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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2024

 

Or

 

 

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

 

Commission File Number: 333-209052

 

SKYLINE BANKSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Virginia

 

47-5486027

(State or Other Jurisdiction of Incorporation)

 

(I.R.S. Employer Identification Number)

 

 

 

101 Jacksonville Circle

 

 

Floyd, Virginia

 

24091

(Address of Principal Executive Offices)

 

(Zip Code)

 

(540) 745-4191

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

None

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

  

Non-accelerated filer

Smaller reporting company

  

 

Emerging growth company

 

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

 

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

 

The registrant had 5,629,204 shares of Common Stock, no par value per share, outstanding as of May 14, 2024.

 

 

 

 

 

PART I

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

 
     

 

Consolidated Balance Sheets—March 31, 2024 (Unaudited) and December 31, 2023 (Audited)

3

     

 

Unaudited Consolidated Statements of Income—Three Months Ended March 31, 2024 and March 31, 2023

4

     

 

Unaudited Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2024 and March 31, 2023

5

     

 

Unaudited Consolidated Statements of Changes in Stockholders’ Equity—Three Months Ended March 31, 2024 and March 31, 2023

6

     

 

Unaudited Consolidated Statements of Cash Flows—Three Months Ended March 31, 2024 and March 31, 2023

7

     

 

Notes to Consolidated Financial Statements

9

     

Item 2.

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

45

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

52

     

Item 4.

Controls and Procedures

53

     

PART II

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

54

     

Item 1A.

Risk Factors

54

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

     

Item 3.

Defaults Upon Senior Securities

55

     

Item 4.

Mine Safety Disclosures

55

     

Item 5.

Other Information

56

     

Item 6.

Exhibits

56

     

Signatures

57

 

 

 

Part I. Financial Information

 

Item 1. Financial Statements


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Balance Sheets

March 31, 2024 and December 31, 2023


 

(dollars in thousands)

 

March 31,

  

December 31,

 
  

2024

  

2023

 

 

 

(Unaudited)

  

(Audited)

 
Assets         
         

Cash and due from banks

 $13,115  $16,811 

Interest-bearing deposits with banks

  8,233   4,808 

Federal funds sold

  384   474 

Total cash and cash equivalents

  21,732   22,093 

Investment securities available for sale

  122,368   127,389 

Restricted equity securities

  3,609   3,338 

Loans, net of allowance for credit losses of $6,765 at March 31, 2024 and $6,739 at December 31, 2023

  819,919   810,965 

Cash value of life insurance

  23,055   22,909 

Properties and equipment, net

  31,394   31,183 

Accrued interest receivable

  3,450   3,463 

Core deposit intangible

  837   917 

Goodwill

  3,257   3,257 

Deferred tax assets, net

  5,252   5,046 

Other assets

  15,207   15,283 
  $1,050,080  $1,045,843 
         

Liabilities and Stockholders Equity

        
         

Liabilities

        

Deposits

        

Noninterest-bearing

 $293,912  $305,115 

Interest-bearing

  636,529   623,627 

Total deposits

  930,441   928,742 
         

Borrowings

  30,000   27,500 

Accrued interest payable

  683   531 

Other liabilities

  6,081   6,188 
   967,205   962,961 

Commitments and contingencies (Note 11)

          
         

Stockholders Equity

        

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

  -   - 

Common stock, no par value; 25,000,000 shares authorized, 5,629,204 and 5,584,204 issued and outstanding at March 31, 2024 and December 31, 2023, respectively

  -   - 

Surplus

  33,145   33,356 

Retained earnings

  69,638   68,866 

Accumulated other comprehensive loss

  (19,908)  (19,340)
   82,875   82,882 
  $1,050,080  $1,045,843 
 

See Notes to Consolidated Financial Statements

 

3

 


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Income

For the Three Months ended March 31, 2024 and 2023


 

   

Three Months Ended

 
   

March 31,

 

(dollars in thousands except share amounts)

 

2024

   

2023

 
   

(Unaudited)

   

(Unaudited)

 

Interest income

               

Loans and fees on loans

  $ 11,147     $ 9,164  

Interest-bearing deposits in banks

    64       88  

Federal funds sold

    4       10  

Interest on taxable securities

    685       747  

Interest on nontaxable securities

    49       49  

Dividends

    37       10  
      11,986       10,068  

Interest expense

               

Deposits

    2,682       894  

Interest on borrowings

    437       169  
      3,119       1,063  

Net interest income

    8,867       9,005  
                 

Provision for (recovery of) credit losses

    93       (106 )

