For the Nine and Three Months ended September 30, 2022 and 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-five full-service banking offices. As a 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 ~~March 31,~~September 30, 2022 and for the nine and three-month periods ended ~~March 31,~~September 30, 2022 and 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, 2021, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The results of operations for the nine and three months ended ~~March 31,~~September 30, 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.

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

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

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.

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

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.

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.

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 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 offered short-term loan modifications to assist borrowers during the COVID-19 pandemic. These modifications generally 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 did not account for such loan modifications as TDRs. As the COVID-19 pandemic persisted in negatively impacting the economy, the Company 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 were granted specifically under Section 4013 of the CARES Act and generally 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 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 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 did not account for such loan modifications as TDRs.

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

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 ~~can~~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 ~~will~~ have: (a) an interest rate of 1.0%, (b) a two-year or five-year term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the SBA-PPP loans made to eligible borrowers. The entire principal amount of the borrower’s SBA-PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the SBA-PPP, subject to certain eligibility requirements and conditions.

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

The allowance for loan losses for SBA-PPP loans originated during 2021 and 2020 were separately evaluated given the explicit government guarantee. This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore these loans were assigned a zero expected credit loss in the allowance for loan losses.

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:

The Parkway Acquisition Corp. 2020 Equity Incentive Plan (the “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 ~~March 31,~~September 30, 2022, only restricted stock awards have been 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.

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

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.

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 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 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.

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.

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

Service Charges on Deposit Accounts - Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds 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. 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 ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 amounted to ~~$166~~$359 thousand and ~~$309~~$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:

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

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.

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.

The Company expenses advertising costs as they are incurred. Advertising expense for ~~the~~ ~~three~~nine months ended ~~March 31,~~September 30, 2022 and 2021 amounted to ~~$145~~$488 thousand and ~~$110~~$473 thousand, respectively. Advertising expense for the three months ended September 30, 2022 and 2021 amounted to $161 thousand and $172 thousand, respectively.

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 ~~March 31,~~September 30, 2022 and 2021, there were no dilutive instruments.

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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

Balance, December 31, 2020	$	582		$	(1,103	)	$	(521	)	$	582		$	(1,103	)	$	(521	)
Other comprehensive loss before reclassifications		(1,362	)		0			(1,362	)		(814	)		-			(814	)
Amounts reclassified from accumulated other comprehensive income, net of tax		0			0			0			(209	)		-			(209	)
Balance March 31, 2021	$	780		$	(1,103	)	$	(1,883	)
Balance September 30, 2021										$	(441	)	$	(1,103	)	$	(1,544	)

Balance, December 31, 2021	$	(1,477	)	$	(662	)	$	(2,139	)	$	(1,477	)	$	(662	)	$	(2,139	)
Other comprehensive loss before reclassifications		(7,388	)		0			(7,388	)		(20,218	)		-			(20,218	)
Amounts reclassified from accumulated other comprehensive income, net of tax		0			0			0			-			-			-
Balance March 31, 2022	$	(8,865	)	$	(662	)	$	(9,527	)
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

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)~~

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.

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)~~

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.

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 ~~March 31,~~September 30, 2022 and December 31, 2021 follow:

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2022
September 30, 2022
*Available for sale:*
U.S. Treasury securities	$	2,525	$	3	$	0		$	2,528	$	4,976	$	-	$	(145	)	$	4,831
U.S. Government agencies		20,342		0		(1,575	)		18,767		24,991		-		(4,355	)		20,636
Mortgage-backed securities		85,397		0		(5,060	)		80,337		80,546		-		(11,995	)		68,551
Corporate securities		1,500		0		0			1,500		1,500		-		-			1,500
State and municipal securities		50,892		44		(4,633	)		46,303		53,940		19		(10,986	)		42,973
	$	160,656	$	47	$	(11,268	)	$	149,435	$	165,953	$	19	$	(27,481	)	$	138,491
December 31, 2021
*Available for sale:*
U.S. Government agencies	$	20,333	$	7	$	(191	)	$	20,149	$	20,333	$	7	$	(191	)	$	20,149
Mortgage-backed securities		64,437		208		(1,334	)		63,311		64,437		208		(1,334	)		63,311
Corporate securities		1,500		0		0			1,500		1,500		-		-			1,500
State and municipal securities		45,314		189		(748	)		44,755		45,314		189		(748	)		44,755
	$	131,584	$	404	$	(2,273	)	$	129,715	$	131,584	$	404	$	(2,273	)	$	129,715

Restricted equity securities totaled ~~$1.9 million and~~ $2.0 million at ~~March 31,~~September 30, 2022 and December 31, 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 ~~March 31,~~September 30, 2022 and December 31, 2021.

Less Than 12 Months

12 Months or More

Total

(dollars in thousands)

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

March 31, 2022

Available for sale:

U.S. Government agencies
$ 16,952 $ (1,390 ) $ 1,815 $ (185 ) $ 18,767 $ (1,575 )
Mortgage-backed securities
41,113 (2,393 ) 24,102 (2,667 ) 65,215 (5,060 )
State and municipal securities
29,707 (3,413 ) 10,157 (1,220 ) 39,864 (4,633 )
Total securities available for sale
$ 87,772 $ (7,196 ) $ 36,074 $ (4,072 ) $ 123,846 $ (11,268 )

December 31, 2021

Available for sale:

U.S. Government agencies
$ 15,091 $ (191 ) $ 0 $ 0 $ 15,091 $ (191 )
Mortgage-backed securities
51,990 (1,334 ) 0 0 51,990 (1,334 )
State and municipal securities
28,305 (589 ) 3,560 (159 ) 31,865 (748 )
Total securities available for sale
$ 95,386 $ (2,114 ) $ 3,560 $ (159 ) $ 98,946 $ (2,273 )

	Less Than 12 Months					12 Months or More					Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
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	$	15,091	$	(191	)	$	-	$	-		$	15,091	$	(191	)
Mortgage-backed securities		51,990		(1,334	)		-		-			51,990		(1,334	)
State and municipal securities		28,305		(589	)		3,560		(159	)		31,865		(748	)
Total securities available for sale	$	95,386	$	(2,114	)	$	3,560	$	(159	)	$	98,946	$	(2,273	)

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

Note 2. Investment Securities, continued

At ~~March 31,~~September 30, 2022, 7382 investment securities with unrealized losses had depreciated ~~8.34~~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 ~~March 31,~~September 30, 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 0no sales of investment securities available for sale for the nine and three-month periods ended ~~March 31, 2022~~September 30, 2022. Proceeds from sales of investment securities available for sale was $8.62 million for the nineand ~~2021,~~three ~~respectively.~~ -month periods ended September 30, 2021. Gross proceeds from called securities totaled ~~$720~~$1.7 million for the nine-month period ended September 30, 2022 and $500 thousand for the ~~three~~nine-month period ended ~~March 31, 2022.~~ ~~There were 0 called securities for the~~ ~~three~~~~-month period ended~~ ~~March 31,~~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. ~~There were 0~~Gross realized gains and losses for the nine-month and three-month periods ended ~~March 31,~~September 30, 2022 and ~~2021.~~2021 are as follows:

	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 ~~March 31,~~September 30, 2022, were as follows:

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

Due in one year or less	$	2,310	$	2,313	$	78	$	77
Due after one year through five years		5,868		5,818		13,630		13,061
Due after five years through ten years		54,097		51,674		67,344		57,252
Due after ten years		98,381		89,630		84,901		68,101
	$	160,656	$	149,435	$	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 ~~$33.8~~$34.2 million and $32.0 million at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~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 ~~March 31,~~September 30, 2022 and December 31, 2021 are as follows:

(dollars in thousands)	2022			2021			2022			2021

Construction & development	$	47,602		$	44,252		$	45,826		$	44,252
Farmland		23,690			25,026			24,846			25,026
Residential		316,590			298,413			346,308			298,413
Commercial mortgage		233,907			230,071			261,879			230,071
Commercial & agricultural		38,859			38,442			39,794			38,442
SBA-PPP		12,724			24,528			86			24,528
Consumer & other		24,214			22,800			20,253			22,800
Total loans		697,586			683,532			738,992			683,532
Allowance for loan losses		(5,797	)		(5,677	)		(6,168	)		(5,677	)
Loans, net of allowance for loan losses	$	691,789		$	677,855		$	732,824		$	677,855

As of ~~March 31,~~September 30, 2022 and December 31, 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 ~~$13.5 million~~$96 thousand with net deferred fees of ~~$805~~$10 thousand remained on the balance sheet as of ~~March 31,~~September 30, 2022. Gross SBA-PPP loans totaling $26.3 million with net deferred fees of $1.8 million remained on the balance sheet at December 31, 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 ~~March 31,~~September 30, 2022 and December 31, 2021 by SBA tier is as follows:

(dollars in thousands)
March 31, 2022
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		0.29	%	$	1,953		15.35	%			-		-	%	$	-		-	%
Over $350,000 to less than $2 million		4		1.17	%		1,645		12.93	%			-		-	%		-		-	%
Up to $350,000		336		98.54	%		9,126		71.72	%			8		100.00	%		86		100.00	%
Total		341		100.00	%	$	12,724		100.00	%			8		100.00	%	$	86		100.00	%

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

$2 million to $10 million		1		0.12	%	$	1,950		7.95	%
Over $350,000 to less than $2 million		11		1.36	%		5,018		20.46	%
Up to $350,000		797		98.52	%		17,560		71.59	%
Total		809		100.00	%	$	24,528		100.00	%

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~March 31,~~September 30, 2022 and December 31, 2021 by industry is as follows:

(dollars in thousands)
March 31, 2022
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		14		4.11	%	$	1,372		10.78	%			-		-	%	$	-		-	%
Retail Trade		32		9.38	%		719		5.65	%			1		12.50	%		21		24.42	%
Construction		67		19.65	%		1,567		12.32	%			1		12.50	%		10		11.63	%
Health Care & Social Assistance		8		2.35	%		404		3.17	%			1		12.50	%		5		5.81	%
Accommodation & Retail Services		35		10.26	%		2,444		19.21	%			1		12.50	%		30		34.88	%
Educational Services		4		1.17	%		2,428		19.08	%			-		-	%		-		-	%
General & Other		181		53.08	%		3,790		29.79	%			4		50.00	%		20		23.26	%
Total		341		100.00	%	$	12,724		100.00	%			8		100.00	%	$	86		100.00	%

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

Manufacturing		26		3.21	%	$	2,067		8.43	%
Retail Trade		61		7.54	%		1,124		4.58	%
Construction		127		15.70	%		2,855		11.64	%
Health Care & Social Assistance		18		2.23	%		1,300		5.30	%
Accommodation & Retail Services		58		7.17	%		4,235		17.27	%
Educational Services		4		0.49	%		2,424		9.88	%
General & Other		515		63.66	%		10,523		42.90	%
Total		809		100.00	%	$	24,528		100.00	%

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~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.

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~March 31,~~September 30, 2022 and December 31, 2021:

Allowance for Loan Losses and Recorded Investment in Loans

(dollars in thousands)	Construction & Development		Farmland			Residential		Commercial Mortgage		Commercial & Agricultural			Consumer & Other			Total				Construction & Development			Farmland			Residential		Commercial Mortgage		Commercial & Agricultural			Consumer & Other			Total
*For the Three Months Ended March 31, 2022*
*For the Three Months Ended September 30, 2022*																			*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*																			*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*																			*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			$	484		$	315		$	2,521	$	1,908	$	321		$	128		$	5,677
Charge-offs		-		-			-		-		-			(25	)		(25	)			-			-			-		-		(6	)		(86	)		(92	)
Recoveries		1		-			-		-		1			6			8				3			-			11		8		23			36			81
Provision		47		(28	)		52		51		(1	)		16			137				22			(24	)		199		264		(11	)		52			502
Balance, March 31, 2022	$	532	$	287		$	2,573	$	1,959	$	321		$	125		$	5,797
Balance, September 30, 2022																				$	509		$	291		$	2,731	$	2,180	$	327		$	130		$	6,168

*For the Three Months Ended March 31, 2021*
*For the Nine Months Ended September 30, 2021*																			*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			$	499		$	406		$	2,167	$	1,421	$	293		$	114		$	4,900
Charge-offs		-		-			-		-		-			(34	)		(34	)			-			-			-		-		(8	)		(73	)		(81	)
Recoveries		-		-			2		-		1			20			23				3			-			2		61		53			36			155
Provision		3		(22	)		78		136		(35	)		2			162				(14	)		(94	)		268		447		(68	)		37			576
Balance, March 31, 2021	$	502	$	384		$	2,247	$	1,557	$	259		$	102		$	5,051
Balance, September 30, 2021																				$	488		$	312		$	2,437	$	1,929	$	270		$	114		$	5,550

March 31, 2022
September 30, 2022
Allowance for loan losses:
Ending Balance	$	532	$	287		$	2,573	$	1,959	$	321		$	125		$	5,797			$	509		$	291		$	2,731	$	2,180	$	327		$	130		$	6,168
Ending balance: individually evaluated for impairment	$	3	$	7		$	-	$	-	$	-		$	-		$	10			$	5		$	6		$	-	$	-	$	-		$	-		$	11
Ending balance: collectively evaluated for impairment	$	529	$	280		$	2,573	$	1,959	$	321		$	125		$	5,787			$	504		$	285		$	2,731	$	2,180	$	327		$	130		$	6,157
Ending balance: purchased credit impaired loans	$	-	$	-		$	-	$	-	$	-		$	-		$	-			$	-		$	-		$	-	$	-	$	-		$	-		$	-

Loans outstanding:
Ending Balance	$	47,602	$	23,690		$	316,590	$	233,907	$	38,859		$	24,214		$	684,862			$	45,826		$	24,846		$	346,308	$	261,879	$	39,794		$	20,253		$	738,906
Ending balance: individually evaluated for impairment	$	702	$	262		$	-	$	403	$	-		$	-		$	1,367			$	383		$	262		$	-	$	393	$	-		$	-		$	1,038
Ending balance: collectively evaluated for impairment	$	46,900	$	23,428		$	316,460	$	233,406	$	38,813		$	24,414		$	683,221			$	45,443		$	24,584		$	346,187	$	261,394	$	39,749		$	20,253		$	737,610
Ending balance: purchased credit impaired loans	$	-	$	-		$	130	$	98	$	46		$	-		$	274			$	-		$	-		$	121	$	92	$	45		$	-		$	258

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~~ ~~March 31, 2022~~ ~~and~~ ~~December 31, 2021,~~ ~~the Bank had~~ no ~~unallocated reserves included in the allowance for loan losses.~~

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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, 2022 and December 31, 2021, the Bank had no unallocated reserves included in the allowance for loan losses.

