10-K 1 pkkw20221231_10k.htm FORM 10-K pkkw20221231_10k.htm
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Washington, D.C. 20549






For the fiscal year ended December 31, 2022




For the transition period from _______ to _______  


Commission File Number: 333-209052



(Exact name of registrant as specified in its charter)



(State or other jurisdiction

of incorporation or organization)



(I.R.S. Employer

Identification No.)

101 Jacksonville Circle

Floyd, Virginia

(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



Name of each exchange

on which registered



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



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☐    No  ☑


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐    No ☑


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 check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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 filerSmaller 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.


If securities are registered pursuant to Section 12(b) of the Act, indicated by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.  ☐


Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).  ☐


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


State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  $64,203,200


Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  5,607,416 shares of Common Stock as of March 27, 2023













Page Number

Part I


Item 1.



Item 1A.

Risk Factors


Item 1B.

Unresolved Staff Comments


Item 2.



Item 3.

Legal Proceedings


Item 4.

Mine Safety Disclosures



Part II


Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


Item 6.



Item 7.

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


Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


Item 8.

Financial Statements and Supplementary Data


Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Item 9A.

Controls and Procedures


Item 9B.

Other Information


Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections



Part III


Item 10.

Directors, Executive Officers and Corporate Governance


Item 11.

Executive Compensation


Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


Item 13.

Certain Relationships and Related Transactions, and Director Independence


Item 14.

Principal Accountant Fees and Services



Part IV


Item 15.

Exhibits, Financial Statement Schedules


Item 16.

Form 10-K Summary









Item 1.





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


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


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


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






Lending Activities


The Bank’s lending services include real estate, commercial, agricultural, and consumer loans. The loan portfolio constituted 83.53% of the interest earning assets of the Bank at December 31, 2022, and has historically produced the highest interest rate spread above the cost of funds. The Bank’s loan personnel have the authority to extend credit under guidelines established and approved by the Bank’s Board of Directors. The Officers Loan Committee has the authority to approve loans from $1.5 million up to $2.5 million of total indebtedness to a single customer. The Directors’ Loan Committee has the authority to approve loans from $2.5 million up to $4.0 million of total indebtedness to a single customer. All loans in excess $4.0 million must be presented to the full Board of Directors of the Bank for ultimate approval or denial.


The Bank has in the past and intends to continue to make most types of real estate loans, including, but not limited to, single and multi-family housing, farm loans, residential and commercial construction loans, and loans for commercial real estate. At December 31, 2022, the Bank had 47.49% of the loan portfolio in single and multi-family housing, 34.93% in non-farm, non-residential real estate loans, 3.14% in farm related real estate loans, and 6.59% in real estate construction and development loans.


The Bank’s loan portfolio includes commercial and agricultural production loans totaling 5.23% of the portfolio at December 31, 2022. Consumer and other loans make up approximately 2.62% of the total loan portfolio. Consumer loans include loans for household expenditures, car loans, and other loans to individuals. While this category has historically experienced a greater percentage of charge-offs than the other classifications, the Bank is committed to continue to make this type of loan to fulfill the needs of the Bank’s customer base.


All loans in the Bank’s portfolio are subject to risk from the state of the economy in the Bank’s service area and also that of the nation. The Bank has used and continues to use conservative loan-to-value ratios and thorough credit evaluation to lessen the risk on all types of loans. The use of conservative appraisals has also reduced exposure on real estate loans. Thorough credit checks and evaluation of past internal credit history has helped reduce the amount of risk related to consumer loans. Government guarantees of loans are used when appropriate, but apply to a minimal percentage of the portfolio. Commercial loans are evaluated by collateral value and ability to service debt. Businesses seeking loans must have a good product line and sales, responsible management, and demonstrated cash flows sufficient to service the debt.




The Bank invests a portion of its assets in U.S. Treasury, U.S. Government agency, and U.S. Government Sponsored Enterprise securities, state, county and local obligations, corporate and equity securities. The Bank’s investment portfolio is managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at reduced yields and risks relative to increases in loan demand or to offset fluctuations in deposits.


Deposit Activities


Deposits are the major source of funds for lending and other investment activities. The Bank considers the majority of its regular savings, demand, NOW, money market deposits, individual retirement accounts and certificates of deposit in denominations of $250,000 or less to be core deposits. These accounts comprised approximately 94.86% of the Bank’s total deposits at December 31, 2022. Certificates of deposit in excess of the FDIC insured limit of $250,000 represented the remaining 5.14% of deposits at December 31, 2022.





Market Area


The Bank’s primary market area consists of:



all of Grayson County, Virginia


all of Floyd County, Virginia


all of Carroll County, Virginia


all of Wythe County, Virginia


all of Pulaski County, Virginia


all of Montgomery County, Virginia


portions of Roanoke County, Virginia


all of Alleghany County, North Carolina


all of Ashe County, North Carolina


all of Burke County, North Carolina


all of Caldwell County, North Carolina


all of Catawba County, North Carolina


all of Cleveland County, North Carolina


all of Davie County, North Carolina


all of Watauga County, North Carolina


all of Wilkes County, North Carolina


all of Yadkin County, North Carolina


the City of Galax, Virginia


the City of Radford, Virginia


the City of Salem, Virginia


the City of Roanoke, Virginia


Grayson, Carroll, Alleghany, Ashe, Wilkes, and Yadkin Counties, as well as the City of Galax, are rural in nature and employment in these areas was once dominated by furniture and textile manufacturing. As those industries have declined, employment has shifted to healthcare, retail and service, light manufacturing, tourism, and agriculture. Median household income in these markets ranged from a low of $35,184 in the City of Galax, to a high of $46,954 in Yadkin County, based upon 2020 census data. Montgomery, Pulaski, Floyd, Wythe, Burke, Davie, Caldwell, Catawba, Cleveland and Watauga counties, as well as the City of Radford, while largely rural, are more economically diverse. Montgomery County is home to Virginia Tech, Watauga County is home to Appalachian State University, the City of Radford is home to Radford University, and community colleges are located in both Wythe County and Pulaski County. The university presence has led to the development of several technology related companies in the region. Manufacturing, agriculture, tourism, retail, healthcare and service industries are also prevalent in these markets. The increased economic diversity of these markets is reflected in the median household incomes which range from a low of $34,576 in the City of Radford, to a high of $62,028 in Davie County, according to the 2020 census data. The Bank has a lesser presence in Roanoke County and the Cities of Roanoke and Salem where median household incomes ranged from a low of $45,664 in Roanoke City, to a high of $70,076 in Roanoke County, based on 2020 census data.




The Bank encounters strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws that permit multi-bank holding companies as well as an increasing level of interstate banking have created a highly competitive environment for commercial banking. In one or more aspects of its business, the Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries, as well as marketplace lenders and other financial technology firms. Many of these competitors have substantially greater resources and lending limits and may offer certain services that the Bank does not currently provide. In addition, many of the Bank’s competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Recent federal and state legislation has heightened the competitive environment in which financial institutions must conduct their business, and the potential for competition among financial institutions of all types has increased significantly.




To compete, the Bank relies upon specialized services, responsive handling of customer needs, and personal contacts by its officers, directors, and staff. Large multi-state banking competitors tend to compete primarily by rate and the number and location of branches, while smaller, independent financial institutions tend to compete primarily by rate and personal service.




At December 31, 2022, the Company had 227 total employees representing 223 full time equivalents, none of whom are represented by a union or covered by a collective bargaining agreement. The Company’s management considers employee relations to be good.


Internet Site


The Company maintains an internet website at www.skylinenationalbank.bank. Shareholders of the Company and the public may access, free of charge, the Company’s periodic and current reports (including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports) filed with or furnished to the Securities and Exchange Commission (the "SEC"), through the “Investor Relations” section of the Company’s website. The reports are made available on this website as soon as practicable following the filing of the reports with the SEC. The information is free of charge and may be reviewed, downloaded and printed from the website at any time.


Government Supervision and Regulation


The Company and the Bank are extensively regulated under federal and state law.  The following information describes certain aspects of that regulation applicable to the Company and the Bank and does not purport to be complete.  Proposals to change the laws and regulations governing the banking industry are frequently raised in U.S. Congress, in state legislatures, and before the various bank regulatory agencies.  The likelihood and timing of any changes and the impact such changes might have on the Company and the Bank are impossible to determine with any certainty.  A change in applicable laws or regulations, or a change in the way such laws or regulations are interpreted by regulatory agencies or courts, may have a material impact on the business, operations, and earnings of the Company and the Bank.


Skyline Bankshares, Inc. (Formerly Known as Parkway Acquisition Corp.)


The Company is a bank holding company (“BHC”) within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is registered as such with the Federal Reserve.  As a bank holding company, the Company is subject to supervision, regulation and examination by the Federal Reserve Bank of Richmond and is required to file various reports and additional information with the Federal Reserve.  The Company is also registered under the bank holding company laws of Virginia and is subject to supervision, regulation and examination by the Virginia State Corporation Commission (the “SCC”).


