For the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

For the ~~Nine and~~ Three Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

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

For the ~~Nine and~~ Three Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)

For the ~~Nine~~Three Months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

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.~~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 full-service banking offices and ~~two~~one loan production ~~offices.~~office. As an 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 ~~September 30, 2020~~March 31, 2021 and for the ~~nine- and three-month~~ periods ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ 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 for the fiscal year ended December 31, ~~2019.~~2020. The results of operations for the ~~nine and~~ three months ended ~~September 30, 2020~~March 31, 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. 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

Critical Accounting Policies

Principles of Consolidation

Business Segments

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

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

Cash and Cash Equivalents

Trading Securities

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

Securities Held to Maturity

Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at amortized cost. The Company does not currently hold any securities classified as held to maturity.

Securities Available for Sale

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

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.

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.

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 September 30, 2020 totaled $79.4 million.

The allowance for loan losses for SBA-PPP loans originated during the second and third quarters 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.

~~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.

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 March 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.

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.

The allowance for loan losses for SBA-PPP loans originated thru March 31, 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 “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.

As of March 31, 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.

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) the assets have been isolated from the Bank; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

~~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 A~~ssets~~Assets

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the 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.

Cash Value of Life Insurance

The Bank is owner and beneficiary of life insurance policies on certain current and former employees and directors. The Company records these policies in the consolidated balance sheets at cash surrender value, with changes recorded in noninterest income in the consolidated statements of income.

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Revenue Recognition

~~On January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) 2014-9,~~ ~~Revenue from Contracts with Customers (“ASU Topic 606”)~~. The Company completed its overall assessment of revenue streams and review 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.

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 three months ended March 31, 2021 and 2020 amounted to $96 thousand and $103 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 three months ended March 31, 2021 and 2020 the Company received $15 thousand and $9 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.

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

~~Revenue Recognition~~~~, continued~~

~~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.

~~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.

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
	And (Losses)
(dollars in thousands)	On Available for			Defined Benefit						Unrealized Gains And (Losses) On Available for Sale Securities			Defined Benefit Pension Items			Total
	Sale Securities			Pension Items			Total
Balance, December 31, 2018	$	(929	)	$	(1,038	)	$	(1,967	)
Other comprehensive income before reclassifications		1,093			-			1,093
Amounts reclassified from accumulated other comprehensive income, net of tax		(35	)		-			(35	)
Balance September 30, 2019	$	129		$	(1,038	)	$	(909	)

Balance, December 31, 2019	$	51		$	(975	)	$	(924	)	$	51		$	(975	)	$	(924	)
Other comprehensive income before reclassifications		757			-			757			129			-			129
Amounts reclassified from accumulated other comprehensive income, net of tax		(249	)		-			(249	)		(168	)		-			(168	)
Balance September 30, 2020	$	559		$	(975	)	$	(416	)
Balance March 31, 2020										$	12		$	(975	)	$	(963	)

Balance, December 31, 2020										$	582		$	(1,103	)	$	(521	)
Other comprehensive income before reclassifications											(1,362	)		-			(1,362	)
Amounts reclassified from accumulated other comprehensive income, net of tax											-			-			-
Balance March 31, 2021										$	(780	)	$	(1,103	)	$	(1,883	)

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 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.

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.

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

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

In June 2016, the FASB issued ASU No. 2016-13 to change the accounting for credit losses and 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, 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, 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 November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (“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.

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

In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial ~~statements~~statements.

In October 2020, the FASB updated various Topics of the ASC to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules. The amendments were effective upon issuance and did not have a material effect on the financial statements.

In October 2020, the FASB issued amendments to clarify the ASC and make minor improvements that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are effective for annual periods beginning after December 15, 2020. 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.

Restricted equity securities totaled $2.2 million and $2.4 million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (“FHLB”), CBB Financial Corp., Pacific Coast Bankers Bank, and the Federal Reserve Bank of Richmond, all of which are carried at cost. All of these entities are upstream correspondents of the Bank. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow money. The Bank is required to hold that stock so long as it borrows from the FHLB. The Federal Reserve requires banks to purchase stock as a condition for membership in the Federal Reserve System. The Bank’s stock in CBB Financial Corp. and Pacific Coast Bankers Bank is restricted only in the fact that the stock may only be repurchased by the respective banks.

The following tables details unrealized losses and related fair values in the Company’s available for sale investment securities portfolios. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

At ~~September 30, 2020, 2~~March 31, 2021, 29 debt securities with unrealized losses had depreciated ~~2.07~~2.49 percent from their total amortized cost basis. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, and the financial condition and near-term prospects of the issuer. The relative significance of these and other factors will vary on a ~~case by case~~case-by-case basis. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the results of reviews of the issuer’s financial condition and the issuer’s anticipated ability to pay the contractual cash flows of the investments. Since the Company intends to hold all of its investment securities until maturity, and it is more likely than not that the Company will not have to sell any of its investment securities before unrealized losses have been recovered, and the Company expects to recover the entire amount of the amortized cost basis of all its securities, none of the securities are deemed other than temporarily impaired at ~~September 30, 2020.~~March 31, 2021. Management continues to monitor all of these securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of these securities are other than temporarily impaired, which could require a charge to earnings in such periods.

