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 six months endedJune 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.
23
--------------------------------------------------------------------------------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 Six Months Year Six Months Ended Ended Ended December 31, June 30, 2022 2021 June 30, 2021 Average equity as a percentage of average assets 7.65 % 8.67 % 8.78 % Equity to total assets at end of period 7.51 7.97 8.43 Return on average assets(1) 0.98 1.11 1.28 Return on average equity(1) 12.78 12.81 14.55 Noninterest expense to average assets(1) 1.78 1.87
1.87
Nonperforming loans to total loans at end of period 0.06 - - Nonperforming assets to total assets 0.04 - -
(1) Annualized for the six 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 ofJune 30, 2022 , have remained unchanged from the disclosures presented in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 24
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FINANCIAL CONDITION Average assets totaled$869.6 million and$861.3 million for the three and six months endedJune 30, 2022 respectively, an increase of$137.9 million (18.9%) and$157.9 million (22.4%), over the comparable periods in 2021. The growth in average assets stemmed mostly from increases in securities (comparing three-month periods) and cash and securities (comparing six-month periods), funded by deposit inflows. The average balance of loans grew more modestly as the average balance of PPP loans decreased$66.4 million comparing 2Q21 to 2Q22 and$63.8 million , comparing the first six months of 2022 to the first six months of 2021.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 and dividend income, to provide liquidity to meet funding requirements, and to provide collateral for pledging to secure the deposit of public funds at the Bank. AtJune 30, 2022 our debt securities available for sale and held to maturity investment portfolios included highly ratedU.S. government 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$141.2 million and an amortized cost value of$151.0 million . AtJune 30, 2022 andDecember 31, 2021 , our investment securities portfolio represented approximately 16.5% and 8.8% of our total assets, respectively. The average yield on the average balance of investment securities for the six months endedJune 30, 2022 was 2.07%, compared to 1.71% for the comparable period in 2021. Loans. Our primary earning asset is our loan portfolio and our primary source of income is the interest earned on the loan portfolio. Our loan portfolio consists of commercial real estate loans, construction loans, and commercial loans made 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
Nonperforming assets. AtJune 30, 2022 , the Company had$349,000 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. AtJune 30, 2022 the Bank had two loans totaling$349,000 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. During the second quarter of 2022, the Bank reported a$731,000 provision for loan losses due to loan production during the quarter. This compared to a$185,000 credit for loan losses in the second quarter of 2021 due mostly to a decrease in the amount of COVID-19 unallocated reserve. The Company had net charge-offs of$7,000 during the three months endedJune 30, 2022 compared to net charge-offs of$13,000 in the three months endedJune 30, 2021 . For the six-month period endedJune 30, 2022 , the Company reported$277,000 in net recoveries compared to net charge-offs of$8,000 for the same period in 2021. Management believes the allowance for loan losses, which was$6.6 million , or 1.22%, of gross loans atJune 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 atJune 30, 2022 were$784.6 million , an increase of$21.6 million , or 2.8%, fromDecember 31, 2021 . The average balance of noninterest-bearing deposits accounted for 26.9% of the average balance of total deposits for the six months endedJune 30, 2022 , compared to 29.2% for the six months endedJune 30, 2021 . Given the current interest rate environment, management is monitoring potential volatility in deposit balances closely. Borrowings. The Bank has an agreement with theFederal Home Loan Bank of Atlanta ("FHLB") and pledges its qualified loans as collateral which would allow the Bank, as ofJune 30, 2022 , to borrow up to$92.7 million . In addition, the Bank maintains unsecured lines of credit with correspondent banks that totaled$47.0 million atJune 30, 2022 . There were no loans outstanding under any of these lines atJune 30, 2022 . In 2020, the Company entered into a Promissory Note (the "Note") and a Security Agreement withThomasville 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 adjusts daily to the then-current Wall Street Journal Prime Rate and was 4.75% atJune 30, 2022 . 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. AtJune 30, 2022 , the Company had a$4,125,000 outstanding loan balance and incurred$71,000 in year-to-date interest expense under this line. 25 --------------------------------------------------------------------------------
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
for the three-month period due primarily to volume and rate increases in loans
and securities. Comparing the six- month periods, the impact of PPP forgiveness
is more dominant and resulted in the lower net interest margin in 2022.
