PRIME MERIDIAN HOLDING COMPANY Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations ofPrime 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 endedDecember 31, 2021 . Results of operations for the three and nine months endedSeptember 30, 2022 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;
•
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.
24
--------------------------------------------------------------------------------GENERALPrime Meridian Holding Company ("PMHG") was incorporated as aFlorida corporation onMay 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 onFebruary 4, 2008 and was acquired by PMHG onSeptember 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 inTallahassee ,Crawfordville , andLakeland, 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 Nine Months Year Nine Months Ended Ended Ended September 30, December 31, September 30, 2022 2021 2021 Average equity as a percentage of average assets 7.66 % 8.67 % 8.60 % Equity to total assets at end of period 7.68 7.97 8.26 Return on average assets(1) 1.09 1.11 1.21 Return on average equity(1) 14.25 12.81 14.08 Noninterest expense to average assets(1) 1.82 1.87
1.85
Nonperforming loans to total loans at end of period 0.18 - - Nonperforming assets to total assets at end of period 0.12 - -
(1) Annualized for the nine months ended
CRITICAL ACCOUNTING POLICIES Our critical accounting policies which involve significant judgments and assumptions that have a material impact on the carrying value of certain assets and liabilities and used in preparation of the Condensed Consolidated Financial Statements as ofSeptember 30, 2022 , have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 25
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FINANCIAL CONDITION Average assets totaled$857.9 million and$860.4 million for the three and nine months endedSeptember 30, 2022 respectively, increases of$86.1 million (11.1%) and$133.9 million (18.4%), over the comparable periods in 2021. The growth in average assets stemmed mostly from increases in loans and securities (comparing three-month periods) and loans, cash and securities (comparing nine-month periods), funded by deposit inflows through the first half of the year. Loan production in 2022 has helped offset the runoff of PPP loans.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. AtSeptember 30, 2022 our debt securities available for sale and held to maturity investment portfolios included highly ratedU.S. government treasury and agency securities, municipal securities,U.S. agency mortgage-backed securities, and asset-backed securities. As of the same date, this portfolio had a fair market value of$141.8 million and an amortized cost value of$157.3 million . AtSeptember 30, 2022 andDecember 31, 2021 , our investment securities portfolio represented approximately 17.2% and 8.8% of our total assets, respectively. The average yield on the average balance of investment securities for the nine months endedSeptember 30, 2022 was 2.21%, compared to 1.72% for the comparable period in 2021. 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 loans, including first and second mortgages, and consumer 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. Excluding nearly$15.0 million in PPP loan forgiveness during the first nine months of 2022, the Company's gross loan portfolio increased$90.7 million , or 18.3%, since 2021 year-end. Nonperforming assets. AtSeptember 30, 2022 , the Company had$1.0 million in nonperforming assets compared to none atDecember 31, 2021 . 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. AtSeptember 30, 2022 , the four nonperforming loans totaling$1.0 million are also on nonaccrual status, compared to none atDecember 31, 2021 . Accounting standards require the Company to identify loans as impaired loans when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. These standards require that impaired loans be valued at the present value of expected future cash flows, discounted at the loan's effective interest rate, using one of the following methods: the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. We implement these standards in our monthly review of the adequacy of the allowance for loan losses and identify and value impaired loans in accordance with GAAP. Allowance for Loan Losses. Management's policy is to maintain the allowance for loan losses at a level sufficient to absorb probable losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. The Bank reported provision expense of$241,000 for the quarter endedSeptember 30, 2022 , and$601,000 year-to-date, incurred primarily from funded loan growth