UPDATE: Parkway Acquisition Corp, Floyd, VA (PKKW)

When I first reviewed Parkway Acquisition Corp in July 2017, I was hoping they'd reach their own projected earnings of $1.01 per share and get the stock trading at $14 by year end 2018.

Instead, Parkway paid $14.1 million in stock to incorporate the assets of Great State Bank of Wilkesboro, NC into Skyline National Bank. They missed their projections, and CEO Alan Funk retired shortly after the acquisition.

Happily, Parkway is still A Case of Better Than Before. PKKW has outperformed the BKX Index by 10% over the past two years. If Parkway's progress pattern holds through 2020, PKKW should earn over $1.30, have a book value over $14, and trade over $15.

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Disclosure: As of this posting, I own shares of PKKW and may subsequently either dispose of them or purchase more.

Prospective Buyers	Skyline National Bank has the same prospects for sale as it did in 2017. First Citizens BancShares, Raleigh, NC (FCNCA) National Bankshares, Blacksburg, VA (NKSH) Union Bankshares, Richmond, VA (UBSH)
Financial Snapshot †as of 12/31/2018	Total assets: $680M† Tangible book value per share:    $11.03† NPAs to assets: 1.7%† Price to book: 90% Market cap: $68.3M Dividend yield: 2.2% Trailing 12-month ROA: 0.8%† Trailing 12-month ROE: 7.0%†
The Crew	Thomas M. Jackson, Jr., Chairman Blake M. Edwards Jr., President and CEO Laurie J. Vaught, Executive VP and CFO
The Skinny	It's too soon to say whether Parkway's acquisition of Great State Bancorp has added to the value of the combined franchise, but I'm still bullish on this stock. I see two new reasons to have high hopes for PKKW: The bank recently authorized a buyback which should make book value and earnings accrete even faster.  Skyline National Bank could attract some strong talent and customers disrupted by the upcoming BB&T/SunTrust merger. As in 2017, I don't expect miracles from this latest acquisition. Floyd County is a low-growth market that has struggled to attract business, which is why 8 out of the 20 branches Parkway now owns are smaller today than they were in 2013. With 206 employees, Skyline National Bank now has $3.3M in assets per employee, but neighboring National Bankshares — which has $5.4M in assets per employee — is still doing more with less. Five Directors from Cardinal's board are still on Parkway's board, including third generation Director Dr. Condruff, under whose watch Cardinal's Bank of Floyd was grossly mismanaged. Why I'm not worried the sky's going to fall for investors: At 90% of book value, PKKW is cheap, and there aren't many $700M banks with relatively clean asset quality left that are trading this low. Skyline National Bank is the only bank in four towns and enjoys over 50% market share in two other towns. If the bank underperforms, I believe shareholders will hold management to its 2016 Investor Presentation promise that it would either perform or sell.
Sources	Skyline National Bank website March 2019 Earnings Release March 2019 Amendment to Earnings Release 2018 Form 10-K 2017 Annual Report S&P Global Market Intelligence Confidential interviews with shareholders and analysts

Parkway Acquisition Corp, Floyd, VA (PKKW)

A Case of Better Than Before

If you're looking for a relatively safe place to park a few dollars, PKKW might be it.

Parkway Acquisition Corp and its wholly owned subsidiary Skyline National Bank are the product of a 2016 merger of Grayson Bankshares, Inc. (GSON), Cardinal Bankshares Corporation (CDBK), and their respective subsidiaries, Grayson National Bank and the Bank of Floyd.

I would have preferred to see Grayson and Cardinal sell rather than merge, but now that they've kicked the scoundrels* to the curb, I'm content to focus on the blue sky ahead.

Management predicts PKKW will earn $1.01 per share in 2018. If they're right, book value should grow to $12.50 and the stock could trade at $14, providing investors who buy PKKW today a decent 37% return.

*See my April 2012 review of Cardinal Bankshares for the backstory.

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Disclosure: As of this posting, I own shares of PKKW and may subsequently either dispose of them or purchase more.