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

    8,774       9,111  
                 

Noninterest income

               

Service charges on deposit accounts

    551       497  

Other service charges and fees

    849       823  

Net realized losses on securities

    (141 )     -  

Mortgage origination fees

    55       84  

Increase in cash value of life insurance

    146       139  

Life insurance income

    218       -  

Other income

    21       21  
      1,699       1,564  

Noninterest expenses

               

Salaries and employee benefits

    4,321       4,086  

Occupancy and equipment

    1,411       1,186  

Data processing expense

    649       491  

FDIC Assessments

    144       111  

Advertising

    217       135  

Bank franchise tax

    99       105  

Director fees

    58       61  

Professional fees

    221       221  

Telephone expense

    107       139  

Core deposit intangible amortization

    80       105  

Other expense

    669       695  
      7,976       7,335  

Net income before income taxes

    2,497       3,340  
                 

Income tax expense

    446       612  

Net income

  $ 2,051     $ 2,728  
                 

Net income per share

  $ 0.37     $ 0.49  

Weighted average shares outstanding

    5,564,568       5,597,233  

Dividends declared per share

  $ 0.23     $ 0.21  

 

See Notes to Consolidated Financial Statements

 

4

 


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the Three Months ended March 31, 2024 and 2023


 

   

Three Months Ended

 
   

March 31,

 

(dollars in thousands)

 

2024

   

2023

 
   

(Unaudited)

   

(Unaudited)

 
                 

Net Income

  $ 2,051     $ 2,728  
                 

Other comprehensive (loss) income

               
                 

Unrealized losses on investment securities available for sale:

               

Unrealized (losses) gains arising during the period

    (859 )     3,326  

Tax related to unrealized losses (gains)

    180       (698 )

Reclassification of net realized losses during the period

    141       -  

Tax related to net realized losses

    (30 )     -  
                 

Total other comprehensive (loss) income

    (568 )     2,628  

Total comprehensive income

  $ 1,483     $ 5,356  

 

See Notes to Consolidated Financial Statements

 

5

 


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders Equity

For the Three Months ended March 31, 2024 and 2023 (unaudited)


 

(dollars in thousands except share amounts)

         
                  

Accumulated

     
                  

Other

     
  

Common Stock

      

Retained

  

Comprehensive

     
  

Shares

  

Amount

  

Surplus

  

Earnings

  

Loss

  

Total

 
                         

Balance, December 31, 2022

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

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

  -   -   -   (710)  -   (710)

Net income

  -   -   -   2,728   -   2,728 

Other comprehensive income

  -   -   -   -   2,628   2,628 

Dividends paid ($0.21 per share)

  -   -   -   (1,180)  -   (1,180)

Share-based compensation

  -   -   20   -   -   20 

Common stock repurchased

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

Balance, March 31, 2023

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

Balance, December 31, 2023

  5,584,204  $-  $33,356  $68,866  $(19,340) $82,882 
                         

Net income

  -   -   -   2,051   -   2,051 

Other comprehensive loss

  -   -   -   -   (568)  (568)

Dividends paid ($0.23 per share)

  -   -   -   (1,279)  -   (1,279)

Stock awards issued

  65,000   -   -   -   -   - 

Share-based compensation

  -   -   19   -   -   19 

Common stock repurchased

  (20,000)  -   (230)  -   -   (230)
                         

Balance, March 31, 2024

  5,629,204  $-  $33,145  $69,638  $(19,908) $82,875 

 

See Notes to Consolidated Financial Statements

 

6

 


 

 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Three Months ended March 31, 2024 and 2023


 

   

Three Months Ended

 
   

March 31,

 

(dollars in thousands)

 

2024

   

2023

 
   

(Unaudited)

   

(Unaudited)

 

Cash flows from operating activities

               

Net income

  $ 2,051     $ 2,728  

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

               

Depreciation

    511       466  

Amortization of core deposit intangible

    80       105  

Accretion of loan discount and deposit premium, net

    (40 )     (32 )

Provision for (recovery of) credit losses

    93       (106 )

Deferred income taxes

    (56 )     (80 )

Net realized losses on securities

    141       -  

Accretion of discount on securities, net of amortization of premiums

    27       33  

Deferred compensation

    44       38  

Share-based compensation

    19       20  

Loss on sale of other real estate owned

    -       6  

Changes in assets and liabilities:

               

Cash value of life insurance

    (146 )     (139 )

