Skyline Bankshares (SLBK) 10-Q 2024 Q3 Quarterly report

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 September 30, 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 5,639,204 shares of Common Stock, no par value per share, outstanding as of November 13, 2024.

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets—September 30, 2024 (Unaudited) and December 31, 2023 (Audited)	3
	Unaudited Consolidated Statements of Income—Three and Nine Months Ended September 30, 2024 and September 30, 2023	4
	Unaudited Consolidated Statements of Comprehensive Income—Nine and Three Months Ended September 30, 2024 and September 30, 2023	5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity—Nine and Three Months Ended September 30, 2024 and September 30, 2023	6
	Unaudited Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2024 and September 30, 2023	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4.	Controls and Procedures	61
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
Signatures		65

Part I. Financial Information

Item 1.  Financial Statements

Skyline Bankshares, Inc. and Subsidiary

Consolidated Balance Sheets

September 30, 2024 and December 31, 2023

(dollars in thousands)	September 30,			December 31,
	2024			2023
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	27,862		$	16,811
Interest-bearing deposits with banks		6,766			4,808
Federal funds sold		536			474
Total cash and cash equivalents		35,164			22,093
Investment securities available for sale		123,906			127,389
Restricted equity securities		4,235			3,338
Loans, net of allowance for credit losses of $7,787 at September 30, 2024 and $6,739 at December 31, 2023		945,335			810,965
Cash value of life insurance		26,558			22,909
Other real estate owned		140			-
Properties and equipment, net		33,741			31,183
Accrued interest receivable		3,810			3,463
Core deposit intangible		4,031			917
Goodwill		7,900			3,257
Deferred tax assets, net		5,125			5,046
Other assets		16,555			15,283
	$	1,206,500		$	1,045,843
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	340,340		$	305,115
Interest-bearing		745,567			623,627
Total deposits		1,085,907			928,742
Borrowings		25,000			27,500
Accrued interest payable		979			531
Other liabilities		5,991			6,188
		1,117,877			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, 5,639,204 and 5,584,204 issued and outstanding at September 30, 2024 and December 31, 2023, respectively		-			-
Surplus		33,283			33,356
Retained earnings		71,212			68,866
Accumulated other comprehensive loss		(15,872	)		(19,340	)
		88,623			82,882
	$	1,206,500		$	1,045,843

See Notes to Consolidated Financial Statements

3

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Income

For the Three and Nine Months ended September 30, 2024 and 2023

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands except share amounts)	2024		2023		2024			2023
	(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)
Interest income
Loans and fees on loans	$	12,759	$	10,193	$	35,433		$	29,034
Interest-bearing deposits in banks		150		24		298			211
Federal funds sold		25		2		33			26
Interest on taxable securities		678		691		2,023			2,135
Interest on nontaxable securities		59		48		156			146
Dividends		41		21		155			88
		13,712		10,979		38,098			31,640
Interest expense
Deposits		3,407		1,902		9,049			4,257
Interest on borrowings		374		350		1,148			761
		3,781		2,252		10,197			5,018
Net interest income		9,931		8,727		27,901			26,622
Provision for (Recovery of) credit losses		738		182		902			(119	)
Net interest income after
Provision for (recovery of) credit losses		9,193		8,545		26,999			26,741
Noninterest income
Service charges on deposit accounts		598		564		1,693			1,606
Other service charges and fees		940		894		2,698			2,546
Net realized losses on securities		-		-		(141	)		(16	)
Mortgage origination fees		108		37		209			189
Increase in cash value of life insurance		161		146		458			438
Life insurance income		-		69		221			69
Other income		44		207		82			379
		1,851		1,917		5,220			5,211
Noninterest expenses
Salaries and employee benefits		4,525		4,355		13,194			12,617
Occupancy and equipment		1,387		1,363		4,191			3,721
Data processing expense		744		606		2,079			1,621
FDIC Assessments		153		150		441			445
Advertising		256		227		713			549
Bank franchise tax		132		105		330			315
Director fees		52		60		178			199
Professional fees		188		151		580			528
Telephone expense		117		144		353			401
Core deposit intangible amortization		107		79		266			289
Merger related expenses		1,143		-		1,500			-
Other expense		821		662		2,158			1,949
		9,625		7,902		25,983			22,634
Net income before income taxes		1,419		2,560		6,236			9,318
Income tax expense		362		496		1,314			1,773
Net income	$	1,057	$	2,064	$	4,922		$	7,545
Net income per share	$	0.19	$	0.37	$	0.89		$	1.35
Weighted average shares outstanding		5,553,579		5,571,454		5,557,229			5,585,914
Dividends declared per share	$	0.23	$	0.21	$	0.46		$	0.42

See Notes to Consolidated Financial Statements

4

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the Nine and Three Months ended September 30, 2024 and 2023

	Nine Months Ended
	September 30,
(dollars in thousands)	2024			2023
	(Unaudited)			(Unaudited)
Net Income	$	4,922		$	7,545
Other comprehensive income (loss)
Unrealized gains (losses) on investment securities available for sale:
Unrealized gains (losses) arising during the period		4,249			(3,225	)
Tax benefit (expense)		(892	)		677
Reclassification of net realized losses during the period		141			16
Tax benefit		(30	)		(3	)
Total other comprehensive income (loss)		3,468			(2,535	)
Total comprehensive income	$	8,390		$	5,010

	Three Months Ended
	September 30,
(dollars in thousands)	2024			2023
	(Unaudited)			(Unaudited)
Net Income	$	1,057		$	2,064
Other comprehensive income (loss)
Unrealized gains (losses) on investment securities available for sale:
Unrealized gains (losses) arising during the period		5,423			(4,349	)
Tax benefit (expense)		(1,139	)		913
Reclassification of net realized losses during the period		-			-
Tax benefit		-			-
Total other comprehensive income (loss)		4,284			(3,436	)
Total comprehensive income (loss)	$	5,341		$	(1,372	)

See Notes to Consolidated Financial Statements

5

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Nine and Three Months ended September 30, 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
Net income		-			-		-			2,753			-			2,753
Other comprehensive loss		-			-		-			-			(1,727	)		(1,727	)
Share-based compensation		-			-		46			-			-			46
Common stock repurchased		(19,712	)		-		(217	)		-			-			(217	)
Balance, June 30, 2023		5,587,704		$	-	$	33,349		$	65,820		$	(22,005	)	$	77,164
Net income		-			-		-			2,064			-			2,064
Other comprehensive loss		-			-		-			-			(3,436	)		(3,436	)
Dividends paid ($0.21 per share)		-			-		-			(1,173	)		-			(1,173	)
Share-based compensation		-			-		17			-			-			17
Balance, September 30, 2023		5,587,704		$	-	$	33,366		$	66,711		$	(25,441	)	$	74,636
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
Net income		-			-		-			1,814			-			1,814
Other comprehensive loss		-			-		-			-			(248	)		(248	)
Share-based compensation		-			-		68			-			-			68
Balance, June 30, 2024		5,629,204		$	-	$	33,213		$	71,452		$	(20,156	)	$	84,509
Net income		-			-		-			1,057			-			1,057
Other comprehensive income		-			-		-			-			4,284			4,284
Dividends paid ($0.23 per share)		-			-		-			(1,297	)		-			(1,297	)
Stock awards issued		10,000			-		-			-			-			-
Share-based compensation		-			-		70			-			-			70
Balance, September 30, 2024		5,639,204		$	-	$	33,283		$	71,212		$	(15,872	)	$	88,623

See Notes to Consolidated Financial Statements

6

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months ended September 30, 2024 and 2023

	Nine Months Ended
	September 30,
(dollars in thousands)	2024			2023
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	4,922		$	7,545
Adjustments to reconcile net income to net cash provided by operations:
Depreciation		1,527			1,419
Amortization of core deposit intangible		266			289
Accretion of loan discount and deposit premium, net		(128	)		(115	)
Provision for (recovery of) credit losses		902			(119	)
Deferred income taxes		1,164			(183	)
Net realized losses on securities		141			16
Accretion of discount on securities, net of amortization of premiums		59			112
Deferred compensation		133			128
Share-based compensation		157			83
Gains on disposal of property and equipment		-			(196	)
Loss on sale of other real estate owned		-			6
Life insurance income		(221	)		(69	)
Changes in assets and liabilities:
Cash value of life insurance		(458	)		(438	)
Accrued interest receivable		66			(224	)
Other assets		8			(532	)
Accrued interest payable		173			325
Other liabilities		(462	)		319
Net cash provided by operating activities		8,249			8,366
Cash flows from investing activities
Activity in available for sale securities:
Sales		46,210			4,427
Maturities/calls/paydowns		7,966			5,634
Purchases of restricted equity securities		(415	)		(1,388	)
Net increase in loans		(48,101	)		(42,782	)
Proceeds from life insurance contracts		730			221
Proceeds from sale of other real estate owned		-			229
Proceeds from sale of property and equipment		-			1,721
Purchases of property and equipment		(2,267	)		(2,142	)
Cash received in business combination, net of cash paid		(17,733	)		-
Net cash used in investing activities		(13,610	)		(34,080	)
Cash flows from financing activities
Net increase (decrease) in deposits		31,826			(12,249	)
Advance on short-term line of credit		5,000			2,500
Net change in FHLB advances		(13,088	)		25,000
Repayment of bank term funding program advances		(2,500	)		-
Common stock repurchased		(230	)		(330	)
Dividends paid		(2,576	)		(2,353	)
Net cash provided by financing activities		18,432			12,568
Net increase (decrease) in cash and cash equivalents		13,071			(13,146	)
Cash and cash equivalents, beginning		22,093			31,061
Cash and cash equivalents, ending	$	35,164		$	17,915

See Notes to Consolidated Financial Statements

7

Skyline Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows, continued

For the Nine Months ended September 30, 2024 and 2023

	Nine Months Ended
	September 30,
(dollars in thousands)	2024		2023
	(Unaudited)		(Unaudited)
Supplemental disclosure of cash flow information
Interest paid	$	9,749	$	4,693
Taxes paid	$	1,235	$	1,665
Supplemental disclosure of noncash investing activities
Effect on equity of change in net unrealized gain (loss) on available for sale securities	$	3,468	$	(2,535	)
Right-of-use assets obtained in exchange for new operating lease liabilities	$	35	$	1,562
Cumulative effect of adoption of credit losses standard, net of tax	$	-	$	(710	)
Business combinations
Assets acquired (excluding goodwill)	$	154,128	$	-
Liabilities assumed	$	133,771	$	-
Net assets	$	20,357	$	-
Goodwill recorded	$	4,643	$	-
Cash paid to acquire Johnson County Bank	$	25,000	$	-

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.

