•       merging or consolidating with another bank holding company.

As a result, our ability to engage in certain strategic activities is conditioned on regulatory approval.

In addition, and subject to some exceptions, the BHCA and the Change in Bank Control Act require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company as defined in the statutes and regulations. These requirements make it more difficult for control of our company to change or for us to acquire substantial investments.

Financial Holding Company. As of March 4, 2016, the Company elected to become qualified as a financial holding company (FHC). The Gramm-Leach-Bliley Act (GLBA) created this category of bank holding companies. FHC’s may directly or indirectly through subsidiaries engage in financial activities and activities “incidental” or “complementary” to financial activities. Generally, aan FHC need not give prior notice of such activities, but must notify the Federal Reserve within 30 days after thean event.

The BHCA provides a long list of “financial” activities that may be engaged in by FHCs such as underwriting, brokering or selling insurance; providing financial or investment advice or underwriting, dealing in or making a market in securities.

There are other potential “financial” activities in which the Federal Reserve is permitted to designate as permitted financial or incidental to financial activities.

We do not currently undertake activities specifically permitted to us as aan FHC that are not otherwise permissible for bank holding companies not qualified as FHCs.

Bureau of Financial Institutions (BFI).Institutions. As a bank holding company registered with the BFI, we must provide the BFI with information concerning our financial condition, operations and management, among other reports required by the BFI. New Peoples is also examined by the BFI in addition to its Federal Reserve examinations. Similar to the BHCA, the Code of Virginia requires that the BFI approve the acquisition of direct or indirect ownership or control of more than 5% of the voting shares of any Virginia bank or bank holding company like us.

Payment of Dividends. New Peoples is a separate legal entity that derives the majority of its revenues from dividends paid to it by its subsidiaries. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, both New Peoples and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FDIC has the general authority to limit the dividends paid by FDIC insured banks if the FDIC deems the payment to be an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.

Capital Adequacy. The federal banking regulators have issued substantially similar capital requirements applicable to all banks and bank holding companies. In addition, those regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.

The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February, 2015 and does not report consolidated regulatory capital. With respect to the Bank, the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act (FDIA) were revised, effective as of January 1, 2015, to incorporate a new Common Equity Tier 1 (CET1) risk-based capital measure. The risk-based capital and leverage capital requirements under the final prompt corrective action regulationsFDIA are set forth in the following table:

The FDIA requires the federal banking regulators to take “prompt corrective action” if a depository institution does not meet minimum capital requirements as set forth above. Generally, a receiver or conservator for a bank that is “critically undercapitalized” must be appointed within specific time frames. The regulations also provide that a capital restoration plan must be filed within 45 days of the date a bank is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for a bank required to submit a capital restoration plan must guarantee the lesser of (i) an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by a regulator, or (ii) the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the bank is notified that it has maintained adequately capitalized status for specified time periods. Additional measures with respect to undercapitalized institutions include a prohibition on capital distributions, growth limits and restrictions on activities.

The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The final rules established minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The phase-in of the capital conservation buffer requirement began on January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until it was fully implemented at 2.5% on January 1, 2019. The final provisions for banks with $250 billion or less in total assets, such as the Bank, are set forth in the following table:

⁽¹⁾    The capital conservation buffer must be maintained in order for a banking organization to avoid being subject to limitations on capital distributions, including dividend payments, and discretionary bonus payments to executive officers.

The final rules include comprehensive guidance with respect to the measurement of risk-weighted assets.  For residential mortgages, Basel III retains the risk-weights contained in the prior capital rules, which assign a risk-weight of 50% to most first-lien exposures and 100% to other residential mortgage exposures.  The final rule increased the risk-weights associated with certain on-balance sheet assets, such as high volatility commercial real estate loans, and loans that are more than 90 days past due or in nonaccrual status. Capital requirements also increased for certain off-balance sheet exposures including, for example, loan commitments with an original maturity of one year or less.

Under the final rules, certain banking organizations, including the Company and the Bank, were permitted to make a one-time election to continue the prior treatment of excluding from regulatory capital most accumulated other comprehensive income (AOCI) components, including amounts relating to unrealized gains and losses on available-for-sale debt securities and amounts attributable to defined benefit post-retirement plans.  Institutions that elected to exclude most AOCI components from regulatory capital under Basel III will be able to avoid volatility that would otherwise be caused by things such as the impact of fluctuations in interest rates on the fair value of available-for-sale debt securities.  The Company and the Bank elected to exclude AOCI components from regulatory capital under Basel III.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements as set forth above.

On September 17, 2019, the federal banking regulators jointly issued a final rule required by the Economic Growth, Regulatory Reform and Consumer Protection Act (EGRRCPA) that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets, such as New Peoples and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or CBLR). Under the rule, which became effective on January 1, 2020, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework. The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020. In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive. One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework. It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater. The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement. It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement. We have not adopted the CBLR framework.

For further detail on capital and capital ratios, see discussion undercontained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” sections “Capital Resources” and “Liquidity,” containedand in Item 7,8, “Financial Statements and inSupplementary Data,” “Consolidated Financial Statements and Notes,” Note 21, “Capital,“Capital.” to the accompanying Consolidated Financial Statements contained in Item 8.

Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on banks and financial or bank holding companies and their bank subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, the Federal Reserve requires a bank or financial or bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. These requirements can restrict the ability of bank holding companies to deploy their capital as they otherwise might.

