0001163389 srt:MultifamilyMember us-gaap:RealEstateMember us-gaap:PassMember 2022-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM ~~10-Q/A~~10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2022~~2023

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission file number: 000-33411

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


Virginia (State or other jurisdiction of incorporation or organization)			31-1804543 (I.R.S. Employer Identification No.)
67 Commerce Drive, Honaker, Virginia (Address of principal executive offices)			24260 (Zip Code)

(~~276~~(276)) 873-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
	None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

[X]

[ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ((§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

[X]

[ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer [ ]		Accelerated filer [ ]
Non-accelerated filer [X]		Smaller reporting company [X]
		Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes	[ ]		No	[X]

The number of shares outstanding of the registrant’s common stock was ~~23,872,311~~23,794,301 as of ~~November 10, 2022.~~August 7, 2023.

NEW PEOPLES BANKSHARES, INC.

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets - ~~September~~June 30, ~~2022~~2023 (Unaudited) and December 31, ~~2021~~2022	3

	Consolidated Statements of Income – Three and ~~Nine~~six months ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended June 30, 2023 and 2022 ~~and 2021~~ (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity – Three and ~~Nine~~six months ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ (Unaudited)	6

	Consolidated Statements of Cash Flows – ~~Nine~~Six months ended ~~September~~June 30, 2023 and 2022 ~~and 2021~~ (Unaudited)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2529

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3739

Item 4.	Controls and Procedures	3739

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	3840

Item 1A.	Risk Factors	3840

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3840

Item 3.	Defaults upon Senior Securities	3841

Item 4.	Mine Safety Disclosures	3841

Item 5.	Other Information	3841

Item 6.	Exhibits	3941

SIGNATURES		4042

Part I Financial Information

Item 1

Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

~~SEPTEMBER~~JUNE 30, ~~2022~~2023 AND DECEMBER 31, ~~2021~~2022

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

(UNAUDITED)

September 30, December 31,
2022 2021
ASSETS
Cash and due from banks 17,134 $ 14,952
Interest-bearing deposits with banks 97,406 45,766
Federal funds sold 378 228
Total Cash and Cash Equivalents 114,918 60,946
Investment securities available-for-sale 98,845 107,358
Loans receivable 579,874 593,744
Allowance for loan losses (6,593 ) (6,735 )
Net loans 573,281 587,009
Bank premises and equipment, net 19,675 20,735
Other real estate owned 321 1,361
Accrued interest receivable 2,174 2,112
Deferred taxes, net 4,570 1,673
Bank owned life insurance 4,602 4,685
Right-of-use assets – operating leases 3,816 4,062
Other assets 6,363 4,706
Total Assets 828,565 $ 794,647
LIABILITIES
Deposits:
Noninterest bearing 269,052 $ 251,257
Interest-bearing 454,862 456,256
Total Deposits 723,914 707,513
Borrowed funds 41,496 16,496
Lease liabilities – operating leases 3,816 4,062
Accrued interest payable 355 272
Accrued expenses and other liabilities 3,754 2,673
Total Liabilities 773,335 731,016
SHAREHOLDERS’ EQUITY
Common stock - $2.00 par value; 50,000,000 shares authorized;
23,877,601 and 23,922,086 shares issued and outstanding at
September 30, 2022 and December 31, 2021, respectively
47,755 47,844
Additional paid-in-capital 14,556 14,570
Retained earnings 6,665 2,031
Accumulated other comprehensive loss (13,746 ) (814 )
Total Shareholders’ Equity 55,230 63,631
Total Liabilities and Shareholders’ Equity 828,565 $ 794,647

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~NEW PEOPLES BANKSHARES, INC.~~

~~CONSOLIDATED STATEMENTS OF INCOME~~

~~FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021~~

~~(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)~~

~~(UNAUDITED)~~

For the Three Months Ended For the Nine Months Ended
September 30, September 30,

INTEREST AND DIVIDEND INCOME 2022 2021 2022 2021
Loans including fees $ 7,010 7,602 $ 20,476 $ 21,483
Federal funds sold 2 —   3 —
Interest-earning deposits with banks 559 28 738 69
Investments 505 388 1,422 969
Dividends on equity securities (restricted) 34 26 88 90
Total Interest and Dividend Income 8,110 8,044 22,727 22,611

INTEREST EXPENSE
Deposits 418 522 1,252 1,780
Borrowed funds 492 104 810 349
Total Interest Expense 910 626 2,062 2,129

NET INTEREST INCOME 7,200 7,418 20,665 20,482

PROVISION FOR LOAN LOSSES 225 —   400 372

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,975 7,418 20,265 20,110

NONINTEREST INCOME
Service charges and fees 1,069 1,001 2,973 2,674
Card processing and interchange 915 982 2,858 2,918
Insurance and investment fees 167 222 650 723
Net gain on sales of available-for-sale securities —   322 —   322
Other noninterest income 38 443 425 840
Total Noninterest Income 2,189 2,970 6,906 7,477

NONINTEREST EXPENSES
Salaries and employee benefits 3,290 3,239 9,947 9,417
Occupancy and equipment expense 1,177 2,215 3,200 4,575
Data processing and telecommunications 607 609 1,762 1,835
Other operating expenses 1,525 2,004 4,787 5,313
Total Noninterest Expenses 6,599 8,067 19,696 21,140

INCOME BEFORE INCOME TAXES 2,565 2,321 7,475 6,447

INCOME TAX EXPENSE 579 476 1,645 1,354

NET INCOME $ 1,986 1,845 $ 5,830 $ 5,093

Earnings per share
Basic and diluted $ 0.08 0.08 $ 0.24 $ 0.21

Average Weighted Shares of Common Stock
Basic and diluted 23,893,224 23,922,086 23,910,287 23,922,086


	June 30,			December 31,
	2023			2022
ASSETS
Cash and due from banks		15,238		$	13,979
Interest-bearing deposits with banks		52,382			46,747
Federal funds sold		63			960
Total cash and cash equivalents		67,683			61,686
Investment securities available-for-sale		93,106			96,076
Loans receivable		609,038			584,613
Allowance for credit losses		(6,814	)		(6,727	)
Net loans		602,224			577,886
Bank premises and equipment, net		18,635			19,290
Other real estate owned		261			261
Accrued interest receivable		2,483			2,555
Deferred taxes, net		4,430			4,623
Bank owned life insurance		4,577			4,549
Right-of-use assets – operating leases		3,557			3,725
Other assets		6,036			4,707
Total assets		802,992		$	775,358
LIABILITIES
Deposits:
Noninterest bearing		247,135		$	249,924
Interest-bearing		460,941			442,783
Total deposits		708,076			692,707
Borrowed funds		26,496			16,496
Lease liabilities – operating leases		3,557			3,725
Accrued interest payable		930			526
Accrued expenses and other liabilities		3,776			4,685
Total liabilities		742,835			718,139
SHAREHOLDERS’ EQUITY
Common stock - $2.00 par value; 50,000,000 shares authorized;
23,802,857 and 23,848,491 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		47,606			47,697
Additional paid-in-capital		14,536			14,546
Retained earnings		11,019			8,917
Accumulated other comprehensive loss		(13,004	)		(13,941	)
Total shareholders’ equity		60,157			57,219
Total liabilities and shareholders’ equity		802,992		$	775,358

The accompanying notes are an integral part of these consolidated financial statements.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE (LOSS)~~ INCOME

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2022~~2023 AND ~~2021~~2022

(IN ~~THOUSANDS)~~THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,
2022 2021 2022 2021

NET INCOME $ 1,986 $ 1,845 $ 5,830 $ 5,093

Other comprehensive (loss) income:
  Investment securities activity
    Unrealized losses arising during the period (3,614 ) (45 ) (16,369 ) (629 )
    Reclassification adjustment for net gains included
        in net income —   (322 ) —   (322 )
    Other comprehensive loss on investment securities (3,614 ) (367 ) (16,369 ) (951 )
    Related tax benefit 759 76 3,437 199
TOTAL OTHER COMPREHENSIVE LOSS (2,855 ) (291 ) (12,932 ) (752 )
TOTAL COMPREHENSIVE (LOSS) INCOME $ (869 ) $ 1,554 $ (7,102 ) $ 4,341


	For the Three Months Ended			For the Six Months Ended
	June 30,			June 30,
		2023	2022		2023			2022
INTEREST AND DIVIDEND INCOME
Loans including fees	$	7,876	6,792	$	15,258		$	13,466
Federal funds sold		8	1		16			1
Interest-earning deposits with banks		551	158		1,083			179
Investments		547	482		1,107			917
Dividends on equity securities (restricted)		36	27		76			54
Total interest and dividend income		9,018	7,460		17,540			14,617
INTEREST EXPENSE
Deposits		1,645	404		2,791			834
Borrowed funds		373	212		682			318
Total interest expense		2,018	616		3,473			1,152
NET INTEREST INCOME		7,000	6,844		14,067			13,465
PROVISION FOR CREDIT LOSSES		149	75		149			175
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES		6,851	6,769		13,918			13,290
NONINTEREST INCOME						��
Service charges and fees		961	897		1,877			1,904
Card processing and interchange		943	1,027		1,842			1,943
Insurance and investment fees		306	242		563			483
Other noninterest income		194	182		520			387
Total noninterest income		2,404	2,348		4,802			4,717
NONINTEREST EXPENSES
Salaries and employee benefits		3,652	3,382		7,202			6,657
Occupancy and equipment expense		975	1,017		1,935			2,023
Data processing and telecommunications		619	601		1,261			1,155
Other operating expenses		1,789	1,658		3,505			3,262
Total noninterest expenses		7,035	6,658		13,903			13,097
INCOME BEFORE INCOME TAXES		2,220	2,459		4,817			4,910
INCOME TAX EXPENSE		497	536		1,073			1,066
NET INCOME	$	1,723	1,923	$	3,744		$	3,844
Earnings per share
Basic and diluted	$	0.07	0.08	$	0.16		$	0.16
Average Weighted Shares of Common Stock
Basic and diluted		23,817,903	23,915,869		23,829,468			23,918,960

The accompanying notes are an integral part of these consolidated financial statements.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2022~~2023 AND ~~2021~~2022