~~Proceeds from~~There were no sales of investment securities available for sale ~~were $10.74 million and $8.91 million~~ for the ~~nine-month periods~~three-month period ended ~~September 30, 2020 and 2019 and $2.94 million and $4.96~~March 31, 2021. Proceeds from the sale of investment securities available for sale were $7.8 million for the three-month ~~periods~~period ended ~~September 30, 2020 and 2019, respectively.~~March 31, 2020. There were no called securities for the three-month period ended March 31, 2021. Gross proceeds from called securities totaled ~~$1.29 million and $1.15 million~~$10 thousand for the ~~nine-month periods~~three-month period ended ~~September 30, 2020 and 2019, respectively.~~March 31, 2020. Gains and losses on the sale of investment securities are recorded on the trade date and are determined using the specific identification method. Gross realized gains and losses for the ~~nine-month and~~ three-month periods ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ are as follows:

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

The scheduled maturities of securities available for sale at ~~September 30, 2020,~~March 31, 2021, were as follows:

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

Investment securities with amortized cost of approximately ~~$14.9~~$13.7 million and ~~$15.5~~$14.1 million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

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 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. As of September 30, 2020, the Bank had 1,296 SBA-PPP loans outstanding with an outstanding principal balance of $81.9 million, less unearned net fees of $2.5 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 September 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.

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, substantially all of the Bank’s residential 1-4 family loans were pledged as collateral for borrowing lines at the ~~Federal Home~~FHLB.

Gross SBA-PPP loans totaling $75.2 million with net deferred fees of $3.6 million remained on the balance sheet as of March 31, 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 March 31, 2021 and December 31, 2020 by SBA tier is as follows:

A summary of our SBA-PPP loans as of March 31, 2021 and December 31, 2020 by industry is as follows:

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 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.

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.

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 ~~September 30, 2020~~March 31, 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 September 30, 2020
For the Three Months Ended March 31, 2021																						For the Three Months Ended March 31, 2021
Allowance for loan losses:
Balance, June 30, 2020	$	415		$	472		$	2,126		$	1,051		$	450		$	140		$	4,654
Balance, December 31, 2020																							$	499	$	406		$	2,167	$	1,421	$	293		$	114		$	4,900
Charge-offs		(8	)		-			(48	)		(61	)		(14	)		(28	)		(159	)			-		-			-		-		-			(34	)		(34	)
Recoveries		-			-			-			-			-			8			8				-		-			2		-		1			20			23
Provision		-			(8	)		89			246			(38	)		2			291				3		(22	)		78		136		(35	)		2			162
Balance, September 30, 2020	$	407		$	464		$	2,167		$	1,236		$	398		$	122		$	4,794
Balance, March 31, 2021																							$	502	$	384		$	2,247	$	1,557	$	259		$	102		$	5,051

For the Three Months Ended September 30, 2019
Allowance for loan losses:
Balance, June 30, 2019	$	285		$	540		$	1,730		$	852		$	292		$	119		$	3,818
Charge-offs		-			-			-			-			(14	)		(59	)		(73	)
Recoveries		-			-			-			41			2			33			76
Provision		13			(9	)		92			16			(10	)		49			151
Balance, September 30, 2019	$	298		$	531		$	1,822		$	909		$	270		$	142		$	3,972

For the Nine Months Ended September 30, 2020
For the Three Months Ended March 31, 2020																						For the Three Months Ended March 31, 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		(8	)		-			(48	)		(61	)		(14	)		(106	)		(237	)			-		-			-		-		-			(53	)		(53	)
Recoveries		4			-			11			65			2			29			111				4		-			8		65		2			11			90
Provision		106			(23	)		382			308			199			55			1,027				32		(22	)		168		65		33			46			322
Balance, September 30, 2020	$	407		$	464		$	2,167		$	1,236		$	398		$	122		$	4,794
Balance, March 31, 2020																							$	341	$	465		$	1,998	$	1,054	$	246		$	148		$	4,252

For the Nine Months Ended September 30, 2019
Allowance for loan losses:
Balance, December 31, 2018	$	246		$	385		$	1,807		$	682		$	281		$	94		$	3,495
Charge-offs		-			(14	)		(32	)		(41	)		(77	)		(154	)		(318	)
Recoveries		-			-			8			69			6			47			130
Provision		52			160			39			199			60			155			665
Balance, September 30, 2019	$	298		$	531		$	1,822		$	909		$	270		$	142		$	3,972

