PRIME MERIDIAN: Management report and analysis of the financial position and operating results (Form 10-Q)

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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, 2020. Results of operations for the three and six
months ended June 30, 2021are 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;

• we and global securities markets, government debt markets and others

    markets;


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


  • litigation, tax, and other regulatory matters;

• demand for banking services, 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;

• attracting and retaining key personnel, including our management team and

directors;

• technology, product distribution channels, 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 disturbances, bad weather, pandemics, public health,

and other conditions affecting our operations or those of our customers;

• other economic, competitive, government, regulatory or technological aspects

the factors that affect us; and

• application and interpretation of accounting principles and directives.




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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
                                                 Six Months               Year               Six Months
                                                    Ended                 Ended                 Ended
                                                June 30, 2021       December 31, 2020       June 30, 2020
Average equity as a percentage of average
assets                                                    8.78 %                  9.64 %             10.01 %
Equity to total assets at end of period                   8.43                    9.31                9.47
Return on average assets(1)                               1.28                    0.75                0.51
Return on average equity(1)                              14.56                    7.77                5.09
Noninterest expense to average assets(1)                  1.87                    2.01                2.04
Nonperforming loans to total loans at end of
period                                                       -                    0.26                0.44
Nonperforming assets to total assets                         -                    0.19                0.33



(1) Annualized for the six months ended June 30, 2021 and 2020


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 of June 30, 2021, have remained unchanged from the disclosures
presented in our Annual Report on Form 10-K for the year ended December 31,
2020.



COVID-19 RESPONSE



The COVID-19 pandemic has negatively impacted the global economy, disrupted
global supply chains, and created significant volatility and disruption in
financial markets. The extent to which the COVID-19 pandemic impacts our
business, results of operations, and financial condition, as well as our
regulatory capital and liquidity ratios, will depend on future developments, the
duration of the pandemic, the effectiveness and adoption of available vaccines,
and the actions taken by governmental authorities to slow the spread of the
disease or to mitigate its effects.  We continue to monitor and adhere to
national guidelines and local safety ordinances to ensure the safety of our
clients and employees.  At this time, it is not known how the more contagious
Delta variant and the consequential rise in cases nationally may impact the
economy, safety protocols or consumer behavior.



Management believes credit quality deterioration directly related to the
pandemic could materialize in the future. Since March of 2020, the Company
has reported a peak of 70 requests for payment deferrals or modifications on
loans totaling $42.4 million. Approximately 91% of the requests have been for
loans secured with real estate.  That number declined to one loan modification
totaling $411,000 as of June 30, 2021.



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FINANCIAL CONDITION



Average assets totaled $731.7 million and $703.4 million for the three and six
months ended June 30, 2021, respectively, an increase of $115.0 million (18.7%)
and $140.0 million(24.8%), over the comparable periods in 2020, with the
majority of growth coming from loans. The average balance of PPP loans increased
$7.2 million from the second quarter of 2020 to the second quarter of 2021 and
$39.1 million from the six month period ended June 30, 2020 to the six month
period ended June 30, 2021 and accounted for approximately 13.0% and 41.9% of
the growth in the average loan balance over those same time periods.



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. At June 30, 2021, our debt securities
available for sale investment portfolio included U.S. government agency
securities, municipal securities, mortgage-backed securities, and asset-backed
securities. As of the same date, this portfolio had a fair market value of
$63.3 million and an amortized cost value of $62.4 million. At June 30, 2021 and
December 31, 2020, our investment securities portfolio represented approximately
8.4% and 9.6% of our total assets, respectively. The average yield on the
average balance of investment securities for the six months ended June 30, 2021
was 1.71%, compared to 2.47% for the comparable period in 2020.



Loans. Our primary earning asset is our loan portfolio and our primary source of
income is the interest earned on the loan portfolio. Our loan portfolio consists
of commercial real estate loans, construction loans, and commercial loans made
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.



The Company's gross loan portfolio decreased $5.8 million since December 31,
2020. Excluding the quarter-end balance of PPP loans ($66.7 million at December
31, 2020 and $54.6 million at June 30, 2021), the Company's gross loan portfolio
increased $6.4 million since 2020 year-end.  This was following a high level
($57.5 million) of non-PPP loan payoffs in the first half of the year. At June
30, 2021, PPP loans comprised $54.6 million, or 11.4%, of total loans.
Management expects that the majority of these loans will be forgiven by the end
of 2021. In total, approximately 73.4% of the total loan portfolio was
collateralized by commercial and residential real estate mortgages at June 30,
2021 compared to 69.5% at December 31, 2020. Subtracting out the PPP loans, the
percentage of the total loan portfolio collateralized by commercial and
residential real estate mortgages was 82.8% at June 30, 2021.



