For the Three and Nine Months ended September 30, ~~2021~~2022 and ~~2020~~2021

For the Nine and Three Months ended September 30, ~~2021~~2022 and ~~2020~~2021

For the Nine and Three Months ended September 30, ~~2021~~2022 and ~~2020~~2021 (unaudited)

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”), a wholly-owned subsidiary of Grayson. Effective March 13, 2017, the Bank changed its name to Skyline National Bank.

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

The Bank was organized under the laws of the United States in 1900 and now serves the Virginia counties of Grayson, Floyd, Carroll, Wythe, Pulaski, Montgomery and Roanoke, and the North Carolina counties of Alleghany, Ashe, Burke, Caldwell, Catawba, Cleveland, Davie, Watauga, Wilkes, and Yadkin, and the surrounding areas, through ~~twenty-four~~twenty-five full-service banking ~~offices and~~ ~~one~~ ~~loan production office.~~offices. As ana 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 (the “Federal Reserve”).

The consolidated financial statements as of September 30, ~~2021~~2022 and for the nine and three-month periods ended September 30, ~~2021~~2022 and ~~2020~~2021 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, ~~2020,~~2021, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021. The results of operations for the nine and three months ended September 30, ~~2021~~2022 are not necessarily indicative of the results to be expected for the full year.

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

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.

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.

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.

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.

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.

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

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.

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

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.

Available for sale securities are reported at fair value and consist of mortgage-backed, U.S. government agencies, corporate, and state and municipal securities not classified as trading securities or as held to maturity securities.

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

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.

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

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.

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.

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.

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 provided several amendments to the SBA-PPP, including additional funding for first and second draws of SBA-PPP loans up to May 31, 2021. The Company is a participant in the SBA-PPP. See Note 3 Loans Receivable for more information.

Also, in response to the COVID-19 pandemic, the Federal Reserve, the FDIC, the National Credit Union Administration, the OCC, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The ~~regulatory~~ agencies confirmed with FASB staff that those 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~~offered short-term loan modifications to assist borrowers during the COVID-19 pandemic. These modifications generally ~~involve~~involved 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~~did not account for such loan modifications as TDRs. As the COVID-19 pandemic ~~persists~~persisted in negatively impacting the economy, the Company ~~continues to offer~~offered 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~~were granted specifically under Section 4013 of the CARES Act and generally ~~involve~~involved 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 (“FFIEC”) on behalf of its members issued a joint statement on additional loan accommodations related to COVID-19. The joint statement ~~clarifies~~clarified 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~~had to 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~~did 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.~~Act. Overseen by the U.S. Treasury Department, the SBA-PPP ~~offers~~offered 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 could 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 have: (a) an interest rate of 1.0%, (b) a two-year or five-year term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the SBA-PPP loans made to eligible borrowers. The entire principal amount of the borrower’s SBA-PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the SBA-PPP, subject to certain eligibility requirements and conditions.

Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate loan class. Origination fees received by the SBA are capitalized into the carrying amount of the loans. The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the straight-line method.

The allowance for loan losses for SBA-PPP loans originated ~~through~~during ~~September 30,~~ 2021 and 2020were 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:

Share-Based Compensation

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

As of September 30, ~~2021,~~2022, only restricted stock awards have been ~~issued.~~issued to key employees and stock awards have been issued to non-employee directors. The fair value of the stock awards or restricted stock is determined based on the closing price of the Company’s common stock on the date of grant. The Company recognizes compensation expense related to restricted stock on a straight-line basis over the vesting period for service-based awards. See additional discussion of share-based compensation in Note 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.

Goodwill and Other Intangible Assets

Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquire, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected November 1 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

Other intangible assets consist of core deposit intangibles that represent the value of long-term deposit relationships acquired in a business combination. Core deposit intangibles are amortized over the estimated useful lives of the deposit accounts acquired. The core deposit intangible as a result of the Cardinal merger, is amortized over an estimated useful life of twenty years on an accelerated basis. For the core deposit intangible as a result of the Great State merger, we used an estimated useful life of seven years on an accelerated basis for the amortization.

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

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. Fees for these services for the nine months ended September 30, 2022 and 2021 amounted to $1.4 million and $1.1 million, respectively. Fees for these services for the three months ended September 30, 2022 and 2021 amounted to $489 thousand and $444 thousand, respectively.

Mortgage Origination Fees –Mortgage origination fees consist of commissions received on mortgage loans closed in the secondary market. The Company acts as an intermediary between the Company’s customer and companies that specialize in mortgage lending in the secondary market. The Company’s performance obligation is generally satisfied when the mortgage loan is closed and funded and the Company receives its commission at that time. Fees for these services for the nine months ended September 30, 2022 and 2021 amounted to $359 thousand and $861 thousand, respectively. Fees for these services for the three months ended September 30, 2022 and 2021 amounted to $74 thousand and $275 thousand, respectively.

Other Service Charges and Fees - Other service charges include safety deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. In addition, the following items are also included in other service charges and fees on the consolidated statements of income:

●

ATM, Credit and Debit Card Fees - ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa or Mastercard. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for ATM fees, interchange fee income, and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Fees for these services for the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 amounted to ~~$295 thousand~~$2.0 million and ~~$293 thousand,~~$1.7 million, respectively. Fees for these services for the three months ended September 30, ~~2021~~2022 and ~~2020~~2021 amounted to ~~$106~~$704 thousand and ~~$105~~$588 thousand, respectively.

	●	Insurance and Investment - Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. For the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 the Company received ~~$45~~$46 thousand and ~~$26~~$45 thousand, respectively in income from these services. For the three months ended September 30, ~~2021~~2022 and ~~2020~~2021 the Company received ~~$14~~$20 thousand and $9$14 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. For the ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~and~~ ~~2020~~ ~~the Company received $861 thousand and $566 thousand, respectively in income from mortgage origination fees. For the~~ ~~three~~ ~~months ended~~ ~~September 30, 2021~~ ~~and~~ ~~2020~~ ~~the Company received $275 thousand and $185 thousand, respectively in income from mortgage origination fees.~~

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Leases

We have performed an evaluation of our leasing contracts and activities. We have developed our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments. There was not a material change to the timing of expense recognition. See additional discussion of leases in Note 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.

Advertising Expense

The Company expenses advertising costs as they are incurred. Advertising expense for nine months ended September 30, 2022 and 2021 amounted to $488 thousand and $473 thousand, respectively. Advertising expense for the ~~years presented is~~ ~~not~~three ~~material.~~months ended September 30, 2022 and 2021 amounted to $161 thousand and $172 thousand, respectively.

Basic Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends. For the nine and three months ended September 30, 2022 and 2021, there were no dilutive instruments.

~~Fair Value of Financial Instruments~~

~~Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note~~ ~~10.~~ ~~Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.~~

~~Reclassification~~

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

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

	Unrealized Gains									Unrealized Gains
	And (Losses)									And (Losses)
(dollars in thousands)	*On Available for*			*Defined Benefit*						*On Available for*			*Defined Benefit*
	*Sale Securities*			*Pension Items*			*Total*			*Sale Securities*			*Pension Items*			*Total*

Balance, December 31, 2019	$	51		$	(975	)	$	(924	)
Other comprehensive income before reclassifications		757			0			757
Amounts reclassified from accumulated other comprehensive income, net of tax		(249	)		0			(249	)
Balance September 30, 2020	$	559		$	(975	)	$	(416	)

Balance, December 31, 2020	$	582		$	(1,103	)	$	(521	)	$	582		$	(1,103	)	$	(521	)
Other comprehensive income before reclassifications		(814	)		0			(814	)
Other comprehensive loss before reclassifications											(814	)		-			(814	)
Amounts reclassified from accumulated other comprehensive income, net of tax		(209	)		0			(209	)		(209	)		-			(209	)
Balance September 30, 2021	$	(441	)	$	(1,103	)	$	(1,544	)	$	(441	)	$	(1,103	)	$	(1,544	)

Balance, December 31, 2021										$	(1,477	)	$	(662	)	$	(2,139	)
Other comprehensive loss before reclassifications											(20,218	)		-			(20,218	)
Amounts reclassified from accumulated other comprehensive income, net of tax											-			-			-
Balance September 30, 2022										$	(21,695	)	$	(662	)	$	(22,357	)

Off-Balance Sheet Credit Related Financial Instruments

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

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 10. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

Reclassification

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Recent Accounting Pronouncements

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to change the accounting for credit losses to a current expected credit losses (“CECL”) model and modify the impairment model for certain debt securities. The Company will apply the amendments to the Accounting Standards Updates (“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.

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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

~~Recent Accounting Pronouncements, continued~~

In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification (“ASC”) 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 consolidated financial statements.

In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13. The amendments affect a variety of Topics in the ASC. 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 consolidated 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 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 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 consolidated financial statements.

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Recent Accounting Pronouncements, continued

In August 2021, the FASB issued amendments to update SEC paragraphs in the ASC to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments are effective upon issuance. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In October 2021, the FASB amended the Business Combinations topic in the Accounting Standards Codification to require entities to apply guidance in the Revenue topic to recognize and measure contract assets and contract liabilities acquired in a business combination. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments are applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In March 2022, the FASB issued ASU No.2022-02,Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.

In June 2022, the FASB issued amendments to clarify the guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. The amendments are effective for fiscal years beginning after December 15, 2023, 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 consolidated 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.

2021

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 2. Investment Securities

Investment securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 follow:

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2021
September 30, 2022
*Available for sale:*
U.S. Treasury securities										$	4,976	$	-	$	(145	)	$	4,831
U.S. Government agencies											24,991		-		(4,355	)		20,636
Mortgage-backed securities											80,546		-		(11,995	)		68,551
Corporate securities											1,500		-		-			1,500
State and municipal securities											53,940		19		(10,986	)		42,973
										$	165,953	$	19	$	(27,481	)	$	138,491
December 31, 2021
*Available for sale:*
U.S. Government agencies	$	15,295	$	28	$	(84	)	$	15,239	$	20,333	$	7	$	(191	)	$	20,149
Mortgage-backed securities		56,124		377		(795	)		55,706		64,437		208		(1,334	)		63,311
Corporate securities		1,500		0		0			1,500		1,500		-		-			1,500
State and municipal securities		35,062		297		(382	)		34,977		45,314		189		(748	)		44,755
	$	107,981	$	702	$	(1,261	)	$	107,422	$	131,584	$	404	$	(2,273	)	$	129,715
December 31, 2020
*Available for sale:*
Mortgage-backed securities	$	15,212	$	472	$	0		$	15,684
Corporate securities		1,500		0		0			1,500
State and municipal securities		16,059		295		(31	)		16,323
	$	32,771	$	767	$	(31	)	$	33,507

Restricted equity securities totaled ~~$2.2 million and $2.4~~$2.0 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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, ~~2021~~2022 and December 31, ~~2020.~~2021.

	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, 2021
September 30, 2022
*Available for sale:*
U.S. Treasury securities																$	4,831	$	(145	)	$	-	$	-			4,831	$	(145	)
U.S. Government agencies																	8,677		(1,943	)		8,684		(2,412	)		20,636		(4,355	)
Mortgage-backed securities																	42,691		(4,977	)		29,127		(7,018	)		68,543		(11,995	)
State and municipal securities																	27,860		(6,897	)		13,534		(4,089	)		41,394		(10,986	)
Total securities available for sale																$	84,059	$	(13,962	)	$	51,345	$	(13,519	)	$	135,404	$	(27,481	)

December 31, 2021
*Available for sale:*
U.S. Government agencies	$	10,927	$	(84	)	$	0	$	0	��	$	10,927	$	(84	)	$	15,091	$	(191	)	$	-	$	-		$	15,091	$	(191	)
Mortgage-backed securities		40,501		(795	)		0		0			40,501		(795	)		51,990		(1,334	)		-		-			51,990		(1,334	)
Corporate securities		0		0			0		0			0		0
State and municipal securities		15,762		(356	)		1,509		(26	)		17,271		(382	)		28,305		(589	)		3,560		(159	)		31,865		(748	)
Total securities available for sale	$	67,190	$	(1,235	)	$	1,509	$	(26	)	$	68,699	$	(1,261	)	$	95,386	$	(2,114	)	$	3,560	$	(159	)	$	98,946	$	(2,273	)

December 31, 2020
*Available for sale:*
U.S. Government agencies	$	0	$	0		$	0	$	0		$	0	$	0
Mortgage-backed securities		0		0			0		0			0		0
Corporate securities		0		0			0		0			0		0
State and municipal securities		3,694		(31	)		0		0			3,694		(31	)
Total securities available for sale	$	3,694	$	(31	)	$	0	$	0		$	3,694	$	(31	)

2122

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 2. Investment Securities, continued

At September 30, ~~2021,~~2022, ~~32 debt~~82 investment securities with unrealized losses had depreciated ~~1.80~~16.87 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 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, ~~2021.~~2022. 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.