Skyline National Bank


The Bank is a federally chartered national bank.  It is subject to federal regulation by the OCC and the FDIC.


The OCC conducts regular examinations of the Bank, reviewing such matters as the adequacy of loan loss reserves, quality of loans and investments, management practices, compliance with laws, and other aspects of its operations. In addition to these regular examinations, the Bank must furnish the OCC with periodic reports containing a full and accurate statement of its affairs. Supervision, regulation and examination of banks by these agencies are intended primarily for the protection of depositors rather than shareholders.




The regulations of the OCC, the FDIC and the Federal Reserve govern most aspects of the Company’s and the Bank’s business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, payment of dividends, branching, deposit interest rate ceilings, and numerous other matters. The OCC, the FDIC and the Federal Reserve have adopted guidelines and released interpretative materials that establish operational and managerial standards to promote the safe and sound operation of banks and bank holding companies. These standards relate to the institution’s key operating functions, including but not limited to capital management, internal controls, internal audit system, information systems and data and cybersecurity, loan documentation, credit underwriting, interest rate exposure and risk management, vendor management, executive management and its compensation, asset growth, asset quality, earnings, liquidity and risk management.


Dodd-Frank Act


On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act significantly restructured the financial regulatory regime in the United States and continues to have a broad impact on the financial services industry as a result of the significant regulatory and compliance changes required under the act. While significant rulemaking under the Dodd-Frank Act has occurred, certain of the act’s provisions require additional rulemaking by the federal bank regulatory agencies. The Dodd-Frank Act has increased our operations and compliance costs in the short-term; however, the ultimate impact of the Dodd-Frank Act remains dependent on the regulatory environment and future regulatory rulemaking and interpretations.


In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), was enacted to modify or remove certain regulatory financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, such as the Bank, and for large banks with assets of more than $50 billion.


Among other matters, the Economic Growth Act expands the definition of qualified mortgages which may be held by a financial institution with total consolidated assets of less than $10 billion, exempts community banks from the Volcker Rule, and includes additional regulatory relief regarding regulatory examination cycles, call reports, mortgage disclosures and risk weights for certain high-risk commercial real estate loans.


In addition, the Economic Growth Act simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10 percent. On September 17, 2019, the FDIC finalized a rule that introduced the CBLR framework for community banks with a Tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities. The Economic Growth Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” (the “HC Policy Statement”) by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act.


Deposit Insurance


The deposits of the Bank are insured by the Deposit Insurance Fund (“DIF”) up to applicable limits and are subject to FDIC deposit insurance assessments to maintain the DIF.


The Federal Deposit Insurance Act (the “FDIA”), as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set a ratio of deposit insurance reserves to estimated insured deposits of at least 1.35%.  The FDIC uses a risk-based system to calculate assessment rates and revised its methodology in April 2016 to calculate assessment rates for banks with under $10 billion in assets based upon certain financial measures of the bank and its supervisory ratings.  Initial base assessment rates currently range from 5 to 32 basis points, subject to a decrease for certain unsecured debt. Progressively lower assessment rate schedules will take effect once the reserve ratio reaches 2.0% or greater and again once the reserve ratio reaches 2.5% or greater.




Capital Requirements


The Federal Reserve, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banks and bank holding companies.  In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Pursuant to the HC Policy Statement, qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are not subject to consolidated regulatory capital requirements.


Federal banking regulators have adopted rules effective January 1, 2015, to implement the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rules required the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6% of risk-weighted assets; (iii) a total capital ratio of 8% of risk-weighted assets; and (iv) a leverage ratio of 4% of total assets.  As fully phased in effective January 1, 2019, these rules require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.


The capital conservation buffer requirement has been phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress.  Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.


The rules also revised the prompt corrective action framework, which is designed to place restrictions on insured depository institutions if their capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following capital level requirements in order to qualify as “well capitalized:” a common equity Tier 1 capital ratio of 6.5%; a Tier 1 capital ratio of 8%; a total capital ratio of 10%; and a Tier 1 leverage ratio of 5%.


Based on management’s understanding and interpretation of the capital rules, it believes that, as of December 31, 2022, the Bank meets all capital adequacy requirements under such rules on a fully phased-in basis.


In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the proposed framework, these standards will generally be effective on January 1, 2023, with an aggregate output floor phasing-in through January 1, 2027. Under the current capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Company. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.


As directed by the Economic Growth Act, on September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework). 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 December 31, 2022, Call Report. At this time the Company has elected not to opt into the CLBR framework for the Bank, but may opt into the CBLR framework in the future.




The Company’s ability to distribute cash dividends depends primarily on the ability of the Bank to pay dividends to it. The Company is a legal entity, separate and distinct from its subsidiaries. A significant portion of the Company’s revenues result from dividends paid to it by the Bank. There are various legal limitations applicable to the payment of dividends by the Bank to the Company and to the payment of dividends by the Company to its shareholders. As a national bank, the Bank is subject to certain restrictions on its reserves and capital imposed by federal banking statutes and regulations. Under OCC regulations, a national bank may not declare a dividend in excess of its undivided profits. Additionally, a national bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the OCC. A national bank may not declare or pay any dividend if, after making the dividend, the national bank would be “undercapitalized,” as defined in regulations of the OCC.


In addition, under the current supervisory practices of the Federal Reserve, the Company should inform and consult with its regulators reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the Company’s capital structure.


Permitted Activities


As a bank holding company, the Company is limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.


Banking Acquisitions; Changes in Control


The BHC Act requires, among other things, the prior approval of the Federal Reserve in any case where a bank holding company proposes to (i) acquire direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless it already owns a majority of such voting shares), (ii) acquire all or substantially all of the assets of another bank or bank holding company, or (iii) merge or consolidate with any other bank holding company. In determining whether to approve a proposed bank acquisition, the Federal Reserve will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s performance under the Community Reinvestment Act of 1977 (the “CRA”) and its compliance with fair housing and other consumer protection laws.




Subject to certain exceptions, the BHC Act and the Change in Bank Control Act, together with the applicable regulations, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring “control” of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered its securities with the Securities and Exchange Commission under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. The Company’s common stock currently is not registered under Section 12 of the Exchange Act.


In addition, Virginia law requires the prior approval of the SCC for (i) the acquisition of more than 5% of the voting shares of a Virginia bank or any holding company that controls a Virginia bank, or (ii) the acquisition by a Virginia bank holding company of a bank or its holding company domiciled outside Virginia.


Source of Strength


Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.


Safety and Soundness


There are a number of obligations and restrictions imposed on bank holding companies and their subsidiary banks by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event of a depository institution default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any subsidiary bank that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.


Under the FDIA, the federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines.


The Federal Deposit Insurance Corporation Improvement Act


Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the federal bank regulatory agencies possess broad powers to take prompt corrective action to resolve problems of insured depository institutions.  The extent of these powers depends upon whether the institution is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” as defined by the law.




Reflecting changes under the Basel III capital requirements, the relevant capital measures that became effective on January 1, 2015 for prompt corrective action are the total capital ratio, the common equity Tier 1 capital ratio, the Tier 1 capital ratio and the leverage ratio.  A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any capital directive order; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital ratio that is less than 8.0%, a common equity Tier 1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio of less than 6.0%, a common equity Tier 1 capital ratio less than 3.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.  Management believes, as of December 31, 2022 and 2021, the Company met the requirements for being classified as “well capitalized.”


As discussed under “Capital Requirements” above, federal banking regulators have issued a final rule that permits qualifying banks that have less than $10 billion in total consolidated assets to elect to be subject to a 9% “community bank leverage ratio,” in which case a bank that has chosen such proposed framework would be considered to have met the capital ratio requirements to be “well capitalized” under prompt corrective action rules, provided it has a community bank leverage ratio greater than 9%.


As required by FDICIA, the federal bank regulatory agencies also have adopted guidelines prescribing safety and soundness standards relating to, among other things, internal controls and information systems, internal audit systems, loan documentation, credit underwriting, and interest rate exposure.  In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.  In addition, the agencies adopted regulations that authorize, but do not require, an institution which has been notified that it is not in compliance with safety and soundness standard to submit a compliance plan.  If, after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the prompt corrective action provisions described above.




The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the “Interstate Banking Act”), generally permits well capitalized bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; and permits a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition. Under the Dodd-Frank Act, a bank holding company or bank must be well capitalized and well managed to engage in an interstate acquisition. Bank holding companies and banks are required to obtain prior Federal Reserve approval to acquire more than 5% of a class of voting securities, or substantially all of the assets, of a bank holding company, bank or savings association. The Interstate Banking Act and the Dodd-Frank Act permit banks to establish and operate de novo interstate branches to the same extent a bank chartered by the host state may establish branches.


Transactions with Affiliates


Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. Loan transactions with an affiliate generally must be collateralized and certain transactions between the Bank and its affiliates, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.




Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank (a “10% Shareholders”), are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus. Section 22(g) of the Federal Reserve Act identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.


Consumer Financial Protection


The Company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws, and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. If the Company fails to comply with these laws and regulations, it may be subject to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required bank regulatory approval for merger or acquisition transactions the Company may wish to pursue or being prohibited from engaging in such transactions even if approval is not required.