~~(IN THOUSANDS INCLUDING SHARE DATA)~~

~~(UNAUDITED)~~

Shares of Common Stock Common Stock Additional Paid-in- Capital
Retained
Earnings
(Deficit)

Accumulated Other
Comprehensive Income (Loss)
Total Shareholders’ Equity

Balance, December 31, 2020 23,922 $ 47,844 $ 14,570 $ (4,979 ) $ 742 $ 58,177

Net income —   —   —   1,585 —   1,585
Other comprehensive loss, net of tax —   —   —   —   (415 ) (415 )
Balance, March 31, 2021 23,922 $ 47,844 $ 14,570 $ (3,394 ) $ 327 $ 59,347

Net income —   —   —   1,663 —   1,663
Other comprehensive loss, net of tax —   —   —   —   (46 ) (46 )
Balance, June 30, 2021 23,922 $ 47,844 $ 14,570 $ (1,731 ) $ 281 $ 60,964

Net income —   —   —   1,845 —   1,845
Other comprehensive loss, net of tax —   —   —   —   (291 ) (291 )
Balance, September 30, 2021 23,922 $ 47,844 $ 14,570 $ 114 $ (10 ) $ 62,518

Balance, December 31, 2021 23,922 $ 47,844 $ 14,570 $ 2,031 $ (814 ) $ 63,631

Net income —   —   —   1,921 —   1,921
Other comprehensive loss, net of tax —   —   —   —   (5,444 ) (5,444 )
Cash dividend declared ($0.05 per share) —   —   —   (1,196 ) —   (1,196 )
Balance, March 31, 2022 23,922 $ 47,844 $ 14,570 $ 2,756 $ (6,258 ) $ 58,912

Net income —   —   —   1,923 —   1,923
Other comprehensive loss, net of tax —   —   —   —   (4,633 ) (4,633 )
Repurchase of common stock (16 ) (33 ) (5 ) —   —   (38 )
Balance, June 30, 2022 23,906 $ 47,811 $ 14,565 $ 4,679 $ (10,891 ) $ 56,164

Net income —   —   —   1,986 —   1,986
Other comprehensive loss, net of tax —   —   —   —   (2,855 ) (2,855 )
Repurchase of common stock (28 ) (56 ) (9 ) —   —   (65 )
Balance, September 30, 2022 23,878 $ 47,755 $ 14,556 $ 6,665 $ (13,746 ) $ 55,230

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~NEW PEOPLES BANKSHARES, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021~~

(IN THOUSANDS)

(UNAUDITED)

2022 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,830 $ 5,093
Adjustments to reconcile net income to net cash provided by
operating activities:

Depreciation 1,337 1,609
Provision for loan losses 400 372
Loss (income) on bank owned life insurance 83 (25 )
Net gain on sale of securities available-for-sale —   (322 )
Net gain on sale of mortgage loans (27 ) (95 )
Loss (gain) on sale or disposal of premises and equipment 195 (149 )
Gain on sale of other real estate owned (70 ) (122 )
Loans originated for sale (1,503 ) (5,494 )
Proceeds from sales of loans originated for sale 1,530 5,869
Adjustment to carrying value of premises transferred to other real estate owned —   1,067
Adjustment of carrying value of other real estate owned 137 423
Net amortization/accretion of bond premiums/discounts 392 336
Deferred tax expense 540 1,351
Net change in:
Accrued interest receivable (62 ) 250
Other assets (693 ) (491 )
Accrued interest payable 83 (146 )
Accrued expenses and other liabilities 1,136 212
Net Cash Provided by Operating Activities 9,308 9,738

CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 14,039 41
Purchase of securities available-for-sale (19,790 ) (77,168 )
Proceeds from sale of investment securities available-for-sale —   7,686
Proceeds from repayments and maturities of securities available-for-sale 11,542 11,695
Net (purchase) redemption of equity securities (restricted) (964 ) 555
Payments for the purchase of premises and equipment (478 ) (2,217 )
Proceeds from sale of premises and equipment —   1,203
Proceeds from insurance claims on other real estate owned or premises 6 54
Proceeds from sales of other real estate owned 207 2,128
Net Cash Provided by (Used) in Investing Activities 4,562 (56,023 )

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short term borrowings 25,000 (5,000 )
Net change in noninterest bearing deposits 17,795 31,718
Net change in interest bearing deposits (1,394 ) 13,759
Dividends paid (1,196 ) —
Repurchase of common stock (103 ) —
Net Cash Provided by Financing Activities 40,102 40,477

Net increase (decrease) in cash and cash equivalents 53,972 (5,808 )
Cash and Cash Equivalents, Beginning of the Period 60,946 92,350
Cash and Cash Equivalents, End of the Period $ 114,918 $ 86,542

Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 1,979 $ 2,275
Taxes $ 325 $ —
Supplemental Disclosure of Non-cash Transactions:
Other real estate acquired in settlement of foreclosed loans $ —   $ 566
Loans made to finance sale of other real estate owned $ 711 $ —
Transfer of premises and equipment to other real estate $ —   $ 950
Change in unrealized losses on securities available for sale $ (16,369 ) $ (951 )



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022

NET INCOME	$	1,723		$	1,923		$	3,744		$	3,844

Other comprehensive income (loss):
Investment securities activity
Unrealized (losses) gains arising during the period		(1,518	)		(5,865	)		1,187			(12,756	)
Related tax benefit (expense)		319			1,232			(250	)		2,679
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		(1,199	)		(4,633	)		937			(10,077	)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	524		$	(2,710	)	$	4,681		$	(6,233	)

The accompanying notes are an integral part of these consolidated financial statements.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)


	Shares of Common Stock			Common Stock			Additional Paid-in- Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, December 31, 2021		23,922		$	47,844		$	14,570		$	2,031		$	(814	)	$	63,631
Net income		—			—			—			1,921			—			1,921
Other comprehensive loss, net of tax		—			—			—			—			(5,444	)		(5,444	)
Cash dividend declared ($0.05 per share)		—			—			—			(1,196	)		—			(1,196	)
Balance, March 31, 2022		23,922		$	47,844		$	14,570		$	2,756		$	(6,258	)	$	58,912

Net income		—			—			—			1,923			—			1,923
Other comprehensive loss, net of tax		—			—			—			—			(4,633	)		(4,633	)
Repurchase of common stock		(16	)		(33	)		(5	)		—			—			(38	)
Balance, June 30, 2022		23,906		$	47,811		$	14,565		$	4,679		$	(10,891	)	$	56,164

Balance, December 31, 2022		23,848		$	47,697		$	14,546		$	8,917		$	(13,941	)	$	57,219
Net income		—			—			—			2,021			—			2,021
Adoption of ASU 2016-13		—			—			—			(212	)		—			(212	)
Other comprehensive income, net of tax		—			—			—			—			2,136			2,136
Repurchase of common stock		(20	)		(40	)		(6	)		—			—			(46	)
Cash dividend declared ($0.06 per share)		—			—			—			(1,430	)		—			(1,430	)
Balance, March 31, 2023		23,828		$	47,657		$	14,540		$	9,296		$	(11,805	)	$	59,688

Net income		—			—			—			1,723			—			1,723
Other comprehensive loss, net of tax		—			—			—			—			(1,199	)		(1,199	)
Repurchase of common stock		(25	)		(51	)		(4	)		—			—			(55	)
Balance, June 30, 2023		23,803		$	47,606		$	14,536		$	11,019		$	(13,004	)	$	60,157

The accompanying notes are an integral part of these consolidated financial statements.

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(IN THOUSANDS)

(UNAUDITED)


	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	3,744		$	3,844
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		793			916
Provision for credit losses		149			175
Income on bank owned life insurance		(28	)		(12	)
Gain on sale of mortgage loans		(4	)		(20	)
Gain on sale or disposal of premises and equipment		(134	)		—
Gain on sale of other real estate owned		—			(25	)
Loans originated for sale		(81	)		(1,134	)
Proceeds from sales of loans originated for sale		85			1,092
Adjustment of carrying value of other real estate owned		—			137
Net amortization/accretion of bond premiums/discounts		151			276
Deferred tax (benefit) expense		(1	)		644
Net change in:
Accrued interest receivable		72			(127	)
Other assets		(909	)		(1,426	)
Accrued interest payable		404			61
Accrued expenses and other liabilities		(1,191	)		409
Net cash provided by operating activities		3,050			4,810

CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans		(24,473	)		8,730
Purchase of securities available-for-sale		—			(14,861	)
Proceeds from repayments and maturities of securities available-for-sale		4,006			8,571
Net purchase of equity securities (restricted)		(420	)		(2,277	)
Payments for the purchase of premises and equipment		(813	)		(392	)
Proceeds from sales of premises and equipment		809			—
Proceeds from sales of other real estate owned		—			207
Net cash used in investing activities		(20,891	)		(22	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short term borrowings		—			60,000
Issuance of long-term debt		10,000			—
Net change in noninterest bearing deposits		(2,789	)		8,734
Net change in interest bearing deposits		18,158			(9,183	)
Dividends paid		(1,430	)		(1,196	)
Repurchase of common stock		(101	)		(38	)
Net cash provided by financing activities		23,838			58,317

Net increase in cash and cash equivalents		5,997			63,105
Cash and cash equivalents, beginning of the period		61,686			60,946
Cash and cash equivalents, end of the period	$	67,683		$	124,051

Supplemental disclosure of cash paid during the period for:
Interest	$	3,069		$	1,091
Taxes		1,925			325
Supplemental disclosure of non-cash transactions:
Loans made to finance sale of other real estate owned		—			711
Change in unrealized losses on securities available-for-sale		1,187			(12,756	)

The accompanying notes are an integral part of these consolidated financial statements.

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF OPERATIONS

Nature of Operations – New Peoples Bankshares, Inc. (New Peoples or the Company) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (the Federal Reserve). The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, western North Carolina and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements conform to U. S. generally accepted accounting principles (GAAP) and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position ~~at September~~as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, and the results of operations for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022. The Notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

The consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (hereinafter, collectively referred to as the Company, we, us or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for ~~loan~~credit losses ~~and the determination of the deferred tax asset are~~is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income.

The Company’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in the Company’s Annual report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022 except for the following:

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $80,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other liabilities. The Company recorded a net decrease to retained earnings of $212,000 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material.

