litigation, and other possible liabilities that could exceed the maximum policy limits.

Florida financial institutions face a higher risk of noncompliance and enforcement actions with anti-money laundering statutes and regulations.

Banking regulators focus intensely on anti-money laundering compliance requirements. They also intensely scrutinize compliance with the rules enforced by the Office of Foreign Assets Control. Both federal and state banking regulators and examiners have been extremely aggressive in their supervision and examination of financial institutions located in the State of Florida with respect to institutions’ anti-money laundering compliance.

In order to comply with regulations, guidelines, and examination procedures in this area, the Bank has been required to adopt policies and procedures and to install expensive systems. If our policies, procedures, and systems are deemed deficient, then we may be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan including acquisition plans.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject the Bank to the payment of FDIC deposit insurance assessments. The Bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. Any increases in assessment rates or special assessments which may occur in the future could reduce our profitability or limit our ability to pursue certain business opportunities, which could materially and adversely affect our business, financial condition, results of operations, and prospects.

The FASB has issued an accounting standard update that will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operations.

The Financial Accounting Standards Board (“FASB”) issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaced the current “incurred loss” model for recognizing credit losses with an “expected loss” model. This model is commonly referred to as CECL. Under CECL, which for us was effective January 1, 2023, we are required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events (including historical experience), current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs from the “incurred loss” model previously required. Accordingly, the adoption of the CECL model may affect how we determine our allowance for credit losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for credit losses. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The Company adopted this ASU on January 1, 2023 with an initial adjustment to the allowance for loan losses of $2.6 million ($1.9 million, net of taxes). The ratio of allowance to total loans fell from 1.20% at December 31, 2022 to 0.86% at December 31, 2023.

RISKS RELATED TO OWNERSHIP OF SHARES OF OUR COMMON STOCK

The limited trading market may make it difficult for you to sell your shares in the future.

Shares of our common stock trade on the OTCQX market under the symbol, “PMHG.” However, there is limited trading activity in our common stock which may make it difficult for you to sell your shares and may depress the prices at which you would be able to sell your shares. A public market having depth and liquidity depends on having enough buyers and sellers at any given time. Without an active trading market, shareholders may find it difficult to find buyers for their shares. The price at which you may be able to sell your shares may also be subject to volatility due to the size of, and activity in, the market for them. Investors should be aware that they may be required to bear the financial risks of this investment for an indefinite period of time.

Our Board of Directors owns a significant percentage of our shares and will be able to make decisions to which you may be opposed.

As of February 29, 2024, the Company’s directors and executive officers as a group owned 763,780 shares of common stock, or 23.3% of our outstanding common stock. In addition, the directors and executive officers have stock options to acquire 168,250 shares of common stock, which, if fully exercised, would result in them owning 27.1% of our outstanding common stock. Our directors and executive officers are expected to exert a significant influence on the election of Board members and on the direction of the Company. This influence could negatively affect the price of our shares or be inconsistent with other shareholders’ desires.

We have pledged the outstanding shares of the Bank to secure a loan and if we cannot repay the loan or continue to refinance the loan, the lender may foreclose on the loan and take ownership of the Bank.

We have pledged 100% of the outstanding shares of the Bank’s capital stock to secure a line of credit for PMHG. If we do not have cash available at PMHG or we are unable to fund dividends from the Bank to PMHG, we will not be able to make principal or interest payments due on any line of credit draws. If we cannot repay or refinance them on or prior to maturity, the lender may foreclose on the pledged stock and take ownership of the Bank, in which case, we will not have any source of revenue and it would be unlikely that we would continue to operate.

We may face statutory and other restrictions on our ability to pay dividends in the immediate future.

In January 2024, the Board of Directors declared an annual dividend of $0.25 per share on our common stock, payable on February 29, 2024 to shareholders of record as of February 9, 2024. PMHG’s ability to pay dividends to our shareholders depends on our retention of capital from our stock offerings and our possible receipt of dividends from the Bank. The Bank is also subject to restrictions on dividends as a result of banking laws, regulations, and policies. If PMHG has not retained sufficient capital, or access to capital, and the Bank elects not to, or is unable to, pay dividends to PMHG, then it is unlikely that PMHG will be able to pay dividends to its shareholders.

In addition, PMHG has a line of credit. Should we take draws on that line of credit, our obligation to make interest and principal payments will reduce the amount of cash available to pay dividends on common stock. In addition, PMHG or the Bank may issue additional debt. Payments on such debt would further reduce the amount of money available to PMHG to pay common stock dividends.

Item 1B Unresolved Staff Comments

None.

Item 1C Cybersecurity

General Overview

Information, including but not limited to proprietary information and personally identifiable information, is one of the Company’s most important assets. Protection of our information assets is necessary to establish trust with our clients, fulfill our fiduciary responsibilities, maintain regulatory and legal compliance, and protect our reputation.

Our Information Security Program outlines the process of protecting and securing our digital systems that contain and process information vital to our operations. Our cybersecurity management program is a subset of our larger Information Security Program. It provides protection of both client and bank information by preventing, detecting, and responding to cyber-attacks, managing vulnerable access points, practicing active governance, and adhering to risk and compliance regulations. Both programs are managed by our Chief Information Officer (“CIO”) who reports directly to the Company’s Chief Executive Officer (“CEO”) and both are overseen by the Board’s Information Technology (“IT”) Committee and Audit Committee.

The Company has established an information security culture that promotes and communicates the role of all employees in protecting the Company’s information and systems. The program defines information security responsibilities and accountability throughout the organization. We communicate these responsibilities to employees upon hiring and regularly throughout employment.

We have established policies and procedures, including our Incident Response Plan (“IRP”) for identifying and assessing potential threats, responding to cybersecurity incidents and security breaches, informing executive leadership and the Board, and reporting incidents within the approved timeline adopted by the FDIC in 2021 and the Securities and Exchange Commission in December 2023. In addition, the Company complies with the following reporting requirements:

●

FDIC Computer-Security Incident Notification Rule;

●

State statutes and laws regarding cybersecurity;

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Cyber Incident Reporting for Critical Infrastructure Act of 2022 (CIRCIA);

●

Rules adopted by the SEC on Cybersecurity Risk Management, Strategy, Governance and Incident Response disclosure; and

●

All other applicable regulations.

Strategy

In order to provide proper management of cybersecurity risk, management has committed to the following plan: (1) foster an environment that values cybersecurity initiatives in order to accomplish business and operational goals; (2) review and update the cybersecurity program on an annual basis; (3) perform a cybersecurity risk assessment on an annual basis requiring that the performance of the assessment meets standards set forth by the Federal Financial Institutions Examination Council (“FFIEC”) guidelines and external auditors; (4) foster awareness and training for all employees; (5) enlist additional support of third-party experts in the event of cybersecurity incidents; (6) subscribe to cybersecurity forums where information is distributed; (7) monitor and respond to cybersecurity threats and alerts; (7) review and update the business continuity plan, IRP, and vendor management plan, focusing on cyber-resiliency and third-party management of cyber activities; and (8) keep the Audit Committee, IT Committee and Board informed on the status of cybersecurity.

On an annual basis the Company’s IT Committee and Board will review and approve the information security and cybersecurity program, review and approve the business continuity plan and testing, and approve the risk assessment guidelines and methodologies.

Enterprise Risk Management

Our policies and procedures related to Cybersecurity are a vital component of the Company’s enterprise risk management program (“ERM”) which is managed by the Company’s Chief Risk Officer (“CRO”) and is overseen by Audit Committee. Our ERM program includes periodic activities to assess cybersecurity risks that could result in material disruption to the Company such as data breaches, malfunction of critical systems to operate key banking functions, “information hostage” incidents, and interference with key vendor programs. Any cybersecurity risks identified are tracked through the ERM program and their assessments are assigned risk owners at the senior leadership level.

Cybersecurity training is a key component of annual employee training and is conducted through the year utilizing different methods such as training sessions with the CIO, on-demand third-party cybersecurity and phishing exercise campaigns, and periodic third-party-conducted social engineering testing.

Third Party Service Providers

The Bank has implemented a third-party management policy (Vendor Management Policy) within the Information Security and Cybersecurity Program which requires due diligence and consideration of cyber risk prior to contract signing. As deemed necessary, vendors identified within the program are reviewed at least annually, and in-depth reviews of critical vendors are documented and presented to management as needed. The overall program is presented to the Board of Directors each year.

Governance

The Board and IT Committees oversee the responsibility in developing, implementing, and maintaining the information security program and cybersecurity program, and hold senior management accountable for its actions. To accomplish this, the Board maintains a reasonable understanding, and is informed through Committee minutes and Board meetings. The Board of Directors receives annual training on cybersecurity and information security.

The IT Committee has direct oversight responsibilities for our cybersecurity program and receives reports on the Company’s cybersecurity program from our CIO at each of our regular meetings which occur quarterly. These reports include analyses of any recent cybersecurity threats and incidents at the Company and across the industry, along with a review of internal controls, risk mitigation strategies and third-party service providers. At least annually, the Board of Directors receives reports on the Company’s cybersecurity program and a briefing of recent developments from the CIO.

Management

Our senior executive management team is actively engaged in the oversight of our cybersecurity program and its future strategy.

The CIO has been with the Company since 2011 and in the banking industry since 2002 holding various positions in operations, compliance and information technology. He has a background in software programming and hacking/intrusion and holds various certifications and designations such as Certified Information Systems Security Professional, Certified Data Privacy Solutions Engineer, Certified Regulatory Compliance Manager, Accredited ACH Professional and others in technology, security, risk, and compliance. The CIO has a Bachelor of Science in Electrical Engineering and a Master of Science in Cybersecurity and Information Assurance. Additionally, the CIO participates in Infragard (a partnership between the Federal Bureau of Investigation ("FBI") and the private sector and the American Banker's Association ("ABA") cyber forums. He also participated in the FBI Chief Information Security Officer ("CISO") Academy, Class 10.