The Dodd-Frank Act centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), and giving it responsibility for implementing, examining, and enforcing compliance with federal consumer protection laws. The CFPB focuses on (i) risks to consumers and compliance with the federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services. The CFPB has broad rule making authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or injunction.


Community Reinvestment Act


The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate income neighborhoods.  Furthermore, such assessment is also required of banks that have applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch.  In the case of a BHC applying for approval to acquire a bank or BHC, the record of each subsidiary bank of the applicant BHC is subject to assessment in considering the application.  Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.”  The Company was rated “outstanding” in its most recent CRA evaluation.


In May 2022, the federal bank regulatory agencies jointly issued a proposed rule intended to strengthen and modernize the CRA regulatory framework.  If implemented, the rule would, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions.




Anti-Money Laundering Laws and Regulations


The Bank is subject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities (“AML laws”). This category of laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020. The Anti-Money Laundering Act of 2020, the most sweeping anti-money laundering legislation in 20 years, requires various federal agencies to promulgate regulations implementing a number of its provisions.


The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.


Privacy Legislation


Several recent laws, including the Right to Financial Privacy Act, and related regulations issued by the federal bank regulatory agencies, also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers’ personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated parties without prior notice and approval from the customer.


Incentive Compensation


In June 2010, the federal bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of a financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.


The OCC will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the financial institution is not taking prompt and effective measures to correct the deficiencies. At December 31, 2022, the Company had not been made aware of any instances of non-compliance with the final guidance.






The federal banking agencies have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services. The federal banking agencies expect financial institutions to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack. If the Bank fails to meet the expectations set forth in this regulatory guidance, it could be subject to various regulatory actions and any remediation efforts may require significant resources of the Bank. In addition, all federal and state bank regulatory agencies continue to increase focus on cybersecurity programs and risks as part of regular supervisory exams.


In November 2021, the federal banking agencies approved a final rule that, among other things, requires banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” that rises to the level of a “notification incident.” The rule also requires bank service providers to notify their banking organization customers as soon as possible after becoming aware of similar incidents.


Effect of Governmental Monetary Policies


The Company’s operations are affected not only by general economic conditions, but also by the policies of various regulatory authorities.  In particular, the Federal Reserve regulates money and credit conditions and interest rates to influence general economic conditions.  These policies have a significant impact on overall growth and distribution of loans, investments and deposits; they affect interest rates charged on loans or paid for time and savings deposits.  Federal Reserve monetary policies have had a significant effect on the operating results of commercial banks, including the Company, in the past and are expected to do so in the future.  As a result, it is difficult for the Company to predict the potential effects of possible changes in monetary policies upon its future operating results.




On March 27, 2020, President Trump signed the Coronavirus Aid Relief and Economic Security (“CARES”) Act into law.  The CARES Act established several new temporary U.S. Small Business Administration (“SBA”) loan programs to assist U.S. small businesses through the COVID-19 pandemic.  One of the new loan programs is the Small Business Paycheck Protection Program (“SBA-PPP”), an expansion of the SBA’s 7(a) loan program and the Economic Injury Disaster Loan Program.  Many of the provisions of the CARES Act, including the availability of PPP loans, were renewed or extended by the Coronavirus Response and Relief Supplemental Appropriations Act on December 21, 2020.


The SBA-PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during this emergency.  Eligible borrowers need to make a good faith certification that the uncertainty of current economic conditions make requesting assistance necessary to support ongoing operations.  Pursuant to the provisions of Section 1106 of the CARES Act, borrowers may apply to the Bank for loan forgiveness of all or a portion of the loan, subject to certain eligibility requirements and conditions.  The Bank is an SBA lender and began accepting applications under the CARES Act via its online application process on April 3, 2020.  As of December 31, 2022, the Bank had outstanding seven SBA-PPP loans totaling $71 thousand.





Item 1A.

Risk Factors.


Risks Related to Macroeconomic and Political Conditions


We may be adversely affected by economic conditions in our market area.


We are located in southwestern Virginia and northwestern North Carolina, and our local economy is heavily influenced by the furniture and textile industries, both of which have been in decline in recent years. Further changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. Higher unemployment rates may lead to future increases in past-due and nonperforming loans thus having a negative impact on the earnings of the Bank. An additional, significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control, would impact these local economic conditions and the demand for banking products and services generally, which could negatively affect our financial condition and performance.


We may be adversely impacted by changes in market conditions.



We are directly and indirectly affected by fluctuations in market conditions, which are subject to rapid or unpredictable change. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. As a financial institution, market risk is inherent in the financial instruments associated with our operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt and trading account assets and liabilities. A few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest rates, inflation, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. Our investment securities portfolio, in particular, may be impacted by market conditions beyond our control, including rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and inactivity or instability in the credit markets, and changes in market interest rates.  Any changes in these conditions, in current accounting principles or interpretations of these principles could have negative impacts on our investment securities portfolio, including on our returns, unrealized gains or unrealized losses, or our assessment of fair value and thus the determination of other-than-temporary impairment, any of which could have a material adverse effect on our net interest income or our results of operations.


The economic impact of the COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations.


Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have significantly disrupted the macroeconomic environment in the United States, and the outbreak significantly increased economic uncertainty. Although the domestic and global economies have largely recovered from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains.  The growth in economic activity and in the demand for goods and services, coupled with labor shortages and supply chain disruptions, has also contributed to rising inflationary pressures and the risk of recession.  Further, the COVID-19 pandemic could have long-lasting impacts on consumer behavior and business practices, including on remote work and business travel.


The extent to which the pandemic impacts our business, liquidity, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, if and when the virus can be fully controlled and abated and the extent of its lasting impacts on economic and operating conditions.  The impact of the removal of most pandemic related economic stimulus programs is also unknown.  To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 and related economic consequences materialize, it could exacerbate the risk factors discussed above, or otherwise materially and adversely affect our business, liquidity, financial condition and results of operations.






As a participating lender in SBA-PPP loans, the Company and the Bank are subject to additional risks regarding the Banks processing of SBA-PPP loans and risks that the SBA may not fund some or all SBA-PPP loan guarantees.


On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as SBA-PPP. Under the SBA-PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank participated as a lender in the SBA-PPP. The SBA-PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the SBA-PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the SBA-PPP, which exposes us to potential risks relating to noncompliance with the SBA-PPP. Since then, the SBA and the U.S. Department of Treasury have provided additional guidance and clarity on the SBA-PPP through the issuance of over 20 interim final rules implementing the SBA-PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the SBA-PPP was exhausted. The SBA-PPP was then expanded by the Paycheck Protection Program and Health Care Enhancement Act in late April 2020, adding an additional $310 billion in funding while the Paycheck Protection Program Flexibility Act made certain changes to the SBA-PPP, by allowing for more time to spend the funds, and making it easier to get a loan fully forgiven. Many of the provisions of the CARES Act, including the availability of SBA-PPP loans, were renewed or extended by the Coronavirus Response and Relief Supplemental Appropriations Act on December 21, 2020. As of December 31, 2022, we had seven SBA-PPP loans outstanding with an outstanding principal balance of $79 thousand, less unearned net fees of $8 thousand.


Since the initiation of the SBA-PPP, several larger banks have been subject to litigation regarding the protocols and procedures that they used in processing applications for the SBA-PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers that approached us regarding the SBA-PPP loans, regarding our policies and procedures used in processing applications for the SBA-PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to us, it could result in financial liability or adversely affect our reputation. In addition, litigation can be costly regardless of outcome. Any financial liability, litigation costs or reputation damage caused by SBA-PPP related litigation could have an adverse impact on our business, financial condition and results of operations.


Risks Related to Credit Risks


Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results.


We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market area. At December 31, 2022, the Company had $695.6 million of such loans outstanding, or 92.15% of its total loans. A major change in the real estate market, such as deterioration in the value of this collateral, or in the local or national economy, could adversely affect our customers’ ability to pay these loans, which in turn could impact us. Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring our extensions of credit carefully. We cannot fully eliminate credit risk, and as a result credit losses may occur in the future.





Should our loan quality deteriorate, and our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.


Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. In addition, we maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within our loan portfolio. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations.


The amount of future loan losses will be influenced by changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in the loan portfolio, we cannot precisely predict such losses or be certain that the loan loss allowance will be adequate in the future. While the risk of nonpayment is inherent in banking, we could experience greater nonpayment levels than we anticipate. Further deterioration in the quality of our loan portfolio could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase further, which could adversely affect our results of operations and financial condition.


Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. Any increase in the amount of the provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results and financial condition.


Our small-to-medium sized business target market may have fewer financial resources to weather a downturn in the economy.


We target our business development and marketing strategy primarily to serve the banking and financial services needs of small and medium sized businesses. These businesses generally have less capital or borrowing capacity than larger entities. If general economic conditions adversely affect this major economic sector in our markets, our results of operations and financial condition may be adversely affected.


