UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
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:
SKYLINE BANKSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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| (Address of Principal Executive Offices) |
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(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.
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.
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 ☐ |
| | Smaller reporting company |
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| 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
The registrant had
| PART I |
FINANCIAL INFORMATION |
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| Item 1. |
Financial Statements |
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Consolidated Balance Sheets—June 30, 2023 (Unaudited) and December 31, 2022 (Audited) |
3 |
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Unaudited Consolidated Statements of Income—Three and Six Months Ended June 30, 2023 and June 30, 2022 |
4 |
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Unaudited Consolidated Statements of Comprehensive Income—Six and Three Months Ended June 30, 2023 and June 30, 2022 |
5 |
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Unaudited Consolidated Statements of Changes in Stockholders’ Equity—Six and Three Months Ended June 30, 2023 and June 30, 2022 |
6 |
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Unaudited Consolidated Statements of Cash Flows—Six Months Ended June 30, 2023 and June 30, 2022 |
7 |
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Notes to Consolidated Financial Statements |
9 |
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
48 |
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
56 |
| Item 4. |
Controls and Procedures |
57 |
| PART II |
OTHER INFORMATION |
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| Item 1. |
Legal Proceedings |
58 |
| Item 1A. |
Risk Factors |
58 |
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
58 |
| Item 3. |
Defaults Upon Senior Securities |
58 |
| Item 4. |
Mine Safety Disclosures |
58 |
| Item 5. |
Other Information |
58 |
| Item 6. |
Exhibits |
59 |
| Signatures |
60 |
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Part I. Financial Information
Item 1. Financial Statements
Skyline Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, 2023 and December 31, 2022
| (dollars in thousands) | June 30, | December 31, | ||||||
| 2023 | 2022 | |||||||
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| (Unaudited) | (Audited) | ||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing deposits with banks | ||||||||
| Federal funds sold | ||||||||
| Investment securities available for sale | ||||||||
| Restricted equity securities | ||||||||
| Loans, net of allowance for credit losses of $ at June 30, 2023 and $ at December 31, 2022 | ||||||||
| Cash value of life insurance | ||||||||
| Other real estate owned | ||||||||
| Properties and equipment, net | ||||||||
| Accrued interest receivable | ||||||||
| Core deposit intangible | ||||||||
| Goodwill | ||||||||
| Deferred tax assets, net | ||||||||
| Other assets | ||||||||
| $ | $ | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Deposits | ||||||||
| Noninterest-bearing | $ | $ | ||||||
| Interest-bearing | ||||||||
| Total deposits | ||||||||
| Borrowings | ||||||||
| Accrued interest payable | ||||||||
| Other liabilities | ||||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, par value; shares authorized, issued | ||||||||
| Common stock, par value; shares authorized, and issued and outstanding at June 30, 2023 and December 31, 2022, respectively | ||||||||
| Surplus | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| $ | $ | |||||||
See Notes to Consolidated Financial Statements
Skyline Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Three and Six Months ended June 30, 2023 and 2022
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (dollars in thousands except share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Interest income | ||||||||||||||||
| Loans and fees on loans | $ | $ | $ | $ | ||||||||||||
| Interest-bearing deposits in banks | ||||||||||||||||
| Federal funds sold | ||||||||||||||||
| Interest on taxable securities | ||||||||||||||||
| Interest on nontaxable securities | ||||||||||||||||
| Dividends | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Deposits | ||||||||||||||||
| Interest on borrowings | ||||||||||||||||
| Net interest income | ||||||||||||||||
| (Recovery of) provision for credit losses | ( | ) | ( | ) | ||||||||||||
| Net interest income after (recovery of) provision for credit losses | ||||||||||||||||
| Noninterest income | ||||||||||||||||
| Service charges on deposit accounts | ||||||||||||||||
| Other service charges and fees | ||||||||||||||||
| Net realized losses on securities | ( | ) | ( | ) | ||||||||||||
| Mortgage origination fees | ||||||||||||||||
| Increase in cash value of life insurance | ||||||||||||||||
| Life insurance income | ||||||||||||||||
| Other income | ||||||||||||||||
| Noninterest expenses | ||||||||||||||||
| Salaries and employee benefits | ||||||||||||||||
| Occupancy and equipment | ||||||||||||||||
| Data processing expense | ||||||||||||||||
| FDIC Assessments | ||||||||||||||||
| Advertising | ||||||||||||||||
| Bank franchise tax | ||||||||||||||||
| Director fees | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Telephone expense | ||||||||||||||||
| Core deposit intangible amortization | ||||||||||||||||
| Other expense | ||||||||||||||||
| Net income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income per share | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Dividends declared per share | $ | $ | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements
Skyline Bankshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the Six and Three Months ended June 30, 2023 and 2022
| Six Months Ended |
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| June 30, |
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| (dollars in thousands) |
2023 |
2022 |
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| (Unaudited) |
(Unaudited) |
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| Net Income |
$ | $ | ||||||
| Other comprehensive income (loss) |
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| Unrealized gains (losses) on investment securities available for sale: |
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| Unrealized gains (losses) arising during the period |
( |
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| Tax related to unrealized (gains) losses |
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| Reclassification of net realized losses during the period |
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| Tax related to realized losses |
( |
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| Total other comprehensive income (loss) |
( |
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| Total comprehensive income (loss) |
$ | $ | ( |
) | ||||
| Three Months Ended |
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| June 30, |
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| (dollars in thousands) |
2023 |
2022 |
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| (Unaudited) |
(Unaudited) |
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| Net Income |
$ | $ | ||||||
| Other comprehensive income (loss) |
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| Unrealized losses on investment securities available for sale: |
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| Unrealized losses arising during the period |
( |
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| Tax related to unrealized losses |
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| Reclassification of net realized losses during the period |
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| Tax related to realized losses |
( |
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| Total other comprehensive loss |
( |
) | ( |
) | ||||
| Total comprehensive income (loss) |
$ | $ | ( |
) | ||||
See Notes to Consolidated Financial Statements
Skyline Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the Six and Three Months ended June 30, 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 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Dividends paid ($ per share) | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock issued | ||||||||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Cumulative effect of adoption of credit losses standard, net of tax | - | ( | ) | ( | ) | |||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||