On April 16, 2024, the Company entered into a definitive agreement to acquire Johnson County Bank (“JCB”), based in Mountain City, Tennessee, in an all-cash transaction valued at $25.0 million, with the Bank as the surviving bank. The purpose of this acquisition was to facilitate the Bank's entry into Eastern Tennessee. The transaction closed and the merger of JCB with and into the Bank became effective on September 1, 2024. The Company was considered the acquiror and JCB was considered the acquiree in the transaction for accounting purposes. Pursuant to the JCB merger, the Company acquired $154.1 million of assets, including $87.2 million in loans and assumed $133.8 million in liabilities, including $125.3 million of deposits, on September 1, 2024. Such amounts include preliminary estimated fair value adjustments, which are subject to change.

For purposes of this quarterly report on Form 10-Q, all information contained herein as of and for periods prior to September 1, 2024 reflects the operations of the Company prior to the JCB merger. Unless this report otherwise indicates or the context otherwise requires, all references to the “Company” as of and for periods subsequent to September 1, 2024 refer to the combined company and its subsidiary as a combined entity after the merger, and all references to the “Company” as of and for periods prior to September 1, 2024 are references to the Company and its subsidiary as a combined entity prior to the merger.

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, the North Carolina counties of Alleghany, Ashe, Burke, Caldwell, Catawba, Cleveland, Davie, Iredell, Watauga, Wilkes, and Yadkin, and the Tennessee county of Johnson, and the surrounding areas, through twenty-eight 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”).

9

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Organization, continued

The consolidated financial statements as of September 30, 2024 and for the three and nine-month periods ended September 30, 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 and nine months ended September 30, 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.

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

On September 1, 2024, the Company completed its merger with JCB. The merger was accounted for under the acquisition method of accounting. The Company was considered the acquirer and JCB was considered the acquiree in the transaction for accounting purposes.

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.

10

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Use of Estimates

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.

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.

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 September 30, 2024 or December 31, 2023.

11

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

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, ASC 326 made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

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

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

12

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 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 September 30, 2024 and December 31, 2023, there was no allowance for credit loss related to the available for sale portfolio.

Accrued interest receivable on available for sale debt securities, which is reported in accrued interest receivable on the consolidated balance sheets, totaled $513 thousand and $641 thousand at September 30, 2024 and December 31, 2023, respectively and was excluded from the estimate of credit losses.

13

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

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 $3.3 million and $2.8 million at September 30, 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.

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

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.

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 – 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.

16

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 September 30, 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.

17

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. For the core deposit intangible as a result of the JCB merger, we used an estimated useful life of ten 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.

18

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 nine months ended September 30, 2024 and 2023 amounted to $713 thousand and $549 thousand, respectively. Advertising expense for the three months ended September 30, 2024 and 2023 amounted to $256 thousand and $227 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 nine and three months ended September 30, 2024 and 2023, there were no dilutive instruments.

19

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 nine months ended September 30, 2024 and 2023 amounted to $1.7 million and $1.6 million, respectively. Fees for these services for the three months ended September 30, 2024 and 2023 amounted to $598 thousand and $564 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 nine months ended September 30, 2024 and 2023 amounted to $209 thousand and $189 thousand, respectively. Fees for these services for the three months ended September 30, 2024 and 2023 amounted to $108 thousand and $37 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 nine months ended September 30, 2024 and 2023 amounted to $2.3 million and $2.2 million, respectively. Fees for these services for the three months ended September 30, 2024 and 2023 amounted to $815 thousand and $764 thousand, respectively.

● Insurance and Investment - Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. For the nine months ended September 30, 2024 and 2023 the Company received $52 thousand and $43 thousand, respectively in income from these services. For the three months ended September 30, 2024 and 2023 the Company received $17 thousand and $13 thousand, respectively in income from these services.

20

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		(2,548	)		-			(2,548	)
Amounts reclassified from accumulated other comprehensive income, net of tax		13			-			13
Balance September 30, 2023	$	(23,477	)	$	(1,964	)	$	(25,441	)
Balance, December 31, 2023	$	(17,964	)	$	(1,376	)	$	(19,340	)
Other comprehensive loss before reclassifications		3,357			-			3,357
Amounts reclassified from accumulated other comprehensive loss, net of tax		111			-			111
Balance September 30, 2024	$	(14,496	)	$	(1,376	)	$	(15,872	)

Reclassification

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

21

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.

In March 2024, the FASB issued amendments to the Codification that remove references to various FASB Concepts Statements. The amendments are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company will apply the amendments prospectively to all new transactions recognized on or after the date that the Company first applies the amendments. 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.

22

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 2.  Business Combinations

On September 1, 2024, the Company completed its merger with JCB as discussed above in Note 1. The merger was accounted for under the acquisition method of accounting. The Company is considered the acquiring entity in this business combination for accounting purposes. Under the terms of the merger agreement, JCB was acquired by the Company in an all-cash transaction valued at $25.0 million. The Company calculated fair values of all assets and liabilities acquired in the transaction. The assets and liabilities of JCB have been recorded at their estimated fair values and added to those of the Company for periods following the merger date. Valuations of acquired JCB assets and liabilities may be refined for up to one year following the merger date. The Company does not expect that any portion of goodwill will be deductible for tax purposes.

The following table presents the JCB assets acquired and liabilities assumed as of September 1, 2024 as well as the related fair value adjustments and determination of goodwill.

(dollars in thousands)	As Reported by			Fair Value			As Reported by
	JCB			Adjustments			the Company
Assets
Cash and cash equivalents	$	7,267		$	-		$	7,267
Investment securities available for sale		48,293			(1,790	)		46,503
Restricted equity securities		482			-			482
Loans		91,411			(4,235	)		87,176
Allowance for credit losses		(823	)		627			(196	)
Cash Value of life insurance		3,700			-			3,700
Other real estate owned		140			-			140
Property and equipment		511			1,307			1,818
Accrued interest receivable		413			-			413
Core deposit intangible		-			3,380			3,380
Deferred tax assets, net		1,934			231			2,165
Other assets		1,346			(66	)		1,280
Total assets acquired	$	154,674		$	(546	)	$	154,128
Liabilities
Deposits	$	125,437		$	(146	)	$	125,291
Borrowings		8,000			88			8,088
Accrued interest payable		275			-			275
Other liabilities		112			5			117
Total liabilities acquired	$	133,824		$	(53	)	$	133,771
Net assets acquired								20,357
Cash consideration								25,000
Goodwill							$	4,643

The Management made significant estimates and exercised significant judgement in accounting for the acquisition of JCB. The following is a brief description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed.

Investment Securities Available for Sale

The estimated fair value of the acquired portfolio of debt securities was based on quoted market prices. All of the acquired portfolio was sold upon completion of the acquisition.

23

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 2.  Business Combinations, continued

Loans and Allowance for Credit Losses

The fair valuation process identified loans with credit risk indicators that qualified for “purchase credit deteriorated” (“PCD”) status. PCD and non-PCD loans were then evaluated for credit risk and other fair value indicators. Consistent with GAAP, JCB’s related allowance for credit losses on loans was not recorded. Upon the acquisition of JCB, the Company reclassed $196 thousand out of the fair value discount on PCD loans to the allowance for credit losses.

Credit risk was quantified using a probability of default (“PD”)/loss given default(“LGD”) methodology from a market participant perspective and applied to each loan’s outstanding principal balance. PD rates were applied based on FDIC call report code and risk rating category. LGD rates were applied based on FDIC call report code. Other fair value indicators were quantified using a discounted cash flow methodology, utilizing a built-up discount rate that contemplates current index rates adjusted for market assumed premiums. Cash flows were generated based upon the loans’ underlying characteristics and estimated prepayment speeds.

The following table provides information on PCD and non-PCD loans as of the Acquisition Date:

(dollars in thousands)	PCD Loans			Non-PCD Loans			Total Loans
September 1, 2024
Number of Loans		128			1,136			1,264
JCB recorded value	$	6,127		$	85,284		$	91,411
Discount for credit risk		(256	)		(370	)		(626	)
Discount for non-credit factors		(396	)		(3,409	)		(3,805	)
Reclass of PCD discount to ACL		196			-			196
Fair value	$	5,671		$	81,505		$	87,176

Property and Equipment

The fair value of premises acquired was based on recent third-party appraisals. Acquired equipment was based on the remaining net book value of JCB, which approximated fair value.

Intangible Assets

Core deposit relationships provide a stable source of funds for lending and contribute to profitability. The core deposit intangible was valued using an income approach focused on cost savings, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source. The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates.

Deferred Tax Asset

Application of the fair value measurements resulted in an increase to the deferred tax asset. The deferred tax assets were calculated using a blended tax rate of 22.20%.

Other Assets

The fair value adjustment of other assets was based on the Company’s evaluation of acquired other assets.

24

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 2.  Business Combinations, continued

Deposits

Deposits were valued using methods appropriate to their characteristics. The fair value of noninterest bearing demand deposits, interest bearing demand deposits, money market and savings deposit accounts were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Time deposits were valued at the present value of the expected contractual payments discounted at market rates for instruments with similar terms.

Borrowings

The estimated fair value of borrowings was determined by obtaining payoff quotes from the Federal Home Loan Bank. The borrowings were paid off upon completion of the acquisition.

Other Liabilities

The fair value adjustment of other liabilities was based on the Company’s evaluation of acquired other liabilities.