There were no sales of investment securities available for sale for the nine and three-month periods ended September 30, 2022. Proceeds from sales of investment securities available for sale ~~were~~was $8.62 ~~million and $10.74~~ million for the nine~~-month periods ended~~ ~~September 30, 2021~~ and~~2020~~ ~~and $8.62 million and $2.94 million for the~~ three-month periods ended September 30, ~~2021~~2021. ~~and~~ ~~2020,~~ ~~respectively.~~ Gross proceeds from called securities totaled ~~$500 thousand and $1.29~~$1.7 million for the nine-month ~~periods~~period ended September 30, ~~2021~~2022 and $500 thousand for the ~~2020,~~nine ~~respectively.~~ -month period ended September 30, 2021. 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, ~~2021~~2022 and ~~2020~~2021 are as follows:

Nine Months Ended September 30

Three Months Ended September 30

(dollars in thousands)

2021

2020

2021

2020

Realized gains
$ 265 $ 315 $ 265 $ 103
Realized losses
0 0 0 0
$ 265 $ 315 $ 265 $ 103

	Nine Months Ended September 30				Three Months Ended September 30
(dollars in thousands)	2022		2021		2022		2021

Realized gains	$	-	$	265	$	-	$	265
Realized losses		-		-		-		-
	$	-	$	265	$	-	$	265

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, ~~2021~~2022, were as follows:

(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	2,810	$	2,847	$	78	$	77
Due after one year through five years		4,777		4,835		13,630		13,061
Due after five years through ten years		26,891		26,743		67,344		57,252
Due after ten years		73,503		72,997		84,901		68,101
	$	107,981	$	107,422	$	165,953	$	138,491

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

Investment securities with amortized cost of approximately ~~$23.2~~$34.2 million and ~~$14.1~~$32.0 million at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

2223

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 3. Loans Receivable

The major components of loans in the consolidated balance sheets at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:

(dollars in thousands)	2021			2020			2022			2021

Construction & development	$	44,435		$	46,053		$	45,826		$	44,252
Farmland		28,082			32,449			24,846			25,026
Residential		292,670			279,893			346,308			298,413
Commercial mortgage		229,118			203,886			261,879			230,071
Commercial & agricultural		32,726			33,663			39,794			38,442
SBA-PPP		37,762			51,118			86			24,528
Consumer & other		21,324			17,033			20,253			22,800
Total loans		686,117			664,095			738,992			683,532
Allowance for loan losses		(5,550	)		(4,900	)		(6,168	)		(5,677	)
Loans, net of allowance for loan losses	$	680,567		$	659,195		$	732,824		$	677,855

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, substantially all of the Bank’s residential 1-4 family loans were pledged as collateral for borrowing lines at the FHLB.

Small Business Administration Paycheck Protection Program

Gross SBA-PPP loans totaling ~~$40.8 million~~$96 thousand with net deferred fees of ~~$3.0 million~~$10 thousand remained on the balance sheet as of September 30, ~~2021.~~2022. Gross SBA-PPP loans totaling ~~$52.5~~$26.3 million with net deferred fees of ~~$1.4~~$1.8 million remained on the balance sheet at December 31, ~~2020.~~2021. 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 forgiveness payments will be treated as prepayments and recognized as they occur. A summary of our SBA-PPP loans as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 by SBA tier is as follows:

(dollars in thousands)
September 30, 2021
September 30, 2022											September 30, 2022
	# of SBA					Balance Less						# of SBA					Balance Less
SBA Tier	Approved		Mix			Unearned Fees		Mix				Approved		Mix			Unearned Fees		Mix

$2 million to $10 million		1		0.07	%	$	1,947		5.16	%			-		-	%	$	-		-	%
Over $350,000 to less than $2 million		18		1.26	%		8,062		21.35	%			-		-	%		-		-	%
Up to $350,000		1,415		98.67	%		27,753		73.49	%			8		100.00	%		86		100.00	%
Total		1,434		100.00	%	$	37,762		100.00	%			8		100.00	%	$	86		100.00	%

(dollars in thousands)
December 31, 2020
December 31, 2021											December 31, 2021
	# of SBA					Balance Less						# of SBA					Balance Less
SBA Tier	Approved		Mix			Unearned Fees		Mix				Approved		Mix			Unearned Fees		Mix

$2 million to $10 million		2		0.20	%	$	7,267		14.22	%			1		0.12	%	$	1,950		7.95	%
Over $350,000 to less than $2 million		18		1.78	%		11,693		22.87	%			11		1.36	%		5,018		20.46	%
Up to $350,000		988		98.02	%		32,158		62.91	%			797		98.52	%		17,560		71.59	%
Total		1,008		100.00	%	$	51,118		100.00	%			809		100.00	%	$	24,528		100.00	%

2324

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 3. Loans Receivable, continued

Small Business Administration Paycheck Protection Program, continued

A summary of our SBA-PPP loans as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021 by industry is as follows:

(dollars in thousands)
September 30, 2021
September 30, 2022											September 30, 2022
	# of SBA					Balance Less						# of SBA					Balance Less
Industry	Approved		Mix			Unearned Fees		Mix				Approved		Mix			Unearned Fees		Mix

Manufacturing		46		3.21	%	$	3,929		10.41	%			-		-	%	$	-		-	%
Retail Trade		102		7.11	%		1,848		4.89	%			1		12.50	%		21		24.42	%
Construction		190		13.25	%		3,980		10.54	%			1		12.50	%		10		11.63	%
Health Care & Social Assistance		40		2.79	%		2,543		6.73	%			1		12.50	%		5		5.81	%
Accommodation & Retail Services		90		6.27	%		6,021		15.95	%			1		12.50	%		30		34.88	%
Educational Services		9		0.63	%		2,432		6.44	%			-		-	%		-		-	%
General & Other		957		66.74	%		17,009		45.04	%			4		50.00	%		20		23.26	%
Total		1,434		100.00	%	$	37,762		100.00	%			8		100.00	%	$	86		100.00	%

(dollars in thousands)
December 31, 2020
December 31, 2021											December 31, 2021
	# of SBA					Balance Less						# of SBA					Balance Less
Industry	Approved		Mix			Unearned Fees		Mix				Approved		Mix			Unearned Fees		Mix

Manufacturing		74		7.34	%	$	14,327		28.03	%			26		3.21	%	$	2,067		8.43	%
Retail Trade		134		13.29	%		5,247		10.26	%			61		7.54	%		1,124		4.58	%
Construction		127		12.60	%		3,577		7.00	%			127		15.70	%		2,855		11.64	%
Health Care & Social Assistance		73		7.24	%		3,550		6.94	%			18		2.23	%		1,300		5.30	%
Accommodation & Retail Services		91		9.03	%		3,705		7.25	%			58		7.17	%		4,235		17.27	%
Educational Services		7		0.70	%		4,825		9.44	%			4		0.49	%		2,424		9.88	%
General & Other		502		49.80	%		15,887		31.08	%			515		63.66	%		10,523		42.90	%
Total		1,008		100.00	%	$	51,118		100.00	%			809		100.00	%	$	24,528		100.00	%

2425

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 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.

2526

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, ~~2021~~2022 and December 31, ~~2020:~~2021:

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)

Construction
&
Development

Farmland

Residential

Commercial
Mortgage

Commercial
&
Agricultural

Consumer
& Other

Total

For the Three Months Ended September 30, 2021

Allowance for loan losses:

Balance, June 30, 2021
$ 428 $ 344 $ 2,320 $ 1,843 $ 273 $ 134 $ 5,342
Charge-offs
0 0 0 0 (8 ) (22 ) (30 )
Recoveries
1 0 0 0 8 10 19
Provision
59 (32 ) 117 86 (3 ) (8 ) 219
Balance, September 30, 2021
$ 488 $ 312 $ 2,437 $ 1,929 $ 270 $ 114 $ 5,550

For the Three Months Ended September 30, 2020

Allowance for loan losses:

Balance, June 30, 2020
$ 415 $ 472 $ 2,126 $ 1,051 $ 450 $ 140 $ 4,654
Charge-offs
(8 ) 0 (48 ) (61 ) (14 ) (28 ) (159 )
Recoveries
0 0 0 0 0 8 8
Provision
0 (8 ) 89 246 (38 ) 2 291
Balance, September 30, 2020
$ 407 $ 464 $ 2,167 $ 1,236 $ 398 $ 122 $ 4,794

For the Nine Months Ended September 30, 2021

Allowance for loan losses:

Balance, December 31, 2020
$ 499 $ 406 $ 2,167 $ 1,421 $ 293 $ 114 $ 4,900
Charge-offs
0 0 0 0 (8 ) (73 ) (81 )
Recoveries
3 0 2 61 53 36 155
Provision
(14 ) (94 ) 268 447 (68 ) 37 576
Balance, September 30, 2021
$ 488 $ 312 $ 2,437 $ 1,929 $ 270 $ 114 $ 5,550

For the Nine Months Ended September 30, 2020

Allowance for loan losses:

Balance, December 31, 2019
$ 305 $ 487 $ 1,822 $ 924 $ 211 $ 144 $ 3,893
Charge-offs
(8 ) 0 (48 ) (61 ) (14 ) (106 ) (237 )
Recoveries
4 0 11 65 2 29 111
Provision
106 (23 ) 382 308 199 55 1,027
Balance, September 30, 2020
$ 407 $ 464 $ 2,167 $ 1,236 $ 398 $ 122 $ 4,794

September 30, 2021

Allowance for loan losses:

Ending Balance
$ 488 $ 312 $ 2,437 $ 1,929 $ 270 $ 114 $ 5,550
Ending balance: individually evaluated for impairment
$ 5 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5
Ending balance: collectively evaluated for impairment
$ 483 $ 312 $ 2,437 $ 1,929 $ 270 $ 114 $ 5,545
Ending balance: purchased credit impaired loans
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0

Loans outstanding:

Ending Balance
$ 44,435 $ 28,082 $ 292,670 $ 229,118 $ 32,726 $ 21,324 $ 648,355
Ending balance: individually evaluated for impairment
$ 732 $ 2,349 $ 0 $ 0 $ 0 $ 0 $ 3,081
Ending balance: collectively evaluated for impairment
$ 43,703 $ 25,733 $ 292,533 $ 229,014 $ 32,630 $ 21,324 $ 644,937
Ending balance: purchased credit impaired loans
$ 0 $ 0 $ 137 $ 104 $ 96 $ 0 $ 337

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)	Construction & Development			Farmland			Residential		Commercial Mortgage		Commercial & Agricultural			Consumer & Other			Total
*For the Three Months Ended September 30, 2022*
Allowance for loan losses:
Balance, June 30, 2022	$	470		$	287		$	2,712	$	2,087	$	334		$	144		$	6,034
Charge-offs		-			-			-		-		-			(42	)		(42	)
Recoveries		1			-			-		8		13			6			28
Provision		38			4			19		85		(20	)		22			148
Balance, September 30, 2022	$	509		$	291		$	2,731	$	2,180	$	327		$	130		$	6,168

*For the Three Months Ended September 30, 2021*
Allowance for loan losses:
Balance, June 30, 2021	$	428		$	344		$	2,320	$	1,843	$	273		$	134		$	5,342
Charge-offs		-			-			-		-		(8	)		(22	)		(30	)
Recoveries		1			-			-		-		8			10			19
Provision		59			(32	)		117		86		(3	)		(8	)		219
Balance, September 30, 2021	$	488		$	312		$	2,437	$	1,929	$	270		$	114		$	5,550

*For the Nine Months Ended September 30, 2022*
Allowance for loan losses:
Balance, December 31, 2021	$	484		$	315		$	2,521	$	1,908	$	321		$	128		$	5,677
Charge-offs		-			-			-		-		(6	)		(86	)		(92	)
Recoveries		3			-			11		8		23			36			81
Provision		22			(24	)		199		264		(11	)		52			502
Balance, September 30, 2022	$	509		$	291		$	2,731	$	2,180	$	327		$	130		$	6,168

*For the Nine Months Ended September 30, 2021*
Allowance for loan losses:
Balance, December 31, 2020	$	499		$	406		$	2,167	$	1,421	$	293		$	114		$	4,900
Charge-offs		-			-			-		-		(8	)		(73	)		(81	)
Recoveries		3			-			2		61		53			36			155
Provision		(14	)		(94	)		268		447		(68	)		37			576
Balance, September 30, 2021	$	488		$	312		$	2,437	$	1,929	$	270		$	114		$	5,550

September 30, 2022
Allowance for loan losses:
Ending Balance	$	509		$	291		$	2,731	$	2,180	$	327		$	130		$	6,168
Ending balance: individually evaluated for impairment	$	5		$	6		$	-	$	-	$	-		$	-		$	11
Ending balance: collectively evaluated for impairment	$	504		$	285		$	2,731	$	2,180	$	327		$	130		$	6,157
Ending balance: purchased credit impaired loans	$	-		$	-		$	-	$	-	$	-		$	-		$	-

Loans outstanding:
Ending Balance	$	45,826		$	24,846		$	346,308	$	261,879	$	39,794		$	20,253		$	738,906
Ending balance: individually evaluated for impairment	$	383		$	262		$	-	$	393	$	-		$	-		$	1,038
Ending balance: collectively evaluated for impairment	$	45,443		$	24,584		$	346,187	$	261,394	$	39,749		$	20,253		$	737,610
Ending balance: purchased credit impaired loans	$	-		$	-		$	121	$	92	$	45		$	-		$	258

2627

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Allowance for Loan Losses, continued

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)	Construction & Development		Farmland		Residential		Commercial Mortgage		Commercial & Agricultural		Consumer & Other		Total
December 31, 2021
Allowance for loan losses:
Ending Balance	$	484	$	315	$	2,521	$	1,908	$	321	$	128	$	5,677
Ending balance: individually evaluated for impairment	$	-	$	8	$	-	$	-	$	-	$	-	$	8
Ending balance: collectively evaluated for impairment	$	484	$	307	$	2,521	$	1,908	$	321	$	128	$	5,669
Ending balance: purchased credit impaired loans	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Loans outstanding:
Ending Balance	$	44,252	$	25,026	$	298,413	$	230,071	$	38,442	$	22,800	$	659,004
Ending balance: individually evaluated for impairment	$	712	$	283	$	-	$	-	$	-	$	-	$	995
Ending balance: collectively evaluated for impairment	$	43,540	$	24,743	$	298,279	$	229,970	$	38,396	$	22,800	$	657,728
Ending balance: purchased credit impaired loans	$	-	$	-	$	134	$	101	$	46	$	-	$	281

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had no unallocated reserves included in the allowance for loan losses.