Senior management documents and reports to the Board (or a Board-appointed subcommittee) on the status of the information security program, which includes, but is not limited to, the following:

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Risk assessment process, including threat identification and assessment

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Risk management and control decisions, including risk acceptance and avoidance

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Third-party service provider arrangements

	●	Results of testing
	●	If applicable, security incidents and/or breaches or violations of law or regulation and management's response to such incidents; and

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Recommendations for updates and improvements to the overall information security program.

Detection, Mitigation and Remediation

The Bank has implemented automated systems designed to detect potential malware and anomalies, and notify management of threats. These systems include anti-virus/anti-malware, network log reporting, network-based intrusion detection and incident response systems, external firewall intrusion detection and prevention systems, endpoint protection, and data leakage protection. Anti-virus/anti-malware systems are designed to be updated as needed and definitions are distributed to Bank computers.

Network Log Reporting is consolidated and retained in read-only formats with limited access. Logs are gathered from critical systems on the network and consolidated within a security information and event management ("SIEM") solution.

A third-party monitored network-based intrusion detection and incident response program has been contracted. This system draws logs from systems and firewalls, and is driven by classification and risk-based threat analysis of network traffic. This system automatically analyzes network traffic against a world-wide threat exchange to increase the awareness of newly introduced threats and vulnerabilities.

All monitoring efforts are expected to communicate directly with the Bank through the IT department. Staff has adequate experience and subject matter knowledge to address or elevate issues, and is entrusted with making final determinations of risk and threats, and escalating issues through management or to third-parties. Where appropriate, the Bank will disseminate information to organizations such as the Financial Services Information Sharing and Analysis Center (“FS-ISAC”) or Cybersecurity & Infrastructure Security Agency ("CISA") and other similar incident management user groups.

The Bank has implemented an IRP that identifies roles and responsibilities for Bank employees, as well as general scenarios for management and containment of incidents. The Plan is reviewed and updated at least annually by senior management and reviewed by either the IT Committee or the Board of Directors prior to approval by the Board of Directors.

Incidents and Risks

We have not experienced a material cybersecurity incident and although we are subject to ongoing and evolving cybersecurity threats, management is not aware of any material risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect the Company, including our business strategy, results of operations, or financial condition. Please see Item 1A "Risk Factors" for further discussion of the material risks associated with the interruption or breach of our information systems or information assets.

Item 2 Properties

We operated out of four facilities during the year ended December 31, 2023.

Location	Use	Own or Lease	Year First Occupied

1897 Capital Circle NE Tallahassee, Florida 32308	Branch office and operations center of the Bank	Own	2012

1471 Timberlane Road Tallahassee, Florida 32312	Executive office and headquarters of the Company and main office of the Bank	Lease	2007

2201 Crawfordville Highway Crawfordville, Florida 32327	Branch office of the Bank	Own	2016

3340 South Florida Avenue Lakeland, Florida 33803	Branch office of the Bank	Own	2019

Item 3 Legal Proceedings

From time to time, we are a party to various matters incidental to the conduct of a banking business. Presently, 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 4 Mine Safety Disclosure

Not applicable.

Item 5 Market for Registrant’s Common Equity, Related Stockholder’s Matters and Issuer Purchases of Equity Securities

The Company's stock is traded on the OTCQX, an interdealer quotation system, under the symbol "PMHG." As of February 29, 2024, there were 350 record holders of common stock. Quotations on the OTCQX reflect interdealer prices, without retail mark-up or commission and may not necessarily represent actual transactions.

Share Repurchase

We repurchased no shares of our common stock in 2023.

Sales of Unregistered Securities

During 2023, the Company issued 6,700 shares to members of its Board of Directors in lieu of cash fees. To incentivize our directors to elect to receive stock, they receive shares valued at 110% of the otherwise-payable cash fees. In 2023, such shares were valued at $163,000 and were all issued in accordance with the benefit plan exemption from registration pursuant to SEC Rule 701.

Also during 2023, the Company issued 69,473 restricted stock shares (net of forfeitures) to employees as part of their compensation. The shares were valued at $1,571,000 at the date of grant and were issued in accordance with the benefit plan exemption from registration pursuant to SEC Rule 701.

The equity compensation plan information presented in Part III, Item 12 of this Form 10-K is incorporated herein by reference.

Item 6: Reserved

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations and the operations of our subsidiary, Prime Meridian Bank, include, but are not limited to, changes in the following:

	●	local, regional, and national economic and business conditions;
	●	banking laws, compliance, and the regulatory environment;
	●	unanticipated changes in the 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;
	●	fraud committed by our clients or persons doing business with our clients;
	●	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;
	●	application and interpretation of accounting principles and guidelines;
	●	natural disasters, public unrest, adverse weather, public health and other conditions impacting our or our clients’ operations;
	●	and other economic, competitive, governmental, regulatory, or technological factors affecting us.

General

The following discussion and analysis 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 relate to activities primarily conducted at the subsidiary level. The following discussion should be read in conjunction with the Company’s consolidated financial statements.

As a 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, salaries plus related employee benefits, and occupancy and equipment. We measure our performance through our net interest margin, return on average assets, return on average equity, and ratio of nonperforming assets to total assets, while maintaining appropriate regulatory leverage and risk-based capital ratios.

Application of Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with prevailing practices within the banking industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes; therefore, our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Bank must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policy applied is the valuation of our subsidiary bank's loan portfolio. A variety of estimates impact the carrying value of the loan portfolio including the calculation of the allowance for credit losses, the valuation of underlying collateral, the timing of loan charge-offs, and the amount and amortization of loan fees and deferred origination costs.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates and actual results may differ from these estimates.

We have identified the following accounting policy and estimate as critical. In order to understand our financial condition and results of operations, it is important to comprehend how these assumptions apply to our consolidated financial statements.

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

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

Our ACL is evaluated for adequacy by management on a monthly basis and is based upon management’s periodic review of the collectability of the loan portfolio in light of historical experience in the industry, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and industry standards. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

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

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

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

●

Commercial real estate

●

Residential and home equity

●

Construction

●

Commercial

●

Consumer and other

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

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

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

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

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

●

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

●

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

The Company follows its nonaccrual policy by reversing contractual interest income in the statements of earnings when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an ACL on accrued interest receivable. As of December 31, 2023, the accrued interest receivable for loans recorded in accrued interest receivable was $2,522,000.

The Company has a variety of assets that have a component that qualifies as an OBS exposure. These primarily include undrawn portions of revolving lines of credit and construction loans. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. Management used its judgement to determine funding rates. Management applied the funding rates, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments. Any adjustment to the ACL for unfunded commitments will be recognized through the ACL in the statements of earnings. As of December 31, 2023, there was no liability recorded for expected credit losses on unfunded commitments.

Recent Interest-Rate Trends

Like many other financial institutions, our results of operations are dependent on net interest income. Net interest income is the difference between interest received on interest-earning assets, such as loans and securities, and interest paid on interest-bearing liabilities, namely deposits and borrowings. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control including inflation, economic conditions, unemployment, money supply, domestic and international events, and changes in the United States and other financial markets. Our net interest income may be reduced if (i) more interest-earning assets than interest-earning liabilities reprice or mature during a time when interest rates are declining, or (ii) more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising. We measure the potential adverse impacts of changing interest rates by shocking average interest rates up or down 100 to 400 basis points and calculating the potential impacts on our net interest income, liquidity, and EVE. We utilize the results of these simulations to determine whether to increase or decrease our fixed rate loan portfolio, to adjust our investment in assets such as bonds, or to take other action in order to maintain or improve our net interest margin given the trending or expected interest rate changes.

As of December 31, 2023, $463.1 million, or 71.0%, of our loan portfolio consisted of adjustable-rate loans, meaning these loans will adjust with changes in interest rates and pose less interest rate risk in a rising interest rate environment. Of these, loans totaling $439.4 million, or approximately 67.4% of the total loan portfolio, have interest rate floors which will help protect our net interest margin in a decreasing rate environment. On the other hand, $163.3 million, or 25.0% have interest rate ceilings in place which protects the borrower from interest rates rising beyond a certain level. The majority of our loans with ceilings in place are residential mortgage loans with additional upwards repricing ability of 3.00% to 5.00% until their ceilings are reached. Also as of December 31, 2023, $207.6 million, or 31.8%, of the total loan portfolio was scheduled to mature in five years or less, which helps mitigate the risks of the fixed-rate portion of our loan portfolio in a rising interest rate environment.

If interest rates increase, borrowers may be less inclined to seek new loans. In addition, higher interest rates could adversely affect an adjustable-rate borrower’s ability to continue servicing debt.

Furthermore, our ability to originate new loans may be further impeded by increased competition for high quality borrowers which leads to downward pricing pressure on loans, a general consumer and business bias towards reducing debt levels, and the effects of a potential economic recession in the future on the financial condition of both consumers and businesses which could make the underwriting of new loans more challenging.

Interest Rate Sensitivity

A principal objective of the Bank’s asset liability management strategy is to manage its exposure to changes in interest rates within Board approved policy limits by matching the maturity and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. This strategy is overseen through the direction of the Bank’s Asset and Liability Committee (“ALCO”), which establishes policies and monitors results to control interest rate sensitivity.