Supplemental Pro Forma Information (dollars in thousands except per share data)

The table below presents supplemental pro forma information as if the JCB acquisition had occurred at the beginning of the earliest period presented, which was January 1, 2023. Pro forma results include adjustments for amortization and accretion of fair value adjustments and do not include any projected cost savings or other anticipated benefits of the merger. Therefore, the pro forma financial information is not indicative of the results of operations that would have occurred had the transactions been effected on the assumed date. Pre-tax merger-related costs of $1.5 million and $1.1 million included in the Company’s consolidated statements of operations for the nine months and three months ended September 30, 2024 and are not included in the pro forma statements below.

	Nine Months ended
	September 30,
	2024		2023
	(Unaudited)		(Unaudited)
Net interest income	$	27,660	$	26,439
Net income (a)	$	4,732	$	7,400
Weighted average shares outstanding (b)		5,557,229		5,585,914
Earnings per common share	$	0.85	$	1.32

	Three Months ended
	September 30,
	2024		2023
	(Unaudited)		(Unaudited)
Net interest income	$	9,860	$	8,668
Net income (a)	$	1,001	$	2,017
Weighted average shares outstanding (b)		5,553,579		5,571,454
Earnings per common share	$	0.18	$	0.36

(a) Supplemental pro forma net income includes the impact of certain fair value adjustments. Supplemental pro forma net income does not include assumptions on cost savings or the impact of merger-related expenses.

(b) Weighted average shares outstanding are not affected by the merger because no common stock was issued in connection with the JCB acquisition. The acquisition was an all-cash transaction valued at $25.0 million.

The net interest income for JCB included in the consolidated statements of income statement for the three and nine month periods ended September 30, 2024 was  $413 thousand.  The net loss for JCB included in the consolidated income statements for the three and nine month periods ended September 30, 2024 was $521 thousand. 

25

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 September 30, 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 September 30, 2024 and December 31, 2023.

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2024
Available for sale:
U.S. Treasury securities	$	2,505	$	-	$	(26	)	$	2,479
U.S. Government agencies		25,272		-		(3,029	)		22,243
Mortgage-backed securities		66,637		-		(7,794	)		58,843
Corporate securities		1,500		-		(23	)		1,477
State and municipal securities		46,342		4		(7,482	)		38,864
	$	142,256	$	4	$	(18,354	)	$	123,906
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 $4.2 million at September 30, 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 September 30, 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 September 30, 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
September 30, 2024
Available for sale:
U.S. Treasury securities	$	-	$	-		$	2,479	$	(26	)	$	2,479	$	(26	)
U.S. Government agencies		-		-			22,243		(3,029	)		22,243		(3,029	)
Mortgage-backed securities		-		-			58,843		(7,794	)		58,843		(7,794	)
Corporate securities		-		-			1,477		(23	)		1,477		(23	)
State and municipal securities		-		-			37,550		(7,482	)		37,550		(7,482	)
Total securities available for sale	$	-	$	-		$	122,592	$	(18,354	)	$	122,592	$	(18,354	)
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	)

26

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 3.  Investment Securities, continued

At September 30, 2024, 79 investment securities with unrealized losses had depreciated 13.02 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 September 30, 2024 and December 31, 2023, there was no allowance for credit losses related to the available for sale portfolio.

Proceeds from the sales of investment securities available for sale were $46.2 million for the nine-month period ended September 30, 2024. Proceeds from sales of investment securities available for sale were $4.4 million for the nine-month period ended September 30, 2023. Gross proceeds from called securities totaled $2.7 million for the nine-month period ended September 30, 2024. There were no called securities for the nine-month period ended September 30, 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 for the nine-month period ended September 30, 2024 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 nine and three-month periods ended September 30, 2024 and 2023 are as follows:

	Nine Months Ended September 30,						Three Months Ended September 30,
(dollars in thousands)	2024			2023			2024		2023
Realized gains	$	-		$	12		$	-	$	-
Realized losses		(141	)		(28	)		-		-
	$	(141	)	$	(16	)	$	-	$	-

There were no securities transferred between the available for sale and held to maturity portfolios or other sales of held to maturity securities during the periods presented. In the future management may elect to classify securities as held to maturity based upon such considerations as the nature of the security, the Bank’s ability to hold the security until maturity, and general economic conditions. The scheduled maturities of securities available for sale at September 30, 2024, were as follows:

(dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	4,005	$	3,956
Due after one year through five years		14,523		13,682
Due after five years through ten years		71,609		63,227
Due after ten years		52,119		43,041
	$	142,256	$	123,906

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

Investment securities with amortized cost of approximately $57.8 million and $36.0 million at September 30, 2024 and December 31, 2023, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

27

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

The major components of loans in the consolidated balance sheets at September 30, 2024 and December 31, 2023 are as follows:

(dollars in thousands)	2024			2023
Real Estate Secured:
Construction & development	$	64,547		$	53,473
Farmland		24,927			25,598
Residential		506,495			400,947
Commercial mortgage		279,985			269,666
Non-Real Estate Secured:
Commercial & agricultural		59,386			47,681
Consumer & other		17,782			20,339
Total loans		953,122			817,704
Allowance for credit losses		(7,787	)		(6,739	)
Loans, net of allowance for credit losses	$	945,335		$	810,965

Included in total loans above are deferred loan fees of $1.5 million and $1.4 million at September 30, 2024 and December 31, 2023, respectively. Deferred loan costs were $5.1 million and $4.7 million, at September 30, 2024 and December 31, 2023, respectively. Income from net deferred fees and costs is recognized over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or cost is recognized at that time.

The Company elected to exclude accrued interest receivable from the amortized cost basis of loans. Accrued interest receivable related to loans totaled $3.3 million at September 30, 2024 and $2.8 million at December 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets.

As of September 30, 2024 and December 31, 2023, substantially all of the Bank’s residential 1-4 family loans were pledged as collateral for borrowing lines at the FHLB.

As of September 30, 2024 and December 31, 2023, the Bank had no residential real estate loans in the process of foreclosure.

28

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses

Allowance for Credit Losses - Loans

The following table summarizes the activity related to the allowance for credit losses for the three and nine month periods ended September 30, 2024 and 2023 under the CECL methodology.

(dollars in thousands)	Construction & Development		Farmland			Residential		Commercial Mortgage			Commercial & Agricultural			Consumer & Other			Total
For the Three Months Ended September 30, 2024
Balance, June 30, 2024	$	791	$	181		$	3,349	$	1,937		$	455		$	157		$	6,870
Merger adjustment for PCD acquired loans		45		-			148		1			-			2			196
Charge-offs		-		-			-		-			-			(22	)		(22	)
Recoveries		-		-			-		1			25			7			33
Provision for (recovery of provision)		115		(8	)		444		(87	)		(2	)		248			710
Balance, September 30, 2024	$	951	$	173		$	3,941	$	1,852		$	478		$	392		$	7,787

(dollars in thousands)	Construction & Development			Farmland		Residential		Commercial Mortgage		Commercial & Agricultural		Consumer & Other			Total
For the Three Months Ended September 30, 2023
Balance, June 30, 2023	$	953		$	140	$	3,088	$	1,866	$	404	$	173		$	6,624
Charge-offs		-			-		-		-		-		(36	)		(36	)
Recoveries		-			-		-		1		1		6			8
Provision for (recovery of provision)		(51	)		4		85		38		6		17			99
Balance, September 30, 2023	$	902		$	144	$	3,173	$	1,905	$	411	$	160		$	6,695

(dollars in thousands)	Construction & Development			Farmland		Residential		Commercial Mortgage			Commercial & Agricultural			Consumer & Other			Total
For the Nine Months Ended September 30, 2024
Balance, December 31, 2023	$	910		$	154	$	3,167	$	1,902		$	424		$	182		$	6,739
Merger adjustment for PCD acquired loans		45			-		148		1			-			2			196
Charge-offs		-			-		-		-			(16	)		(77	)		(93	)
Recoveries		-			-		9		3			27			19			58
Provision for (recovery of provision)		(4	)		19		617		(54	)		43			266			887
Balance, September 30, 2024	$	951		$	173	$	3,941	$	1,852		$	478		$	392		$	7,787

(dollars in thousands)	Construction & Development			Farmland			Residential		Commercial Mortgage			Commercial & Agricultural		Consumer & Other			Total
For the Nine Months Ended September 30, 2023
Balance, December 31, 2022	$	526		$	259		$	2,820	$	2,197		$	312	$	134		$	6,248
Adjustment to allowance for adoption of ASU 2016-13		408			(108	)		279		(119	)		84		48			592
Charge-offs		-			-			-		-			-		(89	)		(89	)
Recoveries		1			50			1		10			14		17			93
Provision for (recovery of provision)		(33	)		(57	)		73		(183	)		1		50			(149	)
Balance, September 30, 2023	$	902		$	144		$	3,173	$	1,905		$	411	$	160		$	6,695

29

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Credit Quality Indicators

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered “Substandard” if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. “Substandard” assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as “Doubtful” have all the weaknesses inherent in assets classified “Substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as "Loss” are those considered uncollectible, and of such little value that its continuance on the books is not warranted. As of September 30, 2024 and December 31, 2023, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.