| Dividends paid ($ per share) | - | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | - | |||||||||||||||||||||||
| Common stock repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
See Notes to Consolidated Financial Statements
Skyline Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2023 and 2022
| Six Months Ended |
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| June 30, |
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| (dollars in thousands) |
2023 |
2022 |
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| (Unaudited) |
(Unaudited) |
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| Cash flows from operating activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operations: |
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| Depreciation |
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| Amortization of core deposit intangible |
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| Accretion of loan discount and deposit premium, net |
( |
) | ( |
) | ||||
| (Recovery of) provision for credit losses |
( |
) | ||||||
| Deferred income taxes |
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| Net realized losses on available for sale securities |
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| Accretion of discount on securities, net of amortization of premiums |
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| Deferred compensation |
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| Share-based compensation |
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| Loss on sale of other real estate owned |
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| Life insurance income |
(217 | ) | ||||||
| Changes in assets and liabilities: |
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| Cash value of life insurance |
( |
) | ( |
) | ||||
| Accrued interest receivable |
( |
) | ( |
) | ||||
| Other assets |
( |
) | ||||||
| Accrued interest payable |
( |
) | ||||||
| Other liabilities |
( |
) | ||||||
| Net cash provided by operating activities |
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| Cash flows from investing activities |
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| Activity in available for sale securities: |
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| Purchases |
( |
) | ||||||
| Sales |
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| Maturities/calls/paydowns |
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| (Purchases) redemption of restricted equity securities |
( |
) | ||||||
| Net increase in loans |
( |
) | ( |
) | ||||
| Purchases of life insurance contracts |
( |
) | ||||||
| Proceeds from life insurance contracts |
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| Proceeds from sale of other real estate owned |
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| Purchases of property and equipment |
( |
) | ( |
) | ||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
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| Net (decrease) increase in deposits |
( |
) | ||||||
| FHLB advances |
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| Prepayment of FHLB advances |
( |
) | ||||||
| Federal funds purchased, net |
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| Advance on short-term line of credit |
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| Common stock repurchased |
( |
) | ( |
) | ||||
| Dividends paid |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
||||||||
| Net decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents, beginning |
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| Cash and cash equivalents, ending |
$ | $ | ||||||
See Notes to Consolidated Financial Statements
Skyline Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows, continued
For the Six Months ended June 30, 2023 and 2022
| Six Months Ended |
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| June 30, |
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| (dollars in thousands) |
2023 |
2022 |
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| (Unaudited) |
(Unaudited) |
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| Supplemental disclosure of cash flow information |
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| Interest paid |
$ | $ | ||||||
| Taxes paid |
$ | $ | ||||||
| Supplemental disclosure of noncash investing activities |
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| Effect on equity of change in net unrealized gain (loss) on available for sale securities |
$ | $ | ( |
) | ||||
| Right-of-use assets obtained in exchange for new operating lease liabilities |
$ | $ | ||||||
| Cumulative effect of adoption of credit losses standard, net of tax |
$ | ( |
) | $ | ||||
See Notes to Consolidated Financial Statements
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
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
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, Roanoke and Patrick, and the North Carolina counties of Alleghany, Ashe, Burke, Caldwell, Catawba, Cleveland, Davie, Iredell, Watauga, Wilkes, and Yadkin, and the surrounding areas, through twenty-seven full-service banking offices and one loan production office. 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 June 30, 2023 and for the three and six-month periods ended June 30, 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 and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the full year.
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 credit losses on 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.
Skyline Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, 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.
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 $
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.
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 June 30, 2023, there was no allowance for credit loss related to the available for sale portfolio.
Accrued interest receivable on available for sale debt securities, which is reported in accrued interest receivable on the consolidated balance sheets, totaled $
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 $
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.
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. |
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 – Loans, continued
| ● | 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. |
| ● | 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.
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 $
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.
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 | - | ||||
| Furniture and equipment | - | ||||
Share-Based Compensation
The Parkway Acquisition Corp. 2020 Equity Incentive Plan (the “Equity 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.
As of June 30, 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.
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, however, due to the recent economic environment an impairment test was conducted as of June 1, 2023. The test as of June 1, 2023 found no impairment on the goodwill. 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 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.
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 six months ended June 30, 2023 and 2022 amounted to $
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 six months ended June 30, 2023 and 2022 amounted to $
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 six months ended June 30, 2023 and 2022 amounted to $ |
| ● | 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 six months ended June 30, 2023 and 2022 the Company received $ |
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 six months ended June 30, 2023 and 2022 amounted to $
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 six and three months ended June 30, 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 | ||||||||||||
| Losses | ||||||||||||
| (dollars in thousands) | On Available for | Defined Benefit | ||||||||||
| Sale Securities | Pension Items | Total | ||||||||||
| Balance, December 31, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive loss before reclassifications | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax | ||||||||||||
| Balance June 30, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Balance, December 31, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Other comprehensive income before reclassifications | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income, net of tax | ||||||||||||
| Balance June 30, 2023 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
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.
