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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended

March 31, 2024

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

For the transition period from

Commission File Number:

333-191801

PRIME MERIDIAN HOLDING COMPANY

(Exact Name of registrant as specified in its charter)

Florida	27-2980805
(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)

(850) 907-2300

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class

None.

Trading Symbol(s)

N/A

Name of exchange on which registered

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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, a smaller reporting company, or an emerging growth 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 2, 2024: 3,297,063

INDEX

PART I. FINANCIAL INFORMATION	PAGE

Item 1. Financial Statements

Condensed Consolidated Balance Sheets March 31, 2024 (unaudited) and December 31, 2023	2

Condensed Consolidated Statements of Earnings Three Months ended March 31, 2024 and 2023 (unaudited)	3

Condensed Consolidated Statements of Comprehensive Income Three Months ended March 31, 2024 and 2023 (unaudited)	4

Condensed Consolidated Statements of Stockholders’ Equity Three Months ended March 31, 2024 and 2023 (unaudited)	5

Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 2024 and 2023 (unaudited)	6

Notes to Condensed Consolidated Financial Statements (unaudited)	7-25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26-33

Item 3. Quantitative and Qualitative Disclosures About Market Risk	33

Item 4. Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	35

Item 1A. Risk Factors	35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3. Defaults Upon Senior Securities	35

Item 4. Mine Safety Disclosures	35

Item 5. Other Information	35

Item 6. Exhibits	36

Signatures	37

Certifications

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Balance Sheets

	*March 31,*			*December 31,*
	*2024*			*2023*
(in thousands)	(Unaudited)
Assets
Cash and due from banks	$	9,600		$	9,003
Federal funds sold		8,595			14,856
Interest-bearing deposits		5,279			4,557
Total cash and cash equivalents		23,474			28,416
Debt securities available for sale at fair value (amortized cost of $128,268 and $134,940)		117,413			124,475
Debt securities held to maturity (fair value of $10,328 and $10,358)		11,861			11,850
Loans held for sale		3,583			5,288
Loans, net of allowance for credit losses of $5,796 and $5,609		666,826			646,127
Federal Home Loan Bank stock		1,548			1,283
Premises and equipment, net		7,406			7,476
Right of use operating lease asset		2,767			2,823
Accrued interest receivable		3,465			3,114
Bank-owned life insurance		17,021			16,921
Other assets		7,296			6,755
Total assets	$	862,660		$	854,528

Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing demand deposits	$	201,083		$	189,426
Savings, NOW and money-market deposits		462,601			476,826
Time deposits		88,029			82,436
Total deposits		751,713			748,688
Federal Home Loan Bank advances		20,000			15,000
Official checks		831			2,377
Operating lease liability		2,963			3,013
Other liabilities, net		5,714			5,474
Total liabilities		781,221			774,552
Stockholders' equity:
Preferred stock, undesignated; 1,000,000 shares authorized, none issued or outstanding		-			-
Common stock, $.01 par value; 9,000,000 shares authorized, 3,295,265 and 3,259,881 issued and outstanding		33			33
Additional paid-in capital		41,163			40,522
Retained earnings		48,347			47,234
Accumulated other comprehensive loss		(8,104	)		(7,813	)
Total stockholders' equity		81,439			79,976
Total liabilities and stockholders' equity	$	862,660		$	854,528

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Earnings (Unaudited)

	*Three Months Ended*
	*March 31,*
(in thousands, except per share amounts)	*2024*		*2023*
Interest income:
Loans	$	9,962	$	8,044
Debt securities		896		933
Other		207		222
Total interest income		11,065		9,199
Interest expense:
Deposits		3,677		1,533
Other borrowings and FHLB advances		255		111
Total interest expense		3,932		1,644
Net interest income		7,133		7,555
Credit loss expense		211		243
Net interest income after credit loss expense		6,922		7,312
Noninterest income:
Service charges and fees on deposit accounts		69		85
Debit card/ATM revenue, net		158		151
Mortgage banking revenue, net		71		54
Income from bank-owned life insurance		100		94
Other income		55		57
Total noninterest income		453		441
Noninterest expense:
Salaries and employee benefits		2,865		2,752
Occupancy and equipment		405		409
Professional fees		154		135
Marketing		274		223
FDIC assessment		108		84
Software maintenance, amortization and other		404		277
Other		631		575
Total noninterest expense		4,841		4,455
Earnings before income taxes		2,534		3,298
Income taxes		603		797
Net earnings	$	1,931	$	2,501

Earnings per common share:
Basic	$	0.59	$	0.79
Diluted		0.59		0.78
Cash dividends per common share		0.25		0.22

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	*Three Months Ended*
	*March 31,*
(in thousands)	*2024*			*2023*
Net earnings	$	1,931		$	2,501
Other comprehensive (loss) income:
Change in unrealized loss on debt securities available for sale-
Unrealized (loss) income arising during the period		(390	)		1,980
Deferred income tax benefit (expense) on above change		99			(502	)
Total other comprehensive (loss) income		(291	)		1,478
Comprehensive income	$	1,640		$	3,979

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Stockholders' Equity

Three Months ended March 31, 2024 and 2023

										*Accumulated*
					*Additional*					*Other*			*Total*
	*Common Stock*				*Paid-in*		*Retained*			*Comprehensive*			*Stockholders'*
	*Shares*		*Amount*		*Capital*		*Earnings*			*Loss*			*Equity*
(dollars in thousands)
*Balance at December 31, 2022*		3,164,491	$	32	$	39,718	$	37,278		$	(9,975	)	$	67,053
Impact of adopting ASC 326 (net of tax)						-		1,946			-			1,946
Net earnings for the three months ended March 31, 2023 (unaudited)		-		-		-		2,501			-			2,501
Dividends paid (unaudited)		-		-		-		(698	)		-			(698	)
Net change in unrealized loss on debt securities available for sale, net of income tax expense (unaudited)		-		-		-		-			1,478			1,478
Stock options exercised (unaudited)		15,867		-		273		-			-			273
Common stock issued as compensation to directors (unaudited)		1,573		-		40		-			-			40
Issuance of restricted stock (unaudited)		3,834		-		-		-			-			-
Stock-based compensation (unaudited)		-		-		83		-			-			83
*Balance at March 31, 2023 (unaudited)*		3,185,765	$	32	$	40,114	$	41,027		$	(8,497	)	$	72,676

										*Accumulated*
					*Additional*					*Other*			*Total*
	*Common Stock*				*Paid-in*		*Retained*			*Comprehensive*			*Stockholders'*
	*Shares*		*Amount*		*Capital*		*Earnings*			*Loss*			*Equity*
*Balance at December 31, 2023*		3,259,881	$	33	$	40,522	$	47,234		$	(7,813	)	$	79,976
Net earnings for the three months ended March 31, 2024 (unaudited)		-		-		-		1,931			-			1,931
Dividends paid (unaudited)		-		-		-		(818	)		-			(818	)
Net change in unrealized loss on debt securities available for sale, net of income tax benefit (unaudited)		-		-		-		-			(291	)		(291	)
Stock options exercised (unaudited)		23,940		-		481		-			-			481
Common stock issued as compensation to directors (unaudited)		1,654		-		41		-			-			41
Issuance of restricted stock (unaudited)		9,790		-		113		-			-			113
Stock-based compensation (unaudited)		-		-		6		-			-			6
*Balance at March 31, 2024 (unaudited)*		3,295,265	$	33	$	41,163	$	48,347		$	(8,104	)	$	81,439

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flow (Unaudited)