We model our current interest rate exposure in various rate scenarios, review our model assumptions, and then stress test those assumptions. Based on the results, we then formulate strategies regarding asset generation, funding sources and their pricing parameters, as well as evaluate off-balance sheet commitments in order to maintain interest rate risk within Board approved target limits. We utilize industry recognized asset liability models driven by third-party providers to analyze the Bank’s interest rate sensitivity. From these externally generated reports, ALCO can estimate both the effect on net interest income and the effect on EVE in various interest rate scenarios.

As a part of the Bank’s Interest Rate Risk Management Policy, our ALCO examines the extent to which the Bank’s assets and liabilities are “interest rate sensitive” and monitors its interest rate sensitivity. An asset or liability is considered to be interest rate sensitive, for income purposes, if its projected income/expense amount will change if interest rates change. Likewise, it is considered interest rate sensitive for EVE if its economic value will change if interest rates change.

In an asset sensitive portfolio, the Bank’s net income and EVE will increase in a rising rate environment as assets will re-price faster than liabilities. Conversely, if the Bank is liability sensitive and the liabilities re-price faster than the assets, net income and EVE will fall in a rising rate environment.

In modeling the Bank’s interest rate exposure, the Bank makes a number of important assumptions about the behavior of assets and liabilities. The critical assumptions fall into three main categories, nonmaturity deposit assumptions, asset prepayment assumptions, and optionality. Currently, the most significant assumption which affects the Bank’s interest rate sensitivity is the nonmaturity deposit assumption, followed by the asset prepayment assumptions and optionality.

Nonmaturity Deposit Assumptions

Nonmaturity Deposit Betas – The beta of a nonmaturity deposit is a measure of the anticipated pricing behavior of the deposit. Based on the Bank’s own historical experience, the Bank determines how much the price of a deposit will change as a percentage of the change in the market rates. For example, a 50% beta means that the deposit price will change by 50% of the market rate change.

Nonmaturity Decay – We determine how “sticky” deposits are by assigning a blended 120-month “maturity” to our nonmaturity transaction deposit accounts. These assumptions are based on our own experience by considering both the age of the current deposit base and the historic monthly account closing and balance migration experience. The lower the beta (more fixed rate nature) and the longer the decay (longer duration), the less interest rate sensitive a bank becomes, from an EVE perspective, in a rising interest rate environment. Conversely, higher betas combined with lower decay rates results in higher interest rate sensitivity in a rising interest rate environment.

Asset Prepayment Assumptions

We also determine how likely each earning asset is to prepay prior to its contracted maturity date. As refinancing rates become increasingly attractive, prepayment speeds increase as clients are able to prepay loans and refinance at lower rates. Conversely, prepayments decrease in a rising rate environment.

Loan prepayment speed changes are not linear; they will continue to increase as rates fall but will plateau as rates rise. Therefore, the Bank’s asset prices will not change linearly with market rate changes. The higher the prepayment speed of assets, the more liability sensitive the Bank becomes. The Bank monitors its prepayments and updates the assumptions used in the risk models on an annual basis.

In addition, certain balance sheet instruments such as interest-rate floors or caps on loans, be they periodic or lifetime, and other optionality on investments such as call features on debt securities, limit or increase income and create value changes of the instrument as interest rates change.

Option Risk

We monitor our exposure to option-type effects and manage our option risk. The amount of option risk, aside from prepayment risk, is minimal.

We monitor our exposure on a monthly basis under thirteen different rate scenarios, including rates rising or declining by up to 4% and the current yield curve flattening or steepening. We compare these results to the Board’s established limits to determine if a limit has been compromised. If a limit is exceeded, we have policies and strategies in place to reduce the exposure to acceptable levels. In addition, we also stress test all of our assumptions under these rate scenarios to determine at what point the Board approved target limits would be compromised, even if they are not currently compromised using the historically determined assumptions. If the limits are in danger of being compromised with relatively small assumption changes, we would adjust our strategy to reduce exposure. All of these assumptions, reports, stress tests, and strategies are reviewed by ALCO at least quarterly and all limit exceptions are reported to the Board monthly.

Our strategy is to maintain an interest rate risk position within the tolerance limits set by the Board of Directors in order to protect our net interest margin under extreme market fluctuations. Principal among our asset liability management strategies has been the emphasis on reducing exposure during periods of fluctuating interest rates. We believe that the type and amount of our interest rate sensitive liabilities should reduce the potential impact that a rise in interest rates might have on our net interest income.

We look to maintain a core deposit base by providing quality services to our clients, without significantly increasing our cost of funds or operating expenses. We anticipate that these accounts will continue to comprise a significant portion of the Bank’s total deposit base. We also maintain a portfolio of liquid assets in order to reduce overall exposure to changes in market interest rates. Likewise, we maintain a “floor,” or minimum rate, on certain of our floating or published base rate loans. These floors allow us to continue to earn a higher rate when the floating rate falls below the established floor rate. All interest rate ceilings and floors are clearly and closely related to the loan agreement; therefore, they are not bifurcated and valued separately.

At December 31, 2023, both our EVE and one-year net interest income sensitivity position were liability sensitive in all measured interest rate scenarios, such that an immediate and parallel shift in interest rates beyond the forward rate curve would have a negative impact on our EVE and one-year net interest income over the next twelve months. Our ALCO model shows that the effects would fall within Board approved limits for all interest rate scenarios.

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 assets over interest expense on interest-bearing liabilities. The principal interest-earning assets are investment securities and loans. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts, savings deposits, money-market accounts, and other borrowings. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on these assets and liabilities.

The table below sets forth information regarding: (i) the total dollar amount of interest and dividend income of the Bank from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on 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 (dollars in thousands). As shown in the table below, year over year, the yield on the average balance of interest-earning assets increased 137 basis points, while the average balance of interest-earning assets decreased $37.9 million, or 4.7%. The average rate paid on interest-bearing liabilities increased 148 basis points while the average balance of total interest-bearing liabilities decreased 4.8%, or $27.0 million.

	For the Year Ended December 31,
	2023							2022
			Interest							Interest
	Average		and		Yield/			Average		and		Yield/
(dollars in thousands)	Balance		Dividends		Rate			Balance		Dividends		Rate
Interest-earning assets:
Loans⁽¹⁾	$	613,059	$	34,938		5.70	%	$	537,304	$	25,803		4.80	%
Loans held for sale		6,769		353		5.21			9,852		418		4.24
Debt securities		137,066		3,698		2.70			126,102		2,938		2.33
Other⁽²⁾		18,106		937		5.18			139,614		1,581		1.13
Total interest-earning assets		775,000	$	39,926		5.15	%		812,872	$	30,740		3.78	%
Noninterest-earning assets		40,813							39,400
Total assets	$	815,813						$	852,272

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	456,263	$	7,681		1.68	%	$	518,777	$	2,315		0.45	%
Time deposits		61,893		1,811		2.93			42,536		264		0.62
Total interest-bearing deposits		518,156		9,492		1.83			561,313		2,579		0.46
Other borrowings and FHLB advances		20,127		1,086		5.40			4,016		200		4.98
Total interest-bearing liabilities		538,283	$	10,578		1.97	%		565,329	$	2,779		0.49	%
Noninterest-bearing deposits		193,896							213,570
Noninterest-bearing liabilities		10,540							7,824
Stockholders' equity		73,094							65,549
Total liabilities and stockholders' equity	$	815,813						$	852,272

Net earning assets	$	236,717						$	247,543
Net interest income			$	29,348						$	27,961
Interest rate spread⁽³⁾						3.18	%						3.29	%
Net interest margin⁽⁴⁾						3.79	%						3.44	%

Ratio of average interest-earning assets to average interest-bearing liabilities		1.44							1.44

⁽¹⁾Includes nonaccrual loans

⁽²⁾Other interest-earning assets include federal funds sold, interest-bearing deposits and FHLB stock.

⁽³⁾Net interest spread is the difference between the total interest-earning asset yield and the rate paid on total interest.

⁽⁴⁾Net interest margin is net interest income divided by total average interest-earning assets.

COMPARISON OF YEARS ENDED December 31, 2023 AND 2022

Year ended December 31,					Change 2023 vs. 2022
(dollars in thousands)	2023		2022		Amount			Percent
Net Interest Income	$	29,348	$	27,961	$	1,387			5.0	%
Credit loss expense		1,450		890		560			62.9
Noninterest income		1,895		1,934		(39	)		(2.0	)
Noninterest expense		18,345		16,268		2,077			12.8
Income Taxes		2,740		3,056		(316	)		(10.3	)
Net earnings	$	8,708	$	9,681	$	(973	)		(10.1	)%

Compared to 2022, the $973,000, or 10.1%, decrease in net earnings in 2023 is primarily attributed to a $7.8 million increase in interest expense driven by the rising rate environment and competition for deposits. The increase in credit loss expense is mostly attributed to specific reserves required by several new individually evaluated loans, funded loan growth of $56.3 million, and environmental factors reflecting a greater number of past due loans in the residential mortgage sector during the fourth quarter. The decrease in noninterest income primarily reflects an industry-wide decline in mortgage banking activity due to the rising rate environment, partially offset by higher revenue generated from service charges and fees on deposit accounts and debit card/ATM transactions. The 12.8% increase in noninterest expense is primarily related to higher salaries and employee benefits driven by general wage inflation, slightly higher headcount, and lower deferred loan costs. The decrease in income tax expense resulted from lower pretax income.

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 debt securities, and interest expense on interest-bearing liabilities such as deposits and borrowings. Net interest income was $29.3 million for the year ended December 31, 2023, compared to $28.0 million for the year ended December 31, 2022.