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.
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 June 30, 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 June 30, 2023.
| (dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
| June 30, 2023 | ||||||||||||||||
| Available for sale: | ||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. Government agencies | ( | ) | ||||||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| Corporate securities | ( | ) | ||||||||||||||
| State and municipal securities | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
| December 31, 2022 | ||||||||||||||||
| Available for sale: | ||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| U.S. Government agencies | ( | ) | ||||||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| Corporate securities | ||||||||||||||||
| State and municipal securities | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Restricted equity securities totaled $
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 June 30, 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 June 30, 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 | ||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| U.S. Government agencies | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ||||||||||||||||||||
| Corporate securities | ( | ) | ( | ) | ||||||||||||||||||||
| State and municipal securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total securities available for sale | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Available for sale: | ||||||||||||||||||||||||
| U.S. Treasury securities | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||
| U.S. Government agencies | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| State and municipal securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total securities available for sale | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
Skyline Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 2. Investment Securities, continued
At June 30, 2023,
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 June 30, 2023, there was no allowance for credit losses related to the available for sale portfolio.
Proceeds from sales of investment securities available for sale were $
| Six Months Ended June 30 | Three Months Ended June 30 | |||||||||||||||
| (dollars in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Realized gains | $ | $ | $ | $ | ||||||||||||
| Realized losses | ( | ) | ( | ) | ||||||||||||
| $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
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 June 30, 2023, were as follows:
| (dollars in thousands) | Amortized Cost | Fair Value | ||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| $ | $ | |||||||
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 $
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 June 30, 2023 and December 31, 2022 are as follows:
| (dollars in thousands) | 2023 | 2022 | ||||||
| Construction & development | $ | $ | ||||||
| Farmland | ||||||||
| Residential | ||||||||
| Commercial mortgage | ||||||||
| Commercial & agricultural | ||||||||
| Consumer & other | ||||||||
| Total loans | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Loans, net of allowance for credit losses | $ | $ | ||||||
Included in total loans above are deferred loan fees of $
The Company elected to exclude accrued interest receivable from the amortized cost basis of loans. Accrued interest receivable related to loans totaled $
As of June 30, 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 tables summarizes the activity related to the allowance for credit losses for the three and six month periods ended June 30, 2023 under the CECL methodology.
| (dollars in thousands) | Construction & Development | Farmland | Residential | Commercial Mortgage | Commercial & Agricultural | Consumer & Other | Total | |||||||||||||||||||||
| For the Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (dollars in thousands) | Construction & Development | Farmland | Residential | Commercial Mortgage | Commercial & Agricultural | Consumer & Other | Total | |||||||||||||||||||||
| For the Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Adjustment to allowance for adoption of ASU 2016-13 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
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 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 June 30, 2022:
| (dollars in thousands) | Construction & Development | Farmland | Residential | Commercial Mortgage | Commercial & Agricultural | Consumer & Other | Total | |||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Charge-offs | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | - | $ | $ | $ | $ | ||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Loans outstanding: | ||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: purchased credit impaired loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Skyline Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 4. Allowance for Credit Losses, continued
Allowance for Credit Losses – Loans, continued
| (dollars in thousands) | Construction & Development | Farmland | Residential | Commercial Mortgage | Commercial & Agricultural | Consumer & Other | Total | |||||||||||||||||||||
| For the Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Charge-offs | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | - | |||||||||||||||||||||||||||
| Provision | ( | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| For the Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Charge-offs | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | - | 11 | ||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | - | $ | - | $ | - | $ | - | $ | |||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: purchased credit impaired loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Loans outstanding: | ||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | - | $ | $ | - | $ | - | $ | ||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Ending balance: purchased credit impaired loans | $ | - | $ | - | $ | $ | $ | $ | - | $ | ||||||||||||||||||
As of December 31, 2022 and June 30, the Bank had no unallocated reserves included in the allowance for loan losses.