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 ~~March 31,~~September 30, 2022 and December 31, 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 ~~March 31,~~September 30, 2022 and December 31, 2021:

Credit Risk Profile by Internally Assigned Grades

Loan Grades

(dollars in thousands)

Pass

Watch

Special
Mention

Substandard

Total

March 31, 2022

Real Estate Secured:

Construction & development
$ 46,786 $ 0 $ 0 $ 816 $ 47,602
Farmland
20,156 830 612 2,092 23,690
Residential
315,077 265 569 679 316,590
Commercial mortgage
225,404 3,256 3,432 1,815 233,907
Non-Real Estate Secured:

Commercial & agricultural
38,641 42 0 176 38,859
SBA-PPP
12,724 0 0 0 12,724
Consumer & other
24,214 0 0 0 24,214
Total
$ 683,002 $ 4,393 $ 4,613 $ 5,578 $ 697,586

December 31, 2021

Real Estate Secured:

Construction & development
$ 43,423 $ 0 $ 0 $ 829 $ 44,252
Farmland
21,430 831 480 2,285 25,026
Residential
296,160 356 582 1,315 298,413
Commercial mortgage
220,061 5,036 3,607 1,367 230,071
Non-Real Estate Secured:

Commercial & agricultural
38,254 20 0 168 38,442
SBA-PPP
24,528 0 0 0 24,528
Consumer & other
22,800 0 0 0 22,800
Total
$ 666,656 $ 6,243 $ 4,669 $ 5,964 $ 683,532

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

September 30, 2022
Real Estate Secured:
Construction & development	$	45,411	$	-	$	-	$	415	$	45,826
Farmland		21,420		824		600		2,002		24,846
Residential		344,715		269		510		814		346,308
Commercial mortgage		255,409		2,211		2,313		1,946		261,879
Non-Real Estate Secured:
Commercial & agricultural		39,624		36		-		134		39,794
SBA-PPP		86		-		-		-		86
Consumer & other		20,243		-		-		10		20,253
Total	$	726,908	$	3,340	$	3,423	$	5,321	$	738,992

December 31, 2021
Real Estate Secured:
Construction & development	$	43,423	$	-	$	-	$	829	$	44,252
Farmland		21,430		831		480		2,285		25,026
Residential		296,160		356		582		1,315		298,413
Commercial mortgage		220,061		5,036		3,607		1,367		230,071
Non-Real Estate Secured:
Commercial & agricultural		38,254		20		-		168		38,442
SBA-PPP		24,528		-		-		-		24,528
Consumer & other		22,800		-		-		-		22,800
Total	$	666,656	$	6,243	$	4,669	$	5,964	$	683,532

2829

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~March 31,~~September 30, 2022 and December 31, 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

March 31, 2022
September 30, 2022
Real Estate Secured:
Construction & development	$	0	$	0	$	427	$	427	$	47,175	$	47,602	$	0	$	426	$	-	$	31	$	383	$	414	$	45,412	$	45,826	$	-	$	415
Farmland		0		0		115		115		23,575		23,690		0		115		-		-		-		-		24,846		24,846		-		98
Residential		424		157		239		820		315,770		316,590		0		499		189		280		238		707		345,601		346,308		-		552
Commercial mortgage		403		0		46		449		233,458		233,907		0		522		-		93		46		139		261,740		261,879		-		641
Non-Real Estate Secured:
Commercial & agricultural		23		0		53		76		38,783		38,859		0		53		-		8		54		62		39,732		39,794		-		54
SBA-PPP		0		0		0		0		12,724		12,724		0		0		-		-		-		-		86		86		-		-
Consumer & other		0		0		0		0		24,214		24,214		0		0		-		-		10		10		20,243		20,253		-		10
Total	$	850	$	157	$	880	$	1,887	$	695,699	$	697,586	$	0	$	1,615	$	189	$	412	$	731	$	1,332	$	737,660	$	738,992	$	-	$	1,770

December 31, 2021
Real Estate Secured:
Construction & development	$	0	$	0	$	426	$	426	$	43,826	$	44,252	$	0	$	426	$	-	$	-	$	426	$	426	$	43,826	$	44,252	$	-	$	426
Farmland		0		0		117		117		24,909		25,026		0		117		-		-		117		117		24,909		25,026		-		117
Residential		246		163		285		694		297,719		298,413		0		596		246		163		285		694		297,719		298,413		-		596
Commercial mortgage		0		0		46		46		230,025		230,071		0		121		-		-		46		46		230,025		230,071		-		121
Non-Real Estate Secured:
Commercial & agricultural		58		0		46		104		38,338		38,442		0		60		58		-		46		104		38,338		38,442		-		60
SBA-PPP		0		0		0		0		24,528		24,528		0		0		-		-		-		-		24,528		24,528		-		-
Consumer & other		11		0		0		11		22,789		22,800		0		0		11		-		-		11		22,789		22,800		-		-
Total	$	315	$	163	$	920	$	1,398	$	682,134	$	683,532	$	0	$	1,320	$	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)~~

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 ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, the recorded investment in impaired loans totaled ~~$4.0~~$3.2 million and $3.6 million. The total amount of collateral-dependent impaired loans at ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, was ~~$1.4~~$1.0 million and $966 thousand. As of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, ~~$830~~$393 thousand and $713 thousand of the recorded investment in impaired loans did not have a related allowance. The Bank had $3.2 million and $3.2 million in troubled debt restructured loans included in impaired loans at ~~March 31,~~September 30, 2022 and December 31, 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 ~~March 31,~~September 30, 2022 and December 31, 2021, respectively, $2.1 million and $2.6 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have ~~$149~~$114 thousand and $142 thousand of related allowance.

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

Impaired Loans

(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

(dollars in thousands)

Recorded
Investment¹

Unpaid
Principal
Balance

Related
Allowance

March 31, 2022

With no related allowance recorded:

Construction & development
$ 830 $ 829 $ -
Farmland
- - -
Residential
- - -
Commercial mortgage
- - -
Commercial & agricultural
- - -
Consumer & other
- - -
Subtotal
830 829 -

With an allowance recorded:

Construction & development
407 407 17
Farmland
372 388 8
Residential
2,276 2,453 128
Commercial mortgage
70 70 4
Commercial & agricultural
29 29 2
Consumer & other
- 0 -
Subtotal
3,154 3,347 159

Totals:

Construction & development
1,237 1,236 17
Farmland
372 388 8
Residential
2,276 2,453 128
Commercial mortgage
70 70 4
Commercial & agricultural
29 29 2
Consumer & other
- 0 -
Total
$ 3,984 $ 4,176 $ 159

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

3031

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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

¹	¹Recorded 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 ~~March 31,~~September 30, 2022 and 2021:

For the Three Months Ended March 31,

2022

2021

(dollars in thousands)

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Construction & development
$ 1,245 $ 10 $ 923 $ 2
Farmland
383 6 2,636 21
Residential
2,287 32 2,886 47
Commercial mortgage
70 1 8 1
Commercial & agricultural
31 - 45 1
Consumer & other
- - 1 -
Total
$ 4,016 $ 49 $ 6,499 $ 72

	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

3132

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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.

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 ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021:

For the Nine Months Ended September 30, 2022

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

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

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

During the nine months ended September 30, 2022, three loans were modified that were considered to be TDRs. One residential loan had term concessions granted and 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, 2022.