during the periods. Also contributing to the volume of provision expense for the nine months endedSeptember 30, 2022 is$286,000 in year-to-date net recoveries, combined with a marginal reduction in the general reserve requirement for commercial loans. The Company is not required to implement the provisions of the Current Expected Credit Losses ("CECL") accounting standard untilJanuary 1, 2023 and is continuing to account for the allowance for loan losses under the incurred loss model. Management believes the allowance for loan losses, which was$6.9 million , or 1.20%, of gross loans atSeptember 30, 2022 is adequate to cover losses inherent in the loan portfolio. Deposits. Deposits are the major source of the Company's funds for lending and other investment purposes. Total deposits atSeptember 30, 2022 were$755.4 million , a decrease of$7.5 million , or 1.0%, fromDecember 31, 2021 . The decrease is attributed to several factors - seasonal outflows of public funds, net outflows from attorney trust accounts due to less real estate closing activity and the movement of personal interest-bearing accounts to higher yielding investment options outside of the Bank. The average balance of noninterest-bearing deposits accounted for 27.1% of the average balance of total deposits for the nine months endedSeptember 30, 2022 , compared to 29.6% for the nine months endedSeptember 30, 2021 . Given the current interest rate environment, management is monitoring potential volatility in deposit balances closely. Borrowings. The Bank has an agreement with FHLB and pledges its qualified loans as collateral which would allow the Bank, as ofSeptember 30, 2022 , to borrow up to$88.6 million . In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled$59.0 million atSeptember 30, 2022 . There were no outstanding balances under any of these lines atSeptember 30, 2022 . In 2020, the Company entered into a Promissory Note (the "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 and was 6.25% atSeptember 30, 2022 . Pursuant to the Security Agreement, the Company has pledged to TNB all of the outstanding shares of common stock of the Bank. AtSeptember 30, 2022 , the Company had a$4,125,000 outstanding loan balance and incurred$127,000 in year-to-date interest expense under this line. 26 --------------------------------------------------------------------------------
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 table, the Company's net interest margin improved 65 basis points for the three-month period comparison due primarily to higher interest rates combined with growth in loan and investment balances and a reduction of cash balances, partially offset by the near completion of the PPP loan program and the related fees earned by the Bank. Furthermore, the yield on interest-earning assets improved 70 basis points compared to a 5-basis-points increase in the average cost of interest-bearing liabilities, reflecting a lag in the rising cost of deposits. Comparing the nine-month periods, the net interest margin increased 8 basis points to 3.27%. The average balance of interest-earnings assets increased 17.9%, or$124.6 million , and was a primary driver of the increase in net interest income along with higher yields on loans (excluding the impact of PPP) and other interest-earning assets. There was a$2.0 million decrease in interest and fee income from PPP loans as the Bank moved through the forgiveness process of these loans which has impacted average loan yields and the net interest margin for multiple quarters. The yield on the average balance of interest-earning assets improved slightly to 3.52% while the average cost of funds decreased 9 basis points to 0.36%. For the Three Months Ended September 30, 2022 2021 Interest Interest Average and Yield/ Average and Yield/ (dollars in thousands) Balance Dividends Rate(5) Balance Dividends Rate(5) Interest-earning assets: Loans(1)$ 555,764 $ 6,646 4.78 %$ 477,322 $ 5,708 4.78 % Loans held for sale 9,869 109 4.42 12,437 111 3.57 Debt securities 144,710 878 2.43 65,226 283 1.74 Other(2) 108,875 649 2.38 184,525 78 0.17 Total interest-earning assets 819,218$ 8,282 4.04 % 739,510$ 6,180 3.34 % Noninterest-earning assets 38,699 32,357 Total assets$ 857,917 $ 771,867 Interest-bearing liabilities: Savings, NOW and money-market deposits$ 527,408 $ 570 0.43 %$ 435,213 $ 426 0.39 % Time deposits 38,244 54 0.56 49,844 76 0.61 Total interest-bearing deposits 565,652 624 0.44 485,057 502 0.41 Other borrowings 4,125 56 5.43 3,075 25 3.25 Total interest-bearing liabilities 569,777$ 680 0.48 % 488,132$ 527 0.43 % Noninterest-bearing deposits 214,462 213,570 Noninterest-bearing liabilities 7,787 5,529 Stockholders' equity 65,891 64,636 Total liabilities and stockholders' equity$ 857,917 $ 771,867 Net earning assets$ 249,441 $ 251,378 Net interest income$ 7,602 $ 5,653 Interest rate spread (3) 3.56 % 2.91 % Net interest margin(4) 3.71 % 3.06 % Ratio of interest-earning assets to average interest-bearing liabilities 143.78 % 151.50 % (1) Includes nonaccrual loans (2) Other interest-earning assets include 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 (5) Annualized 27