Year ended December 31,					Change 2023 vs. 2022
(dollars in thousands)	2023		2022		Amount			Percent
Interest income:
Loans	$	35,291	$	26,221	$	9,070			34.6	%
Debt securities		3,698		2,938		760			25.9
Other		937		1,581		(644	)		(40.7	)
Total interest income	$	39,926	$	30,740	$	9,186			29.9	%
Interest expense:
Deposits		9,492		2,579		6,913			268.0	%
FHLB advances and other borrowings		1,086		200		886			443.0
Total interest expense		10,578		2,779		7,799			280.6
Net interest income	$	29,348	$	27,961	$	1,387			5.0	%

Since March 2022, the Federal Open Market Committee ("FOMC") has raised the target federal funds rate 525 basis points. This rising rate environment was a key contributing factor to the financial performance of the Company and the banking industry in general in 2023. Net interest income in 2023 increased 5.0%, or $1.4 million, as higher yields on interest-earning assets and loan growth during the year outpaced the impact of a higher cost of funds and a higher level of borrowings. Average earning assets decreased 4.7%, or $37.9 million, year-over-year, while average total deposits declined $62.8 million, or 8.1%. The decrease in average deposits reflects both a migration of deposits to higher paying investment alternatives outside the Bank and a general reduction in excess liquidity in the banking system. The Company's cost of interest-bearing liabilities for 2023 was 1.97% compared to 0.49% in 2022. The Company's NIM for 2023 was 3.79% compared to 3.44% for the same period a year ago.

Credit Loss Expense

Credit loss expense was $1.45 million for the year ending December 31, 2023. The allowance for credit losses to total loans was 0.86% at December 31, 2023 compared to 1.20% at December 31, 2022. The Company adopted ASC 326 Current Expected Credit Losses ("CECL") January 1, 2023 which resulted in a $2.6 million decrease to the allowance for credit losses at the time of adoption. Credit loss expense for the year ended December 31, 2023 primarily reflects specific reserves required by several new individually evaluated loans, followed by loan growth of $56.3 million during the year, and environmental factors reflecting a greater number of past due loans in the residential mortgage sector during the fourth quarter.

Noninterest Income

Year ended December 31,					Change 2023 vs. 2022
(dollars in thousands)	2023		2022		Amount			Percent
Service charges and fees on deposit accounts	$	357	$	302	$	55			18.2	%
Debit card/ATM revenue, net		573		540		33			6.1
Mortgage banking revenue, net		352		473		(121	)		(25.6	)
Income from bank-owned life insurance		389		379		10			2.6
Other income		224		240		(16	)		(6.7	)
Total noninterest income	$	1,895	$	1,934	$	(39	)		(2.0	)%

Noninterest income provides an additional source of revenue. In 2023 and 2022, noninterest income comprised 6.1% and 6.5%, respectively, of total revenue (net interest income plus noninterest income). The $39,000 decline in noninterest income in 2023 is attributed primarily to a 25.6% decline in mortgage banking revenue. A continued rising and high interest rate environment in 2023 led to a decrease in activity of new and refinanced mortgage loans. Since March of 2022, the industry has withstood 11 rate hikes totaling 525 basis points.

Service charges and fees on deposit accounts along with debit card and ATM revenue saw increases of $55,000 and $33,000 respectively from 2022 as the number of deposit accounts increased. Other income saw a decline of 6.7% from 2022 due primarily to 10.9% decrease in merchant services income, partially offset by a 2.6% increase in income from bank-owned life insurance.

Noninterest Expense

Year ended December 31,					Change 2023 vs. 2022
(dollars in thousands)	2023		2022		Amount		Percent
Salaries and employee benefits	$	11,172	$	9,627	$	1,545		16.0	%
Occupancy and equipment		1,647		1,621	$	26		1.6
Professional fees		559		514	$	45		8.8
Marketing		903		793	$	110		13.9
FDIC Assessment		360		360	$	-		-
Software maintenance, amortization and other		1,214		1,162	$	52		4.5
Other		2,490		2,191	$	299		13.6
Total noninterest expense	$	18,345	$	16,268	$	2,077		12.8	%

The $2.1 million increase in total noninterest expense is predominantly a function of higher salaries and employee benefits due to higher headcount (the Company reported 110 full-time equivalents (FTEs) at the end of 2023 compared to 107 at the end of 2022), annual raises, general wage inflation, higher incentive accrual and lower deferred loan costs. Marketing saw an increase of $110,000 or 13.9% due to client appreciation events and campaigns as well as increased spending on leveraging additional Bank client and prospect experiences. Nearly a quarter of the $299,000, or 13.6%, increase in other noninterest expense is attributed to deposit related operating and fraud expenses while printing and supplies increased 17.5%, or $25,000, mostly due to increased technology and equipment expenses related to upgrades of the Bank’s online banking platform and internal core systems in the second half of the year.

Income Taxes

The provision for income taxes decreased $316,000 to $2.7 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, attributed to lower earnings before taxes in 2023. The Company's effective income tax rate in 2023 was 23.9%, compared to 24.0% in 2022.

Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense for the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in rate (change in rate multiplied by prior volume); (ii) changes in volume (changes in volume multiplied by prior rate); and (iii) changes in rate-volume (change in rate multiplied by change in volume). As disclosed in the table below, the higher rates were the primary drivers impacting net interest income in 2023.

	Year Ended December 31, 2023 versus 2022
	Rate		Volume			Rate/Volume			Total
(in thousands)
Interest-earning assets:
Loans	$	4,932	$	3,483		$	655		$	9,070
Debt securities		464		256			40			760
Other		5,644		(1,376	)		(4,912	)		(644	)
Total	$	11,040	$	2,363		$	(4,217	)	$	9,186

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	6,418	$	(279	)	$	(773	)	$	5,366
Time deposits		981		120			446			1,547
Total Deposits		7,399		(159	)		(327	)		6,913
FHLB advances and other borrowings		17		802			67			886
Total	$	7,416	$	643		$	(260	)	$	7,799
Total change in net interest income	$	3,624	$	1,720		$	(3,957	)	$	1,387

FINANCIAL CONDITION

Average interest-earning assets decreased $37.9 million from $812.9 million at December 31, 2022 to $775.0 million at December 31, 2023, reflecting a decrease in other interest-earnings assets - federal funds sold, interest-bearing deposits, and FHLB stock.

Debt Securities

Our investment securities portfolio is a significant part of our operations and a key component of our asset/liability management. 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 of public funds. We manage our investment portfolio according to a written investment policy approved by our Board of Directors in order to accomplish these goals. Currently, two types of classifications are approved for investment securities in our portfolio - Available-for-Sale and Held-to-Maturity. Adjustments are sometimes necessary in the portfolio to provide liquidity for funding loan demand and deposit fluctuations and to control interest rate risk. Therefore, from time to time, management may sell certain securities prior to their maturity.

At December 31, 2023, our available-for-sale investment portfolio included U.S. government treasury and agency securities, municipal securities, U.S. agency mortgage-backed securities, and asset-backed securities and had a fair market value of $124.5 million. Our held-to-maturity portfolio included municipal securities and U.S. agency mortgage-backed securities and had a carrying value of $11.9 million and a fair market value of $10.4 million. At December 31, 2023 and 2022, our debt securities portfolio represented approximately 16.0% and 17.3% of our total assets, respectively, on the balance sheet. The average balance of debt securities increased 8.7% from $126.1 million in 2022 to $137.1 million in 2023, while the average yield on debt securities increased from 2.33% for the year ended December 31, 2022 to 2.70% for the year ended December 31, 2023.

At December 31, 2023, we had 103 debt securities (including both available-for-sale and held-to-maturity) with unrealized losses totaling $12.0 million. See Note 2 - Debt Securities in the consolidated financial statements for additional information. The increase in the number of debt securities in a loss position since December 31, 2021 and the relative percentage of loss to portfolio size was due primarily to an increase in short-term and long-term interest rates during 2022 and 2023.

The following table sets forth the carrying amount of the investment portfolio as of the dates indicated:

	At December 31,
	2023		2022
(in thousands)
*Available for Sale:*
U.S. Government treasury and agency securities	$	45,258	$	45,905
Municipal securities		20,108		19,464
U.S. agency mortgage-backed securities		56,159		60,502
Asset backed securities		2,950		3,565
Total debt securities available for sale	$	124,475	$	129,436

*Held to Maturity:*
Municipal securities	$	9,257	$	9,215
U.S. agency mortgage-backed securities		2,593		2,590
Total debt securities held to maturity	$	11,850	$	11,805

The carrying amount and weighted average yields for debt securities as of December 31, 2023 are shown below:

(dollars in thousands)	U.S. Government Agency		Municipal		Mortgage- Backed		Asset-Backed		Total		Weighted-Average Yields⁽¹⁾
Available for Sale:
Due within one year	$	33,001	$	1,950	$	-	$	-	$	34,951		2.36	%
Due in one to five years		10,210		6,522		-		-		16,732		2.22
Due in five to ten years		2,047		9,645		-		-		11,692		2.27
Due after ten years		-		1,991		-		2,950		4,941		4.77
U.S. agency mortgage-backed securities		-		-		56,159		-		56,159		2.38
Total debt securities available for sale	$	45,258	$	20,108	$	56,159	$	2,950	$	124,475		2.44	%

Held to Maturity:
Due in five to ten years	$	-	$	2,050	$	-	$	-	$	2,050		3.71	%
Due after ten years		-		7,207		-		-		7,207		3.27
U.S. agency mortgage-backed securities		-		-		2,593		-		2,593		3.65
Total debt securities held to maturity	$	-	$	9,257	$	2,593	$	-	$	11,850		3.43	%

⁽¹⁾ All debt securities are listed at actual yield and not on a tax-equivalent basis.