For the Three Months Ended ~~March 31,~~September 30, 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		-	$	-	$	-		-	$	-	$	-		-	$	-	$	-		-	$	-	$	-
Farmland		-		-		-		-		-		-		-		-		-		-		-		-
Residential		1		50		50		-		-		-		1		29		29		-		-		-
Commercial mortgage		-		-		-		-		-		-		-		-		-		-		-		-
Commercial & agricultural		-		-		-		-		-		-		-		-		-		-		-		-
Consumer & other		-		-		-		-		-		-		-		-		-		-		-		-
Total		1	$	50	$	50		-	$	-	$	-		1	$	29	$	29		-	$	-	$	-

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

During the three months ended ~~March 31,~~September 30, 2022, one loan was modified that 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, 2022.

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, 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		-	$	-	$	-		-	$	-	$	-
Farmland		-		-		-		-		-		-
Residential		-		-		-		-		-		-
Commercial mortgage		1		73		71		-		-		-
Commercial & agricultural		-		-		-		-		-		-
Consumer & other		-		-		-		-		-		-
Total		1	$	73	$	71		-	$	-	$	-

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

During the nine months ended September 30, 2021, one loan was modified that was considered to be a TDR. Term concessions were granted on the loan and the ~~interest rate changed from variable to fixed.~~ loan had additional funds advanced for insurance. No TDRs identified in the last twelve months subsequently defaulted in the ~~quarter~~nine months ended ~~March 31, 2022.~~September 30, 2021.

For the Three Months Ended ~~March 31,~~September 30, 2021

(dollars in thousands)

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 ~~March 31,~~September 30, 2021, no loans were modified that were considered to be ~~TDRs.~~ a TDR. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended ~~March 31,~~September 30, 2021.

3235

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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 offered short-term loan modifications to assist borrowers during the COVID-19 pandemic. These modifications generally involved principal and/or interest payment deferrals for up to six months. As the COVID-19 pandemic persisted in negatively impacting the economy, the Company 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 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 accrued and recognized interest income during the forbearance period. The Company 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 did not involve forgiveness or interest rate reductions. The CARES Act, along with a joint agency statement issued by banking agencies, provided that modifications made in response to COVID-19 to borrowers who qualified were not required to be accounted for as a TDR. Accordingly, the Company 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 December 31, 2021, the Bank approved approximately 250 requests for loan payment deferment of approximately $66.5 million in loans, all of which have resumed payment. There were no loans with deferments remaining as of ~~March 31,~~September 30, 2022 or December 31, 2021.

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 ~~March 31,~~September 30, 2022 and December 31, 2021 are as follows:

(dollars in thousands)	2022		2021		2022		2021

Residential	$	130	$	134	$	121	$	134
Commercial mortgage		98		101		92		101
Commercial & agricultural		46		46		45		46
Outstanding balance	$	274	$	281	$	258	$	281

Carrying amount	$	274	$	281	$	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 ~~three~~nine months ended ~~March 31,~~September 30, 2022 and during the year ended December 31, 2021. Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected.

3336

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~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 ~~March 31,~~September 30, 2022 and 2021.

	Three Months Ended March 31,						Nine Months Ended September 30,						Three Months Ended September 30,
(dollars in thousands)	2022			2021			2022			2021			2022			2021

Interest cost	$	36		$	36		$	108		$	108		$	36		$	36
Expected return on plan assets		(185	)		(174	)		(555	)		(522	)		(185	)		(174	)
Recognized net actuarial loss		0			9
Recognized net actuarial (gain)/loss								-			27			-			9
Net periodic benefit cost	$	(149	)	$	(129	)	$	(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, 2021 and there is no required contribution for 2022. Based on this we do not anticipate making a contribution to the plan in 2022.

Note 6. Goodwill and Intangible Assets

Goodwill

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

	March 31,		December 31,		September 30,		December 31,
(dollars in thousands)	2022		2021		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 ~~March 31,~~September 30, 2022 and December 31, 2021 are as follows:

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

Balance at beginning of year, net of accumulated amortization	$	1,764		$	2,359		$	1,764		$	2,359
Amortization expense		(134	)		(595	)		(373	)		(595	)
Net book value	$	1,630		$	1,764		$	1,391		$	1,764

Aggregate amortization expense was ~~$134~~$373 thousand and ~~$164~~$461 thousand for the nine-month periods ended September 30, 2022 and 2021, respectively. Aggregate amortization expense was $105 thousand and $134 thousand for the three-month periods ended ~~March 31,~~September 30, 2022 and 2021, respectively.

3437

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

Note 7. Leases

The Company’s leases are recorded under ASC Topic 842, “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.

Contracts 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:

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

Lease liabilities	$	518		$	553		$	775		$	553
Right-of-use assets	$	518		$	553		$	775		$	553
Weighted average remaining lease term (years)		6.67			6.70			5.79			6.70
Weighted average discount rate		2.46	%		2.45	%		2.74	%		2.45	%

Three Months Ended March 31,

(dollars in thousands)

2022

2021

Lease Expense

Operating lease expense
$ 38 $ 38
Short-term lease expense
5 9
Total lease expense
$ 43 $ 47

Cash paid for amounts included in lease liabilities
$ 38 $ 38

	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)

Nine months ending December 31, 2022	$	84
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		72			143
Thereafter		186			221
Total undiscounted cash flows	$	566		$	841
Less discount		(48	)		(66	)
Lease liabilities	$	518		$	775

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

Note 8. Share-Based Compensation

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.

No ~~Award~~award may be granted under the plan after March 16, 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. As of ~~March 31,~~September 30, 2022, 37,700 shares have been issued under the Equity Plan, leaving 262,300 shares available for future grants.

On February 18, 2022, 14,500 restricted stock awards were issued at a price of $13.00 per share. These awards vest 20% on December 15, 2022, 20% on December 15, 2023, 20% on December 15, 2024, 20% on December 15, 2025, and 20% on December 15, 2026. For the ~~three~~nine months ended ~~March 31,~~September 30, 2022 ~~$15~~and 2021, $59 thousand and $28 thousand, respectively, was recognized as compensation expense related to share-based ~~compensation for restricted stock awards.~~compensation. For the three months ended ~~March 31,~~ September 30, 2022 and 2021,~~there~~ $22 thousand and $14 thousand was 0recognized as compensation expense related to share-based compensation for restricted stock awards.

As of ~~March 31,~~September 30, 2022, the unrecognized compensation expense related to unvested restricted stock awards was ~~$296~~$252 thousand. The unrecognized compensation expense is expected to be recognized over a weighted average period of ~~3.99~~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, 2021		10,875	$	11.30				10,875	$	11.30 -
Granted		14,500		13.00				14,500		13.00
Vested		-		-	$	-		-		-	$	-
Forfeited		-		-				-		-
Unvested as of March 31, 2022		25,375	$	12.35
Unvested as of September 30, 2022								25,375	$	12.38

3639

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~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 ~~March 31,~~September 30, 2022 and December 31, 2021 is as follows:

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

Commitments to extend credit	$	136,854	$	140,526	$	149,800	$	140,526
Standby letters of credit		1,237		1,161		1,329		1,161
	$	138,091	$	141,687	$	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.

3740

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~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 ~~March 31,~~September 30, 2022 and December 31, 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 ASU No. 2016-01, the fair value of loans as of ~~March 31,~~September 30, 2022 and December 31, 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)

March 31, 2022
September 30, 2022

Financial Instruments – Assets
Net Loans	$	691,789	$	673,535	$	-	$	673,348	$	187	$	732,824	$	693,126	$	-	$	-	$	693,126

Financial Instruments – Liabilities
Time Deposits		186,092		186,642		-		186,642		-		175,015		174,327		-		174,327		-
FHLB Advances		-		-		-		-		-

December 31, 2021

Financial Instruments – Assets
Net Loans	$	677,855	$	671,826	$	-	$	671,637	$	189	$	677,855	$	671,826	$	-	$	-	$	671,826

Financial Instruments – Liabilities
Time Deposits		190,334		191,464		-		191,464		-		190,334		191,464		-		191,464		-
FHLB Advances		5,000		4,951		-		4,951		-		5,000		4,951		-		4,951		-

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.