Interstate Banking and Branching. Banks in Virginia may branch without geographic restriction. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Bank holding companies may acquire banks in any state without regard to state law except for state laws requiring a minimum time a bank must be in existence to be acquired. The Code of Virginia generally permits out of state bank holding companies or banks to acquire Virginia banks or bank holding companies subject to regulatory approval. These laws have the effect of increasing competition in banking markets.

Monetary Policy. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The Federal Reserve’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of unsettled conditions in the national and international political environment, economy and money markets, as well as governmental fiscal and monetary policies, their impact on interest rates, deposit levels, loan demand or the business and earnings of the Bank is unpredictable.

Federal Reserve System. Depository institutions that maintain transaction accounts or nonpersonal time deposits are subject to reserve requirements. These reserve requirements are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.

Transactions with Affiliates. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. These provisions restrict the amount of, and provide conditions with respect to, loans, investments, transfers of assets and other transactions between New Peoples and the Bank.

Loans to Insiders. The Bank is subject to rules on the amount, terms and risks associated with loans to executive officers, directors, principal shareholders and their related interests.

Community Reinvestment Act. Under the Community Reinvestment Act, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practices. The Community Reinvestment Act emphasizes the delivery of bank products and services through branch locations in a bank’s market areas and requires banks to keep data reflecting their efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA (see below) may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “Satisfactory” rating in its latest Community Reinvestment Act examination. The Bank received a rating of “Satisfactory” at its last Community Reinvestment Act performance evaluation, as of July 22, 2019.August 1, 2022.

In September 2020,May 2022, the Federal Reservefederal bank regulatory agencies jointly issued a proposed rule thatintended to strengthen and modernize the CRA regulatory framework. If implemented, the rule would, significantly change existing Community Reinvestment Act regulations. The proposed rule is intended to:among other things, (i) strengthen Community Reinvestment Act’s core purpose of meeting the wide range ofexpand access to credit, investment and basic banking services in low- toand moderate-income banking needs and addressing inequities in financial services and credit access;communities, (ii) update standardsadapt to reflect changes in the banking over time,industry, including the increased use ofinternet and mobile and internet delivery channels,banking, (iii) promote financial inclusion by including special provisions for activities in underserved areas, and for investments in minority-owned institutions, (iv) bringprovide greater clarity, consistency and transparency to performance evaluations that are tailored to local conditions, (v)in the application of the regulations and (iv) tailor performance tests and assessmentsstandards to account for differences in bank sizessize, business model, and business models, (vi) clarify and expand eligible Community Reinvestment Act activities focused on low- to moderate-income communities, (vii) minimize data burden and tailor data collection and reporting requirements, and (vii) recognize the special circumstances of small banks in rural areas. We are evaluating what impact this proposed rule, if implemented, may have on the Company.local conditions.

Gramm-Leach-Bliley Act of 1999. The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. For example, the GLBA permits unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become FHCs, which can engage in a broad range of financial services as described above. In order to become aan FHC, a bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating. On March 4, 2016 the Federal Reserve Bank of Richmond approved New Peoples’ election to become aan FHC.

The GLBA also provides that the states continue to have the authority to regulate insurance activities, but prohibits the states, in most instances, from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities.

Anti-Money Laundering Legislation. New Peoples is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020. Among other things, these laws and regulations require New Peoples to take steps to prevent the use of New Peoples for facilitating the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. The Company is also required to carry out a comprehensive anti-money laundering compliance program. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

Privacy and Fair Credit Reporting. Financial institutions, such as the Bank, are required to disclose their privacy policies to customers and consumers and require that such customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of nonpublic personal information about them with nonaffiliated third persons. The Bank also requires business partners with whom it shares such information to assure the Bank that they have adequate security safeguards and to abide by the redisclosure and reuse provisions of applicable law. In addition to adopting federal requirements regarding privacy, individual states are authorized to enact more stringent laws relating to the use of customer information. To date,The Virginia has not done so.Consumer Data Protection Act, passed in 2021, became effective January 1, 2023 These privacy laws create compliance obligations and potential liability for the Bank.

Mortgage Banking Regulation. The Bank is subject to rules and regulations related to mortgage loans that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank’s mortgage origination activities are subject to the Federal Reserve’s Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. To the extent that we make mortgage loans, we are required to comply with these rules, subject to available exceptions.

Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) is intended to increase corporate responsibility, provide enhanced penalties for accounting and auditing improprieties by publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. The changes required by the Sarbanes-Oxley Act and its implementing regulations are intended to allow shareholders to monitor the performance of companies and their directors more easily and effectively.

The Sarbanes-Oxley Act generally applies to all domestic companies, such as New Peoples, that file periodic reports with the Securities and Exchange Commission (SEC)SEC under the Securities Exchange Act of 1934, as amended. The Sarbanes-Oxley Act includes significant additional disclosure requirements and expanded corporate governance rules and the SEC has adopted extensive additional disclosures, corporate governance provisions and other related rules pursuant to it. New Peoples has expended, and will continue to expend, considerable time and money in complying with the Sarbanes-Oxley Act.

Federal Deposit Insurance Corporation. The Bank’s deposits are insured by the Deposit insuranceInsurance Fund, as administered by the FDIC, to the maximum amount permitted by law, which is $250,000 per depositor. The FDIC uses a “financial ratios method” based on “CAMELS” composite ratings to determine deposit insurance assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk (CAMELS). CAMELS composite ratings set a maximum assessment for banks rated CAMELS 1 and 2, rated banks, and set minimum assessments for lower rated institutions. In 2022 and 2021, the Company recorded expense of $216 thousand and $266 thousand, respectively, for FDIC insurance premiums.

Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide rangingwide-ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the American financial services industry. Among the provisions of the Dodd-Frank Act that directly impactimpacted the Company iswas the creation of an independent Consumer Financial Protection Bureau (CFPB), which has the ability to write rules for consumer protections governing all financial institutions. All consumer protection responsibility formerly handled by other banking regulators is consolidated in the CFPB. It also oversees the enforcement of all federal laws intended to ensure fair access to credit. For smallerSmaller financial institutions, such as the Company and the Bank, the CFPB coordinates its examination activities throughcontinued to be examined primarily by their primary regulators.

The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages. The EGRRCPA modified a number of these requirements, including, for smaller institutions (under $10 billion in total assets) that qualify, a safe harbor for compliance with the “ability to pay” requirements for consumer mortgage loans. The CFPB has implemented mortgage lending regulations to carry out its mandate. In addition, the Federal Reserve has issued rules limiting the fees charged to merchants by credit card companies for debit card transactions. The result of these rules is to limit the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.

The Dodd-Frank Act has had, and may in the future have, a material impact on New Peoples’ operations, particularly through increased compliance costs resulting from new and possible future consumer and fair lending regulations. TheAny future changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent regulatory requirements or otherwise adversely affect the business and financial condition of New Peoples and the Bank. These changes may also require New Peoples to invest significant management attention and resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.

The Economic Growth, Regulatory Reform and Consumer Protection Act of 2018. The EGRRCPA, which became effective in May 2018, amended provisions of the Dodd-Frank Act and other statutes administered by banking regulators. Among these amendments are provisions exempting insured depository institutions (and their parent companies) with less than $10 billion in consolidated assets and meeting certain other asset and liabilities trading tests from the Volker Rule, which prohibits banks from conducting certain investment activities with their own accounts. The EGRRCPA required the regulators to promulgate rules establishing the new CBLR, as described above. The ActEGRRCPA increased the asset threshold from $1 billion to $3 billion for financial institutions to qualify for a less burdensome 18 month on site18-month on-site examination schedule. The EGRRCPA made numerous other changes in regulatory requirements based on the size and complexity of financial institutions, particularly benefiting smaller institutions like the Company.

Cyber Security. In March 2015, federal Federal regulators issued two related statements regarding cyber security. One statement indicatesexpect that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates thatAdditionally, a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to developmaintain appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or any of its critical service providers fall victim to this type of cyber-attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

Federal bank regulators issued a joint rule, effective in 2022, establishing computer-security incident notification requirements for banking organizations and their bank service providers. The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. In addition, the final rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. The rule defines computer-security incident as an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.

Limitations on Incentive Compensation. The federal bank regulatory agencies have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company and the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the institution’s safety and soundness, and the financial institution is not taking prompt and effective measures to correct the deficiencies. As of December 31, 2022, the Company and the Bank have not been made aware of any instances of noncompliance with this guidance.

Other Laws. Banks and other depository institutions also are subject to other numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act of 2003 and the Fair Housing Act, require compliance by depository institutions with various disclosure and consumer information handling requirements. These and other similar laws result in significant costs to financial institutions and create potential liability for financial institutions, including the imposition of regulatory penalties for inadequate compliance.

Future Regulatory Uncertainty. Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, New Peoples cannot forecast how regulation of financial institutions may change in the future and impact its operations. New Peoples fully expects that the financial institution industry will remain heavily regulated notwithstanding the regulatory relief that has been recently adopted.

Not required.

Item 1A.    Risk Factors

Not required.

Item 1B.    Unresolved Staff Comments

Not applicable.

Item 2. Properties

AtAs of December 31, 2020,2022, the Company’sCompany's net investment in premises and equipment was $22.2 million, which includes construction $1.0 million in progress related to a Bristol, Virginia location.$19.3 million. Our main office and operations center isare in Honaker, Virginia, which includes a full-service branch, and a separate administration and operations center.

The Bank owns 1413 of its 17 full-service branches,branch offices, including its headquarters office. In addition to the headquarters in Honaker, Virginia we own or lease branch offices located in Virginia, West Virginia, Tennessee, and a loan production office plus its one limited-service branch. The locations of these branches are described in Item 1. In 2017,North Carolina. Additionally, the Bank soldowns an operations building housing its Abingdon, Bristol, Gate Citynetwork and Castlewood, Virginia properties and in connection with the sale of these four properties, entered into commercial lease agreements for the properties, which allowed the Bank to continue to service customers from these locations. During the third quarter of 2019, the Bank sold its Lebanon, Virginia property, and in connection with this sale, entered into a commercial lease agreement which allows the Bank to continue to service customers from this location. For additional discussion of these leases see Note 17, Leasing Activities, in Notes to the Consolidated Financial Statements contained in Item 8 of this form 10-K. Aside from the retail branch offices, we own a building in Bristol, Virginia that is being renovated as a full-service branch with a planned opening in the third quarter of 2021. Additionally, theother support operations. The bank owns two operations buildings, one housing itsformer branch offices that were closed in 2022, and the facility that formerly housed ITM network operations and another that serves as our call center andoperations, that was closed in 2021. The former ITM network operations center. In November 2020, we entered intoand call center facility was sold in March, 2023. We also own a short-term lease onwarehouse facility in Honaker, Virginia. Our loan production office operates from a building in Boone, North Carolina that serves asunder a loan production office.short-term lease renewed in June 2022.

