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Skyline Bankshares, Inc. - Quarter Report: 2023 March (Form 10-Q)

pkkw20230331_10q.htm
 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023

 

Or

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from          to

 

Commission File Number: 333-209052

 

SKYLINE BANKSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Virginia

 

47-5486027

 
 

(State or Other Jurisdiction of Incorporation)

 

(I.R.S. Employer Identification Number)

 
 

 

 

 

 
 

101 Jacksonville Circle

 

 

 
 

Floyd, Virginia

 

24091

 
 

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

(540) 745-4191

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

None

 

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

 

Indicate by checkmark whether the Registrant has submitted electronically any Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405) of this chapter during the preceding 12 months or for such shorter period that the Registrant was required to submit such files. Yes ☑ No ☐

 

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

 

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

                                                               

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

The registrant had 5,607,416 shares of Common Stock, no par value per share, outstanding as of May 12, 2023.

 

 

 

 

 
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
 

Consolidated Balance Sheets—March 31, 2023 (Unaudited) and December 31, 2022 (Audited)

3
     
 

Unaudited Consolidated Statements of Income—Three Months Ended March 31, 2023 and March 31, 2022

4
     
 

Unaudited Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2023 and March 31, 2022

5
     
 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity—Three Months Ended March 31, 2023 and March 31, 2022

6
     
 

Unaudited Consolidated Statements of Cash Flows—Three Months Ended March 31, 2023 and March 31, 2022

7
     
  Notes to Consolidated Financial Statements 9
     
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

47
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 54
     
Item 4. Controls and Procedures 55
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 56
     
Item 1A. Risk Factors 56
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 56
     
Item 3. Defaults Upon Senior Securities 56
     
Item 4. Mine Safety Disclosures 56
     
Item 5. Other Information 56
     
Item 6.  Exhibits 57
     
Signatures   58

 

 

 

 

Part I.  Financial Information

 

Item 1.  Financial Statements


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Balance Sheets

March 31, 2023 and December 31, 2022


 

(dollars in thousands)

 

March 31,

  

December 31,

 
  

2023

  

2022

 

 

 

(Unaudited)

  

(Audited)

 
Assets        
         

Cash and due from banks

 $25,017  $19,299 

Interest-bearing deposits with banks

  14,653   10,802 

Federal funds sold

  2,378   960 

Investment securities available for sale

  136,678   135,151 

Restricted equity securities

  3,014   1,950 

Loans, net of allowance for credit losses of $6,819 at March 31, 2023 and $6,248 at December 31, 2022

  757,796   748,624 

Cash value of life insurance

  22,623   22,484 

Other real estate owned

  -   235 

Properties and equipment, net

  31,676   31,753 

Accrued interest receivable

  2,888   2,979 

Core deposit intangible

  1,181   1,286 

Goodwill

  3,257   3,257 

Deferred tax assets, net

  5,321   5,744 

Other assets

  12,592   13,210 
  $1,019,074  $997,734 
         

Liabilities and Stockholders Equity

        
         

Liabilities

        

Deposits

        

Noninterest-bearing

 $300,280  $310,510 

Interest-bearing

  605,175   609,817 

Total deposits

  905,455   920,327 
         

Borrowings

  25,000   - 

Accrued interest payable

  261   95 

Other liabilities

  12,049   4,376 
   942,765   924,798 

Commitments and contingencies (Note 10)

          
         

Stockholders Equity

        

Preferred stock, no par value; 5,000,000 shares authorized, none issued

  -   - 

Common stock, no par value; 25,000,000 shares authorized, 5,607,416 and 5,617,416 issued and outstanding at March 31, 2023 and December 31, 2022, respectively

  -   - 

Surplus

  33,520   33,613 

Retained earnings

  63,067   62,229 

Accumulated other comprehensive loss

  (20,278)  (22,906)
   76,309   72,936 
  $1,019,074  $997,734 

 

See Notes to Consolidated Financial Statements

 

3


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Income

For the Three Months ended March 31, 2023 and 2022


 

  

Three Months Ended

 
  

March 31,

 

(dollars in thousands except share amounts)

 

2023

  

2022

 
  

(Unaudited)

  

(Unaudited)

 

Interest income

        

Loans and fees on loans

 $9,164  $7,876 

Interest-bearing deposits in banks

  88   36 

Federal funds sold

  10   - 

Interest on taxable securities

  747   507 

Interest on nontaxable securities

  49   49 

Dividends

  10   8 
   10,068   8,476 

Interest expense

        

Deposits

  894   447 

Interest on borrowings

  169   45 
   1,063   492 

Net interest income

  9,005   7,984 
         

(Recovery of) provision for credit losses

  (106)  137 

Net interest income after (recovery of) provision for credit losses

  9,111   7,847 
         

Noninterest income

        

Service charges on deposit accounts

  497   436 

Other service charges and fees

  823   683 

Mortgage origination fees

  84   166 

Increase in cash value of life insurance

  139   127 

Life insurance income

  -   217 

Other income

  21   7 
   1,564   1,636 

Noninterest expenses

        

Salaries and employee benefits

  4,086   3,579 

Occupancy and equipment

  1,186   1,005 

Data processing expense

  491   506 

FDIC Assessments

  111   114 

Advertising

  135   145 

Bank franchise tax

  105   126 

Director fees

  61   61 

Professional fees

  221   168 

Telephone expense

  139   133 

Core deposit intangible amortization

  105   134 

Other expense

  695   564 
   7,335   6,535 

Net income before income taxes

  3,340   2,948 
         

Income tax expense

  612   542 

Net income

 $2,728  $2,406 
         

Net income per share

 $0.49  $0.43 

Weighted average shares outstanding

  5,597,233   5,595,341 

Dividends declared per share

 $0.21  $0.15 

 

See Notes to Consolidated Financial Statements

 

4


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the Three Months ended March 31, 2023 and 2022


 

  

Three Months Ended

 
  

March 31,

 

(dollars in thousands)

 

2023

  

2022

 
  

(Unaudited)

  

(Unaudited)

 
         

Net Income

 $2,728  $2,406 
         

Other comprehensive income (loss)

        
         

Unrealized gains (losses) on investment securities available for sale:

        

Unrealized gains (losses) arising during the period

  3,326   (9,352)

Tax related to unrealized (gains) losses

  (698)  1,964 
         

Total other comprehensive income (loss)

  2,628   (7,388)

Total comprehensive income (loss)

 $5,356  $(4,982)

 

See Notes to Consolidated Financial Statements

 

5


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity

For the Three Months ended March 31, 2023 and 2022 (unaudited)


 

(dollars in thousands except share amounts)

         
                  

Accumulated

     
                  

Other

     
  

Common Stock

      

Retained

  

Comprehensive

     
  

Shares

  

Amount

  

Surplus

  

Earnings

  

Loss

  

Total

 
                         

Balance, December 31, 2021

  5,606,216  $-  $33,588  $53,745  $(2,139) $85,194 
                         

Net income

  -   -   -   2,406   -   2,406 

Other comprehensive loss

  -   -   -   -   (7,388)  (7,388)

Dividends paid ($0.15 per share)

  -   -   -   (843)  -   (843)

Restricted stock issued

  14,500   -   -   -   -   - 

Share-based compensation

  -   -   15   -   -   15 
                         

Balance, March 31, 2022

  5,620,716  $-  $33,603  $55,308  $(9,527) $79,384 
                         
                         

Balance, December 31, 2022

  5,617,416  $-  $33,613  $62,229  $(22,906) $72,936 
                         

Cumulative effect of adoption of credit losses standard, net of tax

  -   -   -   (710)  -   (710)

Net income

  -   -   -   2,728   -   2,728 

Other comprehensive income

  -   -   -   -   2,628   2,628 

Dividends paid ($0.21 per share)

  -   -   -   (1,180)  -   (1,180)

Share-based compensation

  -   -   20   -   -   20 

Common stock repurchased

  (10,000)  -   (113)  -   -   (113)
                         

Balance, March 31, 2023

  5,607,416  $-  $33,520  $63,067  $(20,278) $76,309 

 

See Notes to Consolidated Financial Statements

 

6

 

 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Three Months ended March 31, 2023 and 2022


 

  

Three Months Ended

 
  

March 31,

 

(dollars in thousands)

 

2023

  

2022

 
  

(Unaudited)

  

(Unaudited)

 

Cash flows from operating activities

        

Net income

 $2,728  $2,406 

Adjustments to reconcile net income to net cash provided by operations:

        

Depreciation

  466   398 

Amortization of core deposit intangible

  105   134 

Accretion of loan discount and deposit premium, net

  (32)  (170)

(Recovery of) provision for credit losses

  (106)  137 

Deferred income taxes

  (80)  224 

Accretion of discount on securities, net of amortization of premiums

  33   81 

Deferred compensation

  38   41 

Share-based compensation

  20   15 

Loss on sale of other real estate owned

  6   - 

Life insurance income

  -   (217)

Changes in assets and liabilities:

        

Cash value of life insurance

  (139)  (127)

Accrued interest receivable

  91   (78)

Other assets

  583   (1,475)

Accrued interest payable

  166   26 

Other liabilities

  7,430   (560)

Net cash provided by operating activities

  11,309   835 
         

Cash flows from investing activities

        

Activity in available for sale securities:

        

Purchases

  -   (33,010)

Maturities/calls/paydowns

  1,766   3,857 

(Purchases) redemption of restricted equity securities

  (1,064)  21 

Net increase in loans

  (9,703)  (13,920)

Purchases of life insurance contracts

  -   (3,500)

Proceeds from life insurance contracts

  -   496 

Proceeds from sale of other real estate owned

  229   - 

Purchases of property and equipment

  (389)  (1,989)

Net cash used in investing activities

  (9,161)  (48,045)
         

Cash flows from financing activities

        

Net (decrease) increase in deposits

  (14,868)  22,924 

FHLB advances

  25,000   - 

Prepayment of FHLB advances

  -   (5,000)

Common stock repurchased

  (113)  - 

Dividends paid

  (1,180)  (843)

Net cash provided by financing activities

  8,839   17,081 

Net increase (decrease) in cash and cash equivalents

  10,987   (30,129)
         

Cash and cash equivalents, beginning

  31,061   115,646 

Cash and cash equivalents, ending

 $42,048  $85,517 

 

See Notes to Consolidated Financial Statements

 

7


 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows, continued

For the Three Months ended March 31, 2023 and 2022


 

  

Three Months Ended

 
  

March 31,

 

(dollars in thousands)

 

2023

  

2022

 
  

(Unaudited)

  

(Unaudited)

 

Supplemental disclosure of cash flow information

        

Interest paid

 $897  $466 

Taxes paid

 $-  $- 
         

Supplemental disclosure of noncash investing activities

        

Effect on equity of change in net unrealized gain (loss) on available for sale securities

 $2,628  $(7,388)

Right-of-use assets obtained in exchange for new operating lease liabilities

 $-  $- 
Cumulative effect of adoption of credit losses standard, net of tax $(710) $- 

 

 

See Notes to Consolidated Financial Statements

 

8


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 1. Organization and Summary of Significant Accounting Policies

 

Organization

 

Skyline Bankshares, Inc. (formerly Parkway Acquisition Corp.) (the “Company”) is a bank holding company headquartered in Floyd, Virginia.  The Company offers a wide range of retail and commercial banking services through its wholly-owned bank subsidiary, Skyline National Bank (the “Bank”).  On January 1, 2023, the Company changed its name from Parkway Acquisition Corp. to Skyline Bankshares, Inc. to align its brand across the entire organization. 