Risks Related to Liquidity and Interest Rate Risk


Our ability to maintain adequate sources of liquidity may be negatively impacted by the economic environment which could adversely affect our financial condition and results of operations.


In managing our consolidated balance sheet, we depend on cash and due from banks, federal funds sold, loan and investment security payments, core deposits, lines of credit with correspondent banks and lines of credit with the Federal Home Loan Bank to provide sufficient liquidity to meet our commitments and business needs, and to accommodate the transaction and cash management needs of clients. Deposit levels may be affected by a number of factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, changes in the liquidity needs of our depositors and general economic conditions that affect savings levels and the amount of liquidity in the economy, including government stimulus efforts in response to economic crises.  If market interest rates rise or our competitors raise the rates they pay on deposits, our funding costs may increase, either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources of funding.  Further, the availability of these funding sources is highly dependent upon the perception of the liquidity and creditworthiness of the financial institution, and such perception can change quickly in response to market conditions or circumstances unique to a particular company. Any event that limits our access to these sources, such as a decline in the confidence of debt purchasers, or our depositors or counterparties, may adversely affect our liquidity, financial position, and results of operations.


We may incur losses if we are unable to successfully manage interest rate risk.


Our profitability will depend in substantial part upon the spread between the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities. Changes in monetary policy, including changes in interest rates, will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits and the volume of loan originations in our mortgage-origination office. We attempt to minimize our exposure to interest rate risk, but we will be unable to eliminate it. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally.


In addition, changes in interest rates may negatively affect both the returns on and market value of our investment securities. As we experienced due to rising interest rates in 2022, interest rate changes can reduce unrealized gains or increase unrealized losses in our portfolio and thereby negatively impact our accumulated other comprehensive income and equity levels. Further, such losses could be realized into earnings should liquidity and/or business strategy necessitate the sales of securities in a loss position. Additionally, actual investment income and cash flows from investment securities that carry prepayment risk, such as mortgage-backed securities and callable securities, may materially differ from those anticipated at the time of investment or subsequently as a result of changes in interest rates and market conditions. These occurrences could have a material adverse effect on our net interest income or our results of operations.




Risks Related to Our Business and Industry


Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.


We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. In addition, credit unions have been able to increasingly expand their membership definition and, because they enjoy a favorable tax status, may be able to offer more attractive loan and deposit pricing. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, marketplace lenders and other financial technology firms, insurance companies and governmental organizations which may offer more favorable financing than we can. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.


Our ability to operate profitably may be dependent on our ability to implement various technologies into our operations.


The market for financial services, including banking and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, online banking and tele-banking. The pace of technological change has increased in the "fintech" environment, in which industry-changing technology-driven products and services are often introduced and adopted, including innovative ways that customers can make payments, access products, and manage accounts. Our ability to compete successfully in our market may depend on the extent to which we are able to exploit such technological changes. If we are not able to afford such technologies, properly or timely anticipate or implement such technologies, or effectively train our staff to use such technologies, our business, financial condition or operating results could be adversely affected.


Consumers may decide not to use banks to complete their financial transactions.


Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. The activity and prominence of so-called marketplace lenders and other technological financial service companies have grown significantly over recent years and are expected to continue growing. In addition, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions, such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. If we are unable to address the competitive pressures that we face, we could lose market share, which could result in reduced net revenue and profitability and lower returns. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.


Our exposure to operational risk may adversely affect our business.


We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Reputational risk, or the risk to our earnings and capital from negative public opinion, could result from our actual alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance or the occurrence of any of the events or instances mentioned below, or from actions taken by government regulators or community organizations in response to that conduct. Negative public opinion could also result from adverse news or publicity that impairs the reputation of the financial services industry generally.




Further, if any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be adversely affected. We depend on internal systems and outsourced technology to support these data storage and processing operations. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. We could be adversely affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. We are also at risk of the impact of business disruptions resulting from natural disasters, pandemic, terrorism and international hostilities, including effects on our workforce or systems or for the effects of outages or other failures involving power or communications systems operated by others.


Misconduct by employees could include fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential information. We may not be able to prevent employee errors or misconduct, and the precautions we take to detect this type of activity might not be effective in all cases. Employee errors or misconduct could subject us to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on our business. In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts. Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers. Such activity can result in financial liability and harm to our reputation.


If any of the foregoing risks materialize, it could have a material adverse effect on our business, financial condition and results of operations.


Natural disasters, severe weather events, acts of war or terrorism, pandemics or endemics, climate change and other external events could significantly impact our business.


Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, pandemics or endemics and other adverse external events could have a significant adverse impact on business operations of the Company, third parties who perform operational services for the Company or the Company’s borrowers and customers. Such events could affect the stability of the Company’s deposit base, create economic or market uncertainty, negatively impact consumer confidence, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause the Company to incur additional expenses. Although the Company’s management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.


Our operations depend upon third party vendors that perform services for us.


We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day operations, including data processing and interchange and transmission services for the ATM network. Accordingly, our success depends on the services provided by these vendors, and our operations are exposed to risk that these vendors will not perform in accordance with the contracted service agreements. Although we maintain a system of policies and procedures designed to monitor and mitigate vendor risks, the failure of an external vendor to perform in accordance with the contracted arrangements under service agreements could disrupt our operations, which could have a material adverse impact on our business and, in turn, our financial condition and results of operations.


Our operations may be adversely affected by cybersecurity risks.


In the ordinary course of business, we collect and store sensitive data, including proprietary business information and personally identifiable information of our customers and employees, in systems and on networks. The secure processing, maintenance and use of this information is critical to our operations and business strategy. We have invested in accepted technologies and review processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these security measures, our computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. The Bank has experienced fraudulent online banking enrollments to gain access to home equity lines of credit in the past. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Bank and its customers. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, reimbursement of fraudulent transfers, disruption in operations and damage to our reputation, which could adversely affect our business.




Our inability to successfully manage growth or implement our growth strategy may adversely affect our results of operations and financial condition.


A key aspect of our long-term business strategy is our continued growth and expansion. We may not be able to successfully implement this strategy if we are unable to identify attractive expansion locations or opportunities in the future. In addition, our successful implementation and management of growth will be contingent upon whether we can maintain appropriate levels of capital to support our growth, maintain control over expenses, maintain adequate asset quality, attract talented bankers and successfully integrate into the organization any branches or businesses acquired. As we continue to implement our growth strategy, we expect to incur increased personnel, occupancy and other operating expenses. In many cases, our expenses will increase prior to the income we expect to generate from the growth. For instance, in the case of new branches, we must absorb these expenses prior to or as we begin to generate new deposits, and there is a further time lag involved in redeploying the new deposits into attractively priced loans and other higher yielding earning assets. Thus, our plans to branch or expand loan or mortgage operations could depress earnings in the short run, even if we are able to efficiently execute our strategy.


In addition, our business strategy involves branch expansion in North Carolina, with several branches opening in new markets in western North Carolina in 2020 and 2022. The banking business in western North Carolina is competitive, and the level of competition may increase further. There can be no assurance that the Company will be able to successfully compete in this competitive market, or that we will be able to successfully manage additional growth in western North Carolina. Because of our limited participation in these new markets, there may be unexpected challenges and difficulties that could adversely affect our operations.


Risks Related to the Regulatory Environment


An inability to maintain our regulatory capital position could adversely affect our operations.


As of December 31, 2022, the Bank was classified as “well capitalized” for regulatory capital purposes. If we do not maintain the expected levels of regulatory capital in the future, it could increase the regulatory scrutiny on the Company and the Bank, and the OCC could establish individual minimum capital ratios or take other regulatory actions against us. Further, if the Bank were no longer “well capitalized” for regulatory capital purposes, it would not be able to offer interest rates on deposit accounts that are significantly higher than the average rates in its market area. As a result, it may be more difficult for us to increase deposits. If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected. In addition, the Bank is subject to a capital conservation buffer designed to absorb losses during periods of economic stress.  Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum capital requirements but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. We also could be required to pay higher insurance premiums to the FDIC if our capital position declines, which would reduce our earnings. Any of the foregoing could have a material adverse effect on our operations or financial condition.


Our profitability may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.


We are subject to extensive supervision by several governmental regulatory agencies at the federal and state levels. Recently enacted, proposed and future banking legislation and regulations have had, and will continue to have, a significant impact on the financial services industry. These regulations, which are intended to protect depositors and not our shareholders, and the interpretation and application of them by federal and state regulators, are beyond our control, may change rapidly and unpredictably and can be expected to influence our earnings and growth. Our success depends on our continued ability to comply with these regulations.




We are subject to stringent capital requirements, which could adversely affect our results of operations and future growth.


In 2013, the Federal Reserve, the FDIC and the OCC approved a new rule that substantially amended the regulatory risk-based capital rules applicable to us. The final rule implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule included new minimum risk-based capital and leverage ratios that became effective for us on January 1, 2015, and refined the definition of what constitutes “capital” for purposes of calculating these ratios. These minimum capital requirements are: (i) a new common equity Tier 1 (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The final rule also established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and when fully effective on January 1, 2019, resulted in the following minimum ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital ratio of 8.5%; and (c) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities. In addition, the final rule provides for a number of new deductions from and adjustments to capital and prescribes a revised approach for risk weightings that could result in higher risk weights for a variety of asset categories.