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

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

The following table presents the Company’s recorded investment in loans by credit quality indicators as of September 30, 2024 and December 31, 2023:

	Loan Grades
(dollars in thousands)	Pass		Watch		Special Mention		Substandard		Total
September 30, 2024
Real Estate Secured:
Construction & development	$	64,315	$	18	$	-	$	214	$	64,547
Farmland		23,289		112		726		800		24,927
Residential		503,064		208		2,196		1,027		506,495
Commercial mortgage		273,001		3,484		3,057		443		279,985
Non-Real Estate Secured:
Commercial & agricultural		59,181		-		56		149		59,386
Consumer & other		17,320		-		22		440		17,782
Total	$	940,170	$	3,822	$	6,057	$	3,073	$	953,122
December 31, 2023
Real Estate Secured:
Construction & development	$	53,444	$	-	$	-	$	29	$	53,473
Farmland		23,329		-		737		1,532		25,598
Residential		400,432		213		36		266		400,947
Commercial mortgage		265,441		2,329		202		1,694		269,666
Non-Real Estate Secured:
Commercial & agricultural		47,481		-		24		176		47,681
Consumer & other		19,903		-		-		436		20,339
Total	$	810,030	$	2,542	$	999	$	4,133	$	817,704

30

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Credit Quality Indicators, continued

The following table presents the Company’s recorded investment in loans by credit quality indicators by year of origination as of September 30, 2024:

	Term Loans by Year of Origination														Revolving Loans Converted
(dollars in thousands)	2024		2023		2022		2021		2020		Prior		Revolving		To Term		Total
Construction & development
Pass	$	21,120	$	17,454	$	6,359	$	6,396	$	1,600	$	7,757	$	3,629	$	-	$	64,315
Watch		-		-		-		-		18		-		-		-		18
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		174		-		25		-		-		15		-		214
Total construction & development	$	21,120	$	17,628	$	6,359	$	6,421	$	1,618	$	7,757	$	3,644	$	-	$	64,547
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Farmland
Pass	$	2,573	$	3,756	$	1,994	$	1,414	$	2,510	$	9,393	$	1,649	$	-	$	23,289
Watch		-		-		-		-		-		112		-		-		112
Special Mention		-		-		-		-		-		626		100		-		726
Substandard		-		-		-		-		-		800		-		-		800
Total farmland	$	2,573	$	3,756	$	1,994	$	1,414	$	2,510	$	10,931	$	1,749	$	-	$	24,927
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Residential
Pass	$	46,039	$	70,412	$	111,352	$	58,541	$	49,902	$	90,727	$	75,410	$	681	$	503,064
Watch		-		-		-		-		208		-		-		-		208
Special Mention		219		-		1,019		243		267		448		-		-		2,196
Substandard		-		-		361		14		-		652		-		-		1,027
Total residential	$	46,258	$	70,412	$	112,732	$	58,798	$	50,377	$	91,827	$	75,410	$	681	$	506,495
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial mortgage
Pass	$	21,640	$	40,512	$	47,971	$	48,726	$	36,857	$	71,470	$	5,825	$	-	$	273,001
Watch		-		-		-		1,427		2,037		-		20		-		3,484
Special Mention		-		-		2,648		-		-		409		-		-		3,057
Substandard		-		-		-		76		-		367		-		-		443
Total residential	$	21,640	$	40,512	$	50,619	$	50,229	$	38,894	$	72,246	$	5,845	$	-	$	279,985
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial & agricultural
Pass	$	10,117	$	13,315	$	6,374	$	3,807	$	1,159	$	1,885	$	22,524	$	-	$	59,181
Watch		-		-		-		-		-		-		-		-		-
Special Mention		-		-		38		-		-		18		-		-		56
Substandard		-		-		-		-		-		149		-		-		149
Total commercial & agricultural	$	10,117	$	13,315	$	6,412	$	3,807	$	1,159	$	2,052	$	22,524	$	-	$	59,386
Current period gross write-offs	$	-	$	16	$	-	$	-	$	-	$	-	$	-	$	-	$	16
Consumer & other
Pass	$	4,506	$	3,993	$	2,547	$	1,905	$	172	$	3,461	$	736	$	-	$	17,320
Watch		-		-		-		-		-		-		-		-		-
Special Mention		-		14		1		1		-		-		6		-		22
Substandard		27		-		-		376		-		37		-		-		440
Total consumer & other	$	4,533	$	4,007	$	2,548	$	2,282	$	172	$	3,498	$	742	$	-	$	17,782
Current period gross write-offs	$	8	$	32	$	10	$	7	$	3	$	17	$	-	$	-	$	77
Total loans
Pass	$	105,995	$	149,442	$	176,597	$	120,789	$	92,200	$	184,693	$	109,773	$	681	$	940,170
Watch		-		-		-		1,427		2,263		112		20		-		3,822
Special Mention		219		14		3,706		244		267		1,501		106		-		6,057
Substandard		27		174		361		491		-		2,005		15		-		3,073
Total loans	$	106,241	$	149,630	$	180,664	$	122,951	$	94,730	$	188,311	$	109,914	$	681	$	953,122
Total Current period gross write-offs	$	8	$	48	$	10	$	7	$	3	$	17	$	-	$	-	$	93

31

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Credit Quality Indicators, continued

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

	Term Loans by Year of Origination														Revolving Loans Converted
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving		To Term		Total
Construction & development
Pass	$	15,743	$	8,291	$	12,945	$	1,742	$	2,552	$	6,492	$	5,679	$	-	$	53,444
Watch		-		-		-		-		-		-		-		-		-
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		29		-		-		-		-		-		29
Total construction & development	$	15,743	$	8,291	$	12,974	$	1,742	$	2,552	$	6,492	$	5,679	$	-	$	53,473
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Farmland
Pass	$	4,750	$	2,376	$	1,448	$	2,764	$	1,365	$	9,019	$	1,607	$	-	$	23,329
Watch		-		-		-		-		-		-		-		-		-
Special Mention		-		-		-		-		-		637		100		-		737
Substandard		-		-		-		-		8		1,507		17		-		1,532
Total farmland	$	4,750	$	2,376	$	1,448	$	2,764	$	1,373	$	11,163	$	1,724	$	-	$	25,598
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Residential
Pass	$	56,921	$	99,100	$	54,974	$	46,877	$	17,527	$	63,461	$	60,520	$	1,052	$	400,432
Watch		-		-		-		213		-		-		-		-		213
Special Mention		-		-		-		9		-		27		-		-		36
Substandard		-		-		-		-		-		252		-		14		266
Total residential	$	56,921	$	99,100	$	54,974	$	47,099	$	17,527	$	63,740	$	60,520	$	1,066	$	400,947
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial mortgage
Pass	$	36,852	$	53,022	$	49,799	$	41,429	$	22,069	$	58,119	$	4,048	$	103	$	265,441
Watch		-		-		-		2,081		-		248		-		-		2,329
Special Mention		-		-		-		-		-		202		-		-		202
Substandard		-		-		86		-		-		1,209		399		-		1,694
Total residential	$	36,852	$	53,022	$	49,885	$	43,510	$	22,069	$	59,778	$	4,447	$	103	$	269,666
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial & agricultural
Pass	$	12,056	$	6,579	$	4,931	$	1,610	$	573	$	1,624	$	20,079	$	29	$	47,481
Watch		-		-		-		-		-		-		-		-		-
Special Mention		-		-		-		-		24		-		-		-		24
Substandard		-		4		-		-		25		147		-		-		176
Total commercial & agricultural	$	12,056	$	6,583	$	4,931	$	1,610	$	622	$	1,771	$	20,079	$	29	$	47,681
Current period gross write-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Consumer & other
Pass	$	9,836	$	2,866	$	2,410	$	229	$	799	$	3,025	$	738	$	-	$	19,903
Watch		-		-		-		-		-		-		-		-		-
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		397		-		-		39		-		-		436
Total consumer & other	$	9,836	$	2,866	$	2,807	$	229	$	799	$	3,064	$	738	$	-	$	20,339
Current period gross write-offs	$	27	$	33	$	14	$	8	$	5	$	23	$	-	$	-	$	110
Total loans
Pass	$	136,158	$	172,234	$	126,507	$	94,651	$	44,885	$	141,740	$	92,671	$	1,184	$	810,030
Watch		-		-		-		2,294		-		248		-		-		2,542
Special Mention		-		-		-		9		24		866		100		-		999
Substandard		-		4		512		-		33		3,154		416		14		4,133
Total loans	$	136,158	$	172,238	$	127,019	$	96,954	$	44,942	$	146,008	$	93,187	$	1,198	$	817,704
Total Current period gross write-offs	$	27	$	33	$	14	$	8	$	5	$	23	$	-	$	-	$	110

32

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Nonaccrual Loans

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

	September 30, 2024
(dollars in thousands)	Nonaccrual Loans with no Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans
Construction & development	$	-	$	24	$	24
Farmland		-		71		71
Residential		-		627		627
Commercial mortgage		300		143		443
Commercial & agricultural		-		130		130
Consumer & other		-		424		424
Total	$	300	$	1,419	$	1,719

	December 31, 2023
(dollars in thousands)	Nonaccrual Loans with no Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans
Construction & development	$	-	$	29	$	29
Farmland		314		86		400
Residential		-		221		221
Commercial mortgage		339		176		515
Commercial & agricultural		-		130		130
Consumer & other		398		38		436
Total	$	1,051	$	680	$	1,731

33

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Nonaccrual Loans, continued

The following table represents the accrued interest receivables written off on nonaccrual loans by reversing interest income during the three and nine months ended September 30, 2024 and September 30, 2023:

(dollars in thousands)	For the Three Months Ended September 30, 2024		For the Three Months Ended September 30, 2023
Construction & development	$	-	$	-
Farmland		-		-
Residential		-		-
Commercial mortgage		-		-
Commercial & agricultural		-		-
Consumer & other		1		1
Total	$	1	$	1

(dollars in thousands)	For the Nine Months Ended September 30, 2024		For the Nine Months Ended September 30, 2023
Construction & development	$	-	$	-
Farmland		-		-
Residential		3		16
Commercial mortgage		-		-
Commercial & agricultural		-		-
Consumer & other		1		1
Total	$	4	$	17

34

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Aging Analysis

The following table presents an aging analysis of past due loans by category as of September 30, 2024:

	Accruing
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Nonaccrual Loans		Current		Total Loans
September 30, 2024
Real Estate Secured:
Construction & development	$	68	$	-	$	-	$	24	$	64,455	$	64,547
Farmland		-		-		-		71		24,856		24,927
Residential		592		40		-		627		505,236		506,495
Commercial mortgage		-		-		-		443		279,542		279,985
Non-Real Estate Secured:
Commercial & agricultural		5		-		-		130		59,251		59,386
Consumer & other		62		22		-		424		17,274		17,782
Total	$	727	$	62	$	-	$	1,719	$	950,614	$	953,122

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

	Accruing
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Nonaccrual Loans		Current		Total Loans
December 31, 2023
Real Estate Secured:
Construction & development	$	-	$	-	$	-	$	29	$	53,444	$	53,473
Farmland		-		-		-		400		25,198		25,598
Residential		-		45		-		221		400,681		400,947
Commercial mortgage		-		-		-		515		269,151		269,666
Non-Real Estate Secured:
Commercial & agricultural		35		-		-		130		47,516		47,681
Consumer & other		12		-		-		436		19,891		20,339
Total	$	47	$	45	$	-	$	1,731	$	815,881	$	817,704

35

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Collateral Dependent Loans

Loans that do not share risk characteristics within their respective loan pools are individually evaluated. The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:

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

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

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

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

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

The following table details the amortized cost of collateral dependent loans as of September 30, 2024 and December 31, 2023:

(dollars in thousands)	2024		2023
Construction & development	$	-	$	-
Farmland		-		-
Residential		-		-
Commercial mortgage		300		339
Commercial & agricultural		-		-
Consumer & other		-		-
Total Loans	$	300	$	339

36

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Modifications Made to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a lifetime probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. There are no commitments to lend additional funds to borrowers experiencing financial difficulty as of September 30, 2024 and December 31, 2023.