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For the Nine Months Ended September 30,
2022 2021
Interest Interest
Average and Yield/ Average and Yield/
(dollars in
thousands) Balance Dividends Rate(5) Balance Dividends Rate(5)
Interest-earning
assets:
Loans(1) $ 519,975 $ 18,242 4.68 % $ 481,762 $ 16,912 4.68 %
Loans held for sale 10,529 326 4.13 13,527 344 3.39
Debt securities 120,675 2,000 2.21 61,690 794 1.72
Other(2) 169,402 1,104 0.87 139,017 192 0.18
Total
interest-earning
assets 820,581 $ 21,672 3.52 % 695,996 $ 18,242 3.49 %
Noninterest-earning
assets 39,792 30,490
Total assets $ 860,373 $ 726,486
Interest-bearing
liabilities:
Savings, NOW and
money-market deposits $ 527,077 $ 1,263 0.32 % $410,799$ 1,243 0.40 % Time deposits 43,552 179 0.55 51,874 296 0.76 Total interest-bearing deposits 570,629 1,442 0.34 462,673 1,539 0.44 Other borrowings 3,960 127 4.28 1,309 32 3.26 Total interest-bearing liabilities 574,589$ 1,569 0.36 % 463,982$ 1,571 0.45 %
Noninterest-bearing deposits 212,507 194,909 Noninterest-bearing liabilities 7,401 5,128 Stockholders' equity 65,876 62,467 Total liabilities and stockholders' equity$ 860,373 $ 726,486 Net earning assets$ 245,992 $ 232,014 Net interest income$ 20,103 $ 16,671 Interest rate spread (3) 3.16 % 3.04 % Net interest margin(4) 3.27 % 3.19 % Ratio of interest-earning assets to average interest-bearing liabilities 142.81 % 150.00 % (1) Includes nonaccrual loans (2) Other interest-earning assets include 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 (5) Annualized 28
-------------------------------------------------------------------------------- Comparison of Operating Results for the THREE MONTHS ENDEDSEPTEMBER 30, 2022 AND 2021 Earnings Summary (dollars in thousands) Change 3Q'22 vs. 3Q'21 3Q'22 3Q'21 Amount Percentage Net Interest Income$ 7,602 $ 5,653 $ 1,949 34.5 % Provision for loan losses 241 - 241 N/A Noninterest income 483 613 (130 ) (21.2 ) Noninterest expense 4,085 3,503 582 16.6 Income Taxes 928 664 264 39.8 Net earnings$ 2,831 $ 2,099 $ 732 34.9 %
Compared to 3Q21, larger loan and investment balances combined with higher yields on interest-earning assets drove the 34.5% increase in net interest income, partially offset by lower noninterest income, higher noninterest expense and higher income taxes.
Net Interest Income
Our operating results depend primarily on our net interest income, which is the
difference between interest and dividend income on interest-earning assets such
as loans and securities, and interest expense on interest-bearing liabilities
such as deposits.
Interest income
(dollars in thousands)
Change 3Q'22 vs. 3Q'21
3Q'22 3Q'21 Amount Percentage
Interest income:
Loans $ 6,755 $ 5,819 $ 936 16.1 %
Securities 878 283 595 210.2
Other 649 78 571 732.1
Total interest income $ 8,282 $ 6,180 $ 2,102 34.0 %
Interest expense:
Deposits 624 502 $ 122 24.3 %
Other borrowings 56 25 31 124.0
Total interest expense 680 527 153 29.0
Net interest income $ 7,602 $ 5,653 $ 1,949 34.5 %
Net interest income of
higher interest rates led to the improvement in interest income, partially offset by the near completion of the PPP loan program and its fees. An$81.6 million increase in the average balance of interest-bearing liabilities combined with a 5-basis-points increase in the cost of interest-bearing liabilities resulted in the$153,000 , or 29.0%, increase in total interest expense. The Company's net interest margin ("NIM") was 3.71% in the third quarter of 2022, an increase of 65 basis points over the third quarter of 2021. The yield on interest-earning assets improved 70 basis points, outpacing a 5-basis-points increase in the average cost of interest-bearing liabilities and reflecting a lag in the rising cost of deposits. 29