Cash Surrender Value of Bank-Owned Life Insurance

We recorded investments of $16.9 million and $16.5 million in bank-owned life insurance policies at December 31, 2023 and 2022, respectively, due to attractive risk-adjusted returns and for protection against the loss of key executives, including our Chief Executive Officer Sammie D. Dixon and all of our Executive Vice Presidents- Senior Lender, Chris L. Jensen, Jr., Chief Risk Officer, Susan Payne Turner, Chief Financial Officer, Clint F. Weber, and Chief Information Officer, Monte L. Ward.

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 is divided into three portfolio segments - real estate mortgage loans, commercial loans and consumer and other loans - and five portfolio classes - commercial real estate loans, residential and home equity loans, construction loans, commercial loans, and consumer and other loans.

We work diligently to attract new lending clients through direct solicitation by our loan officers, utilizing relationship networks from existing clients and community involvement, competitive pricing, and innovative structure. Evidence of this effort is seen in the organic growth in our loan portfolio where we saw growth across all of the Bank's portfolio classes in 2023. As of December 31, 2023, the Bank’s gross loans were $651.9 million, representing 76.3% of total assets, compared to gross loans of $595.6 million as of December 31, 2022, representing 73.1% of total assets. These loans were priced based upon the degree of risk, collateral, loan amount, and maturity.

The composition of our loan portfolio as of the dates indicated was as follows:

	As of December 31,
	2023						2022						2021
(dollars in thousands)	Amount			% of Total			Amount			% of Total			Amount			% of Total
Real estate mortgage loans:
Commercial	$	223,795			34.3	%	$	202,263			34.0	%	$	156,306			31.5	%
Residential and home equity		254,574			39.1			224,211			37.6			183,536			36.9
Construction		81,640			12.5			75,151			12.6			71,164			14.3
Total real estate mortgage loans		560,009			85.9			501,625			84.2			411,006			82.7

Commercial		85,983			13.2			86,308			14.5			78,584			15.8
Consumer and other loans		5,936			0.9			7,698			1.3			7,283			1.5
Total loans		651,928			100.0	%		595,631			100.0	%		496,873			100.0	%
Less:
Net deferred loan (fees) costs		(192	)					229						(701	)
Allowance for credit losses		(5,609	)					(7,145	)					(5,974	)
Loans, net	$	646,127					$	588,715					$	490,198

Commercial real estate ("CRE") represents the Company's second largest loan category. Commercial real estate loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. The Company regularly monitors its CRE portfolio against regulatory concentration thresholds. Additionally, the Company manages its risk in the CRE portfolio through, but not limited to, established policy limits on loan-to-value or loan-to-cost, the use of internal lending limits, annual reviews on borrowers and guarantors above certain total credit exposure thresholds, and minimum required debt service coverage ratios and borrower equity levels.

A summary of the Company's CRE portfolio by collateral type as of December 31, 2023 is as follows:

(dollars in thousands)
Owner Occupied CRE	Amount		% of Total			Average Loan Size
Office	$	27,388		27.0	%	$	334
Retail		39,007		38.4			1,011
Warehouse		19,014		18.7			656
Restaurant		5,998		5.9			666
Other		10,137		10.0			641
Total		101,544		100.0	%	$	591

Non-owner Occupied CRE
Office	$	49,377		40.4	%	$	1,178
Retail		17,267		14.1			540
Warehouse		12,366		10.1			563
Restaurant		1,853		1.5			463
Hotel		20,982		17.2			3,497
Other		20,406		16.7			1,582
Total	$	122,251		100.0	%	$	1,021

Maturities of Loans

The following tables show the contractual maturities of the Bank’s loan portfolio at December 31, 2023. Loans with scheduled maturities are reported in the maturity category in which the payment is due. Demand loans with no stated maturity and overdrafts are reported in the “due one year or less” category. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The tables do not include prepayment or scheduled principal repayments.

(in thousands)	Due in One Year or Less		Due in One to Five Years		Due After Five Years		Total
Type of loans
Real estate mortgage loans:
Commercial	$	6,823	$	56,096	$	160,876	$	223,795
Residential and home equity		7,465		15,513		231,596		254,574
Construction		31,603		20,341		29,696		81,640
Total real estate mortgage loans		45,891		91,950		422,168		560,009
Commercial		28,926		35,443		21,614		85,983
Consumer and other loans		2,723		2,626		587		5,936
Total loans	$	77,540	$	130,019	$	444,369	$	651,928

Sensitivity. For loans due after one year or more, the following table presents the sensitivities to changes in interest rates at December 31, 2023:

(in thousands)	Fixed Interest Rate		Floating Interest Rate		Total
Type of loans
Real estate mortgage loans:
Commercial	$	93,283	$	123,689	$	216,972
Residential and home equity		30,885		216,224		247,109
Construction		4,586		45,451		50,037
Total real estate mortgage loans		128,754		385,364		514,118
Commercial		38,478		18,579		57,057
Consumer and other loans		2,635		578		3,213
Total loans	$	169,867	$	404,521	$	574,388

Nonperforming Assets

Nonperforming assets consist of nonperforming loans and other real estate owned (“OREO”). Nonperforming loans include loans that are on nonaccrual status and loans past due greater than 90 days and still accruing interest. OREO consists of real property acquired through foreclosure.

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.

Our goal is to maintain a high quality of loans through sound underwriting and lending practices. As of December 31, 2023, 2022, and, 2021, approximately 85.9%, 84.2%, and 82.7%, respectively, of the total loan portfolio were collateralized by commercial and residential real estate mortgages. The level of nonperforming loans and OREO is relevant to the credit quality of a loan portfolio. As of December 31, 2023, nonperforming loans totaled $3,445,000 compared to $747,000 at December 31, 2022 and none at December 31, 2021. We had no OREO at December 31, 2023, 2022, or 2021.

The goal of the loan review process is to identify and address classified and nonperforming loans as early as possible. The following table sets forth certain information on nonperforming loans and OREO, the ratio of such loans and foreclosed assets to total assets as of the dates indicated, and certain other related information.

	At December 31,
	2023			2022			2021
(dollars in thousands)
Total nonperforming loans	$	3,445		$	747		$	-
OREO		-			-			-
Total nonperforming loans and foreclosed assets	$	3,445		$	747		$	-
Total nonperforming loans as a percentage of total loans		0.53	%		0.13	%		-
Total nonperforming assets as a percentage of total assets		0.40	%		0.09	%		-

Allowance for Credit Losses

As of December 31, 2023, our ACL was allocated to expected loan losses using historical loss experience and qualitative risk factors. The $559,000 unallocated reserve that was established in 2020 in connection to the COVID-19 pandemic was gradually released in 2021. Our ACL was allocated as follows, as of the indicated dates.

	As of December 31,
	2023					2022					2021
	Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans			Amount		% of Loans to Total Loans
(dollars in thousands)
Commercial real estate	$	1,713		34.4	%	$	2,303		34.0	%	$	1,762		31.5	%
Residential real estate and home equity		2,034		39.0			2,607		37.6			2,139		36.9
Construction		559		12.5			922		12.6			857		14.3
Commercial		1,272		13.2			1,223		14.5			1,125		15.8
Consumer		31		0.9			90		1.3			91		1.5
Total loans	$	5,609		100.0	%	$	7,145		100.0	%	$	5,974		100.0	%

The following table sets forth certain information with respect to activity in our ACL during the years indicated:

	Year Ended December 31,
(dollars in thousands)	2023			2022			2021
ACL at beginning of year	$	7,145		$	5,974		$	6,092
Impact of adopting ASC 326		(2,606	)		-			-
Charge-offs:
Construction		(386	)		-			(49	)
Commercial		(1	)		-			-
Consumer		(46	)		(49	)		(34	)
Total charge-offs		(433	)		(49	)		(83	)
Recoveries:
Residential and home equity		-			-			39
Construction		2
Commercial		44			299			23
Consumer		7			31			7
Total recoveries		53			330			69
Credit loss expense (income)		1,450			890			(104	)
ACL at end of year	$	5,609		$	7,145		$	5,974

Ratio of net (charge-offs) recoveries during the year to average loans outstanding during the year		(0.06	)%		0.05	%		-	%
ACL as a percentage of total loans at end of year		0.86	%		1.20	%		1.20	%
ACL as a percentage of nonperforming loans		162.82	%		956.49	%		-	%

We believe that our ACL at December 31, 2023, appropriately reflected the risk inherent in the portfolio as of that date. The methodologies used in the calculation are in compliance with regulatory policy and GAAP. Beginning in 2023, we applied CECL in calculating our credit loss expense and ACL. At the time of adoption, the Company recorded a one-time cumulative-effect adjustment to the ACL of $2.6 million which was recognized through a $1.9 million adjustment to retained earnings, net of taxes. The adjustment brought the beginning balance of the ACL to $4.5 million as of January 1, 2023.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which the other-than-temporary impairment has been recognized prior to December 31, 2022. As of December 31, 2023, the Company did not have any other-than-temporarily impaired debt securities.

Deposits

The major source of the Bank’s funds for lending and other investment purposes are deposits, in particular core deposits and non-maturity deposits. Substantially all of our depositors are residents in our primary market areas. Total deposits were $748.7 million at December 31, 2023, compared to $731.5 million at December 31, 2022, a $17.2 million, or 2.4%, increase. Noninterest-bearing deposits decreased by $8.6 million, while the net increase in interest-bearing deposits was $25.7 million. The decrease in deposits is mostly attributed to the movement of personal interest-bearing accounts into higher yielding investments outside of the Bank and higher paying time deposits at the Bank as competitive rate pressures persisted throughout 2023.