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

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

There were no loans modified to borrowers experiencing financial difficulty during the three months ended September 30, 2024. The following table shows the amortized cost basis of loans modified to borrowers experiencing financial difficulty for the nine months ended September 30, 2024 and September 30, 2023 and for the three months ended September 30, 2023, disaggregated by class of loans and type of concession granted and describes the financial effect of the modifications made to borrowers experiencing financial difficulty:

	Term Extension
Nine Months Ended September 30, 2024	Amortized Cost		% of Total Loan			Financial
(dollars in thousands)	Basis		Type			Effect
Residential	$	23		0.01	%	Added an average of 11.92 years to the life of the loan, which resulted in reduced payment.
Total	$	23

	Combination – Term Extension & Interest Rate Reduction
Nine Months Ended September 30, 2023	Amortized Cost		% of Total Loan			Financial
(dollars in thousands)	Basis		Type			Effect
Residential	$	595		0.15	%	Reduced average interest rate from 8.75% to 5.75%. Added 3.86 years to the life of the loan, which resulted in reduced payment.
Consumer & agricultural		430		2.09	%	Reduced average interest rate from 9.50% to 7.00%. Added 0.61 years to the life of the loan.
Total	$	1,025

37

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Modifications Made to Borrowers Experiencing Financial Difficulty, continued

	Combination – Term Extension & Interest Rate Reduction
Three Months Ended September 30, 2023	Amortized Cost		% of Total Loan			Financial
(dollars in thousands)	Basis		Type			Effect
Residential	$	586		0.15	%	Reduced average interest rate from 7.50% to 6.50%. Added 4.92 years to the life of the loan, which resulted in reduced payment.
Consumer & agricultural		430		2.09	%	Reduced average interest rate from 9.50% to 7.00%. Added 0.61 years to the life of the loan.
Total	$	1,025

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

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months as of September 30, 2024 and September 30, 2023:

	Payment Status (Amortized Cost Basis)
(dollars in thousands)	Current		30-89 Days Past Due		90+ Days Past Due
September 30, 2024
Construction & development	$	-	$	-	$	-
Farmland		-		-		-
Residential		608		-		-
Commercial mortgage		-		-		-
Commercial & agricultural		-		-		-
Consumer & other		376		-		-
Total	$	984	$	-	$	-
September 30, 2023
Construction & development	$	-	$	-	$	-
Farmland		-		-		-
Residential		595		-		-
Commercial mortgage		-		-		-
Commercial & agricultural		-		-		-
Consumer & other		430		-		-
Total	$	1,025	$	-	$	-

38

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5.  Allowance for Credit Losses, continued

Unfunded Commitments

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

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three and nine months ended September 30, 2024 and September 30, 2023:

(dollars in thousands)	Total Allowance for Credit Losses – Unfunded Commitments
For the Three Months Ended September 30, 2024
Balance, June 30, 2024	$	389
Provision for credit losses - unfunded commitments		28
Balance, September 30, 2024	$	417
For the Three Months Ended September 30, 2023
Balance, June 30, 2023	$	306
Provision for credit losses - unfunded commitments		83
Balance, September 30, 2023	$	389
For the Nine Months Ended September 30, 2024
Balance, December 31, 2023	$	402
Provision for credit losses - unfunded commitments		15
Balance, September 30, 2024	$	417
For the Nine Months Ended September 30, 2023
Balance, December 31, 2022	$	46
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13		313
Provision for credit losses - unfunded commitments		30
Balance, September 30, 2023	$	389

39

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 6.  Deposits

The following table presents the composition of deposits at September 30, 2024 and December 31, 2023:

	September 30,		December 31,
(dollars in thousands)	2024		2023
Interest-bearing deposits:
Interest-bearing demand deposit accounts	$	144,219	$	136,305
Money market		84,947		70,669
Savings		173,319		152,666
Time deposits		343,082		263,987
Total interest-bearing deposits		745,567		623,627
Noninterest-bearing deposits		340,340		305,115
Total deposits	$	1,085,907	$	928,742

The aggregate amount of time deposits in denominations of more than $250 thousand at September 30, 2024 and December 31, 2023 was $103.6 million, and $78.6 million, respectively.

Note 7.  Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees. Effective December 31, 2012, the pension plan was amended to freeze benefit accruals for all eligible employees. The following is a summary of net periodic pension costs for the nine-month and three-month periods ended September 30, 2024 and 2023.

	Nine Months Ended September 30,						Three Months Ended September 30,
(dollars in thousands)	2024			2023			2024			2023
Interest cost	$	93		$	108		$	31		$	36
Expected return on plan assets		(378	)		(360	)		(126	)		(120	)
Recognized net actuarial loss		87			147			29			49
Net periodic benefit	$	(198	)	$	(105	)	$	(66	)	$	(35	)

It has been Company practice to contribute the maximum tax-deductible amount each year as determined by the plan administrator. As a result of prior year contributions exceeding the minimum requirements, a Prefunding Balance existed as of December 31, 2023 and there is no required contribution for 2024. Based on this we do not anticipate making a contribution to the plan in 2024.

40

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 8.  Goodwill and Intangible Assets

Goodwill

An analysis of goodwill during the nine-month period ended September 30, 2024 and for the year ended December 31, 2023 is as follows:

	September 30,		December 31,
(dollars in thousands)	2024		2023
Beginning of year	$	3,257	$	3,257
Acquired goodwill as a result of JCB merger		4,643		-
Impairment		-		-
End of the period	$	7,900	$	3,257

Intangible Assets

The following table presents the activity for the Company’s core deposit intangible assets, which are the only identifiable intangible assets subject to amortization. Core deposit intangibles at September 30, 2024 and December 31, 2023 are as follows:

	September 30,			December 31,
(dollars in thousands)	2024			2023
Balance at beginning of year, net of accumulated amortization	$	917		$	1,286
Core deposit intangible as result of JCB merger		3,380			-
Amortization expense		(266	)		(369	)
Net book value	$	4,031		$	917

Aggregate amortization expense was $266 thousand and $289 thousand for the nine-month periods ended September 30, 2024 and 2023, respectively. Aggregate amortization expense was $107 thousand and $79 thousand for the three-month periods ended September 30, 2024 and 2023, respectively.

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

(dollars in thousands)
Three months ending December 31, 2024	$	216
For the year ending December 31, 2025		771
For the year ending December 31, 2026		647
For the year ending December 31, 2027		565
For the year ending December 31, 2028		484
Thereafter		1,348
Total	$	4,031

41

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 9.  Leases

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

Contracts are evaluated to determine whether they are or contain a lease in accordance with Topic 842. The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less. The Company renewed two operating leases during the first nine months of 2024 and recognized a right-of-use asset and lease liability on the renewals. In August 2024, the Company was released from an operating lease, which resulted in the elimination of $197 thousand in right-of-use asset and lease liability. The Company entered into an operating lease in June 2023 and as a result incurred $95 thousand in initial direct costs that was factored into the right-of-use asset. In August 2023, the Company executed a sale leaseback transaction on a branch location which resulted in a gain of $197 thousand, and as a result, entered into a two year operating lease agreement and recognized a right-of-use asset and lease liability on the transaction.

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

	September 30,			December 31,
(dollars in thousands)	2024			2023
Lease liabilities	$	1,591		$	1,983
Right-of-use assets	$	1,674		$	2,073
Weighted average remaining lease term (years)		7.41			7.45
Weighted average discount rate		4.10	%		3.98	%

	Nine Months Ended September 30,
(dollars in thousands)	2024		2023
Lease Expense
Operating lease expense	$	293	$	178
Short-term lease expense		9		8
Total lease expense	$	302	$	186
Cash paid for amounts included in lease liabilities	$	293	$	178

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

(dollars in thousands)
Three months ending December 31, 2024	$	85
Twelve months ending December 31, 2025		297
Twelve months ending December 31, 2026		230
Twelve months ending December 31, 2027		223
Twelve months ending December 31, 2028		231
Thereafter		798
Total undiscounted cash flows	$	1,864
Less discount		(273	)
Lease liabilities	$	1,591

42

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 10.  Share-Based Compensation

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

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

No award may be granted under the Equity Plan after March 16, 2030 and any awards outstanding on such date shall remain valid in accordance with their terms. The Board of Directors shall have the right to terminate the Equity Plan at any time pursuant to the terms of the Equity Plan. The Compensation Committee of the Board of Directors has been appointed to administer the Equity Plan. The maximum aggregate number of shares that may be issued pursuant to awards made under the Equity Plan shall not exceed 300,000 shares of common stock. As of September 30, 2024, 134,900 shares have been issued under the Equity Plan, leaving 165,100 shares available for future grants.

On March 28, 2024, 65,000 restricted stock awards were issued with a fair value of $11.30 per share. These awards vest 20% on December 15, 2024, 20% on December 15, 2025, 20% on December 15, 2026, 20% on December 15, 2027, and 20% on December 15, 2028. On September 3, 2024, 10,000 restricted stock awards were issued with a fair value of $11.33 per share. These awards vest 25% on December 15, 2025, 25% on December 15, 2026, 25% on December 15, 2027, and 25% on December 15, 2028. For the nine months ended September 30, 2024 and 2023, $157 thousand and $83 thousand, respectively, was recognized as compensation expense related to share-based compensation. For the three months ended September 30, 2024 and 2023, $70 thousand and $17 thousand was recognized as compensation expense related to share-based compensation for restricted stock awards.