	*Three Months Ended March 31,*
(in thousands)	*2024*			*2023*
Cash flows from operating activities:
Net earnings	$	1,931		$	2,501
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		180			181
Credit loss expense		211			243
Net amortization of deferred loan fees		30			50
Net accretion of discounts on debt securities		(78	)		(69	)
Gain on sale of loans held for sale		(71	)		(54	)
Proceeds from the sale of loans held for sale		13,396			13,681
Loans originated as held for sale		(11,620	)		(14,674	)
Stock issued as compensation to directors		41			40
Stock-based compensation expense		119			83
Income from bank-owned life insurance		(100	)		(94	)
Net increase in accrued interest receivable		(351	)		(238	)
Net change in operating leases		6			6
Net (increase) decrease in other assets		(442	)		192
Net decrease in other liabilities and official checks		(1,306	)		(2,640	)
Net cash provided by (used in) operating activities		1,946			(792	)
Cash flows from investing activities:
Loan originations, net of principal repayments		(20,940	)		(15,100	)
Principal repayments of debt securities available for sale		1,679			1,720
Maturities and calls of debt securities available for sale		5,060			6
Purchase of Federal Home Loan Bank stock		(265	)		(582	)
Purchase of premises and equipment		(110	)		(52	)
Net cash used in investing activities		(14,576	)		(14,008	)
Cash flows from financing activities:
Net increase (decrease) in deposits		3,025			(14,299	)
Change in other borrowings		-			(2,550	)
Increase in Federal Home Loan Bank advances		5,000			15,000
Proceeds from stock options exercised		481			273
Common stock dividends paid		(818	)		(698	)
Net cash provided by (used in) financing activities		7,688			(2,274	)
Net decrease in cash and cash equivalents		(4,942	)		(17,074	)
Cash and cash equivalents at beginning of period		28,416			39,788
Cash and cash equivalents at end of period	$	23,474		$	22,714
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$	3,948		$	1,580
Income taxes	$	-		$	-
Noncash transactions:
Accumulated other comprehensive (loss) income, net change in unrealized loss on debt securities available for sale, net of income tax benefit (expense)	$	(291	)	$	1,478
Impact of adopting ASC 326 (net of tax)	$	-		$	1,946

See Accompanying Notes to Condensed Consolidated Financial Statements.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited)

(1)

General

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, and 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 accounting and financial reporting policies of the Company conform, in all material respects, to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The condensed consolidated financial statements in the Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all necessary adjustments for a fair presentation of the Company’s condensed consolidated financial position and condensed consolidated results of operations. All adjustments were of a normal and recurring nature. The condensed consolidated financial statements have been prepared in accordance with GAAP and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (the “SEC”). Accordingly, the condensed consolidated financial statements do not include all information and footnotes required by GAAP for complete financial presentation and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2023, included in our Annual Report on Form 10-K filed with the SEC on March 21, 2024. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year or any future period.

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

Stock-Based Compensation. The Company expenses the fair value of stock options and restricted stock granted. The Company recognizes stock-based compensation expense in the condensed consolidated statements of earnings over the vesting period.

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.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Debt Securities

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

			*Gross*		*Gross*
	*Amortized*		*Unrealized*		*Unrealized*			*Fair*
	*Cost*		*Gains*		*Losses*			*Value*
(in thousands)
*At March 31, 2024*
Debt Securities Available for Sale
U.S. Government treasury and agency securities	$	41,585	$	-	$	(1,053	)	$	40,532
Municipal securities		22,183		-		(2,198	)		19,985
U.S. agency mortgage-backed securities		61,623		26		(7,580	)		54,069
Asset-backed securities		2,877		6		(56	)		2,827
Total	$	128,268	$	32	$	(10,887	)	$	117,413

Debt Securities Held to Maturity
Municipal securities	$	9,267	$	23	$	(1,364	)	$	7,926
U.S. agency mortgage-backed securities		2,594		-		(192	)		2,402
Total	$	11,861	$	23	$	(1,556	)	$	10,328

*At December 31, 2023*
Debt Securities Available for Sale
U.S. Government treasury and agency securities	$	46,492	$	-	$	(1,234	)	$	45,258
Municipal securities		22,259		-		(2,151	)		20,108
U.S. agency mortgage-backed securities		63,165		7		(7,013	)		56,159
Asset-backed securities		3,024		-		(74	)		2,950
Total	$	134,940	$	7	$	(10,472	)	$	124,475

Debt Securities Held to Maturity
Municipal securities	$	9,257	$	39	$	(1,378	)	$	7,918
U.S. agency mortgage-backed securities		2,593		-		(153	)		2,440
Total	$	11,850	$	39	$	(1,531	)	$	10,358

There were no debt securities available for sale sold during the three months ended March 31, 2024 and 2023.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Debt Securities, Continued

Debt securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

	*Less Than Twelve Months*					*More Than Twelve Months*
	*Gross*					*Gross*
	*Unrealized*			*Fair*		*Unrealized*			*Fair*
	*Losses*			*Value*		*Losses*			*Value*
(in thousands)
*At March 31, 2024*
Debt Securities Available for Sale
U.S. Government treasury and agency securities	$	-		$	-	$	(1,053	)	$	40,532
Municipal securities		-			-		(2,198	)		19,985
U.S. agency mortgage-backed securities		-			-		(7,580	)		52,896
Asset-backed securities		-			-		(56	)		1,968
Total	$	-		$	-	$	(10,887	)	$	115,381

Debt Securities Held to Maturity
Municipal securities	$	-		$	-	$	(1,364	)	$	6,908
U.S. agency mortgage-backed securities		-			-		(192	)		2,402
Total	$	-		$	-	$	(1,556	)	$	9,310

*At December 31, 2023*
Debt Securities Available for Sale
U.S. Government treasury and agency securities	$	-		$	-	$	(1,234	)	$	45,258
Municipal securities		(2	)		386		(2,149	)		19,722
U.S. agency mortgage-backed securities		-			-		(7,013	)		54,987
Asset-backed securities		-			-		(74	)		2,950
Total	$	(2	)	$	386	$	(10,470	)	$	122,917

Debt Securities Held to Maturity
Municipal securities	$	-		$	-	$	(1,378	)	$	6,884
U.S. agency mortgage-backed securities		-			-		(153	)		2,440
Total	$	-		$	-	$	(1,531	)	$	9,324

The unrealized losses at March 31, 2024 and December 31, 2023 on 100 and 103 debt securities, respectively, were caused by market conditions such as interest rate movements, and not changes in credit quality. It is expected that the debt securities would not be settled at a price less than the par value of the debt securities. Because the decline in fair value is attributable to market conditions and not credit quality, and because the Company has the ability and intent to hold these debt securities until a market price recovery or maturity, these debt securities are not considered other-than-temporarily impaired. Therefore, at March 31, 2024 and December 31, 2023, no ACL on debt securities has been recorded.

Management evaluates debt securities for impairment where there has been a decline in fair value below the amortized cost basis of a debt security to determine whether there is a credit loss associated with the decline in fair value on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Credit losses are calculated individually and collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the debt security.