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 June 30, 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 June 30, 2023 and December 31, 2022:
| Loan Grades | ||||||||||||||||||||
| (dollars in thousands) |
Pass |
Watch |
Special Mention |
Substandard |
Total | |||||||||||||||
| June 30, 2023 | ||||||||||||||||||||
| Real Estate Secured: | ||||||||||||||||||||
| Construction & development | $ | $ | $ | $ | $ | |||||||||||||||
| Farmland | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial mortgage | ||||||||||||||||||||
| Non-Real Estate Secured: | ||||||||||||||||||||
| Commercial & agricultural | ||||||||||||||||||||
| Consumer & other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Real Estate Secured: | ||||||||||||||||||||
| Construction & development | $ | $ | $ | $ | $ | |||||||||||||||
| Farmland | ||||||||||||||||||||
| Residential | ||||||||||||||||||||
| Commercial mortgage | ||||||||||||||||||||
| Non-Real Estate Secured: | ||||||||||||||||||||
| Commercial & agricultural | ||||||||||||||||||||
| Consumer & other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
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 June 30, 2023:
| Term Loans by Year of Origination | Revolving Loans Converted | |||||||||||||||||||||||||||||||||||
| (dollars in thousands) | 2023 |
2022 |
2021 |
2020 |
2019 |
Prior |
Revolving |
To Term |
Total | |||||||||||||||||||||||||||
| Construction & development | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total construction & development | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total farmland | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total residential | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial mortgage | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total residential | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial & agricultural | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total commercial & agricultural | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer & other | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total consumer & other | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total loans | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Watch | ||||||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total Current period gross write-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
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 | |||||||||||||||
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| (dollars in thousands) | Nonaccrual Loans with no Allowance | Nonaccrual Loans with an Allowance | Total Nonaccrual Loans | Nonaccrual Loans | ||||||||||||
| Construction & development | $ | $ | $ | $ | ||||||||||||
| Farmland | ||||||||||||||||
| Residential | ||||||||||||||||
| Commercial mortgage | ||||||||||||||||
| Commercial & agricultural | ||||||||||||||||
| Consumer & other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table represents the accrued interest receivables written off on nonaccrual loans by reversing interest income during the three and six months ended June 30, 2023:
| (dollars in thousands) | For the Three Months Ended June 30, 2023 | |||
| Construction & development | $ | |||
| Farmland | ||||
| Residential | ||||
| Commercial mortgage | ||||
| Commercial & agricultural | ||||
| Consumer & other | ||||
| Total Loans | $ | |||
| (dollars in thousands) | For the Six Months Ended June 30, 2023 | |||
| Construction & development | $ | |||
| Farmland | ||||
| Residential | ||||
| Commercial mortgage | ||||
| Commercial & agricultural | ||||
| Consumer & other | ||||
| Total Loans | $ | |||
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 June 30, 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 | ||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||||||
| Real Estate Secured: | ||||||||||||||||||||||||
| Construction & development | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Farmland | ||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||
| Commercial mortgage | ||||||||||||||||||||||||
| Non-Real Estate Secured: | ||||||||||||||||||||||||
| Commercial & agricultural | ||||||||||||||||||||||||
| Consumer & other | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Farmland | ||||||||||||||||||||||||||||||||
| Residential | ||||||||||||||||||||||||||||||||
| Commercial mortgage | ||||||||||||||||||||||||||||||||
| Non-Real Estate Secured: | ||||||||||||||||||||||||||||||||
| Commercial & agricultural | ||||||||||||||||||||||||||||||||
| Consumer & other | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) Nonaccrual loans are included in the applicable past due column based on number of days past due as of December 31, 2022.
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 June 30, 2023:
| (dollars in thousands) | June 30, 2023 | |||
| Construction & development | $ | |||
| Farmland | ||||
| Residential | ||||
| Commercial mortgage | ||||
| Commercial & agricultural | ||||
| Consumer & other | ||||
| Total Loans | $ | |||
Purchased Credit Deteriorated
There were
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 June 30, 2023 and December 31, 2022 are as follows:
| (dollars in thousands) | 2023 | 2022 | ||||||
| Residential | $ | $ | ||||||
| Commercial mortgage | ||||||||
| Outstanding balance | $ | $ | ||||||
| Carrying amount | $ | $ | ||||||
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 $
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, $
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 | $ | $ | $ | - | ||||||||
| Farmland | - | |||||||||||
| Residential | - | |||||||||||
| Commercial mortgage | - | |||||||||||
| Commercial & agricultural | - | |||||||||||
| Consumer & other | - | |||||||||||
| Subtotal | - | |||||||||||
| With an allowance recorded: | ||||||||||||
| Construction & development | ||||||||||||
| Farmland | ||||||||||||
| Residential | ||||||||||||
| Commercial mortgage | ||||||||||||
| Commercial & agricultural | ||||||||||||
| Consumer & other | ||||||||||||
| Subtotal | ||||||||||||
| Totals: | ||||||||||||
| Construction & development | ||||||||||||
| Farmland | ||||||||||||
| Residential | ||||||||||||
| Commercial mortgage | ||||||||||||
| Commercial & agricultural | ||||||||||||
| Consumer & other | ||||||||||||
| Total | $ | $ | $ | |||||||||
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 and six month periods ended June 30, 2022:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2022 | June 30, 2022 | |||||||||||||||
| (dollars in thousands) | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||
| Construction & development | $ | $ | $ | $ | ||||||||||||
| Farmland | ||||||||||||||||
| Residential | ||||||||||||||||
| Commercial mortgage | ||||||||||||||||
| Commercial & agricultural | ||||||||||||||||
| Consumer & other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 June 30, 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 | % | 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 | $ | |||||||||
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
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 June 30, 2023:
| Payment Status (Amortized Cost Basis) | ||||||||||||
| (dollars in thousands) | Current | 30-89 Days Past Due | 90+ Days Past Due | |||||||||
| Construction & development | $ | $ | $ | |||||||||
| Farmland | ||||||||||||
| Residential | ||||||||||||
| Commercial mortgage | ||||||||||||
| Commercial & agricultural | ||||||||||||
| Consumer & other | ||||||||||||
| Total | $ | $ | $ | |||||||||
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 tables set forth information with respect to the Bank’s troubled debt restructurings as of June 30, 2022:
For the Six Months Ended June 30, 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 | - | - | - | |||||||||||||||||||||
| Commercial mortgage | - | - | - | |||||||||||||||||||||
| Commercial & agricultural | - | - | - | - | - | - | ||||||||||||||||||
| Consumer & other | - | - | - | - | - | - | ||||||||||||||||||
| Total | $ | $ | - | $ | - | $ | - | |||||||||||||||||
(1) Loans past due 30 days or more are considered to be in default.
During the six months ended June 30, 2022, loans were modified that were considered to be TDRs. The residential loan had term concessions granted and additional funds advanced for insurance. The commercial mortgage loan had the principal and interest payments modified; however, the maturity date remained the same.