September 30, 2020
March 31, 2021
Allowance for loan losses:
Ending Balance	$	407		$	464		$	2,167		$	1,236		$	398		$	122		$	4,794			$	502	$	384		$	2,247	$	1,557	$	259		$	102		$	5,051
Ending balance: individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-		$	-		$	-			$	-	$	-		$	-	$	-	$	-		$	-		$	-
Ending balance: collectively evaluated for impairment	$	407		$	464		$	2,167		$	1,236		$	398		$	122		$	4,794			$	502	$	384		$	2,247	$	1,557	$	259		$	102		$	5,051
Ending balance: purchased credit impaired loans	$	-		$	-		$	-		$	-		$	-		$	-		$	-			$	-	$	-		$	-	$	-	$	-		$	-		$	-

Loans outstanding:
Ending Balance	$	44,356		$	33,881		$	274,139		$	193,833		$	32,890		$	19,231		$	598,330			$	45,901	$	32,430		$	284,763	$	210,192	$	35,034		$	17,693		$	626,013
Ending balance: individually evaluated for impairment	$	-		$	2,696		$	-		$	-		$	-		$	-		$	2,696			$	756	$	2,439		$	-	$	-	$	-		$	-		$	3,195
Ending balance: collectively evaluated for impairment	$	44,356		$	31,185		$	273,996		$	193,718		$	32,744		$	19,231		$	595,230			$	45,145	$	29,991		$	284,621	$	210,082	$	34,939		$	17,693		$	622,471
Ending balance: purchased credit impaired loans	$	-		$	-		$	143		$	115		$	146		$	-		$	404			$	-	$	-		$	142	$	110	$	95		$	-		$	347

December 31, 2020
Allowance for loan losses:
Ending Balance																							$	499	$	406		$	2,167	$	1,421	$	293		$	114		$	4,900
Ending balance: individually evaluated for impairment																							$	-	$	-		$	-	$	-	$	-		$	-		$	-
Ending balance: collectively evaluated for impairment																							$	499	$	406		$	2,167	$	1,421	$	293		$	114		$	4,900
Ending balance: purchased credit impaired loans																							$	-	$	-		$	-	$	-	$	-		$	-		$	-

Loans outstanding:
Ending Balance																							$	46,053	$	32,449		$	279,893	$	203,886	$	33,663		$	17,033		$	612,977
Ending balance: individually evaluated for impairment																							$	-	$	2,580		$	-	$	-	$	-		$	-		$	2,580
Ending balance: collectively evaluated for impairment																							$	46,053	$	29,869		$	279,751	$	203,773	$	33,567		$	17,033		$	610,046
Ending balance: purchased credit impaired loans																							$	-	$	-		$	142	$	113	$	96		$	-		$	351

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

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

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.

The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of March 31, 2021 and December 31, 2020:

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:

~~These reclassifications did not have an impact on our calculation of the allowance for loan losses or our provision expense.~~

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

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

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 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 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.

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, the recorded investment in impaired loans totaled ~~$6.6~~$6.4 million and ~~$7.8~~$6.2 million. The total amount of collateral-dependent impaired loans at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, was ~~$2.7~~$3.2 million and ~~$2.9~~$2.6 million. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, ~~$2.7~~$2.9 million and ~~$4.1~~$2.6 million of the recorded investment in impaired loans did not have a related allowance. The Bank had ~~$4.3~~$3.8 million and ~~$4.8~~$3.9 million in troubled debt restructured loans included in impaired loans at ~~September 30, 2020~~March 31, 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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, ~~$4.0~~$3.2 million and $3.6 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have ~~$212~~$189 thousand and ~~$174~~$192 thousand of related allowance.

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

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.~~

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

~~For the~~ ~~Nine~~ ~~Months Ended~~ ~~September~~ ~~30, 2020~~

During the nine months ended September 30, 2020, five 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 nine months ended September 30, 2020.

During the three months ended September 30, 2020, one loan was modified that was considered to be a TDR. Term concessions were granted on the loan. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended September 30, 2020.

~~For~~The following table sets forth information with respect to the ~~Nine~~ ~~Months Ended~~ ~~September~~ ~~30, 2019~~

⁽¹⁾~~Loans past due 30 days or more are considered to be in default.~~Bank’s troubled debt restructurings as of March 31, 2021 and March 31, 2020:

During the nine months ended September 30, 2019, three loans were modified that were considered to be a TDRs. Term concessions were granted on all loans and two loans had additional funds advanced for legal expenses and property taxes. No TDRs identified in the last twelve months subsequently defaulted in the nine months ended September 30, 2019.

During the three months ended ~~September~~March 31, 2021, no loans were modified that were considered to be TDRs.

⁽¹⁾Loans past due 30 ~~2019,~~days or more are considered to be in default.

During the three months ended March 31, 2020, one loan was modified that was considered to be a TDR. ~~Term concessions were granted on~~For this one loan, ~~and additional funds advanced for legal expenses and property taxes.~~a term concession was granted. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended ~~September 30, 2019.~~March 31, 2020.