 

The Company was incorporated as a Virginia corporation on November 2, 2015.  The Company was formed as a business combination shell company for the purpose of completing a business combination transaction between Grayson Bankshares, Inc. (“Grayson”) and Cardinal Bankshares Corporation (“Cardinal”). On November 6, 2015, Grayson, Cardinal and the Company entered into an agreement pursuant to which Grayson and Cardinal merged with and into the Company, with the Company as the surviving corporation (the “Cardinal merger”).  The merger agreement established exchange ratios under which each share of Grayson common stock was converted to the right to receive 1.76 shares of common stock of the Company, while each share of Cardinal common stock was converted to the right to receive 1.30 shares of common stock of the Company.  The exchange ratios resulted in Grayson shareholders receiving approximately 60% of the newly issued shares of the Company and Cardinal shareholders receiving approximately 40% of the newly issued shares of the Company.  The Cardinal merger was completed on July 1, 2016. Grayson was considered the acquiror and Cardinal was considered the acquiree in the transaction for accounting purposes.  Upon completion of the Cardinal merger, the Bank of Floyd (“Floyd”), a wholly-owned subsidiary of Cardinal, was merged with and into the Bank (formerly Grayson National Bank), a wholly-owned subsidiary of Grayson.  Effective March 13, 2017, the Bank changed its name to Skyline National Bank. 

 

On March 1, 2018, the Company entered into a definitive agreement pursuant to which the Company acquired Great State Bank (“Great State”), based in Wilkesboro, North Carolina. The agreement provided for the merger of Great State with and into the Bank, with the Bank as the surviving bank (the “Great State merger”). The transaction closed and the merger became effective on July 1, 2018. Each share of Great State common stock was converted into the right to receive 1.21 shares of the Company’s common stock. The Company issued 1,191,899 shares and recognized $15.5 million in surplus in the Great State merger. The Company was considered the acquiror and Great State was considered the acquiree in the transaction for accounting purposes.

 

The Bank was organized under the laws of the United States in 1900 and now serves the Virginia counties of Grayson, Floyd, Carroll, Wythe, Pulaski, Montgomery and Roanoke, and the North Carolina counties of Alleghany, Ashe, Burke, Caldwell, Catawba, Cleveland, Davie, Watauga, Wilkes, and Yadkin, and the surrounding areas, through twenty-five full-service banking offices. As a Federal Deposit Insurance Corporation (“FDIC”) insured national banking association, the Bank is subject to regulation by the Comptroller of the Currency and the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System.

 

The consolidated financial statements as of March 31, 2023 and for the three-month periods ended March 31, 2023 and 2022 included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s consolidated financial position, results of operations, changes in stockholders’ equity and cash flows for such interim periods. Management believes that all interim period adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, 2022, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year.

 

9

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Critical Accounting Policies

 

Management believes the policies with respect to the methodology for the determination of the allowance for credit losses, and asset impairment judgments, such as the recoverability of intangible assets and other-than-temporary impairment of investment securities, involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and the Bank, which is wholly owned. All significant, intercompany transactions and balances have been eliminated in consolidation.

 

Business Segments

 

The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.

 

Business Combinations

 

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business, or acquires equity interests in one or more other entities that are businesses and obtains control over those entities. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired entity are recorded at their respective fair values as of the closing date of the acquisition. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in our consolidated results from the closing date of the merger, and prior periods are not restated. No allowance for credit losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding future credit losses. The fair value estimates associated with the acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for credit and foreclosed real estate losses, management obtains independent appraisals for significant properties.

 

10

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Use of Estimates, continued

 

Substantially all of the Bank’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse, but influenced to an extent by the manufacturing and agricultural segments.

 

While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Bank’s allowances for loan and foreclosed real estate losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term.

 

The Company seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. The Company’s tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy.

 

Accounting for pension benefits, costs and related liabilities are developed using actuarial valuations. These valuations include key assumptions determined by management, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension costs may occur in the future due to changes in these assumptions.

 

Cash and Cash Equivalents

 

For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from banks (including cash items in process of collection), interest-bearing deposits with banks and federal funds sold.

 

Trading Securities

 

The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.

 

Securities Held to Maturity

 

Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at amortized cost. The Company does not currently hold any securities classified as held to maturity.

 

Securities Available for Sale

 

Available for sale securities are reported at fair value and consist of mortgage-backed, U.S. government agencies, corporate, and state and municipal securities not classified as trading securities or as held to maturity securities.

 

Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of accumulated other comprehensive income. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity for discounts and the earlier of call date or maturity for premiums.

 

11

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Accounting Standards Adopted in 2023

 

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated (“PCD”) loans will receive an initial allowance at the acquisition date that represents an adjustment to the amortized cost basis of the loan, with no impact to earnings.

 

In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

 

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures.  The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $592 thousand, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $313 thousand, which is recorded within Other Liabilities.  The Company recorded a net decrease to retained earnings of $710 thousand as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded.  Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

 

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed necessary.

 

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

 

The allowance for credit losses is established as losses are estimated to have occurred through a provision for credit losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance, or portion thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

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

 

12

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Allowance for Credit Losses Available for Sale Securities

 

For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

 

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

 

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit loss related to the available for sale portfolio.

 

Accrued interest receivable on available for sale debt securities totaled $611 thousand at March 31, 2023 and was excluded from the estimate of credit losses.

 

Loans Receivable

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.3 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

 

The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.

 

All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.

 

13

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Purchased Credit Deteriorated (PCD) Loans

 

Upon adoption of ASC 326, loans that were designated as Purchased Credit Impaired loans under the previous accounting guidance were classified as PCD loans without reassessment.

 

In future acquisitions, the Company may purchase loans, some of which have experienced more than insignificant credit deterioration since origination. In those cases, the Company will consider internal loan grades, delinquency status and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at the amount paid. An initial allowance for credit loss is determined using the same methodology as other loans held for investment, but with no impact to earnings. The initial allowance for credit loss determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and allowance for credit loss becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-PCD loans, with changes to the allowance for credit loss recorded through provision expense.

 

Allowance for Credit Losses Loans

 

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.

 

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

 

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist.  The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a Lifetime of Probability of Default / Loss Given Default (“Lifetime PD/LGD”) methodology because of the historical loss information the Company has on its loan portfolio, which is less subjective in nature, than the other methodologies available.  In addition, this methodology is less reliant on qualitative factors versus the other methodologies and the previously used incurred loss model.

 

 

Construction and development loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for or supply of the property being constructed.

 

 

Farmland loans are loans secured by farmland and improvements thereon, as evidenced by mortgages or other liens.  Farmland includes all land known to be used or usable for agricultural purposes, such as crop and livestock production.  Farmland includes grazing or pasture land, whether tillable or not and whether wooded or not.  Primary source of repayment for these loans is the income of the borrower.  The condition of the local economy is an important indicator of risk for this segment.  The state of the real estate market, in regards to farmland, can also have a significant impact on this segment because low demand and/or declining values can limit the ability of borrowers to sell a property and satisfy the debt.

 

14

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Allowance for Credit Losses Loans, continued

 

 

Residential loans are loans secured by first and second liens such as home equity loans, home equity lines of credit, 1-4 family residential mortgages, including purchased money mortgages, as well as multifamily units.  The primary source of repayment for these loans is the income of the borrower.  The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment.  The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

 

 

Commercial mortgage loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, retail facilities, and office space.  Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans.  The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business.

 

 

Commercial & agricultural loans are made to operating companies, manufacturers, or farmers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the borrower is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

 

 

Consumer and other loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured. This segment includes auto loans and unsecured loans and lines. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. Also included in this category is loans made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment. These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company. The primary repayment source for these loans include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority. The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment. The ability of each municipality to increase taxes and fees to offset debt service requirements give this type of loan a very low risk profile in the continuum of the Company’s loan portfolio.

 

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.

 

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate.

 

15

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Allowance for Credit Losses Unfunded Commitments

 

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

 

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s income statements.  The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees.  The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

 

Small Business Administration Paycheck Protection Program

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) established the Small Business Administration Paycheck Protection Program (“SBA-PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program, administered directly by the SBA.  On December 27, 2020 the Consolidated Appropriations Act (“CAA”), 2021 was signed into law.  The CAA provided several amendments to the SBA-PPP, including additional funding for first and second draws of SBA-PPP loans up to May 31, 2021.  The Company is a participant in the SBA-PPP.  See Note 3 Loans Receivable for more information.

 

The SBA-PPP is one of the centerpieces of the CARES Act. Overseen by the U.S. Treasury Department, the SBA-PPP offered cash-flow assistance to nonprofit and small business employers through guaranteed loans for expenses incurred between February 15, 2020, and August 8, 2020. Borrowers are eligible for forgiveness of principal and accrued interest on SBA-PPP loans to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period between eight and 24-weeks after the loan is made as long as the borrower retains its employees and their compensation levels. The CARES Act authorized the SBA to temporarily guarantee these loans.

 

As a qualified SBA lender, we were automatically authorized to originate SBA-PPP loans and began taking applications on April 3, 2020. An eligible business could apply for a SBA-PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. SBA-PPP loans have: (a) an interest rate of 1.0%, (b) a two-year or five-year term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the SBA-PPP loans made to eligible borrowers. The entire principal amount of the borrower’s SBA-PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the SBA-PPP, subject to certain eligibility requirements and conditions.

 

SBA-PPP loan balances are included as a part of the commercial & agricultural loans line item in the loan disclosures found in Notes 3 and 4 to the consolidated financial statements.  Gross SBA-PPP loans totaling $68 thousand with net deferred fees of $7 thousand remained on the balance sheet as of March 31, 2023.  Gross SBA-PPP loans totaling $79 thousand with net deferred fees of $8 thousand remained on the balance sheet at December 31, 2022.  These fees, net of direct costs relating to the origination of these loans, have been deferred and are being amortized over the life of the loans as an adjustment to yield using the straight-line method.  Loan forgiveness payments will be treated as prepayments and recognized as they occur.

 

The allowance for credit losses for SBA-PPP loans originated during 2021 and 2020 were separately evaluated given the explicit government guarantee. This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore these loans were assigned a zero expected credit loss in the allowance for credit losses.

 

16

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Property and Equipment

 

Land is carried at cost. Bank premises, furniture and equipment are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:

 

  Years 
      
Buildings and improvements 10-40 
Furniture and equipment 5-12 

 

Share-Based Compensation

 

The Parkway Acquisition Corp. 2020 Equity Incentive Plan (the “Plan”) was adopted by the Board of Directors of the Company on March 17, 2020 and approved by the Company’s shareholders on August 18, 2020. The Plan permits the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, and stock awards to key employees and non-employee directors of the Company or its subsidiaries.

 

As of March 31, 2023, only restricted stock awards have been issued to key employees and stock awards have been issued to non-employee directors. The fair value of the stock awards or restricted stock is determined based on the closing price of the Company’s common stock on the date of grant.  The Company recognizes compensation expense related to restricted stock on a straight-line basis over the vesting period for service-based awards. See additional discussion of share-based compensation in Note 9 to the consolidated financial statements.

