Note 2. Business Combinations

On July 1, 2016, Parkway completed its merger with Grayson and Cardinal. Parkway had no material assets or liabilities and did not conduct any business prior to consummation of the merger except to perform its obligations under the merger agreement. As such, Grayson is considered the acquiring entity in this business combination for accounting purposes. Under the terms of the merger agreement, each share of Cardinal common stock was converted to the right to receive 1.30 shares of common stock of Parkway. There was no trading market and no market price for Parkway common stock on the date of the transaction. Parkway was quoted on the OTC Markets and began trading on August 31, 2016; however, Parkway is a new company and the stock is thinly traded. Grayson, as the accounting acquirer at the time of the merger, was also thinly traded and the limited number of shares traded prior to the acquisition were not considered indicative of trading value. Due to the limited trading history of Parkway and Grayson, the Company engaged a third party to determine the value of the transaction as well as the value of the consideration paid to Cardinal as a result of the transaction. The Company also 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.

The following table presents the Cardinal assets acquired and liabilities assumed as of July 1, 2016 as well as the related fair value adjustments and determination of purchase gain.


(dollars in thousands)	As Reported by Cardinal			Fair Value Adjustments				As Reported by Parkway
Assets
Cash and cash equivalents	$	11,698		$	—	—		$	11,698
Investment securities		59,327			(322)	(a	)		59,005
Restricted equity securities		1,308			—	—			1,308
Loans		164,044			(6,192)	(b	)		157,852
Allowance for loan losses		(2,123	)		2,123	(c	)		—
Cash value of life insurance		6,714			—	—			6,714
Property and equipment		5,384			1,039	(d	)		6,423
Intangible assets		—			2,469	(e	)		2,469
Accrued interest receivable		539			—	—			539
Other assets		2,450			3,968	(f	)		6,418

Total assets acquired	$	249,341		$	3,085			$	252,426

Liabilities
Deposits	$	218,671		$	602	(g	)	$	219,273
Borrowings		8,000			—	—			8,000
Accrued interest payable		35			—	—			35
Other liabilities		1,289			147	(h	)		1,436

Total liabilities acquired	$	227,995		$	749			$	228,744

Net assets acquired									23,682
Total consideration paid									23,500

Purchase gain								$	182

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 Cardinal’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 = 34%). Also recognizes partial reversal of Cardinal’s deferred tax asset valuation allowance.

(g)	Estimated fair value adjustment to time deposits based on the Company’s third party evaluation 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 Cardinal have been recorded at their estimated fair values and added to those of Grayson for periods following the merger date. Valuations of acquired Cardinal assets and liabilities may be refined 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 Financial Accounting Standards Board Accounting Standards Codification (“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.

The following table presents the assets and liabilities of Parkway and Grayson prior to the merger, the estimated fair value of Cardinal assets acquired and liabilities assumed, and the resulting estimated balance sheet of Parkway immediately following the merger on July 1, 2016.


(dollars in thousands)	Pre-Merger		Pre-Merger			Cardinal		Post-Merger
(dollars in thousands)	Parkway		Grayson			Acquired		Parkway
Assets
Cash and cash equivalents	$	—	$	13,117		$	11,698	$	24,815
Investment securities		—		33,847			59,005		92,852
Restricted equity securities		—		971			1,308		2,279
Loans		—		244,800			157,852		402,652
Allowance for loan losses		—		(3,309	)		—		(3,309	)
Cash value of life insurance		—		10,122			6,714		16,836
Foreclosed assets		—		95			—		95
Property and equipment		—		11,548			6,423		17,971
Goodwill and other intangible assets		—		—			2,469		2,469
Accrued interest receivable		—		1,253			539		1,792
Other assets		—		5,044			6,418		11,461

Total assets	$	—	$	317,488		$	252,426	$	569,913

Liabilities
Deposits	$	—	$	274,265		$	219,273	$	493,538
Borrowings		—		10,000			8,000		18,000
Accrued interest payable		—		96			35		131
Other liabilities		—		1,146			1,436		2,582

Total liabilities	$	—	$	285,507		$	228,744	$	514,251

Shareholders’ Equity	$	—	$	31,981		$	23,682	$	55,662

Supplemental Pro Forma Information (dollars in thousands except per share data)

The table below presents supplemental pro forma information as if the Cardinal acquisition had occurred at the beginning of the earliest period presented, which was January 1, 2015. 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 $484 thousand and $720 thousand are included in the Company’s consolidated statements of operations for the three months and nine months ended September 30, 2016 and are not included in the pro forma statements below.


	Three Months ended
	September 30,
	2016		2015
	(Unaudited)		(Unaudited)
Net interest income	$	5,046	$	2,966
Net income (a)	$	956	$	631
Basic and diluted weighted average shares outstanding (b)		5,021,376		5,021,376
Basic and diluted earnings per common share	$	0.19	$	0.13

	Nine Months ended
	September 30,
	2016		2015
	(Unaudited)		(Unaudited)
Net interest income	$	11,139	$	8,827
Net income (a)	$	2,267	$	1,943
Basic and diluted weighted average shares outstanding (b)		5,021,376		5,021,376
Basic and diluted earnings per common share	$	0.45	$	0.39

(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 Cardinal acquisition as of the earliest reporting date.