While the Economic Growth Act provided some relief through the establishment of a simplified leverage capital framework for smaller banks, these more stringent capital requirements for us could, among other things, result in lower returns on equity, require the raising of additional capital, adversely affect our future growth opportunities, and result in regulatory actions such as a prohibition on the payment of dividends or on the repurchase shares if we were unable to comply with such requirements.


Government measures to regulate the financial industry could materially affect our businesses, financial condition or results of operations.


As a financial institution, we are heavily regulated at the state and federal levels. Banking regulations generally are intended to protect depositors, not investors, and regulators have broad interpretive and enforcement powers beyond our control that may change rapidly and unpredictably and could influence our earnings and growth. Our success depends on our continued ability to comply with these regulations. Future changes in the laws or regulations or their interpretations or enforcement could be materially adverse to us and our shareholders.


Further, as a result of the financial crisis and related global economic downturn that began in 2008, we have faced, and expect to continue to face, increased public and legislative scrutiny as well as stricter and more comprehensive regulation of our financial services practices. In July 2010, the Dodd-Frank Act was signed into law and has increased our compliance costs in the short term. We expect that financial institutions will remain heavily regulated in the near future and that additional laws or regulations may be adopted further regulating specific banking practices. The ultimate impact of current or future legislation on our businesses and results of operations, will depend on regulatory interpretation and rulemaking, as well as the success of our actions to mitigate the negative earnings impact of certain provisions.


The Bank may be required to transition from the use of the London Interbank Offered Rate (LIBOR) index in the future.


The Bank has certain variable-rate loans indexed to LIBOR to calculate the loan interest rate. In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR. In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one-week and two-month LIBOR offered rates will cease after December 31, 2021, but the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, federal bank regulators have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. Regulators, industry groups, and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., SOFR, as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments.




The Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), enacted in March 2022, provides a statutory framework to replace LIBOR with a benchmark rate based on SOFR for contracts governed by U.S. law that have no or ineffective fallbacks. Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities will not be adversely affected. For example, SOFR is a relatively new reference rate, has a very limited history, and differs fundamentally from U.S. Dollar LIBOR. SOFR is a broad U.S. Treasury repo financing rate that represents overnight secured funding transactions, whereas U.S. Dollar LIBOR is an unsecured rate that represents interbank funding over different maturities. As a result, there can be no assurance that SOFR will perform in the same way as U.S. Dollar LIBOR would have done at any time, and there is no guarantee that it is a comparable substitute for U.S. Dollar LIBOR.


The transition to alternative reference rate for new contracts, or the implementation of a substitute index or indices for the calculation of interest rates under the Bank’s existing loan agreements with borrowers or other financial arrangements, could change the Bank’s market risk profile, interest margin, interest spread and pricing models, may cause the Bank to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept a substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices, any of which could have a material adverse effect on the Bank’s results of operations.


Changes in accounting standards could impact reported earnings and capital.


The authorities that promulgate accounting standards, including the Financial Accounting Standards Board (the “FASB”), the SEC, and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also impact the capital levels of the Company and the Bank, or require the Company to incur additional personnel or technology costs. Most notably, new guidance on the calculation of credit reserves using current expected credit losses, referred to as CECL, was finalized in June, 2016. The CECL model will estimate lifetime "expected credit losses" and record an allowance that, when deducted from the amortized cost basis of the financial assets, presents the net amount expected to be collected on the financial assets.  The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts.  The Company will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, which, for the Company, is January 1, 2023.  Future adjustments to credit loss expectations will be recorded through the income statement as charges or credits to earnings.  The Company has substantially completed its CECL model and continues to make enhancements to its estimate of expected credit losses as of January 1, 2023 based on internal analysis and consultations with third-party vendors.  At this time the company expects its allowance for loan losses will decrease to $6.1 million upon adoption compared to its allowance for loan losses of $6.3 million at December 31, 2022.  In addition, the Company expects to recognize a liability for unfunded commitments of approximately $286 thousand upon adoption.  The impact of the initial adoption will be reflected in the Company’s financial statements included in its quarterly report on Form 10-Q for the period ending March 31, 2023.


Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to environmental, social and governance (ESG) practices may impose additional costs on the Company or expose it to new or additional risks.


Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. Investor advocacy groups, investment funds, and influential investors are also increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues. Increased ESG related compliance costs could result in increases to the Company’s overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact the Company’s reputation, ability to do business with certain partners, and the Company’s stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.


Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Companys business.


The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. Federal and state legislatures and regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. The federal banking agencies have emphasized that climate-related risks are faced by banking organizations of all types and sizes and are in the process of enhancing supervisory expectations regarding banks’ risk management practices. In December 2021, the OCC published proposed principles for climate risk management by banking organizations with more than $100 billion in assets. The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency’s efforts to enhance its supervision of climate change risk management. Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to the Company, the Company would likely experience increased compliance costs and other compliance-related risks.


The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact the Company’s financial condition and results of operations; however, the physical effects of climate change may also directly impact the Company. Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in the Bank’s loan portfolio. Additionally, if insurance obtained by borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to borrowers, the collateral securing loans may be negatively impacted by climate change, which could impact the Company’s financial condition and results of operations. Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on customers and impact the communities in which the Company operates. Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on the Company’s financial condition and results of operations.





Item 1B.

Unresolved Staff Comments.




Item 2.



The Company is headquartered at 101 Jacksonville Circle, Floyd, Virginia. The Bank is headquartered in the Main Office at 113 West Main Street, Independence, Virginia. The Bank operates branches at the following locations, all of which are owned by the Bank, except for the offices in Boone, Mocksville, and Willis, which are leased facilities:


East Independence Office – 802 East Main St., Independence, VA




Full service

Elk Creek Office – 60 Comers Rock Rd., Elk Creek, VA




Full service

Galax Office – 209 West Grayson St., Galax, VA




Full service

Troutdale Office – 101 Ripshin Rd., Troutdale, VA




Full service

Carroll Office – 8351 Carrollton Pike, Galax, VA




Full service

Sparta Office – 98 South Grayson Street, Sparta NC




Full service

Hillsville Office – 419 South Main Street, Hillsville, VA




Full service

Whitetop Office – 16303 Highlands Parkway, Whitetop, VA




Full service

Wytheville Office – 420 North 4th Street, Wytheville, VA




Full service

Floyd Office - 101 Jacksonville Circle, Floyd, VA




Full service

Cave Spring Office - 4094 Postal Drive, Roanoke, VA




Full service

Christiansburg Office – 2681 Market Street NE, Christiansburg, VA  



Full service

Fairlawn Office - 7349 Peppers Ferry Blvd., Radford, VA




Full service

Roanoke Office – 3850 Keagy Rd., Roanoke, VA




Full service

West Jefferson Office – 1055 Mount Jefferson Road, West Jefferson, NC




Full service

Boone Office – 189 Boone Heights Drive, Boone, NC




Full service

Wilkesboro Office – 1422 US Highway 421, Wilkesboro, NC




Full service

Yadkinville Office – 532 East Main Street, Yadkinville, NC




Full service

Mocksville Office – 119 Gaither Street, Mocksville, NC




Full service

Lenoir Office – 509 Wilkesboro Blvd. NE, Lenoir, NC




Full service

Hickory – Mountain View Office – 2900 Hwy 127 South, Hickory, NC




Full service

Hudson Office – 537 Main Street, Hudson, NC




Full service

Hickory – Viewmont Office – 1625 North Center Street, Hickory, NC




Full service

Willis Office - 5598 B Floyd Highway South, Willis, VA




Limited service/conducts normal teller transactions


The Bank has a conference center located at 203 E. Oxford Street, Floyd, Virginia, which is used for various board and committee meetings, as well as continuing education and training programs for bank employees. The Bank owns an operations center adjacent to the main office in Independence, Virginia.  The Bank also leases an administrative office in the town of Wilkesboro, North Carolina.  The Bank purchased an existing vacant building in Blacksburg, Virginia in August of 2021.  The Bank is currently renovating the building and anticipates opening this building as a full service branch facility in the second quarter of 2023.    


Item 3.

Legal Proceedings.


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


Item 4.

Mine Safety Disclosures.


Not applicable.







Item 5.

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities.


The Company’s common stock is quoted on the OTC Markets Group’s OTCQX tier under the symbol “PKKW.”  As of March 27, 2023, there were 5,607,416 shares of the Company’s common stock outstanding, held by 1,334 shareholders of record.


The Company’s common stock began quotation on the OTC Market on or about August 31, 2016, before which there was no trading market and no market price for the Company’s common stock. Any over-the-counter market quotations in the Company’s common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The Company was incorporated under Virginia law on November 2, 2015, solely to facilitate the merger between Cardinal and Grayson that was completed on July 1, 2016.