Skyline Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 4. Allowance for Credit Losses, continued
Troubled Debt Restructuring, continued
For the Three Months Ended June 30, 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 | - | - | - | |||||||||||||||||||||
| Commercial mortgage | - | - | - | |||||||||||||||||||||
| Commercial & agricultural | - | - | - | - | - | - | ||||||||||||||||||
| Consumer & other | - | - | - | - | - | - | ||||||||||||||||||
| Total | $ | $ | - | $ | - | $ | - | |||||||||||||||||
(1) Loans past due 30 days or more are considered to be in default.
During the three months ended June 30, 2022, loan was modified that was considered to be a TDR. The commercial mortgage loan had the principal and interest payments modified; however, the maturity date remained the same.
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 six months ended June 30, 2023:
| (dollars in thousands) | Total Allowance for Credit Losses – Unfunded Commitments | |||
| Balance, December 31, 2022 | $ | |||
| Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13 | ||||
| (Recovery of) provision for unfunded commitments | ( | ) | ||
| Balance, June 30, 2023 | $ | |||
Skyline Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Deposits
The following table presents the composition of deposits at June 30, 2023 and December 31, 2022:
| June 30, | December 31, | |||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Interest-bearing deposits: | ||||||||
| Interest-bearing demand deposit accounts | $ | $ | ||||||
| Money market | ||||||||
| Savings | ||||||||
| Time deposits | ||||||||
| Total interest-bearing deposits | ||||||||
| Noninterest-bearing deposits | ||||||||
| Total deposits | $ | $ | ||||||
The aggregate amount of time deposits in denominations of more than $250 thousand at June 30, 2023 and December 31, 2022 was $
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 six-month and three-month periods ended June 30, 2023 and 2022.
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| (dollars in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Interest cost | $ | $ | $ | $ | ||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recognized net actuarial loss | ||||||||||||||||
| Net periodic benefit cost | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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.
Skyline Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 7. Goodwill and Intangible Assets
Goodwill
An analysis of goodwill during the six-month period ended June 30, 2023 and for the year ended December 31, 2022 is as follows:
| June 30, | December 31, | |||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Beginning of year | $ | $ | ||||||
| Impairment | ||||||||
| End of the period | $ | $ | ||||||
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 June 30, 2023 and December 31, 2022 are as follows:
| June 30, | December 31, | |||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Balance at beginning of year, net of accumulated amortization | $ | $ | ||||||
| Amortization expense | ( | ) | ( | ) | ||||
| Net book value | $ | $ | ||||||
Aggregate amortization expense was $
The following table presents the estimated amortization expense of the core deposit intangible over the remaining useful life:
| (dollars in thousands) | ||||
| Six months ending December 31, 2023 | $ | |||
| For the year ending December 31, 2024 | ||||
| For the year ending December 31, 2025 | ||||
| For the year ending December 31, 2026 | ||||
| For the year ending December 31, 2027 | ||||
| Thereafter | ||||
| Total | $ |
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 entered into an operating lease in June 2023 and as a result incurred $
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:
| June 30, | December 31, | |||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Lease liabilities | $ | $ | ||||||
| Right-of-use assets | $ | $ | ||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
| Six Months Ended June 30, | ||||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Lease Expense | ||||||||
| Operating lease expense | $ | $ | ||||||
| Short-term lease expense | ||||||||
| Total lease expense | $ | $ | ||||||
| Cash paid for amounts included in lease liabilities | $ | $ | ||||||
The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liabilities:
| (dollars in thousands) | ||||
| Six months ending December 31, 2023 | $ | |||
| Twelve months ending December 31, 2024 | ||||
| Twelve months ending December 31, 2025 | ||||
| Twelve months ending December 31, 2026 | ||||
| Twelve months ending December 31, 2027 | ||||
| Thereafter | ||||
| Total undiscounted cash flows | $ | |||
| Less discount | ( | ) | ||
| Lease liabilities | $ |
Skyline Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 9. Share-Based Compensation
The Equity 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 Equity 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 Equity 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
On February 18, 2022,
As of June 30, 2023, the unrecognized compensation expense related to unvested restricted stock awards was $
| 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 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | $ | |||||||||
| Forfeited | - | |||||||||||
| Unvested as of December 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Vested | ( | ) | $ | |||||||||
| Forfeited | - | |||||||||||
| Unvested as of June 30, 2023 | $ | |||||||||||
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 June 30, 2023 and December 31, 2022 is as follows:
| June 30, | December 31, | |||||||
| (dollars in thousands) | 2023 | 2022 | ||||||
| Commitments to extend credit | $ | $ | ||||||
| Standby letters of credit | ||||||||
| $ | $ | |||||||
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.
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 June 30, 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 June 30, 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) | |||||||||||||||
| June 30, 2023 | ||||||||||||||||||||
| Financial Instruments – Assets | ||||||||||||||||||||
| Net Loans | $ | $ | $ | - | $ | $ | ||||||||||||||
| Financial Instruments – Liabilities | ||||||||||||||||||||
| Time Deposits | - | - | ||||||||||||||||||
| FHLB Advances | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Financial Instruments – Assets | ||||||||||||||||||||
| Net Loans | $ | $ | $ | - | $ | $ | ||||||||||||||
| Financial Instruments – Liabilities | ||||||||||||||||||||
| Time Deposits | - | - | ||||||||||||||||||
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.
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.
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.