The following table illustrates the impact on the allowance for credit losses from the adoption of ASC 326:

Schedule of allowance for credit losses on available for sale securities
	January 1, 2023 As Reported Under ASC 326		December 31, 2022 Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
(Dollars are in thousands)
Assets:
Loans, at amortized cost		584,613		584,613	$	—
Allowance for credit losses on loans:
Real estate secured:
Commercial		2,065		2,364		(299	)
Construction and land development		509		345		164
Residential 1-4 family		2,639		2,364		275
Multifamily		274		262		12
Farmland		228		153		75
Total real estate loans		5,715		5,488		227
Commercial		622		381		241
Agriculture		27		32		(5	)
Consumer and other loans		283		386		(103	)
Unallocated		—		440		(440	)
Total allowance for credit losses for loans		6,647		6,727		(80	)
Deferred tax asset		4,679		4,623		56
Liabilities:
Allowance for credit losses for unfunded commitments		348		—		348

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

Allowance for Credit Losses – Available-for-sale Securities

For available-for-sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income (loss).

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. As of June 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.0 million as of June 30, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company primarily utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes to: lending policies and procedures, national and local economic conditions, the experience and ability of management and staff; the volume and severity of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements and competition.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a discounted cash flow methodology:

Commercial Loans. We make commercial loans to qualified businesses in our market area. Our commercial lending consists primarily of commercial and industrial loans to finance accounts receivable, inventory, property, plant and equipment. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate. To manage these risks, our underwriting guidelines generally require us to secure commercial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition, we actively monitor certain measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.

Residential Mortgage Loans. Our residential mortgage loans consist of residential first and second mortgage loans, residential construction loans, home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. We make mortgage loans with a variety of terms, including fixed and floating or variable rates and a variety of maturities. Under our underwriting guidelines, residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with our appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

Construction Loans. Construction lending entails significant additional risks compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate the total loan funds required to complete a project and related loan-to-value ratios accurately. To minimize the risks associated with construction lending, loan-to-value limitations for residential, multi-family and non-residential construction loans are in place. These are in addition to the usual credit analyses of borrowers. Management feels that the loan-to-value ratios help to minimize the risk of loss and to compensate for normal fluctuations in the real estate market. Maturities for construction loans generally range from 4 to 12 months for residential property and from 6 to 18 months for non-residential and multi-family properties.

Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance due to the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. A borrower may also be able to assert against the Bank as an assignee any claims and defenses that it has against the seller of the underlying collateral.

Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates loan relationships of $250,000 or more that have been determined to meet the regulatory definitions of “special mention” or “classified” (together known as “criticized”) as individually evaluated. The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral method”) or the DCF method.

The collateral method is applied to individually evaluated loans for which foreclosure is probable. The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral (“collateral dependent”). The allowance for credit loss is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, the allowance for credit loss is calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the allowance for credit loss is calculated as the amount by which the loan's amortized cost basis exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit loss may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

The DCF method is applied to individually evaluated loans that do not meet the criteria for collateral method measurement. Cash flows are projected and discounted using the same method as for collectively evaluated loans, and the Company considers default and prepayment assumptions.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments, which is included in the provision for credit losses, in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

On January 1, 2023, concurrent with its adoption of ASU No. 2016-13, the Company adopted ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. Disclosures about periods prior to adoption will be presented under GAAP applicable for that period.

Similar to its policy under previous GAAP, the Company continues to identify modifications to loans and to determine whether the borrower is experiencing financial difficulty. If the Company determines that the borrower is experiencing financial difficulty, the loan's risk rating is evaluated to determine whether it falls within the regulatory definition of “criticized” and requires individual evaluation. Under previous GAAP, modifications to loans when the borrower was experiencing financial difficulty were designated as TDR and were individually evaluated for the duration of the loan. Under CECL, if a previously modified loan with financial difficulty is subsequently upgraded to a pass rating, it will no longer be individually evaluated.

NOTE 3 EARNINGS PER SHARE

Basic ~~Earnings~~earnings per share computations are based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the three-month and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, there were no potential common shares. Basic and diluted net income per common share calculations follows:

Schedule of basic and diluted net loss per common share calculations
(Dollars in Thousands, Except Share and Per Share Data)	For the three months ended September 30,				For the Nine months ended September 30,
(Dollars are in thousands, except share and per share data)									For the three months ended June 30,				For the six months ended June 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income	$	1,986	$	1,845	$	5,830	$	5,093	$	1,723	$	1,923	$	3,744	$	3,844
Weighted average shares outstanding		23,893,224		23,922,086		23,910,287		23,922,086		23,817,903		23,915,869		23,829,468		23,918,960
Weighted average dilutive shares outstanding		23,893,224		23,922,086		23,910,287		23,922,086		23,817,903		23,915,869		23,829,468		23,918,960

Basic and diluted Earnings per share	$	0.08	$	0.08	$	0.24	$	0.21
Basic and diluted earnings per share									$	0.07	$	0.08	$	0.16	$	0.16

812

NOTE 4 CAPITAL

Capital Requirements and Ratios

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

To qualify as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3 billion or less. The primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level.

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer required is ~~2.50~~2.50%%. ~~At September~~As of June 30, ~~2022,~~2023, the Bank had a capital conservation buffer of ~~8.35%~~8.59%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management believes as of ~~September~~June 30, ~~2022,~~2023, the Bank met all capital adequacy requirements to which it was subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. ~~At September~~As of June 30, ~~2022,~~2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commencing January 1, 2023, and elected not to phase in the effect of CECL on regulatory capital.

The Bank’s actual capital amounts and ratios are presented in the following table as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Schedule of capital requirements
Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands) Amount Ratio Amount Ratio Amount Ratio
September 30, 2022:
Total Capital to Risk Weighted Assets 90,849 16.35 % $ 44,465 8.0 % $ 55,582 10.0 %
Tier 1 Capital to Risk Weighted Assets 84,256 15.16 % 33,349 6.0 % 44,465 8.0 %
Tier 1 Capital to Average Assets 84,256 9.86 % 34,166 4.0 % 42,707 5.0 %
Common Equity Tier 1 Capital
to Risk Weighted Assets 84,256 15.16 % 25,012 4.5 % 36,128 6.5 %

December 31, 2021:

Total Capital to Risk Weighted Assets 85,890 16.23 % $ 42,332 8.0 % $ 52,915 10.0 %
Tier 1 Capital to Risk Weighted Assets 79,274 14.98 % 31,749 6.0 % 42,332 8.0 %
Tier 1 Capital to Average Assets 79,274 9.86 % 32,145 4.0 % 40,181 5.0 %
Common Equity Tier 1 Capital
to Risk Weighted Assets 79,274 14.98 % 23,812 4.5 % 34,395 6.5 %

Schedule of capital requirements
	Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2023:
Total capital to risk weighted assets		95,814		16.59	%	$	46,196		8.00	%	$	55,745		10.00	%
Tier 1 capital to risk weighted assets		88,718		15.35	%		34,647		6.00	%		46,196		8.00	%
Tier 1 capital to average assets		88,718		11.05	%		32,111		4.00	%		40,139		5.00	%
Common equity Tier 1 capital
to risk weighted assets		88,718		15.35	%		25,985		4.50	%		37,534		6.50	%

December 31, 2022:
Total capital to risk weighted assets		93,028		16.50	%	$	45,106		8.00	%	$	56,382		10.00	%
Tier 1 capital to risk weighted assets		86,301		15.31	%		33,829		6.00	%		45,106		8.00	%
Tier 1 capital to average assets		86,301		10.40	%		33,206		4.00	%		41,508		5.00	%
Common equity Tier 1 capital
to risk weighted assets		86,301		15.31	%		25,372		4.50	%		36,648		6.50	%

NOTE 5 INVESTMENT SECURITIES

The amortized cost and estimated fair value of available-for-sale ~~(AFS)~~(“AFS”) securities as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 is as follows:

Schedule of securities amortized cost and estimated fair value
				Gross		Gross		Approximate			Gross		Gross		Amortized
		Amortized		Unrealized		Unrealized		Fair	Amortized		Unrealized		Unrealized		Fair
(Dollars are in thousands)	(Dollars are in thousands)	Cost		Gains		Losses		Value	Cost		Gains		Losses		Value
September 30, 2022
June 30, 2023
U.S. Treasuries	$	12,639	$	-	$	993	$	11,646	$	12,648	$	—	$	892	$	11,756
U.S. Government Agencies		10,451		4		695		9,760		9,407		4		744		8,667
Taxable municipals	Taxable municipals	23,338	-		5,560		17,778			23,000		—		5,468		17,532
Corporate bonds	Corporate bonds	3,515	-		340		3,175			3,505		—		407		3,098
Mortgage backed securities	Mortgage backed securities	66,301	-		9,815		56,486			61,007		—		8,954		52,053
Total Securities available for sale	$	116,244	$	4	$	17,403	$	98,845

December 31, 2021
Total securities available-for-sale									$	109,567	$	4	$	16,465	$	93,106
December 31, 2022
U.S. Treasuries	$	7,791	$	2	$	122	$	7,671	$	12,642	$	—	$	957	$	11,685
U.S. Government Agencies		9,098		77		86		9,089		10,129		4		734		9,399
Taxable municipals		23,075		159		254		22,980		23,022		—		6,207		16,815
Corporate bonds		2,014		23		18		2,019		3,512		—		376		3,136
Mortgage backed securities		66,410		143		954		65,599		64,419		—		9,378		55,041
Total Securities available for sale	$	108,388	$	404	$	1,434	$	107,358
Total securities available-for-sale									$	113,724	$	4	$	17,652	$	96,076

The following table details unrealized losses and related fair values in the AFS portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