Dividend Policy


The Company historically has paid dividends on its common stock on a semi-annual basis. The final determination of the timing, amount and payment of dividends on the Company’s common stock is at the discretion of the Company’s Board of Directors and will depend upon the earnings of the Company and its subsidiaries, principally the Bank, the financial condition of the Company and other factors, including general economic conditions and applicable governmental regulations and policies as discussed in “Item 1., Business – Government Supervision and Regulation – Dividends,” above.


The Company’s ability to distribute cash dividends will depend primarily on the ability of the Bank to pay dividends to it. As a national bank, the Bank is subject to certain restrictions on our reserves and capital imposed by federal banking statutes and regulations. Furthermore, under Virginia law, the Company may not declare or pay a cash dividend on its capital stock if it is insolvent or if the payment of the dividend would render it insolvent or unable to pay its obligations as they become due in the ordinary course of business. For additional information on these limitations, see “Item 1., Business – Government Supervision and Regulation – Dividends,” above.


Securities Authorized for Issuance Under Equity Compensation Plans


The following table summarizes information, as of December 31, 2022, relating to the Company’s stock-based compensation plans under which shares of common stock are authorized for issuance. During 2022, 14,500 restricted stock awards were issued and 8,700 stock awards were issued.


Equity Compensation Plan Information



Number of Shares To Be

Issued Upon Exercise of

Outstanding Options,

Warrants and Rights



Exercise Price of

Outstanding Options,

Warrants and Rights


Number of Shares


Available for

Future Issuance

Under Equity




Equity compensation plans approved by shareholders:


2020 Equity Incentive Plan

    -     $ -       253,600  

Equity compensation plans not approved by shareholders (1)

    -       -       -  


    -     $ -       253,600  




(1)         The Company does not have any equity compensation plans that have not been approved by shareholders.




Stock Repurchases


In January 2019, the Board of Directors (“Board”) of the Company approved a stock repurchase plan.  The Board  has authorized an initial repurchase of up to 200,000 shares of its common stock from time to time for a period of two years ending in January 2021.  In May 2020 the Board amended the plan to increase the shares by 150,000, bringing the aggregate total to 350,000 shares of common stock.  In January 2021, the Board authorized the extension of the plan to January 2023. In January 2023, the Board authorized the extension of the 91,325 shares remaining in the plan to January 2025.  The Company intends to purchase shares periodically through privately negotiated transactions or in the open market in accordance with SEC rules.  The actual timing, number and value of shares repurchased under the plan will be determined by management in its discretion and will depend on a number of factors, including the market price of the shares, general market and economic conditions, applicable legal requirements and other conditions.  During 2021, we repurchased 79,175 shares of our common stock under our stock repurchase program at an average cost per share of $12.07 and a total cost of $956 thousand.  During 2022, we repurchased 12,000 shares of our common stock under our stock repurchase program at an average cost per share of $12.85 and a total cost of $154 thousand.


The following table details the Company’s purchase of its common stock during the fourth quarter of 2022.



Total number

of shares





paid per



Total number of

shares purchased as

part of publicly

announced program


Maximum number

of shares that may

yet be purchased

under the plan


Purchased 10/1 through 10/31

    -     $ -       -       91,325  

Purchased 11/1 through 11/30

    -     $ -       -       91,325  

Purchased 12/1 through 12/31

    -     $ -       -       91,325  


    -     $ -       -          


Item 6.





Managements Discussion and Analysis


Item 7.

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


Managements Discussion and Analysis of Operations




Management’s Discussion and Analysis is provided to assist in the understanding and evaluation of Skyline Bankshares, Inc’s. financial condition and its results of operations. The following discussion should be read in conjunction with the Company’s consolidated financial statements.


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


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


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


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


The Company had net earnings of $10.3 million for 2022 compared to $9.5 million for 2021.  Our strong financial performance in 2022 can be attributed in part to our team’s efforts that resulted in solid growth in the Bank’s core loan portfolio of $97.1 million, or 14.84%, during 2022.  Earnings for the year ended December 31, 2022 represented a return on average assets of 1.01% and a return on average equity of 13.35%, compared to 1.01% and 10.98%, respectively, for the year ended December 31, 2021.  The net interest margin was 3.68% in 2022, compared to 3.74% in 2021.  As we look to 2023, competition for deposits has led to increased interest expense in recent months and we expect this trend to continue throughout 2023, and because of this we expect to see some near-term pressure on our net interest margin.  The lagging effect of historic interest rate increases and continued inflationary pressures are also likely to dampen the overall economic activity in 2023 and may impact our operating costs.




Managements Discussion and Analysis


Forward Looking Statements


From time to time, the Company and its senior managers have made and will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be contained in this report and in other documents that the Company files with the Securities and Exchange Commission. Such statements may also be made by the Company and its senior managers in oral or written presentations to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Also, forward-looking statements can generally be identified by words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “seek,” “expect,” “intend,” “plan” and similar expressions.


Forward-looking statements provide management’s expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made. There are a number of factors, many of which are beyond the Company’s control that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors, some of which are discussed elsewhere in this report, include:



any required increase in our regulatory capital ratios;


inflation, interest rate levels and market and monetary fluctuations;


the difficult market conditions in our industry;


trade, monetary and fiscal policies and laws, including interest rate policies of the federal government;


applicable laws and regulations and legislative or regulatory changes;


the timely development and acceptance of new products and services of the Company;


the willingness of customers to substitute competitors’ products and services for the Company’s products and services;


the financial condition of the Company’s borrowers and lenders;


the Company’s success in gaining regulatory approvals, when required;


technological and management changes;


the Company’s ability to implement its growth and acquisition strategies;


the Company’s critical accounting policies and the implementation of such policies;


lower-than-expected revenue or cost savings or other issues in connection with mergers and acquisitions and branch expansion;


changes in consumer spending and saving habits;


deposit flows;


the strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations;


the effects of the COVID-19 pandemic, including the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions;


geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;


the Company’s potential exposure to fraud, negligence, computer theft, and cyber-crime;


the Company’s success at managing the risks involved in the foregoing; and,


other factors identified in Item 1A. “Risk Factors” above.




Managements Discussion and Analysis


Critical Accounting Policies


The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The notes to the audited consolidated financial statements included in the Annual Report for the year ended December 31, 2022 contain a summary of its significant accounting policies. Management believes the Company’s policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments, such as the recoverability of intangible assets and other-than-temporary impairment of investment securities, involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, management considers the policies related to those areas as critical.


The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: the first of which requires that losses be accrued when they are probable of occurring and estimable, and the second, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance.


The allowance for loan losses has three basic components: (i) the formula allowance, (ii) the specific allowance, and (iii) the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these techniques is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance.




Managements Discussion and Analysis


Table 1. Net Interest Income and Average Balances (dollars in thousands)



































Interest-earning assets:


Interest-bearing deposits

  $ 55,635     $ 788       1.42 %   $ 44,227     $ 88       0.20 %

Federal funds sold

    8,307       29       0.35 %     37,365       44       0.12 %

Investment securities

    159,196       3,063       1.92 %     96,020       1,535       1.60 %

Loans 1, 2

    717,326       32,687       4.56 %     687,587       33,089       4.81 %


    940,464       36,567               865,199       34,756          

Yield on average interest-earning assets

                    3.89 %                     4.02 %

Non interest-earning assets:


Cash and due from banks

    18,992                       12,634                  

Premises and equipment

    32,261                       28,342                  

Interest receivable and other

    46,775                       39,299                  

Allowance for loan losses

    (5,985 )                     (5,296 )                

Unrealized gain/(loss) on securities

    (17,028 )                     (569 )                


    75,015                       74,410                  

Total assets

  $ 1,015,479                     $ 939,609                  

Interest-bearing liabilities:


Demand deposits

  $ 242,751       365       0.15 %   $ 197,835       298       0.15 %

Savings deposits

    195,976       196       0.10 %     172,847       198       0.11 %

Time deposits

    179,839       1,181       0.66 %     195,008       1,847       0.95 %


    4,188       188       4.49 %     9,862       86       0.87 %


    622,754       1,930               575,552       2,429          

Cost on average interest-bearing liabilities

                    0.31 %                     0.42 %

Non interest-bearing liabilities:


Demand deposits

    311,032                       273,393                  

Interest payable and other

    4,663                       4,298                  


    315,695                       277,691                  

Total liabilities

    938,449                       853,243                  

Stockholder's equity:

    77,030                       86,366                  

Total liabilities and stockholder's equity

  $ 1,015,479                     $ 939,609                  

Net interest income

          $ 34,637                     $ 32,327          

Net yield on interest-earning assets

                    3.68 %                     3.74 %


1  Includes nonaccural loans

2  Interest income includes loan fees




Managements Discussion and Analysis


Table 2. Rate/Volume Variance Analysis (dollars in thousands)



2022 Compared to 2021


2021 Compared to 2020






Attributable To(1)






Attributable To(1)
















Interest-earning assets:


Interest bearing deposits

  $ 700     $ 671     $ 29     $ (126 )   $ (119 )   $ (7 )

Federal funds sold

    (15 )     (25 )     10       41       -       41  

Investment securities

    1,528       361       1,167       778       (147 )     925  


    (402 )     (2,167 )     1,765       2,319       (221 )     2,540  


    1,811       (1,160 )     2,971       3,012       (487 )     3,499  

Interest-bearing liabilities:


Demand deposits

    67       (1 )     68       (30 )     334       (364 )

Savings deposits

    (2 )     37       (39 )     (217 )     (364 )     147  

Time deposits

    (666 )     (531 )     (135 )     (757 )     (791 )     34  


    102       118       (16 )     (7 )     56       (63 )


    (499 )     (377 )     (122 )     (1,011 )     (765 )     (246 )

Net interest income

  $ 2,310     $ (783 )   $ 3,093     $ 4,023     $ 278     $ 3,745  



The variance in interest attributed to both volume and rate has been allocated to variance attributed to volume and variance attributed to rate in proportion to the absolute value of the change in each.