Non-performing assets. TO June 30, 2021, the Company had no non-performing assets in relation to $ 1.25 million of non-performing assets to December 31, 2020.

 We generally place loans on nonaccrual status when they become 90 days or more
past due, unless they are well secured and in the process of collection. We also
place loans on nonaccrual status if they are less than 90 days past due if the
collection of principal or interest is in doubt. When a loan is placed on
nonaccrual status, any interest previously accrued, but not collected, is
reversed from income. At June 30, 2021, the Bank had no loans on nonaccrual
status, compared to five nonaccrual loans totaling $1.25 million at December 31,
2020. 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 2021, the Bank reported a $185,000 credit for loan
losses due to no specific reserve requirements, loan recoveries, and a decrease
in the amount of COVID-19 unallocated reserve. The Company did not carry
any aggregate specific reserves at June 30, 2021.  The Company reported net
charge-offs of $13,000, or 0.01% annualized of average loans, during the
quarter ended June 30, 2021 compared to net charge-offs of $686,000, or 0.64%
annualized of average loans, in the second quarter of 2020.  Management believes
the allowance for loan losses, which was $5.9 million or 1.39% of gross loans
(excluding PPP loans) at June 30, 2021 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 at June 30, 2021 were $683.4 million,
an increase of $102.8 million, or 17.7%, from December 31, 2020, with growth
coming from both noninterest-bearing and interest-bearing accounts and
attributed to expansion of existing relationships, the addition of new clients,
and to a lesser extent, due to PPP activity. The average balance of
noninterest-bearing deposits accounted for 29.2% of the average balance of total
deposits for the six months ended June 30, 2021, compared to 24.9% for the six
months ended June 30, 2020. While management expects some shrinkage in deposits
as remaining PPP funds are spent, management expects the majority of the
increase in total deposits will remain long-term.



Borrowings. The Bank has an agreement with the Federal Home Loan Bank of Atlanta
("FHLB") and pledges its qualified loans as collateral which would allow the
Bank, as of June 30, 2021, to borrow up to $52.8 million. In addition, the
Bank maintains unsecured lines of credit with correspondent banks that totaled
$28.0 million at June 30, 2021. There were no loans outstanding under any of
these lines at June 30, 2021.



In 2020, the Company entered into a Promissory Note (the "Note") and a Security
Agreement with Thomasville National Bank ("TNB"). Pursuant to the Note, the
Company obtained a $15 million revolving line of credit with a 5-year term. The
initial interest rate on the line of credit is 3.25% and will adjust daily to
the then-current Wall Street Journal Prime Rate. 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 June 30,
2021, the Company had a $3,075,000 outstanding loan balance and reported $7,000
in year-to-date interest expense under this line.



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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
slightly for both the three and six month periods ended June 30, 2021 as lower
funding costs and PPP fee and interest income offset an overall downward
repricing of earning assets and a shift in the asset mix towards lower-yielding
earnings assets triggered by excess liquidity.



                                                 For the Three Months Ended June 30,
                                           2021                                          2020
                                        Interest                                       Interest
                        Average            and             Yield/        Average         and           Yield/
(dollars in
thousands)              Balance         Dividends         Rate(5)        Balance      Dividends       Rate(5)
Interest-earning
assets:
Loans(1)               $ 483,587     $         5,505           4.55 %   $ 427,902     $    4,745           4.44 %
Loans held for sale       14,784                 127           3.44         9,788             99           4.05
Debt securities
available for sale        60,155                 262           1.74        68,014            428           2.52
Other(2)                 141,842                  65           0.18        89,217             62           0.28

Total

interest-bearing

assets                   700,368     $         5,959           3.40 %     594,921     $    5,334           3.59 %
Noninterest-earning
assets                    31,313                                           21,749
Total assets           $ 731,681                                        $ 616,670