During 2018, we limited activity at theA former branch office located in Jonesborough, Tennessee loan production office and in 2019 it was closed and the ITM at this site was relocated. Currently, this location is being used as a hub for meeting with prospective loan customers.

The Bank owns a location in Dungannon, Virginia that is currently being leased out, but was formerly used as aDuring 2022, two branch until its closure during 2010. Two otherlocations were closed, branches (Bluewell, WestBig Stone Gap, Virginia and Jonesville, Virginia) that are vacant may be used for future banking offices again. A third vacantChilhowie, Virginia, with customer accounts transferred to nearby offices. ITM services remain available at these two locations. Three former branch office in Bristol, Virginia had been under consideration as a future banking office, but this is likely to change due to its proximity to the office we are renovating. A fourth former branch office in Norton, Virginia wasoffices that were transferred to other real estate owned in 2019 and is being marketed for sale. With the opening of an office2021, were sold in Kingsport, Tennessee in the third quarter of 2020, we closed a nearby location and transferred customer accounts2022.

We continue to the new Kingsport office. As a result of assessingassess our branch network as partwe look to improve the efficiency of the overall efficiency project undertaken in 2019 and 2020, offices in Pound and Weber City, Virginia are scheduledour branch operations while seeking to close in the second quarter of 2021, with those accounts being transferred to nearby offices.increase market share.

We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.

Item 3. Legal Proceedings

In the normal course of operations, we may become a party to legal proceedings, as discussed in Note 20 Legal Contingencies to the consolidated financial statements contained in Item 8 of this form 10-K10-K.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)       Market Information

Computershare Investor Services is the stock transfer agent for New Peoples Bankshares, Inc. The common stock of New Peoples is quoted on the OTC Market’s Pink Open Market under the symbol “NWPP”. The volume of trading of shares of common stock is very limited. Trades in our common stock occur sporadically on a local basis and typically in small volumes. Over-the-Counter market quotations reflect inter-dealer prices without retail mark up, mark down or commissions and may not necessarily represent actual transactions.

The most recent sales price of which management is aware was $2.00$2.25 per share on March 24, 2021.20, 2023.

(b)       Holders

On March 24, 2021,22, 2023, there were approximately 4,3214,060 shareholders of record.

(c)       Dividends

In order to preserve capital we have not paid cash dividends to our shareholders. Any declaration of dividends in the future will depend on our earnings, capital requirements, growth strategies, and compliance with regulatory mandates, principally at the Bank level, since the Company’s primary source of income is dividends which it would receive frompaid by the Bank. During the first quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders. On February 27, 2023, the Company declared a dividend of $0.06 per share, payable March 31, 2023 to shareholders of record as of March 15, 2023.

We are subject to certain dividend restrictions and capital requirements imposed by the Federal Reserve Bank as well as Virginia banking statutes and regulations. We do not anticipate paying a dividend on our common stock in the near future as the Company continues to have a retained deficit. We expect to retain earnings to build capital and position the Company to pay a dividend to its shareholders as soon as practicable. See Note 16, Dividend LimitationLimitations on Subsidiary Bank, and Note 21, Capital, to the consolidated financial statements contained in Item 8 of this formForm 10-K.

The Company has an approved one-year stock repurchase program that authorizes the repurchase of up to 500,000 of the Company’s common shares through March 31, 2023. Repurchases may be made through open market purchases or in privately negotiated transactions. Shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company.

Shares of the Company’s common stock were repurchased during the three months ended December 31, 2022, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 426,405 shares of common stock. On February 27, 2023, the board of directors approved an extension of the repurchase program through March 31, 2024.

Item 6. Selected Financial Data[Reserved]

Not required.applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward Looking Statements

We make forward looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. These forward lookingforward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. TheThese forward-looking information isstatements are based on various factors and waswere derived using numerous assumptions.  assumptions as of the date of this Form 10-K, and are subject to significant risks.

Important factors that may cause actual results to differ from projections include:

• the success or failure of our efforts to implement our business plan;
• any required increase in our regulatory capital ratios;
• satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors;
• deterioration of asset quality;
• changes in the level of our nonperforming assets and charge-offs;
• fluctuations of real estate values in our markets;
• our ability to attract and retain talent;
• demographical changes in our markets which negatively impact the local economy;
• the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators;
• the successful management of interest rate risk;
• the successful management of liquidity;
• changes in general economic and business conditions in our market area and the United States in general;
• credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;
• competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources;
• demand, development and acceptance of new products and services we have offered or may offer;
• deposit flows and competition for deposits;
• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations;
• the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the lingering impact of the novel coronavirus (COVID-19) outbreak and other catastrophic events;
• geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad;
• technology utilized by us;
• our ability to successfully manage cyber security;
• our reliance on third-party vendors and correspondent banks;
• changes in generally accepted accounting principles;
• changes in the allowance for loan losses resulting from the adoption and implementation of the CECL methodology;
• the transition from the use of the LIBOR index;
• changes in governmental regulations, tax rates and similar matters; and,
• other risks, which may be described, from time to time, in our filings with the SEC.

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward lookingforward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

General

General

The following commentary discusses major components of our business and presents an overview of our consolidated financial position atas of December 31, 20202022 and 20192021, as well as results of operations for the years ended December 31, 20202022 and 2019.2021. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.

New Peoples generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the volume of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank’sBank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccrualnonaccruing loans and the amount of provision expense added to the allowance for loan losses. The Bank also generates noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance and investment products sold.