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Provision for Loan Losses The provision for loan losses is charged to earnings to increase the total loan loss allowance to a level deemed appropriate by management. The provision is based upon the volume and type of lending conducted by the Bank, industry standards, general economic conditions, particularly as they relate to our market areas, and other factors related to our historic loss experience and the collectability of the loan portfolio. Provision expense was$241,000 for the quarter, incurred primarily from funded loan growth during the period. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of examination. Noninterest income (dollars in thousands) Change 3Q'22 vs. 3Q'21 3Q'22 3Q'21 Amount Percentage Service charges and fees on deposit accounts$ 78 $ 61 $ 17 27.9 % Debit card/ATM revenue, net 132 108 24 22.2 Mortgage banking revenue, net 116 325 (209 ) (64.3 ) Income from bank-owned life insurance 96 73 23 31.5 Other income 61 46 15 32.6 Total noninterest income$ 483 $ 613 $ (130 ) (21.2 %) The decline in noninterest income is predominantly due to lower mortgage banking revenue which was anticipated given the rising rate environment and the high level of refinancing activity that occurred in 2021. Increases in bank-owned life insurance ("BOLI") income, service charges and fees on deposit accounts, and fee income from merchant cards, debit cards, and ATM transactions partially offset the decrease in mortgage banking revenue. Noninterest expense (dollars in thousands) Change 3Q'22 vs. 3Q'21 3Q'22 3Q'21 Amount Percentage
Salaries and employee benefits
16.7 % Occupancy and equipment 413 380 33 8.7 Professional fees 124 103 21 20.4 Marketing 195 197 (2 ) (1.0 ) FDIC Assessment 95 78 17 21.8 Software maintenance and amortization 310 237 73 30.8 Other 581 480 101 21.0 Total noninterest expense$ 4,085 $ 3,503 $ 582 16.6 % An increase in compensation costs is the primary driver of higher noninterest expense due to a larger employee base (106 FTEs atSeptember 30, 2022 versus 95 atSeptember 30, 2021 ), annual raises, higher incentive accrual, and lower deferred loan costs. The increase inFDIC assessment expense is explained by changing assessment rates and higher deposit balances while higher software maintenance, amortization and other expense reflects the expanding information technology needs of a growing company. Increases in other noninterest expense are largely attributed to higher travel and entertainment and board related expenses. Income Taxes Income taxes are based on amounts reported in the condensed consolidated statements of earnings after adjustments for nontaxable income and nondeductible expenses and consist of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Income taxes were$928,000 for the three months endedSeptember 30, 2022 , compared to income taxes of$664,000 for the three months endedSeptember 30, 2021 with the increase attributed to higher pre-tax earnings. 30
-------------------------------------------------------------------------------- Comparison of Operating Results for the nine months endedSeptember 30, 2022 and 2021 Earnings Summary (dollars in thousands) Nine Months Ended Change 2022 vs. 2021 September 30, September 2022 30, 2021 Amount Percentage Net Interest Income$ 20,103 $ 16,671 $ 3,432 20.6 % Provision (credit) for loan losses 601 (185 ) 786 424.9 Noninterest income 1,505 1,905 (400 ) (21.0 ) Noninterest expense 11,747 10,078 1,669 16.6 Income Taxes 2,221 2,088 133 6.4 Net earnings$ 7,039 $ 6,595 $ 444 6.7 %
Comparing the nine-month periods, a
Interest income
(dollars in thousands)
Nine Months Ended Change 2022 vs. 2021
September 30, September
2022 30, 2021 Amount Percentage
Interest income:
Loans $ 18,568 $ 17,256 $ 1,312 7.6 %
Securities 2,000 794 1,206 151.9
Other 1,104 192 912 475.0
Total interest income $ 21,672 $ 18,242 $ 3,430 18.8 %
Interest expense:
Deposits 1,442 1,539 $ (97 ) (6.3 %)
Other borrowings 127 32 95 296.9
Total interest expense 1,569 1,571 (2 ) (0.1 )
Net interest income $ 20,103 $ 16,671 $ 3,432 20.6 %
Comparing the nine-month periods, the average balance of interest-earnings
assets increased 17.9%, or $124.6 million , and was a primary driver of the
increase in net interest income along with higher yields on loans (excluding the
impact of PPP), investments, and other interest-earning assets. There was a
$2.0 million decrease in interest and fee income from PPP loans as the Bank
moved through the forgiveness process of these loans which has impacted average
loan yields and the net interest margin for multiple quarters. The yield on the
average balance of interest-earning assets improved slightly to 3.52% while the
average cost of funds decreased 9 basis points to 0.36%. Total interest
expense for the nine-month period stayed essentially flat despite an increase in
the average balance of interest-earning liabilities of $110.6 million . The
Company's net interest margin for the nine-month period improved 8 basis points
to 3.27%.