2728

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Allowance for Loan Losses, continued

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is not warranted. Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.” Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

Credit Risk Profile by Internally Assigned Grades

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

September 30, 2021
September 30, 2022
Real Estate Secured:
Construction & development	$	43,583	$	0	$	0	$	852	$	44,435	$	45,411	$	-	$	-	$	415	$	45,826
Farmland		22,275		840		484		4,483		28,082		21,420		824		600		2,002		24,846
Residential		290,317		358		604		1,391		292,670		344,715		269		510		814		346,308
Commercial mortgage		215,413		5,067		5,474		3,164		229,118		255,409		2,211		2,313		1,946		261,879
Non-Real Estate Secured:
Commercial & agricultural		32,341		0		45		340		32,726		39,624		36		-		134		39,794
SBA-PPP		37,762		0		0		0		37,762		86		-		-		-		86
Consumer & other		21,324		0		0		0		21,324		20,243		-		-		10		20,253
Total	$	663,015	$	6,265	$	6,607	$	10,230	$	686,117	$	726,908	$	3,340	$	3,423	$	5,321	$	738,992

December 31, 2020
December 31, 2021
Real Estate Secured:
Construction & development	$	44,909	$	427	$	122	$	595	$	46,053	$	43,423	$	-	$	-	$	829	$	44,252
Farmland		25,607		419		496		5,927		32,449		21,430		831		480		2,285		25,026
Residential		277,811		659		0		1,423		279,893		296,160		356		582		1,315		298,413
Commercial mortgage		188,156		8,692		3,647		3,391		203,886		220,061		5,036		3,607		1,367		230,071
Non-Real Estate Secured:
Commercial & agricultural		32,467		468		161		567		33,663		38,254		20		-		168		38,442
SBA-PPP		51,118		0		0		0		51,118		24,528		-		-		-		24,528
Consumer & other		17,028		0		0		5		17,033		22,800		-		-		-		22,800
Total	$	637,096	$	10,665	$	4,426	$	11,908	$	664,095	$	666,656	$	6,243	$	4,669	$	5,964	$	683,532

2829

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

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

The following table presents an age analysis of nonaccrual and past due loans by category as of September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

Analysis of Past Due and Nonaccrual Loans

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

September 30, 2021
September 30, 2022
Real Estate Secured:
Construction & development	$	0	$	0	$	426	$	426	$	44,009	$	44,435	$	0	$	426	$	-	$	31	$	383	$	414	$	45,412	$	45,826	$	-	$	415
Farmland		0		0		127		127		27,955		28,082		0		736		-		-		-		-		24,846		24,846		-		98
Residential		495		40		279		814		291,856		292,670		0		663		189		280		238		707		345,601		346,308		-		552
Commercial mortgage		10		0		46		56		229,062		229,118		0		124		-		93		46		139		261,740		261,879		-		641
Non-Real Estate Secured:
Commercial & agricultural		0		1		96		97		32,629		32,726		0		110		-		8		54		62		39,732		39,794		-		54
SBA-PPP		0		0		0		0		37,762		37,762		0		0		-		-		-		-		86		86		-		-
Consumer & other		1		9		0		10		21,314		21,324		0		0		-		-		10		10		20,243		20,253		-		10
Total	$	506	$	50	$	974	$	1,530	$	684,587	$	686,117	$	0	$	2,059	$	189	$	412	$	731	$	1,332	$	737,660	$	738,992	$	-	$	1,770

December 31, 2020
December 31, 2021
Real Estate Secured:
Construction & development	$	71	$	0	$	0	$	71	$	45,982	$	46,053	$	0	$	11	$	-	$	-	$	426	$	426	$	43,826	$	44,252	$	-	$	426
Farmland		100		0		914		1,014		31,435		32,449		0		3,937		-		-		117		117		24,909		25,026		-		117
Residential		386		29		240		655		279,238		279,893		0		557		246		163		285		694		297,719		298,413		-		596
Commercial mortgage		0		0		24		24		203,862		203,886		0		109		-		-		46		46		230,025		230,071		-		121
Non-Real Estate Secured:
Commercial & agricultural		14		15		155		184		33,479		33,663		0		189		58		-		46		104		38,338		38,442		-		60
SBA-PPP		0		0		0		0		51,118		51,118		0		0		-		-		-		-		24,528		24,528		-		-
Consumer & other		7		0		0		7		17,026		17,033		0		0		11		-		-		11		22,789		22,800		-		-
Total	$	578	$	44	$	1,333	$	1,955	$	662,140	$	664,095	$	0	$	4,803	$	315	$	163	$	920	$	1,398	$	682,134	$	683,532	$	-	$	1,320

Impaired Loans

A loan is considered impaired when it is probable that the Bank will be unable to collect all contractual principal and interest payments due in accordance with the original or modified terms of the loan agreement. Smaller balance homogenous loans may be collectively evaluated for impairment. Non-homogenous impaired loans are either measured based on the estimated fair value of the collateral less estimated cost to sell if the loan is considered collateral dependent, or measured based on the present value of expected future cash flows if not collateral dependent. The valuation of real estate collateral is subjective in nature and may be adjusted in future periods because of changes in economic conditions. Management considers third-party 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.

2930

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Impaired Loans, continued

As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, the recorded investment in impaired loans totaled ~~$5.9~~$3.2 million and ~~$6.2~~$3.6 million. The total amount of collateral-dependent impaired loans at ~~was $3.1 million and $3.2 million at~~ September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, ~~respectively.~~respectively, was $1.0 million and $966 thousand. As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, ~~$2.8 million~~$393 thousand and ~~$2.6 million~~$713 thousand of the recorded investment in impaired loans did not have a related allowance. The Bank had ~~$3.4~~$3.2 million and ~~$3.9~~$3.2 million in troubled debt restructured loans included in impaired loans at September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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~~$250,000 or less for impairment. As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, ~~$2.8~~$2.1 million and ~~$3.6~~$2.6 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have ~~$152~~$114 thousand and ~~$192~~$142 thousand of related allowance.

The following table is a summary of information related to impaired loans as of September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

Impaired Loans

Nine months ended

Three months ended

Unpaid
Average

Interest

Average

Interest

Recorded

Principal

Related

Recorded

Income

Recorded

Income

(dollars in thousands)

Investment¹

Balance

Allowance

Investment

Recognized

Investment

Recognized

September 30, 2021

With no related allowance recorded:

Construction & development
$ 426 $ 425 $ - $ 218 $ (5 ) $ 426 $ -
Farmland
2,349 3,008 - 2,464 191 2,384 129
Residential
- - - 198 25 - -
Commercial mortgage
- - - - - - -
Commercial & agricultural
- - - - - - -
Consumer & other
- - - 1 0 0 0
Subtotal
2,775 3,433 - 2,881 211 2,810 129

With an allowance recorded:

Construction & development
449 449 13 469 20 456 7
Farmland
126 142 2 126 6 126 2
Residential
2,425 2,602 136 2,469 108 2,448 39
Commercial mortgage
71 71 4 40 4 71 1
Commercial & agricultural
37 37 2 41 2 39 1
Consumer & other
- 0 0 0 0 0 0
Subtotal
3,108 3,301 157 3,145 140 3,140 50

Totals:

Construction & development
875 874 13 687 15 882 7
Farmland
2,475 3,150 2 2,590 197 2,510 131
Residential
2,425 2,602 136 2,667 133 2,448 39
Commercial mortgage
71 71 4 40 4 71 1
Commercial & agricultural
37 37 2 41 2 39 1
Consumer & other
- 0 0 1 0 0 0
Total
$ 5,883 $ 6,734 $ 157 $ 6,026 $ 351 $ 5,950 $ 179

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

(dollars in thousands)	Recorded Investment¹		Unpaid Principal Balance		Related Allowance

September 30, 2022
With no related allowance recorded:
Construction & development	$	-	$	-	$	-
Farmland		-		-		-
Residential		-		-		-
Commercial mortgage		393		402		-
Commercial & agricultural		-		-		-
Consumer & other		-		-		-
Subtotal		393		402		-

With an allowance recorded:
Construction & development		395		395		5
Farmland		371		387		8
Residential		1,905		2,063		106
Commercial mortgage		67		67		4
Commercial & agricultural		25		25		2
Consumer & other		-		-		-
Subtotal		2,763		2,937		125

Totals:
Construction & development		395		395		5
Farmland		371		387		8
Residential		1,905		2,063		106
Commercial mortgage		460		469		4
Commercial & agricultural		25		25		2
Consumer & other		-		-		-
Total	$	3,156	$	3,339	$	125

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

3031

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Impaired Loans, continued

(dollars in thousands)	Recorded Investment¹		Unpaid Principal Balance		Related Allowance

December 31, 2021
With no related allowance recorded:
Construction & development	$	713	$	712	$	-
Farmland		-		-		-
Residential		-		-		-
Commercial mortgage		-		-		-
Commercial & agricultural		-		-		-
Consumer & other		-		-		-
Subtotal		713		712		-

With an allowance recorded:
Construction & development		136		136		8
Farmland		394		410		9
Residential		2,248		2,425		127
Commercial mortgage		70		70		4
Commercial & agricultural		32		32		2
Consumer & other		-		-		-
Subtotal		2,880		3,073		150

Totals:
Construction & development		849		848		8
Farmland		394		410		9
Residential		2,248		2,425		127
Commercial mortgage		70		70		4
Commercial & agricultural		32		32		2
Consumer & other		-		-		-
Total	$	3,593	$	3,785	$	150

(dollars in thousands)

Recorded
Investment¹

Unpaid
Principal
Balance

Related
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

December 31, 2020

With no related allowance recorded:

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

With an allowance recorded:

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

Totals:

Construction & development
501 501 27 522 31
Farmland
2,707 3,295 2 3,106 29
Residential
2,906 3,082 159 4,057 222
Commercial mortgage
8 53 1 10 3
Commercial & agricultural
46 46 3 49 3
Consumer & other
1 1 0 2 0
Total
$ 6,169 $ 6,978 $ 192 $ 7,746 $ 288

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

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

The following table shows the average recorded investment and interest income recognized for impaired loans for the three months ended September 30, 2022 and 2021:

	For the Three Months Ended September 30,
	2022				2021
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Construction & development	$	610	$	44	$	882	$	7
Farmland		371		6		2,510		131
Residential		2,079		43		2,448		39
Commercial mortgage		465		6		71		1
Commercial & agricultural		26		-		39		1
Consumer & other		-		-		-		-
Total	$	3,551	$	99	$	5,950	$	179

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Impaired Loans, continued

The following table shows the average recorded investment and interest income recognized for impaired loans for the nine months ended September 30, 2022 and 2021:

	For the Nine Months Ended September 30,
	2022				2021
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Construction & development	$	622	$	55	$	687	$	15
Farmland		382		17		2,590		197
Residential		2,102		107		2,667		133
Commercial mortgage		466		16		40		4
Commercial & agricultural		29		1		41		2
Consumer & other		-		-		1		-
Total	$	3,601	$	196	$	6,026	$	351

Troubled Debt Restructuring

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

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

3133

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Troubled Debt Restructuring, continued

The following ~~table sets~~tables set forth information with respect to the Bank’s troubled debt restructurings as of September 30, ~~2021~~2022 and September 30, ~~2020:~~2021:

For the Nine Months Ended September 30, ~~2021~~2022

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

Construction & development		0	$	0	$	0		-	$	0	$	0		-	$	-	$	-		-	$	-	$	-
Farmland		0		0		0		-		0		0		-		-		-		-		-		-
Residential		0		0		0		-		0		0		2		79		77		-		-		-
Commercial mortgage		1		73		71		-		0		0		1		403		393		-		-		-
Commercial & agricultural		0		0		0		-		0		0		-		-		-		-		-		-
Consumer & other		0		0		0		-		0		0		-		-		-		-		-		-
Total		1	$	73	$	71		-	$	0	$	0		3	$	482	$	470		-	$	-	$	-

⁽¹⁾

Loans past due 30 days or more are considered to be in default.

During the nine months ended September 30, ~~2021,~~2022, ~~one~~ ~~loan was~~three loans were modified that ~~was~~were considered to be ~~a TDR. Term~~TDRs. One residential loan had term concessions ~~were~~ granted ~~on the loan~~ and ~~the loan had~~ additional funds advanced for insurance. The other residential loan had the principal and interest payments modified, interest rate lowered, and maturity date extended. The commercial mortgage loan had the principal and interest payments modified; however, the maturity date remained the same. No TDRs identified in the last twelve months subsequently defaulted in the nine months ended September 30, ~~2021.~~2022.

For the Three Months Ended September 30, ~~2021~~2022

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

Construction & development		0	$	0	$	0		-	$	0	$	0		-	$	-	$	-		-	$	-	$	-
Farmland		0		0		0		-		0		0		-		-		-		-		-		-
Residential		0		0		0		-		0		0		1		29		29		-		-		-
Commercial mortgage		0		0		0		-		0		0		-		-		-		-		-		-
Commercial & agricultural		0		0		0		-		-		0		-		-		-		-		-		-
Consumer & other		0		0		0		-		0		0		-		-		-		-		-		-
Total		0	$	0	$	0		-	$	0	$	0		1	$	29	$	29		-	$	-	$	-

⁽¹⁾

Loans past due 30 days or more are considered to be in default.

During the three months ended September 30, ~~2021,~~2022, no ~~loans were~~one loan was modified that ~~were~~was considered to be a TDR. The residential loan had the principal and interest payments modified, interest rate lowered, and maturity date extended. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended September 30, ~~2021.~~2022.

3234

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Troubled Debt Restructuring, continued

For the Nine Months Ended September 30, ~~2020~~2021

(dollars in thousands)	TDRs identified during the period						TDRs identified in the last twelve months that subsequently defaulted⁽¹⁾						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		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		-	$	0	$	0		-	$	-	$	-		-	$	-	$	-
Farmland		0		0		0		-		0		0		-		-		-		-		-		-
Residential		1		46		50		-		0		0		-		-		-		-		-		-
Commercial mortgage		0		0		0		-		0		0		1		73		71		-		-		-
Commercial & agricultural		1		20		20		-		0		0		-		-		-		-		-		-
Consumer & other		0		0		0		-		0		0		-		-		-		-		-		-
Total		5	$	537	$	540		-	$	0	$	0		1	$	73	$	71		-	$	-	$	-

⁽¹⁾

Loans past due 30 days or more are considered to be in default.