As of September 30, 2024, the unrecognized compensation expense related to unvested restricted stock awards was $822 thousand. The unrecognized compensation expense is expected to be recognized over a weighted average period of 3.99 years. The following table presents the activity for restricted stock:

						Grant Date
						Fair Value of
						Restricted
						Stock that
				Weighted		Vested During
	Number of			Average Grant		The Year
	Shares			Date Fair Value		(in thousands)
Unvested as of December 31, 2022		18,850		$	12.38
Granted		-			-
Vested		(8,225	)		12.21	$	99
Forfeited		-			-
Unvested as of December 31, 2023		10,625		$	12.54
Granted		75,000			11.30
Vested		-			-	$	-
Forfeited		-			-
Unvested as of September 30, 2024		85,625		$	11.45

43

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 11.  Commitments and Contingencies

Litigation

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

Financial Instruments with Off-Balance Sheet Risk

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

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Bank’s commitments at September 30, 2024 and December 31, 2023 is as follows:

	September 30,		December 31,
(dollars in thousands)	2024		2023
Commitments to extend credit	$	218,942	$	195,991
Standby letters of credit		1,104		583
	$	220,046	$	196,574

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

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

Concentrations of Credit Risk

Substantially all of the Bank’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Bank’s market area and such customers are generally depositors of the Bank. Investments in state and municipal securities involve governmental entities within and outside the Bank’s market area. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Bank’s primary focus is toward small business and consumer transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers. The Bank has cash and cash equivalents on deposit with financial institutions which exceed federally insured limits.

44

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 12.  Financial Instruments

FASB ASC 825, “Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value of future cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. FASB ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of September 30, 2024 and December 31, 2023. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as FHLB and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of the fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

For loans, the carrying amount is net of unearned income and the allowance for credit losses. In accordance with ASU No. 2016-01, the fair value of loans as of September 30, 2024 and December 31, 2023, was measured using an exit price notion.          

					Fair Value Measurements
(dollars in thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2024
Financial Instruments – Assets
Net Loans	$	945,335	$	912,232	$	-	$	-	$	912,232
Financial Instruments – Liabilities
Time Deposits		343,082		339,351		-		339,351		-
FHLB Advances		20,000		19,992		-		19,992		-
December 31, 2023
Financial Instruments – Assets
Net Loans	$	810,965	$	775,246	$	-	$	-	$	775,246
Financial Instruments – Liabilities
Time Deposits		263,987		260,590		-		260,590		-
FHLB Advances		25,000		24,999		-		24,999		-

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

45

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 12.  Financial Instruments, continued

Fair Value Hierarchy

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

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

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

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

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

Investment Securities Available for Sale

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

Individually Evaluated Loans

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

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

46

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 12.  Financial Instruments, continued

Other Real Estate Owned

Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned. Subsequently, other reals estate owned is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price the Company records the other real estate owned as nonrecurring Level 2. When the fair value of the collateral is based on either an external or internal appraisal and there is no observable market price, the Company records the other real estate owned as nonrecurring Level 3. As a result of the JCB merger, there was one property valued at $140 thousand in other real estate owned at September 30, 2024 and there was no other real estate owned held as of December 31, 2023.

Assets Recorded at Fair Value on a Recurring Basis

(dollars in thousands)	Total		Level 1		Level 2		Level 3
September 30, 2024
Investment securities available for sale
U.S. Treasury securities	$	2,479	$	-	$	2,479	$	-
U.S. Government agencies		22,243		-		22,243		-
Mortgage-backed securities		58,843		-		58,843		-
Corporate securities		1,477		-		1,477		-
State and municipal securities		38,864		-		38,864		-
Total assets at fair value	$	123,906	$	-	$	123,906	$	-
December 31, 2023
Investment securities available for sale
U.S. Treasury securities	$	2,446	$	-	$	2,446	$	-
U.S. Government agencies		21,438		-		21,438		-
Mortgage-backed securities		61,697		-		61,697		-
Corporate securities		1,442		-		1,442		-
State and municipal securities		40,366		-		40,366		-
Total assets at fair value	$	127,389	$	-	$	127,389	$	-

No liabilities were recorded at fair value on a recurring basis as of September 30, 2024 or December 31, 2023. There were no transfers between levels during the nine-month period ended September 30, 2024 and the year ended December 31, 2023.

47

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 12.  Financial Instruments, continued

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. No liabilities were recorded at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023. Assets measured at fair value on a nonrecurring basis are included in the table below.

(dollars in thousands)	Total		Level 1		Level 2		Level 3
September 30, 2024
Individually evaluated loans	$	1,813	$	-		-	$	1,813
Other real estate owned		140	$	-		-		140
Total assets at fair value	$	1,953	$	-	$	-	$	1,953

(dollars in thousands)	Total		Level 1		Level 2		Level 3
December 31, 2023
Individually evaluated loans	$	1,635	$	-		-	$	1,635
Total assets at fair value	$	1,635	$	-	$	-	$	1,635

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value at September 30, 2024		Fair Value at December 31, 2023		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Individually Evaluated Loans	$	1,813	$	1,635	Appraised Value/Discounted Cash Flows/Market Value of Note	Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell	0	-	10%
Other Real Estate Owned	$	140	$	-	Appraised Value/Comparable Sales/Other Estimates from Independent Sources	Discounts to reflect current market conditions and estimated costs to sell	0	-	10%

48

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 13.  Short-Term Borrowings

At September 30, 2024, the Bank had a $15.0 million FHLB advance outstanding at a rate of 5.00%, with a maturity date of January 9, 2025, that was classified as short-term. Also at September 30, 2024, the Bank had a $5.0 million FHLB advance outstanding at a rate of 5.07%, with a maturity date of October 17, 2024, that was classified as short-term.

On September 9, 2024, the Company entered into a $5.0 million unsecured revolving line of credit, with a maturity date of September 9, 2025. Interest on the line of credit is variable and is set at the prime rate. At September 30, 2024, $5.0 million was outstanding under this revolving line of credit at a rate of 8.00% and was classified as short-term debt.

At December 31, 2023, the Bank had a $25.0 million FHLB advance outstanding at a rate of 5.45%, with a maturity date of January 10, 2024, that was classified as short-term. At December 31, 2023, the Bank had a $2.5 million borrowing from the Federal Reserve’s Bank Term Funding Program outstanding at a rate of 5.46%, with a maturity date of August 2, 2024, that was classified as short-term. During the first quarter of 2024, this $2.5 million borrowing was repaid with no prepayment penalty.

At September 30, 2024, the Bank had established unsecured lines of credit of approximately $73.0 million with correspondent banks to provide additional liquidity if, and as needed. In addition, the Bank has the ability to borrow up to approximately $246.0 million from the FHLB, subject to the pledging of collateral.

Note 14.  Long-Term Borrowings

At September 30, 2024 and December 31, 2023, neither the Company nor the Bank had no borrowings outstanding classified as long-term.

49

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 15.  Capital Requirements

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Small Bank Holding Company Policy Statement, and is not obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of September 30, 2024 and December 31, 2023, respectively.  These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2024
Total Capital (to risk weighted assets)	$	104,744		11.10	%	$	75,457		8.00	%	$	94,322		10.00	%
Tier 1 Capital (to risk weighted assets)	$	96,736		10.26	%	$	56,593		6.00	%	$	75,457		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	96,736		10.26	%	$	42,445		4.50	%	$	61,309		6.50	%
Tier 1 Capital (to average total assets)	$	96,736		8.55	%	$	45,233		4.00	%	$	56,541		5.00	%
December 31, 2023
Total Capital (to risk weighted assets)	$	104,800		12.49	%	$	67,130		8.00	%	$	83,913		10.00	%
Tier 1 Capital (to risk weighted assets)	$	97,659		11.64	%	$	50,348		6.00	%	$	67,130		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	97,659		11.64	%	$	37,761		4.50	%	$	54,543		6.50	%
Tier 1 Capital (to average total assets)	$	97,659		9.26	%	$	42,199		4.00	%	$	52,749		5.00	%

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

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

The CBLR framework was available for banks to use in their September 30, 2024 Call Report. At this time the Company has elected not to opt into the CBLR framework for the Bank, but may opt into the CBLR framework in the future.

50

Skyline Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 16.  Subsequent Events

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

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

51

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion provides information about the major components of the results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

As previously announced, the Company and JCB merged on September 1, 2024, with the Company as the surviving corporation.  For accounting purposes, the Company is considered the acquiror and JCB is considered the acquiree in the transaction. As such, all information contained herein as of and for periods prior to September 1, 2024, reflects the operations of the Company prior to the merger.

Critical Accounting Policies

For a discussion of the Company’s critical accounting policies, including its allowance for credit losses and asset impairment judgments, see Note 1 in the Notes to Consolidated Financial Statements above, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Executive Summary

● In connection with the acquisition of JCB, effective  September 1, 2024, the Company acquired $154.1 million in assets at fair value, including $87.2 million in loans.  The Company also assumed $133.8 million of liabilities at fair value, including $125.3 million of total deposits with a core deposit intangible asset recorded of $3.4 million, and goodwill of $4.6 million.

● Net income was $1.1 million, or $0.19 per share, in the third quarter of 2024, compared to $2.1 million, or $0.37 per share, in the third quarter of 2023.  For the nine months ended September 30, 2024, net income was $4.9 million, or $0.89 per share, compared to net income of $7.5 million, or $1.35 per share, for the nine months ended September 30, 2023.  

● Net interest margin (“NIM”) was 3.78% for the third quarter of 2024, compared to 3.72% in the second quarter of 2024, and 3.66% in the third quarter of 2023.  

● Total assets increased $160.7 million, or 15.36%, to $1.21 billion at September 30, 2024 from $1.05 billion at December 31, 2023.