Accrued interest receivable

    13       91  

Other assets

    15       583  

Accrued interest payable

    152       166  

Other liabilities

    (136 )     7,430  

Net cash provided by operating activities

    2,768       11,309  
                 

Cash flows from investing activities

               

Activity in available for sale securities:

               

Purchases

    -       -  

Maturities/calls/paydowns

    4,135       1,766  

Purchases of restricted equity securities

    (271 )     (1,064 )

Net increase in loans

    (8,964 )     (9,703 )

Proceeds from sale of other real estate owned

    -       229  

Purchases of property and equipment

    (722 )     (389 )

Net cash used in investing activities

    (5,822 )     (9,161 )
                 

Cash flows from financing activities

               

Net increase (decrease) in deposits

    1,702       (14,868 )

FHLB advances

    5,000       25,000  

Repayment of bank term funding program advances

    (2,500 )     -  

Common stock repurchased

    (230 )     (113 )

Dividends paid

    (1,279 )     (1,180 )

Net cash provided by financing activities

    2,693       8,839  

Net (decrease) increase in cash and cash equivalents

    (361 )     10,987  
                 

Cash and cash equivalents, beginning

    22,093       31,061  

Cash and cash equivalents, ending

  $ 21,732     $ 42,048  

 

See Notes to Consolidated Financial Statements

 

7

 

 


 

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows, continued

For the Three Months ended March 31, 2024 and 2023


 

   

Three Months Ended

 
   

March 31,

 

(dollars in thousands)

 

2024

   

2023

 
   

(Unaudited)

   

(Unaudited)

 

Supplemental disclosure of cash flow information

               

Interest paid

  $ 2,967     $ 897  

Taxes paid

  $ -     $ -  
                 

Supplemental disclosure of noncash investing activities

               

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

  $ (568 )   $ 2,628  

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

  $ 17     $ -  

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

  $ -     $ (710 )

 

See Notes to Consolidated Financial Statements

 

8

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 1.  Organization and Summary of Significant Accounting Policies

 

Organization

 

Skyline Bankshares, Inc. (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”) in which which Grayson and Cardinal merged with and into the Company, with the Company as the surviving corporation (the “Cardinal merger”), on July 1, 2016. Upon completion of the Cardinal merger, the Bank of Floyd (“Floyd”), a wholly-owned subsidiary of Cardinal, was merged with and into the Bank (formerly Grayson National Bank), a wholly-owned subsidiary of Grayson. Effective March 13, 2017, the Bank changed its name to Skyline National Bank.

 

On July 1, 2018, the Company acquired Great State Bank (“Great State”), based in Wilkesboro, North Carolina, through the merger of Great State with and into the Bank, with the Bank as the surviving bank.

 

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, Patrick and Washington, 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 two loan production offices. As a Federal Deposit Insurance Corporation (“FDIC”) insured national banking association, the Bank is subject to regulation by the Comptroller of the Currency and the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

 

The consolidated financial statements as of March 31, 2024 and for the three-month periods ended March 31, 2024 and 2023 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, 2023, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year.

 

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.

 

9


 

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

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.

 

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.

 

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 credit 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 credit 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.

 

10

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

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.

 

Accounting Standards Adopted in 2023

 

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

 

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

 

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

 

11


 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

Accounting Standards Adopted in 2023, continued

 

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 loan balance, or a portion thereof, is uncollectable. 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, which includes forecasted future economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The adoption of ASC 326 eliminated the accounting guidance for troubled debt restructurings by creditors and enhanced the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. For information related to modifications made to borrowers experiencing financial difficulty after the adoption of ASC 326 and information regarding troubled debt restructurings before the adoption of ASC 326, see Note 5 to the consolidated financial statements.

 

Allowance for Credit Losses Available for Sale Securities

 

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

 

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

 

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2024 and December 31, 2023, there was no allowance for credit loss related to the available for sale portfolio.

 

12


 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

Allowance for Credit Losses Available for Sale Securities, continued

 

Accrued interest receivable on available for sale debt securities, which is reported in accrued interest receivable on the consolidated balance sheets, totaled $543 thousand and $641 thousand at March 31, 2024 and December 31, 2023, respectively and was excluded from the estimate of credit losses.

 

Loans Receivable

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.9 million and $2.8 million at March 31, 2024 and December 31, 2023, respectively and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

 

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

 

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

 

Purchased Credit Deteriorated 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.

 

13

 

 


 

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

 

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 loan balance, or a portion thereof, is uncollectable. 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 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. Under this methodology an estimate of probability of default and a lifetime loss rate is applied to the portfolio segment based on the loss history during the economic life cycle of these type of loans.