During the nine months ended September 30, ~~2020,~~2021, ~~5 loans were~~one loan was modified that ~~were~~was considered to be a ~~TDRs.~~TDR. Term concessions were granted on ~~all~~ the ~~loans~~loan and ~~one~~the loan had additional funds advanced for ~~property taxes.~~ insurance. No TDRs identified in the last twelve months subsequently defaulted in the nine months ended September 30, ~~2020.~~2021.

For the Three Months Ended September 30, ~~2020~~2021

(dollars in thousands)

TDRs identified during the period

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

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Number
of
contracts

Pre-
modification
outstanding
recorded
investment

Post-
modification
outstanding
recorded
investment

Construction & development
1 $ 12 $ 12 - $ 0 $ 0
Farmland
0 0 0 - 0 0
Residential
0 0 0 - 0 0
Commercial mortgage
0 0 0 - 0 0
Commercial & agricultural
0 0 0 - 0 0
Consumer & other
0 0 0 - 0 0
Total
1 $ 12 $ 12 - $ 0 $ 0

(dollars in thousands)

⁽¹⁾TDRs identified during the period

TDRs identified in the last twelve

months that subsequently defaulted⁽¹⁾

Number

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Number

contracts

Pre-

modification

outstanding

recorded

investment

Post-

modification

outstanding

recorded

investment

Construction & development

Farmland

Residential

Commercial mortgage

Commercial & agricultural

Consumer & other

Total

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

During the three months ended September 30, ~~2020,~~2021, ~~one~~ ~~loan was~~no loans were modified that ~~was~~were 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.~~2021.

3335

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

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

Modifications in response to COVID-19

The Company ~~began offering~~offered short-term loan modifications to assist borrowers during the COVID-19 pandemic. These modifications generally ~~involve~~involved principal and/or interest payment deferrals for up to six months. As the COVID-19 pandemic ~~persists~~persisted in negatively impacting the economy, the Company ~~continues to offer~~offered 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~~involved 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~~accrued and ~~recognize~~recognized interest income during the forbearance period. The Company ~~offers~~offered 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 dodid not involve forgiveness or interest rate reductions. The CARES Act, along with a joint agency statement issued by banking agencies, ~~provide~~provided that modifications made in response to COVID-19 to borrowers who ~~qualify are~~qualified were not required to be accounted for as a TDR. Accordingly, the Company ~~does~~did not account for such qualifying as TDRs. The relief offered under the CARES Act ended on December 31, 2021. See Note 1 Organization and Summary of Significant Accounting Policies for more information.

The Bank began receiving requests for loan deferments on March 23, 2020 and through ~~September 30,~~December 31, 2021, the Bank approved approximately 250 requests for loan payment deferment of approximately $66.5 million in loans, ~~most~~all of which have resumed payment. ~~A breakdown of the~~There were no loans with deferments ~~by industry~~ remaining as of September 30, ~~2021~~2022 ~~and~~or December 31, ~~2020~~ 2021.~~are as follows:~~

(dollars in thousands)

2021

2020

Classification

# of Loans

Balance

# of Loans

Balance

Commercial Loans w/ First Deferment

Accommodation & Retail Services
- $ 0 - $ 0
Construction
- 0 1 47
General & Other
- 0 - 0

Commercial Loans w/ Second Deferment

Accommodation & Retail Services
- 0 1 752
Construction
- 0 1 36
Agriculture
- 0 2 603
Real Estate Rental
- 0 2 2,146
General & Other
1 404 - 0

Commercial Loans w/ Third Deferment

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

Consumer Loans w/ First Deferment
- 0 7 782

Consumer Loans w/ Second Deferment
- 0 1 52
Total
1 $ 404 18 $ 9,009

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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

Purchased Credit Impaired Loans

During 2018, the Company acquired loans as a result of the Great State merger, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:

(dollars in thousands)	2021		2020		2022		2021

Residential	$	137	$	142	$	121	$	134
Commercial mortgage		104		113		92		101
Commercial & agricultural		96		96		45		46
Outstanding balance	$	337	$	351	$	258	$	281

Carrying amount	$	337	$	351	$	258	$	281

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 months ended September 30, ~~2021~~2022 and during the year ended December 31, ~~2020.~~2021. Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected.

3536

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 5. Employee Benefit Plan

The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees. Effective December 31, 2012, the pension plan was amended to freeze benefit accruals for all eligible employees. The following is a summary of net periodic pension costs for the nine-month and three-month periods ended September 30, ~~2021~~2022 and ~~2020.~~2021.

	Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,
(dollars in thousands)	2021			2020			2021			2020			2022			2021			2022			2021

Interest cost	$	108		$	123		$	36		$	41		$	108		$	108		$	36		$	36
Expected return on plan assets		(522	)		(471	)		(174	)		(157	)		(555	)		(522	)		(185	)		(174	)
Recognized net actuarial (gain)/loss		27			21			9			7			-			27			-			9
Net periodic benefit cost	$	(387	)	$	(327	)	$	(129	)	$	(109	)	$	(447	)	$	(387	)	$	(149	)	$	(129	)

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, ~~2020~~2021 and there is no required contribution for ~~2021.~~2022. Based on this we do not anticipate making a contribution to the plan in ~~2021.~~2022.

Note 6. Goodwill and Intangible Assets

Goodwill

An analysis of goodwill during the nine-month period ended September 30, ~~2021~~2022 and for the year ended December 31, ~~2020~~2021 is as follows:

	September 30,		December 31,		September 30,		December 31,
(dollars in thousands)	2021		2020		2022		2021

Beginning of year	$	3,257	$	3,257	$	3,257	$	3,257
Impairment		0		0		-		-
End of the period	$	3,257	$	3,257	$	3,257	$	3,257

Intangible Assets

The following table presents the activity for the Company’s core deposit intangible assets, which are the only identifiable intangible assets subject to amortization. Core deposit intangibles at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:

	September 30,			December 31,			September 30,			December 31,
(dollars in thousands)	2021			2020			2022			2021

Balance at beginning of year, net	$	2,359		$	3,070
Balance at beginning of year, net of accumulated amortization							$	1,764		$	2,359
Amortization expense		(461	)		(711	)		(373	)		(595	)
Net book value	$	1,898		$	2,359		$	1,391		$	1,764

Aggregate amortization expense was ~~$461~~$373 thousand and ~~$548~~$461 thousand for the nine-month periods ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Aggregate amortization expense was ~~$134~~$105 thousand and ~~$163~~$134 thousand for the three-month periods ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

3637

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 7. Leases

OnThe Company’s leases are recorded under ASC Topic ~~January 1, 2019,~~ ~~the Company adopted ASU~~ ~~No.~~~~2016~~-02842, “Leases ~~(Topic~~ ~~842~~)”~~and all subsequent ASUs that modified Topic~~ ~~842.~~ We adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees.. We have performed an evaluation of our leasing contracts and activities. We have developed our methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments. ~~Prior to adoption, all of the Company’s leases were classified as operating leases and remain operating leases at adoption.~~

Contracts ~~that commence subsequent to adoption~~ are evaluated to determine whether they are or contain a lease in accordance with Topic 842. The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less. ~~During~~ ~~2021,~~ ~~the~~The Company renewed an operating lease during 2021 and renewed an operating lease during 2022 and recognized right-of-use assets and lease ~~liabilities.~~liabilities on each renewal.

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

	September 30,			December 31,			September 30,			December 31,
(dollars in thousands)	2021			2020			2022			2021

Lease liabilities	$	588		$	680		$	775		$	553
Right-of-use assets	$	588		$	680		$	775		$	553
Weighted average remaining lease term (years)		6.76			7.10			5.79			6.70
Weighted average discount rate		2.44	%		2.45	%		2.74	%		2.45	%

Nine Months Ended September 30,

(dollars in thousands)

2021

2020

Lease Expense

Operating lease expense
$ 115 $ 108
Short-term lease expense
22 25
Total lease expense
$ 137 $ 133

Cash paid for amounts included in lease liabilities
$ 115 $ 108

	Nine Months Ended September 30,
(dollars in thousands)	2022		2021

Lease Expense
Operating lease expense	$	117	$	115
Short-term lease expense		7		22
Total lease expense	$	124	$	137

Cash paid for amounts included in lease liabilities	$	117	$	115

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

(dollars in thousands)

Three months ending December 31, 2021	$	38
Twelve months ending December 31, 2022		123
Three months ending December 31, 2022				$	41
Twelve months ending December 31, 2023		83			153
Twelve months ending December 31, 2024		69			140
Twelve months ending December 31, 2025		72			143
Twelve months ending December 31, 2026					143
Thereafter		258			221
Total undiscounted cash flows	$	643		$	841
Less discount		(55	)		(66	)
Lease liabilities	$	588		$	775

3738

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 8. Share-Based Compensation

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

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

~~The Plan was effective on the Effective Date, and~~ noNo ~~Award~~award may be granted under the plan after March 16, ~~2030.~~2030 and any Awards outstanding on such date shall remain valid in accordance with their terms. The Board of Directors shall have the right to terminate the Plan at any time pursuant to the terms of the Equity Plan. The Compensation Committee of the Board of Directors has been appointed to administer the Equity Plan. The maximum aggregate number of shares that may be issued pursuant to awards made under the Equity Plan shall not exceed 300,000 shares of common stock. No ~~awards were~~As of September 30, 2022, 37,700 shares have been issued ~~or exercised in~~ ~~2020~~ ~~and there were 0 Awards outstanding at~~ ~~December 31, 2020.~~under the Equity Plan, leaving 262,300 shares available for future grants.

On ~~March 31, 2021,~~February 18, 2022, 14,500 restricted stock awards were issued at a price of ~~$11.30~~$13.00 per share. These awards vest ~~25%~~20% on December ~~31, 2021,~~15, 2022, ~~25%~~20% on December ~~31, 2022,~~15, 2023, ~~25%~~20% on December ~~31, 2023,~~15, 2024, ~~and 25%~~20% on December ~~31, 2024.~~15, 2025, and 20% on December 15, 2026. For the nine ~~month and~~ ~~three~~ ~~month periods~~months ended September 30, 2022 and 2021,~~$28~~ $59 thousand and ~~$14~~$28 thousand, respectively, was recognized as compensation expense related to share-based compensation. For the three months ended September 30, 2022 and 2021, $22 thousand and $14 thousand was recognized as compensation expense related to share-based compensation for restricted stock awards.

As of September 30, ~~2021,~~2022, the unrecognized compensation expense related to unvested restricted stock awards was ~~$137~~$252 thousand. The unrecognized compensation expense is expected to be recognized over a weighted average period of ~~3.25~~3.52 years. The following table presents the activity for restricted stock:

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

Unvested as of December 31, 2020		0	$	0
Unvested as of December 31, 2021								10,875	$	11.30 -
Granted		14,500		11.30				14,500		13.00
Vested		0		0	$	-		-		-	$	-
Forfeited		0		0				-		-
Unvested as of September 30, 2021		14,500	$	11.30
Unvested as of September 30, 2022								25,375	$	12.38

3839

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 9. Commitments and Contingencies

Litigation

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

Financial Instruments with Off-Balance Sheet Risk

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

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance sheet instruments. A summary of the Bank’s commitments at September 30, ~~2021~~2022 and December 31, ~~2020~~2021 is as follows:

	September 30,		December 31,		September 30,		December 31,
(dollars in thousands)	2021		2020		2022		2021

Commitments to extend credit	$	127,843	$	111,778	$	149,800	$	140,526
Standby letters of credit		382		1,260		1,329		1,161
	$	128,225	$	113,038	$	151,129	$	141,687

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

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

Concentrations of Credit Risk

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

3940

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 10. Financial Instruments

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as FHLB and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of the fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

For loans, the carrying amount is net of unearned income and the allowance for loan losses. In accordance with ~~the prospective adoption of~~ ASU No. 2016-01, the fair value of loans as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, was measured using an exit price notion.

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

September 30, 2021
September 30, 2022

Financial Instruments – Assets
Net Loans											$	732,824	$	693,126	$	-	$	-	$	693,126

Financial Instruments – Liabilities
Time Deposits												175,015		174,327		-		174,327		-

December 31, 2021

Financial Instruments – Assets
Net Loans	$	680,567	$	676,591	$	0	$	676,402	$	189	$	677,855	$	671,826	$	-	$	-	$	671,826

Financial Instruments – Liabilities
Time Deposits		197,712		197,276		0		197,276		0		190,334		191,464		-		191,464		-
FHLB Advances		10,000		9,863		9,863		0		0		5,000		4,951		-		4,951		-

December 31, 2020

Financial Instruments – Assets
Net Loans	$	659,195	$	653,454	$	0	$	653,255	$	199

Financial Instruments – Liabilities
Time Deposits		194,419		196,522		0		196,522		0
FHLB Advances		10,000		9,765		9,765		0		0

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

4041

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 10. Financial Instruments, continued

Fair Value Hierarchy

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

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

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

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

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

Investment Securities Available for Sale

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

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. If a loan is identified as individually impaired, management measures impairment in accordance with applicable accounting guidance. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, ~~2021~~ ~~and~~ ~~December 31, 2020,~~2022, a small percentage of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with accounting standards, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price the Company records the impaired loan as nonrecurring Level 2. When the fair value is based on either an external or internal appraisal and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

~~Derivative Assets and Liabilities~~

~~Derivative instruments held or issued by the Company for risk management purposes are traded in over-the-counter markets where quoted market prices are~~

~~not~~ ~~readily available. Management engages~~ ~~third~~~~-party intermediaries to determine the fair market value of these derivative instruments and classifies these instruments as Level~~ 2. ~~Examples of Level~~ 2 ~~derivatives are interest rate swaps, caps and floors.~~ No ~~derivative instruments were held as of~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020.~~

4142

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 10. Financial Instruments, continued

Assets Recorded at Fair Value on a Recurring Basis

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

September 30, 2021
September 30, 2022
*Investment securities available for sale*
U.S. Treasury securities									$	4,831	$	-	$	4,831	$	-
U.S. Government agencies										20,636		-		20,636		-
Mortgage-backed securities										68,551		-		68,551		-
Corporate securities										1,500		-		1,500		-
State and municipal securities										42,973		-		42,973		-
Total assets at fair value									$	138,491	$	-	$	138,491	$	-

December 31, 2021
*Investment securities available for sale*
U.S. Government agencies	$	15,239	$	0	$	15,239	$	0	$	20,149	$	-	$	20,149	$	-
Mortgage-backed securities		55,706		0		55,706		0		63,311		-		63,311		-
Corporate securities		1,500		0		1,500		0		1,500		-		1,500		-
State and municipal securities		34,977		0		34,977		0		44,755		-		44,755		-
Total assets at fair value	$	107,422	$	0	$	107,422	$	0	$	129,715	$	-	$	129,715	$	-

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

No liabilities were recorded at fair value on a recurring basis as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. There were no ~~significant~~ transfers between levels during the nine-month period ended September 30, ~~2021~~2022 and the year ended December 31, ~~2020.~~2021.