Provision for Loan Losses
Provision expense was $601,000 for the nine months ended September 30, 2022 ,
compared to a $185,000 credit for the loan losses for the same period in 2021.
Provision expense in 2022 is mostly attributed to funded loan growth. Also
contributing to the volume of provision expense during the period is $286,000 in
year-to-date net recoveries, combined with a marginal reduction in the general
reserve requirement for commercial loans. For the nine-month period in 2021, the
Company recorded $597,000 in provision expense for new loan growth which was
offset by a $357,000 credit in the unallocated reserve related to the COVID-19
pandemic and a $425,000 credit in the reserve for commercial loans due to a
decrease in the commercial loan balance for that period.
31--------------------------------------------------------------------------------
Noninterest income
(dollars in thousands) Nine Months Ended Change 2022 vs. 2021
September 30, September
2022 30, 2021 Amount Percentage
Service charges and fees on deposit
accounts $ 219 $ 170 $ 49 28.8 %
Debit card/ATM revenue, net 404 341 63 18.5
Mortgage banking revenue, net 420 958 (538 ) (56.2 )
Income from bank-owned life insurance 285 203 82 40.4
Gain on sale of debt securities
available for sale - 108 (108 ) N/A
Other income 177 125 52 41.6
Total noninterest income $ 1,505 $ 1,905 $ (400 ) (21.0 %)
The decline in noninterest income is predominantly due to lower mortgage banking
revenue, given the rising rate environment and the high level of refinancing
activity that occurred in 2021, and also due to an absence of a gain on sale of
securities as was reported in 2021. Increases in BOLI income and fees on deposit
accounts partially offset the decrease in mortgage banking revenue, along with
fee income from merchant cards, debit cards, and ATM transactions.
Noninterest expense
(dollars in thousands) Nine Months Ended Change 2022 vs. 2021
September 30, September
2022 30, 2021 Amount Percentage
Salaries and employee benefits $ 6,765 $ 5,685 $ 1,080 19.0 %
Occupancy and equipment 1,217 1,144 73 6.4
Professional fees 400 353 47 13.3
Marketing 575 536 39 7.3
FDIC Assessment 303 197 106 53.8
Software maintenance and amortization 837 738 99 13.4
Other 1,650 1,425 225 15.8
Total noninterest expense $ 11,747 $ 10,078 $ 1,669 16.6 %
An increase in compensation costs is the primary driver of higher noninterest
expense due to a larger employee base (106 FTEs at September 30, 2022 versus
95 at September 30, 2021 ), annual raises, higher incentive accrual, and lower
deferred loan costs. The increase in FDIC assessment expense is explained by
changing assessment rates and higher deposit balances, while higher software
maintenance, amortization and other expense reflects the expanding information
technology needs of a growing company. Higher occupancy costs reflect higher
taxes, increases to furniture, fixtures and equipment, and higher depreciation,
utilities, and maintenance contract expense. Increases in other noninterest
expense are largely attributed to higher travel and entertainment, fraud, and
board related expenses.
Income Taxes
Income taxes are based on amounts reported in the condensed consolidated
statements of earnings after adjustments for nontaxable income and nondeductible
expenses and consist of taxes currently due plus deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Income taxes were $2.2 million for the nine months ended
September 30, 2022 , compared to income taxes of $2.1 million for the nine months
ended September 30, 2021 , with the increase attributed to higher pre-tax
earnings. The effective tax rate was 24.0% for the nine months ended September
30, 2022 and the nine months ended September 30, 2021 .