3841

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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 ~~March 31,~~September 30, 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.

3942

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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

March 31, 2022
September 30, 2022
*Investment securities available for sale*
U.S. Treasury securities	$	2,528	$	-	$	2,528	$	-	$	4,831	$	-	$	4,831	$	-
U.S. Government agencies		18,767		-		18,767		-		20,636		-		20,636		-
Mortgage-backed securities		80,337		-		80,337		-		68,551		-		68,551		-
Corporate securities		1,500		-		1,500		-		1,500		-		1,500		-
State and municipal securities		46,303		-		46,303		-		42,973		-		42,973		-
Total assets at fair value	$	149,435	$	-	$	149,435	$	-	$	138,491	$	-	$	138,491	$	-

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

No liabilities were recorded at fair value on a recurring basis as of ~~March 31,~~September 30, 2022 and December 31, 2021. There were ~~0 significant~~no transfers between levels during the ~~three~~nine-month period ended ~~March 31,~~September 30, 2022 and the year ended December 31, 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. ~~NaN~~No liabilities were recorded at fair value on a nonrecurring basis at ~~March 31,~~September 30, 2022 and December 31, 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

March 31, 2022
September 30, 2022
Impaired loans	$	187	$	0	$	0	$	187	$	177	$	-	$	-	$	177
Total assets at fair value	$	187	$	0	$	0	$	187	$	177	$	-	$	-	$	177

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

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

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

Fair Value
at March 31,
2022

Fair Value at
December 31,
2021

Valuation Technique

Significant
Unobservable Inputs

General Range
of Significant
Unobservable
Input Values

Impaired Loans
$ 187 $ 189
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%

4043

Parkway Acquisition Corp. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

~~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 ~~March 31,~~September 30, 2022, $~~3.2~~3.35 million was outstanding under this revolving line of credit at a rate of ~~4.50%~~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 ~~March 31,~~September 30, 2022 and December 31, 2021, the Bank had 0no debt outstanding classified as short-term.

At ~~March 31,~~September 30, 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 ~~$248.9~~$259.5 million from the FHLB, subject to the pledging of collateral.

Note 12. Long-Term Debt

At ~~March 31,~~September 30, 2022, the Bank had 0no debt outstanding classified as long-term.

At December 31, 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.

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 ~~March 31,~~September 30, 2022 and December 31, 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

March 31, 2022

Total Capital

(to risk weighted assets)
$ 92,488 12.76 % $ 58,000 8.00 % $ 72,500 10.00 %
Tier 1 Capital

(to risk weighted assets)
$ 86,651 11.95 % $ 43,500 6.00 % $ 58,000 8.00 %
Common Equity Tier 1

(to risk weighted assets)
$ 86,651 11.95 % $ 32,625 4.50 % $ 47,125 6.50 %
Tier 1 Capital

(to average total assets)
$ 86,651 8.67 % $ 39,984 4.00 % $ 49,980 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 %

	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	%

4144

~~Parkway Acquisition Corp. and Subsidiary~~

~~Notes to Consolidated Financial Statements~~

~~(unaudited)~~

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.

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 ~~March 31,~~September 30, 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.

4245

~~Part I.~~~~Financial Information~~~~Item~~

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

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, 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, 2021.

Executive Summary

●

Net income was ~~$2.4~~$2.8 million, or ~~$0.43~~$0.50 per share, ~~for~~in the ~~first~~third quarter of 2022, compared to ~~$1.8~~$2.7 million, or ~~$0.31~~$0.45 per share, in the third quarter of 2021. For the nine months ended September 30, 2022, net income was $7.4 million, or $1.32 per share, compared to net income of $6.8 million, or $1.14 per share, for the ~~first quarter of~~nine months ended September 30, 2021.

●

Net interest margin (“NIM”) was ~~3.53%~~3.70% for the ~~first~~third quarter of 2022, compared to ~~3.70%~~3.54% in the ~~first~~second quarter of 2022, and 3.60% in the third quarter of 2021.

●

Total assets increased ~~$11.6~~$27.9 million, or ~~1.16%~~2.80%, to ~~$1.0~~$1.02 billion at ~~March 31,~~September 30, 2022 from $995.8 million at December 31, 2021.

●

Net loans were ~~$691.8~~$732.8 million at ~~March 31,~~September 30, 2022, an increase of ~~$13.9~~$54.9 million, or ~~2.06%~~8.10%, when compared to $677.9 million at December 31, 2021.

●

Total deposits were ~~$921.1~~$945.7 million at ~~March 31,~~September 30, 2022, an increase of ~~$22.9~~$47.5 million, or ~~2.55%~~5.28%, from $898.2 million at December 31, 2021.

●

Annualized return on average assets ~~increased~~decreased to ~~0.98%~~1.07% for the quarter ended ~~March 31,~~September 30, 2022, from ~~0.86%~~1.11% for the quarter ended ~~March 31, 2021.~~September 30, 2021, due mainly to growth in total assets. Annualized return on average equity increased to ~~11.75%~~14.69% for the quarter ended ~~March 31,~~September 30, 2022, from ~~8.79%~~12.13% for the quarter ended ~~March 31,~~September 30, 2021.

●

~~The Bank participated in~~Earnings for the ~~Small Business Administration Paycheck Protection Program (“SBA-PPP”) during 2020~~first nine months of 2022 represented an annualized return on average assets of 0.98% and ~~2021. Gross SBA-PPP loans totaling $13.5 million with net deferred fees~~an annualized return on average equity of ~~$805 thousand remain on~~12.65%, compared to 0.99% and 10.57%, respectively, for the ~~balance sheet as~~first nine months of ~~March 31, 2022.~~2021.

Results of Operations

Results of Operations for the Three Months ended ~~March 31,~~September 30, 2022 and 2021

Net interest income after provision for loan losses in the ~~first~~third quarter of 2022 was ~~$7.8~~$8.8 million, compared to ~~$7.2~~$7.9 million in the ~~first~~third quarter of 2021, primarily reflecting increased interest income and a reduction in interest ~~expense and provision for loan losses.~~expense. Total interest income was ~~$8.5~~$9.4 million in the ~~first~~third quarter of 2022, ~~compared~~representing an increase of $728 thousand in comparison to ~~$8.1 million for~~ the ~~same period last year.~~third quarter of 2021. Interest income on loans ~~increased~~decreased in the quarterly comparison by $42 thousand, primarily due to ~~strong organic loan growth~~a decrease in SBA-PPP related interest and fees of $1.1 million from the year ago ~~period, as well as~~period. From September 30, 2021 to September 30, 2022, SBA-PPP ~~related interest and fees.~~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 ~~interest~~ rates in the current year, will have a positive impact on both earning assets and loan yields. Interest income on securities increased by ~~$306~~$444 thousand in the quarterly comparison as a result of the ~~$70.1~~$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 ~~$242~~$182 thousand, or ~~35.12%~~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, ~~as well as a reduction of $6.7 million in~~especially on time ~~deposit balances.~~deposits.