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. No liabilities were recorded at fair value on a nonrecurring basis at September 30, ~~2021~~2022 and December 31, ~~2020.~~2021. Assets measured at fair value on a nonrecurring basis are included in the table below.

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

September 30, 2021
September 30, 2022
Impaired loans	$	189	$	0	$	0	$	189	$	177	$	-	$	-	$	177
Total assets at fair value	$	189	$	0	$	0	$	189	$	177	$	-	$	-	$	177

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

December 31, 2020
December 31, 2021
Impaired loans	$	199	$	0	$	0	$	199	$	189	$	-	$	-	$	189
Total assets at fair value	$	199	$	0	$	0	$	199	$	189	$	-	$	-	$	189

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the significant unobservable inputs used in the fair value measurements were as follows:

Fair Value at
September 30,
2021

Fair Value at
December 31,
2020

Valuation Technique

Significant
Unobservable
Inputs

General Range
of Significant
Unobservable
Input Values

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

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

Fair Value at September 30,

2022

Fair Value at December 31, 2021

Valuation Technique

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

Impaired Loans

177

189

Appraised Value/Discounted Cash Flows/Market Value of Note

Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell

–

10%

4243

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 11. Short-Term Debt

On December 21, 2021, Parkway entered into a $5.0 million unsecured revolving line of credit, with a maturity date of December 21, 2022. Interest on the line of credit is variable and is set at prime plus 1.00%. At September 30, 2022, $3.35 million was outstanding under this revolving line of credit at a rate of 7.25% and is classified as short-term debt. At December 31, 2021,$3.2 million was outstanding under this revolving line of credit at a rate of 4.25% and was classified as short-term debt.

At September 30, 2022 and December 31, ~~2020,~~2021, the Bank had 0no debt outstanding classified as short-term.

At September 30, ~~2021,~~2022, the Bank had established unsecured lines of credit of approximately $73.0 million with correspondent banks to provide additional liquidity if, and as needed. In addition, the Bank has the ability to borrow up to approximately ~~$226.7~~$259.5 million from the FHLB, subject to the pledging of collateral.

Note 12. Long-Term Debt

At September 30, ~~2021~~2022, ~~and~~the Bank had no debt outstanding classified as long-term.

At December 31, ~~2020,~~2021, the Bank’s long-term debt consisted of a ~~$10.0~~$5.0 million advance from ~~FHLB. The advance,~~FHLB, which ~~is secured by substantially all the Bank’s~~ 1-4 ~~family loans, is~~was scheduled to mature on December 6, 2029. ~~Interest on~~ On March 31, 2022, the Bank prepaid the $5.0 million advance ~~was fixed at 0.819 percent~~ and ~~the advance is convertible by FHLB to~~incurred a ~~variable rate quarterly on~~ ~~December 6, 2021.~~ ~~The Bank has the option to repay the advance amount in whole or in part on the conversion date.~~prepayment penalty of $8 thousand.

Note 13. Capital Requirements

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve ~~Board’s~~ Small Bank Holding Company Policy Statement, and is not obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.

Actual

For Capital
Adequacy Purposes

To Be Well-
Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

September 30, 2021

Total Capital (to risk weighted assets)
$ 89,701 12.54 % $ 57,228 8.00 % $ 71,535 10.00 %
Tier 1 Capital (to risk weighted assets)
$ 84,115 11.76 % $ 42,921 6.00 % $ 57,228 8.00 %
Common Equity Tier 1 (to risk weighted assets)
$ 84,115 11.76 % $ 32,191 4.50 % $ 46,498 6.50 %
Tier 1 Capital (to average total assets)
$ 84,115 8.73 % $ 38,561 4.00 % $ 48,201 5.00 %

December 31, 2020

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

	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2022
Total Capital (to risk weighted assets)	$	97,294		12.66	%	$	61,496		8.00	%	$	76,871		10.00	%
Tier 1 Capital (to risk weighted assets)	$	91,081		11.85	%	$	46,122		6.00	%	$	61,496		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	91,081		11.85	%	$	34,592		4.50	%	$	49,966		6.50	%
Tier 1 Capital (to average total assets)	$	91,081		8.66	%	$	42,050		4.00	%	$	52,563		5.00	%

December 31, 2021
Total Capital (to risk weighted assets)	$	90,617		12.23	%	$	59,256		8.00	%	$	74,071		10.00	%
Tier 1 Capital (to risk weighted assets)	$	84,900		11.46	%	$	44,442		6.00	%	$	59,256		8.00	%
Common Equity Tier 1 (to risk weighted assets)	$	84,900		11.46	%	$	33,332		4.50	%	$	48,146		6.50	%
Tier 1 Capital (to average total assets)	$	84,900		8.58	%	$	39,598		4.00	%	$	49,497		5.00	%

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 13. Capital Requirements, continued

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”) framework), 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.

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

~~Note~~ ~~13.~~ ~~Capital Requirements, continued~~

In order to qualify for the CBLR framework, a community banking organization must have a Tier 1 leverage ratio of greater than 9.00%, less than $10.0 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, ~~2021,~~2022, Call Report. At this time the ~~Company~~Bank has elected not to opt into the CBLR framework for the Bank, but may opt into the CBLR framework in the future.

Note 14. Subsequent Events

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

4445

Part I. Financial Information

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

General

The following discussion provides information about the major components of the results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Critical Accounting Policies

For a discussion of the Company’s critical accounting policies, including its allowance for loan losses and asset impairment judgments, see Note 1 in the Notes to Consolidated Financial Statements above, and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Executive Summary

●

Net income was $2.8 million, or $0.50 per share, in the third quarter of 2022, compared to $2.7 million, or $0.45 per share, in the third quarter of ~~2021, compared to $1.4 million, or $0.23 per share, in the third quarter of 2020.~~2021. For the nine months ended September 30, ~~2021,~~2022, net income was ~~$6.8~~$7.4 million, or ~~$1.14~~$1.32 per share, compared to net income of ~~$4.2~~$6.8 million, or ~~$0.69~~$1.14 per share, for the nine months ended September 30, ~~2020.~~2021.

●

Net interest margin (“NIM”) was ~~3.60%~~3.70% for the third quarter of ~~2021,~~2022, compared to ~~3.75%~~3.54% in the second quarter of 2022, and 3.60% in the third quarter of ~~2020.~~2021.

●

Total ~~loans~~assets increased ~~during the first nine months of 2021 by $22.0~~$27.9 million, or ~~3.32%~~2.80%, to ~~$686.1~~$1.02 billion at September 30, 2022 from $995.8 million at December 31, 2021.

●

Net loans were $732.8 million at September 30, ~~2021~~2022, an increase of $54.9 million, or 8.10%, when compared to ~~$664.1~~$677.9 million at December 31, ~~2020, primarily due to organic loan growth and the 2~~^nd ~~round of the Small Business Administration Paycheck Protection Program (“SBA-PPP”).~~2021.

●

Total deposits ~~increased $122.8 million, or 16.24%, to $878.3~~were $945.7 million at September 30, ~~2021~~2022, an increase of $47.5 million, or 5.28%, from ~~$755.5~~$898.2 million at December 31, 2020. The increases in deposit balances came as a result of the Bank’s participation in the SBA-PPP program, government stimulus programs, branch expansion into new markets, and growth in our existing locations.2021.

●

Annualized return on average assets ~~increased~~decreased to 1.07% for the quarter ended September 30, 2022, from 1.11% for the quarter ended September 30, 2021, ~~from 0.70% for the quarter ended September 30, 2020.~~

●

due mainly to growth in total assets. Annualized return on average equity increased to 14.69% for the quarter ended September 30, 2022, from 12.13% for the quarter ended September 30, ~~2021, from 6.73% for the quarter ended September 30, 2020.~~2021.

●

Earnings for the first nine months of ~~2021~~2022 represented an annualized return on average assets of ~~0.99%~~0.98% and aan annualized return on average equity of ~~10.57%~~12.65%, compared to ~~0.73%~~0.99% and ~~6.76%~~10.57%, respectively, for the first nine months of ~~2020.~~

●

~~The Company repurchased 34,175 shares of its common stock through the previously announced share repurchase program during the third quarter of~~ 2021.

Results of Operations

~~Coronavirus (~~“~~COVID-19~~”~~) Response~~Results of Operations for the Three Months ended September 30, 2022 and 2021

●

Net interest income after provision for loan losses in the third quarter of 2022 was $8.8 million, compared to $7.9 million in the third quarter of 2021, primarily reflecting increased interest income and a reduction in interest expense. Total interest income was $9.4 million in the third quarter of 2022, representing an increase of $728 thousand in comparison to the third quarter of 2021. Interest income on loans decreased in the quarterly comparison by $42 thousand, primarily due to a decrease in SBA-PPP related interest and fees of $1.1 million from the year ago period. From September 30, 2021 to September 30, 2022, SBA-PPP loans decreased by $37.7 million; however, this decrease has been offset by higher yielding organic loan growth of $92.5 million. Management anticipates that this loan growth, in addition to higher rates in the current year, will have a positive impact on both earning assets and loan yields. Interest income on securities increased by $444 thousand in the quarterly comparison as a result of the $58.0 million increase in the securities portfolio, excluding market value changes, from the year ago period. The Company also successfully reduced interest expense on deposits by $182 thousand, or 32.73%, in the quarterly comparison, reflecting rate reductions in deposit offerings. Management anticipates that interest expense will increase in the near term as competitive pressures for deposits may result in increases in rates on deposit offerings, especially on time deposits.

The Bank has shifted its branch lobby operations over the past year in accordance with government mandates and by taking case count data into consideration. In the first quarter of 2021, the Bank reopened its lobby doors in addition to continuing to serve its customers through drive-thru and online banking services.

●

~~The Bank began receiving requests for loan deferments on March 23, 2020, and as of September 30, 2021, one loan with an outstanding balance of $404 thousand remained in deferment status.~~

●

The Bank participated in the SBA-PPP during 2020 and 2021. Gross SBA-PPP loans totaling $40.8 million with net deferred fees of $3.0 million remain on the balance sheet as of September 30, 2021. Contractual interest earned on SBA-PPP loans totaled $130 thousand in the third quarter of 2021, while net fees recognized totaled $1.1 million in the third quarter of 2021.

4546

Part I. Financial Information

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

~~Results of Operations~~

Results of Operations for the Three Months ended September 30, 2022 and 2021, ~~and 2020~~continued

Parkway recorded net income of $2.7 million, or $0.45 per share, for the quarter ended September 30, 2021 compared to net income of $1.4 million, or $0.23 per share, for the same period in 2020. Income tax expense totaled $701 thousand for the third quarter of 2021 compared to $358 thousand for the third quarter of 2020. Net income before income taxes totaled $3.4 million, or $0.57 per share, for the quarter ended September 30, 2021 compared to $1.8 million, or $0.29 per share, for the same period in 2020. Third quarter earnings represented an annualized return on average assets (“ROAA”) of 1.11% and an annualized return on average equity (“ROAE”) of 12.13% for the quarter ended September 30, 2021, compared to 0.70% and 6.73%, respectively, for the quarter ended September 30, 2020.

Net interest income after provision for loan losses in the third quarter of 2021 was $7.9 million compared to $6.7 million in the third quarter of 2020. Total interest income was $8.7 million in the third quarter of 2021 compared to $7.8 million for the same period last year. Interest income on loans increased in the quarterly comparison primarily due to organic loan growth and SBA-PPP related interest and fees. Interest income on securities increased by $216 thousand in the quarterly comparison, as a result of the $77.0 million increase in the securities portfolio from September 30, 2020 to September 30, 2021.

The Company successfully reduced interest expense on deposits by $292 thousand, or 34.43%, in the quarterly comparison, reflecting continued rate reductions in deposit offerings. Lower-cost core deposits (demand deposits, savings, and money market accounts) grew by $35.8 million, or 5.55%, during the third quarter of 2021. The growth in core deposits is a result of organic growth in our current markets, with $9.2 million of the core deposit growth in the third quarter of 2021 attributed to our four newest branches opened in North Carolina.

The provision for loan losses was $148 thousand for the quarter ended September 30, 2022, compared to $219 thousand for the quarter ended September 30, ~~2021, compared to $291 thousand for the quarter ended September 30, 2020.~~2021. During the third quarter of ~~2021,~~2022, Parkway recorded $14 thousand in net charge offs compared to $11 thousand in net ~~charge-offs compared to $151 thousand in net charge-offs~~charge offs for the third quarter of ~~2020.~~2021. The reserve for loan losses at September 30, ~~2021~~2022 was approximately ~~0.81%~~0.83% of total loans, compared to ~~0.71%~~0.81% at September 30, ~~2020.~~2021. Management’s estimate of probable credit losses inherent in the acquired loan portfolio from Cardinal Bankshares Corporation and Great State Bank ~~loan portfolios~~ was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired loans. As of September 30, ~~2021,~~2022, the remaining unaccreted discount on the acquired loan portfolios totaled ~~$1.2 million.~~$737 thousand. This remaining discount can be used for credit losses if a loss occurs on individual loans in the purchased portfolios.