Schedule of fair value and gross unrealized losses on investment securities
	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
(Dollars are in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2022
June 30, 2023
U. S. Treasuries													$	1,446	$	16	$	10,308	$	876	$	11,754	$	892
U.S. Government Agencies														1,778		50		6,732		694		8,510		744
Taxable municipals														475		25		17,057		5,443		17,532		5,468
Corporate bonds														985		15		2,113		392		3,098		407
Mortgage backed securities														2,287		71		49,766		8,883		52,053		8,954
Total securities available-for-sale													$	6,971	$	177	$	85,976	$	16,288	$	92,947	$	16,465
December 31, 2022
U.S. Treasuries	$	5,115	$	283	$	5,564	$	710	$	10,679	$	993	$	4,761	$	145	$	6,922	$	812	$	11,683	$	957
U.S. Government Agencies		5,450		362		3,120		333		8,570		695		5,925		348		3,295		386		9,220		734
Taxable municipals		7,009		2,131		9,969		3,429		16,978		5,560		3,689		1,113		13,127		5,094		16,816		6,207
Corporate bonds		2,288		228		388		112		2,676		340		2,375		136		761		240		3,136		376
Mortgage backed securities		14,463		1,759		39,512		8,056		53,975		9,815		11,338		861		43,612		8,517		54,950		9,378
Total Securities available for sale	$	34,325	$	4,763	$	58,553	$	12,640	$	92,878	$	17,403

December 31, 2021
U.S. Treasuries	$	6,200	$	122	$	—	$	—	$	6,200	$	122
U.S. Government Agencies		977		10		3,434		76		4,411		86
Taxable municipals		13,040		237		387		17		13,427		254
Corporate bonds		1,482		18		—		—		1,482		18
Mortgage backed securities		52,180		758		6,282		196		58,462		954
Total Securities available for sale	$	73,879	$	1,145	$	10,103	$	289	$	83,982	$	1,434

Total securities available-for-sale													$	28,088	$	2,603	$	67,717	$	15,049	$	95,805	$	17,652

~~At September~~As of June 30, ~~2022,~~2023, there were ~~216~~219 securities in a loss position, of which ~~100~~202 have been in a loss position for twelve months or more. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are not a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell, any of the securities referenced in the table above before recovery of their amortized cost. None of the individual securities are past due as to principal or interest payments and a number of these securities have explicit or implicit payment guarantees. The remaining securities have credit ratings at or above that necessary to be considered “bank qualified”.

Investment securities with a carrying value of $~~28.3~~36.9 million and $~~12.1~~27.3 million ~~at September~~as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

~~The following table summarizes~~There were no sales of ~~AFS debt~~available-for-sale investment securities ~~for~~during the ~~nine months-ended September~~three and six months ended June 30,

Schedule of summarizes sales of AFS debt securities
(Dollars are in thousands) 2022 2021
Proceeds $ —   $ 7,686
Gains —   322
Losses —   —
Tax provision (benefit) —   68

2023 and 2022.

The amortized cost and fair value of investment securities ~~at September~~as of June 30, ~~2022,~~2023, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Schedule of amortized cost and fair value of investment securities contractual maturity
					Weighted							Weighted
(Dollars are in thousands)	Amortized		Fair		Average			Amortized		Fair		Average
Securities Available-for-Sale	Cost		Value		Yield			Cost		Value		Yield
Due in one year or less	$	1,777	$	1,776		4.30	%	$	2,998	$	2,951		3.22	%
Due after one year through five years		16,829		15,805		2.09	%		15,295		14,351		2.15	%
Due after five years through ten years		14,663		12,832		1.98	%		17,145		14,891		2.09	%
Due after ten years		82,975		68,432		1.82	%		74,129		60,913		1.90	%
Total	$	116,244	$	98,845		1.92	%	$	109,567	$	93,106		2.00	%

The Bank, as a member bank of the Federal Reserve Bank of Richmond (Federal Reserve Bank) and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in ~~Other Assets~~other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $~~3.0~~2.4 million and $~~2.0~~2.1 million ~~at September~~as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The stock has no quoted market value and no ready market exists. When evaluating these securities for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Equity securities are viewed as long-term investments and management believes the Company has the ability and the intent to hold these securities until their value is recovered

NOTE 6 LOANS

Loans receivable outstanding as of ~~September~~June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, are summarized as follows:

Schedule of Loans receivable outstanding
(Dollars are in thousands)
September 30,
2022
December 31, 2021
Real estate secured:
Commercial $ 198,101 $ 206,162
Construction and land development 38,598 32,325
Residential 1-4 family 226,706 224,530
Multifamily 29,062 33,048
Farmland 17,467 18,735
Total real estate loans 509,934 514,800
Commercial 45,126 54,325
Agriculture 3,799 4,021
Consumer installment loans 19,602 18,756
All other loans 1,413 1,842
Total loans $ 579,874 $ 593,744

~~Included in commercial loans at September 30, 2022 and December 31, 2021 were $298~~ ~~thousand and $6.4~~ ~~million of Paycheck Protection Program (PPP) loans, respectively, that are guaranteed by the Small Business Administration (SBA).~~

Schedule of Loans receivable outstanding
(Dollars are in thousands)	June 30, 2023		December 31, 2022
Real estate secured:
Commercial	$	209,780	$	197,069
Construction and land development		43,279		42,470
Residential 1-4 family		231,626		227,232
Multifamily		34,140		29,710
Farmland		17,628		17,744
Total real estate loans		536,453		514,225
Commercial		47,720		46,697
Agriculture		3,607		3,756
Consumer installment loans		20,651		19,309
All other loans		607		626
Total loans	$	609,038	$	584,613

Also included in total loans above are deferred loan fees of $1.7 million and $~~1.8~~1.6 million ~~at September~~as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Deferred loan costs were $~~2.1~~1.9 million and $~~2.0~~1.9 million, ~~at September~~as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Income from net deferred fees and costs is recognized over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities, any unamortized fee or costs is recognized at that time.

~~��11~~

Loans receivable on nonaccrual status as of ~~September~~June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, are summarized as follows:

Summary of loans receivable on nonaccrual status
(Dollars are in thousands)
September 30,
2022
December 31, 2021
Real estate secured:
Commercial $ 273 $ 415
Construction and land development 735 37
Residential 1-4 family 2,636 2,314
Multifamily — 111
Farmland 43 48
Total real estate loans 3,687 2,925
Commercial 15 9
Consumer installment loans and other loans 4 7
Total loans receivable on nonaccrual status $ 3,706 $ 2,941

	Summary of loans receivable on nonaccrual status
				CECL						Incurred Loss
				June 30, 2023						December 31, 2022
(Dollars are in thousands)				With No Allowance		With an Allowance		Total
Real estate secured:
	Commercial		$	-	$	268	$	268	$	-
	Construction and land development			-		-		-		471
	Residential 1-4 family			2,097		-		2,097		2,597
	Multifamily			199		-		199		268
	Farmland			-		-		-		41
		Total real estate loans		2,296		268		2,564		3,377
Commercial				-		-		-		-
Consumer installment loans and other loans				23		-		23		36
Total loans receivable on nonaccrual status			$	2,319	$	268	$	2,587	$	3,413

Total interest income not recognized on nonaccrual loans for the ~~nine~~six months ended ~~September~~June 30, 2023, and June 30, 2022, was $28,000 and ~~September 30, 2021, was $22 thousand and $445 thousand,~~$11,000, respectively.

~~The following tables presents information concerning~~Prior to the ~~Company’s investment in~~adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of ~~September 30, 2022,~~global cash flow sufficient to pay all debt obligations and ~~December 31, 2021:~~

Schedule of summary of impaired loans

As of September 30, 2022
(Dollars are in thousands)

Recorded
Investment

Unpaid Principal Balance

Related
Allowance
With no related allowance recorded:
Real estate secured:
Commercial $ 92 $ 133 $ —
Construction and land development 6 279 —
Residential 1-4 family 1,662 2,008 —
Multifamily —   —   —
Farmland 268 437 —
Commercial 24 32 —
Agriculture —   —   —
Consumer installment loans —   —   —
All other loans —   —   —
With an allowance recorded:
Real estate secured:
Commercial 291 361 69
Construction and land development 710 710 174
Residential 1-4 family 34 49 26
Multifamily —   —   —
Farmland —   —   —
Commercial —   —   —
Agriculture —   —   —
Consumer installment loans —   —   —
All other loans —   —   —
Total $ 3,087 $ 4,009 $ 269

an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all nonaccrual loans greater than $250,000 and all troubled debt restructurings, whether or not currently classified as such. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

1216

As of December 31, 2021
(Dollars are in thousands)

Recorded
Investment

Unpaid Principal Balance

Related
Allowance
With no related allowance recorded:
Real estate secured:
Commercial $ 99 $ 140 $ —
Construction and land development 24 298 —
Residential 1-4 family 1,508 1,791 —
Multifamily —   —   —
Farmland 320 490 —
Commercial —   —   —
Agriculture —   —   —
Consumer installment loans 2 2 —
All other loans —   —   —
With an allowance recorded:
Real estate secured:
Commercial 315 372 94
Construction and land development —   —   —
Residential 1-4 family 340 372 53
Multifamily —   —   —
Farmland 197 209 17
Commercial 28 35 2
Agriculture —   —   —
Consumer installment loans —   —   —
All other loans —   —   —
Total $ 2,833 $ 3,709 $ 166

The following ~~tables present information concerning the Company’s average impaired~~table presents loans ~~and interest recognized on those impaired~~individually evaluated for impairment by class of loans ~~for the periods indicated:~~as of December 31, 2022:

	Nine Months Ended
	September 30, 2022				September 30, 2021
(Dollars are in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Schedule of summary of impaired loans
As of December 31, 2022 (Dollars are in thousands)									Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Real estate secured:
Commercial	$	132	$	4	$	281	$	—	$	90	$	131	$	—	$	124
Construction and land development		25		13		75		9		471		491		—		114
Residential 1-4 family		1,578		37		1,773		24		1,617		1,972		—		1,585
Multifamily		—		—		—		—		—		—		—		—
Farmland		322		18		467		14		248		417		—		307
Commercial		12		1		—		—		23		31		—		14
Agriculture		—		—		—		—		—		—		—		—
Consumer installment loans		1		—		3		—		—		—		—		1
All other loans		—		—		—		—		—		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		442		3		1,010		3		268		338		63		407
Construction and land development		364		17		—		—		—		—		—		291
Residential 1-4 family		243		6		338		6		32		48		23		201
Multifamily		25		—		—		—		—		—		—		20
Farmland		79		—		102		4		—		—		—		63
Commercial		34		1		129		1		—		—		—		27
Agriculture		—		—		—		—		—		—		—		—
Consumer installment loans		—		—		—		—		—		—		—		—
All other loans		—		—		—		—		—		—		—		—
Total	$	3,257	$	100	$	4,178	$	61	$	2,749	$	3,428	$	86	$	3,154