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 thru March 31, 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 as of March 31, 2021 and December 31, 2020 are as follows:

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are as follows:

There was no accretable yield on purchased credit impaired loans for the period presented.

There were no purchased credit impaired loans acquired during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 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 September 30, 2020 and December 31, 2019 are as follows:~~

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.

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

Aggregate amortization expense was ~~$548 thousand and $630 thousand for the nine-month periods ended September 30, 2020 and 2019, respectively. Aggregate amortization expense was $163~~$164 thousand and $193 thousand for the three-month periods ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

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

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.

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.

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.

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 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.

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 ~~September 30,~~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 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 March 31, 2021 and December 31, 2020.

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

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

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

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.

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

The CBLR framework was available for banks to use in their ~~September 30, 2020,~~March 31, 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.

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.

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.

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.

As a qualified SBA lender, we were automatically authorized to originate SBA-PPP loans and began taking applications on April 3, 2020 until the programs ended on August 8, 2020. As of September 30, 2020, the Bank had closed and funded $81.9 million or 1,296 SBA-PPP loans.

The Bank had received $3.25 million of processing fees from the SBA through September 30, 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 September 30, 2020 was approximately $679 thousand. Loan forgiveness payments will be treated as prepayments and recognized as they occur. A summary of our SBA-PPP loans as of September 30, 2020 by SBA tier is as follows:

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 ☐

~~PART I FINANCIAL INFORMATION~~

Item 1.	Financial Statements	3

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

	Unaudited Consolidated Statements of Income—Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	4

	Unaudited Consolidated Statements of Comprehensive Income—~~Nine and~~ Three Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	5

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity—~~Nine and~~ Three Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	6

	Unaudited Consolidated Statements of Cash Flows—~~Nine~~Three Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41 44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	51

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5452

Item 3.	Defaults Upon Senior Securities	5452

Item 4.	Mine Safety Disclosures	5452

Item 5.	Other Information	5452

Item 6.	Exhibits	54 52

Signatures			5553

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

Cash and due from banks	$	9,638		$	8,388		$	10,728		$	10,009
Interest-bearing deposits with banks		36,106			34,861			44,760			84,863
Federal funds sold		888			1,138			751			817
Investment securities available for sale		30,411			32,881			89,557			33,507
Restricted equity securities		2,416			2,394			2,209			2,416
Loans, net of allowance for loan losses of $4,794 at September 30, 2020 and $3,893 at December 31, 2019		672,943			566,460
Loans, net of allowance for loan losses of $5,051 at March 31, 2021 and $4,900 at December 31, 2020								692,634			659,195
Cash value of life insurance		18,179			17,855			18,412			18,304
Properties and equipment, net		26,835			23,437			26,691			26,591
Accrued interest receivable		2,665			2,072			2,412			2,355
Core deposit intangible		2,522			3,070			2,195			2,359
Goodwill		3,257			3,257			3,257			3,257
Deferred tax assets, net		1,454			985			1,828			1,019
Other assets		9,650			9,492			11,391			10,695
	$	816,964		$	706,290		$	906,825		$	855,387

Liabilities and Stockholders’ Equity
Liabilities and Stockholders’ Equity

*Liabilities*
Deposits
Noninterest-bearing	$	221,026		$	165,900		$	261,734		$	231,852
Interest-bearing		492,990			445,311			545,526			523,676
Total deposits		714,016			611,211			807,260			755,528

FHLB advances		10,000			10,000			10,000			10,000
Paycheck protection program liquidity facility advances		5,375			-
Accrued interest payable		212			132			148			124
Other liabilities		3,686			3,519			4,720			4,629
		733,289			624,862			822,128			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		-			-			-			-
Common stock, no par value; 25,000,000 shares authorized, 6,060,775 and 6,137,275 issued and outstanding at September 30, 2020 and December 31, 2019, respectively		-			-
Common stock, no par value; 25,000,000 shares authorized, 6,050,275 and 6,045,775 issued and outstanding at March 31, 2021 and December 31, 2020, respectively								-			-
Surplus		39,885			40,752			39,631			39,740
Retained earnings		44,206			41,600			46,949			45,887
Accumulated other comprehensive loss		(416	)		(924	)		(1,883	)		(521	)
		83,675			81,428			84,697			85,106
	$	816,964		$	706,290		$	906,825		$	855,387

	Three Months Ended					Nine Months Ended				Three Months Ended
	September 30,					September 30,				March 31,
(dollars in thousands except share amounts)	2020		2019			2020		2019		2021		2020
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
*Interest income*
Loans and fees on loans	$	7,631	$	7,451		$	22,490	$	21,712	$	7,753	$	7,419
Interest-bearing deposits in banks		23		47			176		145		37		127
Federal funds sold		-		62			3		241		-		3
Interest on taxable securities		146		229			467		769		241		171
Interest on nontaxable securities		8		-			13		-		9		-
Dividends		12		11			80		72		12		18
											8,052		7,738
		7,820		7,800			23,229		22,939
*Interest expense*
Deposits		848		770			2,508		2,040		689		833
Interest on borrowings		26		3			71		3		20		21
		874		773			2,579		2,043		709		854
Net interest income		6,946		7,027			20,650		20,896		7,343		6,884