~~Total~~Third quarter 2022 noninterest income was $1.6 million compared with $1.8 million in the third quarter of ~~2021~~2021. Income from service charges and fees increased by $212 thousand, offsetting a $201 thousand decrease in mortgage origination fees as mortgage origination volume has declined compared to ~~$1.4 million~~the year ago period. Nonrecurring income of $265 thousand from net realized gains on the sale of securities was recorded in the third quarter of ~~2020. The increase~~2021. Excluding this nonrecurring income of $265 thousand in 2021, noninterest income increased by $22 thousand for the third quarter of 2022 compared to the third quarter of 2021.

Noninterest expense in the quarterly comparison was ~~primarily a result~~negatively impacted by rising inflation in 2022, and the added cost from branch expansion earlier in the year. Noninterest expense increased $616 thousand, or 9.80%, from the third quarter of 2021 to the third quarter of 2022. There was an increase in ~~service charges and fees of $196 thousand, an increase in realized gains on securities of $162 thousand, and an increase in mortgage origination fees of $90 thousand.~~

~~Total noninterest expenses were $6.3 million for the quarters ended September 30, 2021 and 2020, respectively. Salary~~salary and benefit costs ~~increased by $55~~of $230 thousand, while occupancy and equipment expenses increased ~~by $55 thousand. Data processing expenses increased by $18 thousand, professional fees decreased by $21 thousand, and advertising expenses decreased by $20~~$232 thousand in the ~~quarter-to-quarter~~quarterly comparisons. FDIC assessments increased by $38 thousand to adjust for continued deposit growth, offsetting a decrease in core deposit intangible amortization of $29 thousand in the quarterly comparison.

~~Income~~Net income before taxes was comparable at $3.5 million and $3.4 million in the quarterly comparison, resulting in income tax expense ~~increased by $343 thousand in the quarter-to-quarter comparison, totaling~~of $701 thousand for both the ~~quarter~~three months ended September 30, 2022 and 2021, ~~compared to $358 thousand~~respectively.

Results of Operations for the ~~quarter~~Nine Months ended September 30, ~~2020. The increase~~2022 and 2021

For the first nine months of 2022, net interest income after provision for loan losses was $24.8 million compared to $22.7 million for the first nine months of 2021. Interest income increased by $1.4 million, primarily due to an increase ~~in net income before taxes~~ of ~~$1.6~~$1.2 million in interest income on securities and an increase of $463 thousand in interest income on interest-bearing deposits in banks, which offset a decrease in loan interest income of $169 thousand during the ~~quarterly~~first nine months of 2022, compared to the first nine months of 2021. Interest income on loans decreased in the nine-month comparison, primarily due to a decrease in SBA-PPP related interest and fees of $1.2 million from the year ago period. Excluding SBA-PPP related interest and fees of $1.8 million for the first nine months of 2022 and $3.0 for the first nine months of 2021, interest income on loans would have increased $1 million, reflecting our core loan growth as well as the current rate environment. Interest expense on deposits decreased by $625 thousand for the nine months ended September 30, 2022 compared to the same period last year. This is a reflection of the reduced rates for savings and time deposits, as previously discussed, along with a reduction in time deposit balances from a year ago.

For the nine months ended September 30, 2022 and 2021, noninterest income was $4.7 million and $4.8 million, respectively. Included in noninterest income for the nine months ended September 30, 2022 was nonrecurring income from life insurance contracts of $217 thousand, and for the nine months ended September 30, 2021, there was nonrecurring income of $200 thousand from a one-time lease termination fee and $265 thousand from net realized gains on the sale of securities. Excluding these items, noninterest income increased $144 thousand in the nine-month comparison, primarily as a result of increased income from service charges and fees of $715 thousand, partially offset by a decrease of $502 thousand in mortgage origination income.

Part I. Financial Information

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

Results of Operations for the Nine Months ended September 30, 2022 and 2021, ~~and 2020~~continued

~~For~~Noninterest expenses in the ~~first nine months of 2021, net interest income after provision for loan losses~~nine-month comparison was ~~$22.7 million compared to $19.6 million for~~negatively impacted by rising inflation in 2022, and the ~~first nine months of 2020. Interest income increased by $2.0 million, primarily due to an increase~~added cost from branch expansion earlier in ~~loan interest income of $1.6 million and a $506 thousand increase in interest from~~ the securities portfolio during the first nine months of 2021, compared to the first nine months of 2020. Interest expense on deposits decreased by $651 thousand for the nine-months ended September 30, 2021 compared to the same period last year. ~~As previously discussed, this is a reflection of the reduced rates for interest bearing demand deposits, time deposits, and savings products.~~

For the first nine months of 2021, noninterest income increased by $816 thousand compared to the same period last year. The increase was mainly due to an increase in mortgage origination income of $295 thousand and an increase in service charges and fees of $389 thousand. During the first nine months of 2021, there were realized gains on securities of $265 thousand, compared to realized gains on securities of $315 thousand for the first nine months of 2020, representing a decrease of $50 thousand. During the first nine months of 2021, the Company had a one-time lease termination fee of $200 thousand.

For the nine-month period ended September 30, ~~2021,~~2022, total noninterest expenses increased by ~~$558 thousand~~$1.3 million compared to the same period in ~~2020, primarily due to employee and branch costs associated with branch expansion.~~2021. Salary and benefit cost increased by ~~$161~~$459 thousand, occupancy and equipment expenses increased by ~~$286~~$520 thousand, and ~~data processing expenses~~telephone expense increased by ~~$101~~$72 thousand from the first nine months of ~~2020~~2021 to ~~2021. Professional fees~~2022. FDIC assessments increased by ~~$80~~$113 thousand ~~which was offset by a decrease~~ in ~~core~~the nine-month comparison due to continued deposit ~~intangible amortization of $87 thousand from the first nine months of 2020 to 2021.~~growth.

In total, income before taxes increased by ~~$3.4 million~~$626 thousand over the first nine months of ~~2021~~2022 compared to the first nine months of ~~2020.~~2021. Income tax expense increased by ~~$719~~$45 thousand over the prior year, resulting in an increase in net income of ~~$2.6 million~~$581 thousand for the nine months ended September 30, ~~2021,~~2022, compared to the same period in ~~2020.~~2021.

Financial Condition

Total assets increased by ~~$124.8~~$27.9 million, or ~~14.59%~~2.80%, to ~~$980.2 million~~$1.02 billion at September 30, ~~2021~~2022 from ~~$855.4~~$995.8 million at December 31, ~~2020.~~2021. The ~~increase~~growth in ~~total~~ assets during the first nine months of ~~2021 mainly related to increases~~2022 primarily reflects an increase in ~~deposits of $122.8 million.~~

gross loans and deposits. Total loans increased ~~during the first nine months of 2021~~ by ~~$22.0~~$55.5 million, or ~~3.32%~~8.11%, to ~~$686.1~~$739.0 million at September 30, ~~2021 compared to $664.1~~2022 from $683.5 million at December 31, ~~2020. The increases in loan balances can be attributed to organic loan growth of $36.9~~2021. SBA-PPP loans decreased by $24.4 million during the first nine months of ~~2021,~~2022; however, this decrease was offset by ~~a decrease in SBA-PPP loans~~higher yielding organic loan growth of ~~$13.4 million. Gross loans as of September 30, 2021 included $40.8 million in remaining SBA-PPP loans, and net deferred fees of $3.0 million.~~

~~Investment securities increased by $73.9~~$80.7 million during the first nine months of ~~2021~~2022, which is an annualized rate of 16.50%. Gross loans at September 30, 2022 included $96 thousand in SBA-PPP loans with net deferred fees of $10 thousand.

Investment securities increased by $8.8 million to ~~$107.4~~$138.5 million at September 30, ~~2021~~2022 from ~~$33.5~~$129.7 million at December 31, ~~2020.~~2021. The increase in the first nine months of ~~2021~~2022 was the result of ~~$91.5~~$45.2 million in purchases, offset by ~~sales~~paydowns, calls, and maturities of ~~$8.6 million, paydowns of $5.5~~$10.6 million, and ~~call/maturities~~an increase in unrealized losses of ~~$2.2 million.~~$25.6 million as a result of the increase in interest rates during the first nine months of 2022.

Total deposits increased by ~~$122.8~~$47.5 million, or ~~16.24%~~5.28%, to ~~$878.3~~$945.7 million at September 30, ~~2021~~2022 from ~~$755.5~~$898.2 million at December 31, ~~2020. Total deposits~~2021. Deposit growth continues to reflect increased balances held by $164.3 million, or 23.00%, from September 30, 2020 to September 30, 2021. The increases in deposit balances came as a result of the Bank’s participation in the SBA-PPP program, government stimulus programs, branch expansion into new markets, andcustomers, organic growth in our ~~existing locations. Total increases for~~markets and new customer deposits. Lower-cost core deposits (demand deposits, savings, and money market accounts) increased by $62.8 million during the first nine months of ~~2021 included~~2022, resulting in annualized growth of 11.85%, while time deposit balances decreased by $15.3 million.

Total stockholders’ equity decreased by $14.7 million, or 17.23% to $70.5 million at September 30, 2022, from $85.2 million at December 31, 2021. The change during the first nine months of 2022 reflects earnings of $7.4 million, offset by dividend payments of $1.8 million, stock repurchases of $154 thousand, and an unrealized loss on the value of the securities portfolio as a ~~$59.2 million increase~~result of increased interest rates during the first nine months of 2022. As interest rates rise, we anticipate continued negative pressure on the market value of our investment portfolio which is recognized on our balance sheet as a reduction in ~~noninterest bearing deposits, while interest bearing deposits increased by $63.5 million over~~stockholders’ equity. However, management does not anticipate the ~~same time period. The increase in interest bearing deposits was due~~need to ~~an $9.4 million increase in interest-bearing demand deposits, a $30.7 million increase in money markets, a $21.1 million increase in saving accounts, and a $2.3 million increase in time deposits.~~sell any investment securities prior to their scheduled maturity, therefore we do not expect market value changes to impact future earnings.

Part I. Financial Information

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

~~Financial Condition, continued~~Nonperforming and Problem Assets

~~Asset quality has remained strong, with~~Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Bank attempts to use shorter-term loans and, although a ~~ratio~~portion of ~~nonperforming~~the loans have been made based upon the value of collateral, the underwriting decision is generally based on the cash flow of the borrower as the source of repayment rather than the value of the collateral. The Bank also attempts to ~~total loans of 0.30% at September 30, 2021 compared~~reduce repayment risk by adhering to ~~0.73% at September 30, 2020.~~ internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies.

The following table provides information about the allowance for loan losses, at September 30, 2021 was approximately 0.81% of total loans, compared to 0.71% at September 30, 2020. The allowance ratio excluding $37.8 million of SBA-PPP loans would have been 0.86% at September 30, 2021.

~~Nonperforming~~nonperforming assets ~~including nonaccrual loans,~~and loans past due ~~more than ninety~~90 days ~~and foreclosed assets, decreased from $4.80 million at December 31, 2020 to $2.06 million at September 30, 2021. There were no foreclosed assets and no loans past due~~or more ~~than ninety days~~ and still accruing ~~interest at~~as of September 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

	September 30,			December 31,
	2022			2021

Allowance for loan losses	$	6,168		$	5,677
Total loans	$	738,992		$	683,532
Allowance for loan losses to total loans		0.83	%		0.83	%

Nonperforming loans:
Nonaccrual loans	$	1,770		$	1,320
Restructured loans		2,371			3,167
Purchased credit-impaired loans on accrual status		93			103
Loans past due 90 days or more and still accruing		-			-
Total nonperforming loans		4,234			4,590
Foreclosed assets		-			-
Total nonperforming assets	$	4,234		$	4,590

Total nonperforming loans as a percentage to total loans		0.57	%		0.67	%
Total allowance for loan losses to nonperforming loans		145.68	%		123.68	%
Total nonperforming assets as a percentage to total assets		0.41	%		0.46	%
Total nonaccrual loans as a percentage to total loans		0.24	%		0.19	%
Total allowance for loan losses to nonaccrual loans		348.47	%		430.08	%

Total nonperforming loans were 0.57% of total outstanding loans as of September 30, 2022 and 0.67% as of December 31, 2021, respectively. The majority of the increase in nonaccrual loans for the first nine months of 2022 came in the “commercial mortgage” category as a result of one large credit going into nonaccrual status. Nonaccrual loans ~~decreased from $4.80 million at December 31, 2020 to $2.06 million at September 30, 2021.~~in this category increased by $520 thousand. Loans are ~~generally~~ placed in nonaccrual status when, ~~principal or~~in management’s opinion, the borrower may be unable to meet payments as they become due. When interest ~~has been in default for a period of 90 days or more unless the loan~~accrual is ~~both well secured and in the process of collection. The following table summarizes nonperforming assets:~~discontinued, all unpaid accrued interest is reversed.

(dollars in thousands)

September 30,

December 31,

2021

2020

Nonperforming Assets

Nonaccrual loans
$ 2,059 $ 4,803
Loans past due 90 days or more and still accruing interest

Total nonperforming loans
2,059 4,803
Foreclosed assets
- -
Total nonperforming assets
$ 2,059 $ 4,803

Nonperforming assets to total assets
0.21 % 0.56 %
Nonperforming loans to total loans
0.30 % 0.72 %

~~Loans less than 90 days past due may be placed in nonaccrual status if management determines that payment in full of principal or interest is not expected.~~ Loans are removed from nonaccrual status when they are deemed a loss and charged to the allowance, transferred to foreclosed assets, or returned to accrual status based upon performance consistent with the original terms of the loan or a subsequent restructuring thereof. ~~Management continues~~Management’s ability to ~~closely monitor nonperforming assets~~ultimately resolve these loans either with or without significant loss will be determined, to a great extent, by general economic and real estate market conditions.

