Consolidated Statements of Changes in ~~Stockholders’~~Stockholders’ Equity

For the Six and Three Months ended June 30, 2021 and 2020 ~~and 2019~~ (unaudited)

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Parkway Acquisition Corp. (“Parkway” or the “Company”) was incorporated as a Virginia corporation on November 2, 2015. Parkway 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 Parkway entered into an agreement pursuant to which Grayson and Cardinal merged with and into Parkway, with Parkway 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 Parkway, while each share of Cardinal common stock was converted to the right to receive 1.30 shares of common stock of Parkway. The exchange ratios resulted in Grayson shareholders receiving approximately 60% of the newly issued Parkway shares and Cardinal shareholders receiving approximately 40% of the newly issued Parkway shares. 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 Grayson National Bank (the ~~“Bank’~~“Bank”), a wholly-owned subsidiary of Grayson. Effective March 13, 2017, the Bank changed its name to Skyline National Bank.

On March 1, 2018, Parkway entered into a definitive agreement pursuant to which Parkway 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 Parkway common stock. The Company issued 1,191,899 shares and recognized $15.5 million in surplus in the Great State merger. Parkway 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 four~~twenty-four full-service banking offices and one loan production office. As an ~~FDIC-insured~~Federal Deposit Insurance Corporation (“FDIC”) insured national banking association, the Bank is subject to regulation by the Office of the Comptroller of the Currency (“OCC”) and the FDIC. Parkway is regulated by the Board of Governors of the Federal Reserve ~~System.~~System (the “Federal Reserve”).

The consolidated financial statements as of June 30, ~~2020~~ 2021 and for the six and ~~three-month~~three-month periods ended June 30, ~~2020~~ 2021 and ~~2019~~2020 included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Company’s consolidated financial position, results of operations, changes in stockholders’ equity and cash flows for such interim periods. Management believes that all interim period adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto as of December 31, ~~2019,~~ 2020, included in the Company’s Annual Report on Form ~~10-K~~10-K for the fiscal year ended December 31, ~~2019.~~ 2020. The results of operations for the six and ~~three-months~~three months ended June 30, ~~2020~~ 2021 are not necessarily indicative of the results to be expected for the full year.

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Critical Accounting Policies

Management believes the policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments involve a higher degree of complexity and require management to make difficult and subjective 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 judgements that often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and the Bank, which is wholly owned. All significant, intercompany transactions and balances have been eliminated in consolidation.

Business Segments

The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.

Business Combinations

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business, or acquires equity interests in one or more other entities that are businesses and obtains control over those entities. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired entity are recorded at their respective fair values as of the closing date of the acquisition. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in our consolidated results from the closing date of the merger, and prior periods are not restated. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding future credit losses. The fair value estimates associated with the acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Use of Estimates, continued

Substantially all of the Bank’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse, but influenced to an extent by the manufacturing and agricultural segments.

While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Bank’s allowances for loan and foreclosed real estate losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term.

The Company seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. The Company’s tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy.

Accounting for pension benefits, costs and related liabilities are developed using actuarial valuations. These valuations include key assumptions determined by management, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension costs may occur in the future due to changes in these assumptions.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from banks (including cash items in process of collection), interest-bearing deposits with banks and federal funds sold.

Trading Securities

The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.

Securities Held to Maturity

Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at ~~cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.~~amortized cost. The Company does not currently hold any securities classified as held to maturity.

Securities Available for Sale

Available for sale securities are reported at fair value and consist of bonds, notes, debentures, and certain equity securities not classified as trading securities or as held to maturity securities.

Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of accumulated other comprehensive income. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity for discounts and the earlier of call date or maturity for premiums.

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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

~~Securities Available for Sale, continued~~

Declines in the fair value of individual held to maturity and available for sale securities below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal amount adjusted for any charge-offs and the allowance for loan losses. Loan origination costs are capitalized and recognized as an adjustment to yield over the life of the related loan.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received are first applied to principal, and any remaining funds are then applied to interest. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms.

Purchased Performing Loans – The Company accounts for performing loans acquired in business combinations using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the ~~acquisition~~acquisition.

Purchased Credit-Impaired (“PCI”) Loans – Loans purchased with evidence of credit deterioration since origination, and for which it is probable that all contractually required payments will not be collected, are considered credit impaired. Evidence of credit quality deterioration as of the purchase date may include statistics such as internal risk grade and past due and nonaccrual status. Purchased impaired loans generally meet the Company’s definition for nonaccrual status. PCI loans are initially measured at fair value, which reflects estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the associated allowance for credit losses related to these loans is not carried over at the acquisition date. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference, and is available to absorb credit losses on those loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the nonaccretable difference with a positive impact on future interest income.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance, or portion thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

12

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

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

Allowance for Loan Losses, continued

The allowance consists of specific, general and unallocated components. The specific component is calculated on an individual basis for larger-balance, non-homogeneous loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is lower than its carrying value. The specific component of the allowance for smaller- balance loans whose terms have been modified in a troubled debt restructuring (“TDR”) is calculated on a pooled basis considering historical experience adjusted for qualitative factors. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

~~Small Business Administration Paycheck Protection Program~~
The Small Business Administration Paycheck Protection Program (“SBA-PPP”) is one of the centerpieces of the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”), which was passed on March 27, 2020 in response to the outbreak of coronavirus (“COVID-19”) and was supplemented with subsequent legislation. Overseen by the United States (“U.S.”) Treasury Department, the SBA-PPP offers cash-flow assistance to nonprofit and small business employers through guaranteed loans for expenses incurred between February 15, 2020, and August 8, 2020. Borrowers are eligible for forgiveness of principal and accrued interest on SBA-PPP loans to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period between eight and 24-weeks after the loan is made as long as the borrower retains its employees and their compensation levels. The CARES Act authorized the SBA to temporarily guarantee these loans.
Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate loan class. Origination fees received by the SBA are capitalized into the carrying amount of the loans. The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the effective interest method. Loans outstanding as of June 30, 2020 totaled $77.1 million.
The allowance for loan losses for SBA-PPP loans originated during the second quarter of 2020 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.
13
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 1. Organization and Summary of Significant Accounting Policies, continued~~
Troubled Debt Restructurings

Under GAAP, the Bank is required to account for certain loan modifications or restructurings as “troubled debt restructurings” or "troubled debt restructured loans."  In general, the modification or restructuring of a debt constitutes a troubled debt restructuring if the Bank for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that the Bank would not otherwise consider. Debt restructuring or loan modifications for a borrower do not necessarily always constitute a troubled debt restructuring, however, and troubled debt restructurings do not necessarily result in non-accrual loans.

Operating, Accounting and Reporting Considerations related to COVID-19
The COVID-19 pandemic has negatively impacted the global economy, including our market area.  In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020.  The CARES Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief.  Some of the provisions applicable to the Company include, but are not limited to:
Accounting for Loan Modifications – Section 4013 of the CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. See Note 4 Allowance for Loan Losses and Impaired Loans for more information.
13

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Operating, Accounting and Reporting Considerations related to COVID-19, continued
Paycheck Protection Program - The CARES Act established the Small Business Administration Paycheck Protection Program (“SBA-PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program, administered directly by the SBA. On December 27, 2020 the Consolidated Appropriations Act (“CAA”), 2021 was signed into law. The CAA provides several amendments to the SBA-PPP, including additional funding for first and second draws of SBA-PPP loans up to May 31, 2021. The Company is a participant in the SBA-PPP. See Note 3 Loans Receivable for more information.
Also, in response to the COVID-19 pandemic, the Federal Reserve, the FDIC, the National Credit Union Administration, the OCC, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:
Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. See Note 4 Allowance for Loan Losses and Impaired Loans for more information.
Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferrals. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.
Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. These modifications generally involve principal and/or interest payment deferrals for up to six months. These modifications generally meet the criteria of both Section 4013 of the CARES Act and the joint interagency statement, and therefore, the Company does not account for such loan modifications as TDRs. As the COVID-19 pandemic persists in negatively impacting the economy, the Company continues to offer additional loan modifications to borrowers struggling as a result of COVID-19. Similar to the initial modifications granted, the additional round of loan modifications are granted specifically under Section 4013 of the CARES Act and generally involve principal and/or interest payment deferrals for up to an additional six months for commercial and consumer loans, and principal-only deferrals for up to an additional 12 months for selected commercial loans. On August 3, 2020, the Federal Financial Institutions Examination Council on behalf of its members (collectively “the FFIEC members”) issued a joint statement on additional loan accommodations related to COVID-19. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. To be eligible, each loan modification must be (1) related to the COVID-19 event; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The December 31, 2020 deadline was subsequently extended to January 1, 2022 by the CAA. Substantially all of the Company’s additional round of loan modifications granted under Section 4013 of the CARES Act are in compliance with the aforementioned FFIEC requirements. Accordingly, the Company does not account for such loan modifications as TDRs.
14
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Small Business Administration Paycheck Protection Program
The SBA-PPP is one of the centerpieces of the CARES Act, which was passed on March 27, 2020 in response to the outbreak of COVID-19 and was supplemented with subsequent legislation. Overseen by the U.S. Treasury Department, the SBA-PPP offers cash-flow assistance to nonprofit and small business employers through guaranteed loans for expenses incurred between February 15, 2020, and August 8, 2020. Borrowers are eligible for forgiveness of principal and accrued interest on SBA-PPP loans to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period between eight and 24-weeks after the loan is made as long as the borrower retains its employees and their compensation levels. The CARES Act authorized the SBA to temporarily guarantee these loans.
As a qualified SBA lender, we were automatically authorized to originate SBA-PPP loans and began taking applications on April 3, 2020. An eligible business can apply for a SBA-PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. SBA-PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year or five-year term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the SBA-PPP loans made to eligible borrowers. The entire principal amount of the borrower’s SBA-PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the SBA-PPP, subject to certain eligibility requirements and conditions.
Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate loan class. Origination fees received by the SBA are capitalized into the carrying amount of the loans. The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the straight-line method.
The allowance for loan losses for SBA-PPP loans originated through June 30, 2021 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.
Property and Equipment

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

Years

Buildings and improvements 10 - 40
Furniture and equipment 5 - 12
Share-Based Compensation
The Parkway Acquisition Corp. 2020 Equity Incentive Plan (the “Plan”) was adopted by the Board of Directors of the Company on March 17, 2020 and approved by the Company’s shareholders on August 18, 2020. The Plan permits the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, and stock awards to key employees and non-employee directors of the Company or its subsidiaries.
As of June 30, 2021, only restricted stock awards have been issued. The fair value of restricted stock is determined based on the closing price of the Company’s common stock on the date of grant.  The Company recognizes compensation expense related to restricted stock on a straight-line basis over the vesting period for service-based awards. See additional discussion of share-based compensation in Note 8 to the consolidated financial statements.
Years

Buildings and improvements 10 - 40
Furniture and equipment 5 - 12
15

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Foreclosed Assets

Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in foreclosure expense on the consolidated statements of income.

Pension Plan

Prior to the Cardinal merger, both the Bank and Bank of Floyd (“Floyd”) had qualified noncontributory defined benefit pension plans in place which covered substantially all of each bank’s employees. The benefits in each plan are primarily based on years of service and earnings. Both the Bank’s and Floyd’s plans were amended to freeze benefit accruals for all eligible employees prior to the effective date of the Cardinal merger. The Bank’s plan is a single-employer plan, the funded status of which is measured as the difference between the fair value of plan assets and the projected benefit obligation. Floyd’s plan is a multi-employer plan for accounting purposes and is a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when ~~(1)~~(1) the assets have been isolated from the Bank; ~~(2)~~(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and ~~(3)~~(3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

14
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 1. Organization and Summary of Significant Accounting Policies, continued~~
Goodwill and Other Intangible AssetsA~~ssets~~
Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquire, over the fair value of the ~~nets~~net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected ~~July~~November 1 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
Other intangible assets consist of core deposit intangibles that represent the value of long-term deposit relationships acquired in a business combination. Core deposit intangibles are amortized over the estimated useful lives of the deposit accounts acquired. The core deposit intangible as a result of the Cardinal merger, is amortized over an estimated useful life of twenty years on an accelerated basis. For the core deposit intangible as a result of the Great State merger, we used an estimated useful life of seven years on an accelerated basis for the amortization.

~~Revenue Recognition~~Cash Value of Life Insurance

~~On January 1, 2018, we adopted the requirements~~The Bank is owner and beneficiary of ~~Accounting Standards Update (“ASU”) 2014-9,~~ ~~Revenue from Contracts with Customers (“ASU Topic 606”)~~.life insurance policies on certain current and former employees and directors. The Company ~~completed its overall assessment~~records these policies in the consolidated balance sheets at cash surrender value, with changes recorded in noninterest income in the consolidated statements of ~~revenue streams~~income.
16

Parkway Acquisition Corp. and ~~review~~Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of related contracts potentially affected by the ASU, including deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on its evaluation, the Company determined that ASU 2014-09 did not materially change the method in which the Company currently classifies certain costs associated with the related revenue streams. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Noninterest revenue streams in-scope of Topic 606 are discussed below.Significant Accounting Policies, continued
Revenue Recognition

Service Charges on Deposit Accounts - Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees, and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Other Service Charges and Fees - O~~ther~~Other service charges include safety deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. In addition, the following items are also included in other service charges and fees on the consolidated statements of income:
●
Credit and Debit Card Fees - Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or Mastercard. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Fees for these services for the six months ended June 30, 2021 and 2020 amounted to $189 thousand and $188 thousand, respectively. Fees for these services for the three months ended June 30, 2021 and 2020 amounted to $93 thousand and $85 thousand, respectively.
●
Insurance and Investment - Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. For the six months ended June 30, 2021 and 2020 the Company received $31 thousand and $17 thousand, respectively in income from these services. For the three months ended June 30, 2021 and 2020 the Company received $16 thousand and $8 thousand, respectively in income from these services.
Mortgage Origination Fees –Mortgage origination fees consist of commissions received on mortgage loans closed in the secondary market. The Company acts as an intermediary between the Company’s customer and companies that specialize in mortgage lending in the secondary market. The Company’s performance obligation is generally satisfied when the mortgage loan is closed and funded and the Company receives its commission at that time.

15
17

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

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

~~Revenue Recognition, continued~~Leases

~~Credit and Debit Card Fees -~~ Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or Mastercard. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
~~Insurance and Investment -~~ Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.
~~Leases~~
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments were effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Effective January 1, 2019, we adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have performed an evaluation of our leasing contracts and activities. We have developed our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments. There was not a material change to the timing of expense recognition. See additional discussion of leases in Note 7 to the consolidated financial statements.
Income Taxes

Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

16
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 1. Organization and Summary of Significant Accounting Policies, continued~~
Advertising Expense

The Company expenses advertising costs as they are incurred. Advertising expense for the years presented is not material.
Basic Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.

18

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Comprehensive Income

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

Unrealized Gains
Unrealized Gains

And (Losses)
And (Losses)
(dollars in thousands)

On Available for

Defined Benefit

On Available for

Defined Benefit

Sale Securities

Pension Items

Total

Sale Securities

Pension Items
Total
Balance, December 31, 2018
$ (929 ) $ (1,038 ) $ (1,967 )
Other comprehensive income before reclassifications
997 - 997
Amounts reclassified from accumulated other comprehensive income, net of tax
3 - 3
Balance June 30, 2019
$ 71 $ (1,038 ) $ (967 )

Balance, December 31, 2019
$ 51 $ (975 ) $ (924 ) $ 51 $ (975 ) $ (924 )
Other comprehensive income before reclassifications
731 - 731 $ 731 0 $ 731
Amounts reclassified from accumulated other comprehensive income, net of tax
(168 ) - (168 ) $ (168 ) 0 $ (168 )
Balance June 30, 2020
$ 614 $ (975 ) $ (361 ) $ 614 $ (975 ) $ (361 )

Balance, December 31, 2020
$ 582 $ (1,103 ) $ (521 )
Other comprehensive income before reclassifications
$ (898 ) 0 $ (898 )
Amounts reclassified from accumulated other comprehensive income, net of tax
0 0 0
Balance June 30, 2021
$ (316 ) $ (1,103 ) $ (1,419 )

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under line of credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9.10. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

~~Reclassification~~
Reclassification
Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current presentation. Net income and stockholders’ equity previously reported were not affected by these reclassifications.

17
19

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements

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

In June 2016, the FASB issued ~~Accounting Standards Update (“ASU”~~ASU No.2016-13,Financial Instruments—Credit Losses (Topic 326) ~~No. 2016-13~~: Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses ~~and~~to a current expected credit losses (“CECL”) modeland modify the impairment model for certain debt securities. The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We are currently evaluating the impact of the ASU on our consolidated financial statements. We expect the ASU will result in an increase in the recorded allowance for loan losses given the change to estimated losses over the contractual life of the loans adjusted for expected prepayments. The majority of the increase results from longer duration portfolios. In addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time. In July 2019, the FASB proposed changes to the effective date of the ASU for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The proposal delayed the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. On October 16, 2019 the proposed changes were approved by the FASB. ~~As the Company is a smaller reporting company, the delay is applicable to the Company.~~

In ~~November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~. The amendments affect a variety of Topics in the Accounting Standards Codification. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.
In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017.

In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU ~~2016-13,~~2016-13, Measurement of Credit Losses on Financial Instruments. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13. The amendments affect a variety of Topics in the Accounting Standards Codification. For entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not expect these amendments to have a material effect on its financial statements.
In November 2019, the FASB issued guidance to defer the effective dates for private companies, ~~not-for-profit~~not-for-profit organizations, and certain smaller reporting companies applying standards on ~~current expected credit losses (“CECL”).~~CECL. Since the Company is a smaller reporting company, the new effect date for CECL will be fiscal years beginning after December 15, 2022, ~~including interim periods within those fiscal years.~~
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. ~~Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.~~
18
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 1. Organization and Summary of Significant Accounting Policies, continued~~
~~Recent Accounting Pronouncements, continued~~

In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2020, the FASB issued guidance to add and amend SEC paragraphs in the ASC to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2020, the FASB issued guidance that makes narrow-scope improvements to various aspects of the financial instrument guidance, including the CECL guidance issued in 2016. Since the Company is a smaller reporting company, it should adopt the amendments in ASU 2016-13 during 2023. The Company does not expect these amendments to have a material effect on its financial statements.
~~In March 2020,~~ the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

19
20

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 3.3. Loans Receivable

The major components of loans in the consolidated balance sheets at June 30, ~~2020~~ 2021 and December 31, ~~2019~~ 2020 are as follows:

(dollars in thousands)

2020

2019

Construction & development
$ 44,192 $ 39,649
Farmland
34,629 34,166
Residential
260,565 253,674
Commercial mortgage
181,866 190,817
Commercial & agricultural
31,456 32,426
SBA-PPP 77,105 -
Consumer & other
20,786 19,621
Total loans
650,599 570,353
Allowance for loan losses
(4,654 ) (3,893 )
Loans, net of allowance for loan losses
$ 645,945 $ 566,460

As a qualified Small Business Administration (“SBA”) lender, we were automatically authorized to originate “SBA-PPP” loans and began taking applications on April 3, 2020. An eligible business can apply for a SBA- PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. SBA-PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the SBA-PPP loans made to eligible borrowers. The entire principal amount of the borrower’s SBA-PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the SBA-PPP, subject to certain eligibility requirements and conditions. As of June 30, 2020, the Bank had 1,148 SBA-PPP loans outstanding with an outstanding principal balance of $79.9 million, less unearned net fees of $2.8 million.