*Provision for loan losses*		291		151			1,027		665		162		322
Net interest income after provision for loan losses		6,655		6,876			19,623		20,231		7,181		6,562

*Noninterest income*
Service charges on deposit accounts		354		448			1,044		1,184		296		421
Other service charges and fees		562		512			1,572		1,524		606		493
Net realized gains on securities		103		49			315		45		-		212
Mortgage origination fees		185		89			566		299		309		129
Increase in cash value of life insurance		108		108			324		324		108		108
Other income		85		67			205		229		92		98
		1,397		1,273			4,026		3,605		1,411		1,461
*Noninterest expenses*
Salaries and employee benefits		3,590		3,306			10,651		9,725		3,555		3,469
Occupancy and equipment		852		758			2,410		2,197		914		783
Foreclosed asset expense, net		2		-			2		2
Data processing expense		450		401			1,333		1,132		496		416
FDIC Assessments		60		(89	)		135		55		77		15
Advertising		192		148			482		441		110		106
Bank franchise tax		133		111			365		333		126		110
Director fees		79		57			210		205		60		70
Professional fees		128		118			375		480		187		142
Telephone expense		101		102			284		282		105		84
Core deposit intangible amortization		163		193			548		630		164		193
Other expense		529		499			1,632		1,581		491		541
		6,279		5,604			18,427		17,063		6,285		5,929
Net income before income taxes		1,773		2,545			5,222		6,773		2,307		2,094

*Income tax expense*		358		511			1,034		1,339		460		418
Net income	$	1,415	$	2,034		$	4,188	$	5,434	$	1,847	$	1,676

*Net income per share*	$	0.23	$	0.33		$	0.69	$	0.88	$	0.31	$	0.27
*Weighted average shares outstanding*		6,060,775		6,174,851			6,082,950		6,179,909		6,043,269		6,121,616
*Dividends declared per share*	$	0.13	$	0.12		$	0.26	$	0.24	$	0.13	$	0.13

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~September~~ 30~~, 20~~20 March 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

		Nine Months Ended						Three Months Ended
		September 30,						March 31,
(dollars in thousands)	��	2020			2019			2021			2020
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Net Income		$	4,188		$	5,434		$	1,847		$	1,676

Other comprehensive income
Other comprehensive income (loss)

Unrealized gains on investment securities available for sale:
Unrealized gains arising during the period			958			1,385
Tax related to unrealized gains			(201	)		(292	)
Unrealized gains (losses) on investment securities available for sale:
Unrealized gains (losses) arising during the period									(1,724	)		163
Tax related to unrealized (gains) losses									362			(34	)
Reclassification of net realized gains during the period			(315	)		(45	)		-			(212	)
Tax related to realized gains			66			10			-			44

Total other comprehensive income			508			1,058
Total other comprehensive loss									(1,362	)		(39	)
Total comprehensive income		$	4,696		$	6,492		$	485		$	1,637

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2020
March 31, 2021
*Available for sale:*
U.S. Government agencies										$	10,307	$	-	$	(142	)	$	10,165
Mortgage-backed securities											48,295		391		(777	)		47,909
Corporate securities											1,500		-		-			1,500
State and municipal securities											30,443		208		(668	)		29,983
										$	90,545	$	599	$	(1,587	)	$	89,557
December 31, 2020
*Available for sale:*
Mortgage-backed securities	$	13,972	$	496	$	-		$	14,468	$	15,212	$	472	$	-		$	15,684
Corporate securities		1,500		-		(42	)		1,458		1,500		-		-			1,500
State and municipal securities		14,232		274		(21	)		14,485		16,059		295		(31	)		16,323
	$	29,704	$	770	$	(63	)	$	30,411	$	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
September 30, 2020
March 31, 2021
*Available for sale:*
U.S. Government agencies																$	10,165	$	(142	)	$	-	$	-	$	10,165	$	(142	)
Mortgage-backed securities	$	-	$	-		$	-	$	-		$	-	$	-			33,781		(777	)		-		-		33,781		(777	)
Corporate securities		-		-			1,458		(42	)		1,458		(42	)		-		-			-		-		-		-
State and municipal securities		1,518		(21	)		-		-			1,518		(21	)		18,133		(668	)		-		-		18,133		(668	)
Total securities available for sale	$	1,518	$	(21	)	$	1,458	$	(42	)	$	2,976	$	(63	)	$	62,079	$	(1,587	)	$	-	$	-	$	62,079	$	(1,587	)