Any credit loss component would be recognized through a credit loss expense. Consideration is given to (1) the financial condition and near-term prospects of the issuer including looking at default and delinquency rates, (2) the outlook for receiving the contractual cash flows of the debt securities, (3) the length of time and the extent to which the fair value has been less than cost, (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that we will be required to sell the debt security prior to recovering its fair value, (5) the anticipated outlook for changes in the general level of interest rates, (6) credit ratings, (7) third party guarantees, and (8) collateral values. In analyzing an issuer's financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer's financial condition, and the issuer's anticipated ability to pay the contractual cash flows of the debt securities. The Company determined that the U.S. government agency and treasury securities (including mortgage-backed securities) have a zero expected credit loss. All of the government agency securities have the full faith and credit backing of the United States government or one of its agencies. Municipal securities and asset-backed securities that do not have a zero expected credit loss are evaluated quarterly by a third-party resource to determine whether there is a credit loss associated with a decline in fair value. At March 31, 2024 and December 31, 2023, all municipal and asset-backed securities were rated as investment grade. All debt securities in an unrealized loss position as of March 31, 2024 continue to perform as scheduled and we do not believe that there is a credit loss or that a credit loss expense is necessary. At March 31, 2024 and December 31, 2023, no debt securities are on nonaccrual. Also, as part of our evaluation of our intent and ability to hold investments for a period of time sufficient to allow for any anticipated recovery in the market, we consider our investment strategy, cash flow needs, liquidity position, capital adequacy and interest rate risk position. We do not currently intend to sell the debt securities within the portfolio, and it is not more-likely-than-not that we will be required to sell the debt securities.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(2)

Debt Securities, Continued

Debt securities available for sale measured at fair value on a recurring basis are summarized below:

			*Fair Value Measurements Using*
			*Quoted Prices*
			*In Active*		*Significant*
			*Markets for*		*Other*		*Significant*
			*Identical*		*Observable*		*Unobservable*
	*Fair*		*Assets*		*Inputs*		*Inputs*
	*Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
(in thousands)
*At March 31, 2024*
Debt Securities Available for Sale
U.S. Government treasury and agency securities	$	40,532	$	-	$	40,532	$	-
Municipal securities		19,985		-		19,985		-
U.S. agency mortgage-backed securities		54,069		-		54,069		-
Asset-backed securities		2,827		-		2,827		-
Total	$	117,413	$	-	$	117,413	$	-

*At December 31, 2023*
Debt Securities Available for Sale
U.S. Government treasury and agency securities	$	45,258	$	-	$	45,258	$	-
Municipal securities		20,108		-		20,108		-
U.S. agency mortgage-backed securities		56,159		-		56,159		-
Asset-backed securities		2,950		-		2,950		-
Total	$	124,475	$	-	$	124,475	$	-

The scheduled maturities of debt securities are as follows:

	*Debt Securities Available for Sale*				*Debt Securities Held to Maturity*
	*Amortized*		*Fair*		*Amortized*		*Fair*
	*Cost*		*Value*		*Cost*		*Value*
(in thousands)
Due in less than one year	$	30,816	$	30,612	$	-	$	-
Due in one to five years		17,825		16,677		-		-
Due in five to ten years		12,880		11,305		2,056		1,940
Due after ten years		5,124		4,750		7,211		5,986
U.S. agency mortgage-backed securities		61,623		54,069		2,594		2,402
Total	$	128,268	$	117,413	$	11,861	$	10,328

At March 31, 2024 and December 31, 2023 debt securities with a fair value of $16.3 million and $16.4 million, respectively, were pledged as collateral for public deposits.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans

Segments and classes of loans, excluding loans held for sale, are as follows:


(in thousands)	*At March 31, 2024*			*At December 31, 2023*
Real estate mortgage loans:
Commercial	$	226,634		$	223,795
Residential and home equity		264,638			254,574
Construction		87,593			81,640
Total real estate mortgage loans		578,865			560,009

Commercial loans		88,426			85,983
Consumer and other loans		5,545			5,936
Total loans		672,836			651,928

Add (deduct):
Net deferred loan fees		(214	)		(192	)
Allowance for credit losses		(5,796	)		(5,609	)
Loans, net	$	666,826		$	646,127

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

The Company has divided the loan portfolio into three portfolio segments and five portfolio classes, each with different risk characteristics and methodologies for assessing risk. All loans are underwritten based upon standards set forth in the policies approved by the Company’s Board of Directors. The Company identifies the portfolio segments and classes as follows:

Real Estate Mortgage Loans. Real estate mortgage loans are typically divided into three classes: commercial, residential and home equity, and construction loans.

Commercial. Loans of this type are typically our more complex loans. This category of real estate loans is comprised of loans secured by mortgages on commercial property that are typically owner-occupied, but also includes nonowner-occupied investment properties. Commercial loans that are secured by owner-occupied commercial real estate are repaid through operating cash flows of the borrower. Commercial loans that are secured by nonowner-occupied commercial real estate are underwritten by assessing the property’s current and future income potential and appraised value. 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. Typically, interest rates on these types of loans are fixed for five years or less after which they may adjust based upon a predetermined spread over a market index rate. At times, a rate may be fixed for longer than five years. As part of our credit underwriting standards, the Company typically requires personal guarantees from the principal owners of the business supported by a review of the principal owners’ personal financial statements and tax returns. As part of the enterprise risk management process, it is understood that risks associated with commercial real estate loans include fluctuations in real estate values, the overall strength of the borrower and the economy, new job creation trends, tenant vacancy rates, environmental contamination, and the quality of the borrowers’ management. In order to mitigate and limit these risks, we analyze the borrowers’ cash flows and evaluate collateral value. Currently, the collateral securing our commercial real estate loans includes a variety of property types, such as office, warehouse, and retail facilities. Other types include multifamily properties, hotels, mixed-use residential and commercial properties. Generally, commercial real estate loans present a higher risk profile than our consumer real estate loan portfolio.

Residential and Home Equity. The Company offers first and second one-to-four family mortgage loans and home equity lines of credit; the collateral for these loans is generally the clients' owner-occupied residences. Although these types of loans present lower levels of risk than commercial real estate loans, risks do still exist because of possible fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrowers' financial condition. The nonowner-occupied investment properties are more similar in risk to commercial real estate loans, and therefore, are underwritten by assessing the property’s income potential and appraised value. In both cases, we underwrite the borrower’s financial condition and evaluate his or her global cash flow position. Borrowers may be affected by numerous factors, including job loss, illness, or other personal hardship. As part of our product mix, the Bank offers both portfolio and secondary market mortgages; portfolio loans generally are based on a 1-year, 3-year, 5-year, or 7-year adjustable rate mortgage; while 15-year or 30-year fixed-rate loans are generally sold in the secondary market.

Construction. Typically, these loans have a construction period of one to two years and the interest is paid monthly. Once the construction period terminates, some of these loans convert to a term loan with a maturity of one to ten years. This portion of our loan portfolio includes loans to small and midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties, and residential developments. This type of loan is also made to individual clients for construction of single-family homes in our market area. An independent appraisal is used to determine the value of the collateral and confirm that the ratio of the loan principal to the value of the collateral will not exceed policies of the Bank. As the construction project progresses, loan proceeds are requested by the borrower to complete phases of construction and funding is only disbursed after the project has been inspected by a third-party inspector or experienced construction lender. Risks associated with construction loans include fluctuations in the value of real estate, project completion risk, and changes in market trends. The ability of the construction loan borrower to finance the loan or sell the property upon completion of the project is another risk factor that also may be affected by changes in market trends since the initial funding of the loan.

