UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FORM10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30 2018, 2019
Or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission File Number: 333-209052
PARKWAY ACQUISITION CORP.
(Exact Name of Registrant as Specified in Its Charter)
Virginia | 47-5486027 | |
(State or Other Jurisdiction | (I.R.S. Employer | |
101 Jacksonville Circle | ||
Floyd, Virginia | 24091 | |
(Address of Principal Executive Offices) | (Zip Code) |
(540)745-4191
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☑ No ☐
Indicate by checkmark whether the Registrant has submitted electronically any Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (Section 232.405) of this chapter during the preceding 12 months or for such shorter period that the Registrant was required to submit such files. Yes ☒☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |||||||
| Non-accelerated filer | ☑ | Smaller reporting company ☑ | ||||||
| Emerging growth company | ☐ | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒☑
The registrant had 6,213,2756,178,275 shares of Common Stock, no par value per share, outstanding as of November 12, 2018.
August 13, 2019.
Table of ContentsPART I FINANCIAL INFORMATION
Parkway Acquisition Corp. and Subsidiary
Consolidated Balance Sheets
SeptemberJune 30, 20182019 and December 31, 20172018
(dollars in thousands) | June 30, | December 31, | ||||||
2019 | 2018 | |||||||
| (Unaudited) | (Audited) | ||||||
| Assets | ||||||||
Cash and due from banks | $ | 7,948 | $ | 8,858 | ||||
Interest-bearing deposits with banks | 11,102 | 12,159 | ||||||
Federal funds sold | 14,012 | 18,990 | ||||||
Investment securities available for sale | 41,096 | 45,428 | ||||||
Restricted equity securities | 2,054 | 2,053 | ||||||
Loans, net of allowance for loan losses of $3,818 at June 30, 2019 and $3,495 at December 31, 2018 | 546,002 | 532,970 | ||||||
Cash value of life insurance | 17,629 | 17,413 | ||||||
Foreclosed assets | - | 753 | ||||||
Properties and equipment, net | 20,990 | 20,685 | ||||||
Accrued interest receivable | 2,212 | 2,084 | ||||||
Core deposit intangible | 3,455 | 3,892 | ||||||
Goodwill | 3,257 | 3,198 | ||||||
Deferred tax assets, net | 1,091 | 1,853 | ||||||
Other assets | 9,476 | 9,948 | ||||||
| $ | 680,324 | $ | 680,284 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 161,173 | $ | 160,166 | ||||
Interest-bearing | 437,530 | 441,702 | ||||||
Total deposits | 598,703 | 601,868 | ||||||
Accrued interest payable | 111 | 89 | ||||||
Other liabilities | 2,469 | 2,705 | ||||||
| 601,283 | 604,662 | |||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ Equity | ||||||||
Preferred stock, no par value; 5,000,000 shares authorized, none issued | - | - | ||||||
Common stock, no par value; 25,000,000 shares authorized, 6,193,275 and 6,213,275 issued and outstanding at June 30, 2019 and December 31, 2018, respectively | - | - | ||||||
Surplus | 41,425 | 41,660 | ||||||
Retained earnings | 38,583 | 35,929 | ||||||
Accumulated other comprehensive loss | (967 | ) | (1,967 | ) | ||||
| 79,041 | 75,622 | |||||||
| $ | 680,324 | $ | 680,284 | |||||
| (dollars in thousands) | September 30, | December 31, | ||||||
| 2018 | 2017 | |||||||
| (Unaudited) | (Audited) | |||||||
Assets | ||||||||
Cash and due from banks | $ | 8,593 | $ | 6,367 | ||||
Interest-bearing deposits with banks | 9,480 | 8,739 | ||||||
Federal funds sold | 19,168 | 7,769 | ||||||
Investment securities available for sale | 45,787 | 50,675 | ||||||
Restricted equity securities | 2,053 | 1,388 | ||||||
Loans, net of allowance for loan losses of $3,444 at September 30, 2018 and $3,453 at December 31, 2017 | 534,015 | 421,418 | ||||||
Cash value of life insurance | 17,298 | 17,348 | ||||||
Foreclosed assets | 15 | — | ||||||
Properties and equipment, net | 20,749 | 17,646 | ||||||
Accrued interest receivable | 2,130 | 1,737 | ||||||
Core deposit intangible | 4,111 | 2,045 | ||||||
Goodwill | 3,764 | — | ||||||
Deferred tax assets, net | 2,599 | 2,965 | ||||||
Other assets | 9,915 | 9,864 | ||||||
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| $ | 679,677 | $ | 547,961 | |||||
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Liabilities and Stockholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 151,916 | $ | 130,847 | ||||
Interest-bearing | 449,427 | 357,594 | ||||||
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| |||||
Total deposits | 601,343 | 488,441 | ||||||
FHLB Advances | 1,000 | — | ||||||
Accrued interest payable | 186 | 46 | ||||||
Other liabilities | 2,713 | 2,292 | ||||||
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| 605,242 | 490,779 | |||||||
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Commitments and contingencies (Note 8) | ||||||||
Stockholders’ Equity | ||||||||
Preferred stock, no par value; 5,000,000 shares authorized, none issued | — | — | ||||||
Common stock, no par value; 25,000,000 shares authorized, 6,213,275 and 5,021,376 issued and outstanding at September 30, 2018 and December 31, 2017, respectively | — | — | ||||||
Surplus | 41,660 | 26,166 | ||||||
Retained earnings | 35,131 | 32,526 | ||||||
Accumulated other comprehensive loss | (2,356 | ) | (1,510 | ) | ||||
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| 74,435 | 57,182 | |||||||
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| $ | 679,677 | $ | 547,961 | |||||
| �� |
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See Notes to Consolidated Financial Statements
Parkway Acquisition Corp. and Subsidiary
Consolidated Statements of Income
For the Nine Months ended September 30, 2018 and 2017
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (dollars in thousands except share amounts) | 2018 | 2017 | ||||||
| (Unaudited) | (Unaudited) | |||||||
Interest income | ||||||||
Loans and fees on loans | $ | 17,420 | $ | 15,390 | ||||
Interest-bearing deposits in banks | 62 | 36 | ||||||
Federal funds sold | 127 | 80 | ||||||
Interest on taxable securities | 898 | 993 | ||||||
Dividends | 52 | 62 | ||||||
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| 18,559 | 16,561 | |||||||
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Interest expense | ||||||||
Deposits | 1,296 | 1,107 | ||||||
Interest on borrowings | 33 | 1 | ||||||
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| 1,329 | 1,108 | |||||||
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Net interest income | 17,230 | 15,453 | ||||||
Provision for loan losses | 258 | 233 | ||||||
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Net interest income after provision for loan losses | 16,972 | 15,220 | ||||||
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Noninterest income | ||||||||
Service charges on deposit accounts | 1,132 | 987 | ||||||
Other service charges and fees | 1,323 | 1,187 | ||||||
Net realized gains on securities | 5 | 126 | ||||||
Mortgage origination fees | 281 | 203 | ||||||
Increase in cash value of life insurance | 319 | 333 | ||||||
Life insurance income | 303 | — | ||||||
Other income | 87 | 95 | ||||||
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| 3,450 | 2,931 | |||||||
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Noninterest expenses | ||||||||
Salaries and employee benefits | 8,459 | 7,529 | ||||||
Occupancy and equipment | 1,965 | 1,652 | ||||||
Foreclosed asset expense, net | 16 | 33 | ||||||
Data processing expense | 953 | 885 | ||||||
FDIC Assessments | 185 | 225 | ||||||
Advertising | 424 | 471 | ||||||
Bank franchise tax | 319 | 250 | ||||||
Director fees | 199 | 190 | ||||||
Professional fees | 340 | 309 | ||||||
Telephone expense | 302 | 279 | ||||||
Core deposit intangible amortization | 359 | 212 | ||||||
Merger related expenses | 856 | 698 | ||||||
Other expense | 1,372 | 1,630 | ||||||
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| 15,749 | 14,363 | |||||||
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Net income before income taxes | 4,673 | 3,788 | ||||||
Income tax expense | 945 | 1,147 | ||||||
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Net income | $ | 3,728 | $ | 2,641 | ||||
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Net income per share | $ | 0.69 | $ | 0.53 | ||||
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Weighted average shares outstanding | 5,423,042 | 5,021,376 | ||||||
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Dividends declared per share | $ | 0.21 | $ | 0.16 | ||||
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See Notes to Consolidated Financial Statements
Parkway Acquisition Corp. and Subsidiary
Consolidated Statements of Income
For the ThreeSix Months ended SeptemberJune 30, 20182019 and 20172018
Six Months Ended | ||||||||
June 30, | ||||||||
(dollars in thousands except share amounts) | 2019 | 2018 | ||||||
(Unaudited) | (Unaudited) | |||||||
Interest income | ||||||||
Loans and fees on loans | $ | 14,261 | $ | 10,357 | ||||
Interest-bearing deposits in banks | 98 | 35 | ||||||
Federal funds sold | 179 | 38 | ||||||
Interest on taxable securities | 540 | 597 | ||||||
Dividends | 61 | 39 | ||||||
| 15,139 | 11,066 | |||||||
Interest expense | ||||||||
Deposits | 1,270 | 738 | ||||||
Interest on borrowings | - | 27 | ||||||
| 1,270 | 765 | |||||||
Net interest income | 13,869 | 10,301 | ||||||
Provision for loan losses | 514 | 145 | ||||||
Net interest income after provision for loan losses | 13,355 | 10,156 | ||||||
Noninterest income | ||||||||
Service charges on deposit accounts | 736 | 719 | ||||||
Other service charges and fees | 1,012 | 850 | ||||||
Net realized (losses) gains on securities | (4 | ) | 5 | |||||
Mortgage origination fees | 210 | 144 | ||||||
Increase in cash value of life insurance | 216 | 222 | ||||||
Life insurance income | - | 229 | ||||||
Other income | 162 | 55 | ||||||
| 2,332 | 2,224 | |||||||
Noninterest expenses | ||||||||
Salaries and employee benefits | 6,419 | 5,298 | ||||||
Occupancy and equipment | 1,439 | 1,256 | ||||||
Foreclosed asset expense, net | 2 | (2 | ) | |||||
Data processing expense | 731 | 602 | ||||||
FDIC Assessments | 144 | 138 | ||||||
Advertising | 293 | 276 | ||||||
Bank franchise tax | 222 | 210 | ||||||
Director fees | 148 | 130 | ||||||
Professional fees | 362 | 220 | ||||||
Telephone expense | 180 | 187 | ||||||
Core deposit intangible amortization | 437 | 140 | ||||||
Merger related expenses | - | 497 | ||||||
Other expense | 1,082 | 890 | ||||||
| 11,459 | 9,842 | |||||||
Net income before income taxes | 4,228 | 2,538 | ||||||
Income tax expense | 828 | 525 | ||||||
Net income | $ | 3,400 | $ | 2,013 | ||||
Net income per share | $ | 0.55 | $ | 0.40 | ||||
Weighted average shares outstanding | 6,209,629 | 5,021,376 | ||||||
Dividends declared per share | $ | 0.12 | $ | 0.10 | ||||
| Three Months Ended | ||||||||
| September 30, | ||||||||
| (dollars in thousands except share amounts) | 2018 | 2017 | ||||||
| (Unaudited) | (Unaudited) | |||||||
Interest income | ||||||||
Loans and fees on loans | $ | 7,063 | $ | 5,222 | ||||
Interest-bearing deposits in banks | 27 | 14 | ||||||
Federal funds sold | 89 | 21 | ||||||
Interest on taxable securities | 301 | 319 | ||||||
Dividends | 13 | 6 | ||||||
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| 7,493 | 5,582 | |||||||
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Interest expense | ||||||||
Deposits | 558 | 370 | ||||||
Interest on borrowings | 6 | 1 | ||||||
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| 564 | 371 | |||||||
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Net interest income | 6,929 | 5,211 | ||||||
Provision for loan losses | 113 | 75 | ||||||
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Net interest income after provision for loan losses | 6,816 | 5,136 | ||||||
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Noninterest income | ||||||||
Service charges on deposit accounts | 413 | 350 | ||||||
Other service charges and fees | 473 | 417 | ||||||
Net realized gains on securities | — | 13 | ||||||
Mortgage origination fees | 137 | 91 | ||||||
Increase in cash value of life insurance | 97 | 111 | ||||||
Life insurance income | 74 | — | ||||||
Other income | 32 | 39 | ||||||
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| 1,226 | 1,021 | |||||||
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Noninterest expenses | ||||||||
Salaries and employee benefits | 3,161 | 2,489 | ||||||
Occupancy and equipment | 709 | 555 | ||||||
Foreclosed asset expense, net | 18 | 17 | ||||||
Data processing expense | 351 | 306 | ||||||
FDIC Assessments | 47 | 75 | ||||||
Advertising | 148 | 138 | ||||||
Bank franchise tax | 109 | 82 | ||||||
Director fees | 69 | 52 | ||||||
Professional fees | 120 | 99 | ||||||
Telephone expense | 115 | 92 | ||||||
Core deposit intangible amortization | 219 | 70 | ||||||
Merger related expenses | 359 | 56 | ||||||
Other expense | 482 | 449 | ||||||
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| 5,907 | 4,480 | |||||||
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Net income before income taxes | 2,135 | 1,677 | ||||||
Income tax expense | 420 | 520 | ||||||
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Net income | $ | 1,715 | $ | 1,157 | ||||
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Net income per share | $ | 0.28 | $ | 0.23 | ||||
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Weighted average shares outstanding | 6,213,275 | 5,021,376 | ||||||
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Dividends declared per share | $ | 0.10 | $ | 0.08 | ||||
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See Notes to Consolidated Financial Statements
Consolidated Statements of Income
Three Months Ended | ||||||||
June 30, | ||||||||
(dollars in thousands except share amounts) | 2019 | 2018 | ||||||
(Unaudited) | (Unaudited) | |||||||
Interest income | ||||||||
Loans and fees on loans | $ | 7,140 | $ | 5,271 | ||||
Interest-bearing deposits in banks | 40 | 16 | ||||||
Federal funds sold | 109 | 7 | ||||||
Interest on taxable securities | 264 | 294 | ||||||
Dividends | 47 | 30 | ||||||
| 7,600 | 5,618 | |||||||
Interest expense | ||||||||
Deposits | 680 | 377 | ||||||
Interest on borrowings | - | 27 | ||||||
| 680 | 404 | |||||||
Net interest income | 6,920 | 5,214 | ||||||
Provision for loan losses | 276 | 91 | ||||||
Net interest income after provision for loan losses | 6,644 | 5,123 | ||||||
Noninterest income | ||||||||
Service charges on deposit accounts | 376 | 374 | ||||||
Other service charges and fees | 499 | 438 | ||||||
Net realized gains on securities | 10 | 9 | ||||||
Mortgage origination fees | 126 | 67 | ||||||
Increase in cash value of life insurance | 108 | 111 | ||||||
Life insurance income | - | 229 | ||||||
Other income | 141 | 33 | ||||||
| 1,260 | 1,261 | |||||||
Noninterest expenses | ||||||||
Salaries and employee benefits | 3,262 | 2,767 | ||||||
Occupancy and equipment | 714 | 627 | ||||||
Foreclosed asset expense, net | 1 | 1 | ||||||
Data processing expense | 362 | 300 | ||||||
FDIC Assessments | 72 | 69 | ||||||
Advertising | 158 | 160 | ||||||
Bank franchise tax | 111 | 105 | ||||||
Director fees | 88 | 73 | ||||||
Professional fees | 180 | 96 | ||||||
Telephone expense | 66 | 94 | ||||||
Core deposit intangible amortization | 218 | 70 | ||||||
Merger related expenses | - | 299 | ||||||
Other expense | 526 | 480 | ||||||
| 5,758 | 5,141 | |||||||
Net income before income taxes | 2,146 | 1,243 | ||||||
Income tax expense | 411 | 244 | ||||||
Net income | $ | 1,735 | $ | 999 | ||||
Net income per share | $ | 0.28 | $ | 0.20 | ||||
Weighted average shares outstanding | 6,206,022 | 5,021,376 | ||||||
Dividends declared per share | $ | 0.00 | $ | 0.00 | ||||
See Notes to Consolidated Financial Statements
Parkway Acquisition Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
For the Nine MonthsSix and Three Months ended SeptemberJune 30, 20182019 and 20172018
Six Months Ended | ||||||||
June 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
(Unaudited) | (Unaudited) | |||||||
Net Income | $ | 3,400 | $ | 2,013 | ||||
Other comprehensive income (loss) | ||||||||
Unrealized gains (losses) on investment securities available for sale: | ||||||||
Unrealized gains (losses) arising during the period | 1,261 | (844 | ) | |||||
