SKYLINE BANKSHARES, INC. --------------------------------------------------------------------------------
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 endedDecember 31, 2021 . Critical Accounting Policies For a discussion of the Company's critical accounting policies, including its allowance for loan 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 endedDecember 31, 2021 . Executive Summary
? Net income was
compared to
For the nine months ended
for the nine months ended
? Net interest margin ("NIM") was 3.70% for the third quarter of 2022, compared
to 3.54% in the second quarter of 2022, and 3.60% in the third quarter of
2021.
? Total assets increased
30, 2022 from
? Net loans were
million, or 8.10%, when compared to
? Total deposits were
million, or 5.28%, from
? Annualized return on average assets decreased to 1.07% for the quarter ended
mainly to growth in total assets. Annualized return on average equity
increased to 14.69% for the quarter ended
the quarter ended
? Earnings for the first nine months of 2022 represented an annualized return on
average assets of 0.98% and an annualized return on average equity of 12.65%,
compared to 0.99% and 10.57%, respectively, for the first nine months of 2021.
Results of Operations
Results of Operations for the Three Months ended
Net interest income after provision for loan losses in the third quarter of 2022 was$8.8 million , compared to$7.9 million in the third quarter of 2021, primarily reflecting increased interest income and a reduction in interest expense. Total interest income was$9.4 million in the third quarter of 2022, representing an increase of$728 thousand in comparison to the third quarter of 2021. Interest income on loans decreased in the quarterly comparison by$42 thousand , primarily due to a decrease in SBA-PPP related interest and fees of$1.1 million from the year ago period. FromSeptember 30, 2021 toSeptember 30, 2022 , SBA-PPP loans decreased by$37.7 million ; however, this decrease has been offset by higher yielding organic loan growth of$92.5 million . Management anticipates that this loan growth, in addition to higher rates in the current year, will have a positive impact on both earning assets and loan yields. Interest income on securities increased by$444 thousand in the quarterly comparison as a result of the$58.0 million increase in the securities portfolio, excluding market value changes, from the year ago period. The Company also successfully reduced interest expense on deposits by$182 thousand , or 32.73%, in the quarterly comparison, reflecting rate reductions in deposit offerings. Management anticipates that interest expense will increase in the near term as competitive pressures for deposits may result in increases in rates on deposit offerings, especially on time deposits. 46
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Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Results of Operations for the Three Months ended
The provision for loan losses was$148 thousand for the quarter endedSeptember 30, 2022 , compared to$219 thousand for the quarter endedSeptember 30, 2021 . During the third quarter of 2022, Parkway recorded$14 thousand in net charge offs compared to$11 thousand in net charge offs for the third quarter of 2021. The reserve for loan losses atSeptember 30, 2022 was approximately 0.83% of total loans, compared to 0.81% atSeptember 30, 2021 . Management's estimate of probable credit losses inherent in the acquired loan portfolio fromCardinal Bankshares Corporation andGreat State Bank was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired loans. As ofSeptember 30, 2022 , the remaining unaccreted discount on the acquired loan portfolios totaled$737 thousand . This remaining discount can be used for credit losses if a loss occurs on individual loans in the purchased portfolios. Third quarter 2022 noninterest income was$1.6 million compared with$1.8 million in the third quarter of 2021. Income from service charges and fees increased by$212 thousand , offsetting a$201 thousand decrease in mortgage origination fees as mortgage origination volume has declined compared to the year ago period. Nonrecurring income of$265 thousand from net realized gains on the sale of securities was recorded in the third quarter of 2021. Excluding this nonrecurring income of$265 thousand in 2021, noninterest income increased by$22 thousand for the third quarter of 2022 compared to the third quarter of 2021. Noninterest expense in the quarterly comparison was negatively impacted by rising inflation in 2022, and the added cost from branch expansion earlier in the year. Noninterest expense increased$616 thousand , or 9.80%, from the third quarter of 2021 to the third quarter of 2022. There was an increase in salary and benefit costs of$230 thousand , while occupancy and equipment expenses increased$232 thousand in the quarterly comparisons.FDIC assessments increased by$38 thousand to adjust for continued deposit growth, offsetting a decrease in core deposit intangible amortization of$29 thousand in the quarterly comparison. Net income before taxes was comparable at$3.5 million and$3.4 million in the quarterly comparison, resulting in income tax expense of$701 thousand for both the three months endedSeptember 30, 2022 and 2021, respectively.