Net Interest Income


Net interest income, the principal source of the Company’s earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits used to fund earning assets). Table 1 summarizes the major components of net interest income for the past three years and also provides yields and average balances.


For the year ended December 31, 2022 total interest income increased by $1.8 million compared to the year ended December 31, 2021. The increase in interest income in 2022 was primarily due to an increase of $1.5 million in interest income on securities and an increase of $700 thousand in interest income on interest-bearing deposits in banks, which offset a decrease in loan interest income of $402 thousand in the year over year comparison. Interest income on loans decreased primarily due to a decrease in SBA-PPP related interest and fees of $2.5 million from the year ago period. Excluding SBA-PPP related interest and fees of $1.9 million for the year ended December 31, 2022 and $4.4 million for the year ended December 31, 2021, interest income on loans would have increased $2.1 million, reflecting our core loan growth as well as the current rate environment. The increases in interest income on investment securities was due to the $63.2 million increase in average investment securities due to investment purchases during 2022. Interest expense on deposits decreased by $601 thousand in the year over year comparison. This is a reflection of the reduced rates for the majority of 2022, as well as a reduction in time deposit balances from a year ago. However, in the fourth quarter of 2022, due to competitive pressures on deposits, rates were increased on deposit offerings. Management anticipates that interest expense will increase in the near term as competitive pressures for deposits continue. Amortization of premiums on acquired time deposits, which reduces interest expense, totaled $50 thousand in 2022, compared to $108 thousand in 2021, representing a decrease of $58 thousand. The effects of changes in volumes and rates on net interest income in 2022 compared to 2021, and 2021 compared to 2020 are shown in Table 2.




Managements Discussion and Analysis



The aforementioned factors led to an increase in net interest income of $2.3 million or 7.15% for 2022 as compared to 2021.  The net yield on interest-earning assets decreased by 6 basis points to 3.68% in 2022 compared to 3.74% in 2021.


Provision for Loan Losses


The allowance for loan losses is established to provide for expected losses in the Company’s loan portfolio.  Management determines the provision for loan losses required to maintain an allowance adequate to provide for probable losses.  Some of the factors considered in making this decision are the levels and collectability of past due loans, volume of new loans, composition of the loan portfolio, and general economic outlook.



The provision for loan losses was $606 thousand for the year ended December 31, 2022, compared to $723 thousand for the year ended December 31, 2021. The decrease in loan loss provisions from 2021 to 2022 despite the overall growth in the loan portfolio was due to the improvement in credit quality on the loan portfolio and the reduction of past due loans and nonperforming loans from 2021 to 2022.


The allowance for loan losses for SBA-PPP loans remaining at December 31, 2022 were separately evaluated given the explicit government guarantee. This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore these loans were assigned a zero expected credit loss in the allowance for loan losses.


The reserve for loan losses was approximately 0.83% of total loans as of December 31, 2022 and 2021, respectively. Management’s estimate of probable credit losses inherent in the acquired Great State and Cardinal loan portfolios was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired loans. As of December 31, 2022 and 2021, the remaining unaccreted discount on the acquired loan portfolios totaled $672 thousand and $1.0 million, respectively. Management believes the provision and the resulting allowance for loan losses are adequate. Additional information is contained in Tables 12 and 13, and is discussed in Nonperforming and Problem Assets.


Other Income


The major components of noninterest income for the past two years are illustrated in Table 3.


For the year ended December 31, 2022 and 2021, noninterest income was $6.3 million and $6.6 million, respectively.  Included in noninterest income for the twelve months ended December 31, 2022 was nonrecurring income from life insurance contracts of $217 thousand and a $10 thousand loss on the sales of securities.  For the twelve months ended December 31, 2021, there was nonrecurring income of $200 thousand from a one-time lease termination fee, $193 thousand from a one-time incentive bonus on a contract renegotiation with a service provider, and $265 thousand from net realized gains on the sale of securities.  Excluding these items, noninterest income increased $140 thousand in the year over year comparison, primarily as a result of increased income from service charges on deposit accounts of $365 thousand and an increase of ATM, credit and debit card income of $551 thousand, partially offset by a decrease of $662 thousand in mortgage origination income.  The mortgage department closed approximately $23.0 million of mortgage loans for the secondary market during 2022 compared to $57.0 million in 2021.  The decrease in loan volume is due to the increase in interest rates during 2022.  




Managements Discussion and Analysis


Table 3. Sources of Noninterest Income (dollars in thousands)







Service charges on deposit accounts

  $ 1,906     $ 1,541  

Increase in cash value of life insurance

    513       446  

Life insurance income

    217       -  

Mortgage originations fees

    399       1,061  

Safe deposit box rental

    86       88  

Gain (loss) on securities

    (10 )     265  

ATM, credit and debit card income

    2,624       2,073  

Merchant services income

    222       182  

Investment services income

    56       60  

Exchange income

    183       203  

Other income

    61       649  

Total noninterest income

  $ 6,257     $ 6,568  



Other Expense


The major components of noninterest expense for the past two years are illustrated in Table 4.


Total noninterest expenses increased by $1.2 million, or 4.65% for the year ended December 31, 2022, compared to the year ended December 31, 2021 primarily due to employee and branch costs associated with branch expansion. Salary and benefit cost increased by $143 thousand from December 31, 2021 to December 31, 2022. Occupancy and equipment expenses increased by $347 thousand, due to the branch expansion.  Data processing expenses remained comparable at $2.0 million for the year ended December 31, 2022 and 2021, respectively.  ATM/EFT expenses increased by $445 thousand due to increased debit card usage.  There was a decrease in core deposit intangible amortization of $117 thousand in the year-over-year comparison, which was offset by an increase in professional fees of $45 thousand and an increase in telephone expense of $92 thousand. 




Managements Discussion and Analysis


Table 4. Sources of Noninterest Expense (dollars in thousands)







Salaries & wages

  $ 11,526     $ 11,251  

Share-based compensation

    179       155  

Employee benefits

    3,118       3,274  

Total personnel expense

    14,823       14,680  

Director fees

    354       368  

Occupancy expense

    1,891       1,676  

Data processing expense

    1,971       2,026  

Other equipment expense

    1,307       1,175  

FDIC/OCC assessments

    628       609  


    172       156  

Professional fees

    684       639  


    657       702  

Postage & freight

    536       458  


    228       196  

Franchise tax

    506       499  


    482       390  

Travel, dues & meetings

    579       435  

ATM/EFT expense

    1,212       767  
Other real estate owned expenses     71       -  

Core deposit intangible amortization

    478       595  

Other expense

    909       896  

Total noninterest expense

  $ 27,488     $ 26,267  



The overhead efficiency ratio of noninterest expense to adjusted total revenue (net interest income plus noninterest income) was 67.22% in 2022 and 67.53% in 2021.


Income Taxes


Income tax expense is based on amounts reported in the statements of income (after adjustments for non-taxable income and non-deductible expenses) 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. The deferred tax assets and liabilities represent the future Federal income tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.


Income tax expense (substantially all Federal) was $2.5 million in 2022 and $2.4 million in 2021, resulting in effective tax rates of 19.7% and 20.4%, respectively. The increase in income tax expense of $96 thousand in 2022 was primarily due to the increase in income before taxes of $895 thousand in 2022 compared to 2021.


Net deferred tax assets of $5.7 million, and $1.1 million existed at December 31, 2022 and 2021 respectively. At December 31, 2022, net deferred tax assets included $5.6 million of deferred tax assets applicable to unrealized losses on investment securities available for sale, and $522 thousand of deferred tax assets applicable to funded projected pension benefit obligations.  Accordingly, these amounts were not charged to income but recorded directly to the related stockholders’ equity account.




Managements Discussion and Analysis


Analysis of Financial Condition


Average earning assets increased $75.3 million, or 8.70%, from 2021 to 2022 due to asset growth primarily reflected in increased loans and investment securities, which was funded by average deposit growth of $90.5 million. Total earning assets represented 92.61% of total average assets in 2022 and 92.08% in 2021. The mix of average earning assets changed from 2021 to 2022 as average loans increased by $29.7 million, or 4.33%, and average investment securities increased by $63.2 million, or 65.79%. Average federal funds sold and average deposits in banks decreased by $17.6 million, or 21.63%, from 2021 to 2022. 