Upon adoption of ASU 2016-13 the Company began evaluating loans that do not share risk characteristics on an individual basis utilizing the collateral or discounted cash flow methods as described in Note 2 Summary of Significant Accounting Policies. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to those loans as June 30, 2023:

	Three Months Ended
	September 30, 2022				September 30, 2021
(Dollars are in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
As of June 30, 2023 (Dollars are in thousands)									Unpaid Principal Balance		Related Allowance
Real estate secured:
Commercial	$	94	$	4	$	122	$	—	$	268	$	64
Construction and land development		9		9		56		5		—		—
Residential 1-4 family		1,553		23		1,764		10		262		—
Multifamily		—		—		—		—		—		—
Farmland		275		9		452		5		—		—
Total real estate secured										530		64
Commercial		25		1		—		—		—		—
Agriculture		—		—		—		—		109		57
Consumer installment loans		—		—		3		—		—		—
All other loans		—		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		295		—		519		—
Construction and land development		727		17		—		—
Residential 1-4 family		167		6		357		6
Multifamily		25		—		—		—
Farmland		—		—		100		4
Commercial		—		—		29		—
Agriculture		—		—		—		—
Consumer installment loans		—		—		—		—
All other loans		—		—		—		—
Total	$	3,170	$	69	$	3,402	$	30	$	639	$	121

AnThe following table is an age analysis of past due loans receivable as of ~~September~~June 30, ~~2022, and~~2023, segregated by class:

Summary age analysis of past due loans receivable
As of June 30, 2023 (Dollars are in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
Real estate secured:
Commercial	$	99	$	—	$	268	$	367	$	209,413	$	209,780
Construction and land development		—		—		—		—		43,279		43,279
Residential 1-4 family		1,450		877		751		3,078		228,548		231,626
Multifamily		—		—		—		—		34,140		34,140
Farmland		—		—		—		—		17,628		17,628
Total real estate loans		1,549		877		1,019		3,445		533,008		536,453
Commercial		17		—		—		17		47,703		47,720
Agriculture		109		—		—		109		3,498		3,607
Consumer installment loans		50		17		23		90		20,561		20,651
All other loans		—		—		—		—		607		607
Total loans	$	1,725	$	894	$	1,042	$	3,661	$	605,377	$	609,038

The following table is an age analysis of past due loans receivable as of December 31, ~~2021, is below. At September 30,~~ 2022, ~~and December 31, 2021, no loans over 90 days past due were accruing.~~segregated by class:

Summary age analysis of past due loans receivable

As of September 30, 2022
(Dollars are in thousands)

Loans
30-59
Days
Past
Due

Loans
60-89
Days
Past
Due

Loans
90 or
More
Days
Past
Due

Total
Past
Due
Loans

Current
Loans

Total
Loans
Real estate secured:
Commercial $ —   $ —   $ —   $ —   $ 198,101 $ 198,101
Construction and land
development
50 —   710 760 37,838 38,598
Residential 1-4 family 1,879 361 551 2,791 223,915 226,706
Multifamily —   —   —   —   29,062 29,062
Farmland 43 —   —   43 17,424 17,467
Total real estate loans 1,972 361 1,261 3,594 506,340 509,934
Commercial 65 —   15 80 45,046 45,126
Agriculture —   —   —   —   3,799 3,799
Consumer installment
loans
28 32 4 64 19,538 19,602
All other loans 28 —   —   28 1,385 1,413
Total loans $ 2,093 $ 393 $ 1,280 $ 3,766 $ 576,108 $ 579,874

As of December 31, 2022 (Dollars are in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
Real estate secured:
Commercial	$	268	$	—	$	—	$	268	$	196,801	$	197,069
Construction and land development		89		—		—		89		42,381		42,470
Residential 1-4 family		3,521		543		341		4,405		222,827		227,232
Multifamily		229		—		—		229		29,481		29,710
Farmland		285		—		—		285		17,459		17,744
Total real estate loans		4,392		543		341		5,276		508,949		514,225
Commercial		56		—		—		56		46,641		46,697
Agriculture		—		—		—		—		3,756		3,756
Consumer installment Loans		73		17		17		107		19,202		19,309
All other loans		59		—		—		59		567		626
Total loans	$	4,580	$	560	$	358	$	5,498	$	579,115	$	584,613

As of December 31, 2021
(Dollars are in thousands)

Loans
30-59
Days
Past
Due

Loans
60-89
Days
Past
Due

Loans
90 or
More
Days
Past
Due

Total
Past
Due
Loans

Current
Loans

Total
Loans
Real estate secured:
Commercial $ —   $ —   $ —   $ —   $ 206,162 $ 206,162
Construction and land
development
7 —   7 14 32,311 32,325
Residential 1-4 family 2,473 240 486 3,199 221,331 224,530
Multifamily —   —   111 111 32,937 33,048
Farmland —   —   —   —   18,735 18,735
Total real estate loans 2,480 240 604 3,324 511,476 514,800
Commercial 5 —   —   5 54,320 54,325
Agriculture —   —   —   —   4,021 4,021
Consumer installment
Loans
56 5 —   61 18,695 18,756
All other loans —   —   —   —   1,842 1,842
Total loans $ 2,541 $ 245 $ 604 $ 3,390 $ 590,354 $ 593,744

The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

Pass- Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

Special Mention- Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

Substandard- A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified doubtful have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

1518

The following table present the credit risk grade of loans by origination year as of June 30, 2023:

~~Based on~~

Summary of risk category of loans receivable
As of June 30, 2023
Dollars are in thousands	2023			2022			2021			2020		2019		Prior			Revolving		Total
Commercial real estate
Pass	$	17,674		$	43,891		$	47,305		$	30,822	$	21,812	$	46,866		$	1,042	$	209,412
Special mention		—			—			—			—		—		99			—		99
Substandard		—			—			—			—		—		269			—		269
Total commercial real estate	$	17,674		$	43,891		$	47,305		$	30,822	$	21,812	$	47,234		$	1,042	$	209,780
Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—		$	—	$	—
Construction and Land Development
Pass	$	4,944		$	19,547		$	9,988		$	4,603	$	1,453	$	2,127		$	71	$	42,733
Special mention		—			—			—			—		436		110			—		546
Substandard		—			—			—			—		—		—			—		—
Total construction and land development	$	4,944		$	19,547		$	9,988		$	4,603	$	1,889	$	2,237		$	71	$	43,279
Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—		$	—	$	—
Residential 1-4 family
Pass	$	13,532		$	33,923		$	44,183		$	14,297	$	14,548	$	88,856		$	19,901	$	229,240
Special mention		—			—			—			—		—		313			—		313
Substandard		—			—			202			—		40		1,762			69		2,073
Total residential 1-4 family	$	13,532		$	33,923		$	44,385		$	14,297	$	14,588	$	90,931		$	19,970	$	231,626
Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—		$	—	$	—
Multifamily
Pass	$	4,178		$	12,021		$	8,273		$	2,689	$	1,106	$	5,674		$	—	$	33,941
Special mention		—			—			—			—		—		—			—		—
Substandard		—			—			—			—		—		199			—		199
Total multifamily	$	4,178		$	12,021		$	8,273		$	2,689	$	1,106	$	5,873		$	—	$	34,140
Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—		$	—	$	—
Farmland
Pass	$	1,311		$	2,270		$	3,602		$	806	$	1,233	$	8,209		$	—	$	17,431
Special mention		—			—			—			—		1		196			—		197
Substandard		—			—			—			—		—		—			—		—
Total farmland	$	1,311		$	2,270		$	3,602		$	806	$	1,234	$	8,405		$	—	$	17,628
Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—		$	—	$	—
Commercial
Pass	$	8,684		$	12,819		$	6,736		$	1,972	$	2,621	$	7,218		$	7,667	$	47,717
Special mention		—			—			—			—		—		3			—		3
Substandard		—			—			—			—		—		—			—		—
Total commercial	$	8,684		$	12,819		$	6,736		$	1,972	$	2,621	$	7,221		$	7,667	$	47,720
Current period gross charge-offs	$	—		$	(5	)	$	—		$	—	$	—	$	—		$	—	$	(5	)
Agriculture
Pass	$	274		$	639		$	425		$	209	$	112	$	814		$	1,134	$	3,607
Special mention		—			—			—			—		—		—			—		—
Substandard		—			—			—			—		—		—			—		—
Total agriculture	$	274		$	639		$	425		$	209	$	112	$	814		$	1,134	$	3,607
Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—		$	—	$	—
Consumer and All Other
Pass	$	5,555		$	6,869		$	3,293		$	1,242	$	857	$	1,359		$	2,058	$	21,233
Special mention		—			2			—			—		—		—			—		2
Substandard		—			4			—			—		—		19			—		23
Total consumer and all other	$	5,555		$	6,875		$	3,293		$	1,242	$	857	$	1,378		$	2,058	$	21,258
Current period gross charge-offs	$	(97	)	$	(34	)	$	(5	)	$	—	$	—	$	(37	)	$	—	$	(173	)
Total	$	56,152		$	131,985		$	124,007		$	56,640	$	44,219	$	164,093		$	31,942	$	609,038
Total current period gross charge-offs	$	(97	)	$	(39	)	$	(5	)	$	—	$	—	$	(37	)	$	—	$	(178	)

The following table presents the ~~most recent analysis performed, the~~credit risk ~~categories~~grade of loans ~~receivable~~ as of ~~September 30, 2022, and~~ December 31, ~~2021, was as follows:~~2022, prior to the adoption of ASU 2016-13, under the incurred loss model:

Summary of risk category of loans receivable
As of September 30, 2022 (Dollars are in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
As of December 31, 2022 (Dollars are in thousands)											Pass		Special Mention		Substandard		Doubtful		Total
Real estate secured:
Commercial	$	193,557	$	4,271	$	273	$	—	$	198,101	$	195,376	$	1,425	$	268	$	—	$	197,069
Construction and land development		37,738		126		734		—		38,598		41,882		117		471		—		42,470
Residential 1-4 family		223,593		493		2,620		—		226,706		224,228		406		2,598		—		227,232
Multifamily		28,852		210		—		—		29,062		29,503		207		—		—		29,710
Farmland		16,538		886		43		—		17,467		16,848		855		41		—		17,744
Total real estate loans		500,278		5,986		3,670		—		509,934		507,837		3,010		3,378		—		514,225
Commercial		44,208		903		15		—		45,126		46,471		226		—		—		46,697
Agriculture		3,799		—		—		—		3,799		3,756		—		—		—		3,756
Consumer installment loans		19,595		3		4		—		19,602		19,272		2		35		—		19,309
All other loans		1,413		—		—		—		1,413		626		—		—		—		626
Total	$	569,293	$	6,892	$	3,689	$	—	$	579,874	$	577,962	$	3,238	$	3,413	$	—	$	584,613

As of December 31, 2021 (Dollars are in thousands)		Pass		Special Mention		Substandard		Doubtful		Total
Real estate secured:
Commercial	$	198,022	$	7,725	$	415	$	—	$	206,162
Construction and land development		31,366		922		37		—		32,325
Residential 1-4 family		221,342		915		2,273		—		224,530
Multifamily		32,499		438		111		—		33,048
Farmland		18,137		550		48		—		18,735
Total real estate loans		501,366		10,550		2,884		—		514,800
Commercial		53,162		1,154		9		—		54,325
Agriculture		4,021		—		—		—		4,021
Consumer installment loans		18,746		2		8		—		18,756
All other loans		1,842		—		—		—		1,842
Total	$	579,137	$	11,706	$	2,901	$	—	$	593,744

NOTE 7 ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES FOR LOANS (“ACLL”)

In determining the amount of our allowance for ~~loan~~credit losses, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in either the portfolio segment or impairment calculations at September 30, 2022 and December 31, 2021. Additionally, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. This revision included reviewing our internal scoring related to loan modifications and extensions, and external factors, specifically, unemployment and other economic factors.

The following table presents a disaggregated analysis of activity in the allowance for credit losses as of June 30, 2023:

Schedule of allocation of portion of allowance
		Real estate secured
(Dollars are in thousands)		Commercial			Construction and Land Development			Residential 1-4 family			Multifamily			Farmland			Commercial			Agriculture			Consumer and All Other			Unallocated			Total
Six months ended June 30, 2023
Beginning balance	$	2,364		$	345		$	2,364		$	262		$	153		$	381		$	32		$	386		$	440		$	6,727
Adjustment to allowance for adoption of ASU 2016-13		(299	)		164			275			12			75			241			(5	)		(103	)		(440	)		(80	)
Charge-offs		—			—			—			—			—			(5	)		—			(173	)		—			(178	)
Recoveries		—			16			15			—			—			1			—			97			—			129
Provision for credit losses		212			(27	)		(71	)		16			(36	)		(42	)		58			106			—			216
Ending balance	$	2,277		$	498		$	2,583		$	290		$	192		$	576		$	85		$	313		$	—		$	6,814
Three months ended June 30, 2023
Beginning balance	$	2,157		$	472		$	2,619		$	302		$	192		$	588		$	31		$	300		$	—		$	6,661
Charge-offs		—			—			—			—			—			—			—			(95	)		—			(95	)
Recoveries		—			11			6			—			—			—			—			39			—			56
Provision for credit losses		120			15			(42	)		(12	)		—			(12	)		54			69			—			192
Ending balance	$	2,277		$	498		$	2,583		$	290		$	192		$	576		$	85		$	313		$	—		$	6,814

The following tables present a disaggregated analysis of activity in the allowance for loan losses, for comparative periods, prior to the ~~nine- and three-month periods ended September 30, 2022 and 2021, respectively. Additionally, the allocation~~adoption of ~~the allowance by recorded portfolio segment and impairment method is presented as of September 30, 2022, and December 31, 2021, respectively.~~

ASU 2016-13:

		Real estate secured
(Dollars are in thousands)		Commercial			Construction and Land Development			Residential 1-4 family			Multifamily			Farmland			Commercial			Agriculture			Consumer and All Other			Unallocated			Total
Year ended December 31, 2022
Beginning balance	$	2,134		$	189		$	2,237		$	254		$	149		$	1,099		$	28		$	108		$	537		$	6,735
Charge-offs		(5	)		(149	)		(64	)		(111	)		(1	)		(45	)		(1	)		(559	)		—			(935	)
Recoveries		33			6			100			2			14			31			1			115			—			302
Provision		202			299			91			117			(9	)		(704	)		4			722			(97	)		625
Ending balance	$	2,364		$	345		$	2,364		$	262		$	153		$	381		$	32		$	386		$	440		$	6,727
Allowance for loan losses at December 31, 2022
Individually evaluated for impairment	$	63		$	—		$	23		$	—		$	—		$	—		$	—		$	—		$	—		$	86
Collectively evaluated for impairment		2,301			345			2,341			262			153			381			32			386			440			6,641
	$	2,364		$	345		$	2,364		$	262		$	153		$	381		$	32		$	386		$	440		$	6,727
Loans at December 31, 2022
Individually evaluated for impairment	$	358		$	471		$	1,649		$	—		$	248		$	23		$	—		$	—		$	—		$	2,749
Collectively evaluated for impairment		196,711			41,999			225,583			29,710			17,496			46,965			3,756			19,644			—			581,864
	$	197,069		$	42,470		$	227,232		$	29,710		$	17,744		$	46,988		$	3,756		$	19,644		$	—		$	584,613

		Real estate secured
(Dollars are in thousands)		Commercial			Construction and Land Development			Residential 1-4 family			Multifamily			Farmland			Commercial			Agriculture			Consumer and All Other			Unallocated			Total
For the six months ended June 30, 2022
Beginning balance	$	2,134		$	189		$	2,237		$	254		$	149		$	1,099		$	28		$	108		$	537		$	6,735
Charge-offs		—			—			(24	)		(61	)		—			(28	)		—			(45	)		—			(158	)
Recoveries		—			—			22			—			—			14			—			28			—			64
Provision		28			261			4			215			(8	)		(232	)		1			79			(173	)		175
Ending balance	$	2,162		$	450		$	2,239		$	408		$	141		$	853		$	29		$	170		$	364		$	6,816
For the three months ended June 30, 2022
Beginning balance	$	2,132		$	229		$	2,198		$	313		$	143		$	1,005		$	28		$	112		$	599		$	6,759
Charge-offs		—			—			(24	)		—			—			—			—			(31	)		—			(55	)
Recoveries		—			—			8			—			—			3			—			26			—			37
Provision		30			221			57			95			(2	)		(155	)		1			63			(235	)		75
Ending balance	$	2,162		$	450		$	2,239		$	408		$	141		$	853		$	29		$	170		$	364		$	6,816
Allowance for loan losses as of June 30, 2022
Individually evaluated for impairment	$	77		$	207		$	47		$	50		$	—		$	—		$	—		$	—		$	—		$	381
Collectively evaluated for impairment		2,085			243			2,192			358			141			853			29			170			364			6,435
	$	2,162		$	450		$	2,239		$	408		$	141		$	853		$	29		$	170		$	364		$	6,816
Loans as of June 30, 2022
Individually evaluated for impairment	$	394		$	755		$	1,743		$	50		$	281		$	25		$	—		$	—		$	—		$	3,248
Collectively evaluated for impairment		196,216			36,935			221,979			37,561			17,774			46,672			3,623			21,623			—			582,383
	$	196,610		$	37,690		$	223,722		$	37,611		$	18,055		$	46,697		$	3,623		$	21,623		$	—		$	585,631

1621

Schedule of allocation of portion of allowance
Real estate secured
(Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total
Nine months ended September 30, 2022
Beginning balance $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735
Charge-offs (5 ) (149 ) (52 ) (111 ) (2 ) (29 ) —   (454 ) —   (802 )
Recoveries 33 3 87 2 14 29 —   92 —   260
Provision 42 394 (107 ) 97 (24 ) (429 ) 1 565 (139 ) 400
Ending balance $ 2,204 $ 437 $ 2,165 $ 242 $ 137 $ 670 $ 29 $ 311 $ 398 $ 6,593

Three months ended September 30, 2022
Beginning balance $ 2,162 $ 450 $ 2,239 $ 408 $ 141 $ 853 $ 29 $ 170 $ 364 $ 6,816
Charge-offs (5 ) (149 ) (28 ) (50 ) (2 ) (1 ) —   (409 ) —   (644 )
Recoveries 33 3 65 2 14 15 —   64 —   196
Provision 14 133 (111 ) (118 ) (16 ) (197 ) —   486 34 225
Ending balance $ 2,204 $ 437 $ 2,165 $ 242 $ 137 $ 670 $ 29 $ 311 $ 398 $ 6,593

Allowance for loan losses at September 30, 2022
Individually evaluated for impairment $ 69 $ 174 $ 26 $ —   $ —   $ —   $ —   $ —   $ —   $ 269
Collectively evaluated for impairment 2,135 263 2,139 242 137 670 29 311 398 6,324
$ 2,204 $ 437 $ 2,165 $ 242 $ 137 $ 670 $ 29 $ 311 $ 398 $ 6,593

Loans at September 30, 2022
Individually evaluated for impairment $ 383 $ 716 $ 1,696 $ —   $ 268 $ 24 $ —   $ —   $ —   $ 3,087
Collectively evaluated for impairment 197,718 37,882 225,010 29,062 17,199 45,102 3,799 21,015 —   576,787
$ 198,101 $ 38,598 $ 226,706 $ 29,062 $ 17,467 $ 45,126 $ 3,799 $ 21,015 $ —   $ 579,874

Real estate secured
(Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total
Allowance for loan losses at December 31, 2021
Individually evaluated for impairment $ 94 $ —   $ 53 $ —   $ 17 $ 2 $ —   $ —   $ —   $ 166
Collectively evaluated for impairment 2,040 189 2,184 254 132 1,097 28 108 537 6,569
$ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735

Loans at December 31, 2021
Individually evaluated for impairment $ 414 $ 24 $ 1,848 $ —   $ 517 $ 28 $ —   $ 2 $ —   $ 2,833
Collectively evaluated for impairment 205,748 32,301 222,682 33,048 18,218 54,297 4,021 20,596 —   590,911
$ 179,381 $ 25,031 $ 222,980 $ 16,569 $ 18,368 $ 86,010 $ 4,450 $ 22,777 $ —   $ 593,744

