Note

Business Combinations

July 1, 2018,

Parkway completed its merger with Great State as discussed above in Note

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 were subject to review and refinement for up to

one

year following the merger date.

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			Fair Value				As Reported by
	Great State			Adjustments				Parkway
Assets

Cash and cash equivalents	$	25,761		$	-		-	$	25,761
Investment securities		19,630			(229	)	(a)		19,401
Restricted equity securities		523			-		-		523
Loans		97,549			(2,441	)	(b)		95,108
Allowance for loan losses		(1,436	)		1,436		(c)		-
Property and equipment		1,207			189		(d)		1,396
Intangible assets		-			2,425		(e)		2,425
Accrued interest receivable		334			-		-		334
Other assets		599			(151	)	(f)		448
Total assets acquired	$	144,167		$	1,229			$	145,396

Liabilities
Deposits	$	129,611		$	940		(g)	$	130,551
Borrowings		2,000			-		-		2,000
Accrued interest payable		40			-		-		40
Other liabilities		352			17		(h)		369
Total liabilities acquired	$	132,003		$	957			$	132,960

Net assets acquired									12,436
Elimination of Company’s existing investment in Great State									198
Stock consideration									15,495
Goodwill								$	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 valuation report on deposits assumed.

(h)

Reflects the fair value adjustment based on the Company’s evaluation of acquired other liabilities.

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 were subject to refinement for up to

one

year following the merger date.

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 ASC

310

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 ASC

310

20.

In determining the fair values of acquired loans without evidence of credit deterioration at the date of acquisition, management includes (i)

carryover of any previously recorded allowance for loan losses and (ii) an adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and grade assigned to each loan. This adjustment is then accreted into earnings as a yield adjustment, using the effective yield method, over the remaining life of each loan.

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.

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, 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

$2.0

million included in the Company’s consolidated statements of income for the year ended

December 31, 2018

are

not

included in the pro forma statements below.

	Year Ended
	December 31,
	2018
	(Unaudited)

Net interest income	$	24,262
Net income (a)	$	4,508

Basic and diluted weighted average shares outstanding (b)		6,213,275
Basic and diluted earnings per common share	$	1.07

(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.

It is impractical to disclose the net interest income, non-interest income, and net income of Great State from the acquisition date of

July 1, 2018

through

December 31, 2018

due to the system conversion that occurred on

September 7, 2018,

which resulted in the combining of the operations of Great State into Parkway.