To bolster to effectiveness of the SBA-PPP, the Federal Reserve provides liquidity to participating financial institutions through term financing backed by SBA-PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility (“PPPLF”) extends credit on a non-recourse basis to eligible financial institutions that originate SBA- PPP loans, taking the loans as collateral at face value. As of June 30, 2020, the Bank had $5.4 million in PPPLF funding outstanding, that has a maturity date of April 15, 2022 and is secured by $5.4 million in SBA-PPP loans.

(dollars in thousands)

2021

2020

Construction & development
$ 40,954 $ 46,053
Farmland
30,447 32,449
Residential
287,643 279,893
Commercial mortgage
228,288 203,886
Commercial & agricultural
31,962 33,663
SBA-PPP
61,454 51,118
Consumer & other
16,631 17,033
Total loans
697,379 664,095
Allowance for loan losses
(5,342 ) (4,900 )
Loans, net of allowance for loan losses
$ 692,037 $ 659,195

As of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, substantially all of the Bank’s residential ~~1-4~~1-4 family loans were pledged as collateral for borrowing lines at the ~~Federal Home~~FHLB.
Small Business Administration Paycheck Protection Program
Gross SBA-PPP loans totaling $65.6 million with net deferred fees of $4.2 million remained on the balance sheet as of June 30, 2021. Gross SBA-PPP loans totaling $52.5 million with net deferred fees of $1.4 million remained on the balance sheet at December 31, 2020. These fees, net of direct costs relating to the origination of these loans, have been deferred and are being amortized over the life of the loans. Loan ~~Bank~~forgiveness payments will be treated as prepayments and recognized as they occur. A summary of ~~Atlanta.~~our SBA-PPP loans as of June 30, 2021 and December 31, 2020 by SBA tier is as follows:
(dollars in thousands)

June 30, 2021

# of SBA

Balance Less

SBA Tier

Approved

Mix

Unearned Fees

Mix

$2 million to $10 million
2 0.10 % $ 5,620 9.14 %
Over $350,000 to less than $2 million
25 1.24 % 12,935 21.05 %
Up to $350,000
1,981 98.66 % 42,899 69.81 %
Total
2,008 100.00 % $ 61,454 100.00 %
(dollars in thousands)

December 31, 2020

# of SBA

Balance Less

SBA Tier

Approved

Mix

Unearned Fees

Mix

$2 million to $10 million
2 0.20 % $ 7,267 14.22 %
Over $350,000 to less than $2 million
18 1.78 % 11,693 22.87 %
Up to $350,000
988 98.02 % 32,158 62.91 %
Total
1,008 100.00 % $ 51,118 100.00 %
23
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 3. Loans Receivable, continued
Small Business Administration Paycheck Protection Program, continued
A summary of our SBA-PPP loans as of June 30, 2021 and December 31, 2020 by industry is as follows:
(dollars in thousands)

June 30, 2021

# of SBA

Balance Less

Industry

Approved

Mix

Unearned Fees

Mix

Manufacturing
72 3.59 % $ 7,674 12.49 %
Retail Trade
154 7.67 % 3,531 5.75 %
Construction
242 12.05 % 6,012 9.78 %
Health Care & Social Assistance
72 3.59 % 4,376 7.12 %
Accommodation & Retail Services
126 6.27 % 8,183 13.31 %
Educational Services
13 0.65 % 6,236 10.15 %
General & Other
1,329 66.18 % 25,442 41.40 %
Total
2,008 100.00 % $ 61,454 100.00 %
(dollars in thousands)

December 31, 2020

# of SBA

Balance Less

Industry

Approved

Mix

Unearned Fees

Mix

Manufacturing
74 7.34 % $ 14,327 28.03 %
Retail Trade
134 13.29 % 5,247 10.26 %
Construction
127 12.60 % 3,577 7.00 %
Health Care & Social Assistance
73 7.24 % 3,550 6.94 %
Accommodation & Retail Services
91 9.03 % 3,705 7.25 %
Educational Services
7 0.70 % 4,825 9.44 %
General & Other
502 49.80 % 15,887 31.08 %
Total
1,008 100.00 % $ 51,118 100.00 %
24
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 4.4. Allowance for Loan Losses and Impaired Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component is calculated on an individual basis for larger-balance, non-homogeneous loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is lower than its carrying value. The specific component of the allowance for smaller-balance loans whose terms have been modified in a ~~troubled debt restructuring (“TDR”)~~TDR is calculated on a pooled basis considering historical experience adjusted for qualitative factors. These smaller-balance TDRs were collectively evaluated for impairment. The general component covers the remaining loan portfolio, and is based on historical loss experience adjusted for qualitative factors. The appropriateness of the allowance for loan losses on loans is estimated based upon these factors and trends identified by management at the time financial statements are prepared.
22
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 4. Allowance for Loan Losses and Impaired Loans, continued~~
~~Allowance for Loan Losses, continued~~

A provision for loan losses is charged against operations and is added to the allowance for loan losses based on quarterly comprehensive analyses of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.

25

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 4. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
As noted in Note 1, the Company determined that SBA-PPP loans have zero expected credit losses and as such are excluded from the disclosures included in the following table. The following table presents activity in the allowance by loan category and information on the loans evaluated individually for impairment and collectively evaluated for impairment as of June 30, ~~2020~~ 2021 and December 31, ~~2019:~~2020:

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

Construction
&
Development

Farmland

Residential

Commercial
Mortgage

Commercial
&
Agricultural

Consumer
& Other

Total

Construction
&
Development

Farmland

Residential

Commercial
Mortgage

Commercial
&
Agricultural

Consumer
& Other

Total

For the Three Months Ended June 30, 2020

For the Three Months Ended June 30, 2021
For the Three Months Ended June 30, 2021

Allowance for loan losses:

Balance, March 31, 2019
$ 341 $ 465 $ 1,998 $ 1,054 $ 246 $ 148 $ 4,252
Balance, March 31, 2021
$ 502 $ 384 $ 2,247 $ 1,557 $ 259 $ 102 $ 5,051
Charge-offs
- - - - - (25 ) (25 ) 0 0 0 0 0 (17 ) (17 )
Recoveries
- - 3 - - 10 13 2 0 0 61 44 6 113
Provision
74 7 125 (3 ) 204 7 414 (76 ) (40 ) 73 225 (30 ) 43 195
Balance, June 30, 2021
$ 428 $ 344 $ 2,320 $ 1,843 $ 273 $ 134 $ 5,342

For the Three Months Ended June 30, 2020
For the Three Months Ended June 30, 2020

Allowance for loan losses:

Balance, March 31, 2020
$ 415 $ 472 $ 2,126 $ 1,051 $ 450 $ 140 $ 4,654 $ 341 $ 465 $ 1,998 $ 1,054 $ 246 $ 148 $ 4,252

For the Three Months Ended June 30, 2019

Allowance for loan losses:

Balance, March 31, 2019
$ 268 $ 407 $ 1,733 $ 697 $ 385 $ 128 $ 3,618
Charge-offs
- - (20 ) - (19 ) (43 ) (82 ) 0 0 0 0 0 (25 ) (25 )
Recoveries
- - 1 - 2 3 6 0 0 3 0 0 10 13
Provision
17 133 16 155 (76 ) 31 276 74 7 125 (3 ) 204 7 414
Balance, June 30, 2019
$ 285 $ 540 $ 1,730 $ 852 $ 292 $ 119 $ 3,818
Balance, June 30, 2020
$ 415 $ 472 $ 2,126 $ 1,051 $ 450 $ 140 $ 4,654

For the Six Months Ended June 30, 2020

For the Six Months Ended June 30, 2021
For the Six Months Ended June 30, 2021

Allowance for loan losses:

Balance, December 31, 2020
$ 499 $ 406 $ 2,167 $ 1,421 $ 293 $ 114 $ 4,900
Charge-offs
0 0 0 0 0 (51 ) (51 )
Recoveries
2 0 2 61 45 26 136
Provision
(73 ) (62 ) 151 361 (65 ) 45 357
Balance, June 30, 2021
$ 428 $ 344 $ 2,320 $ 1,843 $ 273 $ 134 $ 5,342

For the Six Months Ended June 30, 2020
For the Six Months Ended June 30, 2020

Allowance for loan losses:

Balance, December 31, 2019
$ 305 $ 487 $ 1,822 $ 924 $ 211 $ 144 $ 3,893 $ 305 $ 487 $ 1,822 $ 924 $ 211 $ 144 $ 3,893
Charge-offs
- - - - - (78 ) (78 ) 0 0 0 0 0 (78 ) (78 )
Recoveries
4 - 11 65 2 21 103 4 0 11 65 2 21 103
Provision
106 (15 ) 293 62 237 53 736 106 (15 ) 293 62 237 53 736
Balance, June 30, 2019
$ 415 $ 472 $ 2,126 $ 1,051 $ 450 $ 140 $ 4,654
Balance, June 30, 2020
$ 415 $ 472 $ 2,126 $ 1,051 $ 450 $ 140 $ 4,654

For the Six Months Ended June 30, 2019

Allowance for loan losses:

Balance, December 31, 2018
$ 246 $ 385 $ 1,807 $ 682 $ 281 $ 94 $ 3,495
Charge-offs
- (14 ) (32 ) (41 ) (63 ) (95 ) (245 )
Recoveries
- - 8 28 4 14 54
Provision
39 169 (53 ) 183 70 106 514
Balance, June 30, 2019
$ 285 $ 540 $ 1,730 $ 852 $ 292 $ 119 $ 3,818

June 30, 2020

June 30, 2021

Allowance for loan losses:

Ending Balance
$ 415 $ 472 $ 2,126 $ 1,051 $ 450 $ 140 $ 4,654 $ 428 $ 344 $ 2,320 $ 1,843 $ 273 $ 134 $ 5,342
Ending balance: individually evaluated for impairment
$ - $ - $ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Ending balance: collectively evaluated for impairment
$ 415 $ 472 $ 2,126 $ 1,051 $ 450 $ 140 $ 4,654 $ 428 $ 344 $ 2,320 $ 1,843 $ 273 $ 134 $ 5,342
Ending balance: purchased credit impaired loans
$ - $ - $ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Loans outstanding:

Ending Balance
$ 44,192 $ 34,629 $ 260,565 $ 181,866 $ 31,456 $ 20,786 $ 573,494 $ 40,954 $ 30,447 $ 287,643 $ 228,288 $ 31,962 $ 16,631 $ 635,925
Ending balance: individually evaluated for impairment
$ - $ 2,836 $ - $ - $ - $ - $ 2,836 $ 741 $ 2,417 $ 0 $ 0 $ 0 $ 0 $ 3,158
Ending balance: collectively evaluated for impairment
$ 44,192 $ 31,793 $ 260,422 $ 181,554 $ 31,310 $ 20,786 $ 570,057 $ 40,213 $ 28,030 $ 287,504 $ 228,181 $ 31,866 $ 16,631 $ 632,425
Ending balance: purchased credit impaired loans
$ - $ - $ 143 $ 312 $ 146 $ - $ 601 $ 0 $ 0 $ 139 $ 107 $ 96 $ 0 $ 342

23
26

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 4. Allowance for Loan Losses and Impaired Loans, continued

Allowance for Loan Losses, continued
~~Allowance for Loan Losses and Recorded Investment in Loans~~

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

Construction
&
Development

Farmland

Residential

Commercial
Mortgage

Commercial
&
Agricultural

Consumer
& Other

Total

Construction
&
Development

Farmland

Residential

Commercial
Mortgage

Commercial
&
Agricultural

Consumer
& Other

Total

December 31, 2019

December 31, 2020

Allowance for loan losses:

Ending Balance
$ 305 $ 487 $ 1,822 $ 924 $ 211 $ 144 $ 3,893 $ 499 $ 406 $ 2,167 $ 1,421 $ 293 $ 114 $ 4,900
Ending balance: individually evaluated for impairment
$ - $ - $ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Ending balance: collectively evaluated for impairment
$ 305 $ 487 $ 1,822 $ 924 $ 211 $ 144 $ 3,893 $ 499 $ 406 $ 2,167 $ 1,421 $ 293 $ 114 $ 4,900
Ending balance: purchased credit impaired loans
$ - $ - $ - $ - $ - $ - $ - $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Loans outstanding:

Ending Balance
$ 39,649 $ 34,166 $ 253,674 $ 190,817 $ 32,426 $ 19,621 $ 570,353 $ 46,053 $ 32,449 $ 279,893 $ 203,886 $ 33,663 $ 17,033 $ 612,977
Ending balance: individually evaluated for impairment
$ - $ 3,240 $ 909 $ - $ - $ - $ 4,149 $ 0 $ 2,580 $ 0 $ 0 $ 0 $ 0 $ 2,580
Ending balance: collectively evaluated for impairment
$ 39,649 $ 30,926 $ 252,615 $ 190,496 $ 32,280 $ 19,621 $ 565,587 $ 46,053 $ 29,869 $ 279,751 $ 203,773 $ 33,567 $ 17,033 $ 610,046
Ending balance: purchased credit impaired loans
$ - $ - $ 150 $ 321 $ 146 $ - $ 617 $ 0 $ 0 $ 142 $ 113 $ 96 $ 0 $ 351

As of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, the Bank had no unallocated reserves included in the allowance for loan losses.

27

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 4. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is not warranted. Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.” Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. As of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.
24
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 4. Allowance for Loan Losses and Impaired Loans, continued~~
~~Allowance for Loan Losses, continued~~
During the first quarter of 2020, Management evaluated loan grades included in the “Watch” category and determined that loans associated with a certain grade should be classified as “Pass” credits. As a result of this reclassification, the loan grades previously reported as “Watch” & “Pass” of December 31, 2019 have been reclassified as follows:

Loan Grades

(dollars in thousands)

Watch
As Reported

Reclass

Watch
Adjusted

December 31, 2019

Real Estate Secured:

Construction & development
$ 4,801 $ (4,244 ) $ 557
Farmland
4,059 (2,565 ) 1,494
Residential
19,887 (19,349 ) 538
Commercial mortgage
21,960 (19,557 ) 2,403
Non-Real Estate Secured:

Commercial & agricultural
4,346 (3,805 ) 541
Consumer & other
300 (300 ) -
Total
$ 55,353 $ (49,820 ) $ 5,533

Loan Grades

(dollars in thousands)

Pass
As Reported

Reclass

Pass
Adjusted

December 31, 2019

Real Estate Secured:

Construction & development
$ 34,701 $ 4,244 $ 38,945
Farmland
22,969 2,565 25,534
Residential
231,629 19,349 250,978
Commercial mortgage
163,584 19,557 183,141
Non-Real Estate Secured:

Commercial & agricultural
27,503 3,805 31,308
Consumer & other
19,314 300 19,614
Total
$ 499,700 $ 49,820 $ 549,520
~~These reclassifications did not have an impact on our calculation of the allowance for loan losses or our provision expense.~~
25
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 4. Allowance for Loan Losses and Impaired Loans, continued~~
~~Allowance for Loan Losses, continued~~

The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of June 30, ~~2020~~ 2021 and December 31, ~~2019 (reclassified as noted above):~~2020:

Credit Risk Profile by Internally Assigned Grades

Loan Grades

Loan Grades

(dollars in thousands)

Pass

Watch

Special
Mention

Substandard

Total

Pass

Watch

Special
Mention

Substandard

Total

June 30, 2020

June 30, 2021

Real Estate Secured:

Construction & development
$ 43,581 $ - $ - $ 611 $ 44,192 $ 40,091 $ 0 $ 0 $ 863 $ 40,954
Farmland
27,076 813 661 6,079 34,629 24,419 841 486 4,701 30,447
Residential
257,636 626 124 2,179 260,565 285,396 451 681 1,115 287,643
Commercial mortgage
175,459 2,260 826 3,321 181,866 211,846 7,673 5,519 3,250 228,288
Non-Real Estate Secured:

Commercial & agricultural
30,270 502 125 559 31,456 31,142 345 107 368 31,962
SBA-PPP 77,105 77,105 61,454 0 0 0 61,454
Consumer & other
20,786 - - - 20,786 16,631 0 0 0 16,631
Total
$ 631,913 $ 4,201 $ 1,736 $ 12,749 $ 650,599 $ 670,979 $ 9,310 $ 6,793 $ 10,297 $ 697,379

December 31, 2019

December 31, 2020

Real Estate Secured:

Construction & development
$ 38,945 $ 557 $ - $ 147 $ 39,649 $ 44,909 $ 427 $ 122 $ 595 $ 46,053
Farmland
25,534 1,494 673 6,465 34,166 25,607 419 496 5,927 32,449
Residential
250,978 538 176 1,982 253,674 277,811 659 0 1,423 279,893
Commercial mortgage
183,141 2,403 930 4,343 190,817 188,156 8,692 3,647 3,391 203,886
Non-Real Estate Secured:

Commercial & agricultural
31,308 541 103 474 32,426 32,467 468 161 567 33,663
SBA-PPP
51,118 0 0 0 51,118
Consumer & other
19,614 - - 7 19,621 17,028 0 0 5 17,033
Total
$ 549,520 $ 5,533 $ 1,882 $ 13,418 $ 570,353 $ 637,096 $ 10,665 $ 4,426 $ 11,908 $ 664,095

26
28

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 4.4. Allowance for Loan Losses and Impaired Loans, continued

Loans may be placed in nonaccrual status when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received are first applied to principal, and any remaining funds are then applied to interest. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof.