Tax related to unrealized (gains) losses | (264 | ) | 177 | |||||
Reclassification of net realized (gains) losses during the period | 4 | (5 | ) | |||||
Tax related to realized gains (losses) | (1 | ) | 1 | |||||
Total other comprehensive income (loss) | 1,000 | (671 | ) | |||||
Total comprehensive income | $ | 4,400 | $ | 1,342 | ||||
Three Months Ended | ||||||||
June 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
(Unaudited) | (Unaudited) | |||||||
Net Income | $ | 1,735 | $ | 999 | ||||
Other comprehensive income (loss) | ||||||||
Unrealized gains (losses) on investment securities available for sale: | ||||||||
Unrealized gains (losses) arising during the period | 558 | (242 | ) | |||||
Tax related to unrealized (gains) losses | (117 | ) | 51 | |||||
Reclassification of net realized gains during the period | (10 | ) | (9 | ) | ||||
Tax related to realized gains | 2 | 2 | ||||||
Total other comprehensive income (loss) | 433 | (198 | ) | |||||
Total comprehensive income | $ | 2,168 | $ | 801 | ||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (dollars in thousands) | 2018 | 2017 | ||||||
| (Unaudited) | (Unaudited) | |||||||
Net Income | $ | 3,728 | $ | 2,641 | ||||
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Other comprehensive income (loss) | ||||||||
Unrealized gains (losses) on investment securities available for sale: | ||||||||
Unrealized gains (losses) arising during the period | (1,066 | ) | 872 | |||||
Tax related to unrealized (gains) losses | 224 | (296 | ) | |||||
Reclassification of net realized gains during the period | (5 | ) | (126 | ) | ||||
Tax related to realized gains | 1 | 43 | ||||||
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Total other comprehensive income (loss) | (846 | ) | 493 | |||||
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Total comprehensive income | $ | 2,882 | $ | 3,134 | ||||
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| Three Months Ended | ||||||||
| September 30, | ||||||||
| (dollars in thousands) | 2018 | 2017 | ||||||
| (Unaudited) | (Unaudited) | |||||||
Net Income | $ | 1,715 | $ | 1,157 | ||||
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Other comprehensive income (loss) | ||||||||
Unrealized gains (losses) on investment securities available for sale: | ||||||||
Unrealized gains (losses) arising during the period | (222 | ) | 148 | |||||
Tax related to unrealized (gains) losses | 47 | (50 | ) | |||||
Reclassification of net realized gains during the period | — | (13 | ) | |||||
Tax related to realized gains | — | 4 | ||||||
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Total other comprehensive income (loss) | (175 | ) | 89 | |||||
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Total comprehensive income | $ | 1,540 | $ | 1,246 | ||||
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See Notes to Consolidated Financial Statements
Parkway Acquisition Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders’Stockholder' Equity
For the NineSix and Three Months ended SeptemberJune 30, 2019 and 2018 and 2017 (unaudited)
(dollars in thousands except share amounts) | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Other | ||||||||||||||||||||||||
Common Stock | Retained | Comprehensive | ||||||||||||||||||||||
Shares | Amount | Surplus | Earnings | Loss | Total | |||||||||||||||||||
Balance, December 31, 2018 | 6,213,275 | $ | - | $ | 41,660 | $ | 35,929 | $ | (1,967 | ) | $ | 75,622 | ||||||||||||
Net income | - | - | - | 1,665 | - | 1,665 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 567 | 567 | ||||||||||||||||||
Dividends paid ($0.12 per share) | - | - | - | (746 | ) | - | (746 | ) | ||||||||||||||||
Balance, March 31, 2019 | 6,213,275 | $ | - | $ | 41,660 | $ | 36,848 | $ | (1,400 | ) | $ | 77,108 | ||||||||||||
Net income | - | - | - | 1,735 | - | 1,735 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 433 | 433 | ||||||||||||||||||
Common stock repurchased | (20,000 | ) | - | (235 | ) | - | - | (235 | ) | |||||||||||||||
Balance, June 30, 2019 | 6,193,275 | $ | - | $ | 41,425 | $ | 38,583 | $ | (967 | ) | $ | 79,041 | ||||||||||||
Balance, December 31, 2017 | 5,021,376 | $ | - | $ | 26,166 | $ | 32,526 | $ | (1,510 | ) | $ | 57,182 | ||||||||||||
Net income | - | - | - | 1,014 | - | 1,014 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (473 | ) | (473 | ) | ||||||||||||||||
Dividends paid ($0.10 per share) | - | - | - | (502 | ) | - | (502 | ) | ||||||||||||||||
Balance, March 31, 2018 | 5,021,376 | $ | - | $ | 26,166 | $ | 33,038 | $ | (1,983 | ) | $ | 57,221 | ||||||||||||
Net income | - | - | - | 999 | - | 999 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (198 | ) | (198 | ) | ||||||||||||||||
Balance, June 30, 2018 | 5,021,376 | $ | - | $ | 26,166 | $ | 34,037 | $ | (2,181 | ) | $ | 58,022 | ||||||||||||
| (dollars in thousands except share amounts) | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Common Stock | Retained | Comprehensive | ||||||||||||||||||||||
| Shares | Amount | Surplus | Earnings | Loss | Total | |||||||||||||||||||
Balance, December 31, 2016 | 5,021,376 | $ | — | $ | 26,166 | $ | 30,654 | $ | (1,354 | ) | $ | 55,466 | ||||||||||||
Net income | — | — | — | 2,641 | — | 2,641 | ||||||||||||||||||
Other comprehensive income | — | — | — | — | 493 | 493 | ||||||||||||||||||
Dividends paid ($0.16 per share) | — | — | — | (803 | ) | — | (803 | ) | ||||||||||||||||
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Balance, September 30, 2017 | 5,021,376 | $ | — | $ | 26,166 | $ | 32,492 | $ | (861 | ) | $ | 57,797 | ||||||||||||
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| |||||||||||||
Balance, December 31, 2017 | 5,021,376 | $ | — | $ | 26,166 | $ | 32,526 | $ | (1,510 | ) | $ | 57,182 | ||||||||||||
Net income | — | — | — | 3,728 | — | 3,728 | ||||||||||||||||||
Other comprehensive loss | — | — | — | — | (846 | ) | (846 | ) | ||||||||||||||||
Issuance of common stock in connection with acquisition of Great State Bank | 1,191,899 | — | 15,495 | — | — | 15,495 | ||||||||||||||||||
Redemption of fractional shares issued in acquisition of Great State Bank | — | — | (1 | ) | — | — | (1 | ) | ||||||||||||||||
Dividends paid ($0.21 per share) | — | — | — | (1,123 | ) | — | (1,123 | ) | ||||||||||||||||
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| |||||||||||||
Balance, September 30, 2018 | 6,213,275 | $ | — | $ | 41,660 | $ | 35,131 | $ | (2,356 | ) | $ | 74,435 | ||||||||||||
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See Notes to Consolidated Financial Statements
Parkway Acquisition Corp. and Subsidiary
Consolidated Statements of Cash Flows
For the NineSix Months ended SeptemberJune 30, 20182019 and 20172018
Six Months Ended | ||||||||
June 30, | ||||||||
(dollars in thousands) | 2019 | 2018 | ||||||
(Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 3,400 | $ | 2,013 | ||||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||
Depreciation and amortization | 597 | 600 | ||||||
Amortization of core deposit intangible | 437 | 140 | ||||||
Accretion of loan discount and deposit premium, net | (1,316 | ) | (340 | ) | ||||
Provision for loan losses | 514 | 145 | ||||||
Deferred income taxes | 442 | 628 | ||||||
Net realized losses (gains) on securities | 4 | (5 | ) | |||||
Accretion of discount on securities, net of amortization of premiums | 239 | 269 | ||||||
Deferred compensation | (10 | ) | 18 | |||||
Gains on sale of properties and equipment | (121 | ) | - | |||||
Life insurance income | - | (229 | ) | |||||
Changes in assets and liabilities: | ||||||||
Cash value of life insurance | (216 | ) | (222 | ) | ||||
Accrued interest receivable | (128 | ) | (76 | ) | ||||
Other assets | 468 | (394 | ) | |||||
Accrued interest payable | 22 | (1 | ) | |||||
Other liabilities | (226 | ) | - | |||||
Net cash provided by operating activities | 4,106 | 2,546 | ||||||
Cash flows from investing activities | ||||||||
Activity in available for sale securities: | ||||||||
Purchases | (1,037 | ) | - | |||||
Sales | 3,950 | 525 | ||||||
Maturities/calls/paydowns | 2,441 | 2,559 | ||||||
Purchases of restricted equity securities | (1 | ) | 10 | |||||
Net decrease (increase) in loans | (12,625 | ) | (8,349 | ) | ||||
Proceeds from life insurance contracts | - | 413 | ||||||
Proceeds from sale of foreclosed assets | 753 | - | ||||||
Purchases of property and equipment, net of sales | (781 | ) | (815 | ) | ||||
Net cash used in investing activities | (7,300 | ) | (5,657 | ) | ||||
Cash flows from financing activities | ||||||||
Net decrease in deposits | (2,770 | ) | (13,405 | ) | ||||
Net increase in borrowings | - | 8,906 | ||||||
Common stock repurchased | (235 | ) | - | |||||
Dividends paid | (746 | ) | (502 | ) | ||||
Net cash used in financing activities | (3,751 | ) | (5,001 | ) | ||||
Net decrease in cash and cash equivalents | (6,945 | ) | (8,112 | ) | ||||
Cash and cash equivalents, beginning | 40,007 | 22,875 | ||||||
Cash and cash equivalents, ending | $ | 33,062 | $ | 14,763 | ||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (dollars in thousands) | 2018 | 2017 | ||||||
| (Unaudited) | (Unaudited) | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 3,728 | $ | 2,641 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operations: | ||||||||
Depreciation and amortization | 916 | 975 | ||||||
Amortization of core deposit intangible | 359 | 212 | ||||||
Accretion of loan discount and deposit premium, net | (927 | ) | (995 | ) | ||||
Provision for loan losses | 258 | 233 | ||||||
Deferred income taxes | 972 | 1,021 | ||||||
Net realized gain on securities | (5 | ) | (126 | ) | ||||
Accretion of discount on securities, net of | ||||||||
amortization of premiums | 396 | 531 | ||||||
Deferred compensation | 28 | (64 | ) | |||||
Net realized loss on foreclosed assets | — | 23 | ||||||
Life insurance income | (303 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Cash value of life insurance | (319 | ) | (387 | ) | ||||
Accrued interest receivable | (59 | ) | 153 | |||||
Other assets | (112 | ) | (3,849 | ) | ||||
Accrued interest payable | 100 | 83 | ||||||
Other liabilities | (567 | ) | (1,549 | ) | ||||
|
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| |||||
Net cash provided by (used in) operating activities | 4,465 | (1,098 | ) | |||||
|
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| |||||
Cash flows from investing activities | ||||||||
Activity in available for sale securities: | ||||||||
Purchases | — | (1,914 | ) | |||||
Sales | 18,366 | 8,523 | ||||||
Maturities/calls/paydowns | 4,461 | 4,339 | ||||||
Purchases of restricted equity securities | (142 | ) | (239 | ) | ||||
Net increase in loans | (17,492 | ) | (10,625 | ) | ||||
Proceeds from life insurance contracts | 672 | — | ||||||
Proceeds from sale of foreclosed assets | 475 | 47 | ||||||
Purchases of property and equipment | (2,624 | ) | (718 | ) | ||||
Cash received in business combination | 25,761 | — | ||||||
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| |||||
Net cash provided by (used in) investing activities | 29,477 | (587 | ) | |||||
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| |||||
Cash flows from financing activities | ||||||||
Net decrease in deposits | (17,452 | ) | (12,996 | ) | ||||
Repayment of borrowings | (1,000 | ) | — | |||||
Cash paid for fractional shares | (1 | ) | — | |||||
Dividends paid | (1,123 | ) | (803 | ) | ||||
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| |||||
Net cash used in financing activities | (19,576 | ) | (13,799 | ) | ||||
|
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| |||||
Net increase (decrease) in cash and cash equivalents | 14,366 | (15,484 | ) | |||||
Cash and cash equivalents, beginning | 22,875 | 35,908 | ||||||
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| |||||
Cash and cash equivalents, ending | $ | 37,241 | $ | 20,424 | ||||
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| |||||
See Notes to Consolidated Financial Statements
Parkway Acquisition Corp. and Subsidiary
Consolidated Statements of Cash Flows, continued
For the NineSix Months ended SeptemberJune 30, 20182019 and 20172018
Supplemental disclosure of cash flow information | ||||||||
Interest paid | $ | 1,248 | $ | 766 | ||||
Taxes paid | $ | 50 | $ | 10 | ||||
Supplemental disclosure of noncash investing activities | ||||||||
Effect on equity of change in net unrealized loss on available for sale securities | $ | 1,000 | $ | (671 | ) | |||
Transfers of loans to foreclosed properties | $ | - | $ | 410 |
Supplemental disclosure of cash flow information | ||||||||
Interest paid | $ | 1,189 | $ | 1,025 | ||||
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| |||||
Taxes paid | $ | 10 | $ | — | ||||
|
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| |||||
Supplemental disclosure of noncash investing activities | ||||||||
Effect on equity of change in net unrealized loss on available for sale securities | $ | (846 | ) | $ | 493 | |||
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| |||||
Transfers of loans to foreclosed properties | $ | 410 | $ | — | ||||
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| |||||
Business combinations | ||||||||
Assets acquired (excluding goodwill) | $ | 145,480 | $ | — | ||||
Liabilities assumed | 133,551 | — | ||||||
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| |||||
Net assets | $ | 11,929 | $ | — | ||||
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| |||||
Goodwill recorded | $ | 3,764 | $ | — | ||||
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Stock issued to acquire Great State Bank | $ | 15,495 | $ | — | ||||
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See Notes to Consolidated Financial Statements
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Organization
Parkway Acquisition Corp. (“Parkway” or the “Company”) was incorporated as a Virginia corporation on November 2, 2015. Parkway was formed as a business combination shell company for the purpose of completing a business combination transaction between Grayson Bankshares, Inc. (“Grayson”) and Cardinal Bankshares Corporation (“Cardinal”). On November 6, 2015, Grayson, Cardinal and Parkway entered into an agreement pursuant to which Grayson and Cardinal merged with and into Parkway, with Parkway as the surviving corporation (the “Cardinal merger”). The merger agreement established exchange ratios under which each share of Grayson common stock was converted to the right to receive 1.76 shares of common stock of Parkway, while each share of Cardinal common stock was converted to the right to receive 1.30 shares of common stock of Parkway. The exchange ratios resulted in Grayson shareholders receiving approximately 60% of the newly issued Parkway shares and Cardinal shareholders receiving approximately 40% of the newly issued Parkway shares. The Cardinal merger was completed on July 1, 2016. Grayson was considered the acquiror and Cardinal was considered the acquiree in the transaction for accounting purposes. Upon completion of the Cardinal merger, the Bank of Floyd, a wholly-owned subsidiary of Cardinal, was merged with and into Grayson National Bank (the “Bank’), 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, Montgomery and Roanoke, and the North Carolina counties of Alleghany, Ashe, Burke, Caldwell, Catawba, Cleveland, Watauga, Wilkes, and Yadkin, and the surrounding areas through twenty full-service banking offices and four loan production offices. As an FDIC-insured national banking association, the Bank is subject to regulation by the Comptroller of the Currency and the FDIC. Parkway is regulated by the Board of Governors of the Federal Reserve System.
For purposes of this quarterly report on Form10-Q, all information contained herein as of and for periods prior to July 1, 2018 reflects the operations of Parkway prior to the Great State merger. Unless this report otherwise indicates or the context otherwise requires, all references to “Parkway” or the “Company” as of and for periods subsequent to July 1, 2018 refer to the combined company and its subsidiary as a combined entity after the Great State merger, and all references to the “Company” as of and for periods prior to July 1, 2018 are references to Parkway and its subsidiary as a combined entity prior to the Great State merger.