 

 

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

 

 

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

 

 

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.

 

14

 


 

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

 

 

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. The Company has designated 5-year treasury yield, federal funds rates, and national unemployment as its forecast variables for a period of 12 months. These forecasts from reputable and independent third parties are sourced to inform the Company’s reasonable and supportable forecasting of current expected credit losses. 

 

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 date unadjusted for selling costs as appropriate.

 

15

 

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

Allowance for Credit Losses Unfunded Commitments

 

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

 

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

 

Property and Equipment

 

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

 

  

Years

 
      

Buildings and improvements

 10-40 

Furniture and equipment

 5-12 

 

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.

 

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 March 31, 2024, 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 10 to the consolidated financial statements.

 

16

 

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

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.

 

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

 

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

 

Cash Value of Life Insurance

 

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

 

Leases

 

We have performed an evaluation of our leasing contracts and activities. We have developed our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments. There was not a material change to the timing of expense recognition. See additional discussion of leases in Note 9 to the consolidated financial statements.

 

17

 

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

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.

 

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 12. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

 

Advertising Expense

 

The Company expenses advertising costs as they are incurred. Advertising expense for the three months ended March 31, 2024 and 2023 amounted to $217 thousand and $135 thousand, respectively.

 

Basic Earnings per Share

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. For the three months ended March 31, 2024 and 2023, there were no dilutive instruments.

 

18

 

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

Revenue Recognition

 

Service Charges on Deposit Accounts - Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, wire transfer fees and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. Wire transfer fees, overdraft and nonsufficient funds fees, and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Fees for these services for the three months ended March 31, 2024 and 2023 amounted to $551 thousand and $497 thousand, respectively.

 

Mortgage Origination Fees Mortgage origination fees consist of commissions received on mortgage loans closed in the secondary market. The Company acts as an intermediary between the Company’s customer and companies that specialize in mortgage lending in the secondary market. The Company’s performance obligation is generally satisfied when the mortgage loan is closed and funded and the Company receives its commission at that time. Fees for these services for the three months ended March 31, 2024 and 2023 amounted to $55 thousand and $84 thousand, respectively.

 

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

 

 

ATM, Credit and Debit Card Fees - ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or Mastercard. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for ATM fees, interchange fee income, and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Fees for these services for the three months ended March 31, 2024 and 2023 amounted to $722 thousand and $697 thousand, respectively.

 

 

Insurance and Investment - Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. For each of the three months ended March 31, 2024 and 2023 the Company received $17 thousand in income from these services.

 

19

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

Comprehensive Income

 

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

 

  

Unrealized Gains

         
  

and (Losses)

         

(dollars in thousands)

 

On Available for

  

Defined Benefit

     
  

Sale Securities

  

Pension Items

  

Total

 
             

Balance, December 31, 2022

 $(20,942) $(1,964) $(22,906)

Other comprehensive income before reclassifications

  2,628   -   2,628 

Amounts reclassified from accumulated other comprehensive income, net of tax

  -   -   - 

Balance March 31, 2023

 $(18,314) $(1,964) $(20,278)
             

Balance, December 31, 2023

 $(17,964) $(1,376) $(19,340)

Other comprehensive loss before reclassifications

  (679)  -   (679)

Amounts reclassified from accumulated other comprehensive loss, net of tax

  111   -   111 

Balance March 31, 2024

 $(18,532) $(1,376) $(19,908)

 

Reclassification

 

No reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current presentation.

 

20

 

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

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

 

Recent Accounting Pronouncements

 

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

 

In 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 were 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.

 

In July 2023, the FASB issued amendments to SEC Paragraphs in the Accounting Standards Codification pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022, EITF Meeting, and Staff Accounting Bulletin Topic 6.B. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

In August 2023, the FASB issued amendments to SEC Paragraphs in the Accounting Standards Codification pursuant to SEC Staff Accounting Bulletin No. 121. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

 

In December 2023, the FASB amended the Income Taxes topic in the Accounting Standards Codification to improve the transparency of income tax disclosures. The amendments are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. 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.

 

 

Note 2.  Restrictions on Cash

 

The Bank is required to maintain vault cash on hand or on deposit with the Federal Reserve Bank based on the amount of certain customer deposits, mainly checking accounts. The Federal Reserve lowered the reserve requirement ratios on transaction accounts to zero percent effective March 26, 2020; therefore, there were no required reserve balances as of March 31, 2024 or  December 31, 2023.