Restructured loans represent troubled debt restructurings (“TDRs”) that have returned to accrual status after a period of performance in accordance with their ~~impact on earnings~~modified terms. The decrease in restructured loans from December 31, 2021 to September 30, 2022 came primarily in the form of principal reductions. A TDR is considered to be successful if the borrower maintains adequate payment performance under the modified terms and ~~loan loss reserves.~~is financially stable.

Part I. Financial Information

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

~~Financial Condition,~~Nonperforming and Problem Assets, continued

AtThere were no foreclosed assets as of September 30, 2022 or December 31, 2021. More information on nonperforming assets and loan modifications in response to COVID-19 can be found in Note 4 of the “Notes to Consolidated Financial Statements.”

As of September 30, 2022 and December 31, 2021, we had loans with a current principal balance of $6.8 million and $10.9 million rated “Watch” or “Special Mention”. The “Watch” classification is utilized by us when we have an initial concern about the financial health of a borrower that indicate above average risk. We then gather current financial information about the borrower and evaluate our current risk in the credit. After this review we will either move the loan to a higher risk rating category or move it back to its original risk rating. Loans may be left rated “Watch” for a longer period of time if, in management’s opinion, there ~~was~~are risks that cannot be fully evaluated without the passage of time, and we want to review it on a ~~recorded investment in impaired~~more regular basis. Assets that do not currently expose the Bank to sufficient risk to warrant a classification such as “Substandard” or “Doubtful” but otherwise possess weaknesses are designated “Special Mention”. Loans rated as “Watch” or “Special Mention” are not considered “potential problem loans” until they are determined by management to be classified as “Substandard”. As of September 30, 2022, potential problem loans ~~of $5.9~~classified as substandard totaled $5.3 million ~~of which, $3.1~~compared to $6.0 million ~~had a related allowance of $157 thousand and the remaining $2.8 million had no related allowance. Impaired loans~~ at December 31, ~~2020~~2021. Past due loans are often regarded as a precursor to further credit problems which would lead to future increases in nonaccrual loans or other real estate owned. As of September 30, 2022, loans past due 30-89 days and still accruing totaled ~~$6.2 million, of which $3.6 million required specific reserves of $192 thousand.~~$293 thousand compared to $346 thousand at December 31, 2021.

Summary of Loan Loss Experience

Nine

Nine

months

months

Year

ended

ended

ended

(dollars in thousands)

September 30,

September 30,

December 31,

2021

2020

2020

Total loans outstanding at end of period
$ 686,117 $ 677,737 $ 664,095

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

Charge offs:

Construction & development
- (8 ) (8 )
Farmland
- - -
Residential
- (48 ) (48 )
Commercial mortgage
- (61 ) (61 )
Commercial & agricultural
(8 ) (14 ) (37 )
Consumer & other
(73 ) (106 ) (148 )
Total charge-offs
(81 ) (237 ) (302 )

Recoveries:

Construction & development
3 4 4
Farmland
- - -
Residential
2 11 11
Commercial mortgage
61 65 65
Commercial & agricultural
53 2 6
Consumer & other
36 29 34
Total recoveries
155 111 120
Net (charge-offs) recoveries
74 (126 ) (182 )

Provision for allowance
576 1,027 1,189
Allowance for loan losses at end of period
$ 5,550 $ 4,794 $ 4,900

Ratios:

Allowance for loan losses to loans at end of period
0.81 % 0.71 % 0.74 %
Net (charge-offs) recoveries to allowance for loan losses
1.33 % (2.63
%) (3.71 %)
Net (charge-offs) recoveries to provisions for loan losses
12.85 % (12.27
%) (15.31 %)

Certain types of loans, such as option ~~ARM (adjustable-rate mortgage)~~adjustable rate mortgage products, ~~interest-only loans,~~ subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans. The Bank has not offered these types of loans in the past and does not offer them currently. Junior-lien mortgages can also be considered higher risk loans. Our junior-lien portfolio at September 30, ~~2021~~2022 totaled ~~$3.7~~$3.4 million, or ~~0.54%~~0.47% of total loans. ~~Historical~~The charge-off rates in this category ~~have~~do not ~~varied~~vary significantly from other real estate secured ~~loans.~~loans in the current year.

~~Stockholders’ equity increased by $3.3 million, or 3.85%,~~The allowance for loan losses is maintained at a level adequate to ~~$88.4 million~~absorb potential losses. Some of the factors which management considers in determining the appropriate level of the allowance for loan losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market area that the Bank serves. Bank regulators also periodically review the Bank’s loans and other assets to assess their quality. Loans deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. The reserve for loan losses was approximately 0.83% of total loans at September 30, ~~2021 from $85.1 million at~~2022 and December 31, ~~2020. The increase~~2021. Management’s estimate of probable credit losses inherent in the acquired Cardinal Bankshares Corporation and Great State loan portfolios was ~~due~~reflected as a purchase discount which will continue to ~~earnings~~be accreted into income over the remaining life of ~~$6.8 million offset by dividend payments~~the acquired loans. As of $1.6 million, stock repurchases of $956 thousand, and a $1.0 million increase in accumulated other comprehensive losses due to unrealized losses on investment securities. Book value increased from $14.08 per share at December 31, 2020 to $14.78 per share at September 30, ~~2021.~~2022, the remaining unaccreted discount on the acquired loan portfolios totaled $737 thousand. This remaining discount can be used for credit losses if a loss occurs on individual loans in the purchased portfolios.

Part I.Financial Information

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

Analysis of Net Charge-Offs

The following table shows net charge-offs, average loan balances and the percentage of charge-offs to average loan balances for the nine months ended September 30, 2022 and 2021, and the year ended December 31, 2021.

	Nine months ended September 30, 2022
						Percentage of Net
						(Charge-Offs)
	Net					Recoveries to
	(Charge-Offs)			Average		Average
(dollars in thousands)	Recoveries			Loans		Loans

Construction & development	$	3		$	44,953		0.01	%
Farmland		-			24,293		0.00	%
Residential		11			322,360		0.00	%
Commercial mortgage		8			243,091		0.00	%
Commercial & agriculture		17			39,220		0.04	%
SBA-PPP		-			10,598		0.00	%
Consumer & other		(50	)		22,894		(0.22%	)
Total	$	(11	)	$	707,409		0.00	%

	Nine months ended September 30, 2021
						Percentage of Net
						(Charge-Offs)
	Net					Recoveries to
	(Charge-Offs)			Average		Average
(dollars in thousands)	Recoveries			Loans		Loans

Construction & development	$	3		$	44,544		0.01	%
Farmland		-			30,997		0.00	%
Residential		2			287,589		0.00	%
Commercial mortgage		61			218,896		0.03	%
Commercial & agriculture		45			33,503		0.13	%
SBA-PPP		-			55,763		0.00	%
Consumer & other		(37	)		18,256		(0.20%	)
Total	$	74		$	689,548		0.01	%

	Year ended December 31, 2021
						Percentage of Net
						(Charge-Offs)
	Net					Recoveries to
	(Charge-Offs)			Average		Average
(dollars in thousands)	Recoveries			Loans		Loans

Construction & development	$	5		$	44,437		0.01	%
Farmland		-			29,766		0.00	%
Residential		2			289,445		0.00	%
Commercial mortgage		61			220,897		0.03	%
Commercial & agriculture		45			34,457		0.13	%
SBA-PPP		-			49,438		0.00	%
Consumer & other		(59	)		19,147		(0.31%	)
Total	$	54		$	687,587		0.01	%

Part I. Financial Information

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

Liquidity

Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss. Unsecured federal fund lines available from correspondent banks totaled $73.0 million at September 30, ~~2021.~~2022. The Bank had no balances outstanding on these lines as of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. In addition, the Bank has the ability to borrow up to approximately ~~$226.7~~$259.5 million from the FHLB, subject to the pledging of collateral. ~~The~~

At September 30, 2022, the Bank had ~~long-term FHLB advances of $10.0 million~~no debt outstanding ~~at September 30, 2021 and~~classified as long-term. At December 31, ~~2020, respectively.~~2021, the Bank’s long-term debt consisted of a $5.0 million advance from FHLB, which was scheduled to mature on December 6, 2029. On March 31, 2022, the Bank prepaid the $5.0 million advance and incurred a prepayment penalty of $8 thousand.

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

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

As a result of the steps described above, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs. The liquidity ratio (the level of liquid assets divided by total deposits plus short-term liabilities) was ~~22.8%~~18.3% and ~~15.0%~~23.1% for the periods ended September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. These ratios are considered to be adequate by management.

Capital Resources

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

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios at the Bank level which assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities. At September 30, ~~2021,~~2022, the Bank exceeded minimum regulatory capital requirements and is considered to be “well capitalized.”

At September 30, ~~2021,~~2022, Parkway’s equity to asset ratio was ~~9.02%~~6.89% and the Bank’s capital was in excess of regulatory requirements as discussed above. The Company will continue to monitor the effects of COVID-19 and rising inflation in determining future cash dividends and any requirements for additional capital each quarter. Parkway declared and paid dividends of ~~$1.6~~$1.8 million, and had ~~$956~~$154 thousand of stock repurchases for the first nine months of ~~2021.~~2022.

Part I. Financial Information

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

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934 as amended. These include statements as to expectations future financial performance and any other statements regarding future results or expectations. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identified by the use of words such as "believe," "expect," "intend," "anticipate," "estimate," or "project" or similar expressions. Our ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to: changes in interest rates and general economic conditions; the effects of the COVID-19 pandemic, including the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions; the effect of changes in banking, tax and other laws and regulations and interpretations or guidance thereunder; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve; the quality and composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the combined company’s market area; the implementation of new technologies; the ability to develop and maintain secure and reliable electronic systems; accounting principles, policies, and ~~guidelines;~~guidelines and other factors identified in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or clarify these forward‐looking statements, whether as a result of new information, future events or otherwise.

5153

Part I. Financial Information

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required.

5254

Part I. Financial Information

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

5355

Part II. Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

In connection with the information set forth in this Form 10-Q, the factors discussed under “Risk Factors” in our Form 10-K for the year ended December 31, ~~2020~~2021 should be considered. These risks could materially and adversely affect our business, financial condition and results of operations. There have been no material changes to the factors discussed in our Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table details the Company’s purchase of its common stock during the third quarter of ~~2021.~~2022.

Total
number of
shares
purchased

Average
price
paid per
Share

Total number of
shares purchased
as part of
publicly
announced
program

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

Purchased 7/1 through 7/31
- $ - - 137,500
Purchased 8/1 through 8/31
19,175 $ 12.25 19,175 118,325
Purchased 9/1 through 9/30
15,000 $ 12.30 15,000 103,325
Total during third quarter 2021
34,175 $ 12.27 34,175

	Total number of shares purchased		Average price paid per Share		Total number of shares purchased as part of publicly announced program		Maximum number of shares that may yet be purchased under the plan ⁽¹⁾
Purchased 7/1 through 7/31		-	$	-		-		91,325
Purchased 8/1 through 8/31		-	$	-		-		91,325
Purchased 9/1 through 9/30		-	$	-		-		91,325
Total during third quarter 2022		-	$	-		-

⁽¹⁾

On February 17, 2021, the Company’s Board of Directors publicly announced the extension of the Company’s stock repurchase plan, pursuant to which the Company may purchase an aggregate of up to 350,000 shares of common stock through January 2023.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

None

Item 5.

Other Information

None

Part II. Other Information

Item 6.

Exhibits

31.1

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

31.2

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

32.1

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

101

The following materials from the Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021,~~2022, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Unaudited Consolidated Financial Statements.

104

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

5557

Part II. Other Information

SIGNATURES

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

	Parkway Acquisition Corp.



Date: November ~~15, 2021~~14, 2022	By:	/s/ Blake M. Edwards
		Blake M. Edwards
		President and Chief Executive Officer



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

5658

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

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

	Large accelerated filer ☐		Accelerated filer ☐

	Non-accelerated filer ☑		Smaller reporting company ☑

			Emerging growth company ☐

(dollars in thousands)	September 30,			December 31,			September 30,			December 31,
	2021			2020			2022			2021
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
Assets

Cash and due from banks	$	15,835		$	10,009		$	18,615		$	14,349
Interest-bearing deposits with banks		4,757			84,863			49,795			5,986
Federal funds sold		99,891			817			602			95,311
Investment securities available for sale		107,422			33,507			138,491			129,715
Restricted equity securities		2,209			2,416			1,950			1,971
Loans, net of allowance for loan losses of $5,550 at September 30, 2021 and $4,900 at December 31, 2020		680,567			659,195
Loans, net of allowance for loan losses of $6,168 at September 30, 2022 and $5,677 at December 31, 2021								732,824			677,855
Cash value of life insurance		18,628			18,304			22,368			18,750
Properties and equipment, net		30,268			26,591			32,128			30,856
Accrued interest receivable		2,414			2,355			2,589			2,363
Core deposit intangible		1,898			2,359			1,391			1,764
Goodwill		3,257			3,257			3,257			3,257
Deferred tax assets, net		1,509			1,019			5,955			1,122
Other assets		11,519			10,695			13,780			12,549
	$	980,174		$	855,387		$	1,023,745		$	995,848

Liabilities and Stockholders’ Equity

*Liabilities*
Deposits
Noninterest-bearing	$	291,058		$	231,852		$	328,000		$	298,107
Interest-bearing		587,194			523,676			617,666			600,119
Total deposits		878,252			755,528			945,666			898,226

FHLB advances		10,000			10,000
Borrowings								3,350			8,200
Accrued interest payable		122			124			91			73
Other liabilities		3,420			4,629			4,124			4,155
		891,794			770,281			953,231			910,654
Commitments and contingencies (Note 9)