The Bank was organized under the laws of the United States in 1900 and now serves the Virginia counties of Grayson, Floyd, Carroll, Wythe, Montgomery and Roanoke, and the North Carolina counties of Alleghany, Ashe, Caldwell, Cleveland, Watauga, Wilkes, and Yadkin, and the surrounding areas through twenty full-service banking offices and three loan production offices. As an FDIC-insured national banking association, the Bank is subject to regulation by the Comptroller of the Currency and the FDIC. Parkway is regulated by the Board of Governors of the Federal Reserve System.
The consolidated financial statements as of SeptemberJune 30, 20182019 and for the six-month and three-month periods ended SeptemberJune 30, 20182019 and 20172018 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, 2017,2018, included in the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2017.2018. The results of operations for the three-monthsix-month and nine-monththree-month periods ended SeptemberJune 30, 20182019 are not necessarily indicative of the results to be expected for the full year.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Critical Accounting Policies
Management believes the policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the Bank, which is wholly owned. All significant, intercompany transactions and balances have been eliminated in consolidation.
Business Segments
The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.
Business Combinations
Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business, or acquires equity interests in one or more other entities that are businesses and obtains control over those entities. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired entity are recorded at their respective fair values as of the closing date of the acquisition. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in our consolidated results from the closing date of the merger, and prior periods are not restated. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding future credit losses. The fair value estimates associated with the acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Use of Estimates, continued
Substantially all of the Bank’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse, but influenced to an extent by the manufacturing and agricultural segments.
While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Bank’s allowances for loan and foreclosed real estate losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term.
The Company seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. The Company’s tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy.
Accounting for pension benefits, costs and related liabilities are developed using actuarial valuations. These valuations include key assumptions determined by management, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension costs may occur in the future due to changes in these assumptions.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from banks (including cash items in process of collection), interest-bearing deposits with banks and federal funds sold.
Trading Securities
The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.
Securities Held to Maturity
Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. The Company does not currently hold any securities classified as held to maturity.
Securities Available for Sale
Available for sale securities are reported at fair value and consist of bonds, notes, debentures, and certain equity securities not classified as trading securities or as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of accumulated other comprehensive income. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Critical Accounting Policies
Management believes the policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and the Board of Directors.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the Bank, which is wholly owned. All significant, intercompany transactions and balances have been eliminated in consolidation.
Business Segments
The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.
Business Combinations
Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805,Business Combinations. A business combination occurs when the Company acquires net assets that constitute a business, or acquires equity interests in one or more other entities that are businesses and obtains control over those entities. Business combinations are effected through the transfer of consideration consisting of cash and/or common stock and are accounted for using the acquisition method. Accordingly, the assets and liabilities of the acquired entity are recorded at their respective fair values as of the closing date of the acquisition. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as information relative to closing date fair values becomes available. The results of operations of an acquired entity are included in our consolidated results from the closing date of the merger, and prior periods are not restated. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding future credit losses. The fair value estimates associated with the acquired loans include estimates related to expected prepayments and the amount and timing of expected principal, interest and other cash flows.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Use of Estimates, continued
Substantially all of the Bank’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse, but influenced to an extent by the manufacturing and agricultural segments.
While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Bank’s allowances for loan and foreclosed real estate losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term.
The Company seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. The Company’s tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy.
Accounting for pension benefits, costs and related liabilities are developed using actuarial valuations. These valuations include key assumptions determined by management, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension costs may occur in the future due to changes in these assumptions.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from banks (including cash items in process of collection), interest-bearing deposits with banks and federal funds sold.
Trading Securities
The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.
Securities Held to Maturity
Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. The Company does not currently hold any securities classified as held to maturity.
Securities Available for Sale
Available for sale securities are reported at fair value and consist of bonds, notes, debentures, and certain equity securities not classified as trading securities or as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of accumulated other comprehensive income. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Securities Available for Sale, continued
Declines in the fair value of individual held to maturity and available for sale securities below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity orpay-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.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance, or portion thereof, is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Allowance for Loan Losses, continued
The allowance consists of specific, general and unallocated components. The specific component is calculated on an individual basis for larger-balance,non-homogeneous loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is lower than its carrying value. The specific component of the allowance for smaller-balancesmaller- balance loans whose terms have been modified in a troubled debt restructuring (TDR)(“TDR”) is calculated on a pooled basis considering historical experience adjusted for qualitative factors. The general component coversnon-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 acase-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for all loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
Troubled Debt Restructurings
Under GAAP, the Bank is required to account for certain loan modifications or restructurings as “troubled debt restructurings” or “troubled"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 innon-accrual loans. Troubled debt restructured loans are maintained in nonaccrual status until they have been performing in accordance with modified terms for a period of at least six months.
Property and Equipment
Land is carried at cost. Bank premises, furniture and equipment are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:
| Years | ||||
Buildings and improvements | 10-40 | |||
Furniture and equipment | 5-12 |
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Foreclosed Assets
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in foreclosure expense on the consolidated statements of income.
Pension Plan
Prior to the Cardinal merger, both Grayson Nationalthe Bank (Grayson) and Bank of Floyd (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 Graysonthe Bank and Floyd plans were amended to freeze benefit accruals for all eligible employees prior to the effective date of the Cardinal merger. Grayson’sThe Bank’s plan is a single-employer plan, the funded status of which is measured as the difference between the fair value of plan assets and the projected benefit obligation. Floyd’s plan is a multi-employer plan for accounting purposes and is a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Goodwill and Other Intangible AssetsAssets
Goodwill arises from business combinations and is generally determined as the excess of fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquire, over the fair value of the nets assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently in events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected July 1, 2019 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 (generally twenty years on an accelerated basis).
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Revenue Recognition
On January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”)2014-9,Revenue from Contracts with Customers (“ASU Topic 606”). The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on its evaluation, the Company determined that ASU2014-09 did not materially change the method in which the Company currently classifies certain costs associated with the related revenue streams. The Company adopted ASU2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
Income Taxes
Provision for income taxes is based on amounts reported in the statements of income (after exclusion ofnon-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Advertising Expense
The Company expenses advertising costs as they are incurred. Advertising expense for the years presented is not material.
Basic Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status of the pension plan which are also recognized as separate components of equity. The accumulated balances related to each component of other comprehensive income (loss) are as follows:
| (dollars in thousands) | Unrealized Gains And (Losses) On Available for Sale Securities | Defined Benefit Pension Items | Total | |||||||||
Balance, December 31, 2016 | $ | (574 | ) | $ | (780 | ) | $ | (1,354 | ) | |||
Other comprehensive gain before reclassifications | 576 | — | 576 | |||||||||
Amounts reclassified from accumulated other comprehensive gain | (83 | ) | — | (83 | ) | |||||||
|
|
|
|
|
| |||||||
Balance September 30, 2017 | $ | (81 | ) | $ | (780 | ) | $ | (861 | ) | |||
|
|
|
|
|
| |||||||
Balance, December 31, 2017 | $ | (523 | ) | $ | (987 | ) | $ | (1,510 | ) | |||
Other comprehensive loss before reclassifications | (842 | ) | — | (842 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss | (4 | ) | — | (4 | ) | |||||||
|
|
|
|
|
| |||||||
Balance September 30, 2018 | $ | (1,369 | ) | $ | (987 | ) | $ | (2,356 | ) | |||
|
|
|
|
|
| |||||||
(dollars in thousands) | Unrealized Gains On Available for | Defined Benefit | Total | |||||||||
Balance, December 31, 2017 | $ | (523 | ) | $ | (987 | ) | $ | (1,510 | ) | |||
Other comprehensive loss before reclassifications | (667 | ) | — | (667 | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | (4 | ) | — | (4 | ) | |||||||
Balance June 30, 2018 | $ | (1,194 | ) | $ | (987 | ) | $ | (2,181 | ) | |||
Balance, December 31, 2018 | $ | (929 | ) | $ | (1,038 | ) | $ | (1,967 | ) | |||
Other comprehensive gain before reclassifications | 997 | — | 997 | |||||||||
Amounts reclassified from accumulated other comprehensive gain, net of tax | 3 | — | 3 | |||||||||
Balance June 30, 2019 | $ | 71 | $ | (1,038 | ) | $ | (967 | ) | ||||
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under line of credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
Reclassification
Reclassification
Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current presentation. Net income and stockholders’ equity previously reported were not affected by these reclassifications.
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 February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will bewere effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.
We expect to adopt
Effective January 1, 2019, we adopted the guidance using the modified retrospective method and practical expedients for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. We have startedperformed an initial evaluation of our leasing contracts and activities. We have also started developingdeveloped our methodology to estimate theright-of use assets and lease liabilities, which is based on the present value of lease payments. (theAt December 31, 20172018 future minimum lease payments were approximately $135 thousand). We do$334 thousand. Based on our evaluation the adoption of the guidance was immaterial to our financial position, results of operations, and cash flows. There will not expectbe a material change to the timing of expense recognition, but we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing disclosures and may need to provide additional information as a result of adoption of the ASU.recognition.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.
The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption iswas permitted beginning in first quarter 2019, we dodid not expect to elect that option. 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 ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company, the proposed delay would be applicable to the Company, if it is approved by the FASB.
In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification 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, 2019.Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs Topic of the Accounting Standards Codification related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2018, the FASB amended the Financial Instruments Topic of the Accounting Standards Codification. The amendments clarify certain aspects of the guidance issued in ASU2016-01. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted ASU2016-01. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2018, the FASB updated the Debt Securities and the Regulated Operations Topics of the Accounting Standards Codification. The amendments incorporate into the Accounting Standards Codification recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2018, the FASB updated the Income Taxes Topic of the Accounting Standards Codification. The amendments incorporate into the Accounting Standards Codification recent SEC guidance related to the income tax accounting implications of the Tax Cuts and Jobs Act. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.
In May 2018, the FASB amended the Financial Services—Depository and Lending Topic of the Accounting Standards Codification to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not have a material effect on the financial statements.
In July 2018, the FASB amended the Leases Topic of the Accounting Standards Codification to make narrow amendments to clarify how to apply certain aspects of the new leases standard. The amendments are effective for reporting periods beginning after December 15, 2018.The2018.The Company does not expect these amendments to have a material effect on its financial statements.
In July 2018, the FASB amended the Leases Topic of the Accounting Standards Codification to give entities another option for transition and to provide lessors with a practical expedient. The amendments will be effective for the Company for reporting periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its financial statements.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement,Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In August 2018, the FASB amended the Intangibles—Goodwill and Other Topic of the Accounting Standards Codification to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software. The amendments will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In December 2018, the FASB issued guidance that providing narrow-scope improvements for lessors, that provides relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. The amendments will be effective for the Company for reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.
In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019. The amendments related to hedging will be effective for the Company for annual periods beginning after December 15, 2019, and interim periods within annual reporting periods beginning after December 15, 2020. The amendments related to recognition and measurement of financial instruments will be effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
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, 2019. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Note 2. Business Combinations
On July 1, 2018, Parkway completed its merger with Great State as discussed above in Note 1. Parkway is considered the acquiring entity in this business combination for accounting purposes. Under the terms of the merger agreement, each share of Great State common stock was converted to 1.21 shares of common stock of Parkway which resulted in the issuance of 1,191,899 shares of Parkway stock in the merger. The Company engaged a third party to calculate fair values of all assets and liabilities acquired in the transaction. These valuations are not final and may be refined for up to one year following the merger date.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 2. Business Combinations, continued
The following table presents the Great State assets acquired and liabilities assumed as of July 1, 2018 as well as the related fair value adjustments and determination of goodwill.
| (dollars in thousands) | As Reported by Great State | Fair Value Adjustments | As Reported by Parkway | As Reported by Great Statee | Fair Value Adjustments | As Reported by Parkway | |||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 25,761 | $ | — | — | $ | 25,761 | $ | 25,761 | $ | - | - | $ | 25,761 | |||||||||||||||||
Investment securities | 19,630 | (229 | ) | (a | ) | 19,401 | 19,630 | (229 | ) | (a) | 19,401 | ||||||||||||||||||||
Restricted equity securities | 523 | — | — | 523 | 523 | - | - | 523 | |||||||||||||||||||||||
Loans | 97,549 | (2,441 | ) | (b | ) | 95,108 | 97,549 | (2,441 | ) | (b) | 95,108 | ||||||||||||||||||||
Allowance for loan losses | (1,436 | ) | 1,436 | (c | ) | — | (1,436 | ) | 1,436 | (c) | - | ||||||||||||||||||||
Property and equipment | 1,207 | 189 | (d | ) | 1,396 | 1,207 | 189 | (d) | 1,396 | ||||||||||||||||||||||
Intangible assets | — | 2,425 | (e | ) | 2,425 | - | 2,425 | (e) | 2,425 | ||||||||||||||||||||||
Accrued interest receivable | 334 | — | — | 334 | 334 | - | - | 334 | |||||||||||||||||||||||
Other assets | 599 | (67 | ) | (f | ) | 532 | 599 | (151 | ) | (f) | 448 | ||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total assets acquired | $ | 144,167 | $ | 1,313 | $ | 145,480 | $ | 144,167 | $ | 1,229 | $ | 145,396 | |||||||||||||||||||
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Liabilities | |||||||||||||||||||||||||||||||
Deposits | $ | 129,611 | $ | 940 | (g | ) | $ | 130,551 | $ | 129,611 | $ | 940 | (g) | $ | 130,551 | ||||||||||||||||
Borrowings | 2,000 | — | — | 2,000 | 2,000 | - | - | 2,000 | |||||||||||||||||||||||
Accrued interest payable | 40 | — | — | 40 | 40 | - | - | 40 | |||||||||||||||||||||||
Other liabilities | 943 | 17 | (h | ) | 960 | 352 | 17 | (h) | 369 | ||||||||||||||||||||||
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Total liabilities acquired | $ | 132,594 | $ | 957 | $ | 133,551 | $ | 132,003 | $ | 957 | $ | 132,960 | |||||||||||||||||||
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Net assets acquired | 11,929 | 12,436 | |||||||||||||||||||||||||||||
Elimination of Company’s existing investment in Great State | 198 | 198 | |||||||||||||||||||||||||||||
Stock consideration | 15,495 | 15,495 | |||||||||||||||||||||||||||||
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Goodwill | $ | 3,764 | $ | 3,257 | |||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||
Explanation of fair value adjustments:
(a) | Reflects the opening fair value of securities portfolio, which was established as the new book basis of the portfolio. |
(b) | Reflects the fair value adjustment based on the Company’s third party valuation report. |
(c) | Existing allowance for loan losses eliminated to reflect accounting guidance. |
(d) | Estimated adjustment to Great State’s real property based upon third-party appraisals and the Company’s evaluation of equipment and other fixed assets. |
(e) | Reflects the recording of the estimated core deposit intangible based on the Company’s third party valuation report. |
(f) | Recording of deferred tax asset generated by the net fair value adjustments (tax rate = 21%). |
(g) | Estimated fair value adjustment to time deposits based on the Company’s third party |
(h) | Reflects the fair value adjustment based on the Company’s evaluation of acquired other liabilities. |
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 2. Business Combinations, continued
The merger was accounted for under the acquisition method of accounting. The assets and liabilities of Great State have been recorded at their estimated fair values and added to those of Parkway for periods following the merger date. Valuations of acquired Great State assets and liabilities may be refined for up to one year following the merger date.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 2. Business Combinations, continued
There are two methods to account for acquired loans as part of a business combination. Acquired loans that contain evidence of credit deterioration on the date of purchase are carried at the net present value of expected future proceeds in accordance with FASB ASC310-30. All other acquired loans are recorded at their initial fair value, adjusted for subsequent advances, pay downs, amortization or accretion of any premium or discount on purchase, charge-offs and any other adjustment to carrying value in accordance with ASC310-20.
The
In determining the fair valuevalues of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments to certain receivables were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans which have shownwithout evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements includenon-impaired loans and customer receivables with a fair value and gross contractual amounts receivable of $95.2 million and $118.8 million onat the date of acquisition.
To the extent that current information indicates it is probable that the Company will collect all amounts according to the contractual terms thereof, such loan is not considered impaired and is not considered in the determination of the required allowance for loan losses. To the extent that current information indicates it is probable that the Company will not be able to collect all amounts according to the contractual terms thereon, such loan is considered impaired and is considered in the determination of the required level of allowance for loan and lease losses.
Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Company’s initial estimates are reclassified from nonaccretable difference to accretable yield and are accreted into interest income on a level-yield basis over the remaining life of the loan. Decreases in cash flows expected to be collected are recognized as impairment through the provision for loan losses.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 2. Business Combinations, continued
Supplemental Pro Forma Information (dollars in thousands except per share data)
The table below presents supplemental pro forma information as if the Great State acquisition had occurred at the beginning of the earliest period presented, which was January 1, 2017.2018. Pro forma results include adjustments for amortization and accretion of fair value adjustments and do not include any projected cost savings or other anticipated benefits of the merger. Therefore, the pro forma financial information is not indicative of the results of operations that would have occurred had the transactions been effected on the assumed date.Pre-tax merger-related costs of $359$497 thousand and $856$299 thousand are included in the Company’s consolidated statements of operations for the six months and three months and nine months ended SeptemberJune 30, 2018 and are not included in the pro forma statements below.
| Three Months ended September 30, | Six Months ended June 30, | |||||||||||||||
| 2018 | 2017 | 2019 | 2018 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Net interest income | $ | 6,683 | $ | 5,309 | $ | 13,503 | $ | 10,619 | ||||||||
Net income (a) | $ | 1,553 | $ | 1,222 | $ | 3,111 | $ | 2,264 | ||||||||
Basic and diluted weighted average shares outstanding (b) | 6,213,275 | 6,213,275 | 6,213,275 | 6,213,275 | ||||||||||||
Basic and diluted earnings per common share | $ | 0.25 | $ | 0.20 | $ | 0.50 | $ | 0.36 | ||||||||
| Nine Months ended September 30, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
Net interest income | $ | 17,115 | $ | 15,872 | ||||||||||||
Net income (a) | $ | 3,652 | $ | 2,918 | ||||||||||||
Basic and diluted weighted average shares outstanding (b) | 6,213,275 | 6,213,275 | ||||||||||||||
Basic and diluted earnings per common share | $ | 0.59 | $ | 0.47 | ||||||||||||
Three Months ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| (Unaudited) | (Unaudited) | |||||||
Net interest income | $ | 6,705 | $ | 5,337 | ||||
Net income (a) | $ | 1,565 | $ | 1,096 | ||||
Basic and diluted weighted average shares outstanding (b) | 6,213,275 | 6,213,275 | ||||||
Basic and diluted earnings per common share | $ | 0.25 | $ | 0.18 | ||||
(a) | Supplemental pro forma net income includes the impact of certain fair value adjustments. Supplemental pro forma net income does not include assumptions on cost savings or the impact of merger-related expenses. |
(b) | Weighted average shares outstanding includes the full effect of the common stock issued in connection with the Great State acquisition as of the earliest reporting date. |
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 3.3. Investment Securities
Debt and equity 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 SeptemberJune 30, 20182019 and December 31, 20172018 follow:
| (dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 244 | $ | — | $ | (1 | ) | $ | 243 | $ | 245 | $ | 5 | $ | - | $ | 250 | |||||||||||||||
Mortgage-backed securities | 26,410 | — | (1,298 | ) | 25,112 | 23,988 | 56 | (80 | ) | 23,964 | ||||||||||||||||||||||
Corporate securities | 2,981 | — | (152 | ) | 2,829 | 2,946 | 25 | (85 | ) | 2,886 | ||||||||||||||||||||||
State and municipal securities | 17,886 | 12 | (295 | ) | 17,603 | 13,828 | 172 | (4 | ) | 13,996 | ||||||||||||||||||||||
|
|
|
| $ | 41,007 | $ | 258 | $ | (169 | ) | $ | 41,096 | ||||||||||||||||||||
| $ | 47,521 | $ | 12 | $ | (1,746 | ) | $ | 45,787 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 244 | $ | 1 | $ | - | $ | 245 | ||||||||||||||||||||||||
Mortgage-backed securities | $ | 28,780 | $ | — | $ | (626 | ) | $ | 28,154 | 25,627 | 1 | (865 | ) | 24,763 | ||||||||||||||||||
Corporate securities | 3,016 | — | (80 | ) | 2,936 | 2,970 | - | (181 | ) | 2,789 | ||||||||||||||||||||||
State and municipal securities | 19,542 | 155 | (112 | ) | 19,585 | 17,764 | 31 | (164 | ) | 17,631 | ||||||||||||||||||||||
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| $ | 46,605 | $ | 33 | $ | (1,210 | ) | $ | 45,428 | ||||||||||||||||||||
| $ | 51,338 | $ | 155 | $ | (818 | ) | $ | 50,675 | ||||||||||||||||||||||||
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Restricted equity securities totaled $2.1 million and $1.4 million at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB), Community Bankers Bank,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 Community Bankers BankCBB 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 held to maturity and 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 SeptemberJune 30, 20182019 and December 31, 2017.2018.
| Less Than 12 Months | 12 Months or More | Total | Less Than 12 Months |
12 Months or More |
Total | |||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses | ||||||||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 243 | $ | (1 | ) | $ | — | $ | — | $ | 243 | $ | (1 | ) | ||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 4,566 | (139 | ) | 20,456 | (1,159 | ) | 25,022 | (1,298 | ) | |||||||||||||||||||||||||||||||||||||||
Corporate securities | 1,443 | (39 | ) | 1,387 | (113 | ) | 2,830 | (152 | ) | |||||||||||||||||||||||||||||||||||||||
State and municipal securities | 10,509 | (93 | ) | 5,507 | (202 | ) | 16,016 | (295 | ) | |||||||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | $ | 16,761 | $ | (272 | ) | $ | 27,350 | $ | (1,474 | ) | $ | 44,111 | $ | (1,746 | ) | |||||||||||||||||||||||||||||||||
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December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | 15,791 | $ | (324 | ) | $ | 12,361 | $ | (302 | ) | $ | 28,152 | $ | (626 | ) | $ | - | $ | - | $ | 11,306 | $ | (80 | ) | $ | 11,306 | $ | (80 | ) | |||||||||||||||||||
Corporate securities | 1,506 | (10 | ) | 1,430 | (70 | ) | 2,936 | (80 | ) | - | - | 1,416 | (85 | ) | 1,416 | (85 | ) | |||||||||||||||||||||||||||||||
State and municipal securities | 5,284 | (44 | ) | 2,758 | (68 | ) | 8,042 | (112 | ) | - | - | 2,131 | (4 | ) | 2,131 | (4 | ) | |||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
Total securities available for sale | $ | 22,581 | $ | (378 | ) | $ | 16,549 | $ | (440 | ) | $ | 39,130 | $ | (818 | ) | $ | - | $ | - | $ | 14,853 | $ | (169 | ) | $ | 14,853 | $ | (169 | ) | |||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | 450 | $ | (1 | ) | $ | 24,227 | $ | (864 | ) | $ | 24,677 | $ | (865 | ) | |||||||||||||||||||||||||||||||||
Corporate securities | - | - | 2,789 | (181 | ) | 2,789 | (181 | ) | ||||||||||||||||||||||||||||||||||||||||
State and municipal securities | 5,518 | (19 | ) | 6,834 | (145 | ) | 12,352 | (164 | ) | |||||||||||||||||||||||||||||||||||||||
Total securities available for sale | $ | 5,968 | $ | (20 | ) | $ | 33,850 | $ | (1,190 | ) | $ | 39,818 | $ | (1,210 | ) | |||||||||||||||||||||||||||||||||
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 3.3. Investment Securities, continued
At SeptemberJune 30, 2018, 552019, 17 debt securities with unrealized losses had depreciated 3.811.13 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 SeptemberJune 30, 2018.2019. Management continues to monitor all of these securities with a high degree of scrutiny. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of these securities are other than temporarily impaired, which could require a charge to earnings in such periods.
Proceeds from sales of investment securities available for sale were $18.4$3.95 million and $8.5 million$525 thousand for the nine monthsix-month and three-month periods ended SeptemberJune 30, 20182019 and 2017, respectively and $17.8 million and $7.9 million for the three month periods ended September 30, 2018, and 2017, respectively. There was a losswere gross realized losses of $14 thousand and $4 thousand in the nine month periodsix-month periods ended SeptemberJune 30, 2019 and 2018, respectively, that resulted from of an investment securitysecurities being called prior to itstheir scheduled maturity. Gross proceeds from called securities totaled $735 thousand and $50 thousand for the six-month periods ended June 30, 2019 and 2018, respectively. Gains and losses on the sale of investment securities are recorded on the trade date and are determined using the specific identification method. Gross realized gains and losses for the nine-monthsix-month and three-month periods ended SeptemberJune 30, 20182019 and 20172018 are as follows:
| Nine Months Ended September 30 | Three Months Ended September 30 | Six Months Ended June 30 | Three Months Ended June 30 | |||||||||||||||||||||||||||||
| (dollars in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
Realized gains | $ | 9 | $ | 141 | $ | — | $ | 28 | $ | 32 | $ | 9 | $ | 32 | $ | 9 | ||||||||||||||||
Realized losses | (4 | ) | (15 | ) | — | (15 | ) | (36 | ) | (4 | ) | (22 | ) | - | ||||||||||||||||||
|
|
|
| $ | (4 | ) | $ | 5 | $ | 10 | $ | 9 | ||||||||||||||||||||
| $ | 5 | $ | 126 | $ | — | $ | 13 | |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
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 SeptemberJune 30, 2018,2019, were as follows:
(dollars in thousands) | Amortized Cost | Fair Value | ||||||||||||||
| (dollars in thousands) | Amortized Cost | Fair Value | ||||||||||||||
Due in one year or less | $ | 493 | $ | 492 | $ | 929 | $ | 933 | ||||||||
Due after one year through five years | 13,117 | 12,816 | 11,595 | 11,695 | ||||||||||||
Due after five years through ten years | 15,911 | 15,074 | 16,103 | 16,111 | ||||||||||||
Due after ten years | 18,000 | 17,405 | 12,380 | 12,357 | ||||||||||||
|
| $ | 41,007 | $ | 41,096 | |||||||||||
| $ | 47,521 | $ | 45,787 | |||||||||||||
|
| |||||||||||||||
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 $12.9$13.3 million and $11.2$13.9 million at SeptemberJune 30, 20182019 and December 31, 2017,2018, 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)
Note 4.4. Loans Receivable
The major components of loans in the consolidated balance sheets at SeptemberJune 30, 20182019 and December 31, 20172018 are as follows:
(dollars in thousands) | 2019 | 2018 | ||||||||||||||
| (dollars in thousands) | 2018 | 2017 | ||||||||||||||
Construction & development | $ | 34,109 | $ | 25,475 | $ | 34,623 | $ | 33,449 | ||||||||
Farmland | 33,922 | 33,353 | 35,558 | 33,291 | ||||||||||||
Residential | 230,196 | 199,120 | 243,482 | 235,689 | ||||||||||||
Commercial mortgage | 180,004 | 125,661 | 177,846 | 176,192 | ||||||||||||
Commercial & agricultural | 38,296 | 25,672 | 39,132 | 37,491 | ||||||||||||
Consumer & other | 20,932 | 15,590 | 19,179 | 20,353 | ||||||||||||
|
| |||||||||||||||
Total loans | 537,459 | 424,871 | 549,820 | 536,465 | ||||||||||||
Allowance for loan losses | (3,444 | ) | (3,453 | ) | (3,818 | ) | (3,495 | ) | ||||||||
|
| |||||||||||||||
Loans, net of allowance for loan losses | $ | 534,015 | $ | 421,418 | $ | 546,002 | $ | 532,970 | ||||||||
|
| |||||||||||||||
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, substantially all of the Bank’s residential1-4 family loans were pledged as collateral for borrowing lines at the Federal Home Loan Bank of Atlanta.
Note 5.5. Allowance for Loan Losses and Impaired Loans
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component is calculated on an individual basis for larger-balance,non-homogeneous loans, which are considered impaired. A specific allowance is established when the discounted cash flows, collateral value (less disposal costs), or observable market price of the impaired loan is lower than its carrying value. The specific component of the allowance for smaller-balance loans whose terms have been modified in a troubled debt restructuring (TDR)TDR is calculated on a pooled basis considering historical experience adjusted for qualitative factors. These smaller-balance TDRs were collectively evaluated for impairment. The general component covers the remaining loan portfolio, and is based on historical loss experience adjusted for qualitative factors. The appropriateness of the allowance for loan losses on loans is estimated based upon these factors and trends identified by management at the time financial statements are prepared.