For the Three Months Ended June 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) $ 514,166 $ 5,912 4.60 % $ 483,587 $ 5,505 4.55 %
Loans held for sale 11,174 117 4.19 14,784 127 3.44
Debt securities
available for sale 132,562 737 2.22 60,155 262 1.74
Other(2) 170,320 331 0.78 141,842 65 0.18
Total
interest-earning
assets 828,222 $ 7,097 3.43 % 700,368 $ 5,959 3.40 %
Noninterest-earning
assets 41,391 31,313
Total assets $ 869,613 $ 731,681
Interest-bearing
liabilities:
Savings, NOW and
money-market deposits $ 536,209 $ 357 0.27 % $ 413,859 $ 410 0.40 %
Time deposits 43,611 58 0.53 51,372 90 0.70
Total
interest-bearing
deposits 579,820 415 0.29 465,231 500 0.43
Other borrowings 4,034 40 3.97 802 7 3.49
Total
interest-bearing
liabilities 583,854 $ 455 0.31 % 466,033 $ 507 0.44 %
Noninterest-bearing
deposits 213,521 196,726
Noninterest-bearing
liabilities 7,345 6,085
Stockholders' equity 64,893 62,837
Total liabilities and
stockholders' equity $ 869,613 $ 731,681
Net earning assets $ 244,368 $ 234,335
Net interest income $ 6,642 $ 5,452
Interest rate spread
(3) 3.12 % 2.96 %
Net interest
margin(4) 3.21 % 3.11 %
Ratio of
interest-earning
assets to average
interest-bearing
liabilities 141.85 % 150.28 %
(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
26--------------------------------------------------------------------------------
For the Six Months Ended June 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) $ 501,783 $ 11,596 4.62 % $ 483,586 $ 11,204 4.63 %
Loans held for sale 10,864 217 3.99 14,081 233 3.31
Debt securities
available for sale 108,459 1,122 2.07 59,893 511 1.71
Other(2) 200,167 455 0.45 115,888 114 0.20
Total
interest-earning
assets 821,273$ 13,390 3.26 % 673,448$ 12,062 3.58 % Noninterest-earning assets 40,004 29,971 Total assets$ 861,277 $ 703,419 Interest-bearing liabilities: Savings, NOW and money-market deposits$ 526,909 $ 693 0.26 % $
396,541$ 811 0.41 % Time deposits 46,251 125 0.54 52,906 226 0.85 Total interest-bearing deposits 573,160 818 0.29 449,447 1,037 0.46 Other borrowings 3,877 71 3.66 411 7 3.41 Total interest-bearing liabilities 577,037$ 889 0.31 % 449,858$ 1,044 0.46 %
Noninterest-bearing deposits 211,170 185,424 Noninterest-bearing liabilities 7,202 6,361 Stockholders' equity 65,868 61,776 Total liabilities and stockholders' equity$ 861,277 $ 703,419 Net earning assets$ 244,236 $ 223,590 Net interest income$ 12,501 $ 11,018 Interest rate spread (3) 2.95 % 3.12 % Net interest margin(4) 3.04 % 3.27 % Ratio of interest-earning assets to average interest-bearing liabilities 142.33 % 149.70 % (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
-------------------------------------------------------------------------------- Comparison of Operating Results for the THREE MONTHS ENDEDJUNE 30, 2022 AND 2021 Earnings Summary (dollars in thousands) Change 2Q'22 vs. 2Q'21 2Q'22 2Q'21 Amount Percentage Net Interest Income$ 6,642 $ 5,452 $ 1,190 21.8 % Provision (credit) for loan losses 731 (185 ) 916 495.1 Noninterest income 504 620 (116 ) (18.7 ) Noninterest expense 3,882 3,278 604 18.4 Income Taxes 566 717 (151 ) (21.1 ) Net earnings$ 1,967 $ 2,262 $ (295 ) (13.0 )% Compared to 2Q21, the decrease in net earnings is primarily attributed to the provision for loan losses (compared to a credit in 2021), partially offset by higher net interest income and lower income taxes. Lower income from mortgage banking activities and increases in noninterest expense (mostly attributed to higher salaries and employee benefits) also contributed to the decline in net earnings. 