The following table presents an age analysis of nonaccrual and past due loans by category as of June 30, ~~2020~~ 2021 and December 31, ~~2019:~~2020:

Analysis of Past Due and Nonaccrual Loans

(dollars in thousands)

30-59 Days
Past Due

60-89 Days
Past Due

90 Days
or More
Past Due

Total
Past Due

Current

Total
Loans

90+ Days
Past Due
and Still
Accruing

Nonaccrual
Loans

30-59 Days
Past Due

60-89 Days
Past Due

90 Days
or More
Past Due

Total
Past Due

Current

Total
Loans

90+ Days
Past Due
and Still
Accruing

Nonaccrual
Loans

June 30, 2020

June 30, 2021

Real Estate Secured:

Construction & development
$ - $ - $ 9 $ 9 $ 44,183 $ 44,192 $ - $ 9 $ 0 $ 0 $ 426 $ 426 $ 40,528 $ 40,954 $ 0 $ 426
Farmland
- 669 257 926 33,703 34,629 - 3,630 0 0 130 130 30,317 30,447 0 850
Residential
456 - 357 813 259,752 260,565 - 460 122 44 130 296 287,347 287,643 0 527
Commercial mortgage
- - 292 292 181,574 181,866 - 485 0 60 0 60 228,228 228,288 0 79
Non-Real Estate Secured:

Commercial & agricultural
121 16 146 283 31,173 31,456 - 182 81 8 96 185 31,777 31,962 0 110
SBA-PPP - - - - 77,105 77,105 - - 0 0 0 0 61,454 61,454 0 �� 0
Consumer & other
1 - - 1 20,785 20,786 - - 17 0 0 17 16,614 16,631 0 0
Total
$ 578 $ 685 $ 1,061 $ 2,324 $ 648,275 $ 650,599 $ - $ 4,766 $ 220 $ 112 $ 782 $ 1,114 $ 696,265 $ 697,379 $ 0 $ 1,992

December 31, 2019

December 31, 2020

Real Estate Secured:

Construction & development
$ - $ - $ 10 $ 10 $ 39,639 $ 39,649 $ - $ 10 $ 71 $ 0 $ 0 $ 71 $ 45,982 $ 46,053 $ 0 $ 11
Farmland
893 - 971 1,864 32,302 34,166 - 4,192 100 0 914 1,014 31,435 32,449 0 3,937
Residential
292 48 365 705 252,969 253,674 - 412 386 29 240 655 279,238 279,893 0 557
Commercial mortgage
185 - - 185 190,632 190,817 - 198 0 0 24 24 203,862 203,886 0 109
Non-Real Estate Secured:

Commercial & agricultural
135 8 163 306 32,120 32,426 - 165 14 15 155 184 33,479 33,663 0 189
SBA-PPP
0 0 0 0 51,118 51,118 0 0
Consumer & other
2 6 2 10 19,611 19,621 - 2 7 0 0 7 17,026 17,033 0 0
Total
$ 1,507 $ 62 $ 1,511 $ 3,080 $ 567,273 $ 570,353 $ - $ 4,979 $ 578 $ 44 $ 1,333 $ 1,955 $ 662,140 $ 664,095 $ 0 $ 4,803

Impaired Loans

A loan is considered impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. Smaller balance homogenous loans may be collectively evaluated for impairment. Non-homogenous impaired loans are either measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent, or measured based on the present value of expected future cash flows if not collateral dependent. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers ~~third-party~~third-party appraisals, as well as independent fair market value assessments in determining the estimated fair value of particular properties. In addition, as certain of these ~~third-party~~third-party appraisals and independent fair market value assessments are only updated periodically, changes in the values of specific properties may have occurred subsequent to the most recent appraisals. Accordingly, the amounts of any such potential changes and any related adjustments are generally recorded at the time such information is received. When the measurement of the impaired loan is less than the recorded investment in the loan, impairment is recognized by creating or adjusting an allocation of the allowance for loan losses and uncollected accrued interest is reversed against interest income. If ultimate collection of principal is in doubt, all cash receipts on impaired loans are applied to reduce the principal balance.

27
29

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 4.4. Allowance for Loan Losses and Impaired Loans, continued

Impaired Loans, continued

As of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, respectively, the recorded investment in impaired loans totaled ~~$7.8~~$6.0 million and ~~$7.8~~$6.2 million. The total amount of collateral-dependent impaired loans at was $3.2 million at June 30, ~~2020~~ 2021 and December 31, ~~2019, respectively, was $2.8 million and $2.9 million.~~2020, respectively. As of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, respectively, $2.8 million and ~~$4.1~~$2.6 million of the recorded investment in impaired loans did not have a related allowance. The Bank had ~~$5.3~~$3.5 million and ~~$4.8~~$3.9 million in troubled debt restructured loans included in impaired loans at June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, respectively.

The categories of non-accrual loans and impaired loans overlap, although they are not coextensive. The Bank considers all circumstances regarding the loan and borrower on an individual basis when determining whether an impaired loan should be placed on non-accrual status, such as the financial strength of the borrower, the estimated collateral value, reasons for the delay, payment record, the amount past due and the number of days past due.

Management collectively evaluates performing TDRs with a loan balance of $250,000 or less for impairment. As of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, respectively, ~~$5.0~~$2.9 million and $3.6 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have ~~$246~~$149 thousand and ~~$174~~$192 thousand of related allowance.

The following table is a summary of information related to impaired loans as of June 30, ~~2020~~ 2021 and December 31, ~~2019:~~2020:

Impaired Loans

Six months ended

Three months ended

Unpaid
Average
Interest
Average Interest
Recorded
Principal
Related Recorded
Income
Recorded Income
(dollars in thousands)
Investment¹
Balance
Allowance Investment
Recognized
Investment Recognized
June 30, 2020

With no related allowance recorded:

Construction & development
$ - $ - $ - $ - $ - $ - $ -
Farmland
2,836 3,334 - 3,038 10 2,847 5
Residential
- - - - - - -
Commercial mortgage
- - - - - - - ��
Commercial & agricultural
- - - - - - -
Consumer & other
- - - - - - -
Subtotal
2,836 3,334 - 3,038 10 2,847 5

With an allowance recorded:

Construction & development
538 538 27 545 16 539 10
Farmland
150 159 2 150 1 150 -
Residential
4,263 4,439 214 4,282 113 4,268 57
Commercial mortgage
10 54 1 10 1 10 -
Commercial & agricultural
49 49 2 50 2 50 2
Consumer & other
2 2 - 3 - 2 -
Subtotal
5,012 5,241 246 5,040 133 5,019 69

Totals:

Construction & development
538 538 27 545 16 539 10
Farmland
2,986 3,493 2 3,188 11 2,997 5
Residential
4,263 4,439 214 4,282 113 4,268 57
Commercial mortgage
10 54 1 10 1 10 -
Commercial & agricultural
49 49 2 50 2 50 2
Consumer & other
2 2 - 3 - 2 -
Total
$ 7,848 $ 8,575 $ 246 $ 8,078 $ 143 $ 7,866 $ 74

Six months ended Three months ended

Unpaid

Average

Interest

Average

Interest

Recorded

Principal

Related

Recorded

Income

Recorded

Income

(dollars in thousands)

Investment¹

Balance

Allowance

Investment

Recognized

Investment

Recognized

June 30, 2021
With no related allowance recorded:

Construction & development
$ 427 $ 425 $ - $ 218 $ (5 ) $ 432 $ 0
Farmland
2,417 3,076 - 2,498 $ 62 2,428 42
Residential
- 0 - 198 $ 25 173 11
Commercial mortgage
- 0 - 0 0 0 0
Commercial & agricultural
- 0 - 0 0 0 0
Consumer & other
- 0 - 1 0 0 0
Subtotal
2,844 3,501 - 2,915 $ 82 3,033 53

With an allowance recorded:

Construction & development
463 463 8 476 $ 13 473 7
Farmland
126 143 2 127 $ 4 126 2
Commercial mortgage
72 72 4 40 $ 3 39 3
Commercial & agricultural
40 40 2 43 $ 1 42 1
Consumer & other
- 0 0 0 0 0 0
Subtotal
3,172 3,366 149 3,178 $ 90 3,161 47

Totals:

Construction & development
890 888 8 694 $ 8 905 7
Farmland
2,543 3,219 2 2,625 $ 66 2,554 44
Residential
2,471 2,648 133 2,690 $ 94 2,654 45
Commercial mortgage
72 72 4 40 $ 3 39 3
Commercial & agricultural
40 40 2 43 $ 1 42 1
Consumer & other
- 0 0 1 0 0 0
Total
$ 6,016 $ 6,867 $ 149 $ 6,093 $ 172 $ 6,194 $ 100
¹
Recorded investment is the loan balance, net of any charge-offs

¹     ~~Recorded investment is the loan balance, net of any charge-offs~~
28
30

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 4.4. Allowance for Loan Losses and Impaired Loans, continued
Impaired Loans, continued

(dollars in thousands)

Recorded
Investment¹

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

December 31, 2019

With no related allowance recorded:

Construction & development
$ - $ - $ - $ - $ -
Farmland
3,240 3,240 - 3,505 25
Residential
909 909 - 921 40
Commercial mortgage
- - - - -
Commercial & agricultural
- - - - -
Consumer & other
- - - - -
Subtotal
4,149 4,149 - 4,426 65

With an allowance recorded:

Construction & development
72 72 3 76 6
Farmland
150 150 2 1,545 70
Residential
3,345 3,495 166 4,161 225
Commercial mortgage
11 56 1 268 11
Commercial & agricultural
31 31 1 34 2
Consumer & other
3 3 1 4 -
Subtotal
3,612 3,807 174 6,088 314

Totals:

Construction & development
72 72 3 76 6
Farmland
3,390 3,390 2 5,050 95
Residential
4,254 4,404 166 5,082 265
Commercial mortgage
11 56 1 268 11
Commercial & agricultural
31 31 1 34 2
Consumer & other
3 3 1 4 -
Total $ 7,761 $ 7,956 $ 174 $ 10,514 $ 379

(dollars in thousands)

Recorded
Investment¹

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

December 31, 2020

With no related allowance recorded:

Construction & development
$ - $ 0 $ - $ 0 $ 0
Farmland
2,580 3,151 - 2,731 18
Residential
- 0 - 0 0
Commercial mortgage
- 0 - 0 0
Commercial & agricultural
- 0 - 0 0
Consumer & other
- 0 - 0 0
Subtotal
2,580 3,151 - 2,731 18

With an allowance recorded:

Construction & development
501 501 27 522 31
Farmland
127 144 2 �� 375 11
Residential
2,906 3,082 159 4,057 222
Commercial mortgage
8 53 1 10 3
Commercial & agricultural
46 46 3 49 3
Consumer & other
1 1 0 2 0
Subtotal
3,589 3,827 192 5,015 270

Totals:

Construction & development
501 501 27 522 31
Farmland
2,707 3,295 2 3,106 29
Residential
2,906 3,082 159 4,057 222
Commercial mortgage
8 53 1 10 3
Commercial & agricultural
46 46 3 49 3
Consumer & other
1 1 0 2 0
Total
$ 6,169 $ 6,978 $ 192 $ 7,746 $ 288
¹
¹
Recorded investment is the loan balance, net of any charge-offs

Troubled Debt Restructuring
A troubled debt restructured loan is a loan for which the Bank, for reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are not limited to: a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals and renewals. ~~Troubled debt restructured loans are considered impaired loans.~~

29
31

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 4. 4.Allowance for Loan Losses and Impaired Loans, continued

Troubled Debt Restructuring, continued

The following table sets forth information with respect to the Bank’s troubled debt restructurings as of June 30, ~~2020~~ 2021 and June 30, ~~2019:~~2020:

For the Six Months Ended June 30, 20202021

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
2 $ 459 $ 459 - $ - $ -
Farmland
- - - - - -
Residential
1 46 50 - - -
Commercial mortgage
- - - - - -
Commercial & agricultural
1 20 20 - - -
Consumer & other
- - - - - -
Total
4 $ 525 $ 529 - $ - $ -

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
0 $ 0 $ 0 0 $ 0 $ 0
Farmland
0 0 0 0 0 0
Residential
0 0 0 0 0 0
Commercial mortgage
1 73 72 0 0 0
Commercial & agricultural
0 0 0 0 0 0
Consumer & other
0 0 0 0 0 0
Total
1 $ 73 $ 72 0 $ 0 $ 0
⁽¹⁾
⁽¹⁾
Loans past due 30 days or more are considered to be in default.

During the six months ended June 30, ~~2020, four loans were modified that were considered to be a TDRs. Term concessions were granted on all the loans and~~ 2021, one ~~loan had additional funds advanced for property taxes. No TDRs identified in the last twelve months subsequently defaulted in the six months ended June 30, 2020.~~
~~For the Three Months Ended June 30, 20~~20

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
1 $ 114 $ 114 - $ - $ -
Farmland
- - - - - -
Residential
1 46 50 - - -
Commercial mortgage
- - - - - -
Commercial & agricultural
1 20 20 - - -
Consumer & other
- - - - - -
Total
3 $ 180 $ 184 - $ - $ -
⁽¹⁾~~Loans past due 30 days or more are considered to be in default.~~
During the three months ended June 30, 2020, three loans were modified that was considered to be a TDR. Term concessions were granted on all the loans and one loan had additional funds advanced for property taxes. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended June 30, 2020.
30
~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
~~Note 4. Allowance for Loan Losses and Impaired Loans, continued~~
~~Troubled Debt Restructuring, continued~~
~~For the Six Months Ended June 30, 2019~~

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
- $ - $ - - $ - $ -
Farmland
1 38 38 - - -
Residential
1 117 128 - - -
Commercial mortgage
- - - - - -
Commercial & agricultural
- - - - - -
Consumer & other
- - - - - -
Total
2 $ 155 $ 166 - $ - $ -
⁽¹⁾~~Loans past due 30 days or more are considered to be in default.~~
During the six months ended June 30, 2019, two loans were modified that were considered to be a TDRs. Term concessions were granted on both loans and one loan had additional funds advanced for legal expenses and property taxes. No TDRs identified in the last twelve months subsequently defaulted in the six months ended June 30, 2019.
~~For the Three Months Ended June 30, 2019~~

(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
- $ - $ - - $ - $ -
Farmland
1 38 38 - - -
Residential
- - - - - -
Commercial mortgage
- - - - - -
Commercial & agricultural
- - - - - -
Consumer & other
- - - - - -
Total
1 $ 38 $ 38 - $ - $ -
⁽¹⁾~~Loans past due 30 days or more are considered to be in default.~~
~~During the three months ended June 30, 2019, one~~ loan was modified that was considered to be a TDR. Term concessions were granted on ~~this loan.~~ the loan and the loan had additional funds advanced for insurance. No TDRs identified in the last twelve months subsequently defaulted in the six months ended June 30, 2021.
For the Three Months Ended June 30, 2021
(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
0 $ 0 $ 0 0 $ 0 $ 0
Farmland
0 0 0 0 0 0
Residential
0 0 0 0 0 0
Commercial mortgage
1 73 72 0 0 0
Commercial & agricultural
0 0 0 0 0 0
Consumer & other
0 0 0 0 0 0
Total
1 $ 73 $ 72 0 $ 0 $ 0
⁽¹⁾
Loans past due 30 days or more are considered to be in default.
During the three months ended June 30, 2021, one loan was modified that was considered to be a TDR. Term concessions were granted on the loan and the loan had additional funds advanced for insurance. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended June 30, ~~2019.~~2021.

31
32

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 4.4. Allowance for Loan Losses and Impaired Loans, continued

Troubled Debt Restructuring, continued
For the Six Months Ended June 30, 2020
(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
2 $ 459 $ 459 0 $ 0 $ 0
Farmland
0 0 0 0 0 0
Residential
1 46 50 0 0 0
Commercial mortgage
0 0 0 0 0 0
Commercial & agricultural
1 20 20 0 0 0
Consumer & other
0 0 0 0 0 0
Total
4 $ 525 $ 529 0 $ 0 $ 0
⁽¹⁾
Loans past due 30 days or more are considered to be in default.
During the six months ended June 30, 2020, four loans were modified that were considered to be a TDRs. Term concessions were granted on all the loans and one loan had additional funds advanced for property taxes. No TDRs identified in the last twelve months subsequently defaulted in the six months ended June 30, 2020.
For the Three Months Ended June 30, 2020
(dollars in thousands)

TDRs identified during the period

TDRs identified in the last twelve
months that subsequently defaulted⁽¹⁾

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
1 $ 114 $ 114 0 $ 0 $ 0
Farmland
0 0 0 0 0 0
Residential
1 46 50 0 0 0
Commercial mortgage
0 0 0 0 0 0
Commercial & agricultural
1 20 20 0 0 0
Consumer & other
0 0 0 0 0 0
Total
3 $ 180 $ 184 0 $ 0 $ 0
⁽¹⁾
Loans past due 30 days or more are considered to be in default.
During the three months ended June 30, 2020, three loans were modified that was considered to be a TDR. Term concessions were granted on all the loans and one loan had additional funds advanced for property taxes. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended June 30, 2020.
33
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 4. Allowance for Loan Losses and Impaired Loans, continued
Modifications in response to COVID-19
The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic.  These modifications generally involve principal and/or interest payment deferrals for up to six months.  As the COVID-19 pandemic persists in negatively impacting the economy, the Company continues to offer additional loan modifications to borrowers struggling as a result of COVID-19.  Similar to the initial modifications granted, the additional round of loan modifications generally involve principal and/or interest payment deferrals for up to an additional six months for commercial and consumer loans, and principal-only deferrals for up to an additional 12 months for selected commercial loans.  The Company generally continues to accrue and recognize interest income during the forbearance period.  The Company offers several repayment options such as immediate repayment, repayment over a designated time period or as a balloon payment at maturity, or by extending the loan term.  These modifications generally do not involve forgiveness or interest rate reductions.  The CARES Act, along with a joint agency statement issued by banking agencies, provide that modifications made in response to COVID-19 to borrowers who qualify are not required to be accounted for as a TDR.  Accordingly, the Company does not account for such qualifying as TDRs.  See Note 1 Organization and Summary of Significant Accounting Policies for more information.
The Bank began receiving requests for loan deferments on March 23, 2020 and through June 30, 2021, the Bank approved approximately 250 requests for loan payment deferment of approximately $66.5 million in loans, most of which have resumed payment. A breakdown of the loans with deferments by industry remaining as of June 30, 2021 and December 31, 2020 are as follows:
(dollars in thousands)

2021

2020

Classification

# of Loans

Balance

# of Loans

Balance

Commercial Loans w/ First Deferment

Accommodation & Retail Services
2 $ 2,785 0 $ 0
Construction
0 0 1 47
General & Other
1 21 0 0

Commercial Loans w/ Second Deferment

Accommodation & Retail Services
0 0 1 752
Construction
0 0 1 36
Agriculture
0 0 2 603
Real Estate Rental
0 0 2 2,146

Commercial Loans w/ Third Deferment

Accommodation & Retail Services
0 0 2 4,438
Construction
1 36 0 0
Manufacturing
0 0 1 153

Consumer Loans w/ First Deferment
0 0 7 782

Consumer Loans w/ Second Deferment
0 0 1 52
Total
4 $ 2,842 18 $ 9,009
34
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 4. Allowance for Loan Losses and Impaired Loans, continued
Purchased Credit Impaired Loans
During 2018, the Company acquired loans as a result of the Great State merger, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans at June 30, ~~2020~~ 2021 and December 31, ~~2019~~ 2020 are as follows:

(dollars in thousands)

2020

2019

Residential
$ 143 $ 150
Commercial mortgage
312 321
Commercial & agricultural
146 146
Outstanding balance
$ 601 $ 617

Carrying amount
$ 601 $ 617
(dollars in thousands)

2021

2020

Residential
$ 139 $ 142
Commercial mortgage
107 113
Commercial & agricultural
96 96
Outstanding balance
$ 342 $ 351

Carrying amount
$ 342 $ 351
There was no accretable yield on purchased credit impaired loans for the period presented.