A provision for loan losses is charged against operations and is added to the allowance for loan losses based on quarterly comprehensive analyses of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
The following table presents activity in the allowance by loan category and information on the loans evaluated individually for impairment and collectively evaluated for impairment as of June 30, 2019 and December 31, 2018:
Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands) | Construction & Development |
Farmland |
Residential |
Commercial Mortgage | Commercial & Agricultural |
Consumer & Other |
Total | |||||||||||||||||||||
For the Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, March 31, 2019 | $ | 268 | $ | 407 | $ | 1,733 | $ | 697 | $ | 385 | $ | 128 | $ | 3,618 | ||||||||||||||
Charge-offs | - | - | (20 | ) | - | (19 | ) | (43 | ) | (82 | ) | |||||||||||||||||
Recoveries | - | - | 1 | - | 2 | 3 | 6 | |||||||||||||||||||||
Provision | 17 | 133 | 16 | 155 | (76 | ) | 31 | 276 | ||||||||||||||||||||
Balance, June 30, 2019 | $ | 285 | $ | 540 | $ | 1,730 | $ | 852 | $ | 292 | $ | 119 | $ | 3,818 | ||||||||||||||
For the Three Months Ended June 30, 2018 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, March 31, 2018 | $ | 247 | $ | 322 | $ | 1,896 | $ | 609 | $ | 267 | $ | 74 | $ | 3,415 | ||||||||||||||
Charge-offs | (8 | ) | - | - | (142 | ) | - | (90 | ) | (240 | ) | |||||||||||||||||
Recoveries | - | - | 9 | - | 2 | 4 | 15 | |||||||||||||||||||||
Provision | 17 | 17 | (210 | ) | 152 | 14 | 101 | 91 | ||||||||||||||||||||
Balance, June 30, 2018 | $ | 256 | $ | 339 | $ | 1,695 | $ | 619 | $ | 283 | $ | 89 | $ | 3,281 | ||||||||||||||
For the Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | 246 | $ | 385 | $ | 1,807 | $ | 682 | $ | 281 | $ | 94 | $ | 3,495 | ||||||||||||||
Charge-offs | - | (14 | ) | (32 | ) | (41 | ) | (63 | ) | (95 | ) | (245 | ) | |||||||||||||||
Recoveries | - | - | 8 | 28 | 4 | 14 | 54 | |||||||||||||||||||||
Provision | 39 | 169 | (53 | ) | 183 | 70 | 106 | 514 | ||||||||||||||||||||
Balance, June 30, 2019 | $ | 285 | $ | 540 | $ | 1,730 | $ | 852 | $ | 292 | $ | 119 | $ | 3,818 | ||||||||||||||
For the Six Months Ended June 30, 2018 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 239 | $ | 358 | $ | 1,875 | $ | 619 | $ | 282 | $ | 80 | $ | 3,453 | ||||||||||||||
Charge-offs | (20 | ) | - | (117 | ) | (142 | ) | - | (109 | ) | (388 | ) | ||||||||||||||||
Recoveries | - | 34 | 19 | - | 4 | 14 | 71 | |||||||||||||||||||||
Provision | 37 | (53 | ) | (82 | ) | 142 | (3 | ) | 104 | 145 | ||||||||||||||||||
Balance, June 30, 2018 | $ | 256 | $ | 339 | $ | 1,695 | $ | 619 | $ | 283 | $ | 89 | $ | 3,281 | ||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending Balance | $ | 285 | $ | 540 | $ | 1,730 | $ | 852 | $ | 292 | $ | 119 | $ | 3,818 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | - | $ | 41 | $ | 6 | $ | - | $ | - | $ | - | $ | 47 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 285 | $ | 499 | $ | 1,724 | $ | 852 | $ | 292 | $ | 119 | $ | 3,771 | ||||||||||||||
Ending balance: purchased credit impaired loans | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Loans outstanding: | ||||||||||||||||||||||||||||
Ending Balance | $ | 34,623 | $ | 35,558 | $ | 243,482 | $ | 177,846 | $ | 39,132 | $ | 19,179 | $ | 549,820 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | - | $ | 4,267 | $ | 924 | $ | - | $ | - | $ | - | $ | 5,191 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 34,623 | $ | 31,291 | $ | 242,402 | $ | 177,519 | $ | 38,932 | $ | 19,179 | $ | 543,946 | ||||||||||||||
Ending balance: purchased credit impaired loans | $ | - | $ | - | $ | 156 | $ | 327 | $ | 200 | $ | - | $ | 683 | ||||||||||||||
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
The following table presents activity in the allowance by loan category and information on the loans evaluated individually for impairment and collectively evaluated for impairment as of September 30, 2018 and December 31, 2017:
Allowance for Loan Losses and Recorded Investment in Loans
| (dollars in thousands) | Construction & Development | Farmland | Residential | Commercial Mortgage | Commercial & Agricultural | Consumer & Other | Total | |||||||||||||||||||||
For the Three Months Ended September 30, 2018 |
| |||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, June 30, 2018 | $ | 256 | $ | 339 | $ | 1,695 | $ | 619 | $ | 283 | $ | 89 | $ | 3,281 | ||||||||||||||
Charge-offs | — | — | — | — | — | (30 | ) | (30 | ) | |||||||||||||||||||
Recoveries | — | — | 20 | 48 | 2 | 10 | 80 | |||||||||||||||||||||
Provision | (2 | ) | (3 | ) | 71 | 9 | 2 | 36 | 113 | |||||||||||||||||||
|
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| |||||||||||||||
Balance, September 30, 2018 | $ | 254 | $ | 336 | $ | 1,786 | $ | 676 | $ | 287 | $ | 105 | $ | 3,444 | ||||||||||||||
|
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For the Three Months Ended September 30, 2017 |
| |||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, June 30, 2017 | $ | 329 | $ | 393 | $ | 1,938 | $ | 620 | $ | 214 | $ | 74 | $ | 3,568 | ||||||||||||||
Charge-offs | — | (34 | ) | (76 | ) | — | — | (13 | ) | (123 | ) | |||||||||||||||||
Recoveries | — | — | 4 | — | 2 | 4 | 10 | |||||||||||||||||||||
Provision | (75 | ) | 8 | 46 | 28 | 57 | 11 | 75 | ||||||||||||||||||||
|
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| |||||||||||||||
Balance, September 30, 2017 | $ | 254 | $ | 367 | $ | 1,912 | $ | 648 | $ | 273 | $ | 76 | $ | 3,530 | ||||||||||||||
|
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| |||||||||||||||
For the Nine Months Ended September 30, 2018 |
| |||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 239 | $ | 358 | $ | 1,875 | $ | 619 | $ | 282 | $ | 80 | $ | 3,453 | ||||||||||||||
Charge-offs | (20 | ) | — | (117 | ) | (142 | ) | — | (139 | ) | (418 | ) | ||||||||||||||||
Recoveries | — | 34 | 39 | 48 | 6 | 24 | 151 | |||||||||||||||||||||
Provision | 35 | (56 | ) | (11 | ) | 151 | (1 | )- | 140 | 258 | ||||||||||||||||||
|
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|
|
|
|
|
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| |||||||||||||||
Balance, September 30, 2018 | $ | 254 | $ | 336 | $ | 1,786 | $ | 676 | $ | 287 | $ | 105 | $ | 3,444 | ||||||||||||||
|
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| |||||||||||||||
For the Nine Months Ended September 30, 2017 |
| |||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Balance, December 31, 2016 | $ | 319 | $ | 342 | $ | 1,841 | $ | 600 | $ | 210 | $ | 108 | $ | 3,420 | ||||||||||||||
Charge-offs | — | (34 | ) | (89 | ) | (42 | ) | (27 | ) | (51 | ) | (243 | ) | |||||||||||||||
Recoveries | 56 | — | 19 | — | 31 | 14 | 120 | |||||||||||||||||||||
Provision | (121 | ) | 59 | 141 | 90 | 59 | 5 | 233 | ||||||||||||||||||||
|
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|
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|
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|
|
|
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|
| |||||||||||||||
Balance, September 30, 2017 | $ | 254 | $ | 367 | $ | 1,912 | $ | 648 | $ | 273 | $ | 76 | $ | 3,530 | ||||||||||||||
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| |||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending Balance | $ | 254 | $ | 336 | $ | 1,786 | $ | 676 | $ | 287 | $ | 105 | $ | 3,444 | ||||||||||||||
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Ending balance: individually evaluated for impairment | $ | — | $ | 33 | $ | 19 | $ | — | $ | — | $ | — | $ | 52 | ||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
| |||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 254 | $ | 303 | $ | 1,767 | $ | 676 | $ | 287 | $ | 105 | $ | 3,392 | ||||||||||||||
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|
|
|
|
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|
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| |||||||||||||||
Loans outstanding: | ||||||||||||||||||||||||||||
Ending Balance | $ | 34,109 | $ | 33,922 | $ | 230,196 | $ | 180,004 | $ | 38,296 | $ | 20,932 | $ | 537,459 | ||||||||||||||
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|
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| |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 4,724 | $ | 1,223 | $ | — | $ | — | $ | — | $ | 5,947 | ||||||||||||||
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|
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|
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| |||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 34,109 | $ | 29,198 | $ | 228,973 | $ | 180,004 | $ | 38,296 | $ | 20,932 | $ | 531,512 | ||||||||||||||
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| |||||||||||||||
(dollars in thousands) | Construction & Development |
Farmland |
Residential |
Commercial Mortgage | Commercial & Agricultural |
Consumer & Other |
Total | |||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending Balance | $ | 246 | $ | 385 | $ | 1,807 | $ | 682 | $ | 281 | $ | 94 | $ | 3,495 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | - | $ | 29 | $ | 12 | $ | - | $ | - | $ | - | $ | 41 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 246 | $ | 356 | $ | 1,795 | $ | 682 | $ | 281 | $ | 94 | $ | 3,454 | ||||||||||||||
Ending balance: purchased credit impaired loans | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Loans outstanding: | ||||||||||||||||||||||||||||
Ending Balance | $ | 33,449 | $ | 33,291 | $ | 235,689 | $ | 176,192 | $ | 37,491 | $ | 20,353 | $ | 536,465 | ||||||||||||||
Ending balance: individually evaluated for impairment | $ | - | $ | 4,552 | $ | 1,018 | $ | - | $ | - | $ | - | $ | 5,570 | ||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 33,449 | $ | 28,739 | $ | 234,504 | $ | 175,845 | $ | 37,291 | $ | 20,353 | $ | 530,181 | ||||||||||||||
Ending balance: purchased credit impaired loans | $ | - | $ | - | $ | 167 | $ | 347 | $ | 200 | $ | - | $ | 714 | ||||||||||||||
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
December 31, 2017 | ||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||
Ending Balance | $ | 239 | $ | 358 | $ | 1,875 | $ | 619 | $ | 282 | $ | 80 | $ | 3,453 | ||||||||||||||
|
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|
|
|
|
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|
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|
|
|
|
| |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 49 | $ | 42 | $ | — | $ | — | $ | — | $ | 91 | ||||||||||||||
|
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|
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|
|
|
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|
|
|
|
|
| |||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 239 | $ | 309 | $ | 1,833 | $ | 619 | $ | 282 | $ | 80 | $ | 3,362 | ||||||||||||||
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| |||||||||||||||
Loans outstanding: | ||||||||||||||||||||||||||||
Ending Balance | $ | 25,475 | $ | 33,353 | $ | 199,120 | $ | 125,661 | $ | 25,672 | $ | 15,590 | $ | 424,871 | ||||||||||||||
|
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| |||||||||||||||
Ending balance: individually evaluated for impairment | $ | — | $ | 5,069 | $ | 1,556 | $ | — | $ | — | $ | — | $ | 6,625 | ||||||||||||||
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|
| |||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 25,475 | $ | 28,284 | $ | 197,564 | $ | 125,661 | $ | 25,672 | $ | 15,590 | $ | 418,246 | ||||||||||||||
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|
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, the Bank had no unallocated reserves included in the allowance for loan losses.
Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio. The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is not warranted. Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.” Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk. As of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Allowance for Loan Losses, continued
The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
Credit Risk Profile by Internally Assigned Grades
| Loan Grades | Loan Grades | |||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Pass | Watch | Special Mention | Substandard | Total |
Pass |
Watch | Special Mention |
Substandard |
Total | ||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||
Construction & development | $ | 30,560 | $ | 3,502 | $ | — | $ | 47 | $ | 34,109 | $ | 31,843 | $ | 1,988 | $ | 765 | $ | 27 | $ | 34,623 | ||||||||||||||||||||
Farmland | 24,943 | 4,753 | — | 4,226 | 33,922 | 23,670 | 4,756 | 885 | 6,247 | 35,558 | ||||||||||||||||||||||||||||||
Residential | 208,998 | 17,849 | 370 | 2,979 | 230,196 | 221,695 | 18,878 | 1,232 | 1,677 | 243,482 | ||||||||||||||||||||||||||||||
Commercial mortgage | 153,554 | 20,423 | 1,344 | 4,683 | 180,004 | 148,286 | 23,219 | 1,710 | 4,631 | 177,846 | ||||||||||||||||||||||||||||||
Non-Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||
Commercial & agricultural | 32,941 | 4,300 | 66 | 989 | 38,296 | 33,929 | 4,192 | 248 | 763 | 39,132 | ||||||||||||||||||||||||||||||
Consumer & other | 20,074 | 840 | — | 18 | 20,932 | 18,826 | 349 | - | 4 | 19,179 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total | $ | 471,070 | $ | 51,667 | $ | 1,780 | $ | 12,942 | $ | 537,459 | $ | 478,249 | $ | 53,382 | $ | 4,840 | $ | 13,349 | $ | 549,820 | ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||
Construction & development | $ | 24,612 | $ | 652 | $ | — | $ | 211 | $ | 25,475 | $ | 31,237 | $ | 2,044 | $ | 147 | $ | 21 | $ | 33,449 | ||||||||||||||||||||
Farmland | 23,935 | 4,895 | 74 | 4,449 | 33,353 | 23,250 | 4,933 | 750 | 4,358 | 33,291 | ||||||||||||||||||||||||||||||
Residential | 183,543 | 12,464 | 200 | 2,913 | 199,120 | 213,670 | 18,794 | 299 | 2,926 | 235,689 | ||||||||||||||||||||||||||||||
Commercial mortgage | 106,102 | 15,291 | 1,611 | 2,657 | 125,661 | 148,179 | 23,468 | 1,212 | 3,333 | 176,192 | ||||||||||||||||||||||||||||||
Non-Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||
Commercial & agricultural | 22,446 | 2,057 | 649 | 520 | 25,672 | 33,537 | 2,908 | 70 | 976 | 37,491 | ||||||||||||||||||||||||||||||
Consumer & other | 15,262 | 328 | — | — | 15,590 | 18,975 | 1,364 | - | 14 | 20,353 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total | $ | 375,900 | $ | 35,687 | $ | 2,534 | $ | 10,750 | $ | 424,871 | $ | 468,848 | $ | 53,511 | $ | 2,478 | $ | 11,628 | $ | 536,465 | ||||||||||||||||||||
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|
| ||||||||||||||||||||||||||||||||||||
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. 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.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
The following table presents an age analysis of nonaccrual and past due loans by category as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction & development | $ | — | $ | — | $ | — | $ | — | $ | 34,109 | $ | 34,109 | $ | — | $ | — | $ | 1 | $ | - | $ | 10 | $ | 11 | $ | 34,612 | $ | 34,623 | $ | - | $ | 10 | ||||||||||||||||||||||||||||||||
Farmland | 103 | 2,985 | 185 | 3,273 | 30,649 | 33,922 | — | 3,272 | 375 | - | 1,302 | 1,677 | 33,881 | 35,558 | - | 4,132 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 903 | 9 | 302 | 1,214 | 228,982 | 230,196 | — | 504 | 558 | 85 | 438 | 1,081 | 242,401 | 243,482 | - | 567 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage | 275 | — | 778 | 1,053 | 178,951 | 180,004 | — | 1,804 | 100 | - | 442 | 542 | 177,304 | 177,846 | - | 442 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial & agricultural | 33 | — | 257 | 290 | 38,006 | 38,296 | — | 257 | 26 | - | 245 | 271 | 38,861 | 39,132 | - | 249 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer & other | 7 | 10 | 2 | 19 | 20,913 | 20,932 | — | 2 | 7 | 18 | 4 | 29 | 19,150 | 19,179 | - | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
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|
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,321 | $ | 3,004 | $ | 1,524 | $ | 5,849 | $ | 531,610 | $ | 537,459 | $ | — | $ | 5,839 | $ | 1,067 | $ | 103 | $ | 2,441 | $ | 3,611 | $ | 546,209 | $ | 549,820 | $ | - | $ | 5,404 | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction & development | $ | — | $ | — | $ | 227 | $ | 227 | $ | 25,248 | $ | 25,475 | $ | — | $ | 226 | $ | 29 | $ | - | $ | - | $ | 29 | $ | 33,420 | $ | 33,449 | $ | - | $ | - | ||||||||||||||||||||||||||||||||
Farmland | 188 | — | 308 | 496 | 32,857 | 33,353 | — | 3,610 | 71 | 100 | 989 | 1,160 | 32,131 | 33,291 | - | 3,914 | ||||||||||||||||||||||||||||||||||||||||||||||||
Residential | 395 | 334 | 710 | 1,439 | 197,681 | 199,120 | — | 1,211 | 762 | 145 | 241 | 1,148 | 234,541 | 235,689 | - | 653 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage | — | — | 194 | 194 | 125,467 | 125,661 | — | 194 | - | - | 604 | 604 | 175,588 | 176,192 | - | 740 | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-Real Estate Secured: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial & agricultural | 70 | — | 23 | 93 | 25,579 | 25,672 | — | 94 | 7 | - | 264 | 271 | 37,220 | 37,491 | - | 264 | ||||||||||||||||||||||||||||||||||||||||||||||||
Consumer & other | 2 | 24 | — | 26 | 15,564 | 15,590 | — | — | 12 | 18 | 8 | 38 | 20,315 | 20,353 | - | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 655 | $ | 358 | $ | 1,462 | $ | 2,475 | $ | 422,396 | $ | 424,871 | $ | — | $ | 5,335 | $ | 881 | $ | 263 | $ | 2,106 | $ | 3,250 | $ | 533,215 | $ | 536,465 | $ | - | $ | 5,579 | ||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Impaired Loans, continued
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, the recorded investment in impaired loans totaled $10.9$9.8 million and $12.3$10.3 million. The total amount of collateral-dependent impaired loans at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, was $2.7 million and $2.8 million. As of June 30, 2019 and December 31, 2018, respectively, $3.0 million and $3.7 million. As of September 30, 2018 and December 31, 2017, respectively, $3.1 million and $3.7$3.4 million of the recorded investment in impaired loans did not have a related allowance. The Bank had $7.8$7.1 million and $8.6$7.3 million in troubled debt restructuredTDR loans included in impaired loans at SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively.
The categories ofnon-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 onnon-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.
In 2015, management began collectively evaluating performing TDRs with a loan balance of $250,000 or less for impairment. As of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, $5.0$4.6 million and $5.7$4.7 million of TDRs included in the following table were evaluated collectively for impairment and were deemed to have $268$238 thousand and $303$259 thousand of related allowance.