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 $
Assets Recorded at Fair Value on a Recurring Basis
| (dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| June 30, 2023 | ||||||||||||||||
| Investment securities available for sale | ||||||||||||||||
| U.S. Treasury securities | $ | $ | - | $ | $ | - | ||||||||||
| U.S. Government agencies | - | - | ||||||||||||||
| Mortgage-backed securities | - | - | ||||||||||||||
| Corporate securities | - | - | ||||||||||||||
| State and municipal securities | - | - | ||||||||||||||
| Total assets at fair value | $ | $ | - | $ | $ | - | ||||||||||
| December 31, 2022 | ||||||||||||||||
| Investment securities available for sale | ||||||||||||||||
| U.S. Treasury securities | $ | $ | - | $ | $ | - | ||||||||||
| U.S. Government agencies | - | - | ||||||||||||||
| Mortgage-backed securities | - | - | ||||||||||||||
| Corporate securities | - | - | ||||||||||||||
| State and municipal securities | - | - | ||||||||||||||
| Total assets at fair value | $ | $ | - | $ | $ | - | ||||||||||
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 June 30, 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 | ||||||||||||
| June 30, 2023 | ||||||||||||||||
| Individually evaluated loans | $ | $ | $ | $ | ||||||||||||
| Other real estate owned | ||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| (dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Imparied loans | $ | $ | $ | $ | ||||||||||||
| Other real estate owned | ||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
| Fair Value at June 30, 2023 | Fair Value at December 31, 2022 | Valuation Technique | Significant Unobservable Inputs | General Range of Significant Unobservable Input Values | |||||||||||||
| Individually Evaluated Loans | $ | $ | Appraised Value/Discounted Cash Flows/Market Value of Note | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | – | 10% | |||||||||||
| Impaired Loans | $ | $ | Appraised Value/Discounted Cash Flows/Market Value of Note | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | – | 10% | |||||||||||
| Other Real Estate Owned | $ | $ | 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 June 30, 2023, the Bank had a $
At June 30, 2023, the Bank had established unsecured federal funds lines of credit of approximately $
Note 13. Long-Term Borrowings
At June 30, 2023 and December 31, 2022, the Bank had
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 June 30, 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 | |||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||||||
| Total Capital (to risk weighted assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Tier 1 Capital (to risk weighted assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Common Equity Tier 1 (to risk weighted assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Tier 1 Capital (to average total assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Total Capital (to risk weighted assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Tier 1 Capital (to risk weighted assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Common Equity Tier 1 (to risk weighted assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Tier 1 Capital (to average total assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
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 June 30, 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.
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.
Part I. Financial Information
| Item 2. |
Management’s 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 $2.8 million, or $0.49 per share, in the second quarter of 2023, compared to $2.2 million, or $0.40 per share, in the second quarter of 2022. For the six months ended June 30, 2023, net income was $5.5 million, or $0.98 per share, compared to net income of $4.6 million, or $0.83 per share, for the six months ended June 30, 2022. |
| ● |
Net interest margin (“NIM”) was 3.82% for the second quarter of 2023, compared to and 3.54% in the second quarter of 2022. |
| ● |
Total assets increased $9.4 million, or 0.94%, to $1.01 billion at June 30, 2023 from $997.7 million at December 31, 2022. |
| ● |
Net loans were $772.5 million at June 30, 2023, an increase of $23.9 million, or 3.19%, when compared to $748.6 million at December 31, 2022. |
| ● |
Total deposits were $903.4 million at June 30, 2023, a decrease of $16.9 million, or 1.84%, from $920.3 million at December 31, 2022. |
| ● |
Annualized return on average assets increased to 1.10% for the quarter ended June 30, 2023, from 0.88% for the quarter ended June 30, 2022. Annualized return on average equity increased to 14.35% for the quarter ended June 30, 2023, from 11.67% for the quarter ended June 30, 2022. |
| ● |
Earnings for the first six months of 2023 represented an annualized return on average assets of 1.10% and an annualized return on average equity of 14.57%, compared to 0.92% and 11.70%, respectively, for the first six months of 2022. |
| ● |
The Company repurchased 19,712 shares of its common stock through its publicly announced share repurchase program during the second quarter of 2023. |
Results of Operations
Results of Operations for the Three Months ended June 30, 2023 and 2022
Net interest income after provision for credit losses in the second quarter of 2023 was $9.1 million compared to $8.1 million in the second quarter of 2022, primarily reflecting increased interest income. Total interest income was $10.6 million in the second quarter of 2023, representing an increase of $1.8 million in comparison to the second quarter of 2022. Interest income on loans increased in the quarterly comparison by $1.9 million, primarily due to organic loan growth of $64.7 million from June 30, 2022 to June 30, 2023, as well as interest rate increases during the same 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 expense on deposits increased by $1.1 million in the quarterly comparison, as a result of rate increases on deposit offerings, especially on time deposits due to deposit competition. In addition, customers are continuing to move their deposits out of lower rate transactional accounts and into higher earning time deposits. Management anticipates that interest expense on deposits will 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 $202 thousand, primarily due to short-term FHLB advances to fund loan growth of $14.5 million during the second quarter of 2023.
Part I. Financial Information
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations, continued
Results of Operations for the Three Months ended June 30, 2023 and 2022, continued
Second quarter 2023 noninterest income was $1.7 million compared with $1.5 million in the second quarter of 2022. Income from service charges and fees increased by $97 thousand, offsetting a $51 thousand decrease in mortgage origination fees as mortgage origination volume declined compared to the year ago period. Nonrecurring income of $129 thousand related to loan hedge fees from a correspondent bank was recorded in other income for the second quarter of 2023. Excluding this nonrecurring income of $129 thousand in 2023, noninterest income increased by $69 thousand for the second quarter of 2023 compared to the second quarter of 2022.