32
--------------------------------------------------------------------------------LIQUIDITY Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company's clients, as well as meet current and planned expenditures. Management monitors the liquidity position daily. Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations, and capital. Additionally, as a commercial bank, we are expected to maintain an adequate liquidity position. The liquidity position may consist of cash on hand, cash on demand deposit with correspondent banks, federal funds sold, and unpledged marketable securities such asUnited States government treasury and agency securities, municipal securities,U.S. agency mortgage-backed securities, and asset-backed securities. The Bank also has external sources of funds through the FHLB, unsecured lines of credit with correspondent banks, and theState of Florida's Qualified Public Deposit ("QPD") Program. AtSeptember 30, 2022 , the Bank had access to approximately$88.6 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to$59.0 million in unsecured lines of credit maintained with correspondent banks. There were no outstanding balances under any of these lines atSeptember 30, 2022 .
The Company has a
Some of our securities are pledged to collateralize certain deposits through our participation in theState of Florida's QPD program. The market value of securities pledged to the QPD program was$13.4 million atSeptember 30, 2022 compared to$11.9 million atDecember 31, 2021 . Our primary liquid assets, excluding assets pledged to the QPD program, accounted for 23.3% and 35.1% of total assets atSeptember 30, 2022 andDecember 31, 2021 , respectively. 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 greater than$250,000 and other large deposits. AtSeptember 30, 2022 , total deposits were$755.4 million , of which$11.8 million were in certificates of deposits greater than$250,000 , excluding Individual Retirement Accounts (IRAs). Deposit balances decreased$7.5 million sinceDecember 31, 2021 . Management observed several trends including a seasonal outflow of public funds, lower balances maintained in attorney trust accounts (due to a reduction in real estate closing activity), and a shift in some consumer interest-bearing deposits to higher yielding investments outside of the Bank. We maintain a Contingency Funding Plan ("CFP") that identifies liquidity needs and weighs alternate courses of action designed to address those needs in emergency situations. We perform a monthly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands and do not know of any trends, events, or uncertainties that may result in a significant adverse effect on our liquidity position. CAPITAL RESOURCES Stockholders' equity was$63.9 million atSeptember 30, 2022 compared to$67.0 million atDecember 31, 2021 . The$3.1 million decrease in equity is mostly attributed to the$10.3 million increase in the unrealized losses of our investment portfolio, partially offset by retention of earnings. In 2020, the Company obtained a$15 million revolving line of credit with TNB. At its discretion, the Company may take draws on that line and may contribute the proceeds as capital to the Bank. AtSeptember 30, 2022 , the Company had a$4,125,000 outstanding loan balance and incurred year-to-date interest expense of$127,000 under this revolving line of credit.
At
The following is a summary atSeptember 30, 2022 andDecember 31, 2021 of the regulatory capital requirements to be "well capitalized" and the Bank's capital position. For Capital Adequacy For Well Capitalized Actual Purposes Purposes (dollars in thousands) Amount Percentage Amount Percentage Amount Percentage As of September 30, 2022 Tier 1 Leverage Capital$ 78,221 9.07 %$ 34,510 4.00 %$ 43,137 5.00 % Common Equity Tier 1 Risk-based Capital 78,221 12.62 27,894 4.50 40,291 6.50 Tier 1 Risk-based Capital 78,221 12.62 37,192 6.00 49,589 8.00 Total Risk-based Capital 85,082 13.73 49,589 8.00 61,986 10.00 As of December 31, 2021 Tier 1 Leverage Capital$ 70,548 8.53 %$ 33,071 4.00 %$ 41,338 5.00 % Common Equity Tier 1 Risk-based Capital 70,548 13.45 23,596 4.50 34,083 6.50 Tier 1 Risk-based Capital 70,548 13.45 31,461 6.00 41,948 8.00 Total Risk-based Capital 76,522 14.59 41,948 8.00 52,435 10.00 33
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The Bank is also subject to the following capital level threshold requirements
under the
Threshold Ratios
Common
Equity
Total Tier 1 Tier 1 Tier 1
Risk-Based Risk-Based Risk-Based Leverage
Capital Capital Capital Capital
Capital Category Ratio Ratio Ratio 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%
Until such time as PMHG has
OFF-BALANCE SHEET ARRANGEMENTS
Refer to Note 10 in the notes to condensed consolidated financial statements
included in this Form 10-Q for the period ending
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