● Net loans were $945.3 million at September 30, 2024, an increase of $134.3 million, or 16.57%, when compared to $811.0 million at December 31, 2023.  Excluding the $87.2 million in loans acquired as part of the JCB merger, loans increased by $48.1 million, or 5.90%, for the first nine months of 2024.

● Total deposits were $1.09 billion at September 30, 2024, an increase of $157.2 million, or 16.92%, from $928.7 million at December 31, 2023.  Excluding the $125.3 million of total deposits acquired as part of the JCB merger, total deposits increased by $31.8 million, or 3.43%, for the first nine months of 2024.

● Third quarter 2024 earnings represented an annualized return on average assets (“ROAA”) of 0.37% and an annualized return on average equity (“ROAE”) of 4.82%, compared to 0.81% and 10.66%, respectively, for the same period last year.  

52

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Results of Operations for the Three Months ended September 30, 2024 and 2023

Net interest income after provision for credit losses in the third quarter of 2024 was $9.2 million compared to $8.5 million in the third quarter of 2023.  Total interest income was $13.7 million in the third quarter of 2024, representing an increase of $2.7 million, or 24.89%, in comparison to the third quarter of 2023.  Interest income on loans increased in the quarterly comparison by $2.6 million, primarily due to organic loan growth of $87.7 million from September 30, 2023 to September 30, 2024, as well as interest rate increases during the same time period.  Management anticipates that this loan growth, in addition to higher rates in the current year, will continue to have a positive impact on both earning assets and loan yields.  Interest expense on deposits increased by $1.5 million in the quarterly comparison as a result of rate increases on deposit offerings, especially on time deposits due to deposit competition and a migration from lower cost deposits to time deposits.  Management anticipates that interest expense on deposits will increase in the near term as competitive pressures for deposits may result in continued increases in rates on deposit offerings, especially on time deposits.  Interest on borrowings increased by $24 thousand, primarily due to short-term FHLB advances to fund loan growth.

Third quarter 2024 and 2023 noninterest income was comparable at $1.9 million for both quarters.  Included in noninterest income for the third quarter of 2023 was $69 thousand related to life insurance income, and a gain of $197 thousand on the sale leaseback of a branch location was recorded in other income for the third quarter of 2023.  Excluding these items, noninterest income increased by $200 thousand for the third quarter of 2024 compared to the third quarter of 2023, primarily as a result of an increase in service charges and fees of $80 thousand and an increase of $71 thousand in mortgage origination fees as mortgage origination volume increase compared to the year ago period. 

Noninterest expense in the third quarter of 2024 was $9.6 million compared with $7.9 million in the third quarter of 2023, an increase of $1.7 million, or 21.80%.  There was an increase in salary and benefit costs of $170 thousand due to personnel additions and routine salary adjustments, as well as increased benefit costs.  Occupancy and equipment expenses increased $24 thousand and data processing increased by $138 thousand in the quarterly comparisons primarily due to branch expansion costs.  Also included in noninterest expense in the third quarter of 2024 was $1.1 million in merger related expenses related to the acquisition of Johnson County Bank.

Net income before taxes decreased by $1.1 million in the quarterly comparison causing a decrease in income tax expense of $134 thousand. 

Results of Operations for the Nine Months ended September 30, 2024 and 2023

For the first nine months of 2024, net interest income after provision for (recovery of) credit losses was $27.0 million compared to $26.7 million for the first nine months of 2023.  Interest income increased by $6.5 million, primarily due to an increase of $6.4 million in interest income on loans.  Interest expense on deposits increased by $4.8 million for the nine months ended September 30, 2024 compared to the same period last year.  As previously discussed, this is a reflection of the increased competitive pressures for deposits.  Interest on borrowings increased by $387 thousand in the nine-month comparison, due to short-term borrowings to help fund loan growth.

For the nine months ended September 30, 2024 and 2023, noninterest income was comparable at $5.2 million for both periods.  Included in noninterest income for the first nine months of 2024 was $221 thousand from life insurance contracts and a net realized security loss of $141 thousand.  The net security loss resulted from the recognition of unamortized premiums on a called bond.  Included in noninterest income for the nine months ended September 30, 2023, was income of $129 thousand related to loan hedge fees from a correspondent bank that was recorded in other income, the $197 thousand gain on the sale leaseback discussed above, $69 thousand from life insurance contracts and security losses of $16 thousand.  Excluding these items noninterest income increased by $308 thousand for the first nine months of 2024 compared to the first nine months of 2023, primarily as a result on an increase in service charges and fees of $239 thousand and an increase of $20 thousand in mortgage origination fees. 

53

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Results of Operations for the Nine Months ended September 30, 2024 and 2023, continued

For the nine-month period ended September 30, 2024, total noninterest expenses increased by $3.4 million compared to the same period in 2023, primarily due to employee costs and branch costs associated with branch expansion discussed above.  Salary and benefit cost increased by $577 thousand.  Occupancy and equipment expenses increased by $470 thousand, and data processing increased by $458 thousand from the first nine months of 2023 to 2024.  Merger related expenses related to the acquisition of Johnson County Bank were $1.5 million for the first nine months of 2024.    

In the nine-month comparison, net income before taxes decreased by $3.1 million, resulting in a decrease in income tax expense of $459 thousand. 

Financial Condition

In connection with the acquisition of JCB, effective  September 1, 2024, the Company acquired $154.1 million in assets at fair value, including $87.2 million in loans.  The Company also assumed $133.8 million of liabilities at fair value, including $125.3 million of total deposits with a core deposit intangible asset recorded of $3.4 million, and goodwill of $4.6 million.

Total assets increased by $160.7 million, or 15.36%, to $1.21 billion at September 30, 2024 from $1.05 billion at December 31, 2023.  Total loans increased by $135.4 million, or 16.56%, to $953.1 million at September 30, 2024 from $817.7 million at December 31, 2023.  This increase was due to the $87.2 million in loans acquired as part of the JCB merger, along with loan growth of $48.1 million during the first nine months of September 30, 2024.    

Asset quality has remained strong, with a ratio of nonperforming loans to total loans of 0.18% at September 30, 2024 compared to 0.21% at December 31, 2023.  The allowance for credit losses remained comparable at approximately 0.82% of total loans as of September 30, 2024 and December 31, 2023, respectively.

Investment securities decreased by $3.5 million to $123.9 million at September 30, 2024 from $127.4 million at December 31, 2023.  The decrease in the first nine months of 2024 was the result of $2.7 million in called securities, $5.2 million in paydowns, and a decrease in unrealized losses of $4.4 million as a result of the decrease in interest rates during the first nine months of 2024.

Total deposits increased in the first nine months of 2024 by $157.2 million, or 16.92%, to $1.09 billion September 30, 2024 from $928.7 million at December 31, 2023, primarily as a result of the JCB merger.  Excluding the $125.3 million of total deposits acquired as part of the JCB merger, total deposits increased by $31.8 million, or 3.43%, for the first nine months of 2024.  Excluding the total deposits acquired in the JCB merger, noninterest bearing deposits increased by $2.4 million and interest-bearing deposits increased by $29.5 million during the first nine months of 2024.  Excluding the total deposits acquired in the JCB merger, lower cost interest bearing deposits decreased by $2.9 million during the first nine months of 2024, and time deposits increased by $32.4 million, as customers continue to look for higher returns on their deposits.

Total stockholders’ equity increased by $5.7 million, or 6.93%, to $88.6 million at September 30, 2024, from $82.9 million at December 31, 2023.  The change during the first nine months of 2024 was due to earnings of $4.9 million, less dividends paid of $2.6 million, $3.4 million in other comprehensive income, and stock repurchases of $230 thousand.  Book value increased from $14.84 per share at December 31, 2023 to $15.72 per share at September 30, 2024.    

54

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Nonperforming and Problem Assets

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

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate.  Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies.  Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.  As of September 30, 2024 approximately 49% of our commercial mortgage loans are owner occupied and 51% are non-owner occupied.  The largest concentrations in commercial real estate as to type are office buildings, which includes medical offices, at approximately 23%, hotel properties at approximately 17%, warehouses at approximately 10%, and retail facilities at approximately 9%.

The following table provides information about the allowance for credit losses, nonperforming assets and loans past due 90 days or more and still accruing as of September 30, 2024 and December 31, 2023.

	September 30,			December 31,
	2024			2023
Allowance for credit losses	$	7,787		$	6,739
Total loans	$	953,122		$	817,704
Allowance for credit losses to total loans		0.82	%		0.82	%
Nonperforming loans:
Nonaccrual loans	$	1,719		$	1,731
Loans past due 90 days or more and still accruing		-			-
Total nonperforming loans		1,719			1,731
Other real estate owned		140			-
Total nonperforming assets	$	1,859		$	1,731
Total nonperforming loans as a percentage to total loans		0.18	%		0.21	%
Total allowance for credit losses to nonperforming loans		453.00	%		389.31	%
Total nonperforming assets as a percentage to total assets		0.15	%		0.17	%
Total nonaccrual loans as a percentage to total loans		0.18	%		0.21	%
Total allowance for credit losses to nonaccrual loans		453.00	%		389.31	%

Total nonperforming loans were 0.18% and 0.21% of total outstanding loans as of September 30, 2024 and December 31, 2023, respectively.  Loans are placed in nonaccrual status when, in management’s opinion, the borrower may be unable to meet payments as they become due.  When interest accrual is discontinued, all unpaid accrued interest is reversed.  Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof.  Management’s ability to ultimately resolve these loans either with or without significant loss will be determined, to a great extent, by general economic and real estate market conditions.

Past due loans are often regarded as a precursor to further credit problems which would lead to future increases in nonaccrual loans or other real estate owned.  As of September 30, 2024, loans past due 30-89 days and still accruing totaled $789 thousand compared to $92 thousand at December 31, 2023.

55

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Nonperforming and Problem Assets, continued

Certain types of loans, such as option adjustable rate mortgage products, subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans.  The Bank has not offered these types of loans in the past and does not offer them currently.  Junior-lien mortgages can also be considered higher risk loans.  Our junior-lien portfolio at September 30, 2024 totaled $4.2 million, or 0.44% of total loans.  The charge-off rates in this category do not vary significantly from other real estate secured loans in the current year.