Part I. Financial Information

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

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

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

The provision for loan losses was ~~$137~~$148 thousand for the quarter ended ~~March 31,~~September 30, 2022, compared to ~~$162~~$219 thousand for the quarter ended ~~March 31,~~September 30, 2021. During the ~~first~~third quarter of 2022, Parkway recorded ~~$17~~$14 thousand in net ~~charge-offs~~charge offs compared to $11 thousand in net ~~charge-offs~~charge offs for the ~~first~~third quarter of 2021. The reserve for loan losses at ~~March 31,~~September 30, 2022 was approximately 0.83% of total loans, compared to ~~0.72%~~0.81% at ~~March 31,~~September 30, 2021. Management’s estimate of probable credit losses inherent in the acquired loan portfolio from Cardinal Bankshares Corporation and Great State Bank was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired loans. As of ~~March 31,~~September 30, 2022, the remaining unaccreted discount on the acquired loan portfolios totaled ~~$886~~$737 thousand. This remaining discount can be used for credit losses if a loss occurs on individual loans in the purchased portfolios.

~~First~~

Third quarter 2022 noninterest income was $1.6 million compared with ~~$1.4~~$1.8 million in the ~~first~~third quarter of 2021. Income from service charges and fees increased by ~~$217~~$212 thousand, offsetting a ~~$143~~$201 thousand decrease in mortgage origination fees as mortgage origination volume has declined compared to the year ago period. Nonrecurring income of $265 thousand from ~~life insurance contracts of $217 thousand was included in the first quarter of 2022, as was a $58 thousand gain~~net realized gains on the sale of ~~asset holdings~~securities was recorded in the third quarter of 2021. Excluding this nonrecurring income of $265 thousand in 2021, ~~period.~~

noninterest income increased by $22 thousand for the third quarter of 2022 compared to the third quarter of 2021.

Noninterest expense in the ~~first quarter of~~quarterly comparison was negatively impacted by rising inflation in 2022, ~~was $6.5 million compared with $6.3 million~~and the added cost from branch expansion earlier in the ~~first~~year. Noninterest expense increased $616 thousand, or 9.80%, from the third quarter of 2021 ~~an increase~~to the third quarter of ~~$250 thousand, or 4.00%.~~2022. There was ~~a minimal~~an increase in salary and benefit costs of ~~$24~~$230 thousand, while occupancy and equipment expenses increased ~~$91~~$232 thousand in the quarterly ~~comparisons primarily due to branch expansion cost.~~comparisons. FDIC assessments increased by ~~$37~~$38 thousand to adjust for continued deposit growth, offsetting a decrease in core deposit intangible amortization of ~~$30~~$29 thousand in the quarterly comparison. ~~Other~~

Net income before taxes was comparable at $3.5 million and $3.4 million in the quarterly comparison, resulting in income tax expense of $701 thousand for both the three months ended September 30, 2022 and 2021, respectively.

Results of Operations for the Nine Months ended September 30, 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 of $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 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, continued

Noninterest expenses in the nine-month comparison was negatively impacted by rising inflation in 2022, and the added cost from branch expansion earlier in the year. For the nine-month period ended September 30, 2022, total noninterest expenses increased by $1.3 million compared to the same period in 2021. Salary and benefit cost increased by $459 thousand, occupancy and equipment expenses increased by $520 thousand, and telephone expense increased by $72 thousand from the first ~~quarter~~nine months of ~~2022 included an $8~~2021 to 2022. FDIC assessments increased by $113 thousand ~~prepayment fee incurred on~~in the ~~paydown of $5.0 million in FHLB advances.~~nine-month comparison due to continued deposit growth.

In total, income before taxes ~~totaled $2.9 million or $0.53 per share for~~increased by $626 thousand over the ~~quarter ended March 31,~~first nine months of 2022 compared to ~~$2.3 million, or $0.38 per share for~~ the ~~quarter ended March 31,~~first nine months of 2021. Income tax expense increased by ~~$82~~$45 thousand over the prior year, resulting in ~~the quarter-to-quarter comparison, totaling $542~~an increase in net income of $581 thousand for the ~~quarter~~nine months ended ~~March 31,~~September 30, 2022, compared to ~~$460 thousand for~~ the ~~quarter ended March 31, 2021. Net income for the quarter ended March 31, 2022 totaled $2.4 million or $0.43 per share, compared to $1.8 million, or $0.31 per share for the quarter ended March 31,~~same period in 2021.

Financial Condition

Total assets increased ~~in the first quarter of 2022~~ by ~~$11.6~~$27.9 million, or ~~1.16%~~2.80%, to ~~$1.0~~$1.02 billion at ~~March 31,~~September 30, 2022 from $995.8 million at December 31, 2021. The growth in assets during the first ~~quarter~~nine months of 2022 primarily reflects an increase in gross loans and ~~investment securities resulting from an increase in deposits of $22.9 million.~~deposits. Total loans increased ~~during the first quarter~~ by ~~$14.1~~$55.5 million, or ~~2.06%~~8.11%, to ~~$697.6~~$739.0 million at ~~March 31,~~September 30, 2022 from $683.5 million at December 31, 2021. SBA-PPP loans decreased by ~~$11.8~~$24.4 million during the first ~~quarter~~nine months of 2022; however, this decrease was offset by higher yielding organic loan growth of ~~$26.0~~$80.7 million during the ~~quarter.~~first nine months of 2022, which is an annualized rate of 16.50%. Gross loans at ~~March 31,~~September 30, 2022 included ~~$13.5 million~~$96 thousand in SBA-PPP loans with net deferred fees of ~~$805~~$10 thousand.

Investment securities increased by ~~$19.7~~$8.8 million ~~during the first quarter~~ to ~~$149.4~~$138.5 million at ~~March 31,~~September 30, 2022 from $129.7 million at December 31, 2021. The increase in the first ~~quarter~~nine months of 2022 was the result of ~~$33.0~~$45.2 million in purchases, offset by paydowns, calls, and maturities of ~~$3.9~~$10.6 million, and an increase in unrealized losses of ~~$9.4~~$25.6 million as a result of the increase in interest rates during the ~~quarter.~~

~~The cash value~~first nine months of life insurance increased by $3.3 million, or 17.86%, during the first quarter of 2022 as a result of $3.5 million in purchases of life insurance contracts, offset by a $278 thousand redemption of contracts.

~~Part I.~~~~Financial Information~~~~Item~~

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

2022.

Total deposits increased ~~in the first quarter of 2022~~ by ~~$22.9~~$47.5 million, or ~~2.55%~~5.28%, to ~~$921.1~~$945.7 million at ~~March 31,~~September 30, 2022 from $898.2 million at December 31, 2021. Deposit growth continues to reflect increased balances held by customers, organic growth in our markets and new customer deposits. Lower-cost core deposits (demand deposits, savings, and money market accounts) increased by ~~$27.1~~$62.8 million during the ~~quarter~~first nine months of 2022, resulting in annualized growth of 11.85%, while time deposit balances decreased by ~~$4.2~~$15.3 million.

Asset quality has remained strong, with a ratio of nonperforming loans to total loans of 0.23% at March 31, 2022 compared to 0.19% at December 31, 2021. The allowance for loan losses was approximately 0.83% of total loans as of March 31, 2022 and December 31, 2021. The allowance ratio excluding $12.7 million of SBA-PPP loans, net of deferred fees, was 0.85% at March 31, 2022.

Nonperforming assets, including nonaccrual loans, loans past due more than ninety days and foreclosed assets, increased from $1.3 million at December 31, 2021 to $1.6 million at March 31, 2022. There were no foreclosed assets and no loans past due more than ninety days and still accruing interest at March 31, 2022 and December 31, 2021.