There were no purchased credit impaired loans acquired during the six months ended June 30, ~~2020~~ 2021 and during the year ended December 31, ~~2019.~~
2020. Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected. ~~The carrying amounts of such loans as of June 30, 2020 and December 31, 2019 are as follows:~~

(dollars in thousands)

2020

2019

Loans at beginning of year
$ 617 $ 714
Loans purchased during the year
- -
Loans at end of period
$ 601 $ 617
32
35

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 5.5. Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees. Effective December 31, 2012, the pension plan was amended to freeze benefit accruals for all eligible employees. The following is a summary of net periodic pension costs for the ~~six-month~~six-month and ~~three-month~~three-month periods ended June 30, ~~2020~~ 2021 and ~~2019.~~2020.

Six Months Ended June 30,

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended June 30,

(dollars in thousands)

2020

2019

2020

2019

2021

2020

2021

2020

Service cost
$ - $ - $ - $ -
Interest cost
82 92 41 46 $ 72 $ 82 $ 36 $ 41
Expected return on plan assets
(314 ) (276 ) (157 ) (138 ) $ (348 ) $ (314 ) $ (174 ) $ (157 )
Amortization of prior service cost
- - - -
Recognized net loss due to settlement
- - - -
Recognized net actuarial (gain)/loss
14 20 7 10 $ 18 $ 14 $ 9 $ 7
Net periodic benefit cost
$ (218 ) $ (164 ) $ (109 ) $ (82 ) $ (258 ) $ (218 ) $ (129 ) $ (109 )

It has been Company practice to contribute the maximum tax-deductible amount each year as determined by the plan administrator. As a result of prior year contributions exceeding the minimum requirements, a Prefunding Balance existed as of December 31, ~~2019~~ 2020 and there is no required contribution for ~~2020.~~2021. Based on this we do not anticipate making a contribution to the plan in ~~2020.~~2021.

Note 6. Goodwill and Intangible Assets

Goodwill
~~The change in~~An analysis of goodwill during the ~~six-month~~six-month period ended June 30, ~~2020~~ 2021 and for the year ended December 31, ~~2019~~ 2020 is as follows:

June 30,
December 31,

(dollars in thousands)

2020
2019
June 30,

December 31,

2021

2020

Beginning of year
$ 3,257 $ 3,198 $ 3,257 $ 3,257
Measurement period adjustment
- 59 0 0
Impairment
0 0
End of the period
$ 3,257 $ 3,257 $ 3,257 $ 3,257

Intangible Assets

The following table presents the activity for the Company’s core deposit intangible assets, which are the only identifiable intangible assets subject to amortization. Core deposit intangibles at June 30, ~~2020~~ 2021 and December 31, ~~2019~~ 2020 are as follows:

June 30, December 31,
(dollars in thousands)

2020
2019
June 30,

December 31,

2021

2020

Balance at beginning of year, net
$ 3070 $ 3892 $ 2,359 $ 3,070
Amortization expense
(385 ) (822 ) $ (327 ) $ (711 )
Net book value
$ 2685 $ 3070 $ 2,032 $ 2,359

Aggregate amortization expense was ~~$385~~$327 thousand and ~~$437~~$385 thousand for the ~~six-month~~six-month periods ended June 30, ~~2020~~ 2021 and ~~2019,~~2020, respectively. Aggregate amortization expense was ~~$192~~$163 thousand and ~~$218~~$192 thousand for the ~~three-month~~three-month periods ended June 30, ~~2020~~ 2021 and ~~2019,~~2020, respectively.

33
36

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 7.7. Leases

On January 1, 2019, the Company adopted ASU No. ~~2016-02~~ 2016-02 ““Leases (Topic ~~842)~~842)” and all subsequent ASUs that modified Topic 842. We adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have performed an evaluation of our leasing contracts and activities. We have developed our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments. Prior to adoption, all of the Company’s leases were classified as operating leases and remain operating leases at adoption.

Contracts that commence subsequent to adoption are evaluated to determine whether they are or contain a lease in accordance with Topic 842. The Company has elected the practical expedient provided by Topic 842not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less. ~~Since adoption,~~During 2021, the Company ~~entered into a new operating lease during 2019 and a~~ renewed an operating lease ~~during 2020~~ and recognized right-of-use assets and lease liabilities.

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

June 30,

December 31,

June 30,

December 31,

(dollars in thousands)

2020

2019

2021

2020

Lease liabilities
$ 748 $ 729 $ 623 $ 680
Right-of-use assets
$ 748 $ 729 $ 623 $ 680
Weighted average remaining lease term (years)
7.35 8.06 6.83 7.10
Weighted average discount rate
2.45 % 2.39 % 2.44 % 2.45 %

Six Months Ended June 30,

Six Ended June 30,

(dollars in thousands)

2020

2019

2021

2020

Lease Expense

Operating lease expense
$ 70 $ 45 $ 78 $ 70
Short-term lease expense
18 53 14 18
Total lease expense
$ 88 $ 98 $ 92 $ 88

Cash paid for amounts included in lease liabilities
$ 70 $ 45 $ 78 $ 70

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

(dollars in thousands)

Six months ending December 31, 2020
$ 77
Twelve months ending December 31, 2021
150
Six months ending December 31, 2021
$ 76
Twelve months ending December 31, 2022
119 123
Twelve months ending December 31, 2023
79 83
Twelve months ending December 31, 2024
68 69
Twelve months ending December 31, 2025
72
Thereafter
330 258
Total undiscounted cash flows
$ 823 $ 681
Less discount
(75 ) (58 )
Lease liabilities
$ 748 $ 623

3437

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 8. Share-Based Compensation
The Parkway Acquisition Corp. 2020 Equity Incentive Plan (the “Plan”) was adopted by the Board of Directors of the Company on March 17, 2020 and approved by the Company’s shareholders on August 18, 2020 (the “Effective Date”). The Plan permits the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, and stock awards to key employees and non-employee directors of the Company or its subsidiaries.
The purpose of the Plan is to promote the success of the Company and its subsidiaries by providing incentives to key employees and non-employee directors that will promote the identification of their personal interests with the long-term financial success of the Company and with growth in shareholder value, consistent with the Company’s risk management practices. The Plan is designed to provide flexibility to the Company, including its subsidiaries, in its ability to attract, retain the services of, and motivate key employees and non-employee directors upon whose judgment, interest, and special effort the successful conduct of its operation is largely dependent.
The Plan was effective on the Effective Date, and no Award may be granted under the plan after March 16, 2030. Awards outstanding on such date shall remain valid in accordance with their terms. The Board of Directors shall have the right to terminate the Plan at any time pursuant to the terms of the Plan. The Compensation Committee of the Board of Directors has been appointed to administer the Plan. The maximum aggregate number of shares that may be issued pursuant to awards made under the Plan shall not exceed 300,000 shares of common stock. No awards were issued or exercised in 2020 and there were 0 Awards outstanding at December 31, 2020.
On March 31, 2021, 14,500 restricted stock awards were issued at a price of $11.30 per share. These awards vest 25% on December 31, 2021, 25% on December 31, 2022, 25% on December 31, 2023, and 25% on December 31, 2024. For the six and three month periods ended June 30, 2021, $14 thousand was recognized as compensation expense related to share-based compensation. As of June 30, 2021, the unrecognized compensation expense related to unvested restricted stock awards was $150 thousand. The unrecognized compensation expense is expected to be recognized over a weighted average period of 3.50 years. The following table presents the activity for restricted stock:

Grant Date

Fair Value of

Restricted

Stock that

Weighted

Vested During

Number of

Average Grant

The Year

Shares

Date Fair Value

(in thousands)

Unvested as of December 31, 2020
0 $ 0
Granted
14,500 11.30
Vested
0 0 $ 0
Forfeited
0 0
Unvested as of June 30, 2021
14,500 $ 11.30
38
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 9. Commitments and Contingencies

Litigation

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

Financial Instruments with Off-Balance Sheet Risk

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

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Bank’s commitments at June 30, ~~2020~~ 2021 and December 31, ~~2019~~ 2020 is as follows:

June 30, December 31,
June 30,

December 31,

(dollars in thousands)

2020
2019
2021

2020

Commitments to extend credit
$ 107,134 $ 95,190 $ 121,634 $ 111,778
Standby letters of credit
1,328 1,313 551 1,260
$ 108,462 $ 96,503 $ 122,185 $ 113,038

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

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

Concentrations of Credit Risk

Substantially all of the Bank’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Bank’s market area and such customers are generally depositors of the Bank. Investments in state and municipal securities involve governmental entities within and outside the Bank’s market area. The concentrations of credit by type of loan are set forth in Note 3. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Bank’s primary focus is toward small business and consumer transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers in excess of $5,000,000. The Bank has cash and cash equivalents on deposit with financial institutions which exceed federally insured limits.

35
39

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 9.10. Financial Instruments

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of June 30, ~~2020~~ 2021 and December 31, ~~2019.~~ 2020. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as ~~Federal Home Loan Bank~~FHLB and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of the fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

For loans, the carrying amount is net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASU No. ~~2016-01,~~2016-01, the fair value of loans as of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, was measured using an exit price notion.

Fair Value Measurements

Fair Value Measurements

(dollars in thousands)

Carrying
Amount

Fair
Value

Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Carrying
Amount

Fair
Value

Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

June 30, 2020

June 30, 2021

Financial Instruments – Assets

Net Loans
$ 645,945 $ 642,553 $ - $ 642,352 $ 201 $ 692,037 $ 684,336 $ 0 $ 684,147 $ 189

Financial Instruments – Liabilities

Time Deposits
191,856 194,113 - 194,113 - 200,651 201,651 0 201,651 0
FHLB Advances
10,000 9,671 - 9,671 - 10,000 9,842 9,842 0 0
PPPLF Advances
5,375 5,375 - 5,375 -

December 31, 2019

December 31, 2020

Financial Instruments – Assets

Net Loans
$ 566,460 $ 557,054 $ - $ 556,851 $ 203 $ 659,195 $ 653,454 $ 0 $ 653,255 $ 199

Financial Instruments – Liabilities

Time Deposits
191,988 192,365 - 192,365 - 194,419 196,522 0 196,522 0
FHLB Advances
10,000 10,021 - 10,021 - 10,000 9,765 9,765 0 0

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

36
40

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 9.10. Financial Instruments, continued

Fair Value Hierarchy

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

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

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

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

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

Investment Securities Available for Sale

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

~~Impaired~~ Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. If a loan is identified as individually impaired, management measures impairment in accordance with applicable accounting guidance. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2021 and December 31, 2020, a small percentage of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with accounting standards, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price the Company records the impaired loan as nonrecurring Level 2. When the fair value is based on either an external or internal appraisal and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Derivative Assets and Liabilities
Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are not readily available. Management engages third-party intermediaries to determine the fair market value of these derivative instruments and classifies these instruments as Level 2. Examples of Level 2 derivatives are interest rate swaps, caps and floors. No derivative instruments were held as of June 30, 2021 and December 31, 2020.
3741

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note 9.10. Financial Instruments, continued
Assets Recorded at Fair Value on a Recurring Basis

(dollars in thousands)

Total

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

June 30, 2020

June 30, 2021

Investment securities available for sale

U.S. Government agencies
$ 19,546 $ 0 $ 19,546 $ 0
Mortgage-backed securities
49,469 0 49,469 0
Corporate securities
1,500 0 1,500 0
State and municipal securities
32,380 0 32,380 0
Total assets at fair value
$ 102,895 $ 0 $ 102,895 $ 0

December 31, 2020

Investment securities available for sale

Mortgage-backed securities
$ 18,590 $ - $ 18,590 $ - $ 15,684 $ 0 $ 15,684 $ 0
Corporate securities
1,438 - 1,438 - 1,500 0 1,500 0
State and municipal securities
12,978 - 12,978 - 16,323 0 16,323 0
Total assets at fair value
$ 33,006 $ - $ 33,006 $ - $ 33,507 $ 0 $ 33,507 $ 0

December 31, 2019

Investment securities available for sale

Mortgage-backed securities
$ 19,504 $ - $ 19,504 $ -
Corporate securities
1,433 - 1,433 -
State and municipal securities
11,944 - 11,944 -
Total assets at fair value
$ 32,881 $ - $ 32,881 $ -

No liabilities were recorded at fair value on a recurring basis as of June 30, ~~2020~~ 2021 and December 31, ~~2019.~~ 2020. There were no significant transfers between levels during the ~~six-month and three-month periods~~six-month period ended June 30, ~~2020~~ 2021 and the year ended December 31, ~~2019.~~2020.

Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. No liabilities were recorded at fair value on a nonrecurring basis at June 30, ~~2020~~ 2021 and December 31, ~~2019.~~ 2020. Assets measured at fair value on a nonrecurring basis are included in the table below.

(dollars in thousands)

Total

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

June 30, 2020

June 30, 2021

Impaired loans
$ 201 $ - $ - $ 201 $ 189 $ 0 $ 0 $ 189
Total assets at fair value
$ 201 $ - $ - $ 201 $ 189 $ 0 $ 0 $ 189

(dollars in thousands)

Total

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

December 31, 2019

December 31, 2020

Impaired loans
$ 203 $ - $ - $ 203 $ 199 $ 0 $ 0 $ 199
Total assets at fair value
$ 203 $ - $ - $ 203 $ 199 $ 0 $ 0 $ 199

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, the significant unobservable inputs used in the fair value measurements were as follows:

Fair Value at
June 30,
2020

Fair Value at
December 31,
2019

Valuation Technique

Significant
Unobservable
Inputs

General Range
of Significant
Unobservable
Input Values

Impaired Loans
$ 201 $ 203
Appraised
Value/Discounted
Cash Flows/Market
Value of Note

Discounts to reflect
current market
conditions,
ultimate
collectability, and
estimated costs to sell
0 – 10%

Fair Value at
June 30,
2021

Fair Value at
December 31,
2020

Valuation Technique

Significant
Unobservable
Inputs

General Range
of Significant
Unobservable
Input Values

Impaired Loans
$ 189 $ 199
Appraised Value/Discounted Cash Flows/Market Value of Note

Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell
0 - 10%

3842

Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

Note ~~10.~~11. Short-Term Debt

At June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, the Bank had no0 debt outstanding classified as short-term.

At June 30, ~~2020,~~ 2021, the Bank had established unsecured lines of credit of approximately ~~$50.0~~$68.0 million with correspondent banks to provide additional liquidity if, and as needed. In addition, the Bank has the ability to borrow up to approximately ~~$169.0~~$216.6 million from the ~~Federal Home Loan Bank,~~FHLB, subject to the pledging of collateral.

Note ~~11.~~12. Long-Term Debt

At June 30, 2021 and December 31, 2020, the Bank’s long-term debt consisted of a $10.0 million advance from ~~FHLB and a $5.4 million PPPLF advance from the Federal Reserve Bank. At December 31, 2019, the Bank’s long-term debt consisted of the $10.0 million advance from~~ FHLB.
The ~~FHLB~~ advance, which is secured by substantially all the Bank’s ~~1-4~~1-4 family loans, is scheduled to mature on December 6, 2029. Interest on the advance was fixed at 0.819 percent and the advance is convertible by FHLB to a variable rate quarterly on September ~~8, 2020.~~ 7, 2021. The Bank has the option to repay the advance amount in whole or in part on the conversion date.

To bolster to effectiveness of the SBA-PPP, the Federal Reserve provides liquidity to participating financial institutions through term financing backed by SBA-PPP loans to small businesses. The PPPLF extends credit on a non-recourse basis to eligible financial institutions that originate SBA-PPP loans, taking the loans as collateral at face value. On April 20, 2020, the Bank borrowed $5.4 million in PPPLF funding, that has a maturity date of April 15, 2022 and is secured by $5.4 million in SBA-PPP loans. The interest rate on the PPPLF is 35 basis points. The Bank may request additional PPPLF funding through September 30, 2020.
39

~~Parkway Acquisition Corp. and Subsidiary~~
~~Notes to Consolidated Financial Statements~~
~~(unaudited)~~
Note 12.13. Capital Requirements

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement, and is not obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of June 30, ~~2020~~ 2021 and December 31, ~~2019,~~ 2020, respectively. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

Actual

For Capital
Adequacy Purposes

To Be Well-
Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2020

Total Capital (to risk weighted assets)
$ 81,303 13.80 % $ 47,138 8.00 % $ 58,922 10.00 %
Tier 1 Capital (to risk weighted assets)
$ 76,609 13.00 % $ 35,353 6.00 % $ 47,138 8.00 %
Common Equity Tier 1 (to risk weighted assets)
$ 76,609 13.00 % $ 26,515 4.50 % $ 38,299 6.50 %
Tier 1 Capital (to average total assets)
$ 76,609 10.10 % $ 30,341 4.00 % $ 37,926 5.00 %

December 31, 2019

Total Capital (to risk weighted assets)
$ 78,652 13.53 % $ 46,499 8.00 % $ 58,124 10.00 %
Tier 1 Capital (to risk weighted assets)
$ 74,726 12.86 % $ 34,874 6.00 % $ 46,499 8.00 %
Common Equity Tier 1 (to risk weighted assets)
$ 74,726 12.86 % $ 26,156 4.50 % $ 37,780 6.50 %
Tier 1 Capital (to average total assets)
$ 74,726 10.80 % $ 27,680 4.00 % $ 34,599 5.00 %

Actual

For Capital
Adequacy Purposes

To Be Well-
Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2021

Total Capital (to risk weighted assets)
$ 87,705 12.74 % $ 55,069 8.00 % $ 68,836 10.00 %
Tier 1 Capital (to risk weighted assets)
$ 82,327 11.96 % $ 41,302 6.00 % $ 55,069 8.00 %
Common Equity Tier 1 (to risk weighted assets)
$ 82,327 11.96 % $ 30,976 4.50 % $ 44,743 6.50 %
Tier 1 Capital (to average total assets)
$ 82,327 8.89 % $ 37,055 4.00 % $ 46,319 5.00 %

December 31, 2020

Total Capital (to risk weighted assets)
$ 84,176 13.10 % $ 51,409 8.00 % $ 64,261 10.00 %
Tier 1 Capital (to risk weighted assets)
$ 79,240 12.33 % $ 38,557 6.00 % $ 51,409 8.00 %
Common Equity Tier 1 (to risk weighted assets)
$ 79,240 12.33 % $ 28,918 4.50 % $ 41,770 6.50 %
Tier 1 Capital (to average total assets)
$ 79,240 9.50 % $ 33,354 4.00 % $ 41,692 5.00 %

On September 17, 2019 the ~~Federal Deposit Insurance Corporation~~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,~~framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. 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.

43
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 13. Capital Requirements, continued
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~~$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 June 30, ~~2020,~~ 2021, Call Report. At this time the Company has elected not to opt into the CBLR framework for the Bank, but may opt into the CBLR framework in the future.

Note 13.14. Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed the events occurring through the date the consolidated financial statements were issued and no subsequent events occurred requiring accrual or disclosure.