Results of Operations for the Nine Months ended
For the first nine months of 2022, net interest income after provision for loan losses was$24.8 million compared to$22.7 million for the first nine months of 2021. Interest income increased by$1.4 million , primarily due to an increase of$1.2 million in interest income on securities and an increase of$463 thousand in interest income on interest-bearing deposits in banks, which offset a decrease in loan interest income of$169 thousand during the first nine months of 2022, compared to the first nine months of 2021. Interest income on loans decreased in the nine-month comparison, primarily due to a decrease in SBA-PPP related interest and fees of$1.2 million from the year ago period. Excluding SBA-PPP related interest and fees of$1.8 million for the first nine months of 2022 and$3.0 for the first nine months of 2021, interest income on loans would have increased$1 million , reflecting our core loan growth as well as the current rate environment. Interest expense on deposits decreased by$625 thousand for the nine months endedSeptember 30, 2022 compared to the same period last year. This is a reflection of the reduced rates for savings and time deposits, as previously discussed, along with a reduction in time deposit balances from a year ago. For the nine months endedSeptember 30, 2022 and 2021, noninterest income was$4.7 million and$4.8 million , respectively. Included in noninterest income for the nine months endedSeptember 30, 2022 was nonrecurring income from life insurance contracts of$217 thousand , and for the nine months endedSeptember 30, 2021 , there was nonrecurring income of$200 thousand from a one-time lease termination fee and$265 thousand from net realized gains on the sale of securities. Excluding these items, noninterest income increased$144 thousand in the nine-month comparison, primarily as a result of increased income from service charges and fees of$715 thousand , partially offset by a decrease of$502 thousand in mortgage origination income. 47 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Results of Operations for the Nine Months ended
Noninterest expenses in the nine-month comparison was negatively impacted by rising inflation in 2022, and the added cost from branch expansion earlier in the year. For the nine-month period endedSeptember 30, 2022 , total noninterest expenses increased by$1.3 million compared to the same period in 2021. Salary and benefit cost increased by$459 thousand , occupancy and equipment expenses increased by$520 thousand , and telephone expense increased by$72 thousand from the first nine months of 2021 to 2022.FDIC assessments increased by$113 thousand in the nine-month comparison due to continued deposit growth. In total, income before taxes increased by$626 thousand over the first nine months of 2022 compared to the first nine months of 2021. Income tax expense increased by$45 thousand over the prior year, resulting in an increase in net income of$581 thousand for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Financial Condition Total assets increased by$27.9 million , or 2.80%, to$1.02 billion atSeptember 30, 2022 from$995.8 million atDecember 31, 2021 . The growth in assets during the first nine months of 2022 primarily reflects an increase in gross loans and deposits. Total loans increased by$55.5 million , or 8.11%, to$739.0 million atSeptember 30, 2022 from$683.5 million atDecember 31, 2021 . SBA-PPP loans decreased by$24.4 million during the first nine months of 2022; however, this decrease was offset by higher yielding organic loan growth of$80.7 million during the first nine months of 2022, which is an annualized rate of 16.50%. Gross loans atSeptember 30, 2022 included$96 thousand in SBA-PPP loans with net deferred fees of$10 thousand . Investment securities increased by$8.8 million to$138.5 million atSeptember 30, 2022 from$129.7 million atDecember 31, 2021 . The increase in the first nine months of 2022 was the result of$45.2 million in purchases, offset by paydowns, calls, and maturities of$10.6 million , and an increase in unrealized losses of$25.6 million as a result of the increase in interest rates during the first nine months of 2022. Total deposits increased by$47.5 million , or 5.28%, to$945.7 million atSeptember 30, 2022 from$898.2 million atDecember 31, 2021 . Deposit growth continues to reflect increased balances held by customers, organic growth in our markets and new customer deposits. Lower-cost core deposits (demand