Nonaccrual loans increased $295 thousand during the first quarter of 2022. Loans are generally placed in nonaccrual status when principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection. The following table summarizes nonperforming assets:

March 31,

December 31,

(dollars in thousands)

2022

2021

Nonperforming Assets

Nonaccrual loans
$ 1,615 $ 1,320
Loans past due 90 days or more and still accruing interest
- -
Total nonperforming loans 1,615 1,320
Foreclosed assets
-
Total nonperforming assets $ 1,615 $ 1,320

Nonperforming assets to total assets
0.16 % 0.13 %
Nonperforming loans to total loans
0.23 % 0.19 %

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

~~Part I.~~~~Financial Information~~~~Item~~

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

~~Financial Condition, continued~~

At March 31, 2022, the allowance for loan losses included $159 thousand specifically reserved for impaired loans in the amount of $3.2 million. Based on impairment analysis, loans totaling $830 thousand were also considered to be impaired but did not require a specific reserve or the related reserve had previously been charged-off. Impaired loans at December 31, 2021 totaled $3.6 million, of which $2.9 million required specific reserves of $150 thousand.

Summary of Loan Loss Experience

Three

Three

months

months

Year

ended

ended

ended

(dollars in thousands)

March 31,

March 31,

December 31,

2022
2021

2021

Total loans outstanding at end of period
$ 697,586 $ 697,685 $ 683,532

Allowance for loan losses, beginning of period
$ 5,677 $ 4,900 $ 4,900

Charge offs:

Construction & development
- - -
Farmland
- - -
Residential
- - -
Commercial mortgage
- - -
Commercial & agricultural
- - (8 )
Consumer & other
(25 ) (34 ) (102 )
Total charge-offs (25 ) (34 ) (110 )

Recoveries:

Construction & development
1 - 5
Farmland
- - -
Residential
- 2 2
Commercial mortgage
- - 61
Commercial & agricultural
1 1 53
Consumer & other
6 20 43
Total recoveries 8 23 164
Net (charge-offs) recoveries
(17 ) (11 ) 54

Provision for allowance
137 162 723
Allowance for loan losses at end of period
$ 5,797 $ 5,051 $ 5,677

Ratios:

Allowance for loan losses to loans at end of period
0.83 % 0.72 % 0.83 %
Net (charge-offs) recoveries to allowance for loan losses
(0.29 %) (0.22 %) 0.95 %
Net (charge-offs) recoveries to provisions for loan losses
(12.41 %) (6.79 %) 7.47 %

Certain types of loans, such as option ARM (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 March 31, 2022 totaled $3.5 million, or 0.50% of total loans. Historical charge-off rates in this category have not varied significantly from other real estate secured loans.

Total stockholders’ equity ~~was $79.4~~decreased by $14.7 million, ~~and book value per share was $14.12~~or 17.23% to $70.5 million at ~~March 31,~~September 30, 2022, ~~compared with~~from $85.2 million ~~and book value per share of $15.20~~ at December 31, 2021. The change during the ~~quarter~~first nine months of 2022 reflects earnings of $7.4 million, offset by dividend payments of ~~$843~~$1.8 million, stock repurchases of $154 thousand, and an unrealized loss inon the value of the securities portfolio as a result of increased interest rates during the ~~quarter.~~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 stockholders’ equity. However, management does not anticipate the need to 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

Nonperforming and Problem Assets

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 portion of 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 reduce repayment risk by adhering to 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, nonperforming assets and loans past due 90 days or more and still accruing as of September 30, 2022 and December 31, 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 in this category increased by $520 thousand. Loans are 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.

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’s ability to 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 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 is financially stable.

4649

~~Part I.~~~~Financial Information~~~~Item~~

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

Part I.Financial Information

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

Nonperforming and Problem Assets, continued

There 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 are risks that cannot be fully evaluated without the passage of time, and we want to review it on a 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 classified as substandard totaled $5.3 million compared to $6.0 million at December 31, 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 $293 thousand compared to $346 thousand at December 31, 2021.

Certain types of loans, such as option adjustable rate mortgage products, 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, 2022 totaled $3.4 million, or 0.47% of total loans. The charge-off rates in this category do not vary significantly from other real estate secured loans in the current year.

The allowance for loan losses is maintained at a level adequate to 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, 2022 and December 31, 2021. Management’s estimate of probable credit losses inherent in the acquired Cardinal Bankshares Corporation and Great State 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, 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 ~~March 31,~~September 30, 2022. The Bank had no balances outstanding on these lines as of ~~March 31,~~September 30, 2022 and December 31, 2021, respectively. In addition, the Bank has the ability to borrow up to approximately ~~$248.9~~$259.5 million from the FHLB, subject to the pledging of collateral.

At ~~March 31,~~September 30, 2022, the Bank had no debt outstanding classified as long-term. At December 31, 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 ~~21.4%~~18.3% and 23.1% for the periods ended ~~March 31,~~September 30, 2022 and December 31, 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 ~~March 31,~~September 30, 2022, the Bank exceeded minimum regulatory capital requirements and is considered to be “well capitalized.”

At ~~March 31,~~September 30, 2022, Parkway’s equity to asset ratio was ~~7.88%~~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 ~~$843~~$1.8 million, and had $154 thousand inof stock repurchases for the first ~~quarter~~nine months of 2022.

4752

~~Part I.~~~~Financial Information~~~~Item~~

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

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 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, 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.

4853

~~Part I.~~~~Financial Information~~~~Item~~

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

Part I.Financial Information

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Not required.

4954

~~Part I.~~~~Financial Information~~~~Item~~

~~4. Controls and Procedures~~

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.

5055

~~Part II.~~~~Other Information~~

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, 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 ~~first~~third quarter of 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 1/7/1 through 1/7/31		-	$	-		-		~~103,325~~91,325
Purchased 2/8/1 through ~~2/28~~		-	$	-		-		~~103,325~~
~~Purchased 3/1 through 3/~~8/31		-	$	-		-		~~103,325~~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

~~10.1~~

Supplemental Executive Retirement Plan, dated March 31, 2022, for the benefit of Blake M. Edwards, Jr. (attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 6, 2022 and incorporated herein by reference).

~~10.2~~

Supplemental Executive Retirement Plan, dated March 31, 2022, for the benefit of Lori C. Vaught (attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 6, 2022 and incorporated herein by reference).

~~10.3~~

Supplemental Executive Retirement Plan, dated March 31, 2022, for the benefit of Beth R. Worrell (attached as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed April 6, 2022 and incorporated herein by reference).

~~10.4~~

Supplemental Executive Retirement Plan, dated March 31, 2022, for the benefit of Jonathan L. Kruckow (attached as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed April 6, 2022 and incorporated herein by reference).

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 ~~March 31,~~September 30, 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 Date File (formatted in Inline XBRL and contained in Exhibit 101).