The following table is a summary of information related to impaired loans as of SeptemberJune 30, 20182019 and December 31, 2017:2018:
Impaired Loans
| Nine months ended | Three months ended | Six months ended | Three months ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Recorded Investment1 | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | Recorded Investment1 | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction & development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||
Farmland | 3,118 | 3,118 | — | 3,270 | 4 | 3,118 | 2 | 3,022 | 3,022 | - | 3,087 | 9 | 3,022 | 5 | ||||||||||||||||||||||||||||||||||||||||||
Residential | — | — | — | — | — | — | — | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage | — | — | — | — | — | — | — | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Commercial & agricultural | — | 25 | — | — | — | — | — | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Consumer & other | — | — | — | — | — | — | — | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | 3,118 | 3,143 | — | 3,270 | 4 | 3,118 | 2 | 3,022 | 3,022 | - | 3,087 | 9 | 3,022 | 5 | ||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction & development | 170 | 170 | 9 | 307 | 10 | 273 | 3 | 65 | 65 | 4 | 67 | 3 | 66 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Farmland | 1,890 | 1,890 | 42 | 1,913 | 77 | 1,896 | 25 | 1,553 | 1,553 | 51 | 1,565 | 36 | 1,560 | 17 | ||||||||||||||||||||||||||||||||||||||||||
Residential | 5,358 | 5,515 | 247 | 5,872 | 214 | 5,381 | 69 | 4,892 | 5,042 | 219 | 5,123 | 135 | 4,909 | 63 | ||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage | 357 | 493 | 20 | 536 | 13 | 360 | 4 | 196 | 241 | 10 | 271 | 6 | 197 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Commercial & agricultural | 41 | 41 | 2 | 49 | 2 | 43 | 1 | 35 | 35 | 2 | 36 | 1 | 36 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Consumer & other | — | — | — | — | — | — | — | 4 | 4 | - | 4 | - | 4 | - | ||||||||||||||||||||||||||||||||||||||||||
|
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| ||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | 7,816 | 8,109 | 320 | 8,677 | 316 | 7,953 | 102 | 6,745 | 6,940 | 286 | 7,066 | 181 | 6,772 | 85 | ||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||||||
Totals: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction & development | 170 | 170 | 9 | 307 | 10 | 273 | 3 | 65 | 65 | 4 | 67 | 3 | 66 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Farmland | 5,008 | 5,008 | 42 | 5,183 | 81 | 5,014 | 27 | 4,575 | 4,575 | 51 | 4,652 | 45 | 4,582 | 22 | ||||||||||||||||||||||||||||||||||||||||||
Residential | 5,358 | 5,515 | 247 | 5,872 | 214 | 5,381 | 69 | 4,892 | 5,042 | 219 | 5,123 | 135 | 4,909 | 63 | ||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage | 357 | 493 | 20 | 536 | 13 | 360 | 4 | 196 | 241 | 10 | 271 | 6 | 197 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Commercial & agricultural | 41 | 66 | 2 | 49 | 2 | 43 | 1 | 35 | 35 | 2 | 36 | 1 | 36 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Consumer & other | — | — | — | — | — | — | — | 4 | 4 | - | 4 | - | 4 | - | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 10,934 | $ | 11,252 | $ | 320 | $ | 11,947 | $ | 320 | $ | 11,071 | $ | 104 | $ | 9,767 | $ | 9,962 | $ | 286 | $ | 10,153 | $ | 190 | $ | 9,794 | $ | 90 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||
1 | Recorded investment is the loan balance, net of any charge-offs |
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5.5. Allowance for Loan Losses and Impaired Loans, continued
Impaired Loans, continued
| (dollars in thousands) | Recorded Investment1 | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized |
Recorded Investment1 | Unpaid Principal Balance |
Related Allowance | Average Recorded Investment | Interest Income Recognized | ||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
Construction & development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||
Farmland | 3,422 | 3,456 | — | 3,774 | 10 | 3,284 | 3,284 | - | 3,523 | 23 | ||||||||||||||||||||||||||||||
Residential | 300 | 300 | — | 300 | 8 | 85 | 85 | - | 448 | 13 | ||||||||||||||||||||||||||||||
Commercial mortgage | — | — | — | — | — | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial & agricultural | — | 26 | — | 27 | — | - | 24 | - | - | - | ||||||||||||||||||||||||||||||
Consumer & other | — | — | — | — | 2 | - | - | - | - | - | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Subtotal | 3,722 | 3,782 | — | 4,101 | 20 | 3,369 | 3,393 | - | 3,971 | 36 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||||||||||||||||||
Construction & development | 361 | 361 | 16 | 718 | 111 | 69 | 69 | 4 | 306 | 11 | ||||||||||||||||||||||||||||||
Farmland | 1,936 | 1,936 | 58 | 2,224 | 135 | 1,539 | 1,539 | 38 | 1,568 | 86 | ||||||||||||||||||||||||||||||
Residential | 5,647 | 5,832 | 284 | 6,209 | 290 | 5,005 | 5,162 | 241 | 5,348 | 266 | ||||||||||||||||||||||||||||||
Commercial mortgage | 602 | 737 | 33 | 1,020 | 54 | 275 | 358 | 15 | 522 | 27 | ||||||||||||||||||||||||||||||
Commercial & agricultural | 55 | 55 | 3 | 89 | 13 | 37 | 37 | 2 | 47 | 3 | ||||||||||||||||||||||||||||||
Consumer & other | — | — | — | 2 | — | 4 | 4 | - | 4 | - | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Subtotal | 8,601 | 8,921 | 394 | 10,262 | 603 | 6,929 | 7,169 | 300 | 7,795 | 393 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Totals: | ||||||||||||||||||||||||||||||||||||||||
Construction & development | 361 | 361 | 16 | 718 | 111 | 69 | 69 | 4 | 306 | 11 | ||||||||||||||||||||||||||||||
Farmland | 5,358 | 5,392 | 58 | 5,998 | 145 | 4,823 | 4,823 | 38 | 5,091 | 109 | ||||||||||||||||||||||||||||||
Residential | 5,947 | 6,132 | 284 | 6,509 | 298 | 5,090 | 5,247 | 241 | 5,796 | 279 | ||||||||||||||||||||||||||||||
Commercial mortgage | 602 | 737 | 33 | 1,020 | 54 | 275 | 358 | 15 | 522 | 27 | ||||||||||||||||||||||||||||||
Commercial & agricultural | 55 | 81 | 3 | 116 | 13 | 37 | 61 | 2 | 47 | 3 | ||||||||||||||||||||||||||||||
Consumer & other | — | — | — | 2 | 2 | 4 | 4 | - | 4 | - | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total | $ | 12,323 | $ | 12,703 | $ | 394 | $ | 14,363 | $ | 623 | $ | 10,298 | $ | 10,562 | $ | 300 | $ | 11,766 | $ | 429 | ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
1 | Recorded investment is the loan balance, net of any charge-offs |
Troubled Debt Restructuring
A troubled debt restructuredTDR 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; orre-aging, extensions, deferrals and renewals. Troubled debt restructuredTDR loans are considered impaired loans.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Troubled Debt Restructuring, continued
The following table sets forth information with respect to the Bank’s TDRs as of June 30, 2019 and June 30, 2018:
For the Six Months Ended June 30, 2019
(dollars in thousands) |
TDRs identified during the period | TDRs identified in the last twelve months that subsequently defaulted (1) | ||||||||||||||||||||||
Number of contracts | Pre- modification outstanding recorded investment | Post- modification outstanding recorded investment |
Number of contracts | Pre- modification outstanding recorded investment | Post- modification outstanding recorded investment | |||||||||||||||||||
Construction & development | - | $ | - | $ | - | - | $ | - | $ | - | ||||||||||||||
Farmland | 1 | 38 | 38 | - | - | - | ||||||||||||||||||
Residential | 1 | 117 | 128 | - | - | - | ||||||||||||||||||
Commercial mortgage | - | - | - | - | - | - | ||||||||||||||||||
Commercial & agricultural | - | - | - | - | - | - | ||||||||||||||||||
Consumer & other | - | - | - | - | - | - | ||||||||||||||||||
Total | 2 | $ | 155 | $ | 166 | - | $ | - | $ | - | ||||||||||||||
(1)Loans past due 30 days or more are considered to be in default.
During the six months ended June 30, 2019, two loans were modified that were considered to be a TDRs. Term concessions were granted on both loans and one loan had additional funds advanced for legal expenses and property taxes. No TDRs identified in the last twelve months subsequently defaulted in the six months ended June 30, 2019.
For the Three Months Ended June 30, 2019
(dollars in thousands) |
TDRs identified during the period | TDRs identified in the last twelve months that subsequently defaulted (1) | ||||||||||||||||||||||
Number of contracts | Pre- modification outstanding recorded investment | Post- modification outstanding recorded investment |
Number of contracts | Pre- modification outstanding recorded investment | Post- modification outstanding recorded investment | |||||||||||||||||||
Construction & development | - | $ | - | $ | - | - | $ | - | $ | - | ||||||||||||||
Farmland | 1 | 38 | 38 | - | - | - | ||||||||||||||||||
Residential | - | - | - | - | - | - | ||||||||||||||||||
Commercial mortgage | - | - | - | - | - | - | ||||||||||||||||||
Commercial & agricultural | - | - | - | - | - | - | ||||||||||||||||||
Consumer & other | - | - | - | - | - | - | ||||||||||||||||||
Total | 1 | $ | 38 | $ | 38 | - | $ | - | $ | - | ||||||||||||||
(1)Loans past due 30 days or more are considered to be in default.
During the three months ended June 30, 2019, one loan was modified that was considered to be a TDR. Term concessions were granted on this loan. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended June 30, 2019.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Troubled Debt Restructuring, continued
The following table sets forth information with respectFor the Six Months Ended June 30, 2018
(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 | 80 | �� | 97 | - | - | - | |||||||||||||||||
Commercial mortgage | - | - | - | - | - | - | ||||||||||||||||||
Commercial & agricultural | - | - | - | - | - | - | ||||||||||||||||||
Consumer & other | - | - | - | - | - | - | ||||||||||||||||||
Total | 2 | $ | 80 | $ | 97 | - | $ | - | $ | - | ||||||||||||||
(1)Loans past due 30 days or more are considered to be in default.
During the Bank’s troubled debt restructurings as of Septembersix months ended June 30, 2018, two loans were modified that were considered to be TDRs. Term concessions were granted and Septemberadditional funds were advanced for legal expenses and property taxes. No TDRs identified in the last twelve months subsequently defaulted in the six months ended June 30, 2017:2018.
For the NineThree Months Ended SeptemberJune 30, 2018
(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 | 80 | 97 | - | - | - | ||||||||||||||||||
Commercial mortgage | - | - | - | - | - | - | ||||||||||||||||||
Commercial & agricultural | - | - | - | - | - | - | ||||||||||||||||||
Consumer & other | - | - | - | - | - | - | ||||||||||||||||||
Total | 2 | $ | 80 | $ | 97 | - | $ | - | $ | - | ||||||||||||||
| TDRs identified during the period | TDRs identified in the last twelve months that subsequently defaulted(1) | |||||||||||||||||||||||
| (dollars in thousands) | 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 | 80 | 95 | — | — | — | ||||||||||||||||||
Commercial mortgage | — | — | — | — | — | — | ||||||||||||||||||
Commercial & agricultural | — | — | — | — | — | — | ||||||||||||||||||
Consumer & other | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 2 | $ | 80 | $ | 95 | — | $ | — | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
(1)Loans past due 30 days or more are considered to be in default.
|
During the ninethree months ended SeptemberJune 30, 2018, two loans were modified that were considered to be TDRs. Term concessions were granted and additional funds were advanced for legal expenses and property taxes. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended SeptemberJune 30, 2018.
During the three months ended September 30, 2018, no loans were modified that were considered to be TDRs.
For the Nine Months Ended September 30, 2017
| TDRs identified during the period | TDRs identified in the last twelve months that subsequently defaulted(1) | |||||||||||||||||||||||
| (dollars in thousands) | 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 | 2 | 298 | 298 | — | — | — | ||||||||||||||||||
Residential | 1 | 48 | 48 | — | — | — | ||||||||||||||||||
Commercial mortgage | — | — | — | — | — | — | ||||||||||||||||||
Commercial & agricultural | — | — | — | — | — | — | ||||||||||||||||||
Consumer & other | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 3 | $ | 346 | $ | 346 | — | $ | — | $ | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
During the nine months ended September 30, 2017, three loans were modified that were considered to be TDRs. Term concessions only were granted and no additional funds were advanced. No TDRs identified in the last twelve months subsequently defaulted in the quarter ended September 30, 2017.
During the three months ended September 30, 2017, no loans were modified that were considered to be a TDR.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 5. Allowance for Loan Losses and Impaired Loans, continued
Purchased Credit Impaired Loans
There were no purchased credit impaired loans as of December 31, 2017.
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 SeptemberJune 30, 2019 and December 31, 2018 was aare as follows:
(dollars in thousands) | 2019 | 2018 | ||||||||||
| (dollars in thousands) | September 30, 2018 | |||||||||||
Residential | $ | 172 | $ | 156 | $ | 167 | ||||||
Commercial mortgage | 1,426 | 327 | 347 | |||||||||
Commercial & agricultural | 220 | 200 | 200 | |||||||||
| ||||||||||||
Outstanding balance | $ | 1,818 | $ | 683 | $ | 714 | ||||||
| ||||||||||||
Carrying amount, net of credit marks of $139 | $ | 1,679 | ||||||||||
| ||||||||||||
Carrying amount | $ | 683 | $ | 714 | ||||||||
There was no accretable yield on purchased credit impaired loans for the period presented.
There were no purchased credit impaired loans acquired during the six months ended June 30, 2019. Purchased credit impaired loans acquired during the nine monthsyear ended September 30,December 31, 2018 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
| (dollars in thousands) | September 30, 2018 |
2018 | ||||||
Contractually required payments receivable of loans purchased during the year: | ||||||||
Residential | $ | 233 | $ | 233 | ||||
Commercial mortgage | 1,724 | 1,724 | ||||||
Commercial & agricultural | 221 | 221 | ||||||
| $ | 2,178 | ||||||
| $ | 2,178 | |||||||
| ||||||||
Cash flows expected to be collected at acquisition | $ | 1,781 | $ | 1,781 | ||||
| ||||||||
Fair value of acquired loans at acquisition | $ | 1,781 | $ | 1,781 | ||||
| ||||||||
Income is not recognized on purchased credit impaired loans if the Company cannot reasonably estimate cash flows expected to be collected. The carrying amounts of such loans as of June 30, 2019 and December 31, 2018 are as follows:
(dollars in thousands) | 2019 | 2018 | ||||||||||
| (dollars in thousands) | 2018 | |||||||||||
Loans at beginning of year | $ | — | $ | 714 | $ | - | ||||||
| ||||||||||||
Loans purchased during the year | $ | 1,781 | $ | - | $ | 1,781 | ||||||
| ||||||||||||
Loans at September 30 | $ | 1,679 | ||||||||||
| ||||||||||||
Loans at end of period | $ | 683 | $ | 714 | ||||||||
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 6.6. 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-monthsix-month and three-month periods ended SeptemberJune 30, 20182019 and 2017.2018.
| Nine Months Ended September 30, | Three Months Ended September 30, | Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||
| (dollars in thousands) | 2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||
Service cost | $ | — | $ | — | $ | — | $ | — | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Interest cost | 129 | 144 | 43 | 48 | 92 | 86 | 46 | 43 | ||||||||||||||||||||||||
Expected return on plan assets | (432 | ) | (414 | ) | (144 | ) | (138 | ) | (276 | ) | (288 | ) | (138 | ) | (144 | ) | ||||||||||||||||
Amortization of prior service cost | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||
Recognized net loss due to settlement | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||
Recognized net actuarial (gain)/loss | 24 | 21 | 8 | 7 | 20 | 16 | 10 | 8 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net periodic benefit cost | $ | (279 | ) | $ | (249 | ) | $ | (93 | ) | $ | (83 | ) | $ | (164 | ) | $ | (186 | ) | $ | (82 | ) | $ | (93 | ) | ||||||||
|
|
|
| |||||||||||||||||||||||||||||
It has been Company practice to contribute the maximumtax-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, 20172018 and there is no required contribution for 2018.2019. Based on this we do not anticipate making a contribution to the plan in 2018.2019.