Prospective Buyers	Skyline National Bank may be landlocked in the mountains and short on options for organic growth, but it's holding upwards of 50% of the deposits in five Virginia towns. First Citizens BancShares, Raleigh, NC (FCNCA) National Bankshares, Blacksburg, VA (NKSH) Union Bankshares, Richmond, VA (UBSH)
Financial Snapshot †as of 03/31/2017	Total assets: $558M† Tangible book value per share:    $10.72† NPAs to assets: 2.1%† Price to book: 91.3% Market cap: $51.2M Dividend yield: 1.6% Trailing 12-month ROA: 0.49%† Trailing 12-month ROE: 5.0%†
The Crew	Thomas M. Jackson, Jr., Chairman J. Allan Funk, President and CEO Blake Edwards, Jr.,  Executive VP and CFO
The Skinny	Although I'm bullish on PKKW in general, I don't expect miracles from this new combination. Floyd County is a low-growth market that has struggled to attract business, which is why 7 out of the 16 branches Parkway now owns are smaller today than they were five years ago. With 188 employees, Skyline National Bank has less than $3M in assets per employee. Neighboring National Bankshares operates with $6.2M in assets per employee. Five Directors from Cardinal's board are now on Parkway's board, including third generation Director Dr. Condruff, under whose watch Cardinal's Bank of Floyd was grossly mismanaged. Why I'm not worried the sky's going to fall for investors: At 92% of book value, PKKW is cheap, and there aren't many $500M banks with relatively clean asset quality left that are trading this low. Skyline National Bank is the only bank in four towns and enjoys over 50% market share in two other towns. In its recent investor presentation, Parkway's Management team overtly acknowledges it must perform or forfeit control of the bank.
Sources	Skyline National Bank website May 2017 Form 10-Q April 2017 Earnings Release May 2016 Investor Presentation 2016 Form 10-K SNL Financial Confidential interviews with shareholders and analysts

Cardinal Bankshares, Floyd, VA (CDBK)

The Case of an Unmotivated Straggler in Floyd

Don't you think it's time Leon Moore got his spine back and took another shot at selling Cardinal Bankshares? I have no doubt shareholders would support selling the bank, given how far its performance has fallen behind other community banks since they voted down Moore's proposed sale in 2002 to Mountain Bank.

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Disclosure: As of this posting, I own significant shares of CDBK and may subsequently either dispose of them or purchase more.

Prospective Buyers	CDBK would make a nice "fill-in" for any of these three franchises: Carter Bank & Trust, Martinsville,VA (CARE) First Citizens BancShares, Raleigh, NC (FCNCA) National Bancshares, Blacksburg,VA (NKSH)
Financial Snapshot (as of 12/31/2011)	Total assets: $266,160 Tangible book value per share: $21.51 NPAs to assets: 7.6% Price to book: 67% Market cap: $22.7M Dividend yield: 1.1% Trailing 12-month return on assets: 0.44% Trailing 12-month return on equity: 3.4%
Scoundrels	Leon Moore, Chairman Leon Moore, President Leon Moore, CEO
Red Flags	In June, 2002 Cardinal agreed to sell to Mountain Bank for $24 per share. Ten years of executive salaries and board fees later, the stock is barely half that price. Triple-threat executive Leon Moore only owns 3,086 shares directly. A sale of Cardinal at $24 per share would net Moore a mere $21,000—not even 10% of the $224,701 he pulled down in compensation last year. Rarely does one see such a brazen case of a CEO lying about the true state of affairs of a company in the Annual Report: Leon's Lie #1: The "Fortress balance sheet." Since 2007, NPL's have leapt from .69% of loans and REO to the current 15.2%. Hardly a fortress. The moat around it perhaps.   Leon's Lie #2: "Solid results" in 2011. According to the Notes to the Financial Statements, bad loans nearly doubled from $10.5M to over $19M, while the provision for the year dropped from $661K in the prior year to $592K and the allowance also dropped below $3M, one of the lowest allowances to NPAs in the entire industry. By comparison, National Bancshares (NKSH) has an allowance of over $8M versus NPL's of $5.2M. Had Cardinal provided for just half the increase in bad loans, pre-tax income would have gone from $1.1M to a loss of $3.2M Leon's Lie #3: "We don't make bad loans, but loans do occasionally go bad." An additional 7% ($8.5M) in loans going bad in one year out of only $130M hardly qualifies as an "occasional" experience. Why are Cardinal's loans suddenly going bad so fast, now that the economy is showing signs of life and other banks are recovering? Has Cardinal been hiding bad loans? Are Directors burying their heads in the sand and not admitting just how much the bank stands to lose on these loans?
Sources	Cardinal Bankshares website 2011 Cardinal Bankshares Form 10-K 2011 Annual Report 2012 Proxy Statement 2011 National Bancshares 10-K * NOTE: Although public companies usually readily post their annual reports and proxy statements on their websites, Cardinal chooses not to. If you'd like your own copy, you'll apparently need to contact J. Alan Dickerson, CFO or call 1-888-562-4130.