Interest-bearing
liabilities:
Savings, NOW and
money-market
deposits               $ 413,859     $           410           0.40 %   $ 311,237     $      412           0.53 %
Time deposits             51,372                  90           0.70        67,287            325           1.93
Total
interest-bearing
deposits                 465,231                 500           0.43       378,524            737           0.78
Other borrowings             802                   7           3.49        33,129             28           0.34
Total
interest-bearing
liabilities              466,033     $           507           0.44       411,653     $      765           0.74
Noninterest-bearing
deposits                 196,726                                          140,234
Noninterest-bearing
liabilities                6,085                                            8,220
Stockholders' equity      62,837                                           56,563
Total liabilities
and stockholders'
equity                 $ 731,681                                        $ 616,670

Net earning assets     $ 234,335                                        $ 183,268
Net interest income                  $         5,452                                  $    4,569
Interest rate spread
(3)                                                            2.96 %                                      2.85 %
Net interest
margin(4)                                                      3.11 %                                      3.07 %

Ratio of
interest-earning
assets to average
interest-bearing
liabilities               150.28 %                                         144.52 %




(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






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                                                   For the Six Months Ended June 30,
                                          2021                                          2020
                                       Interest                                      Interest
                         Average          and           Yield/         Average          and           Yield/
(dollars in
thousands)               Balance       Dividends        Rate(5)        Balance       Dividends        Rate(5)
Interest-earning
assets:
Loans(1)                $ 483,586     $    11,204            4.63 %   $ 390,400     $     9,108            4.67 %
Loans held for sale        14,081             233            3.31         7,919             165            4.17
Debt securities
available for sale         59,893             511            1.71        65,798             812            2.47
Other(2)                  115,888             114            0.20        75,687             294            0.78

Total

interest-bearing

assets                    673,448     $    12,062            3.58       539,804     $    10,379            3.85
Noninterest-earning
assets                     29,971                                        23,647
Total assets            $ 703,419                                     $ 563,451

Interest-bearing
liabilities:
Savings, NOW and
money-market deposits   $ 396,541     $       811            0.41 %   $
294,245     $       956            0.65 %
Time deposits              52,906             226            0.85        68,597             680            1.98
Total
interest-bearing
deposits                  449,447           1,037            0.46       362,842           1,636            0.90
Other borrowings              411               7            3.41        17,201              31            0.36
Total
interest-bearing
liabilities               449,858     $     1,044            0.46       380,043     $     1,667            0.88
Noninterest-bearing
deposits                  185,424                                       120,046
Noninterest-bearing
liabilities                 6,361                                         6,954
Stockholders' equity       61,776                                        56,408
Total liabilities and
stockholders' equity    $ 703,419                                     $ 563,451

Net earning assets      $ 223,590                                     $ 159,761
Net interest income                   $    11,018                                   $     8,712
Interest rate spread
(3)                                                          3.12 %                                        2.97 %
Net interest
margin(4)                                                    3.27 %                                        3.23 %

Ratio of
interest-earning
assets to average
interest-bearing
liabilities                149.70 %                                      142.04 %






(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








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Comparison of Operating Results for the Three Months Ended June 30, 2021 And
2020



Earnings Summary
(dollars in thousands)
                                                                 Change 2Q'21 vs. 2Q'20
                                       2Q'21       2Q'20           Amount         Percentage
Net Interest Income                  $ 5,452     $ 4,569     $        883               19.3 %
Provision (credit) for loan losses      (185 )     1,227           (1,412 )           (115.1 )
Noninterest income                       620         414              206               49.8
Noninterest expense                    3,278       2,819              459               16.3
Income Taxes                             717         217              500              230.4
Net earnings                         $ 2,262     $   720     $      1,542              214.2 %




Compared to the same period a year ago, the increase in net earnings was driven
by higher PPP origination fees, higher commercial real estate and residential
real estate loan originations, and a $185,000 credit for loan losses. Lower
funding costs on deposits and higher noninterest income also contributed to
higher net earnings in the second quarter of 2021.



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'21 vs. 2Q'20
                           2Q'21       2Q'20         Amount         Percentage
Interest income:
Loans                    $ 5,632     $ 4,844     $      788               16.3 %
Securities                   262         428           (166 )            (38.8 )
Other                         65          62              3                4.8
Total interest income    $ 5,959     $ 5,334     $      625               11.7 %




Compared to the second quarter of 2020, the increase in total interest income is
mostly attributed to origination fees and interest income from a higher volume
of commercial real estate and residential real estate loan and PPP loans.  The
decrease in interest income from securities since the second quarter of 2020 is
a function of lower volume and rates.