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

	Nine Months Ended September 30					Three Months Ended September 30					Three Months Ended March 31
(dollars in thousands)	2020		2019			2020		2019			2021		2020

Realized gains	$	315	$	88		$	103	$	56		$	-	$	212
Realized losses		-		(43	)		-		(7	)		-		-
	$	315	$	45		$	103	$	49		$	-	$	212

(dollars in thousands)
March 31, 2021
	# of SBA					Balance Less
SBA Tier	Approved		Mix			Unearned Fees		Mix

$2 million to $10 million		3		0.17	%	$	9,237		12.89	%
Over $350,000 to less than $2 million		31		1.73	%		15,158		21.15	%
Up to $350,000		1,757		98.10	%		47,277		65.96	%
Total		1,791		100.00	%	$	71,672		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	%

	Loan Grades
(dollars in thousands)	Pass		Watch		Special Mention		Substandard		Total

March 31, 2021
Real Estate Secured:
Construction & development	$	44,767	$	-	$	120	$	1,014	$	45,901
Farmland		25,783		416		492		5,739		32,430
Residential		283,044		459		-		1,260		284,763
Commercial mortgage		193,096		8,295		5,546		3,255		210,192
Non-Real Estate Secured:
Commercial & agricultural		34,098		362		133		441		35,034
SBA-PPP		71,672		-		-		-		71,672
Consumer & other		17,689		-		-		4		17,693
Total	$	670,149	$	9,532	$	6,291	$	11,713	$	697,685

December 31, 2020
Real Estate Secured:
Construction & development	$	44,909	$	427	$	122	$	595	$	46,053
Farmland		25,607		419		496		5,927		32,449
Residential		277,811		659		-		1,423		279,893
Commercial mortgage		188,156		8,692		3,647		3,391		203,886
Non-Real Estate Secured:
Commercial & agricultural		32,467		468		161		567		33,663
SBA-PPP		51,118		-		-		-		51,118
Consumer & other		17,028		-		-		5		17,033
Total	$	637,096	$	10,665	$	4,426	$	11,908	$	664,095

	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

(dollars in thousands)
March 31, 2021
	# of SBA					Balance Less
Industry	Approved		Mix			Unearned Fees		Mix

Manufacturing		84		4.69	%	$	13,108		18.29	%
Retail Trade		167		9.33	%		4,245		5.92	%
Construction		185		10.33	%		5,968		8.33	%
Health Care & Social Assistance		83		4.63	%		5,558		7.76	%
Accommodation & Retail Services		132		7.37	%		8,158		11.38	%
Educational Services		12		0.67	%		7,362		10.27	%
General & Other		1,128		62.98	%		27,273		38.05	%
Total		1,791		100.00	%	$	71,672		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	%

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

September 30, 2020
March 31, 2021
Real Estate Secured:
Construction & development	$	-	$	-	$	10	$	10	$	44,346	$	44,356	$	-	$	10	$	467	$	-	$	-	$	467	$	45,434	$	45,901	$	-	$	436
Farmland		136		-		783		919		32,962		33,881		-		4,149		305		-		797		1,102		31,328		32,430		-		1,641
Residential		310		-		283		593		273,546		274,139		-		384		292		46		224		562		284,201		284,763		-		531
Commercial mortgage		-		-		125		125		193,708		193,833		-		217		7		-		24		31		210,161		210,192		-		106
Non-Real Estate Secured:
Commercial & agricultural		23		-		146		169		32,721		32,890		-		181		2		-		154		156		34,878		35,034		-		168
SBA-PPP		-		-		-		-		79,407		79,407		-		-		-		-		-		-		71,672		71,672		-		-
Consumer & other		29		1		-		30		19,201		19,231		-		-		-		3		-		3		17,690		17,693		-		-
Total	$	498	$	1	$	1,347	$	1,846	$	675,891	$	677,737	$	-	$	4,941	$	1,073	$	49	$	1,199	$	2,321	$	695,364	$	697,685	$	-	$	2,882

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

Impaired Loans
							Nine months ended				Three months ended
			Unpaid				Average		Interest		Average		Interest
	Recorded		Principal		Related		Recorded		Income		Recorded		Income								Three months ended
(dollars in thousands)	Investment¹		Balance		Allowance		Investment		Recognized		Investment		Recognized		Recorded Investment¹		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2020

March 31, 2021
With no related allowance recorded:
Construction & development	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	426	$	425	$	-	$	426	$	(5	)
Farmland		2,696		3,267		-		2,968		175		2,766		165		2,439		3,098		-		2,509		19
Residential		-		-		-		-		-		-		-		-		-		-		38		8
Commercial mortgage		-		-		-		-		-		-		-		-		-		-		-		-
Commercial & agricultural		-		-		-		-		-		-		-		-		-		-		-		-
Consumer & other		-		-		-		-		-		-		-		-		-		-		1		-
Subtotal		2,696		3,267		-		2,968		175		2,766		165		2,865		3,523		-		2,974		22