 

Other Real Estate Owned

 

Other real estate owned represents properties acquired through, or in lieu of, loan foreclosure and former branch sites that have been closed and for which there are no intentions to re-open or otherwise use the location. These properties are to be sold and are initially recorded at fair value less anticipated cost to sell, establishing a new cost basis. After acquisition, valuations are periodically performed by management and the other real estate owned is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses on the consolidated statements of income.

 

Pension Plan

 

Prior to the Cardinal merger, both the Bank and Floyd had qualified noncontributory defined benefit pension plans in place which covered substantially all of each bank’s employees.  The benefits in each plan are primarily based on years of service and earnings.  Both the Bank’s and Floyd’s plans were amended to freeze benefit accruals for all eligible employees prior to the effective date of the Cardinal merger. The Bank’s plan is a single-employer plan, the funded status of which is measured as the difference between the fair value of plan assets and the projected benefit obligation.  Floyd’s plan is a multi-employer plan for accounting purposes and is a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.

 

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

 

17

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Goodwill and Other Intangible Assets

 

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquire, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected November 1 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

 

Other intangible assets consist of core deposit intangibles that represent the value of long-term deposit relationships acquired in a business combination. Core deposit intangibles are amortized over the estimated useful lives of the deposit accounts acquired. The core deposit intangible as a result of the Cardinal merger, is amortized over an estimated useful life of twenty years on an accelerated basis. For the core deposit intangible as a result of the Great State merger, we used an estimated useful life of seven years on an accelerated basis for the amortization.

 

Cash Value of Life Insurance

 

The Bank is owner and beneficiary of life insurance policies on certain current and former employees and directors. The Company records these policies in the consolidated balance sheets at cash surrender value, with changes recorded in noninterest income in the consolidated statements of income.

 

Leases

 

We have performed an evaluation of our leasing contracts and activities.  We have developed our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments.  There was not a material change to the timing of expense recognition.  See additional discussion of leases in Note 8 to the consolidated financial statements.

 

Income Taxes

 

Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes.  Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

18

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Revenue Recognition

 

Service Charges on Deposit Accounts - Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, wire transfer fees and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. Wire transfer fees, overdraft and nonsufficient funds fees, and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Fees for these services for the three months ended March 31, 2023 and 2022 amounted to $497 thousand and $436 thousand, respectively.

 

Mortgage Origination Fees Mortgage origination fees consist of commissions received on mortgage loans closed in the secondary market. The Company acts as an intermediary between the Company’s customer and companies that specialize in mortgage lending in the secondary market. The Company’s performance obligation is generally satisfied when the mortgage loan is closed and funded and the Company receives its commission at that time. Fees for these services for the three months ended March 31, 2023 and 2022 amounted to $84 thousand and $166 thousand, respectively.

 

Other Service Charges and Fees - Other service charges include safety deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. In addition, the following items are also included in other service charges and fees on the consolidated statements of income:

 

 

ATM, Credit and Debit Card Fees - ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or Mastercard. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for ATM fees, interchange fee income, and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Fees for these services for the three months ended March 31, 2023 and 2022 amounted to $697 thousand and $570 thousand, respectively.

 

 

Insurance and Investment - Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. For the three months ended March 31, 2023 and 2022 the Company received $17 thousand and $13 thousand, respectively in income from these services.

 

19

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Advertising Expense

 

The Company expenses advertising costs as they are incurred. Advertising expense for the three months ended March 31, 2023 and 2022 amounted to $135 thousand and $145 thousand, respectively.

 

Basic Earnings per Share

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. For the three months ended March 31, 2023 and 2022, there were no dilutive instruments.

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and changes in the funded status of the pension plan which are also recognized as separate components of equity. The accumulated balances related to each component of other comprehensive income (loss), net of tax, are as follows:

 

          
  Unrealized Gains       
  And (Losses)       
  On Available for  Defined Benefit    
(dollars in thousands) 

Sale Securities

  

Pension Items

  Total 
Balance, December 31, 2021 $(1,477) $(662) $(2,139)
Other comprehensive loss before reclassifications  (7,388)  -   (7,388)
Amounts reclassified from accumulated other comprehensive income, net of tax  -   -   - 
Balance March 31, 2022 $(8,865) $(662) $(9,527)
             
Balance, December 31, 2022 $(20,942) $(1,964) $(22,906)
Other comprehensive income before reclassifications  2,628   -   2,628 

Amounts reclassified from accumulated other comprehensive income, net of tax

  -   -   - 
Balance March 31, 2023 $(18,314) $(1,964) $(20,278)

 

Off-Balance Sheet Credit Related Financial Instruments

 

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under line of credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

 

Fair Value of Financial Instruments

 

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 11. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

 

Reclassification

 

Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current presentation. Net income and stockholders’ equity previously reported were not affected by these reclassifications.

 

20

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Recent Accounting Pronouncements

 

The following accounting standards may affect the future financial reporting by the Company:

 

In June 2022, the FASB issued amendments to clarify the guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

 

In December 2022, the FASB issued amendments to extend the period of time preparers can use the reference rate reform relief guidance under ASC Topic 848 from December 31, 2022, to December 31, 2024, to address the fact that all London Interbank Offered Rate (“LIBOR”) tenors were not discontinued as of December 31, 2021, and some tenors will be published until June 2023. The amendments are effective immediately for all entities and applied prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

21

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 2. Investment Securities

 

Investment securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values at March 31, 2023 and December 31, 2022 is summarized in the following table. There was no allowance for credit losses on available for sale securities as of March 31, 2023.

 

  Amortized  Unrealized  Unrealized  Fair 

(dollars in thousands)

 

Cost

  

Gains

  

Losses

  

Value

 

March 31, 2023

                

Available for sale:

                

U.S. Treasury securities

 $4,984  $-  $(111) $4,873 

U.S. Government agencies

  25,060   -   (3,746)  21,314 

Mortgage-backed securities

  76,938   -   (10,167)  66,771 

Corporate securities

  1,500   -   (48)  1,452 

State and municipal securities

  51,379   21   (9,132)  42,268 
  $159,861  $21  $(23,204) $136,678 

December 31, 2022

                

Available for sale:

                

U.S. Treasury securities

 $4,980  $-  $(146) $4,834 

U.S. Government agencies

  25,025   -   (4,179)  20,846 

Mortgage-backed securities

  78,755   -   (11,485)  67,270 

Corporate securities

  1,500   -   -   1,500 

State and municipal securities

  51,400   16   (10,715)  40,701 
  $161,660  $16  $(26,525) $135,151 

 

Restricted equity securities totaled $3.0 million at March 31, 2023 and $2.0 million at December 31, 2022.  Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (“FHLB”), CBB Financial Corp., Pacific Coast Bankers Bank, and the Federal Reserve Bank of Richmond, all of which are carried at cost.  All of these entities are upstream correspondents of the Bank.  The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow money.  The Federal Reserve requires banks to purchase stock as a condition for membership in the Federal Reserve System.  The Bank’s stock in CBB Financial Corp. and Pacific Coast Bankers Bank is restricted only in the fact that the stock may only be repurchased by the respective banks.

 

The following tables details unrealized losses and related fair values in the Company’s available for sale investment securities portfolios for which an allowance for credit losses has not been recorded at March 31, 2023 and was not required at December 31, 2022. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2023 and December 31, 2022.

 

  

Less Than 12 Months

  

12 Months or More

  

Total

 

(dollars in thousands)

 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 

March 31, 2023

                        

Available for sale:

                        

U.S. Treasury securities

 $4,873  $(111) $-  $-   4,873  $(111)

U.S. Government agencies

  4,546   (138)  16,768   (3,608)  21,314   (3,746)

Mortgage-backed securities

  13,894   (1,064)  52,871   (9,103)  66,765   (10,167)

Corporate securities

  1,452   (48)  -   -   1,452   (48)

State and municipal securities

  5,734   (237)  35,553   (8,895)  41,287   (9,132)

Total securities available for sale

 $30,499  $(1,598) $105,192  $(21,606) $135,691  $(23,204)
                         

December 31, 2022

                        

Available for sale:

                        

U.S. Treasury securities

 $4,834  $(146) $-  $-  $4,834  $(146)

U.S. Government agencies

  8,563   (1,227)  12,282   (2,952)  20,845   (4,179)

Mortgage-backed securities

  27,796   (2,756)  39,467   (8,729)  67,263   (11,485)

State and municipal securities

  15,234   (2,633)  24,492   (8,082)  39,726   (10,715)

Total securities available for sale

 $56,427  $(6,762) $76,241  $(19,763) $132,668  $(26,525)

 

22

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 2. Investment Securities, continued

 

At March 31, 2023, 81 investment securities with unrealized losses had depreciated 14.60 percent from their total amortized cost basis.  Management evaluates all available for sale investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.  If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

 

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors.  In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security.  If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis.  Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

 

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense.  Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met.  At March 31, 2023, there was no allowance for credit losses related to the available for sale portfolio.

 

There were no sales of investment securities available for sale for the three-month periods ended March 31, 2023 and 2022, respectively. There were no called securities for the three-month period ended March 31, 2023. Gross proceeds from called securities totaled $720 thousand for the three-month period ended March 31, 2022. Gains and losses on the sale of investment securities are recorded on the trade date and are determined using the specific identification method. There were no realized gains and losses for the three-month periods ended March 31, 2023 and 2022.

 

There were no securities transferred between the available for sale and held to maturity portfolios or other sales of held to maturity securities during the periods presented. In the future management may elect to classify securities as held to maturity based upon such considerations as the nature of the security, the Bank’s ability to hold the security until maturity, and general economic conditions.

 

The scheduled maturities of securities available for sale at March 31, 2023, were as follows:

 

  Amortized  Fair 

(dollars in thousands)

 

Cost

  

Value

 
         

Due in one year or less

 $-  $- 

Due after one year through five years

  13,517   13,082 

Due after five years through ten years

  74,959   64,868 

Due after ten years

  71,385   58,728 
  $159,861  $136,678 

 

Maturities of mortgage-backed securities are based on contractual amounts. Actual maturity will vary as loans underlying the securities are prepaid.

 

Investment securities with amortized cost of approximately $33.1 million and $33.7 million at March 31, 2023 and December 31, 2022, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

 

23

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 3. Loans Receivable

 

The major components of loans in the consolidated balance sheets at March 31, 2023 and December 31, 2022 are as follows:

 

(dollars in thousands)

 

2023

  

2022

 
         

Construction & development

 $50,956  $49,728 

Farmland

  23,487   23,688 

Residential

  365,832   358,526 

Commercial mortgage

  260,553   263,664 

Commercial & agricultural

  42,166   39,505 

Consumer & other

  21,621   19,761 

Total loans

  764,615   754,872 

Allowance for credit losses

  (6,819)  (6,248)

Loans, net of allowance for credit losses

 $757,796  $748,624 

 

Included in total loans above are deferred loan fees of $1.1 million and $1.1 million at March 31, 2023 and December 31, 2022, respectively. Deferred loan costs were $4.2 million and $4.1 million, at March 31, 2023 and December 31, 2022, respectively. Income from net deferred fees and costs is recognized over the lives of the respective loans as a yield adjustment. If loans repay prior to schedule maturities and unamortized fee or cost is recognized at that time.

 

The Company elected to exclude accrued interest receivable from the amortized cost basis of loans.  Accrued interest receivable related to loans totaled $2.3 million at March 31, 2023 and $2.3 million at December 31, 2022 and was reported in accrued interest receivable on the consolidated balance sheets. 

 

As of March 31, 2023 and December 31, 2022, substantially all of the Bank’s residential 1-4 family loans were pledged as collateral for borrowing lines at the FHLB.