 

21

 

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

 

Note 3.  Investment Securities

 

Investment securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values at March 31, 2024 and December 31, 2023 is summarized in the following table. There was no allowance for credit losses on available for sale securities as of March 31, 2024 and December 31, 2023.

 

(dollars in thousands)

 

Amortized

Cost

  

Unrealized

Gains

  

Unrealized

Losses

  

Fair

Value

 

March 31, 2024

                

Available for sale:

                

U.S. Treasury securities

 $2,509  $-  $(64) $2,445 

U.S. Government agencies

  25,201   -   (3,977)  21,224 

Mortgage-backed securities

  70,134   -   (10,429)  59,705 

Corporate securities

  1,500   -   (47)  1,453 

State and municipal securities

  46,482   4   (8,945)  37,541 
  $145,826  $4  $(23,462) $122,368 

December 31, 2023

                

Available for sale:

                

U.S. Treasury securities

 $2,511  $-  $(65) $2,446 

U.S. Government agencies

  25,165   -   (3,727)  21,438 

Mortgage-backed securities

  71,617   -   (9,920)  61,697 

Corporate securities

  1,500   -   (58)  1,442 

State and municipal securities

  49,336   9   (8,979)  40,366 
  $150,129  $9  $(22,749) $127,389 

 

Restricted equity securities totaled $3.6 million at March 31, 2024 and $3.3 million at December 31, 2023. Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (“FHLB”), CBB Financial Corp., Pacific Coast Bankers Bank, and the Federal Reserve Bank of Richmond, all of which are carried at cost. All of these entities are upstream correspondents of the Bank. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow money. The Federal Reserve requires banks to purchase stock as a condition for membership in the Federal Reserve System. The Bank’s stock in CBB Financial Corp. and Pacific Coast Bankers Bank is restricted only in the fact that the stock may only be repurchased by the respective banks.

 

The following tables details unrealized losses and related fair values in the Company’s available for sale investment securities portfolios for which an allowance for credit losses has not been recorded as of March 31, 2024 and December 31, 2023. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2024 and December 31, 2023.

 

  

Less Than 12 Months

  

12 Months or More

  

Total

 

(dollars in thousands)

 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 

March 31, 2024

                        

Available for sale:

                        

U.S. Treasury securities

 $-  $-  $2,445  $(64)  2,445  $(64)

U.S. Government agencies

  -   -   21,224   (3,977)  21,224   (3,977)

Mortgage-backed securities

  4   -   59,701   (10,429)  59,705   (10,429)

Corporate securities

  -   -   1,453   (47)  1,453   (47)

State and municipal securities

  1,195   (330)  35,512   (8,615)  36,707   (8,945)

Total securities available for sale

 $1,199  $(330) $120,335  $(23,132) $121,534  $(23,462)
                         

December 31, 2023

                        

Available for sale:

                        

U.S. Treasury securities

 $-  $-  $2,446  $(65)  2,446  $(65)

U.S. Government agencies

  -   -   21,438   (3,727)  21,438   (3,727)

Mortgage-backed securities

  5   -   61,692   (9,920)  61,697   (9,920)

Corporate securities

  1,442   (58)  -   -   1,442   (58)

State and municipal securities

  1,216   (310)  38,181   (8,669)  39,397   (8,979)

Total securities available for sale

 $2,663  $(368) $123,757  $(22,381) $126,420  $(22,749)

 

22

 


 

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)


 

Note 3.  Investment Securities, continued

 

At March 31, 2024, 80 investment securities with unrealized losses had depreciated 16.18 percent from their total amortized cost basis. Management evaluates all available for sale investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

 

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

 

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2024 and December 31, 2023, there was no allowance for credit losses related to the available for sale portfolio.

 

There were no sales of investment securities available for sale for the three-month periods ended March 31, 2024 and 2023, respectively. Gross proceeds from called securities totaled $2.7 million for the three-month period ended March 31, 2024. There were no called securities for the three-month period ended March 31, 2023. Gains and losses on the sale of investment securities are recorded on the trade date and are determined using the specific identification method. The realized loss shown below resulted from the recognition of unamortized premiums on a called bond that had no pre-set call date. Gross realized gains and losses for the three-month periods ended March 31, 2024 and 2023 are as follows:

 

  

Three Months Ended March 31,

 

(dollars in thousands)

 

2024

  

2023

 
         

Realized gains

 $-  $- 

Realized losses

  (141)  - 
  $(1