Note 7. Goodwill and Intangible Assets
Goodwill
The change in goodwill during the nine-monthsix-month period ended SeptemberJune 30, 2019 and for the year ended December 31, 2018 is as follows:
| (dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||||||
| (dollars in thousands) | September 30, 2018 | |||||||||||
Beginning of year | $ | — | $ | 3,198 | $ | - | ||||||
Acquired goodwill as result of Great State merger | 3,764 | 59 | 3,198 | |||||||||
Impairment | — | - | - | |||||||||
| ||||||||||||
End of the period | $ | 3,764 | $ | 3,257 | $ | 3,198 | ||||||
| ||||||||||||
Intangible Assets
The following table presents the gross carrying amount and accumulated amortizationactivity for the Company’s core deposit intangible assets, which are the only identifiable intangible assets subject to amortization. Core deposit intangibles at SeptemberJune 30, 20182019 and December 31, 20172018 are as follows:
| (dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||||||||||
| (dollars in thousands) | September 30, 2018 | December 31, 2017 | ||||||||||||||
Gross carrying amount | $ | 4,894 | $ | 2,469 | ||||||||||||
Accumulated amortization | (783 | ) | (424 | ) | ||||||||||||
|
| |||||||||||||||
Balance at beginning of year, net | $ | 3,892 | $ | 2,045 | ||||||||||||
Core deposit intangible as result of Great State merger | - | 2,425 | ||||||||||||||
Amortization expense | (437 | ) | (578 | ) | ||||||||||||
Net book value | $ | 4,111 | $ | 2,045 | $ | 3,455 | $ | 3,892 | ||||||||
|
| |||||||||||||||
Aggregate amortization expense was $359$437 thousand and $212$140 thousand for the nine-monthsix-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively. Aggregate amortization expense was $219$218 thousand and $70 thousand for the three-month periods ended SeptemberJune 30, 20182019 and 2017,2018, respectively.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 8. 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 withOff-Balance Sheet Risk
The Bank is party to financial instruments withoff-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 foron-balance sheet instruments. A summary of the Bank’s commitments at SeptemberJune 30, 20182019 and December 31, 20172018 is as follows:
| (dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||||||||||
| (dollars in thousands) | September 30, 2018 | December 31, 2017 | ||||||||||||||
Commitments to extend credit | $ | 72,081 | $ | 56,912 | $ | 77,109 | $ | 76,977 | ||||||||
Standby letters of credit | 1,097 | 1,106 | 1,290 | 1,227 | ||||||||||||
|
| $ | 78,399 | $ | 78,204 | |||||||||||
| $ | 73,178 | $ | 58,018 | |||||||||||||
|
| |||||||||||||||
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 acase-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 3.4. 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.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 9.9. 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 SeptemberJune 30, 20182019 and December 31, 2017.2018. 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. Fornon-marketable equity securities such as Federal Home Loan Bank and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of the fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
For loans, the carrying amount is net of unearned income and the allowance for loan losses. In accordance with the prospective adoption of ASUNo. 2016-01, the fair value of loans as of SeptemberJune 30, 2019 and December 31, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.
| Fair Value Measurements | Fair Value Measurements | |||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Carrying Amount |
Fair Value | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
Financial Instruments – Assets | ||||||||||||||||||||||||||||||||||||||||
Net Loans | $ | 534,015 | $ | 529,053 | $ | — | $ | 528,631 | $ | 422 | $ | 546,002 | $ | 535,187 | $ | - | $ | 534,983 | $ | 204 | ||||||||||||||||||||
Financial Instruments – Liabilities | ||||||||||||||||||||||||||||||||||||||||
Time Deposits | 186,395 | 181,355 | — | 181,355 | — | 184,004 | 183,669 | - | 183,669 | - | ||||||||||||||||||||||||||||||
FHLB Advances | 1,000 | 999 | 999 | — | — | |||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Financial Instruments – Assets | ||||||||||||||||||||||||||||||||||||||||
Net Loans | $ | 421,418 | $ | 417,229 | $ | — | $ | 416,426 | $ | 803 | $ | 532,970 | $ | 529,155 | $ | - | $ | 528,784 | $ | 371 | ||||||||||||||||||||
Financial Instruments – Liabilities | ||||||||||||||||||||||||||||||||||||||||
Time Deposits | 147,725 | 144,656 | — | 144,656 | — | 180,143 | 176,188 | - | 176,188 | - | ||||||||||||||||||||||||||||||
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.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 9.9. 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 activeover-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 SeptemberJune 30, 2018,2019, 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.
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 9.9. Financial Instruments, continued
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price the Company records the foreclosed asset as nonrecurring Level 2. When the fair value of the collateral is based on either an external or internal appraisal and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
Assets Recorded at Fair Value on a Recurring Basis
(dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
| (dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||
Investment securities available for sale | ||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 243 | $ | — | $ | 243 | $ | — | $ | 250 | $ | - | $ | 250 | $ | - | ||||||||||||||||
Mortgage-backed securities | 25,112 | — | 25,112 | — | 23,964 | - | 23,964 | - | ||||||||||||||||||||||||
Corporate securities | 2,829 | — | 2,829 | — | 2,886 | - | 2,886 | - | ||||||||||||||||||||||||
State and municipal securities | 17,603 | — | 17,603 | — | 13,996 | - | 13,996 | - | ||||||||||||||||||||||||
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Total assets at fair value | $ | 45,787 | $ | — | $ | 45,787 | $ | — | $ | 41,096 | $ | - | $ | 41,096 | $ | - | ||||||||||||||||
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December 31, 2017 | ||||||||||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||
Investment securities available for sale | ||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | 245 | $ | - | $ | 245 | $ | - | ||||||||||||||||||||||||
Mortgage-backed securities | $ | 28,154 | $ | — | $ | 28,154 | $ | — | 24,763 | - | 24,763 | - | ||||||||||||||||||||
Corporate securities | 2,936 | — | 2,936 | — | 2,789 | - | 2,789 | - | ||||||||||||||||||||||||
State and municipal securities | 19,585 | — | 19,585 | — | 17,631 | - | 17,631 | - | ||||||||||||||||||||||||
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Total assets at fair value | $ | 50,675 | $ | — | $ | 50,675 | $ | — | $ | 45,428 | $ | - | $ | 45,428 | $ | - | ||||||||||||||||
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No liabilities were recorded at fair value on a recurring basis as of SeptemberJune 30, 20182019 and December 31, 2017.2018. There were no significant transfers between levels during the ninesix and three month periods ended SeptemberJune 30, 20182019 and the year ended December 31, 2017.2018.
Assets Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. No liabilities were recorded at fair value on a nonrecurring basis at SeptemberJune 30, 20182019 and December 31, 2017.2018. 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 | ||||||||||||||||||||||||||||
| (dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||
Impaired loans | $ | 422 | $ | — | $ | — | $ | 422 | $ | 204 | $ | - | $ | - | $ | 204 | ||||||||||||||||
Foreclosed assets | 15 | — | — | 15 | - | - | - | - | ||||||||||||||||||||||||
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Total assets at fair value | $ | 437 | $ | — | $ | — | $ | 437 | $ | 204 | $ | - | $ | - | $ | 204 | ||||||||||||||||
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| (dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||
Impaired loans | $ | 803 | $ | — | $ | — | $ | 803 | ||||||||||||||||||||||||
Foreclosed assets | — | — | — | — | ||||||||||||||||||||||||||||
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Total assets at fair value | $ | 803 | $ | — | $ | — | $ | 803 | ||||||||||||||||||||||||
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(dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
December 31, 2018 | ||||||||||||||||
Impaired loans | $ | 371 | $ | - | $ | - | $ | 371 | ||||||||
Foreclosed assets | 753 | - | - | 753 | ||||||||||||
Total assets at fair value | $ | 1,124 | $ | - | $ | - | $ | 1,124 | ||||||||
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 9.9. Financial Instruments, continued
Assets Recorded at Fair Value on a Nonrecurring Basis
For Level 3 assets measured at fair value on a recurring ornon-recurring basis as of SeptemberJune 30, 20182019 and December 31, 2017,2018, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value at June 30, 2019 | Fair Value at December 31, 2018 |
Valuation Technique | Significant Unobservable Inputs | General Range of Significant Unobservable Input Values | ||||||||||||||||||||||||||
| Fair Value at September 30, 2018 | Fair Value at December 31, 2017 | Valuation Technique | Significant | General Range of Significant Unobservable Input Values | ||||||||||||||||||||||||||
Impaired Loans | $ | 422 | $ | 803 | Appraised Value/Discounted Cash Flows/Market Value of Note | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 – 10% | $ | 204 | $ | 371 | Appraised Value/Discounted Cash Flows/Market Value of Note | Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell | 0 | – | 10% | ||||||||||||||
Other Real Estate Owned | $ | 15 | $ | — | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 – 10% | $ | - | $ | 753 | Appraised Value/Comparable Sales/Other Estimates from Independent Sources | Discounts to reflect current market conditions and estimated costs to sell | 0 | – | 10% | ||||||||||||||
Note 10.10. 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, issued in February 2015, and is no longernot obligated to report consolidated regulatory capital. The Bank’s actual capital amounts and ratios are presented in the following table as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. These ratios comply with Federal Reserve rules to align with the Basel III Capital requirements effective January 1, 2015.
| Actual | For Capital Adequacy Purposes | To Be Well- Capitalized | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
(to risk weighted assets) | $ | 69,536 | 12.68 | % | $ | 43,866 | 8.00 | % | $ | 54,832 | 10.00 | % | ||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
(to risk weighted assets) | $ | 66,063 | 12.05 | % | $ | 32,899 | 6.00 | % | $ | 43,866 | 8.00 | % | ||||||||||||
Common Equity Tier 1 | ||||||||||||||||||||||||
(to risk weighted assets) | $ | 66,063 | 12.05 | % | $ | 24,674 | 4.50 | % | $ | 35,641 | 6.50 | % | ||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
(to average total assets) | $ | 66,063 | 9.78 | % | $ | 27,033 | 4.00 | % | $ | 33,792 | 5.00 | % | ||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Total Capital | ||||||||||||||||||||||||
(to risk weighted assets) | $ | 56,962 | 13.14 | % | $ | 34,688 | 8.00 | % | $ | 43,360 | 10.00 | % | ||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
(to risk weighted assets) | $ | 53,483 | �� | 12.33 | % | $ | 26,016 | 6.00 | % | $ | 34,688 | 8.00 | % | |||||||||||
Common Equity Tier 1 | ||||||||||||||||||||||||
(to risk weighted assets) | $ | 53,483 | 12.33 | % | $ | 19,512 | 4.50 | % | $ | 28,184 | 6.50 | % | ||||||||||||
Tier 1 Capital | ||||||||||||||||||||||||
(to average total assets) | $ | 53,483 | 9.81 | % | $ | 21,808 | 4.00 | % | $ | 27,260 | 5.00 | % | ||||||||||||
Actual | For Capital Adequacy Purposes | To Be Well- Capitalized | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||
Total Capital (to risk weighted assets) | $ | 75,061 | 13.53 | % | $ | 44,398 | 8.00 | % | $ | 55,497 | 10.00 | % | ||||||||||||
Tier 1 Capital (to risk weighted assets) | $ | 71,213 | 12.83 | % | $ | 33,298 | 6.00 | % | $ | 44,398 | 8.00 | % | ||||||||||||
Common Equity Tier 1 (to risk weighted assets) | $ | 71,213 | 12.83 | % | $ | 24,974 | 4.50 | % | $ | 36,073 | 6.50 | % | ||||||||||||
Tier 1 Capital (to average total assets) | $ | 71,213 | 10.65 | % | $ | 26,753 | 4.00 | % | $ | 33,442 | 5.00 | % | ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Total Capital (to risk weighted assets) | $ | 71,424 | 13.00 | % | $ | 43,943 | 8.00 | % | $ | 54,929 | 10.00 | % | ||||||||||||
Tier 1 Capital (to risk weighted assets) | $ | 67,899 | 12.36 | % | $ | 32,958 | 6.00 | % | $ | 43,943 | 8.00 | % | ||||||||||||
Common Equity Tier 1 (to risk weighted assets) | $ | 67,899 | 12.36 | % | $ | 24,718 | 4.50 | % | $ | 35,704 | 6.50 | % | ||||||||||||
Tier 1 Capital (to average total assets) | $ | 67,899 | 10.08 | % | $ | 26,932 | 4.00 | % | $ | 33,664 | 5.00 | % | ||||||||||||
Parkway Acquisition Corp. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 11.11. 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 evaluated events occurring subsequent to the balance sheet date through the date these financial statements were issued, determining no events require additional disclosure in these consolidated financial statements.
|
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 Form10-K for the year ended December 31, 2017.2018.
Critical Accounting Policies
For a discussion of the Company’s critical accounting policies, including its allowance for loan losses, see Note 1 in the Notes to Consolidated Financial Statements above, or the Company’s Annual Report on Form10-K for the year ended December 31, 2017.2018.
Results of Operations
Results of Operations for the Three Months ended SeptemberJune 30, 20182019 and 20172018
Parkway recorded net income of $1.7 million, or $0.28 per share for the quarter ended SeptemberJune 30, 20182019 compared to net income of $1.2$1.0 million, or $0.23$0.20 per share for the same period in 2017.Pre-tax earnings2018. Income tax expense totaled $411 thousand for the second quarter of 2019 compared to $244 thousand for the second quarter of 2018. Net income before income taxes totaled $2.1 million or $0.35 per share for the third quarter of 2018ended June 30, 2019 compared topre-tax earnings of $1.7 $1.2 million or $0.25 per share for the same period in 2017. The increase in net income2018. Second quarter earnings represented an annualized return on average assets (“ROAA”) of $558 thousand from1.03% and an annualized return on average tangible equity (“ROATE”) of 9.78% for the third quarter of 2017ended June 30, 2019, compared to 0.73% and 7.20%, respectively, for the third quarter of 2018 was due primarily to increased revenues resulting from the merger with Great State which was completed on July 1,ended June 30, 2018.
Total interest income increased by $1.9$2.0 million for the quarter ended SeptemberJune 30, 20182019 compared to the quarter ended SeptemberJune 30, 2017,2018, while interest expense on deposits increased by $188$303 thousand over the same period. The increase in interest income was attributable primarily to the merger with Great State which added approximately $95.1 million in loans to the Company’s earning assets. Accretion of purchased loan discounts increased interest income by $443$395 thousand in the thirdsecond quarter of 20182019 compared to just $227$129 thousand in the thirdsecond quarter of 2017,2018, representing an increase of $216$266 thousand. The increase came mainly as a result of the Great State merger.
Interest expense on deposits increased by $188$303 thousand for the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018, due to the addition of approximately $110.5 million in interest-bearing deposits from the Great State merger. Amortization of premiums on acquired time deposits, which reduces interest expense, totaled $144$103 thousand in the thirdsecond quarter of 2018,2019, compared to just $45$24 thousand in the thirdsecond quarter of 2017,2018, representing an increase of $99$79 thousand. The increase again, was primarilyagain due to the Great State merger.
The provision for loan losses was $113$276 thousand for the quarter ended SeptemberJune 30, 2018,2019, compared to $75$91 thousand for the quarter ended SeptemberJune 30, 2017.2018. The increase in the provision was due mainly to growth in the Bank’s loan portfolio as total loans increased by $16.2 million in the second quarter of 2019 compared to $6.7 million in the second quarter of 2018, combined with an increase in classified assets during the same period. The reserve for loan losses at SeptemberJune 30, 20182019 was approximately 0.64%0.69% of total loans, compared to 0.83%0.76% at SeptemberJune 30, 2017. 2018.
Management’s estimate of probable credit losses inherent in the acquired Great State loan portfolio was reflected as a purchase discount which will continue to be accreted into income over the remaining life of the acquired loans in addition to the previously acquired loan portfolio from the merger with Cardinal Bankshares Corporation.Cardinal. As of SeptemberJune 30, 2018,2019, the remaining unaccreted discount on the acquired loan portfolios totaled $5.5$4.0 million.
Total noninterest income was $1.2 million This remaining unaccreted discount can be used for credit losses if a loss occurs on individual loans in the third quarterpurchased portfolios. When combined with the allowance for loan losses of 2018 compared to $1.0$3.8 million in the third quarterat June 30, 2019, we have a reserve of 2017. Service charges on deposit accounts increased $63 thousand due to the merger with Great State as well as nonrecurring income from life insurance contracts totaling $74 thousand.approximately 1.42% of total loans, a non-GAAP measure.
Total noninterest expenses increased by $1.4 million for the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017, due to the Great State acquisition as well as an increase in employee benefit costs, as actual health insurance claims have exceeded both current year expected claims as well as prior year actual claims. As a result
Part I. Financial Information
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations, continued
Results of Operations for the Three Months ended SeptemberJune 30, 2019 and 2018, continued
Total noninterest income was $1.3 million in the second quarter of 2019 compared to $1.3 million in the second quarter of 2018. Excluding nonrecurring income from life insurance contracts totaling $229 thousand in the second quarter of 2018 and 2017, continuednet gains from the sale of bank premises totaling $121 thousand in the second quarter of 2019, noninterest income increased $107 thousand for the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018. Deposit account-based service charges and fees increased due to the increased number of accounts and deposit balances resulting from the Great State merger. Mortgage origination fees increased by $59 thousand in the quarter to quarter comparison due to increased demand and new markets as a result of the Great State merger.
Total noninterest expenses increased by $617 thousand for the quarter ended June 30, 2019 compared to the quarter ended June 30, 2018. Salary and benefit costs increased by $495 thousand due to the increase in employees resulting from the Great State acquisition. Occupancy and equipment expenses increased by $87 thousand and data processing expenses increased by $62 thousand from the second quarter of 2018 to 2019, due to the addition of three branch facilities and two loan production offices from the Great State merger. Amortization of core deposit intangibles increased by $148 thousand in the quarter to quarter comparison; however, this increase was offset by a decrease of $299 thousand in merger related expenses as no merger related expenses occurred during the second quarter of 2019.