 

 

Note 4. Allowance for Credit Losses

 

Allowance for Credit Losses - Loans

 

The following table summarizes the activity related to the allowance for credit losses for the three months ended March 31, 2023 under the CECL methodology.

 

(dollars in thousands)

 

Construction

&

Development

  

Farmland

  

Residential

  

Commercial

Mortgage

  

Commercial

&

Agricultural

  

Consumer

& Other

  

Total

 
                             

Balance, December 31, 2022

 $526  $259  $2,820  $2,197  $312  $134  $6,248 

Adjustment to allowance for adoption of

                            

ASU 2016-13

  408   (108)  279   (119)  84   48   592 

Charge-offs

  -   -   -   -   -   (34)  (34)

Recoveries

  1   29   -   8   1   7   46 

Provision

  15   (26)  10   (67)  11   24   (33)

Balance, March 31, 2023

 $950  $154  $3,109  $2,019  $408  $179  $6,819 

 

24

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Allowance for Credit Losses Loans, continued

 

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology.  The following tables are disclosures related to the allowance for loan losses in prior periods.

 

As noted in Note 1, the Company determined that SBA-PPP loans have zero expected credit losses and as such are excluded from the disclosures included in the following table. The following table presents activity in the allowance by loan category and information on the loans evaluated individually for impairment and collectively evaluated for impairment as of December 31, 2022 and March 31, 2022:

 

(dollars in thousands)

 

Construction

&

Development

  

Farmland

  

Residential

  

Commercial

Mortgage

  

Commercial

&

Agricultural

  

Consumer

& Other

  

Total

 

December 31, 2022

                            

Allowance for loan losses:

                            

Beginning Balance

 $484  $315  $2,521  $1,908  $321  $128  $5,677 

Charge-offs

  -   -   -   -   (14)  (114)  (128)

Recoveries

  3   -   12   8   30   40   93 

Provision

  39   (56)  287   281   (25)  80   606 

Ending Balance

 $526  $259  $2,820  $2,197  $312  $134  $6,248 
                             

Ending balance: individually evaluated for impairment

 $4  $-  $-  $-  $-  $-  $4 

Ending balance: collectively evaluated for impairment

 $522  $259  $2,820  $2,197  $312  $134  $6,244 
                             

Loans outstanding:

                            

Ending Balance

 $49,728  $23,688  $358,526  $263,664  $39,434  $19,761  $754,801 

Ending balance: individually evaluated for impairment

 $313  $-  $-  $382  $-  $-  $695 

Ending balance: collectively evaluated for impairment

 $49,415  $23,688  $358,410  $263,194  $39,434  $19,761  $753,902 

Ending balance: purchased credit impaired loans

 $-  $-  $116  $88  $-  $-  $204 

For the Three Months Ended March 31, 2022

          

Allowance for loan losses:

                            

Balance, December 31, 2021

 $484  $315  $2,521  $1,908  $321  $128  $5,677 

Charge-offs

  -   -   -   -   -   (25)  (25)

Recoveries

  1   -   -   -   1   6   8 

Provision

  47   (28)  52   51   (1)  16   137 

Balance, March 31, 2022

 $532  $287  $2,573  $1,959  $321  $125  $5,797 
                             

March 31, 2022

                            

Allowance for loan losses:

                            

Ending Balance

 $532  $287  $2,573  $1,959  $321  $125  $5,797 

Ending balance: individually evaluated for impairment

 $3  $7  $-  $-  $-  $-  $10 

Ending balance: collectively evaluated for impairment

 $529  $280  $2,573  $1,959  $321  $125  $5,787 

Ending balance: purchased credit impaired loans

 $-  $-  $-  $-  $-  $-  $- 
                             

Loans outstanding:

                            

Ending Balance

 $47,602  $23,690  $316,590  $233,907  $38,859  $24,214  $684,862 

Ending balance: individually evaluated for impairment

 $702  $262  $-  $403  $-  $-  $1,367 

Ending balance: collectively evaluated for impairment

 $46,900  $23,428  $316,460  $233,406  $38,813  $24,214  $683,221 

Ending balance: purchased credit impaired loans

 $-  $-  $130  $98  $46  $-  $274 

 

As of December 31, 2022 and March 31, 2022, the Bank had no unallocated reserves included in the allowance for loan losses.

 

25

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Credit Quality Indicators

 

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered “Substandard” if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. “Substandard” assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as “Doubtful” have all the weaknesses inherent in assets classified “Substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as "Loss” are those considered uncollectible, and of such little value that its continuance on the books is not warranted. As of March 31, 2023 and December 31, 2022, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.

 

Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.” Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. Loans that are currently performing and are of high quality are given a loan rating of “Pass”.

 

Loans are graded at origination and will be considered for potential downgrades as the borrower experiences financial difficulties.  Loan officers meet periodically to discuss their past due credits and loan downgrades could occur at that time.  Commercial loans of over $1.0 million are reviewed on an annual basis, and that review could result in downgrades or in some cases, upgrades.  In addition, the Company engages a third-party loan review each quarter.  The results of these loan reviews could result in upgrades or downgrades.

 

The following table presents the Company’s recorded investment in loans by credit quality indicators as of March 31, 2023 and December 31, 2022:

 

  

Loan Grades

     

(dollars in thousands)

 

 

Pass

  

 

Watch

  

Special

Mention

  

 

Substandard

  

 

Total

 

March 31, 2023

                    

Real Estate Secured:

                    

Construction & development

 $50,623  $-  $-  $333  $50,956 

Farmland

  20,996   809   757   925   23,487 

Residential

  364,045   940   28   819   365,832 

Commercial mortgage

  256,446   2,118   152   1,837   260,553 

Non-Real Estate Secured:

                    

Commercial & agricultural

  41,903   12   46   205   42,166 

Consumer & other

  21,621   -   -   -   21,621 

Total

 $755,634  $3,879  $983  $4,119  $764,615 
                     

December 31, 2022

                    

Real Estate Secured:

                    

Construction & development

 $49,384  $-  $-  $344  $49,728 

Farmland

  21,156   814   468   1,250   23,688 

Residential

  356,327   947   499   753   358,526 

Commercial mortgage

  259,529   2,130   153   1,852   263,664 

Non-Real Estate Secured:

                    

Commercial & agricultural

  39,410   13   -   82   39,505 

Consumer & other

  19,761   -   -   -   19,761 

Total

 $745,567  $3,904  $1,120  $4,281  $754,872 

 

 

26

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Credit Quality Indicators, continued

 

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023:

 

         Revolving     
         Loans     
  

Term Loans by Year of Origination

      

Converted

     

(dollars in thousands)

 

2023

  

2022

  

2021

  

2020

  

2019

  

Prior

  

Revolving

  

To Term

  

Total

 
                                     

Construction & development

                                    

Pass

 $2,086  $15,077  $15,446  $1,963  $2,702  $6,702  $6,647  $-  $50,623 

Watch

  -   -   -   -   -   -   -   -   - 

Special Mention

  -   -   -   -   -   -   -   -   - 

Substandard

  -   -   30   -   -   303   -   -   333 

Total construction & development

 $2,086  $15,077  $15,476  $1,963  $2,702  $7,005  $6,647  $-  $50,956 
                                     

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Farmland

                                    

Pass

 $1,843  $2,559  $1,842  $2,894  $1,435  $9,410  $1,013  $-  $20,996 

Watch

  -   -   -   -   -   809   -   -   809 

Special Mention

  -   -   -   -   -   657   100   -   757 

Substandard

  -   -   -   -   -   911   14   -   925 

Total farmland

 $1,843  $2,559  $1,842  $2,894  $1,435  $11,787  $1,127  $-  $23,487 
                                     

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Residential

                                    

Pass

 $11,246  $96,493  $60,457  $50,384  $19,395  $71,618  $54,452  $-  $364,045 

Watch

  -   -   -   229   -   711   -   -   940 

Special Mention

  -   -   -   -   -   28   -   -   28 

Substandard

  -   -   -   -   -   819   -   -   819 

Total residential

 $11,246  $96,493  $60,457  $50,613  $19,395  $73,176  $54,452  $-  $365,832 
                                     

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Commercial mortgage

                                    

Pass

 $5,471  $56,461  $52,027  $49,848  $24,350  $66,632  $1,657  $-  $256,446 

Watch

  -   -   -   2,118   -   -   -   -   2,118 

Special Mention

  -   -   -   -   -   152   -   -   152 

Substandard

  -   -   86   -   -   1,393   358   -   1,837 

Total residential

 $5,471  $56,461  $52,113  $51,966  $24,350  $68,177  $2,015  $-  $260,553 
                                     

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Commercial & agricultural

                                    

Pass

 $3,540  $8,658  $15,300  $2,460  $982  $2,347  $8,581  $35  $41,903 

Watch

  -   -   -   12   -   -   -   -   12 

Special Mention

  -   -   -   -   45   1   -   -   46 

Substandard

  -   6   -   -   32   167   -   -   205 

Total commercial & agricultural

 $3,540  $8,664  $15,300  $2,472  $1,059  $2,515  $8,581  $35  $42,166 
                                     

Current period gross write-offs

 $-  $-  $-  $-  $-  $-  $-  $-  $- 
                                     

Consumer & other

                                    

Pass

 $6,574  $4,313  $4,793  $458  $977  $3,642  $864  $-  $21,621 

Watch

  -   -   -   -   -   -   -   -   - 

Special Mention

  -   -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   -   - 

Total consumer & other

 $6,574  $4,313  $4,793  $458  $977  $3,642  $864  $-  $21,621 
                                     

Current period gross write-offs

 $-  $20  $4  $1  $2  $7  $-  $-  $34 
                                     

Total loans

                                    

Pass

 $30,760  $183,561  $149,865  $108,007  $49,841  $160,351  $73,214  $35  $755,634 

Watch

  -   -   -   2,359   -   1,520   -   -   3,879 

Special Mention

  -   -   -   -   45   838   100   -   983 

Substandard

  -   6   116   -   32   3,593   372   -   4,119 

Total loans

 $30,760  $183,567  $149,981  $110,366  $49,918  $166,302  $73,686  $35  $764,615 
                                     

Total Current period gross write-offs

 $-  $20  $4  $1  $2  $7  $-  $-  $34 

 

27

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Nonaccrual Loans

 

The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated:

 

  

CECL

  

Incurred Loss

 
  

March 31, 2023

  

December 31,

2022

 

(dollars in thousands)

 

Nonaccrual

Loans with no

Allowance

  

Nonaccrual

Loans with an

Allowance

  

Total

Nonaccrual

Loans

  

Nonaccrual

Loans

 
                 

Construction & development

 $303  $30  $333  $344 

Farmland

  -   89   89   94 

Residential

  -   635   635   565 

Commercial mortgage

  370   238   608   622 

Commercial & agricultural

  -   8   8   9 

Consumer & other

  -   -   -   - 

Total

 $673  $1,000  $1,673  $1,634 

 

The following table represents the accrued interest receivables written off on nonaccrual loans by reversing interest income during the three months ended March 31, 2023:

 

(dollars in thousands)

 

For the Three

Months Ended

March 31, 2023

 
     

Construction & development

 $- 

Farmland

  - 

Residential

  16 

Commercial mortgage

  - 

Commercial & agricultural

  - 

SBA-PPP

  - 

Consumer & other

  - 

Total Loans

 $16 

 