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 2Q'22 vs. 2Q'21 2Q'22 2Q'21 Amount Percentage Interest income: Loans$ 6,029 $ 5,632 $ 397 7.0 % Securities 737 262 475 181.3 Other 331 65 266 409.2 Total interest income$ 7,097 $ 5,959 $ 1,138 19.1 % Interest expense: Deposits 415 500$ (85 ) (17.0 %) Other borrowings 40 7 33 471.4 Total interest expense 455 507 (52 ) (10.3 ) Net interest income$ 6,642 $ 5,452 $ 1,190 21.8 % Compared to the second quarter of 2021, the volume increase in loans and securities is the biggest driver of the increase in net interest income, followed by rate increases. Average interest-earning assets totaled$828.2 million for 2Q22, compared to$700.4 million for 2Q21. Partially offsetting this was a$637,000 reduction in PPP fee and interest income when compared to 2Q21. Compared to 2Q21, interest expense decreased$52,000 as volume increases were offset by a strategic reduction of deposit rates made in the first quarter of 2022. The Company's 2Q22 net interest margin of 3.21% compared favorably to the Company's 2Q21 net interest margin of 3.11%. 28
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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. The Company's strong loan production in the second quarter of 2022 resulted in a$731,000 provision for loan losses. This compared to a$185,000 credit to loan losses during the second quarter of 2021 due primarily to a decrease in the amount of the COVID-19 unallocated reserve. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses, or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of examination. Noninterest income (dollars in thousands) Change 2Q'22 vs. 2Q'21 2Q'22 2Q'21 Amount Percentage Service charges and fees on deposit accounts$ 73 $ 56 $ 17 30.4 % Debit card/ATM revenue, net 143 124 19 15.3 Mortgage banking revenue, net 139 332 (193 ) (58.1 ) Income from bank-owned life insurance 94 67 27 40.3 Other income 55 41 14 34.1 Total noninterest income$ 504 $ 620 $ (116 ) (18.7 %) 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 2Q'22 vs. 2Q'21 2Q'22 2Q'21 Amount Percentage
Salaries and employee benefits
24.0 % Occupancy and equipment 396 378 18 4.8 Professional fees 130 120 10 8.3 Marketing 213 199 14 7.0 FDIC Assessment 84 49 35 71.4 Software maintenance and amortization 285 251 34 13.5 Other 536 476 60 12.6 Total noninterest expense$ 3,882 $ 3,278 $ 604 18.4 % An increase in salaries and employee benefits is the primary driver of higher noninterest expense due to a larger employee base (100 FTEs atJune 30, 2022 versus 95 atJune 30, 2021 ) and annual raises that went in effect in March of 2022. The increase in the quarterlyFDIC assessment is attributed to an increased assessment rate and higher deposit balances. The$60,000 increase in other noninterest expense from 2021 to 2022 is attributed to modest fluctuations in various miscellaneous expense categories. 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$566,000 for the three months endedJune 30, 2022 , compared to income taxes of$717,000 for the three months endedJune 30, 2021 with the decrease attributed to lower pre-tax earnings and a lower effective tax rate in 2022. In the second quarter of 2022, the Company received a$65,000 state income tax refund that led to a lower effective tax rate of 22.3% in the second quarter of 2022 versus 24.1% in the second quarter of 2021. 29
-------------------------------------------------------------------------------- Comparison of Operating Results for the six months endedJune 30, 2022 and 2021 Earnings Summary (dollars in thousands) Six Months Ended Change 2022 vs. 2021 June 30, 2022 June 30, 2021 Amount Percentage Net Interest Income$ 12,501 $ 11,018 $ 1,483 13.5 % Provision (credit) for loan losses 360 (185 ) 545 294.6 Noninterest income 1,022 1,292 (270 ) (20.9 ) Noninterest expense 7,662 6,575 1,087 16.5 Income Taxes 1,293 1,424 (131 ) (9.2 ) Net earnings $ 4,208 $ 4,496$ (288 ) (6.4 )%
Comparing the six-month periods, higher net interest income and lower taxes were offset primarily by higher noninterest expense and secondarily by the provision for loan losses and lower noninterest income.