Commercial Loans. The Company offers a wide range of commercial loans, including business term loans, equipment financing, lines of credit, and U.S. Small Business Administration (SBA) loans. Small-to-medium sized businesses, retail, and professional establishments, make up our target market for commercial loans. Our Relationship Managers primarily underwrite these loans based on the borrower's ability to service the loan from cash flow. Lines of credit and loans secured by accounts receivable and/or inventory are monitored periodically by our staff. Loans secured by "all business assets," or a "blanket lien" are typically only made to highly qualified borrowers due to the nonspecific nature of the collateral and do not require a formal valuation of the business collateral. When commercial loans are secured by specifically identified collateral, then the valuation of the collateral is generally supported by an appraisal, purchase order, or third-party physical inspection. Personal guarantees of the principals of business borrowers are usually required. Equipment loans generally have a term of five years or less and may have a fixed or variable rate; we use conservative margins when pricing these loans. Working capital loans generally do not exceed one year and typically, they are secured by accounts receivable, inventory, and personal guarantees of the principals of the business. The Bank currently offers SBA 504 and SBA 7A loans. SBA 504 loans provide financing for major fixed assets such as real estate and equipment while SBA 7A loans are generally used to establish a new business or assist in the acquisition, operation, or expansion of an existing business. With both SBA loan programs, there are set eligibility requirements and underwriting standards outlined by SBA that can change as the government alters its fiscal policy. Significant factors affecting a commercial borrower's creditworthiness include the quality of management and the ability both to evaluate changes in the supply and demand characteristics affecting the business' markets for products and services and to respond effectively to such changes. These loans may be made unsecured or secured, but most are made on a secured basis. Risks associated with our commercial loan portfolio include local, regional, and national market conditions. Other factors of risk could include changes in the borrower's management and fluctuations in collateral value. Additionally, there may be refinancing risk if a commercial loan includes a balloon payment which must be refinanced or paid off at loan maturity. In reference to our risk management process, our commercial loan portfolio presents a higher risk profile than our consumer real estate and consumer loan portfolios. Therefore, we require that all loans to businesses must have a clearly stated and reasonable payment plan to allow for timely retirement of debt, unless secured by liquid collateral or as otherwise justified.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)	Loans, Continued

Consumer and Other Loans. These loans are made for various consumer purposes, such as the financing of automobiles, boats, and recreational vehicles. The payment structure of these loans is normally on an installment basis. The risk associated with this category of loans stems from the reduced collateral value for a defaulted loan; the collateral may not provide an adequate source of repayment of the principal. The underwriting on these loans is primarily based on the borrower's financial condition. In many cases, these are unsecured credits that subject us to risk when the borrower's financial condition declines or deteriorates. Based upon our current trend in consumer loans, management does not anticipate consumer loans will become a substantial component of our loan portfolio at any time in the foreseeable future. Consumer loans are made at fixed and variable interest rates and are based on the appropriate amortization for the asset and purpose.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Furthermore, construction loans, owner-occupied and nonowner-occupied commercial real estate loans, and commercial loan relationships in excess of $1 million are reviewed at least annually. The Company determines the appropriate loan grade during the renewal process and reevaluates the loan grade in situations when a loan becomes past due.

Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the client contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged-off. The Company uses the following definitions for risk ratings:

Pass – A Pass loan's primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.

Special Mention – A Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not necessarily preclude the potential for recovery, but rather signifies it is no longer practical to defer writing off the asset.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Loan balances classified by credit quality indicator, loan type and based on year of origination are as follows:

(in thousands)	*Term Loans by Origination Year*
*At March 31, 2024*	*2024*		*2023*		*2022*		*2021*		*2020*		*Prior*		*Revolving Loans*		*Total*
Commercial Real Estate Loans
Pass	$	5,465	$	27,806	$	61,765	$	32,398	$	40,843	$	49,414	$	7,126	$	224,817
Special mention		-		-		-		-		-		1,761				1,761
Substandard		-		-		-		-		-		56		-		56
Total commercial real estate loans	$	5,465	$	27,806	$	61,765	$	32,398	$	40,843	$	51,231	$	7,126	$	226,634
Year-to-date gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and Home Equity Loans
Pass	$	5,957	$	44,589	$	51,923	$	56,490	$	29,625	$	39,049	$	32,789	$	260,422
Special mention		-		-		-		1,384		275		202		536		2,397
Substandard		-		-		-		1,408		367		-		44		1,819
Total residential loans	$	5,957	$	44,589	$	51,923	$	59,282	$	30,267	$	39,251	$	33,369	$	264,638
Year-to-date gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Construction Loans
Pass	$	7,327	$	32,003	$	17,762	$	19,056	$	759	$	3,321	$	6,790	$	87,018
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		190		-		-		-		385		575
Total construction loans	$	7,327	$	32,003	$	17,952	$	19,056	$	759	$	3,321	$	7,175	$	87,593
Year-to-date gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Commercial Loans
Pass	$	2,329	$	11,846	$	11,672	$	6,353	$	3,373	$	7,777	$	44,297	$	87,647
Special mention		-		14		-		-		-		-		-		14
Substandard		-		-		-		-		-		-		765		765
Total commercial loans	$	2,329	$	11,860	$	11,672	$	6,353	$	3,373	$	7,777	$	45,062	$	88,426
Year-to-date gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Consumer & Other Loans
Pass	$	488	$	1,107	$	566	$	246	$	115	$	488	$	2,486	$	5,496
Special mention		49		-		-		-		-		-		-		49
Substandard		-		-		-		-		-		-		-		-
Total consumer & other loans	$	537	$	1,107	$	566	$	246	$	115	$	488	$	2,486	$	5,545
Year-to-date gross charge-offs	$	27	$	-	$	-	$	-	$	-	$	-	$	-	$	27

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3) Loans, Continued

(in thousands)	*Term Loans by Origination Year*
*At December 31, 2023*	*2023*		*2022*		*2021*		*2020*		*2019*		*Prior*		*Revolving Loans*		*Total*
Commercial Real Estate Loans
Pass	$	27,756	$	62,149	$	32,799	$	42,079	$	12,492	$	38,271	$	6,482	$	222,028
Special mention		-		-		-		-		-		1,767				1,767
Substandard		-		-		-		-		-		-		-		-
Total commercial real estate loans	$	27,756	$	62,149	$	32,799	$	42,079	$	12,492	$	40,038	$	6,482	$	223,795
Year-to-date gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Residential and Home Equity Loans
Pass	$	43,809	$	51,060	$	56,802	$	29,979	$	11,717	$	28,188	$	29,794	$	251,349
Special mention		-		-		1,391		278		-		203		357		2,229
Substandard		-		-		585		367		-		-		44		996
Total residential loans	$	43,809	$	51,060	$	58,778	$	30,624	$	11,717	$	28,391	$	30,195	$	254,574
Year-to-date gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Construction Loans
Pass	$	33,713	$	18,797	$	16,717	$	1,425	$	1,611	$	1,837	$	6,958	$	81,058
Special mention		-		-		-		-		-		-		-		-
Substandard		-		198		-		384		-		-		-		582
Total construction loans	$	33,713	$	18,995	$	16,717	$	1,809	$	1,611	$	1,837	$	6,958	$	81,640
Year-to-date gross charge-offs	$	-	$	-	$	-	$	386	$	-	$	-	$	-	$	386

Commercial Loans
Pass	$	12,024	$	12,130	$	7,247	$	3,543	$	4,823	$	5,250	$	40,064	$	85,081
Special mention		24		-		-		45		-		32		-		101
Substandard		-		-		-		36		-		-		765		801
Total commercial loans	$	12,048	$	12,130	$	7,247	$	3,624	$	4,823	$	5,282	$	40,829	$	85,983
Year-to-date gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	1	$	-	$	1