28

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Aging Analysis

 

The following table presents an aging analysis of past due loans by category as of March 31, 2023:

 

(dollars in thousands)

 

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90+ Days

Past Due

and Still

Accruing

  

Nonaccrual

Loans

  

Current

  

Total

Loans

 
                         

March 31, 2023

                        

Real Estate Secured:

                        

Construction & development

 $-  $-  $-  $333  $50,623  $50,956 

Farmland

  262   -   -   89   23,136   23,487 

Residential

  213   50   -   635   364,934   365,832 

Commercial mortgage

  31   -   -   608   259,914   260,553 

Non-Real Estate Secured:

                        

Commercial & agricultural

  -   17   -   8   42,141   42,166 

Consumer & other

  14   -   -   -   21,607   21,621 

Total

 $520  $67  $-  $1,673  $762,355  $764,615 

 

The following table presents an aging analysis of past due loans by category as December 31, 2022:

 

(dollars in thousands)

 

30-59 Days

Past Due

  

60-89 Days

Past Due

  

90 Days

or More

Past Due

  

Total

Past Due

  

Current

  

Total

Loans

  

90+ Days

Past Due

and Still

Accruing

  

Nonaccrual

Loans

 
                                 

December 31, 2022 (1)

                                

Real Estate Secured:

                                

Construction & development

 $-  $30  $313  $343  $49,385  $49,728  $-  $344 

Farmland

  4   -   -   4   23,684   23,688   -   94 

Residential

  94   315   240   649   357,877   358,526   -   565 

Commercial mortgage

  44   86   46   176   263,488   263,664   -   622 

Non-Real Estate Secured:

                                

Commercial & agricultural

  -   -   9   9   39,496   39,505   -   9 

Consumer & other

  5   -   -   5   19,756   19,761   -   - 

Total

 $147  $431  $608  $1,186  $753,686  $754,872  $-  $1,634 

 

(1) Nonaccrual loans are included in the applicable past due column based on number of days past due as of December 31, 2022.

 

29

 
 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Collateral Dependent Loans

 

Loan relationships graded “Substandard” with a loan balance of more than $250,000 are individually evaluated. The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty.  The underlying collateral can vary based upon the type of loan.  The following provides more detail about the types of collateral that secure collateral dependent loans:

 

 

Construction and development loans include both commercial and consumer loans.  Commercial loans are typically secured by first liens on raw land acquired for the construction of owner occupied commercial real estate or non-owner occupied commercial real estate.  Consumer loans are typically secured by a first lien on raw land acquired for the construction of residential homes for which a binding sales contract exists.  

 

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

 

Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

 

Home equity lines of credit are generally secured by second mortgages on residential real estate property.

 

Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

 

The following table details the amortized cost of collateral dependent loans as of March 31, 2023:

 

(dollars in thousands)

 

March 31, 2023

 
     

Construction & development

 $- 

Farmland

  - 

Residential

  - 

Commercial mortgage

  370 

Commercial & agricultural

  - 

Consumer & other

  - 

Total Loans

 $370 

 

Purchased Credit Deteriorated

 

There were no purchased credit deteriorated loans acquired during the three months ended March 31, 2023 and during the year ended December 31, 2022.

 

During 2018, the Company acquired loans as a result of the Great State merger, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  There was no accretable yield on purchased credit impaired loans for the period presented.  The carrying amount of those loans at March 31, 2023 and December 31, 2022 are as follows:

 

 

(dollars in thousands)

 

2023

  

2022

 
         

Residential

 $112  $116 

Commercial mortgage

  84   88 

Outstanding balance

 $196  $204 
         

Carrying amount

 $196  $204 

 

30

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Impaired Loans

 

Prior to the adoption of ASU 2016-13, a loan was considered impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. Smaller balance homogenous loans may be collectively evaluated for impairment. Non-homogenous impaired loans are either measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent, or measured based on the present value of expected future cash flows if not collateral dependent. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party appraisals, as well as independent fair market value assessments in determining the estimated fair value of particular properties. In addition, as certain of these third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

 

As of December 31, 2022, the recorded investment in impaired loans totaled $3.0 million. The total amount of collateral-dependent impaired loans at December 31, 2022 was $695 thousand. As of December 31, 2022, $584 thousand of the recorded investment in impaired loans did not have a related allowance. The Bank had $3.0 million in troubled debt restructured loans included in impaired loans at December 31, 2022.

 

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.

 

Management collectively evaluated performing TDRs with a loan balance of $250,000 or less for impairment.  As of December 31, 2022, $2.3 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have $115 thousand of related allowance.

 

31

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Impaired Loans, continued

 

The following table is a summary of information related to impaired loans as of December 31, 2022:

 

Impaired Loans

(dollars in thousands)

 

Recorded

Investment1

  

Unpaid

Principal

Balance

  

Related

Allowance

 
             

December 31, 2022

            

With no related allowance recorded:

            

Construction & development

 $203  $203  $- 

Farmland

  -   -   - 

Residential

  -   -   - 

Commercial mortgage

  381   395   - 

Commercial & agricultural

  -   -   - 

Consumer & other

  -   -   - 

Subtotal

  584   598   - 
             

With an allowance recorded:

            

Construction & development

  119   119   4 

Farmland

  355   371   15 

Residential

  1,885   2,043   96 

Commercial mortgage

  66   66   3 

Commercial & agricultural

  24   24   1 

Consumer & other

  -   -   - 

Subtotal

  2,449   2,623   119 
             

Totals:

            

Construction & development

  322   322   4 

Farmland

  355   371   15 

Residential

  1,885   2,043   96 

Commercial mortgage

  447   461   3 

Commercial & agricultural

  24   24   1 

Consumer & other

  -   -   - 

Total

 $3,033  $3,221  $119 

 

1     Recorded investment is the loan balance, net of any charge-offs

 

The following table shows the average recorded investment and interest income recognized for impaired loans for the three months ended March 31, 2022:

 

  

For the Three Months Ended

 
  

March 31, 2022

 

(dollars in thousands)

 

Average

Recorded

Investment

  

Interest

Income

Recognized

 
         

Construction & development

 $1,245  $10 

Farmland

  383   6 

Residential

  2,287   32 

Commercial mortgage

  70   1 

Commercial & agricultural

  31   - 

Consumer & other

  -   - 

Total

 $4,016  $49 

 

32

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Modifications Made to Borrowers Experiencing Financial Difficulty

 

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition.  The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.  The Company uses a lifetime of probability of default/loss given default model to determine the allowance for credit losses.  An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. There are no commitments to lend additional funds to borrowers experiencing financial difficulty.

 

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

 

In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the real estate loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction.

 

The following table shows the amortized cost basis as of March 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty:

 

  

Combination Term Extension & Interest Rate Reduction

  

Amortized

Cost

  

% of Total

Loan

   

Financial

(dollars in thousands)

 

Basis

  

Type

   

Effect

            

Construction & development

 $-   -%   

Farmland

  -   -%   

Residential

  9   0.00%  

Reduced interest rate from 8.75% to 5.75%. Added 3.86 years to the life of the loan, which resulted in reduced payment.

Commercial mortgage

  -   -%   

Commercial & agricultural

  -   -%   

Consumer & other

  -   -%   

Total

 $9        

 

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. There were no loans that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.

 

33

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Modifications Made to Borrowers Experiencing Financial Difficulty, continued

 

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months as of March 31, 2023:

 

  

Payment Status (Amortized Cost Basis)

 

(dollars in thousands)

 

Current

  

30-89 Days

Past Due

  

90+ Days

Past Due

 
             

Construction & development

 $-  $-  $- 

Farmland

  -   -   - 

Residential

  38   -   - 

Commercial mortgage

  -   -   - 

Commercial & agricultural

  -   -   - 

Consumer & other

  -   -   - 

Total

 $38  $-  $- 

 

Troubled Debt Restructuring

 

A troubled debt restructured loan is a loan for which the Bank, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider.

 

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals.

 

The following table sets forth information with respect to the Bank’s troubled debt restructurings as of March 31, 2022:

 

For the Three Months Ended March 31, 2022

(dollars in thousands)

 

TDRs identified during the period

  

TDRs identified in the last twelve

months that subsequently defaulted(1)

 
  

Number

of

contracts

  

Pre-

modification

outstanding

recorded

investment

  

Post-

modification

outstanding

recorded

investment

  

Number

of

contracts

  

Pre-

modification

outstanding

recorded

investment

  

Post-

modification

outstanding

recorded

investment

 
                         

Construction & development

  -  $-  $-   -  $-  $- 

Farmland

  -   -   -   -   -   - 

Residential

  1   50   50   -   -   - 

Commercial mortgage

  -   -   -   -   -   - 

Commercial & agricultural

  -   -   -   -   -   - 

Consumer & other

  -   -   -   -   -   - 

Total

  1  $50  $50   -  $-  $- 

 

(1) Loans past due 30 days or more are considered to be in default.

 

During the three months ended March 31, 2022, one loan was modified that was considered to be a TDR. Term concessions were granted and the interest rate changed from variable to fixed. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended March 31, 2022.

 

34

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 4. Allowance for Credit Losses, continued

 

Unfunded Commitments

 

The Company maintains a separate reserve for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheets. The reserve for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described above, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement.

 

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2023:

 

(dollars in thousands)

 

Total Allowance

for Credit Losses

Unfunded

Commitments

 
     

Balance, December 31, 2022

 $46 

Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13

  313 

Provision for unfunded commitments

  (73)

Balance, March 31, 2023

 $286 

 

35

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 5. Deposits

 

The following table presents the composition of deposits at March 31, 2023 and December 31, 2022:

 

  

March 31,

  

December 31,

 

(dollars in thousands)

 

2023

  

2022

 
         

Interest-bearing deposits:

        

Interest-bearing demand deposit accounts

 $135,566  $144,540 

Money market

  78,590   87,012 

Savings

  181,286   194,723 

Time deposits

  209,733   183,542 

Total interest-bearing deposits

  605,175   609,817 

Noninterest-bearing deposits

  300,280   310,510 

Total deposits

 $905,455  $920,327 

 

The aggregate amount of time deposits in denominations of more than $250 thousand at March 31, 2023 and December 31, 2022 was $63.2 million, and $49.5 million, respectively.  Estimated uninsured deposits totaled $261.9 million and $295.0 million at March 31, 2023 and December 31, 2022, respectively.  Uninsured amounts are estimated based on the portion of account balance in excess of FDIC insurance limits.    

 

 

Note 6. Employee Benefit Plan

 

The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees. Effective December 31, 2012, the pension plan was amended to freeze benefit accruals for all eligible employees. The following is a summary of net periodic pension costs for the three-month periods ended March 31, 2023 and 2022.

 

  

Three Months Ended March 31,

 

(dollars in thousands)

 

2023

  

2022

 
         

Interest cost

 $36  $36 

Expected return on plan assets

  (120)  (185)

Recognized net actuarial loss

  49   - 

Net periodic benefit cost

 $(35) $(149)

 

It has been Company practice to contribute the maximum tax-deductible amount each year as determined by the plan administrator. As a result of prior year contributions exceeding the minimum requirements, a Prefunding Balance existed as of December 31, 2022 and there is no required contribution for 2023. Based on this we do not anticipate making a contribution to the plan in 2023.