Interest expense:
(dollars in thousands)                            Change 2Q'21 vs. 2Q'20
                          2Q'21      2Q'20         Amount         

Percentage

Total interest expense   $  507     $  765     $     (258 )            (33.7 )%




Despite higher balances of interest-bearing liabilities, total interest expense
declined $258,000 from the second quarter of 2020 due to lower funding costs.
The average rate paid on deposits declined 35 basis points when compared to the
second quarter of 2020.



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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 recorded a $185,000 credit
to loan losses during the second quarter of 2021 due to no specific reserve
requirements, loan recoveries, and a decrease in the amount of COVID-19
unallocated reserve.  This differs greatly from the $1.2 million provision
expense in the second quarter of 2020, which was affected by net charge-offs of
$686,000 and the creation of an unallocated reserve in anticipation, at that
time, of possible COVID-19 related credit deterioration.



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'21 vs. 2Q'20
                                                    2Q'21          2Q'20         Amount        Percentage
Service charges and fees on deposit accounts   $       56     $       44     $       12              27.3 %
Debit card/ATM revenue, net                           124             79             45              57.0
Mortgage banking revenue, net                         332            219            113              51.6
Income from bank-owned life insurance                  67             40             27              67.5
Other income                                           41             32              9              28.1
Total noninterest income                       $      620     $      414     $      206              49.8 %




Compared to the second quarter of 2020, noninterest income increased across all
earning categories and was primarily driven by the 51.6% increase in mortgage
banking revenue (net of costs), as the mortgage team continues to report strong
production by units, volume, and gain on sales revenue.  Growth in debit
card/ATM revenue (net of fees) also continues to contribute positively to the
bottom line as more accounts are opened and more debit cards are issued. Income
from bank-owned life insurance (BOLI) increased $27,000 or 67.5%, compared to
the second quarter of 2020, due primarily to a $5.4 million increase in the
asset year over year, which has helped offset additional compensation expense.



Noninterest expense
(dollars in thousands)                                             Change 2Q'21 vs. 2Q'20
                                          2Q'21       2Q'20        Amount          Percentage

Salaries and Benefits $ 1,805 $ 1,546 $ 259

             16.8 %
Occupancy and equipment                     378         381            (3 )              (0.8 )
Professional fees                           120          83            37                44.6
Marketing                                   199         100            99                99.0
FDIC Assessment                              49          67           (18 )             (26.9 )
Software maintenance and amortization       251         201            50                24.9
Other                                       476         441            35                 7.9
Total noninterest expense               $ 3,278     $ 2,819     $     459                16.3 %




Compared to the second quarter of 2020, a $259,000 increase in salaries and
employee benefits expense was the primary driver of the $459,000 increase in
noninterest expense.  The increase in salary and employee benefits expense is
primarily attributed to higher incentive costs along with the impact of new
hires and merit increases. Marketing expense nearly doubled year over year due
to the recent relaxing of COVID-19 restrictions which had led to lower marketing
expense in the second quarter of 2020. This combined with modest increases in
other categories like software maintenance, professional fees, and other
miscellaneous expenses were marginally offset by lower occupancy and FDIC
assessment expense.



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 $717,000 for the three months ended June
30, 2021, compared to income taxes of $217,000 for the three months ended June
30, 2020, with the increase attributed to higher pre-tax earnings in 2021. The
effective tax rate was 24.1% in the second quarter of 2021 versus 23.2% in the
second quarter of 2020.



                                       30
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Comparison of Operating Results for the SIX Months Ended June 30, 2021 And 2020



Earnings Summary
(dollars in thousands)
                                                    Six Months Ended                   Change 2021 vs. 2020
                                             June 30, 2021       June 30, 2020          Amount        Percentage
Net Interest Income                        $        11,018     $         8,712     $     2,306              26.5 %
Provision (credit) for loan losses                    (185 )             1,863          (2,048 )          (109.9 )
Noninterest income                                   1,292                 781             511              65.4
Noninterest expense                                  6,575               5,757             818              14.2
Income Taxes                                         1,424                 437             987             225.9
Net earnings                               $         4,496     $         1,436     $     3,060             213.1 %




Year-to-date net earnings through June 30, 2021 more than tripled compared to
the same period in 2020 due mostly to interest income and origination fees from
PPP loans (totaling $1.9 million, net of costs, year-to-date) and a credit for
loan losses in 2021.  Also contributing to higher profitability in 2021 was a
$511,000, or 65.4%, increase in noninterest income.