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policiesestimates relate to our provision for loan losses and the calculation of our deferred tax asset and any related valuation allowance.

The provision for loan losses reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to further deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the section on “Provision“Allowance for Loan Losses” in this discussion.

Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At December 31, 2020 and 2019, the Company had no valuation allowance on its net deferred tax assets.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Income Taxes and Deferred Tax Assets” in this discussion.

For further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements, foundconsolidated financial statements, contained in Item 8 toof this annual report on Form 10-K.

Cyber Security

The Company, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, the Company’s and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Although the Company has business continuity plans and other safeguards in place, disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Company’s and its subsidiaries’ products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Company’s results of operations or financial condition.

Although to date the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. On June 15, 2022, we experienced a cybersecurity incident that temporarily interrupted the operability of our computer systems. Limited operations were restored June 17, 2022, and full operations were restored June 21, 2022. Since that date, restoration efforts have been completed and normal operations have resumed. The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served. As a result, cyber security and the continued development and enhancement of the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software, data and networks from attack, damage or unauthorized access, remain a priority for the Company. As cyber threats continue to evolve, the Company has expended resources and may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.

In December 2020,As discussed under the heading “Supervision and Regulation” in Item 1 of this Form 10-K, the federal banking agencies have issued a notice of proposed rulemakingjoint rule that would requirerequires banking organizations to notify their primary regulator withinas soon as possible and no later than 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” after any cyber-security incident has occurred.

Overview

The proposed rule also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

To date, we have not experienced aCompany made significant compromise, significant data loss or any material financial losses related to cyber-attacks, but our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant eventprogress during 2022 resulting in the future.

Recent Events

Sincehighest annual consolidated net income in the history of the Company. For the year ended December 31, 2019 COVID-19 has adversely affected,2022, net income was $8.1 million, or basic and will continuediluted net income per share of $0.34, compared to adversely affect, economic activity globally, nationallya net income of $7.0 million, or basic and locally. Market interest rates have declined significantly. In early 2020, the Federal Open Market Committee reduced the target federal funds rate twice by a totaldiluted net income per share of 150 basis points (bps). As a result of these actions the target federal funds rate now stands at 0.00% - 0.25% and the prime interest rate stands at 3.25%.

State and local governments have issued executive orders and businesses have implemented rules as simple as wearing a mask in public and social distancing to limiting attendance at public and household gatherings. This has had, and will continue to have, a significant adverse impact on the economy as certain industries have been seriously impaired or have been forced to close.

Financial services are considered essential services, and we have continued to meet the needs of our customers. We supplemented our existing procedures$0.29, for the adoptionyear ended December 31, 2021, an improvement of workplace safety standards outlined by the Virginia Department of Labor and Industry. Since the first quarter of 2020, we have maintained a committee dedicated$1.1 million, or 15.3%. Retained earnings increased to managing our response to the pandemic. This has included marshalling supplies and personal protective equipment, coordinating employee and customer communications, evaluating staffing and maintaining compliance with various mandates and regulations. We have restricted access to our lobbies since the first quarter of 2020. Based on our continuing assessment of the intensity of the pandemic in our market areas, we continue to limit lobby access and expect this limitation to be discontinued in the second quarter of 2021$8.9 million as local cases decrease and vaccinations increase in our region. Meanwhile, our offices continue to provide customer services principally via drive-thru facilities and ITMs.

As part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), the Small Business Administration (SBA) was authorized to guarantee Paycheck Protection Program (PPP) loans used by borrowers for payroll and other permitted purposes. The SBA has provided a 100% guarantee and paid originators a processing fee ranging from 1% to 5%, based on the loan amount. We funded a total of $44.5 million of these loans for our customers through August 2020, when the funding period closed, and received $1.6 million in net fees from the SBA, which is being recognized as income over the terms of these loans. As of December 31, 2020, $994 thousand of these fees had been recognized in income. At December 31, 2020, $34.82022 from $2.0 million of PPP loans remain. It is anticipated the SBA will forgive the majority of these loans. Through March 31, 2021, 407 loans have received forgiveness payments from the SBA totaling $24.7 million.

In January 2021, the United States Congress passed additional legislation providing economic relief related to the COVID-19 pandemic. This legislation included a second round of Paycheck Protection Loans. We are participating in this program and have funded 322 loans totaling $18.8 million through March 31, 2021

In response to the economic impact brought on by the COVID-19 pandemic, banking and financial regulators provided guidance to financial institutions regarding borrower requests for forbearance. In general, short-term deferrals or other minor modifications extended to borrowers who were current in their loan obligations at December 31, 2019, were not considered troubled debt restructurings (TDRs) or impairments. These accommodations have been provided in the form of payment deferrals or conversion to interest only for a period of time, generally, three to six months. Asas of December 31, 2020, 688 loans which have received some form of forbearance in accordance within the applicable legislative and regulatory guidelines totaled $112.0 million, and virtually all of them have progressed through their forbearance period, with 15 accounts totaling $836 thousand in forbearance at year-end. In addition to loans receiving forbearance under the CARES Act, 36 accounts totaling $2.4 million at December 31, 2020, were existing or newly classified as TDRs, that received temporary forbearance. Of all accounts receiving forbearance, 82 accounts totaling $5.6 million were past due 30 days or more, including six loans totaling $332 thousand that were past due 90 days or more at December 31, 2020. No accounts past due 90 days or more are accruing interest.