Noninterest expense in the second quarter of 2023 was $7.4 million compared with $6.9 million in the second quarter of 2022, an increase of $522 thousand, or 7.59%. There was an increase in salary and benefit costs of $359 thousand due to personnel additions and routine salary adjustments, as well as increased benefit costs. Occupancy and equipment expenses increased $100 thousand and data processing increased by $95 thousand in the quarterly comparisons primarily due to branch expansion costs. FDIC assessments increased by $70 thousand due to an increase in the base assessment rate in 2023.
Net income before taxes increased by $627 thousand in the quarterly comparison causing an increase in income tax expense of $110 thousand.
Results of Operations for the Six Months ended June 30, 2023 and 2022
For the first half of 2023, net interest income after provision for credit losses was $18.2 million compared to $16.0 million for the first half of 2022. Interest income increased by $3.4 million, primarily due to an increase of $3.1 million in interest income on loans, and an increase of $218 thousand on securities. Interest expense on deposits increased by $1.5 million for the six-months ended June 30, 2023 compared to the same period last year, as previously discussed; this is a reflection of the increased competitive pressures for deposits and a shift in deposit mix. Interest on borrowings increased by $326 thousand in the six-month comparison, due to short-term borrowings as a result of the decline in deposits of $16.9 million and loan growth of $24.2 million that occurred during the first half of 2023.
For the six months ended June 30, 2023 and 2022, noninterest income was $3.3 million and $3.2 million, respectively. The increase of $126 thousand included an increase of $298 thousand in service charges and fees, which offset a $133 thousand decrease in mortgage origination fees. Included in income for the six months ended June 30, 2023 was nonrecurring income from loan hedge fees discussed above of $129 thousand, and for the six months ended June 30, 2022, there was nonrecurring income of $217 thousand from life insurance contracts.
For the six-month period ended June 30, 2023, total noninterest expenses increased by $1.3 million compared to the same period in 2022, primarily due to employee and branch costs associated with branch expansion. Salary and benefit cost increased by $866 thousand, which also reflects a reduction in capitalized loan origination cost due to lower loan volume in the first half of 2023 compared to the first half of 2022. Occupancy and equipment expenses increased by $281 thousand, and data processing increased by $80 thousand from the first six months of 2022 to 2023. FDIC assessments increased by $67 thousand in the six-month comparison.
In the six-month comparison, net income before taxes increased by $1.1 million, resulting in an increase in income tax expense of $180 thousand.
Part I. Financial Information
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Financial Condition
Total assets increased by $9.4 million, or 0.94%, to $1.01 billion at June 30, 2023 from $997.7 million at December 31, 2022. The increase in assets during the first six months was the result of an increase in borrowings of $20.3 million, which was used to offset a decrease in deposits of $16.9 million. Total loans increased by $24.2 million, or 3.21%, to $779.1 million at June 30, 2023 from $754.9 million at December 31, 2022.
Asset quality has remained strong, with a ratio of nonaccrual loans to total loans of 0.19% at June 30, 2023 compared to 0.22% at December 31, 2022. The allowance for credit losses was approximately 0.85% of total loans as of June 30, 2023, compared to the allowance for loan losses which was approximately 0.83% of total loans as of December 31, 2022.
Investment securities decreased by $7.1 million to $128.1 million at June 30, 2023 from $135.2 million at December 31, 2022. The decrease in the first half of 2023 was the result of $4.4 million in sales and paydowns of $3.7 million, and an decrease in unrealized losses of $1.2 million.
Total deposits decreased in the first half of 2023 by $16.9 million, or 1.84%, to $903.4 million at June 30, 2023 from $920.3 million at December 31, 2022. Noninterest bearing deposits decreased by $11.1 million and interest bearing deposits decreased by $5.8 million during the first six months of 2023. Lower cost interest bearing deposits decreased by $54.5 million during the first half of 2023, which was offset by a $48.7 million increase in time deposits as customers continue to look for higher returns on their deposits.
Total stockholders’ equity increased by $4.3 million, or 5.80% to $77.2 million at June 30, 2023, from $72.9 million at December 31, 2022. The change during the first half of 2023 was due to earnings of $5.5 million, $901 thousand in comprehensive gains, dividend payments of $1.2 million, stock repurchases of $330 thousand, and a cumulative effect adjustment of $710 thousand out of retained earnings due to the January 1, 2023 adoption of the CECL model. Book value increased from $12.98 per share at December 31, 2022 to $13.81 per share at June 30, 2023.