The following table sets forth the distribution by type of our deposit accounts at the dates indicated:

		As of December 31,
		2023					2022
(dollars in thousands)		Amount		% of Deposits			Amount		% of Deposits
Deposit Types
Noninterest-bearing		$	189,426		25.3	%	$	197,987		27.1	%
Money-market accounts			277,686		37.1			282,678		38.6
NOW			173,417		23.2			175,200		23.9
Savings			25,723		3.4			35,561		4.9
Subtotal			666,252		89.0			691,426		94.5

Time deposits:
0.00 - 1.00	%		1,113		0.1			21,435		3.0
1.01 - 2.00	%		8,359		1.1			7,678		1.0
2.01 - 3.00	%		17,019		2.3			10,496		1.4
3.01 - 4.00	%		5,789		0.8			-		-
4.01 - 5.00	%		49,794		6.6			500		0.1
5.01 - 6.00	%		362		0.1			-		-
Total time deposits			82,436		11.0			40,109		5.6

Total deposits		$	748,688		100.0	%	$	731,535		100.1	%

The following table presents the maturities of our time deposits greater than $250,000 as of December 31, 2023:

(in thousands)
Time Deposits >$250,000
Due in three months or less	$	10,070
Due from three months to six months		4,396
Due from six months to one year		15,463
Due over one year		10,563
Total	$	40,492

Borrowings

Deposits are the primary source of funds for our lending and investment activities and general business purposes. However, as an alternate source of liquidity, the Bank may obtain advances from the Federal Home Loan Bank of Atlanta (“FHLB”) sell debt securities subject to our obligation to repurchase them, purchase federal funds from designated correspondent banks, and engage in overnight borrowings from the Federal Reserve, correspondent banks, or client repurchase agreements. The level of short-term borrowings can fluctuate on a daily basis depending on funding needs and the source of the funds to satisfy the needs.

The Bank has an agreement with the FHLB and pledges its qualified loans as collateral which would allow the Bank, as of December 31, 2023, to borrow an additional $102.1 million. FHLB advances totaled $15 million at December 31, 2023 and there were no advances outstanding at December 31, 2022. The following table details rate and maturity information for FHLB advances as of December 31, 2023.

(dollars in thousands)
Maturity Year	Interest Rate			Amount
2024		4.48% - 4.83	%	$	10,000
2025		4.18	%		5,000
				$	15,000

In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB") which is headquartered in Thomasville, Georgia. Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The interest rate adjusts daily to the then-current Wall Street Journal Prime Rate. 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. As of December 31, 2023, the Company had a zero outstanding balance under this line, but did utilize the line during the year.

Interest expense totaled $1.1 million for FHLB advances and other borrowings in 2023.

Capital Adequacy

Stockholders’ equity was $80.0 million as of December 31, 2023, compared to $67.1 million as of December 31, 2022. The Company announced in January 2024, an annual dividend of $0.25 per share of common stock payable on February 29, 2024 to stockholders of record on February 9, 2024.

As of December 31, 2023, the Bank was considered to be “well capitalized” with a 10.15% Tier 1 Leverage ratio, a 13.18% Common Equity Tier 1 Risk-based Capital ratio and Tier 1 Risk-based Capital ratio, and a 14.03% Total Risk-based Capital ratio.

	Actual					For Capital Adequacy Purposes					For Well Capitalized Purposes
(dollars in thousands)	Amount		Percentage			Amount		Percentage			Amount		Percentage
*As of December 31, 2023*
Tier 1 Leverage ratio to Average Assets	$	86,576		10.15	%	$	34,133		4.00	%	$	42,666		5.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets		86,576		13.18			29,566		4.50			42,706		6.50
Tier 1 Capital to Risk-Weighted Assets		86,576		13.18			39,421		6.00			52,561		8.00
Total Capital to Risk-Weighted Assets		92,185		14.03			52,561		8.00			65,702		10.00

*As of December 31, 2022*
Tier 1 Leverage ratio to Average Assets	$	81,100		9.70	%	$	33,461		4.00	%	$	41,826		5.00	%
Common Equity Tier 1 Capital to Risk-Weighted Assets		81,100		12.90			28,290		4.50			40,863		6.50
Tier 1 Capital to Risk-Weighted Assets		81,100		12.90			37,720		6.00			50,294		8.00
Total Capital to Risk-Weighted Assets		88,245		14.04			50,294		8.00			62,867		10.00

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

Well capitalized		10.00%		8.00%		6.50%		5.00%
Adequately Capitalized		8.00%		6.00%		4.50%		4.00%
Undercapitalized	<8.00%		<6.00%		<4.50%		<4.00%
Significantly Undercapitalized	<6.00%		<4.00%		<3.00%		<3.00%
Critically Undercapitalized	Tangible Equity/Total Assets ≤ 2%

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 Bank’s clients, as well as meet the Company’s current and planned expenditures. Management monitors the liquidity position daily.

The Company has a $15,000,000 revolving line of credit, with a five-year term, with TNB. At December 31, 2023, there were no outstanding borrowings under this line.

As a commercial bank, we are expected to maintain an adequate liquidity position. The Bank’s liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and debt securities, funds provided by operations, and capital. The liquidity position may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and marketable debt securities such as U.S. government treasury and agency securities, municipal securities, U.S. agency mortgage-backed securities and asset-backed securities. Some of our debt securities are pledged to collateralize certain deposits through our participation in the State of Florida’s Qualified Public Deposit Program ("QPD"). The market value of debt securities pledged to the QPD program was $16.4 million at December 31, 2023 and $13.3 million at December 31, 2022. At December 31, 2023, on-balance sheet liquidity (consisting of cash and cash equivalents and debt securities at fair value eligible for pledging) was $146.8 million, compared to $165.8 million at December 31, 2022.

The Bank also has external sources of funds through the FHLB and unsecured lines of credit with correspondent banks. At December 31, 2023, the Bank had access to approximately $102.1 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to $59.0 million in unsecured federal funds lines of credit maintained with correspondent banks. As of December 31, 2023, the Bank had $15.0 million in FHLB advances.

As of December 31, 2023, off-balance sheet liquidity for the Company consisted of available credit lines of $176.1 million. When combined with maximum available brokered and wholesale funding capacity of $213.6 million, total off-balance sheet liquidity totaled $389.7 million at December 31, 2023.

Our core deposits consist of noninterest-bearing accounts, NOW accounts, money-market accounts, time deposits $250,000 or less and savings accounts. We closely monitor our level of certificates of deposit $250,000 and greater and other large deposits. At December 31, 2023, total deposits were $748.7 million, of which $40.5 million was in certificates of deposits greater than $250,000, excluding Individual Retirement Accounts (IRAs). At December 31, 2023, the Bank's estimated uninsured deposits were $286.1 million (excluding collateralized public fund accounts), or 38.2% of total deposits.

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 various liquidity stress scenarios. 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.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions that are not included in our consolidated balance sheets in accordance with GAAP. These transactions include commitments to extend credit in the ordinary course of business to approved clients, construction loans in process, unused lines of credit, guaranteed accounts, and standby performance and financial letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

Generally, loan commitments have been granted on a temporary basis for working capital or commercial real estate financing requirements or may be reflective of loans in various stages of funding. These commitments are recorded on our financial statements as they are funded. Commitments typically have fixed expiration dates or other termination clauses and may require payment of a fee. Loan commitments include unused commitments for open-end lines secured by one-to-four family residential properties and commercial properties, commitments to fund loans secured by commercial real estate, construction loans, business lines of credit and other unused commitments.

Guaranteed accounts are irrevocable standby letters of credit issued by us to guarantee a client’s credit line with our third-party credit card company, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on the particular account 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 are written conditional commitments issued by us to guarantee the client will fulfill his or her contractual financial obligations to a third party. 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 repayment from the client.

We minimize our exposure to loss under loan commitments, guaranteed accounts, and standby letters of credit by subjecting them to credit approval and monitoring procedures. The effect on our revenues, expenses, cash flows, and liquidity of the unused portions of these commitments cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.

The following is a summary of the total contractual amount of commitments outstanding at December 31, 2023 and 2022.

	At December 31,
	2023		2022
(in thousands)
Commitments to extend credit	$	2,194	$	10,667
Construction loans in process		46,882		61,991
Unused lines of credit (nonconstruction)		85,150		77,268
Standby financial letters of credit		2,136		3,319
Standby performance letters of credit		89		-
Guaranteed accounts		1,276		1,425
Total off-balance sheet instruments	$	137,727	$	154,670

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 8. Financial Statements and Supplementary Data

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID 400)	40

Consolidated Balance Sheets, December 31, 2023 and 2022	41

Consolidated Statements of Earnings for the Years Ended December 31, 2023 and 2022	42

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023 and 2022	43

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023 and 2022	44

Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022	45

Notes to Consolidated Financial Statements, December 31, 2023 and 2022 and for the Years Then Ended	46-72

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

Prime Meridian Holding Company

Tallahassee, Florida:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Prime Meridian Holding Company and Subsidiary (the "Company"), as of December 31, 2023 and 2022 and the related consolidated statements of earnings, comprehensive income (loss), stockholders' equity and cash flows for the years then ended and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses ("ACL") - Loans

The Company's loans portfolio totaled $651.9 million as of December 31, 2023, and the ACL on loans was $5.6 million.

As more fully described in Notes 1, 3 and 4 to the Company's consolidated financial statements, the Company estimates its exposure to expected credit losses as of the statement of financial condition date for existing financial instruments held at amortized cost and off-balance sheet exposures, such as unfunded loan commitments, lines of credit and other unused commitments that are not unconditionally cancelable by the Company.

The determination of the ACL-loans requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates and identifying loans requiring individual evaluation among others. As disclosed by management, different assumptions and conditions could result in a materially different amount for the estimate of the ACL-loans.