The majority of the loans which obtained forbearance are within our general market area, with $73.3 million, $16.7 million and $26.9 million in Virginia, Tennessee and West Virginia, respectively. At December 31, 2020, these loans cover a number of industries, such as residential property rental of $21.4 million, commercial and other real estate rental of $16.0 million, hotels and motels of $11.0 million; coal mining and natural gas extraction $6.0 million and amusement and entertainment of $5.0 million. Consumer loans represent $40.5 million, with $39.5 million secured by real estate. Most of these loans have reached the end of their forbearance period and the vast majority of these borrowers have resumed their payments. While we believe that the majority of these borrowers will be able to repay their obligations, we cannot reasonably estimate the risk of loss should the adverse economic impact of the pandemic continue for an extended period of time.

In summary, the adverse economic impact of the COVID-19 pandemic has been extensive and wide ranging, resulting in a steep decline in interest rates,2021, an increase in unemployment and a resulting decline in economic output. At this time, we cannot reasonably estimate the termof $6.9 million or intensity of any possible adverse impact on our financial position, operations or liquidity. Given the continuation in COVID-19 cases and hospitalizations, economic recovery may be slow and uneven. However, we are encouraged by the recent vaccination programs and therapeutic treatments that have been developed and are becoming more available to the mass population.339.0%.

Overview

The Company’s consolidated netNet interest income for the year ended December 31, 20202022 was $2.9$28.3 million or basic income per share of $0.12 as compared to a net income of $2.1$27.2 million or basic income per share of $0.09, for the year ended December 31, 2019. This is an increase2021. The improvement of $831 thousand, or $0.03 per share. This increase was driven primarily by a reduction of $2.0$1.1 million in non-interest expense and an increase of $167 thousand in net interest income was primarily attributable to a $33.8 million increase in average earning assets and rising market interest rates during the year, partially offset by a reduction of $505 thousanddecrease in non-interest incomeloan origination fees compared to 2021 as PPP loans were forgiven and an increase in costs of $250 thousandour variable rate trust preferred securities in provision2022. Net interest margin was 3.62% compared to 3.64% for the year ended December 31, 2022, and 2021, respectively.

Noninterest income was $9.2 million for the year ended December 31, 2022 compared to $10.0 million for the year ended December 31, 2021. The $740,000 decrease was attributable to $322,000 of gains on the sales of investment securities during the year ended December 31, 2021, $190,000 of gains on the sales of three former branch locations during the year December 31, 2021, as well as a write-down of bank owned life insurance (BOLI) of $158,000 during the year ended December 31, 2022, and a decrease in gains and commissions on mortgage loan losses.originations and sales of approximately $162,000 due to the impact of rising interest rates on mortgage demand.

Noninterest expense was $26.5 million for the year ended December 31, 2022 compared to $27.9 million for the year ended December 31, 2021. The $2.0$1.3 million reductiondecrease was primarily due to valuation adjustments of other real estate owned during the year ended December 31, 2021, which consisted of $1.1 million related to former branch locations and approximately $390,000 in non-interest expense is a 6.9% decreasenet losses and write-downs on the sales of other real estate owned. This was drivenoffset by an $878 thousand decreaseincrease of approximately $703,000 in salaries and benefits during the year ended December 31, 2022, which is attributed to higher bonus accruals based on the Company’s performance, annual wage adjustments, and a $1.1adjustments to the minimum starting salaries of employees to reflect rising costs to attract and retain talent.

During the year ended December 31, 2022, total assets decreased $19.3 million, decreaseor 2.4%, to $775.4 million. Loans receivable decreased $9.1 million, or 1.5%, during 2022, which is partly attributable to several large borrowers selling their businesses or collateral and paying off the related loans. Additionally, loan pricing remains very competitive in other operating expenses. The salariesthe Company’s market and benefits reductionhas impacted loan originations. Investment securities decreased $11.0 million in 2022, which is a resultprimarily due to the decline in the market value of the restructure announced in May of 2020. The other operating expenses reduction is a result of renegotiated contracts and reductions in expenses relatedinvestment portfolio due to loan collections and foreclosed assets. A moratorium on foreclosuresrising interest rates.

Total deposits declined $14.8 million, or 2.1%, during 2022, with most of 2020 drove the reductions in loan collections and foreclosed asset expenses. The increase in net interest income resulted from a $919 thousand decline in interest income which was more than mitigated by a $1.1 million reduction in interest expense. Economic conditionsoccurring during 2020 drove reductions in market interest rates which negatively affected our interest income and allowed usthe fourth quarter as competition for funding intensified.

New Peoples Bank remains well-capitalized. Leverage ratio improved to reduce our deposit rates.10.40%.

At December 31, 2020, total assets were $756.6 million, total loans were $575.6 million, and total deposits were $668.0 million. We closed $44.5 million in PPP loans in 2020, which, when combined with federal stimulus payments received by our deposit customers, drove increases in deposits.

The Company’s key performance indicators are as follows:

Highlights from the year 2020 include:

The $49.9 million growth in total assets was driven primarily by an increase of $40.2 million in interest bearing deposits in other banks, which in turn was driven by a $46.5 million increase in total deposits. The increase in deposits was primarily due to PPP loans, which were dispersed into each loan customer’s checking account. Deposits also increased through federal stimulus payments received by customers into their checking accounts.

Total equity increased to $58.2 million at December 31, 2020, an increase of $3.6 million, or 6.5%. The Bank’s capital ratios at December 31, 2020 as compared to December 31, 2019, respectively, were as follows: Tier 1 leverage ratio of 9.49% versus 9.43%; Tier 1 risk based capital ratio of 15.16% versus 13.72%; total risk based capital ratio of 16.41% versus 14.83%; and common equity Tier 1 capital ratio of 15.16% versus 13.72%. The Bank is considered well-capitalized under regulatory guidelines.