Part I. Financial Information
| Item 2. |
Management’s 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 June 30, 2023 and December 31, 2022.
| June 30, |
December 31, |
|||||||
| 2023 |
2022 |
|||||||
| Allowance for credit losses |
$ | 6,624 | $ | 6,248 | ||||
| Total loans |
$ | 779,138 | $ | 754,872 | ||||
| Allowance for credit losses to total loans |
0.85 | % | 0.83 | % | ||||
| Nonperforming loans: |
||||||||
| Nonaccrual loans |
$ | 1,514 | $ | 1,634 | ||||
| Restructured loans, performing under new terms |
2,249 | 2,330 | ||||||
| Purchased credit deteriorated loans on accrual status |
83 | 89 | ||||||
| Loans past due 90 days or more and still accruing |
- | - | ||||||
| Total nonperforming loans |
3,846 | 4,053 | ||||||
| Other real estate owned |
- | 235 | ||||||
| Total nonperforming assets |
$ | 3,846 | $ | 4,288 | ||||
| Total nonperforming loans as a percentage to total loans |
0.49 | % | 0.54 | % | ||||
| Total allowance for credit losses to nonperforming loans |
172.23 | % | 154.16 | % | ||||
| Total nonperforming assets as a percentage to total assets |
0.38 | % | 0.43 | % | ||||
| Total nonaccrual loans as a percentage to total loans |
0.19 | % | 0.22 | % | ||||
| Total allowance for credit losses to nonaccrual loans |
437.52 | % | 382.37 | % | ||||
Total nonperforming loans were 0.49% of total outstanding loans as of June 30, 2023 and 0.54% as of December 31, 2022, respectively. 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 June 30, 2023 came primarily in the form of principal reductions.
There was no other real estate owned at June 30, 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.”
Part I. Financial Information
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Nonperforming and Problem Assets, continued
As of June 30, 2023 and December 31, 2022, we had loans with a current principal balance of $4.0 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 June 30, 2023 and December 31, 2022, respectively, potential problem loans classified as “Substandard” totaled $4.3 million. As of June 30, 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 June 30, 2023, loans past due 30-89 days and still accruing totaled $552 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 June 30, 2023 totaled $2.5 million, or 0.32% 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 0.85% of total loans at June 30, 2023 and 0.83% of total loans at December 31, 2022.
Part I. Financial Information
| Item 2. |
Management’s 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 six months ended June 30, 2023 and 2022, and the year ended December 31, 2022.
| Six months ended June 30, 2023 |
||||||||||||
| Percentage of Net |
||||||||||||
| (Charge-Offs) |
||||||||||||
| Net |
Recoveries to |
|||||||||||
| (Charge-Offs) |
Average |
Average |
||||||||||
| (dollars in thousands) |
Recoveries |
Loans |
Loans |
|||||||||
| Construction & development |
$ | 1 | $ | 51,336 | 0.00 | % | ||||||
| Farmland |
50 | 23,665 | 0.12 | % | ||||||||
| Residential |
1 | 368,594 | 0.00 | % | ||||||||
| Commercial mortgage |
9 | 261,227 | 0.00 | % | ||||||||
| Commercial & agriculture |
13 | 41,469 | 0.00 | % | ||||||||
| Consumer & other |
(42 | ) | 20,928 | (0.13 | %) | |||||||
| Total |
$ | 32 | $ | 767,219 | 0.00 | % | ||||||
| Six months ended June 30, 2022 |
||||||||||||
| Percentage of Net |
||||||||||||
| (Charge-Offs) |
||||||||||||
| Net |
Recoveries to |
|||||||||||
| (Charge-Offs) |
Average |
Average |
||||||||||
| (dollars in thousands) |
Recoveries |
Loans |
Loans |
|||||||||
| Construction & development |
$ | 2 | $ | 44,678 | 0.00 | % | ||||||
| Farmland |
- | 24,118 | 0.00 | % | ||||||||
| Residential |
11 | 314,516 | 0.00 | % | ||||||||
| Commercial mortgage |
- | 236,935 | 0.00 | % | ||||||||
| Commercial & agriculture |
4 | 53,130 | 0.01 | % | ||||||||
| Consumer & other |
(14 | ) | 23,777 | (0.06% | ) | |||||||
| Total |
$ | 3 | $ | 697,154 | 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 | % | |||||
Part I. Financial Information
| Item 2. |
Management’s 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 June 30, 2023. The Bank had $304 thousand outstanding on these lines as of June 30, 2023 and no balances outstanding on these lines as of December 31, 2022, respectively. In addition, the Bank has approximately $234.7 million credit availability on its line from the FHLB, subject to the pledging of collateral, that provides additional borrowing capacity.
At June 30, 2023, the Bank had short-term FHLB advances of $20.0 million. The Bank had no borrowings outstanding classified as short-term at December 31, 2022. At June 30, 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 12.7% and 14.4% for the periods ended June 30, 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 June 30, 2023, the Bank exceeded minimum regulatory capital requirements and is considered to be “well capitalized.”
At June 30, 2023, the Company’s equity to asset ratio was 7.66% 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 $330 thousand of stock repurchases, for the first six months of 2023.
Part I. Financial Information
| Item 2. |
Management’s 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.
Part I. Financial Information
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
Not required.
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.
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 second 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) |
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| Purchased 4/1 through 4/30 |
- | $ | - | - | 81,325 | |||||||||||
| Purchased 5/1 through 5/31 |
- | $ | - | - | 81,325 | |||||||||||
| Purchased 6/1 through 6/30 |
19,712 | $ | 11.00 | 19,712 | 61,613 | |||||||||||
| Total during second quarter 2023 |
19,712 | $ | 11.00 | 19,712 | ||||||||||||
| (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
Part II. Other Information
| Item 6. |
Exhibits |
| 31.1 |
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| 31.2 |
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| 32.1 |
Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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| 101 |
The following materials from the Quarterly Report on Form 10-Q for the quarter ended June 30, 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). |
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.
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Skyline Bankshares, Inc. |
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| Date: August 14, 2023 |
By: |
/s/ Blake M. Edwards |
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Blake M. Edwards |
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President and Chief Executive Officer |
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By: |
/s/ Lori C. Vaught |
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Lori C. Vaught |
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Chief Financial Officer |
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