Consumer & Other Loans
Pass	$	1,317	$	688	$	275	$	122	$	348	$	176	$	3,010	$	5,936
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Total consumer & other loans	$	1,317	$	688	$	275	$	122	$	348	$	176	$	3,010	$	5,936
Year-to-date gross charge-offs	$	46	$	-	$	-	$	-	$	-	$	-	$	-	$	46

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

A loan is defined as a past due loan when one full or partial payment is past due or a contractual maturity is over 30 days past due. Age analysis of past due loans is as follows:

	*Accruing Loans*
					*Greater Than*
	*30-59 Days*		*60-89 Days*		*90 Days*		*Total Past*				*Nonaccrual*		*Total*
(in thousands)	*Past Due*		*Past Due*		*Past Due*		*Due*		*Current*		*Loans*		*Loans*
*At March 31, 2024*
Real estate mortgage loans:
Commercial	$	596	$	-	$	-	$	596	$	225,982	$	56	$	226,634
Residential and home equity		3,459		19		-		3,478		259,110		2,050		264,638
Construction		373		-		-		373		86,645		575		87,593
Commercial loans		-		-		-		-		87,661		765		88,426
Consumer and other loans		-		-		-		-		5,545		-		5,545
Total	$	4,428	$	19	$	-	$	4,447	$	664,943	$	3,446	$	672,836

*At December 31, 2023*
Real estate mortgage loans:
Commercial	$	57	$	-	$	-	$	57	$	223,738	$	-	$	223,795
Residential and home equity		3,792		492		1,110		5,394		248,227		953		254,574
Construction		648		-		-		648		80,410		582		81,640
Commercial loans		18		318		-		336		84,847		800		85,983
Consumer and other loans		28		-		-		28		5,908		-		5,936
Total	$	4,543	$	810	$	1,110	$	6,463	$	643,130	$	2,335	$	651,928

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(3)

Loans, Continued

Loans are generally placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured. The following tables present the amortized cost basis of loans in nonaccrual status and loans past due over 90 days and still on accrual by class of loans and the related ACL, if any. The amount of ACL attributed to the $765,000 commercial loan on nonaccrual was $556,000 at March 31, 2024 and December 31, 2023.



(in thousands)	*Total Nonaccrual Loans*		*Nonaccrual Loans with No ACL*		*Nonaccrual Loans with ACL*		*90+ Days Still Accruing*
*At March 31, 2024*
Commercial real estate	$	56	$	56	$	-	$	-
Residential and home equity		2,050		2,050		-		-
Construction		575		575		-		-
Commercial		765		-		765		-
Total	$	3,446	$	2,681	$	765	$	-


*At December 31, 2023*
Residential and home equity	$	953	$	953	$	-	$	1,110
Construction		582		582		-		-
Commercial		800		36		764		-
Total	$	2,335	$	1,571	$	764	$	1,110

The restructuring of a loan exists if the creditor grants a modification as a result of financial hardship. A loan modification may include an extension of repayment terms which would not normally be granted, a reduction in interest rate or the forgiveness of principal and/or accrued interest. The Company entered into no new restructured loans during the three months ended March 31, 2024 and 2023.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(4)

Allowance for Credit Losses

Activity in the ACL is summarized as follows:

	*Loans*
	*Real Estate Mortgage Loans*
(in thousands)	*Commercial*			*Residential and Home Equity*			*Construction*			*Commercial Loans*			*Consumer and Other Loans*			*Total Funded Loans*
*Three Month Period Ended March 31, 2024*
Beginning balance	$	1,713		$	2,034		$	559		$	1,272		$	31		$	5,609
Credit loss expense		23			84			40			53			11			211
Charge-offs		-			-						-			(27	)		(27	)
Recoveries		-			-			-			-			3			3
Ending balance	$	1,736		$	2,118		$	599		$	1,325		$	18		$	5,796

*Three Month Period Ended March 31, 2023*
Beginning balance	$	2,303		$	2,607		$	922		$	1,223		$	90		$	7,145
Impact of adopting ASC 326		(740	)		(892	)		(403	)		(504	)		(67	)	$	(2,606	)
Credit loss expense		43			27			21			143			9			243
Charge-offs		-			-			-			-			(15	)		(15	)
Recoveries		-			-			-			33			2			35
Ending balance	$	1,606		$	1,742		$	540		$	895		$	19		$	4,802

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(5)

Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Bank is subject to the Basel III capital level threshold requirements under the Prompt Corrective Action regulations. These regulations were designed to ensure that banks maintain strong capital positions even in the event of severe economic downturns or unforeseen losses.

The Bank is subject to the capital conservation buffer rules which place limitations on distributions, including dividend payments, and certain discretionary bonus payments to executive officers. In order to avoid these limitations, a bank must hold a capital conservation buffer above its minimum risk-based capital requirements. As of March 31, 2024, the Bank’s capital conservation buffer exceeded the minimum requirement.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and percentages (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 2024, that the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2024, the Bank is well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage percentages as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and percentages are also presented in the following table.

						*For Capital Adequacy*					*For Well Capitalized*
	*Actual*					*Purposes*					*Purposes*
(dollars in thousands)	*Amount*		*Percentage*			*Amount*		*Percentage*			*Amount*		*Percentage*
As of March 31, 2024
Tier 1 Leverage Capital	$	88,744		10.35	%		34,301		4.00	%		42,876		5.00	%
Common Equity Tier 1 Risk-based Capital		88,744		13.16			30,352		4.50			43,842		6.50
Tier 1 Risk-based Capital		88,744		13.16			40,470		6.00			53,960		8.00
Total Risk-based Capital		94,540		14.02			53,960		8.00			67,450		10.00

As of December 31, 2023
Tier 1 Leverage Capital	$	86,576		10.15	%	$	34,133		4.00	%	$	42,666		5.00	%
Common Equity Tier 1 Risk-based Capital		86,576		13.18			29,566		4.50			42,706		6.50
Tier 1 Risk-based Capital		86,576		13.18			39,421		6.00			52,561		8.00
Total Risk-based Capital		92,185		14.03			52,561		8.00			65,702		10.00

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(6)	Earnings Per Share

Earnings per share, (“EPS”) have been computed on the basis of the weighted-average number of shares of common stock outstanding. For the three months ended March 31, 2024 and 2023, outstanding stock options are considered dilutive securities for purposes of calculating diluted EPS which was computed using the treasury stock method.

	*2024*						*2023*
			*Weighted-*		*Per*				*Weighted-*		*Per*
			*Average*		*Share*				*Average*		*Share*
(dollars in thousands, except per share amounts)	*Earnings*		*Shares*		*Amount*		*Earnings*		*Shares*		*Amount*
*Three Months Ending March 31:*
Basic EPS:
Net earnings	$	1,931		3,275,401	$	0.59	$	2,501		3,175,807	$	0.79
Effect of dilutive securities-incremental shares from assumed conversion of stock options				23,154						34,205
Diluted EPS:
Net earnings	$	1,931		3,298,555	$	0.59	$	2,501		3,210,012	$	0.78

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(7)	Stock Benefit Plans

2015 Stock Incentive Compensation Plan

The 2015 Stock Incentive Compensation Plan (the “2015 Plan”) permits the Company to grant the Company’s key employees and directors stock options, restricted stock, stock appreciation rights, performance shares, and phantom stock. Under the 2015 Plan, the number of shares which may be issued is 500,000 and limited to no more than 15% of the issued and outstanding shares of the Company's common stock at that time. This is determined annually.