With an allowance recorded:
Construction & development		536		536		29		539		23		537		8		493		493		10		497		7
Farmland		149		158		2		150		2		150		1		127		143		2		127		2
Residential		3,208		3,383		177		3,235		136		3,218		45		2,836		3,012		174		2,848		39
Commercial mortgage		8		53		1		10		2		9		1		7		52		-		8		1
Commercial & agricultural		49		49		3		50		2		49		1		44		44		3		45		1
Consumer & other		2		2		-		2		-		2		-		-		-		-		-		-
Subtotal		3,952		4,181		212		3,986		165		3,965		56		3,507		3,744		189		3,525		50

Totals:
Construction & development		536		536		29		539		23		537		8		919		918		10		923		2
Farmland		2,845		3,425		2		3,188		177		2,916		166		2,566		3,241		2		2,636		21
Residential		3,208		3,383		177		3,235		136		3,218		45		2,836		3,012		174		2,886		47
Commercial mortgage		8		53		1		10		2		9		1		7		52		-		8		1
Commercial & agricultural		49		49		3		50		2		49		1		44		44		3		45		1
Consumer & other		2		2		-		2		-		2		-		-		-		-		1		-
Total	$	6,648	$	7,448	$	212	$	6,954	$	340	$	6,731	$	221	$	6,372	$	7,267	$	189	$	6,499	$	72

	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)	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		3	$	471	$	470		-	$	-	$	-
Farmland		-		-		-		-		-		-
Residential		1		46		50		-		-		-
Commercial mortgage		-		-		-		-		-		-
Commercial & agricultural		1		20		20		-		-		-
Consumer & other		-		-		-		-		-		-
Total		5	$	537	$	540		-	$	-	$	-

	Nine Months Ended September 30,						Three Months Ended September 30,
(dollars in thousands)	2020			2019			2020			2019			Three Months Ended March 31,
													2021			2020
Service cost	$	-		$	-		$	-		$	-

Interest cost		123			138			41			46		$	36		$	41
Expected return on plan assets		(471	)		(414	)		(157	)		(138	)		(174	)		(157	)
Amortization of prior service cost		-			-			-			-
Recognized net loss due to settlement		-			36			-			36
Recognized net actuarial loss		21			30			7			10			9			7
Net periodic benefit cost	$	(327	)	$	(210	)	$	(109	)	$	(46	)	$	(129	)	$	(109	)

	September 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2020			2019			2021			2020

Lease liabilities	$	714		$	729		$	657		$	680
Right-of-use assets	$	714		$	729		$	657		$	680
Weighted average remaining lease term (years)		7.22			8.06			6.93			7.10
Weighted average discount rate		2.45	%		2.39	%		2.43	%		2.45	%

	Nine Months Ended September 30,				Three Months Ended March 31,
(dollars in thousands)	2020		2019		2021		2020

Lease Expense
Operating lease expense	$	108	$	67	$	38	$	25
Short-term lease expense		25		62		9		16
Total lease expense	$	133	$	129	$	47	$	41

Cash paid for amounts included in lease liabilities	$	108	$	67	$	38	$	25

(dollars in thousands)

Three months ending December 31, 2020	$	38
Twelve months ending December 31, 2021		150
Nine months ending December 31, 2021				$	115
Twelve months ending December 31, 2022		119			123
Twelve months ending December 31, 2023		79			82
Twelve months ending December 31, 2024		68			69
Twelve months ending December 31, 2025					72
Thereafter		330			258
Total undiscounted cash flows	$	784		$	719
Less discount		(70	)		(62	)
Lease liabilities	$	714		$	657

						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			-	$	-
Granted			14,500		11.30
Vested			-		-	$	-
Forfeited			-		-
Unvested as of March 31, 2021			14,500	$	11.30

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

September 30, 2020
March 31, 2021

Financial Instruments – Assets
Net Loans	$	672,943	$	670,510	$	-	$	670,310	$	200	$	692,634	$	688,117	$	-	$	687,921	$	196

Financial Instruments – Liabilities
Time Deposits		195,063		196,594		-		196,594		-		192,803		194,272		-		194,272		-
FHLB Advances		10,000		9,738		-		9,738		-		10,000		9,849		9,849		-		-
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	$	-	$	653,255	$	199

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

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

September 30, 2020
March 31, 2021
*Investment securities available for sale*
U.S. Government agencies									$	10,165	$	-	$	10,165	$	-
Mortgage-backed securities										47,909		-		47,909		-
Corporate securities										1,500		-		1,500		-
State and municipal securities										29,983		-		29,983		-
Total assets at fair value									$	89,557	$	-	$	89,557	$	-

December 31, 2020
*Investment securities available for sale*
Mortgage-backed securities	$	14,468	$	-	$	14,468	$	-	$	15,684	$	-	$	15,684	$	-
Corporate securities		1,458		-		1,458		-		1,500		-		1,500		-
State and municipal securities		14,485		-		14,485		-		16,323		-		16,323		-
Total assets at fair value	$	30,411	$	-	$	30,411	$	-	$	33,507	$	-	$	33,507	$	-