Table 5. Average Asset Mix (dollars in thousands)




















Earning assets:



  $ 717,326       70.64 %   $ 687,587       73.18 %

Investment securities

    159,196       15.67 %     96,020       10.22 %

Federal funds sold

    8,307       0.82 %     37,365       3.97 %

Deposits in other banks

    55,635       5.48 %     44,227       4.71 %

Total earning assets

    940,464       92.61 %     865,199       92.08 %

Non earning assets:


Cash and due from banks

    18,992       1.87 %     12,634       1.34 %

Premises and equipment

    32,261       3.18 %     28,342       3.02 %

Other assets

    46,775       4.61 %     39,299       4.18 %

Allowance for loan losses

    (5,985 )     -0.59 %     (5,296 )     -0.56 %
Unrealized loss on securities     (17,028 )     -1.68 %     (569 )     -0.06 %

Total nonearning assets

    75,015       7.39 %     74,410       7.92 %

Total assets

  $ 1,015,479       100.00 %   $ 939,609       100.00 %



Average loans for 2022 represented 70.64% of total average assets compared to 73.18% in 2021.  Average federal funds sold decreased from 3.97% to 0.82% of total average assets while deposits in other banks increased from 4.71% to 5.48% of total average assets over the same time period.  Average investment securities increased from 10.22% in 2021 to 15.67% of total average assets in 2022.  The balances of nonearning assets to total average assets decreased from 7.92% to 7.39% in the annual comparison. 




Managements Discussion and Analysis




Average loans totaled $717.3 million for the year ended December 31, 2022.  This represents an increase of $29.7 million, or 4.33%, from the average of $687.6 million for 2021.  The increase was primarily due to organic core loan growth of $97.1 million during 2022. 


The loan portfolio consists primarily of real estate and commercial loans, including SBA-PPP loans. These loans accounted for 97.07% of the total loan portfolio at December 31, 2022. This is up from the 96.31% that the categories maintained at December 31, 2021. The amount of loans outstanding by type at December 31, 2022 and 2021 and the maturity distribution for variable and fixed rate loans as of December 31, 2022 are presented in Tables 6 and 7, respectively.


Table 6. Loan Portfolio Summary (dollars in thousands)



December 31, 2022


December 31, 2021










Construction and development

  $ 49,728       6.59 %   $ 44,252       6.48 %

Residential, 1-4 families

    292,318       38.72 %     240,359       35.16 %

Residential, 5 or more families

    66,208       8.77 %     58,054       8.49 %
Farmland     23,688       3.14 %     25,026       3.66 %

Nonfarm, nonresidential

    263,664       34.93 %     230,071       33.66 %

Total real estate

    695,606       92.15 %     597,762       87.45 %


    2,380       0.31 %     2,420       0.35 %


    37,054       4.91 %     36,022       5.27 %


    71       0.01 %     24,528       3.59 %


    7,902       1.05 %     7,292       1.07 %


    11,859       1.57 %     15,508       2.27 %


  $ 754,872       100.00 %   $ 683,532       100.00 %





Managements Discussion and Analysis


Table 7. Maturity Schedule of Loans, as of December 31, 2022 (dollars in thousands)







Agricultural &










& Other






Fixed rate loans:


One year or less

  $ 12,723     $ 2,248     $ 3,892     $ 18,863       2.50 %

Over one to five years

    66,002       18,791       8,709       93,502       12.38 %

Over five years to 15 years

    38,200       2,761       2,577       43,538       5.77 %

Over 15 years

    2,990       2       11       3,003       0.40 %

Total fixed rate loans

  $ 119,915     $ 23,802     $ 15,189     $ 158,906       21.05 %

Variable rate loans:


One year or less

  $ 12,980     $ 6,358     $ 2,134     $ 21,472       2.84 %

Over one to five years

    18,158       673       173       19,004       2.52 %

Over five years to 15 years

    139,337       8,325       1,255       148,917       19.73 %

Over 15 years

    405,216       347       1,010       406,573       53.86 %

Total variable rate loans

  $ 575,691     $ 15,703     $ 4,572     $ 595,966       78.95 %

Total loans:


One year or less

  $ 25,703     $ 8,606     $ 6,026     $ 40,335       5.34 %

Over one to five years

    84,160       19,464       8,882       112,506       14.90 %

Over five years to 15 years

    177,537       11,086       3,832       192,455       25.50 %

Over 15 years

    408,206       349       1,021       409,576       54.26 %

Total loans

  $ 695,606     $ 39,505     $ 19,761     $ 754,872       100.00 %



Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulations also influence interest rates. On average, loans yielded 4.56% in 2022 compared to an average yield of 4.81% in 2021. The decrease in loan yields was due to a decrease in SBA-PPP related interest and fees of $2.5 million from the year ago period. Excluding SBA-PPP related interest and fees of $1.9 million for the year ended December 31, 2022 and $4.4 million for the year ended December 31, 2021, interest income on loans would have increased $2.1 million, reflecting our core loan growth of $97.1 million as well as the current rate environment. Management anticipates that this loan growth, in addition to higher rates in the current year, will have a positive impact on both earning assets and loan yields.


Investment Securities


The Company uses its investment portfolio to provide liquidity for unexpected deposit decreases or loan generation, to meet the Bank’s interest rate sensitivity goals, and to generate income.


Management of the investment portfolio has always been conservative with the majority of investments taking the form of purchases of U.S. Treasury, U.S. Government Agencies, U.S. Government Sponsored Enterprises and State and Municipal bonds, as well as investment grade corporate bond issues. Management views the investment portfolio as a source of income, and purchases securities with the intent of retaining them until maturity. However, adjustments are necessary in the portfolio to provide an adequate source of liquidity which can be used to meet funding requirements for loan demand and deposit fluctuations and to control interest rate risk. Therefore, from time to time, management may sell certain securities prior to their maturity. Table 8 presents the investment portfolio at the end of 2022 by major types of investments and contractual maturity ranges. Investment securities in Table 8 may have repricing or call options that are earlier than the contractual maturity date.




Managements Discussion and Analysis


The total amortized cost of investment securities increased by approximately $30.1 million from December 31, 2021 to December 31, 2022, while the average balance of investment securities carried throughout the year increased by approximately $63.2 million from 2021 to 2022. The average yield of the investment portfolio increase to 1.92% for the year ended December 31, 2022 compared to 1.60% for 2021.


Table 8. Investment Securities - Maturity/Yield Schedule (dollars in thousands)



December 31, 2022


In One

Year or



After One


Five Years


After Five


Ten Years






















Investment securities:


U.S. Treasury securities

  $ -     $ 4,980     $ -     $ -     $ 4,980     $ 4,834     $ -     $ -  

U.S. Government agencies

    -       4,658       20,367       -       25,025       20,846       20,333       -  

Mortgage-backed securities

    78       1,015       34,118       43,544       78,755       67,270       64,437       15,212  

Corporate securities

    -       1,500       -       -       1,500       1,500       1,500       1,500  

State and municipal securities

    -       1,506       19,656       30,238       51,400       40,701       45,314       16,059  


  $ 78     $ 13,659     $ 74,141     $ 73,782     $ 161,660     $ 135,151     $ 131,584     $ 32,771  

Weighted average yields (1):


U.S. Treasury securities

    0.00 %     2.95 %     0.00 %     0.00 %     2.95 %                        

U.S. Government agencies

    0.00 %     3.08 %     1.68 %     0.00 %     1.94 %                        

Mortgage-backed securities

    2.18 %     2.01 %     2.19 %     1.45 %     1.78 %                        

Corporate securities

    0.00 %     4.11 %     0.00 %     0.00 %     4.11 %                        

State and municipal securities

    0.00 %     2.95 %     2.03 %     2.56 %     2.37 %                        


    2.18 %     3.05 %     2.01 %     1.90 %     2.05 %                        




Weighted average yields on investment securities are based on amortized cost and are calculated on a tax equivalent basis.





The Company relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and for investments in liquid assets. More specifically, core deposits (total deposits less certificates of deposit in denominations of more than $250,000) are the primary funding source. The Company’s balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits, and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. The Company’s management must continuously monitor market pricing, competitor’s rates, and the internal interest rate spreads to maintain the Company’s growth and profitability. The Company attempts to structure rates so as to promote deposit and asset growth while at the same time increasing overall profitability of the Company.


Average total deposits for the year ended December 31, 2022 amounted to $929.6 million, which was an increase of $90.5 million, or 10.79% from 2021. Average core deposits totaled $893.4 million in 2022 representing a 11.53% increase over the $801.0 million in 2021. The percentage of the Company’s average deposits that are interest-bearing decreased to 66.5% in 2022 compared to 67.4% in 2021. This decrease is due to the average demand deposits, which earn no interest, increasing 13.77% from $273.4 million in 2021 to $311.0 million in 2022. Average deposits for the periods ended December 31, 2022 and 2021 are summarized in Table 9.