As of March 31, 2024, 127,349 shares are available to be issued under the 2015 Stock Plan as restricted stock, underlying options, or otherwise. A summary of the stock option activity for the three months ended March 31, 2024 and 2023 is as follows:

							*Weighted-*
				*Weighted-*			*Average*
				*Average*			*Remaining*		*Aggregate*
	*Number of*			*Exercise*			*Contractual*		*Intrinsic*
	*Options*			*Price*			*Term (years)*		*Value*
Outstanding at December 31, 2022		251,367		$	19.99
Options exercised		(15,867	)		17.25
Options forfeited		(50	)		(20.09	)
Outstanding at March 31, 2023		235,450		$	20.67
Options exercised		(3,350	)		(20.09	)
Options forfeited		(10,000	)		28.40
Outstanding at December 31, 2023		222,100		$	20.33
Options exercised		(23,940	)		(20.09	)
Options forfeited		(250	)		(20.09	)
Outstanding at March 31, 2024		197,910		$	20.36			2.4	$	287,000
Exercisable at March 31, 2024		188,710		$	20.19			2.3	$	281,000

The fair value of shares vested and recognized as compensation expense was $119,000 and $83,000 for the three months ended March 31, 2024 and 2023, respectively. These amounts include expense recognized on restricted common stock shares of $113,000 and $38,000 for the three months ended March 31, 2024 and 2023, respectively. The deferred tax benefit related to stock options was $1,000 and $5,000 for the three months ended March 31, 2024 and 2023, respectively. At March 31, 2024, there was $42,000 in unrecognized compensation expense related to unvested stock options granted under the 2015 Plan, with an average remaining vesting period of 2.3 years.

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(7)	Stock Benefit Plans, Continued

Restricted Stock

During the three months ended March 31, 2024 and 2023, the Company issued 9,790 and 3,834 restricted common stock shares, respectively, to some of its executives and employees. The restricted stock awards are on a three to five year vesting schedule. Holders of restricted stock have the right to vote and the right to receive dividends declared on common stock, if any. A summary of restricted stock transactions follows:

				*Wtd-Avg*
				*Grant-Date*
	*Number of*			*Fair Value*			*Grant-Date Fair*
	*Shares*			*per Share*			*Value*
Non-vested restricted stock outstanding at December 31, 2022		14,203		$	25.30		$	359,000
Non-vested restricted stock granted		3,834		$	26.08			100,000
Restricted stock shares vested		(5,234	)		(23.71	)		(124,000	)
Non-vested restricted stock outstanding at March 31, 2023		12,803		$	26.18		$	335,000
Non-vested restricted stock granted		71,917		$	22.50		$	1,618,000
Restricted stock shares vested		(806	)		(26.06	)		(21,000	)
Forfeited		(6,278	)		(23.42	)		(147,000	)
Non-vested restricted stock outstanding at December 31, 2023		77,636		$	22.99		$	1,785,000
Non-vested restricted stock granted		9,790		$	23.21		$	227,000
Restricted stock shares vested		(5,234	)		(25.10	)		(131,000	)
Non-vested restricted stock outstanding at March 31, 2024		82,192		$	22.88		$	1,881,000

At March 31, 2024, the Company had $1,776,000 in unrecognized expense related to unvested restricted shares to be recognized over a weighted-average period of 4.2 years.

Director s’ Plan

In 2012, the Company’s Board of Directors and shareholders adopted the Directors’ Plan. The Directors’ Plan permits the Company’s and the Bank’s non-employee directors to elect to receive any compensation to be paid to them in shares of the Company’s common stock. Pursuant to the Directors’ Plan, each non-employee director is permitted to make an election to receive shares of stock instead of cash. To encourage directors to elect to receive stock, the Directors’ Plan provides that if a director elects to receive stock, he or she will receive in common stock 110% of the amount of cash fees set by the Board or the Compensation Committee. The value of stock to be awarded pursuant to the Directors’ Plan will be the closing price of a share of common stock as traded on the Over-the-Counter Bulletin Board, or a price set by the Board or its Compensation Committee, acting in good faith, but in no case less than fair market value. The maximum number of shares to be issued pursuant to the Directors’ Plan is limited to 74,805 shares. For the three months ended March 31, 2024 and 2023 our directors received 1,654 and 1,573 shares of common stock, respectively, in lieu of cash fees calculated at 110% to be $41,000 and $40,000, respectively. At March 31, 2024, 28,008 shares remained available for grant.

(8)

Other Borrowings

In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the Company obtained a $15 million revolving line of credit with a 5-year term. The interest rate on the line of credit adjusts daily to the then-current Wall Street Journal Prime Rate. At March 31, 2024, the interest rate was 8.50%. Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Company's wholly-owned subsidiary, the Bank. At March 31, 2024 and December 31, 2023, the Company had a zero outstanding loan balance under this line of credit.

The Company incurred $0 in interest expense related to the $15 million revolving line of credit for the three months ended March 31, 2024, compared to $111,000 for the three months ended March 31, 2023.

(9)

Federal Home Loan Bank Advances

Federal Home Loan Bank of Atlanta (“FHLB”) advances are collateralized by a blanket lien on qualifying residential real estate, commercial real estate, home equity lines of credit and multi-family loans. Under this blanket lien, the Company could borrow up to $96.9 million at March 31, 2024. The following table details rate and maturity information for FHLB advances:

(dollars in thousands)
Maturity Year	*Interest Rate*			*At March 31, 2024*		*At December 31, 2023*
2024		4.48% - 5.48%		$	15,000	$	10,000
2025		4.18	%		5,000		5,000
				$	20,000	$	15,000

The Company incurred $255,000 and $0 in interest expense related to FHLB advances for the three months ended March 31, 2024 and 2023, respectively.

(10)

Derivative Financial Instruments

The Company has entered into interest rate swaps in order to provide commercial real estate loan clients the ability to swap from variable to fixed interest rates. Under these agreements, the Company enters into a variable rate loan with a client at a specified index (Wall Street Journal Prime Lending Rate) in addition to a borrower swap agreement. This swap agreement effectively converts the client’s variable rate loan into a fixed rate. The Company then enters into a matching swap agreement with a third-party dealer counterparty in order to offset its exposure on the borrower swap. These interest rate swaps are considered derivative financial instruments. These derivative instruments involve both credit and market risk. The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any, over the life of the contract. Such differences, which represent the fair value of the derivative instruments, are included in “other assets” and “other liabilities” on the Company’s condensed consolidated balance sheets, and the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows. The derivative transactions are considered instruments with no hedging designation, otherwise known as stand-alone derivatives.