4044

Part I.Financial Information

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

General

The following discussion provides information about the major components of the results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Critical Accounting Policies

For a discussion of the Company’s critical accounting policies, including its allowance for loan losses and asset impairment judgments, see Note 1 in the Notes to Consolidated Financial Statements above, and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Executive Summary

●
Net income was ~~$1.1~~$2.3 million, or $0.38 per share, in the second quarter of ~~2020,~~2021, compared to ~~$1.7~~$1.1 million, or $0.18 per share, in the second quarter of ~~2019. Net~~2020. For the six months ended June 30, 2021, net income was $4.1 million, or $0.69 per share, compared to net income of $2.8 million, or $0.46 per share, for the six months ended June 30, ~~2020, compared to $3.4 million for the six months ended June 30, 2019.~~2020.
●
Earnings per share were $0.18 in the second quarter of 2020, compared to $0.28 in the second quarter of 2019. Earnings per share were $0.46 for the first six months of 2020, compared to $0.55 in the prior period comparison.

●
Net interest margin (“NIM”) was ~~3.95%~~3.69% for the second quarter ~~2020,~~of 2021, compared to ~~4.54%~~3.95% in the second quarter of 2019. The primary factor in the NIM compression in the second quarter of 2020 can be primarily attributed to the swift reduction in short term interest rates towards the end of the first quarter of 2020, as well as continual competitive pressure on loan rates.2020.
●
Total assets increased by $87.9 million, or 12.45%, to $794.2 million at June 30, 2020 from $706.3 million at December 31, 2019. The increase in total assets during the first six months of 2020 mainly related to increases in loans and deposits from the SBA-PPP program.

●
Total loans increased during the first six months of ~~2020~~2021 by ~~$80.2~~$33.3 million, or ~~14.07%~~5.01%, to ~~$650.6~~$697.4 million at June 30, ~~2020~~2021 compared to ~~$570.4~~$664.1 million at December 31, ~~2019,~~2020, primarily due to ~~SBA-PPP loans.~~organic loan growth and the 2^nd round of the Small Business Administration Paycheck Protection Program (“SBA-PPP”).

●
Total deposits increased ~~by $80.0~~$90.8 million, or ~~13.09%~~12.02%, to ~~$691.2~~$846.3 million at June 30, ~~2020~~2021 from ~~$611.2~~$755.5 million at December 31, ~~2019, due to funds from~~2020. The increases in deposit balances came as a result of the Bank’s participation in the SBA-PPP ~~loan program.~~program, government stimulus programs, branch expansion into new markets, and growth in our existing locations.

●
Return on average assets ~~decreased~~increased to 0.99% for the quarter ended June 30, 2021, from 0.58% for the quarter ended June 30, ~~2020, from 1.03% for the quarter ended June 30, 2019.~~2020.

●
Return on average equity ~~decreased~~increased to 10.74% for the quarter ended June 30, 2021, from 5.36% for the quarter ended June 30, ~~2020, from 8.92% for the quarter ended June 30, 2019.~~2020.

●
Earnings for the first six months of ~~2020~~2021 represented a return on average assets ~~0.75%~~of 0.93% and a return on average equity of ~~6.78%~~9.76%, compared to ~~1.02%~~0.75% and ~~8.87%~~6.78%, respectively, for the first six months of ~~2019.~~2020.
~~Coronavirus (“COVID-19”) Response~~
With the COVID-19 outbreak and declaration of a pandemic by the World Health Organization on March 11, 2020, the Company has remained focused on protecting the health and safety of its employees and customers, as well as the communities served, while continuing its business operations.
~~Operational Initiatives~~

●
~~Pandemic response team meets on at least a weekly basis and actively monitors local and state case data, as well as guidance released by regulators and banking associations.~~The Company repurchased 35,000 shares through the share repurchase program during the second quarter of 2021.
Coronavirus (“COVID-19”) Response

●
~~All in-person meetings are closely managed~~The Bank has shifted its branch lobby operations over the past year in accordance with government mandates and ~~are held on an as needed basis.~~by taking case count data into consideration. In the first quarter of 2021, the Bank reopened its lobby doors in addition to continuing to serve its customers through drive-thru and online banking services.

●
~~Employees are working remotely, temporarily relocated or are working alternate days to increase social distancing.~~The Bank began receiving requests for loan deferments on March 23, 2020 and as of June 30, 2021, four loans with total outstanding balances of $2.8 million remained in deferment status.

●
~~Branch~~The Bank participated in the SBA-PPP and ~~operational offices are cleaned and sanitized regularly. Employees have access to masks, gloves and disinfectant.~~gross SBA-PPP loans totaling $65.6 million with net deferred fees of $4.2 million remain on the balance sheet as of June 30, 2021. Contractual interest earned on SBA-PPP loans totaled $183 thousand in the second quarter of 2021, while net fees recognized totaled $727 thousand in the second quarter of 2021.

41
45

Part I.Financial Information
~~Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
~~Coronavirus (“COVID-19”) Response, continued~~
~~Operational Initiatives~~~~, continued~~

●Item 2.
~~Several~~Management’s Discussion and Analysis of ~~our branch lobbies are open to the public with limitations. Masks are required for entry, sneeze guards have been placed in customer facing areas,~~Financial Condition and ~~social distancing signs have been placed on the floors. The remaining facilities are utilizing drive through facilities and providing branch lobby services by appointment.~~
●Results of Operations
~~Management provides updates to employees and directors on a regular basis.~~
●
~~Call center hours have been increased to assist with customer inquiries.~~
~~Small Business Administration Paycheck Protection Program~~
As a qualified SBA lender, we were automatically authorized to originate SBA-PPP loans and began taking applications on April 3, 2020. Through July 31, 2020, the Bank had closed and funded approximately $81.1 million or 1,235 SBA-PPP loans.
The Bank had received approximately $3.1 million of processing fees from the SBA through June 30, 2020 and an additional $96 thousand during the month of July 2020. These fees, net of direct costs relating to the origination of these loans, have been deferred and are being amortized over the life of the loans. The amount of net deferred fees recorded to interest income through June 30, 2020 was approximately $278 thousand. Loan forgiveness payments will be treated as prepayments and recognized as they occur. A summary of our SBA-PPP loans as of June 30, 2020 is as follows:
(dollars in thousands)

# of SBA

Balance Less

SBA Tier

Approved

Mix

Unearned Fees

Mix

$2 million to $10 million
2 0.17 % $ 7,249 9.40 %
Over $350,000 to less than $2 million
40 3.49 % 26,763 34.71 %
Up to $350,000
1,106 96.34 % 43,093 55.89 %
Total
1,148 100.00 % $ 77,105 100.00 %
~~Loan Deferment Requests~~
The Bank, like many other financial institutions, has received requests to defer principal and/or interest payments, and has agreed to such deferrals or is in the process of doing so on a case by case basis. The banking regulatory agencies, through an Interagency Statement dated April 7, 2020, are encouraging financial institutions to work prudently with borrowers who request loan modifications or deferrals as a result of COVID-19.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for purposes of COVID-19 related modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. These loans are accruing interest, but the Bank is reserving for these loans separately.
42

~~Part I. Financial Information~~
~~Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
~~Loan Deferment Requests, continued~~
The Bank began receiving requests for loan deferments on March 23, 2020. The payment accommodation provided by the Bank is generally up to three months with the Bank retaining the sole option to extend the payment accommodation for an additional three months. Payments received upon the expiration of the payment accommodation period will generally be first applied to interest accrued, then towards escrow advances, and any remaining amount towards principal. As of July 31, 2020, the Bank had approved 242 requests for loan payment deferment of approximately $63.6 million in loans, or 9.78% of the loan portfolio under the CARES Act. Of these deferrals 146 totaling approximately $37.2 million had expired as of June 30, 2020. 17 of these deferments totaling approximately $8.8 million requested additional payment accommodations, which have been approved. 129 of these deferments totaling approximately $28.4 million had payments scheduled to resume no later than July 31 and had not requested another deferment.
~~Liquidity and Capital Resources~~
Parkway was well positioned with adequate levels of cash and liquid assets as of June 30, 2020, as well as borrowing capacity of over $219.0 million. At June 30, 2020, Parkway’s equity to asset ratio was 10.46% and the Bank’s capital was in excess of regulatory requirements. The Company will continue to monitor the effects of COVID-19 in determining future cash dividends and any requirements for additional capital each quarter. Parkway declared and paid dividends of $794 thousand, and had $867 thousand of stock repurchases for the first six months of 2020.
Results of Operations

Results of Operations for the Three Months ended June 30, ~~2020~~2021 and ~~201~~92020
Parkway recorded net income of $2.3 million, or $0.38 per share, for the quarter ended June 30, 2021 compared to net income of $1.1 million, or $0.18 per share, for the ~~quarter ended June 30, 2020 compared to net income of $1.7 million, or $0.28 per share, for the~~ same period in ~~2019.~~2020. Income tax expense totaled $592 thousand for the second quarter of 2021 compared to $258 thousand for the second quarter of ~~2020 compared to $411 thousand for the second quarter of 2019.~~2020. Net income before income taxes totaled $2.9 million, or $0.48 per share, for the quarter ended June 30, 2021 compared to $1.4 million, or $0.22 per share, for the ~~quarter ended June 30, 2020 compared to $2.1 million, or $0.35 per share, for the~~ same period in ~~2019.~~2020. Second quarter earnings represented an annualized return on average assets (“ROAA”) of ~~0.58%~~0.99% and an annualized return on average equity (“ROAE”) of ~~5.36%~~10.74% for the quarter ended June 30, ~~2020,~~2021, compared to ~~1.03%~~0.58% and ~~8.92%~~5.36%, respectively, for the quarter ended June 30, ~~2019.~~2020.

~~Total~~Net interest income ~~increased by $71 thousand~~after provision for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, while interest expense on deposits increased by $147 thousand over the same period. Interest income on loans increased by $300 thousand from the quarter ended June 30, 2019 compared to June 30, 2020. The increase in interest income was attributable primarily to the loan growth experienced in the second half of 2019 as well as an increase of $80.2 million in gross loans in the first half of 2020. The second quarter of 2020 included SBA-PPP loans originated, net fees of $278 thousand. Accretion of purchased loan discounts increased interest income by $259 thousandlosses in the second quarter of ~~2020~~2021 was $7.7 million compared to $395 thousand in the second quarter of 2019, representing a decrease of $136 thousand. Interest earnings from deposits with correspondents as well as federal funds sold decreased by $123 thousand for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, due to the Fed rate reductions during the second half of 2019 and first quarter of 2020. Interest earned on investments decreased by $109 thousand for the second quarter of 2020 compared the same period last year, primarily as a result of the changes in the portfolio balances in the quarterly comparisons.
Interest expense on deposits increased by $147 thousand for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019, as a result of the increase in interest bearing deposit balances as discussed previously. Amortization of premiums on acquired time deposits, which reduces interest expense, totaled $48 thousand in the second quarter of 2020, compared to $103 thousand in the second quarter of 2019, representing a decrease of $55 thousand. Interest on borrowings increased $24 thousand for the second quarter of 2020 compared to the second quarter of 2019 as a result of $10.0$6.4 million in borrowings with the Federal Home Loan Bank during the second half of 2019 as well as borrowings of $5.4 million from the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) in the second quarter of 2020.
43
~~Part I. Financial Information~~
~~Item 2.      Management’s Discussion and Analysis~~Total interest income was $8.5 million in the second quarter of ~~Financial Condition and Results of Operations~~
~~Results of Operations, continued~~
~~Results of Operations~~2021 compared to $7.7 million for the ~~Three Months ended~~same period last year. Interest income on loans increased in the quarterly comparison primarily due to organic loan growth and SBA-PPP related interest and fees. Interest income on securities increased by $211 thousand in the quarterly comparison, as a result of the $69.9 million increase in the securities portfolio from June 30, 2020 to June 30, 2021.
The Company successfully reduced interest expense on deposits by $215 thousand, or 26.00%, in the quarterly comparison, reflecting continued rate reductions in deposit offerings. Lower-cost core deposits (demand deposits, savings, and ~~2019, continued~~money market accounts) grew by $31.2 million or $5.08% during the second quarter of 2021. The growth in core deposits can be attributed to SBA-PPP funding and government stimulus programs, in addition to organic growth in our current markets.

The provision for loan losses was $195 thousand for the quarter ended June 30, 2021, compared to $414 thousand for the quarter ended June 30, ~~2020,~~2020. During the second quarter of 2021, Parkway recorded $96 thousand in net recoveries compared to ~~$276~~$12 thousand in net charge-offs for the second quarter ~~ended June 30, 2019. The increase in the provision was due mainly to growth in the Bank’s loan portfolio as well as management’s assessment~~ of ~~the impact of the COVID-19 pandemic on certain qualitative and environmental factors.~~2020. The reserve for loan losses at June 30, ~~2020~~2021 was approximately ~~0.72%~~0.77% of total loans, compared to ~~0.69%~~0.72% at June 30, ~~2019. Since SBA-PPP loans carry a 100% government guaranty, management does not anticipate any material credit losses attributable to these loans.~~2020. Management’s estimate of probable credit losses inherent in the acquired Cardinal Bankshares Corporation and Great State Bank loan ~~portfolio~~portfolios was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired ~~loans in addition to the previously acquired loan portfolio from the merger with Cardinal Bankshares Corporation (“Cardinal”).~~loans. As of June 30, ~~2020,~~2021, the remaining unaccreted discount on the acquired loan portfolios totaled ~~$2.5~~$1.4 million. This remaining discount can be used for credit losses if a loss occurs on individual loans in the purchased portfolios.

Total noninterest income was $1.6 million in the second quarter of 2021 compared to $1.2 million in the second quarter of ~~2020 compared to $1.3 million in the second quarter of 2019.~~2020. The ~~decrease~~increase was primarily a result of ~~a decrease in service charges on deposit accounts of $107 thousand, a decrease of $119 thousand in other income, offset by~~ an increase in ~~mortgage origination income of $126 thousand. Deposit account-based~~ service charges and fees ~~reflect the impact~~ of ~~waived deposit~~$205 thousand and ~~transaction fees in the quarterly comparisons, as~~ a ~~result of the COVID-19 pandemic. Stimulus payments also led to a decrease in overdraft fees in the second quarter of 2020. The decrease of $119 thousand~~one-time lease termination fee recorded in other income was due to nonrecurring gains recognized from the sale of bank premises in the second quarter of 2019 totaling $121 thousand. Increased demand for mortgage products primarily driven by lowered interest rates resulted in mortgage origination fees of $252 thousand for the second quarter of ~~2020 compared to $126 thousand for the second quarter of 2019.~~2021 totaling $200 thousand.

Total noninterest expenses increased by ~~$461~~$198 thousand for the quarter ended June 30, ~~2020~~2021 compared to the quarter ended June 30, ~~2019.~~2020, primarily due to employee and branch costs associated with branch expansion in North Carolina that occurred in 2020. Salary and benefit costs increased by ~~$330~~$20 thousand, due to the increase in employees, primarily from the addition of staffing in our newly opened Mocksville, Lenoir, Hickory, and Hudson, North Carolina locations. In addition to branch staffing, the Bank added three commercial lenders to existing markets in the second half of 2019, whose salary and benefit costs therefore were not reflected in the 2019 second quarter numbers. Occupancywhile occupancy and equipment expenses increased by ~~$61 thousand and data processing expenses~~$100 thousand. Professional fees increased by ~~$105 thousand from the second quarter of 2019 to 2020, due to the addition of new branch facilities. Amortization of core deposit intangibles decreased by $26~~$56 thousand in the ~~quarter to quarter~~quarter-to-quarter comparison.

Income tax expense decreased by ~~$153~~$334 thousand in the ~~quarter to quarter~~quarter-to-quarter comparison, totaling $592 thousand for the quarter ended June 30, 2021 compared to $258 thousand for the quarter ended June 30, ~~2020 compared to $411 thousand for the quarter ended June 30, 2019.~~2020. The ~~decrease~~increase was ~~mainly~~primarily due to ~~the decrease~~an increase in net income before taxes of ~~$791 thousand~~$1.5 million in the quarterly ~~comparison.~~comparison
46
Part I.Financial Information
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the Six Months ended June 30, ~~2020~~2021 and ~~2019~~2020
For the first half of 2021, net interest income after provision for loan losses was $14.9 million compared to $13.0 million for the first half of 2020. Interest income increased by $1.2 million, primarily due to an increase in loan interest income of $974 thousand, and a $290 thousand increase from the securities portfolio during the first half of 2021, compared to the first half of 2020. Interest expense on deposits decreased by $359 thousand for the six months ended June 30, ~~2020, total interest income increased by $270 thousand~~2021 compared to the ~~six-month~~same period ~~ended June 30, 2019.~~last year. As ~~noted in~~previously discussed, this is a reflection of the ~~above discussion, increases in~~reduced rates for interest ~~income on loans due to loan growth~~bearing demand deposits, time deposits, and fees related to the SBA-PPP program was partially offset by decreases in interest rates and accretion of purchase discounts on acquired portfolios. Accretion of purchased loan discounts increased interest income by $705 thousand insavings products.
For the first six months of ~~2020 compared to $921 thousand in the first six months of 2019, representing a decrease of $216 thousand. Interest~~2021, noninterest income ~~on federal funds sold decreased~~increased by ~~$176~~$400 thousand compared to the same period last year. ~~Earnings for the first six months of 2020 represented an annualized ROAA of 0.75% and an annualized ROAE of 6.78%, compared to 1.02% and 8.87%, respectively, for the first six months of 2019.~~
44
~~Part I. Financial Information~~
~~Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
~~Results of Operations, continued~~
~~Results of Operations for the Six Months ended June 30, 2020 and 2019~~~~, continued~~
Interest expense on deposits increased by $390 thousand for the six-months ended June 30, 2020 compared to the same period last year. Amortization of premiums on acquired time deposits, which reduces interest expense, totaled $108 thousand in the first six months of 2020, compared to $219 thousand in the first six months of 2019, representing a decrease of $111 thousand. Interest on borrowings increased by $45 thousand due to $10.0 million in borrowings from the Federal Home Loan Bank in September of 2019, and $5.4 million in borrowings through the PPPLF in the second quarter of 2020.
The provision for loan losses for the six-month period ended June 30, 2020 was $736 thousand, compared to $514 thousand for the six-month period ended June 30, 2019. During the first six months of 2020, Parkway recognized $25 thousand in net recoveries compared to $191 thousand in net charge-offs for the first six months of 2019. The increase in provision for the first half of 2020 was due primarily to the overall loan growth experienced in the second half of 2019 and first half of 2020 as well as management’s assessment of the potential impact from the COVID-19 pandemic.
~~Noninterest income increased by $297 thousand for the first six months of 2020, compared to the same period in 2019.~~ The increase was mainly due to an increase in mortgage origination income of ~~$171~~$205 thousand and an increase in ~~realized gains of $216 thousand, offset by a decrease in deposit account-based~~ service charges and fees of ~~$46 thousand, as previously discussed. As noted above nonrecurring~~$193 thousand. During the first half of 2020, there were realized gains ~~from bank premise sales totaled $121 thousand in 2019, and nonrecurring~~on securities of $212 thousand. During the first six months of 2021, while there were no realized gains ~~realized on~~recognized, the ~~sale~~Company had a one-time lease termination fee of ~~investments totaled $212 thousand in 2020. Excluding these nonrecurring transactions, noninterest income increased by $206 thousand for~~$200 thousand.
For the six-month period ended June 30, ~~2020, compared to the same period last year.~~
~~Total~~2021, total noninterest expenses increased by ~~$689~~$554 thousand ~~for the six-month period ended June 30, 2020~~ compared to the same period in ~~2019.~~2020, primarily due to employee and branch costs associated with branch expansion. Salary and benefit cost increased by ~~$642~~$106 thousand, ~~due to the increase in employees resulting from branch expansion into North Carolina markets as well as the addition of commercial lenders as discussed above. Occupancy~~occupancy and equipment expenses increased by ~~$119~~$231 thousand, and data processing expenses increased by ~~$152~~$83 thousand from the first six months of ~~2019~~2020 to ~~2020, due to the addition of branch facilities. Amortization of core deposit intangibles decreased by $52 thousand for the first six months of 2020, compared to same period in 2019.~~2021.