*Stockholders’ Equity*
Preferred stock, no par value; 5,000,000 shares authorized, none issued		0			0			-			-
Common stock, no par value; 25,000,000 shares authorized, 5,981,100 and 6,045,775 issued and outstanding at September 30, 2021 and December 31, 2020, respectively		0			0
Common stock, no par value; 25,000,000 shares authorized, 5,608,716 and 5,606,216 issued and outstanding at September 30, 2022 and December 31, 2021, respectively								-			-
Surplus		38,812			39,740			33,493			33,588
Retained earnings		51,112			45,887			59,378			53,745
Accumulated other comprehensive loss		(1,544	)		(521	)		(22,357	)		(2,139	)
		88,380			85,106			70,514			85,194
	$	980,174		$	855,387		$	1,023,745		$	995,848

	Three Months Ended				Nine Months Ended				Three Months Ended					Nine Months Ended
	September 30,				September 30,				September 30,					September 30,
(dollars in thousands except share amounts)	2021		2020		2021		2020		2022			2021		2022			2021
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
*Interest income*
Loans and fees on loans	$	8,259	$	7,631	$	24,092	$	22,490	$	8,217		$	8,259	$	23,923		$	24,092
Interest-bearing deposits in banks		19		23		85		176		356			19		548			85
Federal funds sold		11		0		11		3		3			11		5			11
Interest on taxable securities		358		146		952		467		742			358		1,962			952
Interest on nontaxable securities		12		8		34		13		72			12		176			34
Dividends		8		12		66		80		5			8		59			66
		8,667		7,820		25,240		23,229		9,395			8,667		26,673			25,240
*Interest expense*
Deposits		556		848		1,857		2,508		374			556		1,232			1,857
Interest on borrowings		21		26		62		71		55			21		140			62
		577		874		1,919		2,579		429			577		1,372			1,919
Net interest income		8,090		6,946		23,321		20,650		8,966			8,090		25,301			23,321

*Provision for loan losses*		219		291		576		1,027		148			219		502			576
Net interest income after provision for loan losses		7,871		6,655		22,745		19,623		8,818			7,871		24,799			22,745

*Noninterest income*
Service charges on deposit accounts		444		354		1,071		1,044		489			444		1,406			1,071
Other service charges and fees		668		562		1,934		1,572		835			668		2,314			1,934
Net realized gains on securities		265		103		265		315
Nets realized gains on securities										-			265		-			265
Mortgage origination fees		275		185		861		566		74			275		359			861
Increase in cash value of life insurance		108		108		324		324		135			108		397			324
Life insurance income										-			-		217			-
Other income		53		85		387		205		37			53		45			387
		1,813		1,397		4,842		4,026		1,570			1,813		4,738			4,842
*Noninterest expenses*
Salaries and employee benefits		3,645		3,590		10,812		10,651		3,875			3,645		11,271			10,812
Occupancy and equipment		907		852		2,696		2,410		1,139			907		3,216			2,696
Foreclosed asset expense, net		1		2		1		2		(1	)		1		(1	)		1
Data processing expense		468		450		1,434		1,333		408			468		1,343			1,434
FDIC Assessments		76		60		229		135		114			76		342			229
Advertising		172		192		473		482		161			172		488			473
Bank franchise tax		126		133		379		365		126			126		379			379
Director fees		58		79		205		210		56			58		202			205
Professional fees		107		128		455		375		144			107		484			455
Telephone expense		100		101		298		284		110			100		370			298
Core deposit intangible amortization		134		163		461		548		105			134		373			461
Other expense		489		529		1,542		1,632		662			489		1,842			1,542
		6,283		6,279		18,985		18,427		6,899			6,283		20,309			18,985
Net income before income taxes		3,401		1,773		8,602		5,222		3,489			3,401		9,228			8,602

*Income tax expense*		701		358		1,753		1,034		701			701		1,798			1,753
Net income	$	2,700	$	1,415	$	6,849	$	4,188	$	2,788		$	2,700	$	7,430		$	6,849

*Net income per share*	$	0.45	$	0.23	$	1.14	$	0.69	$	0.50		$	0.45	$	1.32		$	1.14
*Weighted average shares outstanding*		6,003,504		6,060,775		6,028,449		6,082,950		5,608,716			6,003,504		5,612,452			6,028,449
*Dividends declared per share*	$	0.14	$	0.13	$	0.27	$	0.26	$	0.17		$	0.14	$	0.32		$	0.27

	Nine Months Ended
	September 30,
(dollars in thousands)	2021			2020
	(Unaudited)			(Unaudited)

Net Income	$	6,849		$	4,188

Other comprehensive income

Unrealized gains (losses) on investment securities available for sale:
Unrealized gains (losses) arising during the period		(1,030	)		958
Tax related to unrealized (gains) losses		216			(201	)
Reclassification of net realized gains during the period		(265	)		(315	)
Tax related to realized gains		56			66

Total other comprehensive income (loss)		(1,023	)		508
Total comprehensive income	$	5,826		$	4,696

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets—September 30, ~~2021~~2022 (Unaudited) and December 31, ~~2020~~2021 (Audited)	3

	Unaudited Consolidated Statements of Income—Three and Nine Months Ended September 30, ~~2021~~2022 and September 30, ~~2020~~2021	4

	Unaudited Consolidated Statements of Comprehensive Income—Nine and Three Months Ended September 30, ~~2021~~2022 and September 30, ~~2020~~2021	5

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity—Nine and Three Months Ended September 30, ~~2021~~2022 and September 30, ~~2020~~2021	6

	Unaudited Consolidated Statements of Cash Flows—Nine Months Ended September 30, ~~2021~~2022 and September 30, ~~2020~~2021	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5254

Item 4.	Controls and Procedures	5355

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	5456

Item 1A.	Risk Factors	5456

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5456

Item 3.	Defaults Upon Senior Securities	5456

Item 4.	Mine Safety Disclosures	5456

Item 5.	Other Information	5456

Item 6.	Exhibits	57

Signatures		5658

(dollars in thousands except share amounts)	(dollars in thousands except share amounts)												Accumulated						(dollars in thousands except share amounts)
													Other																		Accumulated
		Common Stock								Retained			Comprehensive																		Other
		Shares			Amount		Surplus			Earnings			Loss			Total				Common Stock								Retained			Comprehensive
																				Shares			Amount		Surplus			Earnings			Loss			Total
*Balance, December 31, 2019*			6,137,275		$	0	$	40,752		$	41,600		$	(924	)	$	81,428

Net income			-			0		0			1,676			0			1,676
Other comprehensive loss			-			0		0			0			(39	)		(39	)
Dividends paid ($0.13 per share)			-			0		0			(794	)		0			(794	)
Common stock repurchased			(70,000	)		0		(800	)		0			0			(800	)

*Balance, March 31, 2020*			6,067,275		$	0	$	39,952		$	42,482		$	(963	)	$	81,471

Net income			-			0		0			1,097			0			1,097
Other comprehensive income			-			0		0			0			602			602
Common stock repurchased			(6,500	)		0		(67	)		0			0			(67	)

*Balance, June 30, 2020*			6,060,775		$	0	$	39,885		$	43,579		$	(361	)	$	83,103

Net income			-			0		0			1,415			0			1,415
Other comprehensive loss			-			0		0			0			(55	)		(55	)
Dividends paid ($0.13 per share)			-			0		0			(788	)		0			(788	)

*Balance, September 30, 2020*			6,060,775		$	0	$	39,885		$	44,206		$	(416	)	$	83,675

*Balance, December 31, 2020*			6,045,775		$	0	$	39,740		$	45,887		$	(521	)	$	85,106				6,045,775		$	-	$	39,740		$	45,887		$	(521	)	$	85,106

Net income			-			0		0			1,847			0			1,847				-			-		-			1,847			-			1,847
Other comprehensive loss			-			0		0			0			(1,362	)		(1,362	)			-			-		-			-			(1,362	)		(1,362	)
Dividends paid ($0.13 per share)			-			0		0			(785	)		0			(785	)
Dividends paid ($0.13 per share)																					-			-		-			(785	)		-			(785	)
Restricted stock issued			14,500			0		0			0			0			0				14,500			-		-			-			-			-
Common stock repurchased			(10,000	)		0		(109	)		0			0			(109	)			(10,000	)		-		(109	)		-			-			(109	)

*Balance, March 31, 2021*			6,050,275		$	0	$	39,631		$	46,949		$	(1,883	)	$	84,697				6,050,275		$	-	$	39,631		$	46,949		$	(1,883	)	$	84,697

Net income			-			0		0			2,302			0			2,302				-			-		-			2,302			-			2,302
Other comprehensive income			-			0		0			0			464			464				-			-		-			-			464			464
Share-based compensation			-			0		14			0			0			14				-			-		14			-			-			14
Common stock repurchased			(35,000	)		0		(427	)		0			0			(427	)			(35,000	)		-		(427	)		-			-			(427	)

*Balance, June 30, 2021*			6,015,275		$	0	$	39,218		$	49,251		$	(1,419	)	$	87,050				6,015,275		$	-	$	39,218		$	49,251		$	(1,419	)	$	87,050

Net income			-			0		0			2,700			0			2,700				-			-		-			2,700			-			2,700
Other comprehensive loss			-			0		0			0			(125	)		(125	)			-			-		-			-			(125	)		(125	)
Dividends paid ($0.14 per share)			-			0		0			(839	)		0			(839	)
Dividends paid ($0.14 per share)																					-			-		-			(839	)		-			(839	)
Share-based compensation			-			0		14			0			0			14				-			-		14			-			-			14
Common stock repurchased			(34,175	)		0		(420	)		0			0			(420	)			(34,175	)		-		(420	)		-			-			(420	)

*Balance, September 30, 2021*			5,981,100		$	0	$	38,812		$	51,112		$	(1,544	)	$	88,380				5,981,100		$	-	$	38,812		$	51,112		$	(1,544	)	$	88,380

*Balance, December 31, 2021*																					5,606,216		$	-	$	33,588		$	53,745		$	(2,139	)	$	85,194

Net income																					-			-		-			2,406			-			2,406
Other comprehensive loss																					-			-		-			-			(7,388	)		(7,388	)
Dividends paid ($0.15 per share)																					-			-		-			(843	)		-			(843	)
Restricted stock issued																					14,500			-		-			-			-			-
Share-based compensation																					-			-		15			-			-			15

*Balance, March 31, 2022*																					5,620,716		$	-	$	33,603		$	55,308		$	(9,527	)	$	79,384

Net income																					-			-		-			2,236			-			2,236
Other comprehensive loss																					-			-		-			-			(5,681	)		(5,681	)
Share-based compensation																					-			-		22			-			-			22
Common stock repurchased																					(12,000	)		-		(154	)		-			-			(154	)

*Balance, June 30, 2022*																					5,608,716		$	-	$	33,471		$	57,544		$	(15,208	)	$	75,807

Net income																					-			-		-			2,788			-			2,788
Other comprehensive loss																					-			-		-			-			(7,149	)		(7,149	)
Dividends paid ($0.17 per share)																					-			-		-			(954	)		-			(954	)
Share-based compensation																					-			-		22			-			-			22

*Balance, September 30, 2022*																					5,608,716		$	-	$	33,493		$	59,378		$	(22,357	)	$	70,514

							Nine months ended					Three months ended
			*Unpaid*				*Average*		*Interest*			*Average*		*Interest*
	*Recorded*		*Principal*		*Related*		*Recorded*		*Income*			*Recorded*		*Income*
*(dollars in thousands)*	Investment¹		*Balance*		*Allowance*		*Investment*		*Recognized*			*Investment*		*Recognized*

September 30, 2021
With no related allowance recorded:
Construction & development	$	426	$	425	$	-	$	218	$	(5	)	$	426	$	-
Farmland		2,349		3,008		-		2,464		191			2,384		129
Residential		-		-		-		198		25			-		-
Commercial mortgage		-		-		-		-		-			-		-
Commercial & agricultural		-		-		-		-		-			-		-
Consumer & other		-		-		-		1		0			0		0
Subtotal		2,775		3,433		-		2,881		211			2,810		129

With an allowance recorded:
Construction & development		449		449		13		469		20			456		7
Farmland		126		142		2		126		6			126		2
Residential		2,425		2,602		136		2,469		108			2,448		39
Commercial mortgage		71		71		4		40		4			71		1
Commercial & agricultural		37		37		2		41		2			39		1
Consumer & other		-		0		0		0		0			0		0
Subtotal		3,108		3,301		157		3,145		140			3,140		50

Totals:
Construction & development		875		874		13		687		15			882		7
Farmland		2,475		3,150		2		2,590		197			2,510		131
Residential		2,425		2,602		136		2,667		133			2,448		39
Commercial mortgage		71		71		4		40		4			71		1
Commercial & agricultural		37		37		2		41		2			39		1
Consumer & other		-		0		0		1		0			0		0
Total	$	5,883	$	6,734	$	157	$	6,026	$	351		$	5,950	$	179

Summary of Loan Loss Experience	Nine			Nine
	months			months			Year
	ended			ended			ended
(dollars in thousands)	September 30,			September 30,			December 31,
	2021			2020			2020
Total loans outstanding at end of period	$	686,117		$	677,737		$	664,095

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

Charge offs:
Construction & development		-			(8	)		(8	)
Farmland		-			-			-
Residential		-			(48	)		(48	)
Commercial mortgage		-			(61	)		(61	)
Commercial & agricultural		(8	)		(14	)		(37	)
Consumer & other		(73	)		(106	)		(148	)
Total charge-offs		(81	)		(237	)		(302	)

Recoveries:
Construction & development		3			4			4
Farmland		-			-			-
Residential		2			11			11
Commercial mortgage		61			65			65
Commercial & agricultural		53			2			6
Consumer & other		36			29			34
Total recoveries		155			111			120
Net (charge-offs) recoveries		74			(126	)		(182	)

Provision for allowance		576			1,027			1,189
Allowance for loan losses at end of period	$	5,550		$	4,794		$	4,900

Ratios:
Allowance for loan losses to loans at end of period		0.81	%		0.71	%		0.74	%
Net (charge-offs) recoveries to allowance for loan losses		1.33	%		(2.63	%)		(3.71	%)
Net (charge-offs) recoveries to provisions for loan losses		12.85	%		(12.27	%)		(15.31	%)

Buildings and improvements

Furniture and equipment