deposits, savings, and money market accounts) increased by$62.8 million during the first nine months of 2022, resulting in annualized growth of 11.85%, while time deposit balances decreased by$15.3 million . Total stockholders' equity decreased by$14.7 million , or 17.23% to$70.5 million atSeptember 30, 2022 , from$85.2 million atDecember 31, 2021 . The change during the first nine months of 2022 reflects earnings of$7.4 million , offset by dividend payments of$1.8 million , stock repurchases of$154 thousand , and an unrealized loss on the value of the securities portfolio as a result of increased interest rates during the first nine months of 2022. As interest rates rise, we anticipate continued negative pressure on the market value of our investment portfolio which is recognized on our balance sheet as a reduction in stockholders' equity. However, management does not anticipate the need to sell any investment securities prior to their scheduled maturity, therefore we do not expect market value changes to impact future earnings. 48 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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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 loan losses, nonperforming assets and loans past due 90 days or more and still accruing as ofSeptember 30, 2022 andDecember 31, 2021 . September 30, December 31, 2022 2021 Allowance for loan losses $ 6,168$ 5,677 Total loans$ 738,992 $ 683,532 Allowance for loan losses to total loans 0.83 % 0.83 % Nonperforming loans: Nonaccrual loans $ 1,770$ 1,320 Restructured loans 2,371 3,167 Purchased credit-impaired loans on accrual status 93 103 Loans past due 90 days or more and still accruing - - Total nonperforming loans 4,234 4,590 Foreclosed assets - - Total nonperforming assets $ 4,234$ 4,590 Total nonperforming loans as a percentage to total loans 0.57 % 0.67 % Total allowance for loan losses to nonperforming loans 145.68 % 123.68 % Total nonperforming assets as a percentage to total assets 0.41 % 0.46 % Total nonaccrual loans as a percentage to total loans 0.24 % 0.19 % Total allowance for loan losses to nonaccrual loans 348.47 % 430.08 % Total nonperforming loans were 0.57% of total outstanding loans as ofSeptember 30, 2022 and 0.67% as ofDecember 31, 2021 , respectively. The majority of the increase in nonaccrual loans for the first nine months of 2022 came in the "commercial mortgage" category as a result of one large credit going into nonaccrual status. Nonaccrual loans in this category increased by$520 thousand . Loans are placed in nonaccrual status when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof. Management's ability to ultimately resolve these loans either with or without significant loss will be determined, to a great extent, by general economic and real estate market conditions. Restructured loans represent troubled debt restructurings ("TDRs") that have returned to accrual status after a period of performance in accordance with their modified terms. The decrease in restructured loans fromDecember 31, 2021 toSeptember 30, 2022 came primarily in the form of principal reductions. A TDR is considered to be successful if the borrower maintains adequate payment performance under the modified terms and is financially stable. 49 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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Nonperforming and Problem Assets, continued
There were no foreclosed assets as ofSeptember 30, 2022 orDecember 31, 2021 . More information on nonperforming assets and loan modifications in response to COVID-19 can be found in Note 4 of the "Notes to Consolidated Financial Statements." As ofSeptember 30, 2022 andDecember 31, 2021 , we had loans with a current principal balance of$6.8 million and$10.9 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 ofSeptember 30, 2022 , potential problem loans classified as substandard totaled$5.3 million compared to$6.0 million atDecember 31, 2021 . 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 ofSeptember 30, 2022 , loans past due 30-89 days and still accruing totaled$293 thousand compared to$346 thousand atDecember 31, 2021 . 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 atSeptember 30, 2022 totaled$3.4 million , or 0.47% 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 loan 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 loan 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 loan losses and recoveries on loans previously charged off are added to the allowance. The reserve for loan losses was approximately 0.83% of total loans atSeptember 30, 2022 andDecember 31, 2021 . Management's estimate of probable credit losses inherent in the acquiredCardinal Bankshares Corporation and Great State loan portfolios was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired loans. As ofSeptember 30, 2022 , the remaining unaccreted discount on the acquired loan portfolios totaled$737 thousand . This remaining discount can be used for credit losses if a loss occurs on individual loans in the purchased portfolios. 50