In total, income before taxes ~~decreased~~increased by ~~$779 thousand~~$1.8 million over the first six months of ~~2020~~2021 compared to the first six months of ~~2019.~~2020. Income tax expense ~~decreased~~increased by ~~$152~~$376 thousand over the prior year, resulting in ~~a decrease~~an increase in net income of ~~$627 thousand~~$1.4 million for the six months ended June 30, ~~2020,~~2021, compared to the same period in ~~2019.~~    2020.
Financial Condition

Total assets increased by ~~$87.9~~$91.5 million, or ~~12.45%~~10.70%, to ~~$794.2~~$946.9 million at June 30, ~~2020~~2021 from ~~$706.3~~$855.4 million at December 31, ~~2019.~~2020. The increase in total assets during the first six months of ~~2020~~2021 mainly related to increases in loans and ~~deposits from the SBA-PPP program.~~deposits.

Total loans increased during the first six months of ~~2020~~2021 by ~~$80.2~~$33.3 million, or ~~14.07%~~5.01%, to ~~$650.6~~$697.4 million at June 30, ~~2020~~2021 compared to ~~$570.4~~$664.1 million at December 31, ~~2019.~~2020. The increases in loan balances can be attributed to organic loan growth and the 2^nd round of the SBA-PPP program. Gross loans ~~for the first six months~~as of ~~2020~~June 30, 2021 included ~~$79.9~~$65.6 million in SBA-PPP loans, and net deferred fees of ~~$2.9~~$4.2 million.
Asset quality has remained strong, with a ratio of nonperforming loans to total loans of 0.29% at June 30, 2021 compared to 0.73% at June 30, 2020. The allowance for loan losses at June 30, 2021 was approximately 0.77% of total loans, compared to 0.72% at June 30, 2020. The allowance ratio excluding $61.5 million ~~originated during the second quarter~~ of ~~2020.~~net SBA-PPP loans would have been 0.84% at June 30, 2021.

Investment securities increased by ~~$125 thousand to $33.0~~$69.4 million ~~at June 30, 2020 from $32.9 million at December 31, 2019.~~
~~Total deposits increased by $80.0 million, or 13.09%, to $691.2 million at June 30, 2020 from $611.2 million at December 31, 2019. The increase~~ during the first six months of 2021 to $102.9 million at June 30, 2021 from $33.5 million at December 31, 2020.�� The increase in the first six months of 2021 was the result of $75.2 million in purchases, primarily offset by paydowns of $3.2 million and maturities of $1.3 million.
Total deposits increased $90.8 million, or 12.02%, to $846.3 million at June 30, 2021 from $755.5 million at December 31, 2020. Total deposits increased by $155.1 million, or 22.44%, from June 30, 2020 ~~can be primarily attributed~~ to ~~funds provided to depositors~~June 30, 2021. The increases in deposit balances came as a result of the ~~SBA- PPP loan~~Bank’s participation in the SBA-PPP program, ~~as well as the Bank’s~~government stimulus programs, branch expansion into new markets, and growth in our existing locations. Total increases for the ~~fourth quarter of 2019 and~~ first half of ~~2020.~~2021 included a $42.8 million increase in noninterest bearing deposits, while interest bearing deposits increased by $48.0 million over the same time period. The increase in interest bearing deposits was due to an $12.8 million increase in interest-bearing demand deposits, a $15.3 million increase in money markets, a $13.6 million increase in saving accounts, and a $6.2 million increase in time deposits.

4547

Part I.Financial Information

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

Financial Condition, continued

Nonperforming assets, including nonaccrual loans, loans past due more than ninety days and foreclosed assets, decreased from ~~$4.98~~$4.80 million at December 31, ~~2019~~2020 to ~~$4.77~~$1.99 million at June 30, ~~2020.~~2021. There were no foreclosed assets and no loans past due more than ninety days and still accruing interest at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

Nonaccrual loans decreased from ~~$4.98~~$4.80 million at December 31, ~~2019~~2020 to ~~$4.77~~$1.99 million at June 30, ~~2020.~~2021. Loans are generally placed in nonaccrual status when principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. The following table summarizes nonperforming assets:

June 30,

December 31,

(dollars in thousands)

2020

2019

Nonperforming Assets

Nonaccrual loans
$ 4,766 $ 4,979
Loans past due 90 days or more and still accruing interest
- -
Total nonperforming loans
4,766 4,979
Foreclosed assets
- -
Total nonperforming assets
$ 4,766 $ 4,979

Nonperforming assets to total assets
0.60 % 0.70 %
Nonperforming loans to total loans
0.73 % 0.87 %
June 30, December 31,
(dollars in thousands)

2021

2020

Nonperforming Assets

Nonaccrual loans
$ 1,992 $ 4,803
Loans past due 90 days or more and still accruing interest
- -
Total nonperforming loans
1,992 4,803
Foreclosed assets
- -
Total nonperforming assets
$ 1,992 $ 4,803

Nonperforming assets to total assets
0.21 % 0.56 %
Nonperforming loans to total loans
0.29 % 0.72 %

Loans less than 90 days past due may be placed in nonaccrual status if management determines that payment in full of principal or interest is not expected. Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof. Management continues to closely monitor nonperforming assets and their impact on earnings and loan loss reserves.

46
48

Part I.Financial Information

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

Financial Condition, continued

At June 30, ~~2020,~~2021, the allowance for loan losses included ~~$246~~$149 thousand specifically reserved for impaired loans in the amount of ~~$5.0~~$3.2 million. Based on impairment analysis, loans totaling $2.8 million were also considered to be impaired but did not require a specific reserve or the related reserve had previously been charged-off. Impaired loans at December 31, ~~2019~~2020 totaled ~~$7.8~~$6.2 million, of which $3.6 million required specific reserves of ~~$174~~$192 thousand.

Summary of Loan Loss Experience

Six

Six

months

months

Year

ended

ended

ended

(dollars in thousands)

June 30,

June 30,

December 31,

2020 2019 2019
Total loans outstanding at end of period
$ 650,599 $ 549,820 $ 570,353

Allowance for loan losses, beginning of period
$ 3,893 $ 3,495 $ 3,495

Charge offs:

Construction & development
- - -
Farmland
- (14 ) (13 )
Residential
- (32 ) (55 )
Commercial mortgage
- (41 ) (41 )
Commercial & agricultural
- (63 ) (77 )
Consumer & other
(78 ) (95 ) (212 )
Total charge-offs
(78 ) (245 ) (398 )

Recoveries:

Construction & development
4 - -
Farmland
- - -
Residential
11 8 8
Commercial mortgage
65 28 69
Commercial & agricultural
2 4 10
Consumer & other
21 14 54
Total recoveries
103 54 141
Net charge-offs
25 (191 ) (257 )

Provision for allowance
736 514 655
Allowance for loan losses at end of period
$ 4,654 $ 3,818 $ 3,893

Ratios:

Allowance for loan losses to loans at end of period
0.72 % 0.69 % 0.68 %
Net charge-offs to allowance for loan losses
0.54 % 5.00 % 6.60 %
Net charge-offs to provisions for loan losses
3.40 % 37.16 % 39.24 %
Summary of Loan Loss Experience

Six

Six

months

months

Year

ended

ended

ended

(dollars in thousands)

June 30,

June 30,

December 31,

2021

2020

2020

Total loans outstanding at end of period
$ 697,379 $ 650,599 $ 664,095

Allowance for loan losses, beginning of period
$ 4,900 $ 3,893 $ 3,893

Charge offs:

Construction & development
- - (8 )
Farmland
- - -
Residential
- - (48 )
Commercial mortgage
- - (61 )
Commercial & agricultural
- - (37 )
Consumer & other
(51 ) (78 ) (148 )
Total charge-offs
(51 ) (78 ) (302 )

Recoveries:

Construction & development
2 4 4
Farmland
- - -
Residential
2 11 11
Commercial mortgage
61 65 65
Commercial & agricultural
45 2 6
Consumer & other
26 21 34
Total recoveries
136 103 120
Net (charge-offs) recoveries
85 25 (182 )

Provision for allowance
357 736 1,189
Allowance for loan losses at end of period
$ 5,342 $ 4,654 $ 4,900

Ratios:

Allowance for loan losses to loans at end of period
0.77 % 0.72 % 0.74 %
Net (charge-offs) recoveries to allowance for loan losses
1.59 % 0.54 % (3.71 %)
Net (charge-offs) recoveries to provisions for loan losses
23.81 % 3.40 % (15.31 %)

Certain types of loans, such as option ARM ~~(adjustable rate~~(adjustable-rate mortgage) products, interest-only loans, subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans. The Bank has not offered these types of loans in the past and does not offer them currently. Junior-lien mortgages can also be considered higher risk loans. Our junior-lien portfolio at June 30, ~~2020~~2021 totaled ~~$4.3~~$3.8 million, or ~~0.66%~~0.55% of total loans. Historical charge-off rates in this category have not varied significantly from other real estate secured loans.

Stockholders’ equity increased by ~~$1.7~~$1.9 million, or ~~2.06%~~2.28%, to ~~$83.1~~$87.1 million at June 30, ~~2020~~2021 from ~~$81.4~~$85.1 million at December 31, ~~2019.~~2020. The increase was due to earnings of ~~$2.8~~$4.1 million ~~plus other comprehensive income~~offset by dividend payments of ~~$563~~$785 thousand, ~~less the payment of dividends of $794 thousand, less common~~ stock repurchases of ~~$867 thousand.~~$536 thousand, and a $898 thousand increase in accumulated other comprehensive losses due to unrealized losses on investment securities. Book value increased from ~~$13.27~~$14.08 per share at December 31, ~~2019~~2020 to ~~$13.71~~$14.47 per share at June 30, ~~2020.~~2021.

47
49

Part I.Financial Information

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

Liquidity

Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss. Unsecured federal fund lines available from correspondent banks totaled ~~$50.0~~$68.0 million at June 30, ~~2020.~~2021. The Bank had no balances outstanding on these lines as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. In addition, the Bank has the ability to borrow up to approximately ~~$169.0~~$216.6 million from the ~~Federal Home Loan Bank (“FHLB”),~~FHLB, subject to the pledging of collateral. The Bank had long-term FHLB advances of $10.0 million outstanding at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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

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

As a result of the steps described above, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs. The liquidity ratio (the level of liquid assets divided by total deposits plus short-term liabilities) was ~~9.6%~~19.3% and ~~9.9%~~15.0% for the periods ended June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. These ratios are considered to be adequate by management.

Capital Resources

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

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios at the Bank level which assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities. At June 30, ~~2020,~~2021, the Bank exceeded minimum regulatory capital requirements and is considered to be “well capitalized.”

At June 30, ~~2020,~~2021, Parkway’s equity to asset ratio was ~~10.46%~~9.19% and the Bank’s capital was in excess of regulatory requirements as discussed above. The Company will continue to monitor the effects of COVID-19 in determining future cash dividends and any requirements for additional capital each quarter. Parkway declared and paid dividends of ~~$794~~$785 thousand, and had ~~$867~~$536 thousand of stock repurchases for the first half of ~~2020.~~2021.

48
50

Part I.Financial Information

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

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934 as amended. These include statements as to expectations future financial performance and any other statements regarding future results or expectations. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by the use of words such as "believe," "expect," "intend," "anticipate," "estimate," or "project" or similar expressions. Our ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the ~~combined company~~Company and its subsidiaries include, but are not limited to: changes in interest rates, general economic conditions; the effects of the COVID-19 pandemic, including the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions; the effect of changes in banking, tax and other laws and regulations and interpretations or guidance thereunder; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal ~~Reserve Board;~~Reserve; the quality and composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the combined company’s market area; the implementation of new technologies; the ability to develop and maintain secure and reliable electronic systems; accounting principles, policies, and ~~guidelines~~guidelines; and other factors identified in Item 1A, “Risk Factors,” ~~in this Quarterly Report on Form 10-Q and~~ in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or clarify these forward‐looking statements, whether as a result of new information, future events or otherwise.

4951

Part I.Financial Information

Item 3.
~~Item 3.~~      Quantitative and Qualitative Disclosures about Market Risk

Not required.

5052

Part I.Financial Information

Item 4.
~~Item 4.~~      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

5153

Part II.Other Information

Item 1.
~~Item 1.~~ Legal Proceedings

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

Item 1A.
~~Item 1A.~~ Risk Factors

In connection with the information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Form 10-K for the year ended December 31, ~~2019~~2020 should be considered. These risks could materially and adversely affect our business, financial condition and results of operations. ~~Other than as set forth below, there~~There have been no material changes to the factors discussed in our Form 10-K.

The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations; the extent of such impacts are highly uncertain and difficult to predict.
Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus. These measures, including shelter in place orders and business limitations and shutdowns, have significantly contributed to rising unemployment and negatively impacted consumer and business spending.
The COVID-19 outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience adverse effects due to a number of operational factors impacting us or our customers or business partners, including but not limited to:
●Item 2.
~~credit losses resulting from financial stress experienced by our borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;~~
●
operational failures, disruptions or inefficiencies due to changes in our normal business practices necessitated by our internal measures to protect our employees and government-mandated measures intended to slow the spread of the virus;
●
~~possible business disruptions experienced by our vendors and business partners in carrying out work that supports our operations;~~
●
~~decreased demand for our products and services due to economic uncertainty, volatile market conditions and temporary business closures;~~
●
~~any financial liability, credit losses, litigation costs or reputational damage resulting from our origination of SBA-PPP loans; and~~
●
~~heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic.~~
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, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. In addition, the rapidly changing and unprecedented nature of COVID-19 heightens the inherent uncertainty of forecasting future economic conditions and their impact on our loan portfolio, thereby increasing the risk that the assumptions, judgments and estimates used to determine the allowance for loan losses and other estimates are incorrect. Further, our loan deferral program could delay or make it difficult to identify the extent of asset quality deterioration during the 90-day deferral period. As a result of these and other conditions, the ultimate impact of the pandemic is highly uncertain and subject to change, and we cannot predict the full extent of the impacts on our business, our operations or the global economy as a whole. To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 materialize, it could exacerbate the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, or otherwise materially and adversely affect our business, liquidity, financial condition and results of operations.
52
~~Part II. Other Information~~
~~Item 2.~~ Unregistered Sales of Equity Securities and Use of Proceeds

The following table details the Company’s purchase of its common stock during the second quarter of ~~2020.~~2021.

Total
number of
shares
purchased

Average
price
paid per
Share

Total number of
shares purchased
as part of
publicly
announced
program⁽¹⁾

Maximum
number of
shares that may
yet be purchased
under the plan⁽¹⁾

Total
number of
shares
purchased

Average
price
paid per
Share

Total number of
shares purchased
as part of
publicly
announced
program

Maximum
number of
shares that may
yet be purchased
under the plan ⁽¹⁾

Purchased 4/1 through 4/30
- $ - - 54,000 - $ - - 172,500
Purchased 5/1 through 5/31
- $ - - 204,000 20,000 $ 12.20 20,000 152,500
Purchased 6/1 through 6/30
6,500 $ 10.25 6,500 197,500 15,000 $ 12.18 15,000 137,500
Total during second quarter 2020
6,500 $ 10.25 6,500
Total during second quarter 2021
35,000 $ 12.19 35,000

⁽¹⁾
~~In January 2019,~~On February 17, 2021, the ~~Company announced that the~~Company’s Board of Directors ~~had authorized a 200,000 share common~~publicly announced the extension of the Company’s stock repurchase plan, ~~with an expiration date of January 2021. In May 2020,~~pursuant to which the Company ~~announced that the Board~~may purchase an aggregate of ~~Director had authorized an additional 150,000 shares to the common stock repurchase plan, bringing the aggregate total~~up to 350,000 shares of common ~~stock. To date 152,500 shares of common~~ stock ~~have been repurchased under the plan, leaving 197,500 shares of common stock that may be repurchased from time to time until~~through January ~~2021.~~2023.

Item 3.
Defaults Upon Senior Securities
None
Item 4.
Mine Safety Disclosures
None
Item 5.
Other Information
None
Item 6.
Exhibits

10.1
Amendment to Change in Control Agreement, dated May 18, 2021 by and between the Company and Jonathan L. Kruckow.
~~None~~
10.2
Amendment to Change in Control Agreement, dated May 18, 2021 by and between the Company and Lorina C. Vaught.

10.3
Amendment to Change in Control Agreement, dated May 18, 2021 by and between the Company and Beth R. Worrell.
~~Item 4.~~ ~~Mine Safety Disclosures~~

31.1
~~None~~
~~Item 5.~~ ~~Other Information~~
~~None~~
~~Item 6.~~ ~~Exhibits~~
~~31.1~~
Rule 15(d)-14(a) Certification of Chief Executive Officer.