Interest income
(dollars in thousands)
Six Months Ended Change 2022 vs. 2021
June 30, 2022 June 30, 2021 Amount Percentage
Interest income:
Loans $ 11,813 $ 11,437 $ 376 3.3 %
Securities 1,122 511 611 119.6
Other 455 114 341 299.1
Total interest income $ 13,390 $ 12,062 $ 1,328 11.0 %
Interest expense:
Deposits 818 1,037 $ (219 ) (21.1 %)
Other borrowings 71 7 64 914.3
Total interest expense 889 1,044 (155 ) (14.8 )
Net interest income $ 12,501 $ 11,018 $ 1,483 13.5 %
Comparing the six-month periods, the average balance of interest-earnings assets
increased 22.0%, or $147.8 million , and was the primary driver of the increase
in net interest income. Partially offsetting this was a $1.2 million decrease
in interest and fee income from PPP Loans as the Bank moved through the
forgiveness process of these loans which impacted average loan yields and the
net interest margin. The yield on the average balance of interest-earning
assets declined from 3.58% for the six months ended June 30, 2021 to 3.26% for
the six months ended June 30, 2022 while the net interest margin dipped from
3.27% to 3.04% for the same time period. Despite higher deposit balances,
year-to-date interest expense declined from 2021 to 2022 due to strategic rate
reductions made in the first quarter of 2022.
Provision for Loan Losses
Through June 30, 2022 , the Company recorded a $360,000 provision for loan losses
compared to a 185,000 credit for loan losses for the same time period in 2021.
The Company recorded a credit in 2021 primarily due to a decrease in the amount
of COVID-19 unallocated reserve. Loan production in the second quarter of 2022
led to a $731,000 provision which offset the $371,000 credit taken in the first
quarter of 2022 due to flat loan growth (net PPP) and a $284,000 net recovery
which reduced the historical loss factor on commercial loans by 19 basis
points.
30--------------------------------------------------------------------------------
Noninterest income
(dollars in thousands) Six Months Ended Change 2022 vs. 2021
June 30, 2022 June 30, 2021 Amount Percentage
Service charges and fees on deposit accounts $ 141 $ 109 $ 32 29.4 %
Debit card/ATM revenue, net 272 233 39 16.7
Mortgage banking revenue, net 304 633 (329 ) (52.0 )
Income from bank-owned life insurance 189 130 59 45.4
Gain on sale of securities available for sale - 108 (108 ) N/A
Other income 116 79 37 46.8
Total noninterest income $ 1,022 $ 1,292 $ (270 ) (20.9 %)
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 BOLI income,
service charges and fees on deposit accounts, and fee income on merchant cards,
debit cards, and ATM transactions helped offset the year-to-date decline in
mortgage banking revenue.