 

36

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 7. Goodwill and Intangible Assets

 

Goodwill

 

An analysis of goodwill during the three-month period ended March 31, 2023 and for the year ended December 31, 2022 is as follows:

 

  

March 31,

  

December 31,

 

(dollars in thousands)

 

2023

  

2022

 
         

Beginning of year

 $3,257  $3,257 

Impairment

  -   - 

End of the period

 $3,257  $3,257 

 

Intangible Assets

 

The following table presents the activity for the Company’s core deposit intangible assets, which are the only identifiable intangible assets subject to amortization. Core deposit intangibles at March 31, 2023 and December 31, 2022 are as follows:

 

  

March 31,

  

December 31,

 

(dollars in thousands)

 

2023

  

2022

 
         

Balance at beginning of year, net of accumulated amortization

 $1,286  $1,764 

Amortization expense

  (105)  (478)

Net book value

 $1,181  $1,286 

 

Aggregate amortization expense was $105 thousand and $134 thousand for the three-month periods ended March 31, 2023 and 2022, respectively.

 

The following table presents the estimated amortization expense of the core deposit intangible over the remaining useful life:

 

(dollars in thousands)

    
     

Nine months ending December 31, 2023

 $264 

For the year ending December 31, 2024

  262 

For the year ending December 31, 2025

  154 

For the year ending December 31, 2026

  97 

For the year ending December 31, 2027

  81 

Thereafter

  323 

Total

 $1,181 

 

 

37

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 8. Leases

 

The Company’s leases are recorded under ASC Topic 842,Leases”. We have performed an evaluation of our leasing contracts and activities. We have developed our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments.

 

Contracts are evaluated to determine whether they are or contain a lease in accordance with Topic 842. The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less. The Company renewed an operating lease during 2022 and recognized a right-of-use asset and lease liability on the renewal.

 

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. For our incremental borrowing rate, we used the Federal Home Loan Bank rate available at the time of lease inception. The right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. The contracts in which the Company is lessee are with parties external to the Company and not related parties. The Company’s lease right-of-use assets are included in other assets and the lease liabilities are included in other liabilities. The following tables present information about leases:

 

  

March 31,

  

December 31,

 

(dollars in thousands)

 

2023

  

2022

 
         

Lease liabilities

 $704  $739 

Right-of-use assets

 $704  $739 

Weighted average remaining lease term (years)

  5.39   5.59 

Weighted average discount rate

  2.77%  2.75%

 

  

Three Months Ended March 31,

 

(dollars in thousands)

 

2023

  

2022

 
         

Lease Expense

        

Operating lease expense

 $41  $38 

Short-term lease expense

  1   5 

Total lease expense

 $42  $43 
         

Cash paid for amounts included in lease liabilities

 $41  $38 

 

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liabilities:

 

(dollars in thousands)

    
     

Nine months ending December 31, 2023

 $113 

Twelve months ending December 31, 2024

  139 

Twelve months ending December 31, 2025

  143 

Twelve months ending December 31, 2026

  143 

Twelve months ending December 31, 2027

  107 

Thereafter

  114 

Total undiscounted cash flows

 $759 

Less discount

  (55)

Lease liabilities

 $704 

 

38

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 9. Share-Based Compensation

 

The Company’s 2020 Equity Incentive Plan (the “Plan”) was adopted by the Board of Directors of the Company on March 17, 2020 and approved by the Company’s shareholders on August 18, 2020.  The Equity Plan permits the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, and stock awards to key employees and non-employee directors of the Company or its subsidiaries. 

 

The purpose of the Equity Plan is to promote the success of the Company and its subsidiaries by providing incentives to key employees and non-employee directors that will promote the identification of their personal interests with the long-term financial success of the Company and with growth in shareholder value, consistent with the Company’s risk management practices. The Equity Plan is designed to provide flexibility to the Company, including its subsidiaries, in its ability to attract, retain the services of, and motivate key employees and non-employee directors upon whose judgment, interest, and special effort the successful conduct of its operation is largely dependent.

 

No award may be granted under the plan after March 16, 2030 and any Awards outstanding on such date shall remain valid in accordance with their terms. The Board of Directors shall have the right to terminate the Plan at any time pursuant to the terms of the Equity Plan. The Compensation Committee of the Board of Directors has been appointed to administer the Equity Plan. The maximum aggregate number of shares that may be issued pursuant to awards made under the Equity Plan shall not exceed 300,000 shares of common stock. As of March 31, 2023, 46,400 shares have been issued under the Equity Plan, leaving 253,600 shares available for future grants.

 

On February 18, 2022, 14,500 restricted stock awards were issued at a price of $13.00 per share. These awards vest 20% on December 15, 2022, 20% on December 15, 2023, 20% on December 15, 2024, 20% on December 15, 2025, and 20% on December 15, 2026. For the three months ended March 31, 2023 and 2022, $20 thousand and $15 thousand was recognized as compensation expense related to share-based compensation for restricted stock awards.

 

As of March 31, 2023, the unrecognized compensation expense related to unvested restricted stock awards was $211 thousand. The unrecognized compensation expense is expected to be recognized over a weighted average period of 3.03 years. The following table presents the activity for restricted stock:

 

          

Grant Date

 
          

Fair Value of

 
          

Restricted

 
          

Stock that

 
      

Weighted

  

Vested During

 
  

Number of

  

Average Grant

  

The Year

 
  

Shares

  

Date Fair Value

  

(in thousands)

 
             

Unvested as of December 31, 2021

  10,875  $11.30     

Granted

  14,500   13.00     

Vested

  (6,525)  12.13  $80 

Forfeited

  -   -     

Unvested as of December 31, 2022

  18,850  $12.38     

Granted

  -   -     

Vested

  -   -  $- 

Forfeited

  -   -     

Unvested as of March 31, 2023

  18,850  $12.38     

 

39

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 10. Commitments and Contingencies

 

Litigation

 

In the normal course of business, the Bank is involved in various legal proceedings. After consultation with legal counsel, management believes that any liability resulting from such proceedings will not be material to the consolidated financial statements.

 

Financial Instruments with Off-Balance Sheet Risk

 

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the consolidated balance sheets.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Bank’s commitments at March 31, 2023 and December 31, 2022 is as follows:

 

  

March 31,

  

December 31,

 

(dollars in thousands)

 

2023

  

2022

 
         

Commitments to extend credit

 $152,923  $163,250 

Standby letters of credit

  1,663   833 
  $154,586  $164,083 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.

 

Concentrations of Credit Risk

 

Substantially all of the Bank’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Bank’s market area and such customers are generally depositors of the Bank. Investments in state and municipal securities involve governmental entities within and outside the Bank’s market area. The concentrations of credit by type of loan are set forth in Note 3. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Bank’s primary focus is toward small business and consumer transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers. The Bank has cash and cash equivalents on deposit with financial institutions which exceed federally insured limits.

 

40

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 11. Financial Instruments

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of March 31, 2023 and December 31, 2022. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as FHLB and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of the fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 

For loans, the carrying amount is net of unearned income and the allowance for credit losses. In accordance with ASU No. 2016-01, the fair value of loans as of March 31, 2023 and December 31, 2022, was measured using an exit price notion.          

 

          

Fair Value Measurements

 

(dollars in thousands)

 

Carrying

Amount

  

Fair

Value

  

Quoted Prices in

Active Markets

for Identical

Assets or

Liabilities

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
                     

March 31, 2023

                    
                     

Financial Instruments – Assets

                    

Net Loans

 $757,796  $733,326  $-  $-  $733,326 
                     

Financial Instruments – Liabilities

                    

Time Deposits

  209,733   208,025   -   208,025   - 

FHLB Advances

  25,000   24,999   -   24,999   - 
                     

December 31, 2022

                    
                     

Financial Instruments – Assets

                    

Net Loans

 $748,624  $702,549  $-  $-  $702,549 
                     

Financial Instruments – Liabilities

                    

Time Deposits

  183,542   181,525   -   181,525   - 

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans or foreclosed assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

41

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 11. Financial Instruments, continued

 

Fair Value Hierarchy

 

Under FASB ASC 820, “Fair Value Measurements and Disclosures”, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

 

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include the use of option pricing models, discounted cash flow models and similar techniques.

 

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

 

Investment Securities Available for Sale

 

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Individually Evaluated Loans

 

Individually evaluated loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale or operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent. All loans individually evaluated are classified as Level 3 in the fair value hierarchy.

 

Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

42

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 11. Financial Instruments, continued

 

Derivative Assets and Liabilities

 

Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. Management engages third-party intermediaries to determine the fair market value of these derivative instruments and classifies these instruments as Level 2. Examples of Level 2 derivatives are interest rate swaps, caps and floors. No derivative instruments were held as of March 31, 2023 and December 31, 2022.

 

Other Real Estate Owned

 

Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned.  Subsequently, other reals estate owned is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  When the fair value of the collateral is based on an observable market price the Company records the other real estate owned as nonrecurring Level 2.  When the fair value of the collateral is based on either an external or internal appraisal and there is no observable market price, the Company records the other real estate owned as nonrecurring Level 3.  There was a former bank premise valued at $235 thousand in other real estate owned at December 31, 2022 and there was no other real estate owned held as of March 31, 2023.

 

Assets Recorded at Fair Value on a Recurring Basis

 

(dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

March 31, 2023

                

Investment securities available for sale

                

U.S. Treasury securities

 $4,873  $-  $4,873  $- 

U.S. Government agencies

  21,314   -   21,314   - 

Mortgage-backed securities

  66,771   -   66,771   - 

Corporate securities

  1,452   -   1,452   - 

State and municipal securities

  42,268   -   42,268   - 

Total assets at fair value

 $136,678  $-  $136,678  $- 
                 

December 31, 2022

                

Investment securities available for sale

                

U.S. Treasury securities

 $4,834  $-  $4,834  $- 

U.S. Government agencies

  20,846   -   20,846   - 

Mortgage-backed securities

  67,270   -   67,270   - 

Corporate securities

  1,500   -   1,500   - 

State and municipal securities

  40,701   -   40,701   - 

Total assets at fair value

 $135,151  $-  $135,151  $- 

 

No liabilities were recorded at fair value on a recurring basis as of March 31, 2023 and December 31, 2022. There were no transfers between levels during the three-month period ended March 31, 2023 and the year ended December 31, 2022.

 

43

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 11. Financial Instruments, continued

 

Assets Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. No liabilities were recorded at fair value on a nonrecurring basis at March 31, 2023 and December 31, 2022. Assets measured at fair value on a nonrecurring basis are included in the table below.

 

(dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

March 31, 2023

                

Individually evaluated loans

 $673  $-  $-  $673 

Other real estate owned

  -   -   -   - 

Total assets at fair value

 $673  $-  $-  $673 

 

(dollars in thousands)

 

Total

  

Level 1

  

Level 2

  

Level 3

 
                 

December 31, 2022

                

Individually evaluated loans

 $695  $-  $-  $695 

Other real estate owned

  235   -   -   235 

Total assets at fair value

 $930  $-  $-  $930 

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

 

  

Fair Value at

March 31,

2023

  

Fair Value at

December 31,

2022

 

Valuation Technique

 

Significant

Unobservable Inputs

 

General Range

of Significant

Unobservable

Input Values

 
                  

Individually Evaluated Loans

 $673  $695 

Appraised Value/Discounted Cash Flows/Market Value of Note

 

Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell

  010% 
                  

Other Real Estate Owned

 $-  $235 

Appraised Value/Comparable Sales/Other Estimates from Independent Sources

 

Discounts to reflect current market conditions and estimated costs to sell

  10% 

 

 

Note 12. Short-Term Borrowings

 

At March 31, 2023, the Bank had a $25.0 million FHLB advance outstanding at a rate of 4.93% and was classified as short-term. The Bank had no borrowings outstanding classified as short-term at December 31, 2022.