Expenses related to OREO properties were $307 thousand in 2020 compared to $635 thousand in 2019. During 2020, we recorded write-downs on other real estate owned properties of $132 thousand compared to $214 thousand in 2019. During 2020, we had a net gain on the sale of OREO of $60 thousand compared to a net loss of $123 thousand in 2019.

Total loans increased $13.0 million in 2020, or 2.3%, to $575.6 million at December 31, 2020, as compared to $562.5 million at December 31, 2019. The main driver of this increase in total loans is the $44.5 million of PPP loans originated during 2020. Since PPP loans are generally commercial loans, they have supported our strategy to grow and diversify the loan portfolio. Total loans also increased as result of loan demand in the Tri-Cities market along with our initial efforts in the western North Carolina market. As evidenced in 2020, loan growth in general is subject to economic conditions, customer demand, and competition in our markets.

Nonperforming assets, which include nonaccrual loans, loans past due 90 days or more and still accruing interest and OREO increased $332 thousand, or 3.88%, to $8.9 million at year-end 2020 from $8.5 million at year-end 2019. Other real estate owned declined by $59 thousand during 2020 to $3.3 million. Nonaccrual loans increased $391 thousand to $5.5 million during the year ended December 31, 2020. Total nonperforming assets represented 1.17% and 1.21% of total assets at December 31, 2020 and December 31, 2019, respectively. There were no loans past due 90 days or greater and still accruing interest at December 31, 2020 or 2019. The makeup of these assets is primarily related to commercial and residential real estate. During the fourth quarter of 2019, the largest foreclosed property, with a recorded balance of $1.6 million, was sold. We continue undertaking extensive and aggressive measures to work out problem credits and liquidate foreclosed properties. Our goal is to continue to reduce the nonperforming assets being mindful of the impact to earnings and capital; however, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.

Our allowance for loan losses at December 31, 2020 was $7.2 million, or 1.25%, of total loans, as compared to $5.4 million, or 0.95% of total loans at December 31, 2019. Impaired loans decreased $493 thousand, or 8.8%, to $5.4 million, with an estimated allowance of $1,052 thousand for potential losses, at December 31, 2020; as compared to $8.0 million in impaired loans, with an estimated allowance of $318 thousand, at the end of 2019. A provision for loan losses of $2.3 million was recorded in 2020, up from $2.1 million in 2019. Net loans charged off in 2020 were $477 thousand, or 0.08% of average loans, compared to $2.0 million, or 0.36% of average loans, in 2019. The losses recorded in 2019, were primarily related to some commercial loans extended to a few borrowers who ceased operations during that year. Two of these relationships accounted for $1.5 million of the losses recorded. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized. We continue to adjust the allowance for loan loss model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary.

Net Interest Income and Net Interest Margin

The Company’s primary source of income is net interest income, which increased $167 thousand,$1.1 million, or 0.7%3.95%, in 20202022 compared to 2019. While we had increases in both loans and overnight balances in interest-bearing deposits in other banks, the growth was not sufficient to offset the impact of decreases in interest rates, resulting in a decrease in interest income of $919 thousand. However, total interest expense decreased by $1.1 million, more than mitigating the decrease in interest income,2021 due primarily to the reduction ofa $33.8 million increase in average earning assets and rising market interest rates paidduring the year. This was offset by an increase in interest expense on money market accounts, time deposits andborrowed funds of approximately $777,000, or 171.5%, related to the increase in variable rates on trust preferred securities.

securities as well as an increase in borrowings from the Federal Home Loan Bank (FHLB) during the year. The decrease in interest income on loans, including fees, was driven by a decrease in fees of $1.8 million resulting from PPP loan forgiveness in 2021 that did not reoccur during 2022.

The following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.

Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following tables set forth the amounts of the total changes in interest income and interest expense which can be attributed to rates, volume and a combination of rates and volume, for the periods indicated.

The increases in interest income and interest expense during 2022 were driven mainly by increased interest rates, as short-term assets and liabilities tied to short-term rates adjusted to market rate increases throughout the year, new production at higher rates, and asset yields outpacing increases in funding costs in the rising interest rate environment. Overall, our net interest margin decreased 2 basis points to 3.62% in 2022 compared to 3.64% in 2021.

The increase in interest income is primarily attributed to an increase in yields on overnight deposits with banks, which was mainly driven by higher market rates, as noted above, combined with a reinvesting of funds in investment securities at higher rates. This increased income offset a decrease in loan interest Overall, loan interest income, including fees, decreased $584,000 during the year ended December 31, 2022 compared to December 31, 2021, due to the impact of PPP loan fees recognized in 2021, that was not repeated in 2022.

Interest expense increased $404,000, due primarily to lower interestan increase in the average balance of FHLB advances of $20.4 million during the year, combined with increased market rates on loan accounts, which accounted for $896 thousand of the $919 thousand total decrease, even though average loan balances increased $23.2 million during 2020. Other contributing items to the decline in interest incometrust preferred securities. This was a $597 thousand decrease in interest income from deposits in other banks and a $355 thousand decrease in interest on investments. Although average balances of deposits in other banks grewoffset by $22.1 million, the decline in yield to 0.34% from 2.06% in 2020 compared to 2019 drove the reduction in interest income from these deposits. The decline in interest income received from investments was driven by reductions in both rates and balances. Partially mitigating these decreases was a $933 thousand increase in loan fees, driven primarily by fees earned on PPP loans.