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Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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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 nine months ended
Nine months ended September 30, 2022
Percentage of Net
(Charge-Offs)
Net Recoveries to
(Charge-Offs) Average Average
(dollars in thousands) Recoveries Loans Loans
Construction & development $ 3 $ 44,953 0.01 %
Farmland - 24,293 0.00 %
Residential 11 322,360 0.00 %
Commercial mortgage 8 243,091 0.00 %
Commercial & agriculture 17 39,220 0.04 %
SBA-PPP - 10,598 0.00 %
Consumer & other (50 ) 22,894 (0.22% ) Total $ (11 )$ 707,409 0.00 % Nine months ended September 30, 2021 Percentage of Net (Charge-Offs) Net Recoveries to (Charge-Offs) Average Average (dollars in thousands) Recoveries Loans Loans Construction & development $ 3$ 44,544 0.01 % Farmland - 30,997 0.00 % Residential 2 287,589 0.00 % Commercial mortgage 61 218,896 0.03 % Commercial & agriculture 45 33,503 0.13 % SBA-PPP - 55,763 0.00 % Consumer & other (37 ) 18,256 (0.20% ) Total $ 74$ 689,548 0.01 % Year ended December 31, 2021 Percentage of Net (Charge-Offs) Net Recoveries to (Charge-Offs) Average Average (dollars in thousands) Recoveries Loans Loans Construction & development $ 5$ 44,437 0.01 % Farmland - 29,766 0.00 % Residential 2 289,445 0.00 % Commercial mortgage 61 220,897 0.03 % Commercial & agriculture 45 34,457 0.13 % SBA-PPP - 49,438 0.00 % Consumer & other (59 ) 19,147 (0.31% ) Total $ 54$ 687,587 0.01 % 51
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Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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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 atSeptember 30, 2022 . The Bank had no balances outstanding on these lines as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. In addition, the Bank has the ability to borrow up to approximately$259.5 million from the FHLB, subject to the pledging of collateral. AtSeptember 30, 2022 , the Bank had no debt outstanding classified as long-term. AtDecember 31, 2021 , the Bank's long-term debt consisted of a$5.0 million advance from FHLB, which was scheduled to mature onDecember 6, 2029 . OnMarch 31, 2022 , the Bank prepaid the$5.0 million advance and incurred a prepayment penalty of$8 thousand . 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 18.3% and 23.1% for the periods endedSeptember 30, 2022 andDecember 31, 2021 , 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 loan losses, certain qualifying long-term debt and preferred stock which does not qualify as Tier 1 capital. Financial institutions are also subject to theBASEL 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. AtSeptember 30, 2022 , the Bank exceeded minimum regulatory capital requirements and is considered to be "well capitalized." AtSeptember 30, 2022 , Parkway's equity to asset ratio was 6.89% and the Bank's capital was in excess of regulatory requirements as discussed above. The Company will continue to monitor the effects of COVID-19 and rising inflation in determining future cash dividends and any requirements for additional capital each quarter. Parkway declared and paid dividends of$1.8 million , and had$154 thousand of stock repurchases for the first nine months of 2022. 52 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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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 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 theU.S. government, including policies of theU.S. Treasury and theFederal 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 endedDecember 31, 2021 . 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 forwardlooking statements, whether as a result of new information, future events or otherwise. 53
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Part I. Financial Information© Edgar Online, source