 

At March 31, 2023, the Bank had established unsecured lines of credit of approximately $73.0 million with correspondent banks to provide additional liquidity if, and as needed. In addition, the Bank has the ability to borrow up to approximately $224.4 million from the FHLB, subject to the pledging of collateral.

 

 

Note 13. Long-Term Borrowings

 

At March 31, 2023 and December 31, 2022, the Bank had no borrowings outstanding classified as long-term.

 

44

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 14. Capital Requirements

 

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Small Bank Holding Company Policy Statement, and is not obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of March 31, 2023 and December 31, 2022, respectively.  These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

 

  

Actual

  

For Capital

Adequacy Purposes

  

To Be Well-

Capitalized

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

March 31, 2023

                        

Total Capital (to risk weighted assets)

 $98,798   12.60% $62,733   8.00% $78,416   10.00%

Tier 1 Capital (to risk weighted assets)

 $91,693   11.69% $47,050   6.00% $62,733   8.00%

Common Equity Tier 1 (to risk weighted assets)

 $91,693   11.69% $35,287   4.50% $50,970   6.50%

Tier 1 Capital (to average total assets)

 $91,693   8.99% $40,801   4.00% $51,001   5.00%
                         

December 31, 2022

                        

Total Capital (to risk weighted assets)

 $97,172   12.42% $62,592   8.00% $78,240   10.00%

Tier 1 Capital (to risk weighted assets)

 $90,878   11.62% $46,944   6.00% $62,592   8.00%

Common Equity Tier 1 (to risk weighted assets)

 $90,878   11.62% $35,208   4.50% $50,856   6.50%

Tier 1 Capital (to average total assets)

 $90,878   8.79% $41,342   4.00% $51,677   5.00%

 

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

 

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9.00%, less than $10.0 billion in total consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the prompt corrective action regulations and will not be required to report or calculated risk-based capital.

 

The CBLR framework was available for banks to use in their March 31, 2023, Call Report. At this time the Bank has elected not to opt into the CBLR framework for the Bank, but may opt into the CBLR framework in the future.

 

45

 

 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 15. Subsequent Events

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued.  Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.  Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. 

 

The Company has disclosed deposit compositions in Note 5.  In relation to current economic conditions, management has monitored deposit concentrations through the date the financial statements were issued noting no significant changes to compositions.  In addition, there has been no significant deposit deterioration through the date the financial statements were issued.

 

The Company has disclosed its investment portfolio position in Note 2.  There has been no significant deterioration in the investment portfolio through the date the consolidated financial statements were issued.

 

Management has reviewed the events occurring through the date the consolidated financial statements were issued and no additional subsequent events occurred requiring accrual or disclosure.

 

46


 

Part I.  Financial Information

 

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations


 

General

 

The following discussion provides information about the major components of the results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Critical Accounting Policies

 

For a discussion of the Company’s critical accounting policies, including its allowance for credit losses and asset impairment judgments, see Note 1 in the Notes to Consolidated Financial Statements above, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Executive Summary

 

 

Net income was $2.7 million, or $0.49 per share, for the first quarter of 2023, compared to $2.4 million, or $0.43 per share, for the first quarter of 2022.

 

Net interest margin (“NIM”) was 3.89% for the first quarter of 2023, compared to 3.53% in the first quarter of 2022.

 

Total assets increased $21.4 million, or 2.14%, to $1.02 billion at March 31, 2023 from $997.7 million at December 31, 2022.

 

Net loans were $757.8 million at March 31, 2023, an increase of $9.2 million, or 1.23%, when compared to $748.6 million at December 31, 2022.

 

Total deposits were $905.5 million at March 31, 2023, a decrease of $14.8 million, or 1.62%, from $920.3 million at December 31, 2022.

 

Annualized return on average assets increased to 1.10% for the quarter ended March 31, 2023, from 0.98% for the quarter ended March 31, 2022. Annualized return on average equity increased to 14.78% for the quarter ended March 31, 2023, from 11.75% for the quarter ended March 31, 2022.

 

Results of Operations

 

Results of Operations for the Three Months ended March 31, 2023 and 2022

 

Net interest income after provision for credit losses in the first quarter of 2023 was $9.1 million, compared to $7.8 million in the first quarter of 2022.  Total interest income was $10.1 million in the first quarter of 2023, representing an increase of $1.6 million in comparison to the $8.5 million in the first quarter of 2022.  Interest income on loans increased in the quarterly comparison by $1.3 million, primarily due to organic loan growth of $81.0 million from March 31, 2022 to March 31, 2023, and increases in interest rates during that time period.  Management anticipates that this loan growth, in addition to higher rates in the current year, will continue to have a positive impact on both earning assets and loan yields.  Interest income on securities increased by $240 thousand in the quarterly comparison, as a result of average investment securities increasing from $141.6 million at March 31, 2022 to $163.4 million at March 31, 2023 as a result of investment purchases during 2022.  Interest expense on deposits increased by $447 thousand in the quarterly comparison, as a result of rate increases on deposit offerings, especially on time deposits due to competition for deposits.  Management anticipates that interest expense on deposits will continue to increase in the near term as competitive pressures for deposits may result in continued increases in rates on deposit offerings, especially on time deposits.  Interest on borrowings increased by $124 thousand, due to short-term FHLB advances during the quarter as a result of the decline in deposits of $14.8 million and loan growth of $9.7 million that occurred during the first quarter of 2023. 

 

Total noninterest income was comparable at $1.6 million in the first quarters of 2023 and 2022, respectively.  Excluding $217 thousand in nonrecurring income from life insurance contracts in the first quarter of 2022, noninterest income would have increased by $145 thousand in the quarterly comparison.

 

47


 

Part I.  Financial Information

 

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations


 

Results of Operations, continued

 

Results of Operations for the Three Months ended March 31, 2023 and 2022, continued

 

Noninterest expense in the first quarter of 2023 was $7.3 million compared with $6.5 million in the first quarter of 2022, an increase of $800 thousand, or 12.24%. There was a $507 thousand increase in salary and benefit costs due to personnel additions and routine salary adjustments, as well as increased benefit costs. A reduction in capitalized loan origination cost due to lower loan volume in the first quarter of 2023 compared to the first quarter of 2022, also contributed to the increased cost. Occupancy and equipment expenses increased $181 thousand in the quarterly comparisons primarily due to branch expansion and branch relocation costs.

 

Income tax expense increased by $70 thousand in the quarter-to-quarter comparison, primarily due to an increase in net income before taxes of $392 thousand in the quarterly comparison.

 

Financial Condition

 

Total assets increased in the first quarter of 2023 by $21.4 million, or 2.14%, to $1.02 billion at March 31, 2023 from $997.7 million at December 31, 2022. The increase in total assets during the quarter can be primarily attributed to the loan growth of $9.7 million during the quarter in addition to the $25.0 million FHLB advance obtained to offset the $14.8 million decrease in deposits.

 

Total loans increased during the first quarter by $9.7 million, or 1.29%, to $764.6 million at March 31, 2023 from $754.9 million at December 31, 2022. Core loan growth during the first quarter was at an annualized rate of 5.36%.

 

Asset quality has remained strong, with a ratio of nonperforming loans to total loans of 0.22% at March 31, 2023 and December 31, 2022. The allowance for credit losses was approximately 0.89% of total loans as of March 31, 2023 compared to 0.83% at December 31, 2022. The primary reason for the increase in the allowance for credit losses was due to the adoption of the current expected credit losses (“CECL”) model effective January 1, 2023. As a result of the adoption of the CECL model there was an increase to the allowance for credit losses of $592 thousand on January 1, 2023. During the first quarter of 2023, the former full service branch facility that was transferred to other real estate owned at a value of $235 thousand during the fourth quarter of 2022, was sold. There was no other real estate owned as of March 31, 2023.

 

Investment securities increased by $1.5 million during the first quarter to $136.7 million at March 31, 2023 from $135.2 million at December 31, 2022. The increase in the first quarter of 2023 was the result of a $3.3 million decrease in unrealized losses on investment securities, partially offset by $1.8 million in paydowns.

 

Total deposits decreased in the first quarter of 2023 by $14.8 million, or 1.62%, to $905.5 million at March 31, 2023 from $920.3 million at December 31, 2022. Noninterest bearing deposits decreased by $10.2 million and interest bearing deposits decreased by $4.6 million largely due to seasonal fluctuations in municipal deposits, as well as increased competition for deposits. Lower cost interest bearing deposits decreased by $30.8 million during the quarter, which was offset by a $26.2 million increase in time deposits as customers continue to look for higher returns on their deposits.

 

Stockholders’ equity increased by $3.4 million, or 4.62%, to $76.3 million at March 31, 2023 from $72.9 million three months earlier. The change during the quarter was due to earnings of $2.7 million, $2.6 million in other comprehensive gains during the quarter, dividend payments of $1.2 million, and a cumulative effect adjustment of $710 thousand out of retained earnings due to the January 1, 2023 adoption of the CECL model, previously discussed above. Book value increased from $12.98 per share at December 31, 2022 to $13.61 per share at March 31, 2023.

 

48

 

 

Part I.  Financial Information

 

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations


 

Nonperforming and Problem Assets

 

Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Bank attempts to use shorter-term loans and, although a portion of the loans have been made based upon the value of collateral, the underwriting decision is generally based on the cash flow of the borrower as the source of repayment rather than the value of the collateral. The Bank also attempts to reduce repayment risk by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies.

 

The following table provides information about the allowance for credit losses, nonperforming assets and loans past due 90 days or more and still accruing as of March 31, 2023 and December 31, 2022.

 

   

March 31,

   

December 31,

 
   

2023

   

2022

 
                 

Allowance for credit losses

  $ 6,819     $ 6,248  

Total loans

  $ 764,615     $ 754,872  

Allowance for credit losses to total loans

    0.89 %     0.83 %
                 

Nonperforming loans:

               

Nonaccrual loans

  $ 1,673     $ 1,634  

Restructured loans

    2,291       2,330  

Purchased credit deteriorated loans on accrual status

    85       89  

Loans past due 90 days or more and still accruing

    -       -  

Total nonperforming loans

    4,049       4,053  

Other real estate owned

    -       235  

Total nonperforming assets

  $ 4,049     $ 4,288  
                 

Total nonperforming loans as a percentage to total loans

    0.53 %     0.54 %

Total allowance for credit losses to nonperforming loans

    168.41 %     154.16 %

Total nonperforming assets as a percentage to total assets

    0.40 %     0.43 %

Total nonaccrual loans as a percentage to total loans

    0.22 %     0.22 %

Total allowance for credit losses to nonaccrual loans

    407.59 %     382.37 %

 

Total nonperforming loans were 0.53% of total outstanding loans as of March 31, 2023 and 0.54% as of December 31, 2022, respectively. The majority of the increase in nonaccrual loans for the first three months of 2023 came in the “residential” category as a result of one credit going into nonaccrual status. Nonaccrual loans in this category increased by $70 thousand. Loans are placed in nonaccrual status when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof. Management’s ability to ultimately resolve these loans either with or without significant loss will be determined, to a great extent, by general economic and real estate market conditions.