The decrease in interest expense of $1.1 million was driven primarily byon time deposits due to a $598 thousand reduction in interest expense paidvolume and rate. While rates on money market deposit accounts, with both lower balances andtime deposits reset at lower rates contributingduring 2022, this trend is not expected to continue into 2023, due to the savings. Lower rates paid on trust preferred securities contributed $254 thousand toward reductions in interest expense, as lower market rates reduced the variable rates paid in these securities.

Overall, the net interest margin decreased 16 bps to 3.66% in 2020 compared to 3.82% in 2019. This reduction in interest rates was a direct result of actions taken by the Federal Reserve’s Federal Open Market Committee, in response to the economic impact of the pandemic, which reduced the target federal funds rate twice in March 2020, by 150 bps. As a result of these actions the target federal funds rate now stands at 0.00% - 0.25% and the prime interest rate stands at 3.25%. Although the reduction of the federal funds rate in the first quarter of 2020 was an instantaneous move, it was in line with activity during the latter half of 2019, when the prime interest rate dropped three times by 25 bps each based on actions by the Federal Open Market Committee. During 2019 the prime interest rate fell from 5.50% to 4.75%. This was essentially full circle from the cycle in 2018 when the prime interest rate increased from 4.50% to 5.50%. Additionally, the yield on PPP loans is 1.00% (excluding the impact of deferred fee income), which reduces the overall average yield on loans. Fee revenue from the SBA on PPP loans only partially mitigates the low rate on these loans. Our yield on loans was 4.95% in 2020 compared to 5.15% in 2019. We have responded by lowering rates paid on deposit accounts, as evidenced by our 0.72% cost of funds in 2020 compared to 0.92% in 2019.

Another factor impacting the decrease in interest expense and the cost of funds was a significant deposit by a related party to our tiered premium money market account. Of the approximately $30 million of funds received during the first quarter of 2019 and intended as a temporary deposit, only approximately $5 million remained at December 31, 2020.

Due to the increased deposit balances, additional borrowings from the FHLB were unnecessary during 2020. Hence, interest paid on FHLB advances declined by $10 thousand in 2020 compared to 2019, due to maturities in 2019.

Unless we are able to continue to increase the volume of our interest-earning assets going forward, while controlling our cost of funds, we may continue to experience compression on the net interest margin. New and renewed loans are often being repriced at lower interest rates while we anticipate nocontinuing increase in interest rates, incombined with the foreseeable future, duecompetitive pressures to the economic impact of the COVID-19 pandemic.acquire and retain deposits.

Our future interest rate structure also may behas been impacted by the pendingcommencement of the end of the use of LIBOR, as a benchmark interest ratewhich will completely phase-out in 2021.2023. We use LIBOR in pricing some of a limited number of our interest earning assets and liabilities, including our trust preferred securities. At this time it appears thatCertain loan and investment products ceased using LIBOR in 2021, for new contracts and commitments. Most of these contracts have been, or will be, replaced bywith the Secured Overnight Financing Ratesecured overnight funding rate (SOFR).

Loans

Our primary source of income is interest earned on loans. Total gross loans decreased $9.1 million during 2022, or 1.54%, which is a transparent measureto $584.6 million as of the cost of borrowing cash overnight collateralized by Treasury securities. Because no there is not yet a consensusDecember 31, 2022 as compared to what rate or rates may become acceptable alternatives to LIBOR, however, we cannot predict the effect of any such alternatives on the value of LIBOR-based variable-rate loans, as well as LIBOR-based securities, trust preferred securities, or other securities or financial arrangements. Regardless of whether SOFR or some other benchmark rate replaces LIBOR, we do not anticipate that the change will have a material impact on our ability to negotiate and price earning assets and liabilities. However, the transition to alternative reference rate for new contracts, or the implementation of a substitute index or indices for the calculation of interest rates under the Company’s existing loan agreements with borrowers or other financial arrangements, could change the Company’s market risk profile, interest margin, interest spread and pricing models, may cause the Company to incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept a substitute index or indices, and may result in disputes or litigation with customers or other counter-parties over the appropriateness or comparability to LIBOR of the substitute index or indices.

Nonaccrual loan balances increased $391 thousand during 2020 to $5.5$593.7 million at December 31, 2020, which2021. The primary drivers of this decrease in total loans were a reduction in commercial real estate loans, multifamily, and commercial loans of $9.1 million, $3.3 million, and $7.6 million, respectively. This was offset by an increase in construction and land development loans of $10.1 million in comparison to December 31, 2021. The decrease in commercial real estate and commercial loans was partly attributable to several large borrowers selling their businesses or collateral and paying off the related loans. For more detail on loan balances, refer to Note 6 of the consolidated financial statements contained in Item 8 of this Form 10-K.

Nonaccrual loans increased approximately $472,000 during 2022 from $2.9 million as of December 31, 2021 to $3.4 million as of December 31, 2022. Nonaccrual loans negatively affect interest income as these loans are nonearning assets. Interest income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status. If the impaired loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method. When doubt about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and in the process of collection. All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed against interest income in the current period. In the case of a nonaccrual loan that is well secured and in the process of collection, the interest accrued but not collected is not reversed. Interest received on these loans is accounted for on the cash basis or cost-recovery method until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured. For more detail on nonaccrual loans, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K.

Net Interest Margin Analysis

Average Balances, Income and Expense, and Yields and Rates

(Dollars in thousands)