	*At March 31, 2024*			*At December 31, 2023*
(dollars in thousands)
Notional amount - interest rate swaps:
Stand-alone derivatives	$	19,456		$	19,548

Weighted-average pay rate - interest rate swaps		3.68	%		3.68	%
Weighted-average receive rate - interest rate swaps		7.75	%		7.75	%
Weighted-average maturity (in years) - interest rate swaps		11.3			11.6

Net realized fair value adjustments:
Stand-alone derivatives - interest rate swaps (other assets)	$	2,509		$	2,253
Stand-alone derivatives - interest rate swaps (other liabilities)	$	(2,509	)	$	(2,253	)

The Company is party to a collateral support agreement with its dealer counterparty. Such agreement requires that the Company or the dealer counterparty to maintain collateral based on the fair values of derivative instruments. In the event of default by a counterparty the non-defaulting counterparty would be entitled to the collateral. The Company does not require borrower counterparties to post cash collateral based on the fair values of borrower interest rate swaps. In the event of default of a borrower counterparty wherein the fair value of the derivative instrument is owed to the Company, the fair value is collected through a real property foreclosure or liquidation.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(11)

Fair Value of Financial Instruments

The estimated fair values and fair value measurement method with respect to the Company's financial instruments were as follows:

			*At March 31, 2024*				*At December 31, 2023*
			*Carrying*		*Fair*		*Carrying*		*Fair*
(in thousands)	*Level*		*Amount*		*Value*		*Amount*		*Value*
Financial assets:
Cash and cash equivalents		1	$	23,474	$	23,474		28,416		28,416
Debt securities available for sale		2		117,413		117,413		124,475		124,475
Debt securities held to maturity		2		11,861		10,328		11,850		10,358
Loans held for sale		3		3,583		3,640		5,288		5,371
Loans, net		3		666,826		580,748		646,127		557,847
Federal Home Loan Bank stock		3		1,548		1,548		1,283		1,283
Accrued interest receivable		3		3,465		3,465		3,114		3,114
Bank-owned life insurance		3		17,021		17,021		16,921		16,921
Derivative contract assets		2		2,509		2,509		2,253		2,253

Financial liabilities:
Deposits		3		751,713		752,561		748,688		749,411
FHLB Advances		3		20,000		19,881		15,000		14,848
Derivative contract liabilities		2		2,509		2,509		2,253		2,253

Off-Balance Sheet Items		3		-		-				-

Discussion regarding the assumptions used to compute the estimated fair values of financial instruments can be found in Note 1 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2023.

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements (unaudited), Continued

(12)	Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments are commitments to extend credit, construction loans in process, unused lines of credit, standby letters of credit, and guaranteed accounts and may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets. The contract amounts of these instruments reflect the extent of involvement the Company has in these financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for available lines of credit, construction loans in process and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.

Commitments to extend credit, construction loans in process and unused lines of credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty.

Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a client to a third party. These letters of credit are primarily issued to support third-party borrowing arrangements and generally have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. In the event the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client. Some of the Company’s standby letters of credit are secured by collateral and those secured letters of credit totaled $642,000 at March 31, 2024.

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, Card Assets and its issuing bank, First Arkansas Bank & Trust. As a part of this agreement, we are responsible for the established credit limit on certain accounts plus 10%. The maximum potential amount of future payments we could be required to make is represented by the dollar amount disclosed in the table below.

Standby letters of credit and commitments to extend credit typically result in loans with a market interest rate when funded.

As of March 31, 2024 and December 31, 2023, there was no credit loss expense included in the ACL for an unfunded loan commitment.

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

	*At March 31, 2024*
(in thousands)
Commitments to extend credit	$	8,885
Construction loans in process	$	34,733
Unused lines of credit	$	81,806
Standby financial letters of credit	$	2,230
Standby performance letters of credit	$	89
Guaranteed accounts	$	1,276

(continued)

PRIME MERIDIAN HOLDING COMPANY AND SUBSIDIARY

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Prime Meridian Holding Company, and its wholly-owned subsidiary, Prime Meridian Bank. This discussion and analysis should be read with the condensed consolidated financial statements, the footnotes thereto, and the other financial data included in this report and in our annual report on Form 10-K for the year ended December 31, 2023. Results of operations for the three months ended March 31, 2024 are not necessarily indicative of results that may be attained for any other period. 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.

Certain information in this report may include “forward-looking statements” as defined by federal securities law. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that,” and similar expressions are intended to identify these forward-looking statements. These forward-looking statements involve risk and uncertainty and a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law, and silence by management over time should not be construed to mean that actual events are occurring as estimated in such forward-looking statements.

Our ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our and our subsidiary’s operations include, but are not limited to, changes in:

•

local, regional, and national economic and business conditions;

•

banking laws, compliance, and the regulatory environment;

•

U.S. and global securities markets, public debt markets, and other capital markets;

•

monetary and fiscal policies of the U.S. Government;

•

litigation, tax, and other regulatory matters;

•

demand for banking services, both loan and deposit products in our market area;

•

quality and composition of our loan or investment portfolios;

•

risks inherent in making loans such as repayment risk and fluctuating collateral values;

•

competition;

•

attraction and retention of key personnel, including our management team and directors;

•

technology, product delivery channels, and end user demands and acceptance of new products;

•

consumer spending, borrowing and savings habits;

•

any failure or breach of our operational systems, information systems or infrastructure, or those of our third-party vendors and other service providers; including cyber-attacks;

•

natural disasters, public unrest, adverse weather, pandemics, public health, and other conditions impacting our or our clients’ operations;

•

other economic, competitive, governmental, regulatory, or technological factors affecting us; and

•

application and interpretation of accounting principles and guidelines.

GENERAL

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”) (collectively, the “Company”). The Bank opened for business on February 4, 2008 and was acquired by PMHG on September 16, 2010. PMHG has no significant operations other than owning the stock of the Bank. The Bank offers a broad array of commercial and retail banking services through four full-service offices located in Tallahassee, Crawfordville, and Lakeland, Florida and through its online banking platform.

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 and salaries and employee benefits. We measure our performance through our net interest margin, return on average assets, and return on average equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.

The following table shows selected information for the periods ended or at the dates indicated:

	At or for the
	Three Months			Year			Three Months
	Ended			Ended			Ended
	March 31, 2024			December 31, 2023			March 31, 2023
Average equity as a percentage of average assets		9.43	%		8.96	%		8.69	%
Equity to total assets at end of period		9.44			9.36			8.90
Return on average assets⁽¹⁾		0.91			1.07			1.23
Return on average equity⁽¹⁾		9.61			11.91			14.20
Noninterest expense to average assets⁽¹⁾		2.27			2.25			2.20
Nonperforming loans to total loans at end of period		0.51			0.53			0.22
Nonperforming assets to total assets at end of period		0.40			0.40			0.17

^{(1) Annualized for the three months ended March 31, 2024 and 2023.}

CRITICAL ACCOUNTING POLICIES

The preparation of our Consolidated Financial Statements in accordance with GAAP and reporting practices applicable to the Banking industry requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from these estimates and result in material changes in our consolidated financial position and consolidated results of operations and related disclosures. Understanding our accounting policies is fundamental to understanding our consolidated financial position and consolidated results of operations. Accordingly, our significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1 in this Quarterly Report on Form 10-Q and in Note 1 of our Annual Report on Form 10-K for the year ended December 31, 2023. As discussed in Note 1 of this Form 10-Q, our policy related to the allowance for credit losses "ACL" changed on January 1, 2023 in connection with adoption of ASC 326. The amount of the ACL represents management's best estimates of current expected credit losses considering available information relevant to assessing exposure to credit loss over the contractual term of the instrument. Management considers the effects of past events, current conditions, and reasonable and supportable forecasts of the collectability of the loan portfolio. The CECL model differs from the incurred loss model previously required in that the measurement of potential loss is required to be the life of the loan and is largely based on historical loss experience by loan type. Adjustments to historical loss information may be made based on an assessment of internal and external influences on credit quality not fully reflected in the quantitative components of the allowance model. These influences may include macroeconomic conditions, recent observable asset quality trends, regional market conditions, employment levels, and loan growth. Based upon management's assessment of these factors, the Company may apply qualitative adjustments to the allowance. While management utilizes its best judgment and information available, the adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.

FINANCIAL CONDITION

Average interest-earning assets totaled $813.0 million and $770.0 million for the three months ended March 31, 2024 and 2023, respectively, representing a period over period increase of $43.0 million, or 5.6%, due to a $58.0 million increase in the average balance of loans. The increase in loans was offset by decreases in the average balances of mortgage loans held for sale, debt securities and other interest-earning assets.