Interest income
(dollars in thousands)
                                                    Six Months Ended                    Change 2021 vs. 2020
                                             June 30, 2021       June 30, 2020          Amount         Percentage
Interest income:
Loans                                      $        11,437     $         9,273     $     2,164               23.3 %
Securities                                             511                 812            (301 )            (37.1 )
Other                                                  114                 294            (180 )            (61.2 )
Total interest income                      $        12,062     $        10,379     $     1,683               16.2 %




Comparing the six-month periods, the increase in total interest income from
loans in 2021 is primarily attributed to $1.9 million of interest income and
fees (net of costs) generated from PPP loans compared to $392,000 for the first
half of 2020. A higher volume of commercial real estate and residential real
estate loan originations in the first half of 2021 also contributed to increased
interest income from loans. The decrease in interest income from securities is a
function of lower volume and rates while the decrease in interest income from
other interest-earning assets is a function of lower rates.





Interest expense:
(dollars in thousands)                              Six Months Ended                    Change 2021 vs. 2020
                                             June 30, 2021       June 30, 2020         Amount          Percentage
Total interest expense                     $         1,044     $         1,667     $     (623 )            (37.4% )



By comparing the six-month periods, a $ 69.8 million the increase in the average balance of interest-bearing debt was offset by a decrease of 42 basis points in the cost of interest-bearing debt.

Allowance for loan losses



The Company did not record any provision for loan losses during the first
quarter of 2021 due to a $7.0 million reduction in total portfolio loan balances
(excluding PPP loans) since year-end 2020. During the second quarter, the
Company reported a credit for loan losses of $185,000 due to no specific reserve
requirements, loan recoveries, and a decrease in the amount of COVID-19
unallocated reserve. This differed greatly from the six months ended June 30,
2020 when the Company's provision for loan losses increased substantially over
prior periods due to $1.0 million in net charge-offs and the creation of
an unallocated reserve in anticipation, at that time, of possible
COVID-19 related credit deterioration.



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Noninterest income
(dollars in thousands)                                    Six Months Ended                   Change 2021 vs. 2020
                                                  June 30, 2021        June 30, 2020         Amount        Percentage
Service charges and fees on deposit accounts    $           109      $           108     $        1               0.9 %
Debit card/ATM revenue, net                                 233                  160             73              45.6
Mortgage banking revenue, net                               633                  367            266              72.5
Income from bank-owned life insurance                       130                   80             50              62.5
Gain on sale of securities available for sale               108                    -            108               N/A
Other income                                                 79                   66             13              19.7
Total noninterest income                        $         1,292      $           781     $      511              65.4 %




Comparing the six-month periods, increases in debit card/ATM revenue (net of
fees), mortgage banking revenue (net of direct origination costs) and BOLI
combined with the $108,000 gain on sale of securities led to the $511,000
(65.4%) increase in noninterest income. The mortgage team has continued to see
strong volume through the first half of 2021.  The percentage of refinances to
purchases has decreased and a higher purchase volume environment has
returned. The mortgage team almost doubled its units in the first six months of
2021 as compared to the same period in 2020 and increased dollar volume by
54.6%. The Bank's investment in BOLI has nearly doubled since June 2020,
resulting in higher income to offset additional compensation expense. Increases
in debit card/ATM net revenue are attributed to growth in transaction deposit
accounts and the number of debit cards issued.





Noninterest expense
(dollars in thousands)                              Six Months Ended                   Change 2021 vs. 2020
                                             June 30, 2021       June 30, 2020         Amount        Percentage
Salaries and employee benefits             $         3,657     $         3,164     $      493              15.6 %
Occupancy and equipment                                764                 719             45               6.3
Professional fees                                      250                 174             76              43.7
Marketing                                              339                 301             38              12.6
FDIC Assessment                                        119                 119              -                 -
Software maintenance and amortization                  501                 394            107              27.2
Other                                                  945                 886             59               6.7
Total noninterest expense                  $         6,575     $         5,757     $      818              14.2 %




Over 60% of the increase in noninterest expense in the first half of 2021 is
attributed to higher salary and commission expense.  At June 30, 2021, the
Company had six additional FTEs compared to June 30, 2020.  The increases in
other noninterest expense categories, for the most part, represent a growing
bank.