Noninterest expense
(dollars in thousands) Six Months Ended Change 2022 vs. 2021
June 30, 2022 June 30, 2021 Amount Percentage
Salaries and employee benefits $ 4,398 $ 3,657 $ 741 20.3 %
Occupancy and equipment 804 764 40 5.2
Professional fees 276 250 26 10.4
Marketing 380 339 41 12.1
FDIC Assessment 208 119 89 74.8
Software maintenance and amortization 527 501 26 5.2
Other 1,069 945 124 13.1
Total noninterest expense $ 7,662 $ 6,575 $ 1,087 16.5 %
Year-to-date, the growth in noninterest expense is mostly attributed to higher
salaries and employee benefits expense due to a larger employee base (100 FTEs
at June 30, 2022 versus 95 at June 30, 2021 ) and annual raises that went in
effect in March of 2022. An increased assessment rate and higher deposit
balances led to the $89,000 increase in the FDIC assessment in 2022. The
$124,000 increase in other noninterest expense from the first half of 2021 to
the first half of 2022 is attributed to modest fluctuations in various
miscellaneous expense categories and can be mostly credited to the Bank's
organic growth.
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 $1.3 million for the six months ended June
30, 2022 , compared to income taxes of $1.4 million for the six months ended June
30, 2021 , with the decrease attributed to lower pre-tax earnings and a lower
effective tax rate in 2022. The effective tax rate was 23.5% for the six months
ended June 30, 2022 versus 24.1% for the six months ended June 30, 2021 .
31
--------------------------------------------------------------------------------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 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. AtJune 30, 2022 , the Bank had access to approximately$92.7 million of available lines of credit secured by qualifying collateral with the FHLB, in addition to$47.0 million in unsecured lines of credit maintained with correspondent banks.
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$14.3 million atJune 30, 2022 compared to$11.9 million atDecember 31, 2021 . Our primary liquid assets, excluding assets pledged to the QPD program, accounted for 29.4% and 35.1% of total assets atJune 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. AtJune 30, 2022 , total deposits were$784.6 million , of which$11.7 million were in certificates of deposits greater than$250,000 , excluding Individual Retirement Accounts (IRAs). We maintain a Contingency Funding Plan ("CFP") that identifies liquidity needs and weighs alternate courses of action designed to address those needs in emergency situations. We perform a monthly cash flow analysis and stress test the CFP to evaluate the expected funding needs and funding capacity during a liquidity stress event. We believe that the sources of available liquidity are adequate to meet all reasonably immediate short-term and intermediate-term demands and do not know of any trends, events, or uncertainties that may result in a significant adverse effect on our liquidity position. CAPITAL RESOURCES Stockholders' equity was$64.6 million atJune 30, 2022 compared to$67.0 million atDecember 31, 2021 . The$2.4 million decrease in equity is mostly attributed to the$6.5 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. AtJune 30, 2022 , the Company had a$4,125,000 outstanding loan balance and incurred year-to-date interest expense of$71,000 under this revolving line of credit. AtJune 30, 2022 , the Bank was considered to be "well capitalized" under theFDIC's Prompt Corrective Action regulations with an 8.61% Tier 1 Leverage Capital Ratio, a 12.61% Common Equity Tier 1 Risk-Based Capital Ratio, a 12.61% Tier 1 Risk-Based Capital Ratio, and a 13.72% Total Risk-Based Capital Ratio, all above the minimum ratios to be considered "well capitalized." The following is a summary atJune 30, 2022 andDecember 31, 2021 of the regulatory capital requirements to be "well capitalized" and the Bank's capital position. For Capital Adequacy For Well Capitalized Actual Purposes Purposes (dollars in thousands) Amount Percentage Amount Percentage Amount Percentage As of June 30, 2022 Tier 1 Leverage Capital$ 75,165 8.61 %$ 34,934 4.00 %$ 43,668 5.00 % Common Equity Tier 1 Risk-based Capital 75,165 12.61 26,829 4.50 38,753 6.50 Tier 1 Risk-based Capital 75,165 12.61 35,772 6.00 47,696 8.00 Total Risk-based Capital 81,776 13.72 47,696 8.00 59,621 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 32
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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 endingJune 30, 2022 for a discussion of off-balance sheet arrangements.
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