5157

~~Part II.~~~~Other Information~~

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: ~~May 16,~~November 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

5258

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)	March 31,			December 31,			September 30,			December 31,
	2022			2021			2022			2021
	(Unaudited)			(Audited)			(Unaudited)			(Audited)
Assets

Cash and due from banks	$	19,741		$	14,349		$	18,615		$	14,349
Interest-bearing deposits with banks		65,524			5,986			49,795			5,986
Federal funds sold		252			95,311			602			95,311
Investment securities available for sale		149,435			129,715			138,491			129,715
Restricted equity securities		1,950			1,971			1,950			1,971
Loans, net of allowance for loan losses of $5,797 at March 31, 2022 and $5,677 at December 31, 2021		691,789			677,855
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		22,098			18,750			22,368			18,750
Properties and equipment, net		32,447			30,856			32,128			30,856
Accrued interest receivable		2,441			2,363			2,589			2,363
Core deposit intangible		1,630			1,764			1,391			1,764
Goodwill		3,257			3,257			3,257			3,257
Deferred tax assets, net		2,862			1,122			5,955			1,122
Other assets		13,989			12,549			13,780			12,549
	$	1,007,415		$	995,848		$	1,023,745		$	995,848

Liabilities and Stockholders’ Equity

*Liabilities*
Deposits
Noninterest-bearing	$	303,247		$	298,107		$	328,000		$	298,107
Interest-bearing		617,884			600,119			617,666			600,119
Total deposits		921,131			898,226			945,666			898,226

Borrowings		3,200			8,200			3,350			8,200
Accrued interest payable		99			73			91			73
Other liabilities		3,601			4,155			4,124			4,155
		928,031			910,654			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, 5,620,716 and 5,606,216 issued and outstanding at March 31, 2022 and December 31, 2021, 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		33,603			33,588			33,493			33,588
Retained earnings		55,308			53,745			59,378			53,745
Accumulated other comprehensive loss		(9,527	)		(2,139	)		(22,357	)		(2,139	)
		79,384			85,194			70,514			85,194
	$	1,007,415		$	995,848		$	1,023,745		$	995,848

	Three Months Ended
	March 31,
(dollars in thousands except share amounts)	2022		2021
	(Unaudited)		(Unaudited)
*Interest income*
Loans and fees on loans	$	7,876	$	7,753
Interest-bearing deposits in banks		36		37
Interest on taxable securities		507		241
Interest on nontaxable securities		49		9
Dividends		8		12
		8,476		8,052

*Interest expense*
Deposits		447		689
Interest on borrowings		45		20
		492		709
Net interest income		7,984		7,343

*Provision for loan losses*		137		162
Net interest income after provision for loan losses		7,847		7,181

*Noninterest income*
Service charges on deposit accounts		436		296
Other service charges and fees		683		606
Mortgage origination fees		166		309
Increase in cash value of life insurance		127		108
Life insurance income		217		-
Other income		7		92
		1,636		1,411
*Noninterest expenses*
Salaries and employee benefits		3,579		3,555
Occupancy and equipment		1,005		914
Data processing expense		506		496
FDIC Assessments		114		77
Advertising		145		110
Bank franchise tax		126		126
Director fees		61		60
Professional fees		168		187
Telephone expense		133		105
Core deposit intangible amortization		134		164
Other expense		564		491
		6,535		6,285
Net income before income taxes		2,948		2,307

*Income tax expense*		542		460
Net income	$	2,406	$	1,847

*Net income per share*	$	0.43	$	0.31
*Weighted average shares outstanding*		5,612,983		6,043,269
*Dividends declared per share*	$	0.15	$	0.13

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

*Provision for loan losses*		148			219		502			576
Net interest income after provision for loan losses		8,818			7,871		24,799			22,745

*Noninterest income*
Service charges on deposit accounts		489			444		1,406			1,071
Other service charges and fees		835			668		2,314			1,934
Nets realized gains on securities		-			265		-			265
Mortgage origination fees		74			275		359			861
Increase in cash value of life insurance		135			108		397			324
Life insurance income		-			-		217			-
Other income		37			53		45			387
		1,570			1,813		4,738			4,842
*Noninterest expenses*
Salaries and employee benefits		3,875			3,645		11,271			10,812
Occupancy and equipment		1,139			907		3,216			2,696
Foreclosed asset expense, net		(1	)		1		(1	)		1
Data processing expense		408			468		1,343			1,434
FDIC Assessments		114			76		342			229
Advertising		161			172		488			473
Bank franchise tax		126			126		379			379
Director fees		56			58		202			205
Professional fees		144			107		484			455
Telephone expense		110			100		370			298
Core deposit intangible amortization		105			134		373			461
Other expense		662			489		1,842			1,542
		6,899			6,283		20,309			18,985
Net income before income taxes		3,489			3,401		9,228			8,602

*Income tax expense*		701			701		1,798			1,753
Net income	$	2,788		$	2,700	$	7,430		$	6,849

*Net income per share*	$	0.50		$	0.45	$	1.32		$	1.14
*Weighted average shares outstanding*		5,608,716			6,003,504		5,612,452			6,028,449
*Dividends declared per share*	$	0.17		$	0.14	$	0.32		$	0.27

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

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

	Unaudited Consolidated Statements of Income—Three and Nine Months Ended ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021	4

	Unaudited Consolidated Statements of Comprehensive Income—Nine and Three Months ~~EndedMarch 31,~~Ended September 30, 2022 and ~~March 31,~~September 30, 2021	5

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity—Nine and Three Months Ended ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021	6

	Unaudited Consolidated Statements of Cash Flows—~~Three~~Nine Months Ended ~~March 31,~~September 30, 2022 and ~~March 31,~~September 30, 2021	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43 46

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4954

Item 4.	Controls and Procedures	5055

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	5156

Item 1A.	Risk Factors	5156

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5156

Item 3.	Defaults Upon Senior Securities	5156

Item 4.	Mine Safety Disclosures	5156

Item 5.	Other Information	5156

Item 6.	Exhibits	51 57

Signatures		5258

(dollars in thousands except share amounts)
												Accumulated
												Other
	Common Stock								Retained			Comprehensive
	Shares			Amount		Surplus			Earnings			Loss			Total

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

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

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


*Balance, December 31, 2021*		5,606,216		$	0	$	33,588		$	53,745		$	(2,139	)	$	85,194

Net income		-			0		0			2,406			0			2,406
Other comprehensive loss		-			0		0			0			(7,388	)		(7,388	)
Dividends paid ($0.15 per share)		-			0		0			(843	)		0			(843	)
Restricted stock issued		14,500			0		0			0			0			0
Share-based compensation		-			0		15			0			0			15

*Balance, March 31, 2022*		5,620,716		$	0	$	33,603		$	55,308		$	(9,527	)	$	79,384

Summary of Loan Loss Experience	Three			Three
	months			months			Year
	ended			ended			ended
(dollars in thousands)	March 31,			March 31,			December 31,
	2022			2021			2021
Total loans outstanding at end of period	$	697,586		$	697,685		$	683,532

Allowance for loan losses, beginning of period	$	5,677		$	4,900		$	4,900

Charge offs:
Construction & development		-			-			-
Farmland		-			-			-
Residential		-			-			-
Commercial mortgage		-			-			-
Commercial & agricultural		-			-			(8	)
Consumer & other		(25	)		(34	)		(102	)
Total charge-offs		(25	)		(34	)		(110	)

Recoveries:
Construction & development		1			-			5
Farmland		-			-			-
Residential		-			2			2
Commercial mortgage		-			-			61
Commercial & agricultural		1			1			53
Consumer & other		6			20			43
Total recoveries		8			23			164
Net (charge-offs) recoveries		(17	)		(11	)		54

Provision for allowance		137			162			723
Allowance for loan losses at end of period	$	5,797		$	5,051		$	5,677

Ratios:
Allowance for loan losses to loans at end of period		0.83	%		0.72	%		0.83	%
Net (charge-offs) recoveries to allowance for loan losses		(0.29	%)		(0.22	%)		0.95	%
Net (charge-offs) recoveries to provisions for loan losses		(12.41	%)		(6.79	%)		7.47	%

Buildings and improvements

Furniture and equipment