As of September 30, 2024 and December 31, 2023, respectively, we had loans with a current principal balance of $9.9 million and $3.5 million rated “Watch” or “Special Mention”.  The “Watch” classification is utilized by us when we have an initial concern about the financial health of a borrower that indicate above average risk.  We then gather current financial information about the borrower and evaluate our current risk in the credit.  After this review we will either move the loan to a higher risk rating category or move it back to its original risk rating.  Loans may be left rated “Watch” for a longer period of time if, in management’s opinion, there are risks that cannot be fully evaluated without the passage of time, and we want to review it on a more regular basis.  Assets that do not currently expose the Bank to sufficient risk to warrant a classification such as “Substandard” or “Doubtful” but otherwise possess weaknesses are designated “Special Mention”.  Loans rated as “Watch” or “Special Mention” are not considered “potential problem loans” until they are determined by management to be classified as “Substandard”.  As of September 30, 2024 and December 31, 2023, respectively, potential problem loans classified as “Substandard” totaled $3.1 million and $4.1 million, respectively.  As of September 30, 2024 and December 31, 2023, the Bank had no loans graded “Doubtful” included in the balance of total loans outstanding.

The allowance for credit losses is maintained at a level adequate to absorb potential losses.  Some of the factors which management considers in determining the appropriate level of the allowance for credit losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market area that the Bank serves.  Bank regulators also periodically review the Bank’s loans and other assets to assess their quality.  Loans deemed uncollectible are charged to the allowance.  Provisions for credit losses and recoveries on loans previously charged off are added to the allowance.  The reserve for credit losses was approximately 0.82% of total loans at September 30, 2024 and December 31, 2023.  The allocation of the allowance for credit losses as of September 30, 2024 and December 31, 2023 is as follows:

(dollars in thousands)	September 30, 2024								December 31, 2023
Balance at the end of the period applicable to:	Amount		% of ACL to Loans			% of Loans to Total Loans			Amount		% of ALL to Loans			% of Loans to Total Loans
Construction & development	$	951		1.47	%		6.77	%	$	910		1.70	%		6.54	%
Farmland		173		0.69	%		2.61	%		154		0.60	%		3.13	%
Residential		3,941		0.78	%		53.14	%		3,167		0.79	%		49.03	%
Commercial mortgage		1,852		0.66	%		29.38	%		1,902		0.71	%		32.98	%
Commercial & agriculture		478		0.80	%		6.23	%		424		0.89	%		5.83	%
Consumer and other		392		2.20	%		1.87	%		182		0.89	%		2.49	%
Total	$	7,787		0.82	%		100.00	%	$	6,739		0.82	%		100.00	%

56

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Analysis of Net Charge-Offs

The following table shows net charge-offs, average loan balances and the percentage of charge-offs to average loan balances for the nine months ended September 30, 2024 and 2023, and the year ended December 31, 2023.

	Nine months ended September 30, 2024
						Percentage of Net
						(Charge-Offs)
	Net					Recoveries to
	(Charge-Offs)			Average		Average
(dollars in thousands)	Recoveries			Loans		Loans
Construction & development	$	-		$	54,333		0.00	%
Farmland		-			24,353		0.00	%
Residential		9			426,712		0.00	%
Commercial mortgage		3			269,798		0.00	%
Commercial & agriculture		11			51,321		0.02	%
Consumer & other		(58	)		16,213		(0.36	%)
Total	$	(35	)	$	842,730		0.00	%

	Nine months ended September 30, 2023
						Percentage of Net
						(Charge-Offs)
	Net					Recoveries to
	(Charge-Offs)			Average		Average
(dollars in thousands)	Recoveries			Loans		Loans
Construction & development	$	1		$	50,846		0.00	%
Farmland		50			23,788		0.21	%
Residential		1			374,958		0.00	%
Commercial mortgage		10			261,951		0.00	%
Commercial & agriculture		14			42,024		0.03	%
Consumer & other		(72	)		20,826		(0.35	%)
Total	$	4		$	774,393		0.00	%

	Year ended December 31, 2023
						Percentage of Net
						(Charge-Offs)
	Net					Recoveries to
	(Charge-Offs)			Average		Average
(dollars in thousands)	Recoveries			Loans		Loans
Construction & development	$	1		$	51,316		0.00	%
Farmland		50			24,124		0.21	%
Residential		1			379,748		0.00	%
Commercial mortgage		11			263,211		0.00	%
Commercial & agriculture		16			43,110		0.04	%
Consumer & other		(87	)		20,706		(0.42	%)
Total	$	(8	)	$	782,215		0.00	%

57

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity

Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss. Unsecured federal fund lines available from correspondent banks totaled $73.0 million at September 30, 2024.  The Bank had no balances outstanding on these lines as of September 30, 2024 or December 31, 2023.  In addition, the Bank has the ability to borrow up to approximately $246.0 million from the FHLB, subject to the pledging of collateral. 

At September 30, 2024, the Bank had short-term FHLB advances of $20.0 million.  At December 31, 2023, the Bank had short-term FHLB advances of $25.0 million and a $2.5 million borrowing from the Federal Reserve’s Bank Term Funding Program that was classified as short-term.

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

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

On September 9, 2024, the Company entered into a $5.0 million unsecured revolving line of credit, with a maturity date of September 9, 2025.  Interest on the line of credit is variable and is set at the prime rate.  At September 30, 2024, $5.0 million was outstanding under this revolving line of credit at a rate of 8.00% and was classified as short-term debt. 

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 9.5% and 11.9% for the periods ended September 30, 2024 and December 31, 2023, respectively.  These ratios are considered to be adequate by management.

58

Part I. Financial Information

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Capital Resources

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

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios at the Bank level which assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities.  At September 30, 2024, the Bank exceeded minimum regulatory capital requirements and is considered to be “well capitalized.”

At September 30, 2024, the Company’s equity to asset ratio was 7.35% and the Bank’s capital was in excess of regulatory requirements as discussed above.  The Company will continue to monitor the residual effects of inflation in determining future cash dividends and any requirements for additional capital each quarter.  The Company declared and paid dividends of $2.6 million, and had $230 thousand of stock repurchases, for the first nine months of 2024.   

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 regarding 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; general economic and financial market conditions; the effect of changes in banking, tax and other laws and regulations and interpretations or guidance thereunder; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality, composition and fair value of the loan and securities portfolios; demand for loan products; deposit flows; liquidity and the availability of secondary funding sources; competition; demand for financial services in the 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; disruptions to customer and employee relationships and business operations caused by the acquisition of Johnson County Bank; the ability to implement integration plans associated with the acquisition, which integration may be more difficult, time-consuming or costly than expected; the ability to achieve the cost savings and synergies contemplated by the acquisition within the expected timeframe, or at all; and other factors identified in Item 1A, “Risk Factors,” in the Company’s Annual Report on 10-K for the year ended December 31, 2023 and this Quarterly Report on Form 10-Q.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  We undertake no obligation to update or clarify these forward‐looking statements, whether as a result of new information, future events or otherwise. 

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Part I. Financial Information

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

Not required.

60

Part I. Financial Information

Item 4.     Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

61

Part II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In connection with the information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 should be considered. These risks could materially and adversely affect our business, financial condition and results of operations. Other than as set forth below, there have been no material changes to the factors discussed in our Annual Report on Form 10-K.

Combining the Bank and JCB may be more difficult, costly or time-consuming than expected, or could result in the loss of customers.

The Bank and JCB companies have operated, and, until the completion of the acquisition, will continue to operate, independently. The success of the acquisition will depend on a number of factors, including, but not limited to the Company’s ability to:

● Timely and successfully integrate JCB into the Bank;

● Retain key employees of JCB, and retain and attract qualified personnel to the Company; and

● Maintain existing relationships with customers, suppliers and vendors of the Company and JCB.

It is possible that the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition. In addition, the success of the Company’s acquisition of JCB will depend in part on its ability to realize the anticipated benefits and estimated cost savings from acquiring JCB, which may be more difficult to achieve than the Company anticipates and may not be realized fully or at all, or may take longer to realize than expected.

The Company may have difficulty managing future growth and competition in Tennessee due to its previous limited operations in that market.

The Company’s primary market area is currently southwestern Virginia and western North Carolina. JCB’s primary market is currently the Johnson County market in eastern Tennessee. After the acquisition is complete, there can be no assurance that the Company will be able to successfully compete in the eastern Tennessee market, or that it will be able to successfully manage additional growth in Tennessee. Because of the Company’s limited participation in Tennessee prior to the acquisition of JCB, there may be unexpected challenges and difficulties that could adversely affect the Company’s operations.

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Part II. Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table details the Company’s purchase of its common stock during the third quarter of 2024.

	Total number of shares purchased		Average price paid per Share		Total number of shares purchased as part of publicly announced program		Maximum number of shares that may yet be purchased under the plan (1)
Purchased 7/1 through 7/31		-	$	-		-		24,613
Purchased 8/1 through 8/31		-	$	-		-		24,613
Purchased 9/1 through 9/30		-	$	-		-		24,613
Total during third quarter 2024		-	$	-		-

⁽¹⁾ On February 16, 2023, the Company’s Board of Directors publicly announced the extension of the Company’s stock repurchase plan, pursuant to which the Company may purchase an aggregate of up to 350,000 shares of common stock through January 2025.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

During the fiscal quarter ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408(a) of Regulation S-K).

63

Part II. Other Information

Item 6. Exhibits

2.1 Amended and Restated Agreement and Plan of Merger, dated June 28, 2024, by and among Skyline Bankshares, Inc., Skyline National Bank, SNB Interim Bank, National Association, and Johnson County Bank (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2024)*.

3.1 Amended and Restated Bylaws of Skyline Bankshares, Inc. (attached as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 4, 2024 incorporated herein by reference).

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

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

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

101 The following materials from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

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

*Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

64

Part II. Other Information

SIGNATURES

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

	Skyline Bankshares, Inc.
Date: November 14, 2024	By:	/s/ Blake M. Edwards
		Blake M. Edwards
		President and Chief Executive Officer
	By:	/s/ Lori C. Vaught
		Lori C. Vaught
		Chief Financial Officer

65