We identified the ACL-loans at December 31, 2023, as a critical audit matter. Auditing the ACL - loans involved a high degree of subjectivity in evaluating management's estimates, such as evaluating management's identification of credit quality indicators, grouping of loans determined to be similar into pools, estimating the remaining life of loans in a pool, assessment of economic conditions and other environmental factors and evaluating the adequacy of specific allowances associated with individually evaluated loans.

The primary procedures we performed as of December 31, 2023, to address this critical audit matter included:

- Obtained an understanding of the Company's process for establishing the ACL-loans, including the qualitative factor adjustments of the ACL-loans
- Tested the completeness and accuracy of the information utilized in the ACL-loans, including evaluating the relevance and reliability of such information
- Tested the ACL-loans model's computational accuracy
- Evaluated the qualitative adjustments to the ACL-loans, including assessing the basis for adjustments and the reasonableness of the significant assumptions
- Evaluated the reasonableness of specific allowances on individually evaluated loans
- Evaluated the overall reasonableness of assumptions used by management considering trends identified within peer groups
- Evaluated credit quality trends in delinquencies, non-accruals, charge-offs and loan risk ratings
- Performed an independent calculation of the ACL-loans
- Evaluated the accuracy and completeness of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, disclosures in the consolidated financial statements

/s/ Hacker, Johnson & Smith PA

HACKER, JOHNSON & SMITH PA

We have served as the Company’s auditor since 2008.

Tampa, Florida

March 21, 2024

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Balance Sheets

	*December 31,*
	*2023*			*2022*
(dollars in thousands, except per share amounts)
Assets
Cash and due from banks	$	9,003		$	8,119
Federal funds sold		14,856			19,259
Interest-bearing deposits		4,557			12,410
Total cash and cash equivalents		28,416			39,788
Debt securities available for sale		124,475			129,436
Debt securities held to maturity (fair value of $10,358 and $9,917)		11,850			11,805
Loans held for sale		5,288			7,058
Loans, net of allowance for credit losses of $5,609 and $7,145		646,127			588,715
Federal Home Loan Bank stock		1,283			463
Premises and equipment, net		7,476			8,022
Right of use lease asset		2,823			3,044
Deferred tax asset		3,529			4,533
Accrued interest receivable		3,114			2,385
Bank-owned life insurance		16,921			16,532
Other assets		3,226			3,391
Total assets	$	854,528		$	815,172

Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing demand deposits	$	189,426		$	197,987
Savings, NOW and money-market deposits		476,826			493,439
Time deposits		82,436			40,109
Total deposits		748,688			731,535

Other borrowings		-			4,275
Federal Home Loan Bank advances		15,000			-
Official checks		2,377			4,090
Operating lease liability		3,013			3,208
Other liabilities		5,474			5,011
Total liabilities		774,552			748,119

Commitments and contingencies (notes 4, 8, and 15)

Stockholders' equity:

Preferred stock, undesignated; 1,000,000 shares authorized, none issued or outstanding		-			-
Common stock, $.01 par value; 9,000,000 shares authorized, 3,259,881 and 3,164,491 issued and outstanding		33			32
Additional paid-in capital		40,522			39,718
Retained earnings		47,234			37,278
Accumulated other comprehensive loss		(7,813	)		(9,975	)
Total stockholders' equity		79,976			67,053
Total liabilities and stockholders' equity	$	854,528		$	815,172

See Accompanying Notes to Consolidated Financial Statements

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Earnings

	*Year Ended December 31,*
(in thousands, except per share amounts)	*2023*		*2022*
Interest income:
Loans	$	35,291	$	26,221
Debt securities		3,698		2,938
Other		937		1,581
Total interest income		39,926		30,740
Interest expense:
Deposits		9,492		2,579
FHLB advances and other borrowings		1,086		200
Total interest expense		10,578		2,779
Net interest income		29,348		27,961
Credit loss expense		1,450		890
Net interest income after credit loss expense		27,898		27,071
Noninterest income:
Service charges and fees on deposit accounts		357		302
Debit card/ATM revenue, net		573		540
Mortgage banking revenue, net		352		473
Income from bank-owned life insurance		389		379
Other income		224		240
Total noninterest income		1,895		1,934
Noninterest expense:
Salaries and employee benefits		11,172		9,627
Occupancy and equipment		1,647		1,621
Professional fees		559		514
Advertising		903		793
FDIC assessment		360		360
Software maintenance, amortization and other		1,214		1,162
Other		2,490		2,191
Total noninterest expense		18,345		16,268
Earnings before income taxes		11,448		12,737
Income taxes		2,740		3,056
Net earnings	$	8,708	$	9,681

Earnings per common share:
Basic	$	2.71	$	3.07
Diluted	$	2.68	$	3.03

See Accompanying Notes to Consolidated Financial Statements

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

	*Year Ended December 31,*
(in thousands)	*2023*			*2022*
Net earnings	$	8,708		$	9,681
Other comprehensive income (loss):
Change in unrealized loss on debt securities available for sale:
Unrealized gain (loss) arising during the year		2,896			(13,264	)
Deferred income tax (expense) benefit		(734	)		3,362
Total other comprehensive income (loss)		2,162			(9,902	)
Comprehensive income (loss)	$	10,870		$	(221	)

See Accompanying Notes to Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2023 and 2022

										*Accumulated*
										*Other*
					*Additional*					*Compre-*			*Total*
	*Common Stock*				*Paid-in*		*Retained*			*hensive*			*Stockholders'*
	*Shares*		*Amount*		*Capital*		*Earnings*			*Loss*			*Equity*
(dollars in thousands)
*Balance at December 31, 2021*		3,129,046	$	31	$	38,909	$	28,164		$	(73	)	$	67,031
Net earnings		-		-		-		9,681			-			9,681
Dividends paid		-		-		-		(567	)		-			(567	)
Net change in unrealized loss on debt securities available for sale, net of income tax benefit		-		-		-		-			(9,902	)		(9,902	)
Stock options exercised		20,240		1		371		-			-			372
Common stock issued as compensation to directors		5,002		-		131		-			-			131
Issuance of restricted stock		10,203		-		129		-			-			129
Stock-based compensation		-		-		178		-			-			178
*Balance at December 31, 2022*		3,164,491	$	32	$	39,718	$	37,278		$	(9,975	)	$	67,053

Net earnings		-		-		-		8,708			-			8,708
Impact of adopting ASC 326 (net of tax)		-		-		-		1,946			-			1,946
Dividends paid		-		-		-		(698	)		-			(698	)
Net change in unrealized loss on debt securities available for sale, net of income taxes		-		-		-		-			2,162			2,162
Stock options exercised		19,217		-		341		-			-			341
Common stock issued as compensation to directors		6,700		-		163		-			-			163
Issuance of restricted stock		69,473		1		243								244
Stock-based compensation		-		-		57		-			-			57
*Balance at December 31, 2023*		3,259,881	$	33	$	40,522	$	47,234		$	(7,813	)	$	79,976

See Accompanying Notes to Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Consolidated Statements of Cash Flows

	*Year Ended December 31,*
(in thousands)	*2023*			*2022*
Cash flows from operating activities:
Net earnings	$	8,708		$	9,681
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		724			683
Credit loss expense		1,450			890
Net amortization (accretion) of deferred loan fees		276			(541	)
Deferred income taxes		(390	)		(328	)
Amortization of premiums and discounts on debt securities		(284	)		(68	)
Gain on sale of loans held for sale		(352	)		(473	)
Proceeds from the sale of loans held for sale		60,437			85,076
Loans originated as held for sale		(58,315	)		(79,893	)
Stock issued as compensation to directors		163			131
Stock-based compensation expense		301			307
Income from bank-owned life insurance		(389	)		(379	)
Net increase in accrued interest receivable		(729	)		(880	)
Net change in operating leases		26			25
Net decrease (increase) in other assets		165			(1,557	)
Net (decrease) increase in other liabilities and official checks		(1,250	)		4,923
Net cash provided by operating activities		10,541			17,597
Cash flows from investing activities:
Loan originations, net of principal repayments		(56,532	)		(98,866	)
Purchase of debt securities available for sale		(1,206	)		(79,322	)
Purchase of debt securities held to maturity		-			(11,782	)
Principal repayments of debt securities available for sale		7,284			10,397
Maturities and calls of debt securities available for sale		2,018			33
Purchase of Federal Home Loan Bank stock		(820	)		(97	)
Purchase of premises and equipment		(178	)		(743	)
Net cash used in investing activities		(49,434	)		(180,380	)
Cash flows from financing activities:
Net increase (decrease) in deposits		17,153			(31,407	)
Net (decrease) increase in other borrowings		(4,275	)		700
Increase in Federal Home Loan Bank advances, net		15,000			-
Proceeds from stock options exercised		341			372
Common stock dividends paid		(698	)		(567	)
Net cash provided by (used in) financing activities		27,521			(30,902	)
Net decrease in cash and cash equivalents		(11,372	)		(193,685	)
Cash and cash equivalents at beginning of year		39,788			233,473
Cash and cash equivalents at end of year	$	28,416		$	39,788
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest	$	10,218		$	2,779
Income taxes	$	3,072		$	3,596
Noncash transactions:
Accumulated other comprehensive loss, net change in unrealized loss on debt securities available for sale, net of income taxes (benefit)	$	2,162		$	(9,902	)
Impact of adopting ASC 326	$	1,946		$	-

See Accompanying Notes to Consolidated Financial Statements

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements

At December 31, 2023 and 2022 and for the Years Then Ended

(1) Summary of Significant Accounting Policies

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

The following is a description of the significant accounting policies and practices followed by the Company, which conform to accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices within the banking industry.

Use of Estimates. In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit losses.

Principles of Consolidation. The consolidated financial statements include the accounts of PMHG and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold and interest-bearing deposits in banks, all of which have original maturities of less than ninety days.