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 $1.4 million for the six months ended June
30, 2021, compared to income taxes of $437,000 for the six months ended June 30,
2020, with the increase attributed to higher pre-tax earnings in 2021. The
effective tax rate was 24.1% for the six month period ended June 30, 2021 versus
23.3% for the six month period ended June 30, 2020.



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LIQUIDITY



Liquidity describes our ability to meet financial obligations, including lending
commitments and contingencies, which arise during the normal course of business.
Liquidity is primarily needed to meet the borrowing and deposit withdrawal
requirements of the Company's clients, as well as meet current and planned
expenditures. Management monitors the liquidity position daily.



Our liquidity is derived primarily from our deposit base, scheduled amortization
and prepayments of loans and investment securities, funds provided by
operations, and capital. Additionally, as a commercial bank, we are expected to
maintain an adequate liquidity reserve. The liquidity reserve may consist of
cash on hand, cash on demand deposit with correspondent banks, federal funds
sold, and unpledged marketable securities such as United States government
agency securities, municipal securities, mortgage-backed securities, and
asset-backed securities.



The Bank also has external sources of funds through the FHLB, unsecured lines of
credit with correspondent banks, and the State of Florida's Qualified Public
Deposit Program ("QPD"). At June 30, 2021, the Bank had access to approximately
$52.8 million of available lines of credit secured by qualifying collateral with
the FHLB, in addition to $28.0 million in unsecured lines of credit maintained
with correspondent banks.


The Company has a $ 15 million revolving credit line with TNB. From June 30, 2021, the outstanding amount of the Company’s borrowings on this line amounts to $ 3,075,000.



Some of our securities are pledged to collateralize certain deposits through our
participation in the State of Florida's QPD program. The market value of
securities pledged to the QPD program was $12.3 million at June 30,
2021 compared to $13.9 million at December 31, 2020. Our primary liquid assets,
excluding assets pledged to the QPD program, accounted for 30.7% and 18.1% of
total assets at June 30, 2021 and December 31, 2020, 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. At June 30, 2021, total deposits were $683.4 million, of
which $21.2 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 $63.8 million at June 30, 2021 compared to
$60.3 million at December 31, 2020. 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.  At June
30, 2021, the Company had a $3,075,000 outstanding loan balance and reported
year-to-date interest expense of $7,000 under this revolving line of credit.
The Company contributed $2.2 million to the capital of the Bank during the
second quarter of 2021.



At June 30, 2021, the Bank was considered to be "well capitalized" under the
FDIC's Prompt Corrective Action regulations with a 9.01% Tier 1 Leverage Capital
Ratio, a 13.87% Equity Tier 1 Risk-Based Capital Ratio, a 13.87% Tier 1
Risk-Based Capital Ratio, and a 15.11% Total Risk-Based Capital Ratio, all above
the minimum ratios to be considered "well capitalized."



The following is a summary at June 30, 2021 and December 31, 2020 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, 2021
Tier 1 Leverage
Capital                 $  65,946             9.01 %   $     29,274              4.00 %   $    36,592               5.00 %
Common Equity Tier 1
Risk-based Capital         65,946            13.87           21,403              4.50          30,916               6.50
Tier 1 Risk-based
Capital                    65,946            13.87           28,538              6.00          38,050               8.00
Total Risk-based
Capital                    71,845            15.11           38,050              8.00          47,563              10.00

As of December 31,
2020
Tier 1 Leverage
Capital                 $  57,800             9.09 %   $     25,421              4.00 %   $    31,776               5.00 %
Common Equity Tier 1
Risk-based Capital         57,800            13.29           19,575              4.50          28,275               6.50
Tier 1 Risk-based
Capital                    57,800            13.29           26,100              6.00          34,799               8.00
Total Risk-based
Capital                    63,245            14.54           34,799              8.00          43,499              10.00




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The Bank is also subject to the following capital level threshold requirements under the FDIC Quick corrective action regulations.


                                                   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 under-capitalized

Critically Undercapitalized                Tangible Equity/Total Assets ? 2%



Until PMHG has $ 3 billion in the total consolidated assets, it will not be subject to any consolidated capital requirement.

OFF-BALANCE SHEET ARRANGEMENTS

Refer to note 9 in the notes to the condensed consolidated financial statements included in this Form 10-Q for the period ending June 30, 2021 for a discussion of off-balance sheet arrangements.

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