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					Actual					For Capital Adequacy Purposes					To Be Well- Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2020
March 31, 2021
Total Capital (to risk weighted assets)	$	82,059		13.32	%	$	49,287		8.00	%	$	61,609		10.00	%	$	85,324		12.78	%	$	53,401		8.00	%	$	66,752		10.00	%
Tier 1 Capital (to risk weighted assets)	$	77,225		12.53	%	$	36,965		6.00	%	$	49,287		8.00	%	$	80,237		12.02	%	$	40,051		6.00	%	$	53,401		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	77,225		12.53	%	$	27,724		4.50	%	$	40,046		6.50	%	$	80,237		12.02	%	$	30,038		4.50	%	$	43,388		6.50	%
Tier 1 Capital (to average total assets)	$	77,225		9.70	%	$	31,836		4.00	%	$	39,796		5.00	%	$	80,237		9.25	%	$	34,713		4.00	%	$	43,391		5.00	%

December 31, 2019
December 31, 2020
Total Capital (to risk weighted assets)	$	78,652		13.53	%	$	46,499		8.00	%	$	58,124		10.00	%	$	84,176		13.10	%	$	51,409		8.00	%	$	64,261		10.00	%
Tier 1 Capital (to risk weighted assets)	$	74,726		12.86	%	$	34,874		6.00	%	$	46,499		8.00	%	$	79,240		12.33	%	$	38,557		6.00	%	$	51,409		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	74,726		12.86	%	$	26,156		4.50	%	$	37,780		6.50	%	$	79,240		12.33	%	$	28,918		4.50	%	$	41,770		6.50	%
Tier 1 Capital (to average total assets)	$	74,726		10.80	%	$	27,680		4.00	%	$	34,599		5.00	%	$	79,240		9.50	%	$	33,354		4.00	%	$	41,692		5.00	%

Summary of Loan Loss Experience	Nine			Nine						Three			Three
	months			months			Year			months			months			Year
	ended			ended			ended			ended			ended			ended
(dollars in thousands)	September 30,			September 30,			December 31,			March 31,			March 31,			December 31,
	2020			2019			2019			2021			2020			2020
Total loans outstanding at end of period	$	677,737		$	562,210		$	570,353		$	697,685		$	577,191		$	664,095

Allowance for loan losses, beginning of period	$	3,893		$	3,495		$	3,495		$	4,900		$	3,893		$	3,893

Charge offs:
Construction & development		(8	)		-			-			-			-			(8	)
Farmland		-			(14	)		(13	)		-			-			-
Residential		(48	)		(32	)		(55	)		-			-			(48	)
Commercial mortgage		(61	)		(41	)		(41	)		-			-			(61	)
Commercial & agricultural		(14	)		(77	)		(77	)		-			-			(37	)
Consumer & other		(106	)		(154	)		(212	)		(34	)		(53	)		(148	)
Total charge-offs		(237	)		(318	)		(398	)		(34	)		(53	)		(302	)

Recoveries:
Construction & development		4			-			-			-			4			4
Farmland		-			-			-			-			-			-
Residential		11			8			8			2			8			11
Commercial mortgage		65			69			69			-			65			65
Commercial & agricultural		2			6			10			1			2			6
Consumer & other		29			47			54			20			11			34
Total recoveries		111			130			141			23			90			120
Net charge-offs		(126	)		(188	)		(257	)		(11	)		37			(182	)

Provision for allowance		1,027			665			655			162			322			1,189
Allowance for loan losses at end of period	$	4,794		$	3,972		$	3,893		$	5,051		$	4,252		$	4,900

Ratios:
Allowance for loan losses to loans at end of period		0.71	%		0.71	%		0.68	%		0.72	%		0.74	%		0.74	%
Net charge-offs to allowance for loan losses		2.63	%		4.73	%		6.60	%		0.22	%		0.87	%		3.71	%
Net charge-offs to provisions for loan losses		12.27	%		28.27	%		39.24	%		6.79	%		11.49	%		15.31	%

	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 1/1 through 1/31		-	$	-		-		182,500
Purchased 2/1 through 2/28		-	$	-		-		182,500
Purchased 3/1 through 3/31		10,000	$	10.95		10,000		172,500
Total		10,000	$	10.95		10,000

	Parkway Acquisition Corp.


	~~Parkway Acquisition Corp.~~
Date: May 17, 2021	By:	/s/ Blake M. Edwards
		Blake M. Edwards
		President and Chief Executive Officer



~~Date: November 13, 2020~~	~~By:~~	~~/s/ Blake M. Edwards~~
	By:	~~Blake M. Edwards~~
		~~President and Chief Executive Officer~~
	/s/ Lori C. Vaught

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