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

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

101
~~101~~
The following materials from the Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2020,~~2021, formatted in Inline eXtensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

5354

Part II.Other Information

SIGNATURES

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

Parkway Acquisition Corp.
Date: August ~~14, 2020~~ 16, 2021
By:
/s/ Blake M. Edwards
Blake M. Edwards
President and Chief Executive Officer

By: /s/ Lori C. Vaught
~~By:~~ ~~/s/~~ Lori C. Vaught
~~Lori C. Vaught~~
Chief Financial Officer

5455

Virginia		47-5486027
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification Number)

101 Jacksonville Circle
Floyd, Virginia		24091
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☑	Smaller reporting company ☑

	Emerging growth company ☐

(dollars in thousands)	June 30,			December 31,			June 30,			December 31,
	2020			2019			2021			2020
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
Assets

Cash and due from banks	$	11,968		$	8,388		$	11,049		$	10,009
Interest-bearing deposits with banks		36,835			34,861			70,520			84,863
Federal funds sold		236			1,138			745			817
Investment securities available for sale		33,006			32,881			102,895			33,507
Restricted equity securities		2,416			2,394			2,209			2,416
Loans, net of allowance for loan losses of $4,654 at June 30, 2020 and $3,893 at December 31, 2019		645,945			566,460
Loans, net of allowance for loan losses of $5,342 at June 30, 2021 and $4,900 at December 31, 2020								692,037			659,195
Cash value of life insurance		18,071			17,855			18,520			18,304
Properties and equipment, net		26,074			23,437			28,150			26,591
Accrued interest receivable		2,576			2,072			2,601			2,355
Core deposit intangible		2,685			3,070			2,032			2,359
Goodwill		3,257			3,257			3,257			3,257
Deferred tax assets, net		1,588			985			1,783			1,019
Other assets		9,531			9,492			11,143			10,695
	$	794,188		$	706,290		$	946,941		$	855,387

Liabilities and Stockholders’ Equity
Liabilities and Stockholders’ Equity

Liabilities
Deposits
Noninterest-bearing	$	219,845		$	165,900		$	274,663		$	231,852
Interest-bearing		471,393			445,311			571,685			523,676
Total deposits		691,238			611,211			846,348			755,528

FHLB advances		10,000			10,000			10,000			10,000
Paycheck protection program liquidity facility advances		5,375			-
Accrued interest payable		126			132			88			124
Other liabilities		4,346			3,519			3,455			4,629
		711,085			624,862			859,891			770,281
Commitments and contingencies (Note 8)
Commitments and contingencies (Note 9)

Stockholders’ Equity
*Stockholders’ Equity*
Preferred stock, no par value; 5,000,000 shares authorized, none issued		-			-			0			0
Common stock, no par value; 25,000,000 shares authorized, 6,060,775 and 6,137,275 issued and outstanding at June 30, 2020 and December 31, 2019, respectively		-			-
Common stock, no par value; 25,000,000 shares authorized, 6,015,275 and 6,045,775 issued and outstanding at June 30, 2021 and December 31, 2020, respectively								0			0
Surplus		39,885			40,752			39,218			39,740
Retained earnings		43,579			41,600			49,251			45,887
Accumulated other comprehensive loss		(361	)		(924	)		(1,419	)		(521	)
		83,103			81,428			87,050			85,106
	$	794,188		$	706,290		$	946,941		$	855,387

	Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
	June 30,				June 30,					June 30,				June 30,
(dollars in thousands except share amounts)	2020		2019		2020		2019			2021		2020		2021		2020
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Interest income
Loans and fees on loans	$	7,440	$	7,140	$	14,859	$	14,261		$	8,080	$	7,440	$	15,833	$	14,859
Interest-bearing deposits in banks		26		40		153		98			29		26		66		153
Federal funds sold		-		109		3		179			0		0		0		3
Interest on taxable securities		150		264		321		540			353		150		594		321
Interest on nontaxable securities		5		-		5		-			13		5		22		5
Dividends		50		47		68		61			46		50		58		68
		7,671		7,600		15,409		15,139			8,521		7,671		16,573		15,409
Interest expense
Deposits		827		680		1,660		1,270			612		827		1,301		1,660
Interest on borrowings		24		-		45		-			21		24		41		45
		851		680		1,705		1,270			633		851		1,342		1,705
Net interest income		6,820		6,920		13,704		13,869			7,888		6,820		15,231		13,704

Provision for loan losses		414		276		736		514			195		414		357		736
Net interest income after provision for loan losses		6,406		6,644		12,968		13,355			7,693		6,406		14,874		12,968

Noninterest income
Service charges on deposit accounts		269		376		690		736			331		269		627		690
Other service charges and fees		517		499		1,010		1,012			660		517		1,266		1,010
Net realized gains (losses) on securities		-		10		212		(4	)
Net realized gains on securities											0		0		0		212
Mortgage origination fees		252		126		381		210			277		252		586		381
Increase in cash value of life insurance		108		108		216		216			108		108		216		216
Other income		22		141		120		162			242		22		334		120
		1,168		1,260		2,629		2,332			1,618		1,168		3,029		2,629
Noninterest expenses
Salaries and employee benefits		3,592		3,262		7,061		6,419			3,612		3,592		7,167		7,061
Occupancy and equipment		775		714		1,558		1,439			875		775		1,789		1,558
Foreclosed asset expense, net		-		1		-		2
Data processing expense		467		362		883		731			470		467		966		883
FDIC Assessments		60		72		75		144			76		60		153		75
Advertising		184		158		290		293			191		184		301		290
Bank franchise tax		122		111		232		222			127		122		253		232
Director fees		61		88		131		148			87		61		147		131
Professional fees		105		180		247		362			161		105		348		247
Telephone expense		99		66		183		180			93		99		198		183
Core deposit intangible amortization		192		218		385		437			163		192		327		385
Other expense		562		526		1,103		1,082			562		562		1,053		1,103
		6,219		5,758		12,148		11,459			6,417		6,219		12,702		12,148
Net income before income taxes		1,355		2,146		3,449		4,228			2,894		1,355		5,201		3,449

Income tax expense		258		411		676		828			592		258		1,052		676
Net income	$	1,097	$	1,735	$	2,773	$	3,400		$	2,302	$	1,097	$	4,149	$	2,773

Net income per share	$	0.18	$	0.28	$	0.46	$	0.55		$	0.38	$	0.18	$	0.69	$	0.46
Weighted average shares outstanding		6,066,704		6,206,022		6,094,160		6,209,629			6,039,011		6,066,704		6,041,129		6,094,160
Dividends declared per share	$	0.00	$	0.00	$	0.13	$	0.12		$	0.00	$	0.00	$	0.13	$	0.13

	Six Months Ended
	June 30,
(dollars in thousands)	2020			2019
	(Unaudited)			(Unaudited)

Net Income	$	2,773		$	3,400

Other comprehensive income

Unrealized gains on investment securities available for sale:
Unrealized gains arising during the period		924			1,261
Tax related to unrealized gains		(194	)		(264	)
Reclassification of net realized (gains) losses during the period		(212	)		4
Tax related to realized gains (losses)		45			(1	)

Total other comprehensive income		563			1,000
Total comprehensive income	$	3,336		$	4,400

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets—June 30, ~~2020~~2021 (Unaudited) and December 31, ~~2019~~2020 (Audited)	3

	Unaudited Consolidated Statements of Income—Three and Six Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	4

	Unaudited Consolidated Statements of Comprehensive Income—Six and Three Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	5


	Unaudited Consolidated Statements of Changes in Stockholders’ Equity—Six and Three Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~ 2020	6

	Unaudited Consolidated Statements of Cash Flows—Six Months Ended June 30, ~~2020~~2021 and June 30, ~~2019~~2020	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4145

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5052

Item 4.	Controls and Procedures	5153

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	5254

Item 1A.	Risk Factors	5254

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5354

Item 3.	Defaults Upon Senior Securities	5354

Item 4.	Mine Safety Disclosures	5354

Item 5.	Other Information	5354

Item 6.	Exhibits	53 54

Signatures		5455

	Six Months Ended						Six Months Ended
	June 30,						June 30,
(dollars in thousands)	2020			2019			2021			2020
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	2,773		$	3,400		$	4,149		$	2,773
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		667			597
Depreciation								743			667
Amortization of core deposit intangible		385			437			327			385
Accretion of loan discount and deposit premium, net		(813	)		(1,316	)		(651	)		(813	)
Provision for loan losses		736			514			357			736
Deferred income taxes		(751	)		442			(526	)		(751	)
Net realized (gains) losses on securities		(212	)		4
Net realized gains on securities								0			(212	)
Accretion of discount on securities, net of amortization of premiums		141			239			128			141
Deferred compensation		(2	)		(10	)		11			(2	)
Gains on sale of properties and equipment		-			(121	)
Share-based compensation								14			0
Losses on disposal of properties and equipment								1			0
Changes in assets and liabilities:
Cash value of life insurance		(216	)		(216	)		(216	)		(216	)
Accrued interest receivable		(504	)		(128	)		(246	)		(504	)
Other assets		(20	)		468			(471	)		(20	)
Accrued interest payable		(6	)		22			(36	)		(6	)
Other liabilities		810			(226	)		(1,162	)		810
Net cash provided by operating activities		2,988			4,106			2,422			2,988

Cash flows from investing activities
Activity in available for sale securities:
Purchases		(10,647	)		(1,037	)		(75,155	)		(10,647	)
Sales		7,798			3,950			0			7,798
Maturities/calls/paydowns		3,506			2,441			4,503			3,506
Purchases of restricted equity securities		(22	)		(1	)
Sales (purchases) of restricted equity securities								207			(22	)
Net increase in loans		(79,516	)		(12,625	)		(32,610	)		(79,516	)
Proceeds from sale of foreclosed assets		-			753
Purchases of property and equipment		(3,304	)		(781	)		(2,303	)		(3,304	)
Net cash used in investing activities		(82,185	)		(7,300	)		(105,358	)		(82,185	)

Cash flows from financing activities
Net increase (decrease) in deposits		80,135			(2,770	)		90,882			80,135
Net change in paycheck protection program liquidity facility advances		5,375			-			0			5,375
Common stock repurchased		(867	)		(235	)		(536	)		(867	)
Dividends paid		(794	)		(746	)		(785	)		(794	)
Net cash provided by (used in) financing activities		83,849			(3,751	)
Net cash provided by financing activities								89,561			83,849
Net increase (decrease) in cash and cash equivalents		4,652			(6,945	)		(13,375	)		4,652

Cash and cash equivalents, beginning		44,387			40,007			95,689			44,387
Cash and cash equivalents, ending	$	49,039		$	33,062		$	82,314		$	49,039

	Unrealized Gains									Unrealized Gains
	And (Losses)									And (Losses)
(dollars in thousands)	On Available for			Defined Benefit						*On Available for*			*Defined Benefit*
	Sale Securities			Pension Items			Total			*Sale Securities*			*Pension Items*			*Total*
Balance, December 31, 2018	$	(929	)	$	(1,038	)	$	(1,967	)
Other comprehensive income before reclassifications		997			-			997
Amounts reclassified from accumulated other comprehensive income, net of tax		3			-			3
Balance June 30, 2019	$	71		$	(1,038	)	$	(967	)

Balance, December 31, 2019	$	51		$	(975	)	$	(924	)	$	51		$	(975	)	$	(924	)
Other comprehensive income before reclassifications		731			-			731		$	731			0		$	731
Amounts reclassified from accumulated other comprehensive income, net of tax		(168	)		-			(168	)	$	(168	)		0		$	(168	)
Balance June 30, 2020	$	614		$	(975	)	$	(361	)	$	614		$	(975	)	$	(361	)

Balance, December 31, 2020										$	582		$	(1,103	)	$	(521	)
Other comprehensive income before reclassifications										$	(898	)		0		$	(898	)
Amounts reclassified from accumulated other comprehensive income, net of tax											0			0			0
Balance June 30, 2021										$	(316	)	$	(1,103	)	$	(1,419	)

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2020
June 30, 2021
*Available for sale:*
U.S. Government agencies										$	19,522	$	98	$	(74	)	$	19,546
Mortgage-backed securities											49,836		396		(763	)		49,469
Corporate securities											1,500		0		0			1,500
State and municipal securities											32,437		249		(306	)		32,380
										$	103,295	$	743	$	(1,143	)	$	102,895
December 31, 2020
Available for sale:
Mortgage-backed securities	$	17,993	$	597	$	-		$	18,590	$	15,212	$	472	$	0		$	15,684
Corporate securities		1,500		-		(62	)		1,438		1,500		0		0			1,500
State and municipal securities		12,737		243		(2	)		12,978		16,059		295		(31	)		16,323
	$	32,230	$	840	$	(64	)	$	33,006	$	32,771	$	767	$	(31	)	$	33,507
December 31, 2019
Available for sale:
Mortgage-backed securities	$	19,540	$	61	$	(97	)	$	19,504
Corporate securities		1,500		-		(67	)		1,433
State and municipal securities		11,777		168		(1	)		11,944
	$	32,817	$	229	$	(165	)	$	32,881

	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More				Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2020
June 30, 2021
Available for sale:
U.S. Government agencies																$	6,787	$	(74	)	$	0	$	0	$	6,787	$	(74	)
Mortgage-backed securities	$	-	$	-		$	-	$	-		$	-	$	-			33,007		(763	)		0		0		33,007		(763	)
Corporate securities		-		-			1,438		(62	)		1,438		(62	)		0		0			0		0		0		0
State and municipal securities		1,006		(2	)		-		-			1,006		(2	)		14,171		(306	)		0		0		14,171		(306	)
Total securities available for sale	$	1,006	$	(2	)	$	1,438	$	(62	)	$	2,444	$	(64	)	$	53,965	$	(1,143	)	$	0	$	0	$	53,965	$	(1,143	)

December 31, 2019
December 31, 2020
Available for sale:
U.S. Government agencies																$	0	$	0		$	0	$	0	$	0	$	0
Mortgage-backed securities	$	8,625	$	(97	)	$	-	$	-		$	8,625	$	(97	)		0		0			0		0		0		0
Corporate securities		-		-			1,433		(67	)		1,433		(67	)		0		0			0		0		0		0
State and municipal securities		1,010		(1	)		-		-			1,010		(1	)		3,694		(31	)		0		0		3,694		(31	)
Total securities available for sale	$	9,635	$	(98	)	$	1,433	$	(67	)	$	11,068	$	(165	)	$	3,694	$	(31	)	$	0	$	0	$	3,694	$	(31	)

	Six Months Ended June 30					Three Months Ended June 30					Six Months Ended June 30				Three Months Ended June 30
(dollars in thousands)	2020		2019			2020		2019			2021		2020		2021		2020

Realized gains	$	212	$	32		$	-	$	32		$	0	$	212	$	0	$	0
Realized losses		-		(36	)		-		(22	)-		0		0		0		0
	$	212	$	(4	)	$	-	$	10		$	0	$	212	$	0	$	0

(dollars in thousands)
June 30, 2021
	# of SBA					Balance Less
SBA Tier	Approved		Mix			Unearned Fees		Mix

$2 million to $10 million		2		0.10	%	$	5,620		9.14	%
Over $350,000 to less than $2 million		25		1.24	%		12,935		21.05	%
Up to $350,000		1,981		98.66	%		42,899		69.81	%
Total		2,008		100.00	%	$	61,454		100.00	%

(dollars in thousands)
December 31, 2020
	# of SBA					Balance Less
SBA Tier	Approved		Mix			Unearned Fees		Mix

$2 million to $10 million		2		0.20	%	$	7,267		14.22	%
Over $350,000 to less than $2 million		18		1.78	%		11,693		22.87	%
Up to $350,000		988		98.02	%		32,158		62.91	%
Total		1,008		100.00	%	$	51,118		100.00	%

(dollars in thousands)	Construction & Development		Farmland			Residential			Commercial Mortgage			Commercial & Agricultural			Consumer & Other			Total				Construction & Development			Farmland			Residential		Commercial Mortgage			Commercial & Agricultural			Consumer & Other			Total
For the Three Months Ended June 30, 2020

*For the Three Months Ended June 30, 2021*																					*For the Three Months Ended June 30, 2021*
Allowance for loan losses:
Balance, March 31, 2019	$	341	$	465		$	1,998		$	1,054		$	246		$	148		$	4,252
Balance, March 31, 2021																						$	502		$	384		$	2,247	$	1,557		$	259		$	102		$	5,051
Charge-offs		-		-			-			-			-			(25	)		(25	)			0			0			0		0			0			(17	)		(17	)
Recoveries		-		-			3			-			-			10			13				2			0			0		61			44			6			113
Provision		74		7			125			(3	)		204			7			414				(76	)		(40	)		73		225			(30	)		43			195
Balance, June 30, 2021																						$	428		$	344		$	2,320	$	1,843		$	273		$	134		$	5,342

*For the Three Months Ended June 30, 2020*																					*For the Three Months Ended June 30, 2020*
Allowance for loan losses:
Balance, March 31, 2020	$	415	$	472		$	2,126		$	1,051		$	450		$	140		$	4,654			$	341		$	465		$	1,998	$	1,054		$	246		$	148		$	4,252

For the Three Months Ended June 30, 2019
Allowance for loan losses:
Balance, March 31, 2019	$	268	$	407		$	1,733		$	697		$	385		$	128		$	3,618
Charge-offs		-		-			(20	)		-			(19	)		(43	)		(82	)			0			0			0		0			0			(25	)		(25	)
Recoveries		-		-			1			-			2			3			6				0			0			3		0			0			10			13
Provision		17		133			16			155			(76	)		31			276				74			7			125		(3	)		204			7			414
Balance, June 30, 2019	$	285	$	540		$	1,730		$	852		$	292		$	119		$	3,818
Balance, June 30, 2020																						$	415		$	472		$	2,126	$	1,051		$	450		$	140		$	4,654

For the Six Months Ended June 30, 2020
*For the Six Months Ended June 30, 2021*																					*For the Six Months Ended June 30, 2021*
Allowance for loan losses:
Balance, December 31, 2020																						$	499		$	406		$	2,167	$	1,421		$	293		$	114		$	4,900
Charge-offs																							0			0			0		0			0			(51	)		(51	)
Recoveries																							2			0			2		61			45			26			136
Provision																							(73	)		(62	)		151		361			(65	)		45			357
Balance, June 30, 2021																						$	428		$	344		$	2,320	$	1,843		$	273		$	134		$	5,342

*For the Six Months Ended June 30, 2020*																					*For the Six Months Ended June 30, 2020*
Allowance for loan losses:
Balance, December 31, 2019	$	305	$	487		$	1,822		$	924		$	211		$	144		$	3,893			$	305		$	487		$	1,822	$	924		$	211		$	144		$	3,893
Charge-offs		-		-			-			-			-			(78	)		(78	)			0			0			0		0			0			(78	)		(78	)
Recoveries		4		-			11			65			2			21			103				4			0			11		65			2			21			103
Provision		106		(15	)		293			62			237			53			736				106			(15	)		293		62			237			53			736
Balance, June 30, 2019	$	415	$	472		$	2,126		$	1,051		$	450		$	140		$	4,654
Balance, June 30, 2020																						$	415		$	472		$	2,126	$	1,051		$	450		$	140		$	4,654

For the Six Months Ended June 30, 2019
Allowance for loan losses:
Balance, December 31, 2018	$	246	$	385		$	1,807		$	682		$	281		$	94		$	3,495
Charge-offs		-		(14	)		(32	)		(41	)		(63	)		(95	)		(245	)
Recoveries		-		-			8			28			4			14			54
Provision		39		169			(53	)		183			70			106			514
Balance, June 30, 2019	$	285	$	540		$	1,730		$	852		$	292		$	119		$	3,818

June 30, 2020
June 30, 2021
Allowance for loan losses:
Ending Balance	$	415	$	472		$	2,126		$	1,051		$	450		$	140		$	4,654			$	428		$	344		$	2,320	$	1,843		$	273		$	134		$	5,342
Ending balance: individually evaluated for impairment	$	-	$	-		$	-		$	-		$	-		$	-		$	-			$	0		$	0		$	0	$	0		$	0		$	0		$	0
Ending balance: collectively evaluated for impairment	$	415	$	472		$	2,126		$	1,051		$	450		$	140		$	4,654			$	428		$	344		$	2,320	$	1,843		$	273		$	134		$	5,342
Ending balance: purchased credit impaired loans	$	-	$	-		$	-		$	-		$	-		$	-		$	-			$	0		$	0		$	0	$	0		$	0		$	0		$	0