 

Restructured loans represent modifications made to borrowers experiencing financial difficulty that have returned to accrual status after a period of performance in accordance with their modified terms. The decrease in restructured loans from December 31, 2022 to March 31, 2023 came primarily in the form of principal reductions.

 

There was no other real estate owned at March 31, 2023, compared to $235 thousand in other real estate owned at December 31, 2022.  During the fourth quarter of 2022, a former full service branch facility was transferred to other real estate owned at a value of $235 thousand.  Subsequent to December 31, 2022, the sale of the property settled on March 1, 2023.  More information on nonperforming assets and modifications to borrowers experiencing financial difficulty can be found in Note 4 of the “Notes to Consolidated Financial Statements.”

 

49


 

Part I.  Financial Information

 

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations


 

Nonperforming and Problem Assets, continued

 

As of March 31, 2023 and December 31, 2022, we had loans with a current principal balance of $4.9 million and $5.0 million rated “Watch” or “Special Mention”. The “Watch” classification is utilized by us when we have an initial concern about the financial health of a borrower that indicate above average risk. We then gather current financial information about the borrower and evaluate our current risk in the credit. After this review we will either move the loan to a higher risk rating category or move it back to its original risk rating. Loans may be left rated “Watch” for a longer period of time if, in management’s opinion, there are risks that cannot be fully evaluated without the passage of time, and we want to review it on a more regular basis. Assets that do not currently expose the Bank to sufficient risk to warrant a classification such as “Substandard” or “Doubtful” but otherwise possess weaknesses are designated “Special Mention”. Loans rated as “Watch” or “Special Mention” are not considered “potential problem loans” until they are determined by management to be classified as “Substandard”. As of March 31, 2023, potential problem loans classified as “Substandard” totaled $4.1 million compared to $4.3 million at December 31, 2022. As of March 31, 2023 and December 31, 2022, respectively, the Bank had no loans graded “Doubtful” included in the balance of total loans outstanding.

 

Past due loans are often regarded as a precursor to further credit problems which would lead to future increases in nonaccrual loans or other real estate owned. As of March 31, 2023, loans past due 30-89 days and still accruing totaled $587 thousand compared to $236 thousand at December 31, 2022.

 

Certain types of loans, such as option adjustable rate mortgage products, subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans. The Bank has not offered these types of loans in the past and does not offer them currently. Junior-lien mortgages can also be considered higher risk loans. Our junior-lien portfolio at March 31, 2023 totaled $2.3 million, or 0.30% of total loans. The charge-off rates in this category do not vary significantly from other real estate secured loans in the current year.

 

The allowance for credit losses is maintained at a level adequate to absorb potential losses.  Some of the factors which management considers in determining the appropriate level of the allowance for credit losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market area that the Bank serves.  Bank regulators also periodically review the Bank’s loans and other assets to assess their quality.  Loans deemed uncollectible are charged to the allowance.  Provisions for credit losses and recoveries on loans previously charged off are added to the allowance.  The reserve for credit losses was approximately 0.89% of total loans at March 31, 2023 and 0.83% of total loans at December 31, 2022. 

 

50


 

Part I.  Financial Information

 

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations


 

Analysis of Net Charge-Offs

 

The following table shows net charge-offs, average loan balances and the percentage of charge-offs to average loan balances for the three months ended March 31, 2023 and 2022, and the year ended December 31, 2022.

 

   

Three months ended March 31, 2023

 
                   

Percentage of Net

 
                   

(Charge-Offs)

 
   

Net

           

Recoveries to

 
   

(Charge-Offs)

   

Average

   

Average

 

(dollars in thousands)

 

Recoveries

   

Loans

   

Loans

 
                         

Construction & development

  $ 1     $ 50,380       0.00 %

Farmland

    29       23,605       0.12 %

Residential

    -       362,449       0.00 %

Commercial mortgage

    8       262,304       0.00 %

Commercial & agriculture

    1       40,866       0.00 %

Consumer & other

    (27 )     20,706       (0.13 %)

Total

  $ 12     $ 760,310       0.00 %

 

   

Three months ended March 31, 2022

 
                   

Percentage of Net

 
                   

(Charge-Offs)

 
   

Net

           

Recoveries to

 
   

(Charge-Offs)

   

Average

   

Average

 

(dollars in thousands)

 

Recoveries

   

Loans

   

Loans

 
                         

Construction & development

  $ 1     $ 45,728       0.00 %

Farmland

    -       24,253       0.00 %

Residential

    -       306,170       0.00 %

Commercial mortgage

    -       230,985       0.00 %

Commercial & agriculture

    1       57,029       0.00 %

Consumer & other

    (19 )     23,405       (0.08 %)

Total

  $ (17 )   $ 687,570       0.00 %

 

   

Year ended December 31, 2022

 
                   

Percentage of Net

 
                   

(Charge-Offs)

 
   

Net

           

Recoveries to

 
   

(Charge-Offs)

   

Average

   

Average

 

(dollars in thousands)

 

Recoveries

   

Loans

   

Loans

 
                         

Construction & development

  $ 3     $ 45,934       0.01 %

Farmland

    -       24,188       0.00 %

Residential

    12       329,779       0.00 %

Commercial mortgage

    8       247,350       0.00 %

Commercial & agriculture

    16       47,792       0.03 %

Consumer & other

    (74 )     22,283       (0.33 %)

Total

  $ (35 )   $ 717,326       0.00 %

 

51

 

 

Part I.  Financial Information

 

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations


 

Liquidity

 

Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss. Unsecured federal fund lines available from correspondent banks totaled $73.0 million at March 31, 2023. The Bank had no balances outstanding on these lines as of March 31, 2023 and December 31, 2022, respectively. In addition, the Bank has the ability to borrow up to approximately $224.4 million from the FHLB, subject to the pledging of collateral.

 

At March 31, 2023, the Bank had short-term FHLB advances of $25.0 million. The Bank had no borrowings outstanding classified as short-term at December 31, 2022. At March 31, 2023 and December 31, 2022, the Bank had no borrowings outstanding classified as long-term.

 

The Bank uses cash and federal funds sold to meet its daily funding needs. If funding needs are met through holdings of excess cash and federal funds, then profits might be sacrificed as higher-yielding investments are foregone in the interest of liquidity. Therefore, management determines, based on such items as loan demand and deposit activity, an appropriate level of cash and federal funds and seeks to maintain that level.

 

The Bank’s investment security portfolio also serves as a source of liquidity. The primary goals of the investment portfolio are liquidity management and maturity gap management. As investment securities mature, the proceeds are reinvested in federal funds sold if the federal funds level needs to be increased; otherwise, the proceeds are reinvested in similar investment securities. The majority of investment security transactions consist of replacing securities that have been called or matured. The Bank keeps a portion of its investment portfolio in unpledged assets with average lives or repricing terms of less than 60 months. These investments are a preferred source of funds because their market value is not as sensitive to changes in interest rates as investments with longer durations.

 

As a result of the steps described above, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs. The liquidity ratio (the level of liquid assets divided by total deposits plus short-term liabilities) was 15.6% and 14.4% for the periods ended March 31, 2023 and December 31, 2022, respectively. These ratios are considered to be adequate by management.

 

Capital Resources

 

A significant measure of the strength of a financial institution is its capital base. Federal regulations have classified and defined capital into the following components: (1) Tier 1 capital, which includes common shareholders’ equity and qualifying preferred equity, and (2) Tier 2 capital, which includes a portion of the allowance for credit losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Financial institutions are also subject to the BASEL III requirements, which includes as part of the capital ratios profile the Common Equity Tier 1 risk-based ratio. Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require a financial institution to maintain capital as a percentage of its assets, and certain off-balance sheet items adjusted for predefined credit risk factors (risk-adjusted assets).

 

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios at the Bank level which assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities. At March 31, 2023, the Bank exceeded minimum regulatory capital requirements and is considered to be “well capitalized.”

 

At March 31, 2023, the Company’s equity to asset ratio was 7.49% and the Bank’s capital was in excess of regulatory requirements as discussed above.  The Company will continue to monitor the residual effects of inflation in determining future cash dividends and any requirements for additional capital each quarter.  Skyline declared and paid dividends of $1.2 million, and had $113 thousand of stock repurchases, for the first three months of 2023.   

 

52

 
 

 

Part I.  Financial Information

 

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations


 

Forward-Looking Statements

 

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934 as amended. These include statements as to expectations future financial performance and any other statements regarding future results or expectations. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by the use of words such as "believe," "expect," "intend," "anticipate," "estimate," or "project" or similar expressions. Our ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to: changes in interest rates and general economic conditions; the residual effects of the COVID-19 pandemic, including the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions; the effect of changes in banking, tax and other laws and regulations and interpretations or guidance thereunder; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve; the quality and composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the combined company’s market area; the implementation of new technologies; the ability to develop and maintain secure and reliable electronic systems; accounting principles, policies, and guidelines and other factors identified in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or clarify these forward‐looking statements, whether as a result of new information, future events or otherwise.

 

 

53

 


 

Part I.  Financial Information

 

Item 3.      Quantitative and Qualitative Disclosures about Market Risk


 

Not required.

 

54


Part I.  Financial Information

 

Item 4.      Controls and Procedures


 

Evaluation of Disclosure Controls and Procedures

 

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 

55


Part II.  Other Information

 

 


 

Item 1.

Legal Proceedings

 

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Skyline is a party or of which any of its property is subject.

 

Item 1A.

Risk Factors

 

In connection with the information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 should be considered.  These risks could materially and adversely affect our business, financial condition and results of operations.  There have been no material changes to the factors discussed in our Annual Report on Form 10-K.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table details the Company’s purchase of its common stock during the first quarter of 2023.

 

   

Total number of shares purchased

   

Average price

paid per Share

   

Total number of shares purchased as part of publicly announced program

   

Maximum number of shares that may yet be purchased under the plan (1)

 

Purchased 1/1 through 1/31

    -     $ -       -       91,325  

Purchased 2/1 through 2/28

    -     $ -       -       91,325  

Purchased 3/1 through 3/31

    10,000     $ 11.25       10,000       81,325  

Total during first quarter 2023

    10,000     $ 11.25       10,000          

 

 

(1)

On February 16, 2023, the Company’s Board of Directors publicly announced the extension of the Company’s stock repurchase plan, pursuant to which the Company may purchase an aggregate of up to 350,000 shares of common stock through January 2025.

 

Item 3.

Defaults Upon Senior Securities

 

None

 

Item 4.

Mine Safety Disclosures

 

None

 

Item 5.

Other Information

 

None

 

56

 

Part II.  Other Information

 

 


 

Item 6.

Exhibits

 

 

31.1

Rule 15(d)-14(a) Certification of Chief Executive Officer.

 

 

31.2

Rule 15(d)-14(a) Certification of Chief Financial Officer.

 

 

32.1

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

 

101

The following materials from the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

 

 

104

Cover Page Interactive Date File (formatted in Inline XBRL and contained in Exhibit 101).

 

 

57


Part II.  Other Information

 

 


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Skyline Bankshares, Inc.

 

       

 

 

 

 

 

 

 

 

Date: May 15, 2023

By:

/s/ Blake M. Edwards

 

 

 

Blake M. Edwards

 

 

 

President and Chief Executive Officer

 

       
       
  By: /s/ Lori C. Vaught  
    Lori C. Vaught  
    Chief Financial Officer  

 

58