Investment Securities . Our primary objective in managing our investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We use the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, to generate interest income, to provide liquidity to meet funding requirements, and to provide collateral for pledging to secure the deposit of public funds at the Bank. At March 31, 2024, our debt securities available for sale and held to maturity investment portfolios included highly rated U.S. government treasury and agency securities, U.S. agency mortgage-backed securities, asset-backed securities, and municipal securities. As of the same date, the combined portfolio had a fair market value of $127.7 million and an amortized cost value of $140.1 million. At March 31, 2024 and December 31, 2023, our investment securities portfolio represented approximately 15.0% and 16.0% of our total assets, respectively. The average yield on the average balance of investment securities for the three months ended March 31, 2024 was 2.68%, compared to 2.64% for the comparable period in 2023.

Loans. Our primary interest-earning asset is our loan portfolio and our primary source of income is the interest earned on the loan portfolio. Our loan portfolio consists of commercial real estate loans, construction loans, and commercial loans made to small-to-medium sized companies and their owners, as well as residential real estate and home equity loans, including first and second mortgages, and consumer and other loans. Our goal is to maintain a high-quality portfolio of loans through sound underwriting and lending practices. We work diligently to attract new lending clients through direct solicitation by our loan officers, utilizing relationship networks from existing clients, competitive pricing, and innovative structure. Our loans are priced based upon the degree of risk, collateral, loan amount, and maturity. At March 31, 2024 our net loan portfolio totaled $666.8 million compared to $646.1 million at December 31, 2023.

Commercial real estate ("CRE") loans represent 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 no 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 is as follows:

(dollars in thousands)
*At March 31, 2024*
Owner Occupied CRE	Amount		% of Total			Average Loan Size
Office	$	26,291		24.4	%	$	325
Retail		42,208		39.2			1,005
Warehouse		18,663		17.3			667
Restaurant		7,050		6.5			705
Other		13,521		12.6			676
Total	$	107,733		100.0	%	$	595

Non-Owner Occupied CRE
Office	$	15,846		13.3	%	$	1,157
Retail		47,457		39.9			528
Warehouse		12,239		10.3			556
Restaurant		1,819		1.5			455
Hotel		20,837		17.5			3,473
Other		20,703		17.5			1,479
Total	$	118,901		100.0	%	$	1,016

*At December 31, 2023*
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

Nonperforming assets. At March 31, 2024 and December 31, 2023, the Company had eleven nonperforming loans totaling $3.4 million. 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.

Allowance for Credit Losses. Management’s policy is to maintain the ACL at a level sufficient to absorb expected credit losses in the loan and debt securities portfolio as of the balance sheet date. The allowance is increased by credit loss expense and decreased by charge-offs, net of recoveries. The Bank reported credit loss expense of $211,000 for the quarter ended March 31, 2024. The Company implemented the provisions of the Current Expected Credit Losses ("CECL") accounting standard January 1, 2023, resulting in a $2.6 million decrease to the ACL. Management believes the ACL, which was $5.8 million, or 0.86%, of gross loans at March 31, 2024 is adequate to cover expected credit losses in the loan portfolio.

Deposits. Deposits are the major source of the Company’s funds for lending and other investment purposes. Total deposits at March 31, 2024 were $751.7 million, an increase of $3.0 million, or 0.40%, from December 31, 2023. Average deposit balances for the three-month period ending March 31, 2024 were up $17.4 million, or 2.4%, from the same period a year ago. The average balance of noninterest-bearing deposits accounted for 25.8% of the average balance of total deposits for the three months ended March 31, 2024, compared to 27.5% for the three months ended March 31, 2023. The Bank's core deposit base is well diversified with a fairly balanced volume distribution between commercial (44%) and retail (48%) deposit accounts at March 31, 2024. Consumer accounts make up the remaining 8%. The Bank's estimated uninsured deposits were $300.2 million, or 39.9% of total deposits, including collateralized public fund accounts and $245.3 million, or 35.2% of total deposits, at March 31, 2024, excluding collateralized public fund accounts. Given the current interest rate environment, management is closely monitoring potential future volatility in deposit balances.

Borrowings. The Bank has an agreement with FHLB and pledges its qualified loans as collateral which would allow the Bank, as of March 31, 2024, to borrow up to $96.9 million. At March 31, 2024, the Bank had $20 million in FHLB advances. In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled $59.0 million at March 31, 2024. There were no outstanding balances under these unsecured lines of credit at March 31, 2024.

In 2020, the Company entered into a Promissory Note and a Security Agreement with TNB. 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 Bank. At March 31, 2024, the Company had a zero balance under this line.

RESULTS OF OPERATIONS

Net interest income constitutes the principal source of income for the Bank and results from the excess of interest income on interest-earning 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, and money-market accounts. 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 as well as the interest rates earned or paid on these assets and liabilities. The following tables set forth information regarding: (i) the total dollar amount of interest and dividend income of the Company 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.

As shown in the following tables, for the three months ended March 31, 2024, the Company's net interest margin declined 41 basis points to 3.51% when compared to the same period last year as the increase in cost of funds outpaced the increase in asset yields.

	For the Three Months Ended March 31,
	2024								2023
				Interest								Interest
	Average			and		Yield/			Average			and		Yield/
(dollars in thousands)	Balance			Dividends		Rate⁽⁵⁾			Balance			Dividends		Rate⁽⁵⁾
Interest-earning assets:
Loans⁽¹⁾	$	660,024		$	9,891		5.99	%	$	602,022		$	7,958		5.29	%
Loans held for sale		4,878			71		5.82			7,345			86		4.68
Debt securities		133,588			896		2.68			141,268			933		2.64
Other⁽²⁾		14,538			207		5.70			19,335			222		4.59
Total interest-earning assets		813,028		$	11,065		5.44	%		769,970		$	9,199		4.78	%
Noninterest-earning assets		39,534								40,538
Total assets	$	852,562							$	810,508

Interest-bearing liabilities:
Savings, NOW and money-market deposits	$	464,991		$	2,828		2.43	%	$	482,788		$	1,387		1.15	%
Time deposits		84,832			849		4.00			42,099			146		1.39
Total interest-bearing deposits		549,823			3,677		2.68			524,887			1,533		1.17
Other borrowings and FHLB advances		21,131			255		4.83			7,301			111		6.08
Total interest-bearing liabilities		570,954		$	3,932		2.75	%		532,188		$	1,644		1.24	%
Noninterest-bearing deposits		191,302								198,790
Noninterest-bearing liabilities		9,948								9,074
Stockholders' equity		80,358								70,456
Total liabilities and stockholders' equity	$	852,562							$	810,508

Net earning assets	$	242,074							$	237,782
Net interest income				$	7,133							$	7,555
Interest rate spread ⁽³⁾							2.69	%							3.54	%
Net interest margin⁽⁴⁾							3.51	%							3.92	%

Ratio of interest-earning assets to average interest-bearing liabilities		142.40	%							144.68	%

⁽¹⁾Includes nonaccrual loans

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

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

⁽⁴⁾ Net interest margin is net interest income divided by total average interest-earning assets, annualized on a 30/360 basis.

⁽⁵⁾ Annualized

Comparison of Operating Results for the THREE MONTHS ENDED mARCH 31, 2024 AND 2023

Earnings Summary

(dollars in thousands)

Prime Meridian Holding Co 10-Q