Loans outstanding:
Ending Balance	$	44,192	$	34,629		$	260,565		$	181,866		$	31,456		$	20,786		$	573,494			$	40,954		$	30,447		$	287,643	$	228,288		$	31,962		$	16,631		$	635,925
Ending balance: individually evaluated for impairment	$	-	$	2,836		$	-		$	-		$	-		$	-		$	2,836			$	741		$	2,417		$	0	$	0		$	0		$	0		$	3,158
Ending balance: collectively evaluated for impairment	$	44,192	$	31,793		$	260,422		$	181,554		$	31,310		$	20,786		$	570,057			$	40,213		$	28,030		$	287,504	$	228,181		$	31,866		$	16,631		$	632,425
Ending balance: purchased credit impaired loans	$	-	$	-		$	143		$	312		$	146		$	-		$	601			$	0		$	0		$	139	$	107		$	96		$	0		$	342

															Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)	Construction & Development		Farmland		Residential		Commercial Mortgage		Commercial & Agricultural		Consumer & Other		Total		Construction & Development		Farmland		Residential		Commercial Mortgage		Commercial & Agricultural		Consumer & Other		Total
December 31, 2019
December 31, 2020
Allowance for loan losses:
Ending Balance	$	305	$	487	$	1,822	$	924	$	211	$	144	$	3,893	$	499	$	406	$	2,167	$	1,421	$	293	$	114	$	4,900
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Ending balance: collectively evaluated for impairment	$	305	$	487	$	1,822	$	924	$	211	$	144	$	3,893	$	499	$	406	$	2,167	$	1,421	$	293	$	114	$	4,900
Ending balance: purchased credit impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Loans outstanding:
Ending Balance	$	39,649	$	34,166	$	253,674	$	190,817	$	32,426	$	19,621	$	570,353	$	46,053	$	32,449	$	279,893	$	203,886	$	33,663	$	17,033	$	612,977
Ending balance: individually evaluated for impairment	$	-	$	3,240	$	909	$	-	$	-	$	-	$	4,149	$	0	$	2,580	$	0	$	0	$	0	$	0	$	2,580
Ending balance: collectively evaluated for impairment	$	39,649	$	30,926	$	252,615	$	190,496	$	32,280	$	19,621	$	565,587	$	46,053	$	29,869	$	279,751	$	203,773	$	33,567	$	17,033	$	610,046
Ending balance: purchased credit impaired loans	$	-	$	-	$	150	$	321	$	146	$	-	$	617	$	0	$	0	$	142	$	113	$	96	$	0	$	351

	Loan Grades
(dollars in thousands)	Watch As Reported		Reclass			Watch Adjusted
December 31, 2019
Real Estate Secured:
Construction & development	$	4,801	$	(4,244	)	$	557
Farmland		4,059		(2,565	)		1,494
Residential		19,887		(19,349	)		538
Commercial mortgage		21,960		(19,557	)		2,403
Non-Real Estate Secured:
Commercial & agricultural		4,346		(3,805	)		541
Consumer & other		300		(300	)		-
Total	$	55,353	$	(49,820	)	$	5,533

	Loan Grades
(dollars in thousands)	Pass As Reported		Reclass		Pass Adjusted
December 31, 2019
Real Estate Secured:
Construction & development	$	34,701	$	4,244	$	38,945
Farmland		22,969		2,565		25,534
Residential		231,629		19,349		250,978
Commercial mortgage		163,584		19,557		183,141
Non-Real Estate Secured:
Commercial & agricultural		27,503		3,805		31,308
Consumer & other		19,314		300		19,614
Total	$	499,700	$	49,820	$	549,520

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Still Accruing		Nonaccrual Loans		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90+ Days Past Due and Still Accruing			Nonaccrual Loans

June 30, 2020
June 30, 2021
Real Estate Secured:
Construction & development	$	-	$	-	$	9	$	9	$	44,183	$	44,192	$	-	$	9	$	0	$	0	$	426	$	426	$	40,528	$	40,954	$	0		$	426
Farmland		-		669		257		926		33,703		34,629		-		3,630		0		0		130		130		30,317		30,447		0			850
Residential		456		-		357		813		259,752		260,565		-		460		122		44		130		296		287,347		287,643		0			527
Commercial mortgage		-		-		292		292		181,574		181,866		-		485		0		60		0		60		228,228		228,288		0			79
Non-Real Estate Secured:
Commercial & agricultural		121		16		146		283		31,173		31,456		-		182		81		8		96		185		31,777		31,962		0			110
SBA-PPP		-		-		-		-		77,105		77,105		-		-		0		0		0		0		61,454		61,454		0	��		0
Consumer & other		1		-		-		1		20,785		20,786		-		-		17		0		0		17		16,614		16,631		0			0
Total	$	578	$	685	$	1,061	$	2,324	$	648,275	$	650,599	$	-	$	4,766	$	220	$	112	$	782	$	1,114	$	696,265	$	697,379	$	0		$	1,992

December 31, 2019
December 31, 2020
Real Estate Secured:
Construction & development	$	-	$	-	$	10	$	10	$	39,639	$	39,649	$	-	$	10	$	71	$	0	$	0	$	71	$	45,982	$	46,053	$	0		$	11
Farmland		893		-		971		1,864		32,302		34,166		-		4,192		100		0		914		1,014		31,435		32,449		0			3,937
Residential		292		48		365		705		252,969		253,674		-		412		386		29		240		655		279,238		279,893		0			557
Commercial mortgage		185		-		-		185		190,632		190,817		-		198		0		0		24		24		203,862		203,886		0			109
Non-Real Estate Secured:
Commercial & agricultural		135		8		163		306		32,120		32,426		-		165		14		15		155		184		33,479		33,663		0			189
SBA-PPP																		0		0		0		0		51,118		51,118		0			0
Consumer & other		2		6		2		10		19,611		19,621		-		2		7		0		0		7		17,026		17,033		0			0
Total	$	1,507	$	62	$	1,511	$	3,080	$	567,273	$	570,353	$	-	$	4,979	$	578	$	44	$	1,333	$	1,955	$	662,140	$	664,095	$	0		$	4,803

							Six months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income
*(dollars in thousands)*	Investment¹		Balance		Allowance		Investment		Recognized		Investment		Recognized
June 30, 2020
With no related allowance recorded:
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Farmland		2,836		3,334		-		3,038		10		2,847		5
Residential		-		-		-		-		-		-		-
Commercial mortgage		-		-		-		-		-		-		-	��
Commercial & agricultural		-		-		-		-		-		-		-
Consumer & other		-		-		-		-		-		-		-
Subtotal		2,836		3,334		-		3,038		10		2,847		5

With an allowance recorded:
Construction & development		538		538		27		545		16		539		10
Farmland		150		159		2		150		1		150		-
Residential		4,263		4,439		214		4,282		113		4,268		57
Commercial mortgage		10		54		1		10		1		10		-
Commercial & agricultural		49		49		2		50		2		50		2
Consumer & other		2		2		-		3		-		2		-
Subtotal		5,012		5,241		246		5,040		133		5,019		69

Totals:
Construction & development		538		538		27		545		16		539		10
Farmland		2,986		3,493		2		3,188		11		2,997		5
Residential		4,263		4,439		214		4,282		113		4,268		57
Commercial mortgage		10		54		1		10		1		10		-
Commercial & agricultural		49		49		2		50		2		50		2
Consumer & other		2		2		-		3		-		2		-
Total	$	7,848	$	8,575	$	246	$	8,078	$	143	$	7,866	$	74

							Six months ended					Three months ended
			*Unpaid*				*Average*		*Interest*			*Average*		*Interest*
	*Recorded*		*Principal*		*Related*		*Recorded*		*Income*			*Recorded*		*Income*
*(dollars in thousands)*	Investment¹		*Balance*		*Allowance*		*Investment*		*Recognized*			*Investment*		*Recognized*
June 30, 2021
With no related allowance recorded:
Construction & development	$	427	$	425	$	-	$	218	$	(5	)	$	432	$	0
Farmland		2,417		3,076		-		2,498	$	62			2,428		42
Residential		-		0		-		198	$	25			173		11
Commercial mortgage		-		0		-		0		0			0		0
Commercial & agricultural		-		0		-		0		0			0		0
Consumer & other		-		0		-		1		0			0		0
Subtotal		2,844		3,501		-		2,915	$	82			3,033		53

With an allowance recorded:
Construction & development		463		463		8		476	$	13			473		7
Farmland		126		143		2		127	$	4			126		2
Commercial mortgage		72		72		4		40	$	3			39		3
Commercial & agricultural		40		40		2		43	$	1			42		1
Consumer & other		-		0		0		0		0			0		0
Subtotal		3,172		3,366		149		3,178	$	90			3,161		47

Totals:
Construction & development		890		888		8		694	$	8			905		7
Farmland		2,543		3,219		2		2,625	$	66			2,554		44
Residential		2,471		2,648		133		2,690	$	94			2,654		45
Commercial mortgage		72		72		4		40	$	3			39		3
Commercial & agricultural		40		40		2		43	$	1			42		1
Consumer & other		-		0		0		1		0			0		0
Total	$	6,016	$	6,867	$	149	$	6,093	$	172		$	6,194	$	100

(dollars in thousands)	Recorded Investment¹		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

December 31, 2019
With no related allowance recorded:
Construction & development	$	-	$	-	$	-	$	-	$	-
Farmland		3,240		3,240		-		3,505		25
Residential		909		909		-		921		40
Commercial mortgage		-		-		-		-		-
Commercial & agricultural		-		-		-		-		-
Consumer & other		-		-		-		-		-
Subtotal		4,149		4,149		-		4,426		65

With an allowance recorded:
Construction & development		72		72		3		76		6
Farmland		150		150		2		1,545		70
Residential		3,345		3,495		166		4,161		225
Commercial mortgage		11		56		1		268		11
Commercial & agricultural		31		31		1		34		2
Consumer & other		3		3		1		4		-
Subtotal		3,612		3,807		174		6,088		314

Totals:
Construction & development		72		72		3		76		6
Farmland		3,390		3,390		2		5,050		95
Residential		4,254		4,404		166		5,082		265
Commercial mortgage		11		56		1		268		11
Commercial & agricultural		31		31		1		34		2
Consumer & other		3		3		1		4		-
Total	$	7,761	$	7,956	$	174	$	10,514	$	379

(dollars in thousands)	TDRs identified during the period						TDRs identified in the last twelve months that subsequently defaulted⁽¹⁾
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment

Construction & development		2	$	459	$	459		-	$	-	$	-
Farmland		-		-		-		-		-		-
Residential		1		46		50		-		-		-
Commercial mortgage		-		-		-		-		-		-
Commercial & agricultural		1		20		20		-		-		-
Consumer & other		-		-		-		-		-		-
Total		4	$	525	$	529		-	$	-	$	-

	Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,
(dollars in thousands)	2020			2019			2020			2019			2021			2020			2021			2020

Service cost	$	-		$	-		$	-		$	-
Interest cost		82			92			41			46		$	72		$	82		$	36		$	41
Expected return on plan assets		(314	)		(276	)		(157	)		(138	)	$	(348	)	$	(314	)	$	(174	)	$	(157	)
Amortization of prior service cost		-			-			-			-
Recognized net loss due to settlement		-			-			-			-
Recognized net actuarial (gain)/loss		14			20			7			10		$	18		$	14		$	9		$	7
Net periodic benefit cost	$	(218	)	$	(164	)	$	(109	)	$	(82	)	$	(258	)	$	(218	)	$	(129	)	$	(109	)

	June 30,		December 31,
(dollars in thousands)	2020		2019		June 30,		December 31,
					2021		2020
Beginning of year	$	3,257	$	3,198	$	3,257	$	3,257
Measurement period adjustment		-		59		0		0
Impairment						0		0
End of the period	$	3,257	$	3,257	$	3,257	$	3,257

	Six Months Ended June 30,				Six Ended June 30,
(dollars in thousands)	2020		2019		2021		2020

Lease Expense
Operating lease expense	$	70	$	45	$	78	$	70
Short-term lease expense		18		53		14		18
Total lease expense	$	88	$	98	$	92	$	88

Cash paid for amounts included in lease liabilities	$	70	$	45	$	78	$	70

(dollars in thousands)

Six months ending December 31, 2020	$	77
Twelve months ending December 31, 2021		150
Six months ending December 31, 2021				$	76
Twelve months ending December 31, 2022		119			123
Twelve months ending December 31, 2023		79			83
Twelve months ending December 31, 2024		68			69
Twelve months ending December 31, 2025					72
Thereafter		330			258
Total undiscounted cash flows	$	823		$	681
Less discount		(75	)		(58	)
Lease liabilities	$	748		$	623

					Grant Date
					Fair Value of
					Restricted
					Stock that
			*Weighted*		*Vested During*
	*Number of*		*Average Grant*		*The Year*
	*Shares*		*Date Fair Value*		*(in thousands)*

Unvested as of December 31, 2020		0	$	0
Granted		14,500		11.30
Vested		0		0	$	0
Forfeited		0		0
Unvested as of June 30, 2021		14,500	$	11.30

					Fair Value Measurements										Fair Value Measurements
(dollars in thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

June 30, 2020
June 30, 2021

Financial Instruments – Assets
Net Loans	$	645,945	$	642,553	$	-	$	642,352	$	201	$	692,037	$	684,336	$	0	$	684,147	$	189

Financial Instruments – Liabilities
Time Deposits		191,856		194,113		-		194,113		-		200,651		201,651		0		201,651		0
FHLB Advances		10,000		9,671		-		9,671		-		10,000		9,842		9,842		0		0
PPPLF Advances		5,375		5,375		-		5,375		-

December 31, 2019
December 31, 2020

Financial Instruments – Assets
Net Loans	$	566,460	$	557,054	$	-	$	556,851	$	203	$	659,195	$	653,454	$	0	$	653,255	$	199

Financial Instruments – Liabilities
Time Deposits		191,988		192,365		-		192,365		-		194,419		196,522		0		196,522		0
FHLB Advances		10,000		10,021		-		10,021		-		10,000		9,765		9,765		0		0

(dollars in thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

June 30, 2020
June 30, 2021
*Investment securities available for sale*
U.S. Government agencies									$	19,546	$	0	$	19,546	$	0
Mortgage-backed securities										49,469		0		49,469		0
Corporate securities										1,500		0		1,500		0
State and municipal securities										32,380		0		32,380		0
Total assets at fair value									$	102,895	$	0	$	102,895	$	0

December 31, 2020
*Investment securities available for sale*
Mortgage-backed securities	$	18,590	$	-	$	18,590	$	-	$	15,684	$	0	$	15,684	$	0
Corporate securities		1,438		-		1,438		-		1,500		0		1,500		0
State and municipal securities		12,978		-		12,978		-		16,323		0		16,323		0
Total assets at fair value	$	33,006	$	-	$	33,006	$	-	$	33,507	$	0	$	33,507	$	0

December 31, 2019
*Investment securities available for sale*
Mortgage-backed securities	$	19,504	$	-	$	19,504	$	-
Corporate securities		1,433		-		1,433		-
State and municipal securities		11,944		-		11,944		-
Total assets at fair value	$	32,881	$	-	$	32,881	$	-

	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2020
Total Capital (to risk weighted assets)	$	81,303		13.80	%	$	47,138		8.00	%	$	58,922		10.00	%
Tier 1 Capital (to risk weighted assets)	$	76,609		13.00	%	$	35,353		6.00	%	$	47,138		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	76,609		13.00	%	$	26,515		4.50	%	$	38,299		6.50	%
Tier 1 Capital (to average total assets)	$	76,609		10.10	%	$	30,341		4.00	%	$	37,926		5.00	%

December 31, 2019
Total Capital (to risk weighted assets)	$	78,652		13.53	%	$	46,499		8.00	%	$	58,124		10.00	%
Tier 1 Capital (to risk weighted assets)	$	74,726		12.86	%	$	34,874		6.00	%	$	46,499		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	74,726		12.86	%	$	26,156		4.50	%	$	37,780		6.50	%
Tier 1 Capital (to average total assets)	$	74,726		10.80	%	$	27,680		4.00	%	$	34,599		5.00	%

Summary of Loan Loss Experience	Six			Six
	months			months			Year
	ended			ended			ended
(dollars in thousands)	June 30,			June 30,			December 31,
	2020			2019			2019
Total loans outstanding at end of period	$	650,599		$	549,820		$	570,353

Allowance for loan losses, beginning of period	$	3,893		$	3,495		$	3,495

Charge offs:
Construction & development		-			-			-
Farmland		-			(14	)		(13	)
Residential		-			(32	)		(55	)
Commercial mortgage		-			(41	)		(41	)
Commercial & agricultural		-			(63	)		(77	)
Consumer & other		(78	)		(95	)		(212	)
Total charge-offs		(78	)		(245	)		(398	)

Recoveries:
Construction & development		4			-			-
Farmland		-			-			-
Residential		11			8			8
Commercial mortgage		65			28			69
Commercial & agricultural		2			4			10
Consumer & other		21			14			54
Total recoveries		103			54			141
Net charge-offs		25			(191	)		(257	)

Provision for allowance		736			514			655
Allowance for loan losses at end of period	$	4,654		$	3,818		$	3,893

Ratios:
Allowance for loan losses to loans at end of period		0.72	%		0.69	%		0.68	%
Net charge-offs to allowance for loan losses		0.54	%		5.00	%		6.60	%
Net charge-offs to provisions for loan losses		3.40	%		37.16	%		39.24	%

	Total number of shares purchased		Average price paid per Share		Total number of shares purchased as part of publicly announced program⁽¹⁾		Maximum number of shares that may yet be purchased under the plan⁽¹⁾		Total number of shares purchased		Average price paid per Share		Total number of shares purchased as part of publicly announced program		Maximum number of shares that may yet be purchased under the plan ⁽¹⁾
Purchased 4/1 through 4/30		-	$	-		-		54,000		-	$	-		-		172,500
Purchased 5/1 through 5/31		-	$	-		-		204,000		20,000	$	12.20		20,000		152,500
Purchased 6/1 through 6/30		6,500	$	10.25		6,500		197,500		15,000	$	12.18		15,000		137,500
Total during second quarter 2020		6,500	$	10.25		6,500
Total during second quarter 2021										35,000	$	12.19		35,000

	10.3	Amendment to Change in Control Agreement, dated May 18, 2021 by and between the Company and Beth R. Worrell.
~~Item 4.~~	~~Mine Safety Disclosures~~


31.1	~~None~~

~~Item 5.~~	~~Other Information~~

	~~None~~

~~Item 6.~~	~~Exhibits~~

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

Buildings and improvements

Furniture and equipment