Income tax expense decreased from $520increased by $167 thousand for the quarter ended SeptemberJune 30, 20172019 compared to $420 thousand for the quarter ended SeptemberJune 30, 2018, despite the increase inpre-tax earnings, due to a reduction in tax rates pursuantmainly to the Tax Cuts and Jobs Act, which became effective January 1, 2018 and reduced the Company’s marginal federal$903 thousand increase in net income tax rate from 34% to 21%.before income taxes.
Results of Operations for the NineSix Months ended SeptemberJune 30, 20182019 and 20172018
For the ninesix months ended SeptemberJune 30, 2018,2019, total interest income increased by $2.0$4.1 million compared to the nine-monthsix-month period ended SeptemberJune 30, 2017. The2018. As noted in the above discussion, interest income on loans was impacted by a increase in interest income was attributable primarilythe accretion of purchase discounts applied to loansthe loan portfolios acquired in the merger with Great State as discussed above.and Cardinal mergers. Accretion of purchased loan discounts increased interest income by $803$921 thousand in the first ninesix months of 20172019 compared to just $730$287 thousand in the first ninesix months of 2018, representing a decreasean increase of $73$634 thousand. Earnings for the first six months of 2019 represented an annualized ROAA of 1.02% and an annualized ROATE of 9.75%, compared to 0.73% and 7.32%, respectively, for the first six months of 2018.
Interest expense on deposits increased by $189$532 thousand for the six-months ended June 30, 2019 compared to the same period last year due to the addition of interest-bearing deposits from the Great State merger. Amortization of premiums on acquired time deposits, which reduces interest expense, totaled $197$219 thousand in the first ninesix months of 2018,2019, compared to $192$53 thousand in the first ninesix months of 2017.2018, representing an increase of $166 thousand. The increase was again due to the Great State merger. Interest on borrowings increaseddecreased by $32$27 thousand due to overnight borrowings which were accessed in the second and third quartersquarter of 2018, along with FHLB Advances that were acquired as partbut not in the same period of the Great State merger.2019.
The provision for loan losses for the nine-monthsix-month period ended SeptemberJune 30, 20182019 was $258$514 thousand, compared to $233$145 thousand for the nine-monthsix-month period ended SeptemberJune 30, 2017.2018. The increase in 2019 was due to the overall loan growth experienced in the first six months of 2019 compared to 2018, combined with an increase in classified assets during the same period. The Bank’s loan portfolio increased $13.4 million in the first six months of 2019, compared to $7.9 million in the first six months of 2018.
Noninterest income increased by $519$108 thousand for the first ninesix months of 2018,2019, compared to the same period in 2017. Service2018. Deposit account-based service charges on deposit accountsand fees increased $145by $179 thousand primarily due to the merger with Great State as well asgrowth and expansion of fee-based products. As noted above nonrecurring gains from bank premise sales totaled $121 thousand in 2019, and nonrecurring proceeds from life insurance contracts totaling $303totaled $229 thousand in 2018. Securities gains decreasedExcluding these nonrecurring transactions, noninterest income increased by $121$216 thousand for the nine-monthsix-month period ended SeptemberJune 30, 20182019, compared to the same period last year as increases in interest rates led to decreases inyear.
Part I. Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations, continued
Results of Operations for the market value of the Bank’s investment securities portfolio.Six Months ended June 30, 2019 and 2018, continued
Total noninterest expenses increased by $1.3$1.6 million for the nine-monthsix-month period ended SeptemberJune 30, 2018,2019, compared to the same period in 2017. The2018. Salary and benefit cost increased by $1.1 million due to the increase was due primarily toin employees resulting from the Great State acquisitionacquisition. Occupancy and the increase in benefit costs discussed above. Salaries and employee benefitsequipment expenses increased by $930$183 thousand inand data processing expenses increased by $129 thousand from the first six months of 2018 to 2019, due to the addition of three branch facilities and two loan production offices from the Great State merger. Amortization of core deposit intangibles increased by $297 thousand for the first six months of 2019, compared to 2017.same period in 2018. This increase was offset by a decrease in merger related expenses of $497 thousand as no merger related expenses occurred during 2019.
In total, income before taxes increased by $885 thousand$1.7 million over the first ninesix months of 20182019 compared to the first ninesix months of 2017.2018. Income tax expense decreasedincreased by $202$303 thousand over the prior year, resulting in an increase in net income of $1.1$1.4 million for the ninesix months ended SeptemberJune 30, 20182019, compared to the same period in 2017.2018.
Financial Condition
Effective July 1,
Total assets remained flat from December 31, 2018 the Company completed its previously announced merger with Great State, pursuant to the AgreementJune 30, 2019. Cash and Plancash equivalent balances decreased by $6.9 million and investment securities decreased by $4.3 million. The reduction in cash and investments was used to fund total loan growth of Merger, dated March 1, 2018. In connection with the merger with Great State, the Company acquired $145.5$13.3 million as well as a reduction in assets at fair value, including $95.1 million in loans. The Company also assumed $133.6 million of liabilities at fair value, including $130.6 million of total deposits with a core deposit intangible asset recorded of $2.4 million, and goodwill of $3.8$3.2 million.
With the Great State merger, total assets increased
Total deposits decreased by $131.7$3.2 million from December 31, 20172018 to SeptemberJune 30, 2018. Net loans increased by $112.6 million, federal funds sold increased by $11.4 million, and interest-bearing deposits in banks increased by $741 thousand.
Part I. Financial Information
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Financial Condition, continued
Total deposits increased by $112.9 million from December 31, 2017 to September 30, 2018 as a result of the merger.2019. Noninterest bearing deposits increased by $21.1$1.0 million from December 31, 20172018 to SeptemberJune 30, 2018,2019, while interest bearing deposits increaseddecreased by $91.8$4.2 million over the same time period. FHLB Advances increased by $1.0 million dueCompetition for deposits continues to the merger with Great State.increase in many of our markets, however, our liquidity position has continued to allow us to fund our balance sheet without “paying up” for high rate, volatile deposits. As a result, our net interest margin remains strong at a rate of 4.54%.
Nonperforming assets, including nonaccrual loans, loans past due more than ninety days and foreclosed assets, increaseddecreased from $5.34$6.33 million at December 31, 20172018 to $5.85$5.40 million at SeptemberJune 30, 2018.2019. Foreclosed assets consistconsisted of one property totaling $15$753 thousand as of September 30, 2018.December 31, 2018, which was subsequently sold during the first quarter of 2019. There were no loans past due more than ninety days and still accruing interest at SeptemberJune 30, 20182019 and December 31, 2017.2018.
Nonaccrual loans increaseddecreased from $5.34$5.58 million at December 31, 20172018 to $5.84$5.40 million at SeptemberJune 30, 2018.2019. 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:
| (dollars in thousands) | June 30, 2019 | December 31, 2018 | ||||||||||||||
| (dollars in thousands) | September 30, 2018 | December 31, 2017 | ||||||||||||||
Nonperforming Assets | ||||||||||||||||
Nonaccrual loans | $ | 5,839 | $ | 5,335 | $ | 5,404 | $ | 5,579 | ||||||||
Loans past due 90 days or more and still accruing interest | — | — | - | - | ||||||||||||
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Total nonperforming loans | 5,839 | 5,335 | 5,404 | 5,579 | ||||||||||||
Foreclosed assets | 15 | — | - | 753 | ||||||||||||
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Total nonperforming assets | $ | 5,854 | $ | 5,335 | $ | 5,404 | $ | 6,332 | ||||||||
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Nonperforming assets to total assets | 0.86 | % | 0.97 | % | 0.79 | % | 0.93 | % | ||||||||
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Nonperforming loans to total loans | 1.09 | % | 1.26 | % | 0.98 | % | 1.04 | % | ||||||||
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Part I. Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition, continued
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.
At SeptemberJune 30, 2018,2019, the allowance for loan losses included $320$286 thousand specifically reserved for impaired loans in the amount of $7.8$6.7 million. Based on impairment analysis, loans totaling $3.1$3.0 million were also considered to be impaired but did not require a specific reserve or the related reserve had previously beencharged-off. Impaired loans at December 31, 20172018 totaled $12.3$10.3 million, of which $8.6$6.9 million required specific reserves of $394$300 thousand.
Part I. Financial Information
|
Financial Condition, continued
Summary of Loan Loss Experience
| (dollars in thousands) | Six months ended June 30, 2019 | Six months ended June 30, 2018 | Year ended December 31, 2018 | |||||||||
Total loans outstanding at end of period | $ | 549,820 | $ | 432,780 | $ | 536,465 | ||||||
Allowance for loan losses, beginning of period | $ | 3,495 | $ | 3,453 | $ | 3,453 | ||||||
Charge offs: | ||||||||||||
Construction & development | - | (20 | ) | (20 | ) | |||||||
Farmland | (14 | ) | - | - | ||||||||
Residential | (32 | ) | (117 | ) | (117 | ) | ||||||
Commercial mortgage | (41 | ) | (142 | ) | (142 | ) | ||||||
Commercial & agricultural | (63 | ) | - | (23 | ) | |||||||
Consumer & other | (95 | ) | (109 | ) | (175 | ) | ||||||
Total charge-offs | (245 | ) | (388 | ) | (477 | ) | ||||||
Recoveries: | ||||||||||||
Construction & development | - | - | - | |||||||||
Farmland | - | 34 | 34 | |||||||||
Residential | 8 | 19 | 44 | |||||||||
Commercial mortgage | 28 | - | 69 | |||||||||
Commercial & agricultural | 4 | 4 | 9 | |||||||||
Consumer & other | 14 | 14 | 38 | |||||||||
Total recoveries | 54 | 71 | 194 | |||||||||
Net charge-offs | (191 | ) | (317 | ) | (283 | ) | ||||||
Provision for allowance | 514 | 145 | 325 | |||||||||
Allowance for loan losses at end of period | $ | 3,818 | $ | 3,281 | $ | 3,495 | ||||||
Ratios: | ||||||||||||
Allowance for loan losses to loans at end of period | 0.69 | % | 0.76 | % | 0.65 | % | ||||||
Net charge-offs to allowance for loan losses | 2.38 | % | 9.66 | % | 8.10 | % | ||||||
Net charge-offs to provisions for loan losses | 17.70 | % | 218.62 | % | 87.08 | % | ||||||
| (dollars in thousands) | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 | Year ended December 31, 2017 | |||||||||
Total loans outstanding at end of period | $ | 537,457 | $ | 423,273 | $ | 424,871 | ||||||
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Allowance for loan losses, beginning of period | $ | 3,453 | $ | 3,420 | $ | 3,420 | ||||||
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Charge offs: | ||||||||||||
Construction & development | (20 | ) | — | (33 | ) | |||||||
Farmland | — | (34 | ) | (34 | ) | |||||||
Residential | (117 | ) | (89 | ) | (89 | ) | ||||||
Commercial mortgage | (142 | ) | (42 | ) | (59 | ) | ||||||
Commercial & agricultural | — | (27 | ) | (27 | ) | |||||||
Consumer & other | (139 | ) | (51 | ) | (76 | ) | ||||||
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Total charge-offs | (418 | ) | (243 | ) | (318 | ) | ||||||
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Recoveries: | ||||||||||||
Construction & development | — | 56 | 56 | |||||||||
Farmland | 34 | — | — | |||||||||
Residential | 39 | 19 | 23 | |||||||||
Commercial mortgage | 48 | — | — | |||||||||
Commercial & agricultural | 6 | 31 | 33 | |||||||||
Consumer & other | 24 | 14 | 22 | |||||||||
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Total recoveries | 151 | 120 | 134 | |||||||||
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Net charge-offs | (267 | ) | (123 | ) | (184 | ) | ||||||
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Provision for allowance | 258 | 233 | 217 | |||||||||
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Allowance for loan losses at end of period | $ | 3,444 | $ | 3,530 | $ | 3,453 | ||||||
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Ratios: | ||||||||||||
Allowance for loan losses to loans at end of period | 0.64 | % | 0.83 | % | 0.81 | % | ||||||
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Net charge-offs to allowance for loan losses | 7.75 | % | 3.48 | % | 5.33 | % | ||||||
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Net charge-offs to provisions for loan losses | 103.49 | % | 52.79 | % | 84.79 | % | ||||||
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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 ofnon-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 SeptemberJune 30, 20182019 totaled $6.6$5.4 million, or 1.24%0.99% of total loans. Historicalcharge-off rates in this category have not varied significantly from other real estate secured loans.
Part I. Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition, continued
Stockholders’ equity totaled $74.4$79.0 million at SeptemberJune 30, 20182019 compared to $57.2$75.6 million at December 31, 2017, an increase of $17.2 million. Of this increase, $15.5 million is due to the issuance of common stock in connection with the merger with Great State.2018. The remaining increase was due to earnings of $3.7$3.4 million, less a net change in unrealized depreciationplus other comprehensive income of investment securities classified as available for sale totaling $846 thousand, and$1.0 million, less the payment of dividends of $1.1 million.$746 thousand, less common stock repurchases of $235 thousand. Book value increased from $11.39$12.17 per share at December 31, 20172018 to $11.98$12.76 per share at SeptemberJune 30, 2018.2019. Skyline remains well capitalized with Common equity tier 1 capital, Tier 1 risk-based capital, Total risk based capital, and Tier 1 leverage ratios of 12.05%12.83%, 12.05%12.83%, 12.68%13.53%, and 9.78%10.65%, respectively, as of SeptemberJune 30, 2018.
Part I. Financial Information
|
2019.
Liquidity
Liquidity is the ability to convert assets to cash to fund depositors’ withdrawals or borrowers’ loans without significant loss.Unsecuredloss.Unsecured federal fund lines available from correspondent banks totaled $28.6$40.5 million at SeptemberJune 30, 2018.2019. The Bank had no balances outstanding on these lines as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively. In addition, the Bank has the ability to borrow up to approximately $135.9$168.3 million from the Federal Home Loan Bank (“FHLB”), subject to the pledging of collateral. The Bank had $1.0 million inno FHLB Advances outstanding at SeptemberJune 30, 2018 that matured2019 and was paid in OctoberDecember 31, 2018. The Bank had no debt outstanding classified as long-term at SeptemberJune 30, 20182019 or December 31, 2017.2018.
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.
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 and holding companies wereare also subject to the new BASEL III requirements, starting the first quarter of 2016. A newwhich includes as part of the capital ratios profile is 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 certainoff-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 tooff-balance sheet activities. At SeptemberJune 30, 2018,2019, the Company and the Bank both exceeded minimum regulatory capital requirements and the Bank is considered to be “well capitalized.”
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 the benefits of or other expectations regarding the Cardinal merger and the Great State merger, 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,”"believe," "expect," "intend," "anticipate," "estimate," or “project”"project" or similar expressions. Our ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the combined company and its subsidiaries include, but are not limited to: ourthe ability to implement integration plans associated with the Great State merger, which integration may be more difficult, time-consuming or costly than expected; disruptions to customer and employee relationships and business operations caused by the Great State merger or the Cardinal merger;otherwise; the ability to achieve the expected revenues, cost savings and synergies contemplated by the Great State merger or the Cardinal merger within the expected time frame, or at all; changes in interest rates, general economic conditions; the effect of changes in banking, tax and other laws and regulations and interpretations or guidance thereunder; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; 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 Form10-K for the year ended December 31, 2017.2018. 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 theseforward-looking forward‐looking statements, whether as a result of new information, future events or otherwise.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required.
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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 Rules13a-15(e) and15d-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.
On July 1, 2018, the Company acquired Great State. As permitted per SEC guidance for newly-acquired businesses, the Company intends to exclude the operations
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 Form10-Q, the factors discussed under “Risk Factors” in our Form10-K for the year ended December 31, 20172018 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 Form10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Mine Safety Disclosures |
None
Item 5. | Other Information |
None
Item 6. |
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10.1 | |||
10.2 | |||
10.3 | |||
31.1 |
31.2 | |||
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 Form10-Q for the quarter ended | ||
Part II. Other Information
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. | ||||||||
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Date: August 14, 2019 | ||||||||
By: | /s/ Blake M. Edwards | |||||||
Blake M. Edwards | ||||||||
President and Chief Executive Officer | ||||||||
By: | /s/ Lori C. Vaught | ||
Lori C. Vaught | |||
Chief Financial Officer |
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