On March 12, 2021, the Board of Governors of the Federal Reserve System adopted as a final rule, without change, its March 24, 2020 interim rule amending its Regulation D (Reserve Requirements of Depository Institutions) to lower reserve requirement ratios on transaction accounts maintained at depository institutions to zero percent.

Debt Securities. Debt securities may be classified as either trading, held-to-maturity or available-for-sale. Trading debt securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading debt securities are included immediately in earnings. Held-to-maturity debt securities are those which the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Debt securities available-for-sale consist of securities not classified as trading debt securities or as held-to-maturity debt securities. Unrealized holding gains and losses on debt securities available-for-sale are excluded from earnings and reported in accumulated other comprehensive loss. Gains and losses on the sale of debt securities are recorded on the trade date determined using the specific-identification method. Premiums and discounts on debt securities are recognized in interest income using the interest method over the period to maturity or call date, if applicable.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Loans Held for Sale. Loans held for sale includes mortgage loans which are intended for sale in the secondary market and are carried at the lower of book value or estimated fair value in the aggregate. For the years ended December 31, 2023 and 2022, gains on loans held for sale are reported on the consolidated statements of earnings under noninterest income in mortgage banking revenue. At December 31, 2023, loans held for sale were $5,288,000 compared to $7,058,000 at December 31, 2022. At December 31, 2023 and 2022, fair values exceeded book values in the aggregate. The Company retains no beneficial interest in these sales and no servicing rights on the loans sold.

Loans. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for credit losses, and any deferred fees or costs. Commitment and loan origination fees are deferred and certain direct origination costs are capitalized. Both are recognized as an adjustment of the yield of the related loan.

The accrual of interest on all portfolio classes is discontinued at the time the loan is ninety-days delinquent unless the loan is well collateralized and in the process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or loans that are charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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

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

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

Management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the debt securities available for sale and does not record an ACL on accrued interest receivable. As of December 31, 2023, the accrued interest receivable for debt securities available for sale included in accrued interest receivable was $523,000.

ACL – Debt Securities Held to Maturity. The Company measures expected credit losses on debt securities held to maturity on a collective basis by major security type. U.S. agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Taxable municipal securities are highly rated by major credit agencies. A debt security is placed on nonaccrual status at the time any principal or interest payments become ninety days delinquent. Interest accrued but not received for a debt security placed on nonaccrual is reversed against interest income. During the year ended December 31, 2023, there were no debt securities placed on nonaccrual. As of December 31, 2023, the accrued interest receivable for debt securities held to maturity included in accrued interest receivable was $69,000.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

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

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

●

Commercial real estate

●

Residential and home equity

●

Construction

●

Commercial

●

Consumer and other

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

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

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

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

●

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

●

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

The Company follows its nonaccrual policy by reversing contractual interest income in the statements of earnings when the Company places a loan on nonaccrual status. Therefore, management excludes the accrued interest receivable balance from the amortized cost basis in measuring expected credit losses on the portfolio and does not record an ACL on accrued interest receivable. As of December 31, 2023, the accrued interest receivable for loans recorded in accrued interest receivable was $2,522,000.

The Company has a variety of assets that have a component that qualifies as an OBS exposure. These primarily include undrawn portions of revolving lines of credit and construction loans. Management has determined that a majority of the Company's off-balance-sheet credit exposures are not unconditionally cancellable. Management used its judgement to determine funding rates. Management applied the funding rates, along with the loss factor rate determined for each pooled loan segment, to unfunded loan commitments, excluding unconditionally cancellable exposures and letters of credit, to arrive at the reserve for unfunded loan commitments. Any adjustment to the ACL for unfunded commitments will be recognized through the ACL in the statements of earnings. As of December 31, 2023, there was no liability recorded for expected credit losses on unfunded commitments.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Premises and Equipment. Land is stated at cost. Buildings, leasehold improvements, furniture, fixtures and equipment, computer and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense are computed using the straight-line method over the estimated useful life of each type of asset, or the lease term if shorter.

Bank-Owned Life Insurance ("BOLI"). The Company has purchased life insurance policies on certain key officers. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the consolidated balance sheet date, which is the cash surrender value adjusted for other charges or other amount due that are probable at settlement.

Transfer of Financial Assets. Transfers of financial assets or a participating interest in an entire financial asset are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. A participating interest is a portion of an entire financial asset that (1) conveys proportionate ownership rights with equal priority to each participating interest holder (2) involves no recourse (other than standard representations and warranties) to, or subordination by, any participating interest holder, and (3) does not entitle any participating interest holder to receive cash before any other participating interest holder.

Off-Balance Sheet Financial Instruments. In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, construction loans in process, unused lines of credit, standby financial and performance letters of credit and guaranteed accounts. Such financial instruments are recorded in the consolidated financial statements when they are funded.

Revenue from Contracts with Customers. In addition to lending and related activities, the Company offers various services to customers that generate revenue, certain of which are governed by ASC Topic 606 Revenue from Contracts with Customers (“ASC 606”). The Company’s services that fall within the scope of ASC 606 are presented within noninterest income and include service charges and fees on deposit accounts and debit card/ATM revenue, net. Revenue is recognized upon satisfaction of our performance obligation when the transactions occur or as services are performed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur.

Debit Card/ATM Revenue. Debit card/ATM revenue primarily includes interchange income from client use of consumer and business debit cards. Interchange income is paid by a merchant bank to the card-issuing bank through the interchange network. Interchange fees are set by the credit card associations and based on cardholder purchase volumes. Also included in debit card/ATM revenue is ATM foreign fee income and ATM non-client ACH credits. This revenue line is shown net of debit card fees and ATM program expenses.

Income Taxes. There are two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.

Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Income Taxes, Continued. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment. As of December 31, 2023, management is not aware of any uncertain tax positions that would have a material effect on the Company's consolidated financial statements. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company files consolidated income tax returns. Income taxes are allocated to the Holding Company and Bank as if separate income tax returns were filed.

Fair Value Measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP has established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

Level 3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost and effort.

The following describes valuation methodologies used for assets measured at fair value:

Debt Securities Available for Sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, certain mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. Government treasury and agency securities, municipal securities, U.S. agency mortgage-backed securities, and asset-backed securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Quoted market prices are not always available for our derivatives. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Fair Values of Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values of financial instruments:

Cash and Cash Equivalents. The carrying amounts of cash and cash equivalents approximate their fair value (Level 1).

Debt Securities. Fair values for debt securities are based on the framework for measuring fair value (Level 2).

Loans Held for Sale. Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices. Fair values are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality (Level 3).

Loans. Fair values for variable rate loans, fixed-rate mortgage loans (e.g., one-to-four family residential), commercial real estate loans and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable (Level 3).

Federal Home Loan Bank Stock. The fair value of the Company's investment in Federal Home Loan Bank stock is based on its redemption value (Level 3).

Accrued Interest Receivable. The carrying amounts of accrued interest approximate their fair values (Level 3).

Bank Owned Life Insurance. The Company has purchased life insurance policies on certain officers. The life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement (Level 3).

Deposits. The fair values disclosed for demand, NOW, money-market and savings deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities of time deposits (Level 3).

Other borrowings. The fair value of other borrowings approximates carrying value due to their short-term maturity (Level 3).

Federal Home Loan Bank Advances. Fair values of FHLB advances are estimated using discounted cash flow analysis based on current borrowing rates of the FHLB (Level 3).

Derivatives. Fair value of the Company’s derivative contracts is based on the framework for measuring fair value (Level 2).

Off-Balance Sheet Instruments. Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing (Level 3).

Advertising. The Company expenses all media advertising as incurred.

Stock-Based Compensation. The Company expenses the fair value of any stock awards granted. The Company recognizes stock-based compensation in the consolidated statements of earnings as the awards vest. The market price of the Company's common stock at the date of the grant is used for restricted stock awards. For stock purchase plans, the Black-Scholes model is utilized to estimate the fair value of the award. The impact of forfeitures of share-based awards on compensation expense is recognized as forfeitures occur.

Comprehensive Income (Loss). GAAP requires that recognized revenue, expenses, gains and losses be included in earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on debt securities available-for-sale, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net earnings, are components of comprehensive income (loss).

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

Mortgage Banking Revenue. Mortgage banking revenue includes gains and losses on the sale of mortgage loans originated for sale, net of direct origination costs, and wholesale brokerage fees. The Company recognizes mortgage banking revenue from mortgage loans originated in the consolidated statements of earnings upon sale of the loans.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(1) Summary of Significant Accounting Policies, Continued

Recently Adopted Accounting Standards

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

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

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

	*January 1, 2023*
	As Reported Under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
	(In thousands)
Assets:
Allowance for credit losses on loans	$	4,539	$	7,145	$	(2,606	)
Deferred tax asset	$	-	$	-	$	660

Equity:
Retained earnings (impact of adopting ASC 326, net of taxes)	$	-	$	-	$	1,946

Also on January 1, 2023, the Company adopted Accounting Standards Update "ASU" 2022-22, "Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-22 eliminates the accounting guidance for troubled debt restructurings ("TDRs") in ASC 310-40 Receivables - Troubled Debt Restructurings by Creditors, and introduces new disclosures related to modifications with borrowers that are experiencing financial difficulties. ASU 2022-02 also requires the disclosure of current-period gross write-offs by year of origination for financing receivables held at amortized cost. Upon adoption, the Company eliminated the separate credit loss estimation process for loans classified as TDRs. The adoption did not have a material impact to the consolidated financial statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Consolidated Financial Statements, Continued

(2) Debt Securities

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

Gross

Amortized

Unrealized

Prime Meridian Holding Co 10-K