Real estate secured
(Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total
Nine months ended September 30, 2021
Beginning balance $ 2,281 $ 233 $ 1,951 $ 151 $ 97 $ 2,275 $ 40 $ 163 $ —   $ 7,191
Charge-offs (915 ) —   (48 ) —   —   (92 ) —   (55 ) —   (1,110 )
Recoveries 2 6 25 —   —   134 1 36 —   204
Provision 700 (69 ) 180 6 59 (842 ) (14 ) (42 ) 394 372
Ending balance $ 2,068 $ 170 $ 2,108 $ 157 $ 156 $ 1,475 $ 27 $ 102 $ 394 $ 6,657

Three months ended September 30, 2021
Beginning balance $ 2,151 $ 155 $ 2,046 $ 160 $ 137 $ 1,916 $ 28 $ 103 $ —   $ 6,696
Charge-offs —   —   (38 ) —   —   —   —   (27 ) —   (65 )
Recoveries —   6 8 —   —   3 —   9 —   26
Provision (83 ) 9 92 (3 ) 19 (444 ) (1 ) 17 394 —
Ending balance $ 2,068 $ 170 $ 2,108 $ 157 $ 156 $ 1,475 $ 27 $ 102 $ 394 $ 6,657

Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

NOTE 8 ~~TROUBLED DEBT RESTRUCTURINGS~~MODIFICATIONS MADE TO BORROWERS EXPERIENCING FINANCIAL DIFFICULTY

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a discounted cash flow methodology to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

There were $no loans modified to borrowers experiencing financial difficulty in the three or six months ended June 30, 2023. Additionally, there were no loans that had a payment default during the quarter that were modified in the previous 12 months.

~~2.1~~ ~~million and $~~

~~2.5~~Prior to adoption of ASC 2022-02, there were $2.0 million in loans classified as troubled debt restructurings ~~at September 30, 2022 and~~as of December 31, ~~2021, respectively.~~2022. All loans considered to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation. No loans modified during the three and ~~nine~~six months ended ~~September~~June 30, 2022 ~~or September 30, 2021,~~ were considered to be troubled debt restructurings.

~~One loan totaling $6 thousand, secured by residential real estate, previously modified as a troubled debt restructuring, was in default during~~For the three and six months ended ~~September~~June 30, ~~2022. Two~~2022, there were no loans ~~totaling $73 thousand, previously~~ modified as a troubled debt restructuring that subsequently defaulted ~~during the first nine~~within twelve months of ~~2022, were in compliance with~~ the terms of the restructuring at September 30, 2022. During the nine months ended September 30, 2021, two loans to the same borrower, previously modified as troubled debt restructurings, totaling $1.1 million defaulted, resulting in charge-offs totaling $835 thousand.loan modification. Generally, a restructured troubled debt is considered to be in default once it becomes 90 days or more past due following a modification.

~~In determining the~~NOTE 9 CREDIT ALLOWANCE FOR UNFUNDED COMMITMENTS

The Company maintains a separate allowance for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheet. The allowance for credit losses ~~management considers troubled debt restructurings~~for off-balance-sheet credit exposures is adjusted through a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and ~~subsequent defaults in~~an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described above, as these ~~restructurings in~~unfunded commitments share similar risk characteristics as its ~~estimate.~~loan portfolio segments. The Company ~~evaluates all troubled debt restructurings~~has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for ~~possible further impairment. As a result,~~off-balance-sheet credit exposures that are unconditionally cancellable by the ~~allowance~~Company or for undrawn amounts under such arrangements that may be ~~increased, adjustments may be made in~~drawn prior to the ~~allocation~~cancellation of the arrangement.

On January 1, 2023, the Company recorded an adjustment to initiate an allowance ~~or charge-offs may be taken~~for credit losses for unfunded commitments of $348,000 for the adoption of ASC Topic 326. For the three and six months ended June 30, 2023, the Company recorded a reversal to ~~further write down~~ the ~~carrying value~~provision for credit losses for unfunded commitments of $43,000, and $66,000, respectively. As of June 30, 2023, the ~~loan.~~liability for credit losses on off-balance-sheet credit exposures included in other liabilities was $282,000.

NOTE 910 OTHER REAL ESTATE OWNED

The following table summarizes the activity in other real estate owned for the ~~Nine~~six months ended ~~September~~June 30, ~~2022,~~2023, and the year ended December 31, ~~2021:~~2022:

Schedule of other real estate owned
(Dollars are in thousands)	September 30, 2022			December 31, 2021			June 30, 2023		December 31, 2022
Balance, beginning of period	$	1,361		$	3,334		$	261	$	1,361
Additions		—			566			—		—
Transfers from premises and equipment		—			950			—		—
Proceeds from sales		(207	)		(2,645	)		—		(207	)
Proceeds from insurance claims		—			(54	)
Loans made to finance sales		(711	)		(400	)		—		(711	)
Adjustment of carrying value		(137	)		(466	)		—		(197	)
Net gains from sales		15			76			—		15
Balance, end of period	$	321		$	1,361		$	261	$	261

18As of June 30, 2023, four loans totaling $383,000 were in the process of foreclosure.

NOTE 1011 FAIR VALUES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (the FASB) ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market and in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are valued using other financial instruments, the parameters of which can be directly observed.

Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows:

Investment Securities ~~Available for Sale~~Available-for-sale - Investment securities ~~available for sale~~available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s ~~available for sale~~available-for-sale securities, totaling $~~98.8~~93.1 million and $~~107.4~~96.1 million ~~at September~~as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

Collateral Dependent Loans with an ACL - ~~The Company does not record~~In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans ~~at fair value~~within our loan pools. In such cases, the loans are evaluated for expected credit losses on ~~a recurring basis. Real estate serves as collateral on a substantial majority~~an individual basis and excluded from the collective evaluation. Specific allocations of the ~~Company’s loans. When a~~allowance for credit losses are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things. A loan is considered ~~impaired, a specific reserve may be established. Loans, which are deemed~~ to be ~~impaired~~collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and ~~require a reserve are primarily valued on a non-recurring basis at~~repayment is expected to be provided substantially through the ~~fair value~~operation or sale of the ~~underlying real estate~~ collateral. ~~Where there is no observable market price,~~In such ~~fair values~~cases, expected credit losses are ~~obtained using independent appraisals, which management evaluates to determine whether or not~~based on the fair value of the collateral ~~is further impaired below~~at the ~~appraised value and adjusts~~measurement date, adjusted for estimated selling costs if satisfaction of ~~disposition.~~the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The ~~Company records impaired~~fair value of real estate collateral supporting collateral dependent loans ~~as nonrecurring Level 3 assets.~~is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice.

Other Real Estate Owned –Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned. These assets are carried at the lower of their carrying value or fair value. Fair value is based upon observable market prices, when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable market prices are not available, management determines the fair value of the foreclosed asset using independent third-party appraisals, evaluated to determine whether or not the property is further impaired below the appraised value, and adjusts for estimated costs of disposition. The Company records foreclosed assets as nonrecurring Level 3.

Assets and liabilities measured at fair value are as follows as of June 30, 2023:

Schedule of summary of assets and liabilities measured at fair value
June 30, 2023 (Dollars are in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(On a recurring basis) Available-for-sale investments
U.S. Treasuries	$	—	$	11,756	$	—
U.S. Government Agencies		—		8,667		—
Taxable municipals		—		17,532		—
Corporate bonds		—		3,098		—
Mortgage-backed securities		—		52,053		—
(On a non-recurring basis) Other real estate owned		—		—		261
Collateral dependent loans with ACL:
Commercial real estate		—		—		204
Agriculture		—		—		52
Total	$	—	$	93,106	$	517

1924

Assets and liabilities measured at fair value are as follows as of ~~September 30,~~December 31, 2022 (for purpose of this table the impaired loans are shown net of the related allowance):

Schedule of summary of assets and liabilities measured at fair value

September 30, 2022
(Dollars are in thousands)

Quoted market price in active markets
(Level 1)

Significant other observable inputs
(Level 2)

Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available for sale investments

    U.S. Treasuries $ —   $ 11,646 $ —
    U.S. Government Agencies —   9,760 —
    Taxable municipals —   17,778 —
    Corporate bonds —   3,175 —
    Mortgage-backed securities —   56,486 —
(On a non-recurring basis)
Other real estate owned
—   —   321
Impaired loans —   —   2,818
Total $ —   $ 98,845 $ 3,139

~~Assets and liabilities measured at fair value are as follows as of December 31, 2021 (for purpose of this table the impaired loans are shown net of the related allowance):~~

December 31, 2021
(Dollars are in thousands)

Quoted market price in active markets
(Level 1)

Significant other observable inputs
(Level 2)

Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available for sale investments

    U.S. Treasuries $ 7,671 —   -
    U.S. Government Agencies —   9,089 $ —
    Taxable municipals —   22,980 —
    Corporate bonds —   2,019 —
    Mortgage-backed securities —   65,599 —
—
(On a non-recurring basis)
Other real estate owned
—   —   1,361
Impaired loans —   —   2,667
Total $ —   $ 107,358 $ 4,028

December 31, 2022 (Dollars are in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(On a recurring basis) Available-for-sale investments
U.S. Treasuries	$	—	$	11,685		—
U.S. Government Agencies		—		9,399	$	—
Taxable municipals		—		16,815		—
Corporate bonds		—		3,136		—
Mortgage-backed securities		—		55,041		—
(On a non-recurring basis) Other real estate owned		—		—		261
Impaired loans		—		—		213
Total	$	—	$	96,076	$	474

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the significant unobservable inputs used in the fair value measurements were as follows:

Schedule of significant unobservable inputs In level 3 assets

(Dollars in thousands)

Fair Value at September 30, 2022

Fair Value at

December 31,

2021

Valuation Technique

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

(Dollars are in thousands)

Fair Value at June 30,
2023

Fair Value at
December 31,
2022

Valuation Technique

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

Impaired Loans

2,818

2,667

Appraised Value

Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell

0 – 18%

Collateral dependent loans with ACL:

Appraised Value

Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell

0 – 18%

Commercial real estate

204

213

Agriculture

—

Other Real Estate Owned

321

1,361

Appraised Value/Comparable Sales/Other Estimates from Independent Sources

Discounts to reflect current market conditions and estimated costs to sell

0 – 18%

261

Appraised Value/Comparable Sales/Other Estimates from Independent Sources

Discounts to reflect current market conditions and estimated costs to sell

0 – 18%

Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis as of ~~September~~June 30, ~~2022,~~2023, and December 31, ~~2021,~~2022, are as follows:

Schedule of estimated fair value of financial instruments

Fair Value Measurements

(Dollars are in thousands)

Carrying
Amount

Fair
Value

Quoted market price in active markets
(Level 1)

Significant other observable inputs
(Level 2)

Significant unobservable inputs
(Level 3)

September 30, 2022
Financial Instruments – Assets
   Net Loans $ 573,281 $ 554,800 $ —   $ —   $ 554,800

Financial Instruments – Liabilities
   Time Deposits 179,709 178,702 —   178,702 —
   Borrowed funds 41,496 40,266 —   40,266 —

December 31, 2021
Financial Instruments – Assets
   Net Loans $ 587,009 $ 580,024 $ —   $ —   $ 580,024

Financial Instruments – Liabilities
   Time Deposits 196,285 198,353 —   198,353 —
   Borrowed funds 16,496 15,649 —   15,649 —

Schedule of estimated fair value of financial instruments
					Fair Value Measurements
(Dollars are in thousands)	Carrying Amount		Fair Value		Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
June 30, 2023
Financial instruments – assets
Net loans	$	602,224	$	572,741	$	—	$	—	$	572,741
Financial instruments – liabilities
Time deposits		220,197		219,049		—		219,049		—
Borrowed funds		26,496		23,785		—		23,785		—
December 31, 2022
Financial instruments – assets
Net loans	$	577,886	$	552,675	$	—	$	552,462	$	213
Financial instruments – liabilities
Time deposits		188,233		187,179		—		187,179		—
Borrowed funds		16,496		14,825		—		14,825		—

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.

Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.

The carrying values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value and are excluded from the table above.

In accordance with our adoption of Accounting Standards Update (ASU) 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments ~~at September~~as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, represent an approximation of exit price; however, an actual exit price may differ.

NOTE 1112 LEASING ACTIVITIES

As of ~~September~~June 30, ~~2022,~~2023, the Bank leases four branch ~~office sites resulting from sale leaseback transactions entered into in 2017~~offices and ~~a sublet of~~sublets a lot adjacent to another branch office. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms ~~at September~~as of June 30, ~~2022~~2023 was ~~9.87~~9.11 years.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted average discount rate for the leases ~~at September~~as of June 30, ~~2022~~2023 was ~~3.24~~3.29%%.

For the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, operating lease expenses were $~~342~~224,000 ~~thousand~~ and $~~421~~228,000 ~~thousand,~~, respectively.

The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. ~~At September~~As of June 30, ~~2022,~~2023, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):

Schedule of future minimum rental commitments under the non-cancellable operating leases
2022 $ 114
2023 455
2024 455
2025 455
2026 455
Thereafter 2,698
Total lease payments 4,632
Less imputed interest 844
Total $ 3,788

Schedule of future minimum rental commitments under the non-cancellable operating leases
2023	$	228
2024		456
2025		456
2026		456
2027		477
Thereafter		2,226
Total lease payments		4,299
Less: imputed interest		(742	)
Total	$	3,557

NOTE 1213 BORROWED FUNDS

Included in Borrowed Funds is ~~a short-term~~an FHLB Advance ~~totaling~~of $2510.0 million ~~at September~~as of June 30, ~~2022.~~ 2023, bearing an interest rate of 3.51% maturing on May 4, 2028. No ~~short-term borrowings~~ FHLB Advances were outstanding at December 31, ~~2021. The outstanding advance at September 30, 2022,~~2022. For additional information on borrowed funds, refer to Note 18 in Item 8 of ~~$25 million, has a fixed rate of 2.60%, and matures~~Form 10-K for the year ended December ~~19,~~31, 2022.

NOTE 1314 REVENUE FROM CONTRACTS WITH CUSTOMERS

All our revenue from contracts with customers as defined in ASC 606 is recognized within ~~Noninterest~~noninterest income. Refer to Note 23 in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 for a description of how each revenue stream is accounted for under ASC 606. The following table presents ~~Noninterest~~noninterest income by revenue stream for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021:~~2022:

Schedule of revenue from contracts with customers

For the three months
ended

For the nine months
ended
September 30, September 30,
(Dollars in thousands) 2022 2021 2022 2021
Service charges and fees $ 1,069 $ 1,001 $ 2,973 $ 2,674
Card Processing and interchange income 915 982 2,858 2,918
Gain on sale of securities available-for-sale ⁽¹⁾ - 322 - 322
Insurance and investment fees 167 222 650 723
Other noninterest income 38 159 425 840
Total Noninterest Income $ 2,189 $ 2,970 $ 6,906 $ 7,477

Schedule of revenue from contracts with customers
	For the three months ended				For the six months ended
	June 30,				June 30,
(Dollars are in thousands)		2023		2022			2023		2022
Service charges and fees	$	961	$	897		$	1,877	$		1,904
Card processing and interchange income		943		1,027			1,842			1,943
Insurance and investment fees		306		242			563			483
Other noninterest income		194		182			520			387
Total noninterest income	$	2,404	$	2,348		$	4,802	$		4,717

⁽¹⁾

^–~~Not within the scope of ASU 2014-19~~

NOTE 1415 NONINTEREST EXPENSES

Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented:

Schedule of noninterest expenses
For the three months ended September 30, For the Nine months ended September 30,
(Dollars are in thousands) 2022 2021 2022 2021
Advertising $ 23 $ 85 $ 115 $ 193
ATM network expense 806 368 1,553 1,113
Legal, accounting and professional fees 258 254 746 842
Consulting fees 98 58 227 206
Loan related expenses 65 198 265 448
Printing and supplies 35 29 107 89
FDIC insurance premiums 56 81 159 218
Other real estate owned expenses, net (35 ) 301 110 439
Other operating expenses 219 630 1,505 1,765
Total other operating expenses $ 1,525 $ 2,004 $ 4,787 $ 5,313

~~NOTE 15~~ ~~SUBSEQUENT EVENTS~~

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. There were no subsequent events requiring recognition or disclosure.

Schedule of noninterest expenses
	For the three months ended June 30,				For the six months ended June 30,
(Dollars are in thousands)	2023		2022		2023		2022
Advertising	$	70	$	64	$	107	$	92
ATM network expense		370		380		730		747
Legal, accounting and professional fees		325		257		660		488
Consulting fees		41		62		132		129
Loan related expenses		127		103		216		200
Printing and supplies		48		39		90		72
FDIC insurance premiums		88		54		176		103
Other real estate owned expenses, net		10		15		16		145
Other operating expenses		710		684		1,378		1,286
Total other operating expenses	$	1,789	$	1,658	$	3,505	$	3,262

NOTE 16 RECENT ACCOUNTING DEVELOPMENTS

The following is a summary of recent authoritative announcements:

In June 2016, per ASU No. 2016-13, ‘Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,’ the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company ~~is currently evaluating the effect that implementation of the new standard will have~~adopted this guidance on ~~its financial position, results of operations, and cash flows.~~January 1, 2023. The Company ~~has contracted with a software vendor~~recognized an adjustment to retained earnings in the amount of $212,000, and is currently working through the implementation process. The new model has been constructed, initial assumptions have been input and historical loan and loss activity has been input and validated. The Company is running the new methodology parallelrecorded an adjustment to the ~~current~~ allowance ~~methodology,~~for credit losses in loans and ~~will be assessing~~unfunded commitments on loans in the ~~comparative results for the first three quarterly calculations during the fourth quarter~~amount of ~~2022.~~$80,000 and $348,000, respectively.

In ~~March 2020,~~June 2022, the FASB ~~released~~issued ASU ~~2020-04, ‘Reference Rate Reform~~2022-03, “Fair Value Measurement (Topic ~~848), Facilitation~~820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the ~~Effects~~unit of ~~Reference Rate Reform on Financial Reporting,’ which provides optional guidance for a limited period~~account of ~~time to ease~~ the ~~potential burden~~equity security and, therefore, is not considered in ~~accounting for (or recognizing the effects of) reference rate reform.~~measuring fair value. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offering Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in the Update areASU is effective for ~~the Company as of March 12, 2020 through~~fiscal years, including interim periods within those fiscal years, beginning after December ~~31, 2022.~~15, 2023. Early adoption is permitted. The Company ~~is working through implementation~~does not expect the adoption of ~~this guidance, and~~ASU 2022-03 to ~~date this amendment has not had~~have a material impact on its consolidated financial statements.

In January 2021, the FASB released ASU 2021-01, ‘Reference Rate Reform (Topic 848),’ which clarifies that certain optional expedients and exceptions in topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition related to reference rate reform. The amendments in this Update are effective immediately for all entities. An entity may elect to apply the amendments in the Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company does not expect this amendment to have a material effect on its financial statements.

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted this guidance on January 1, 2023 and it did not have a material impact on the consolidated financial statements.

In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is ~~currently~~to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the ~~impact~~Company’s transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference rate.

In July 2023, the Financial Accounting Standards Board (FASB) issued ASU ~~2022-02 will~~2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718)”. This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. ASU 2023-03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

2428

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward-Looking Statements

We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for ~~loan~~credit 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. The forward-looking information is based on various factors and was derived using numerous assumptions. 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;
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 ongoing novel coronavirus (COVID-19) outbreak and the associated efforts to limit the spread of the disease),~~ and other catastrophic events;
technology utilized by us;
our ability to successfully manage cybersecurity;
our reliance on third-party vendors and correspondent banks;
changes in generally accepted accounting principles;
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 Securities and Exchange Commission.

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-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.

Critical Accounting Policies

For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, ~~2021 (the 2021~~2022, and Note 2 Summary of Significant Accounting Policies, in Item 1 of this Form ~~10-K).~~10-Q. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our ~~provision~~allowance for ~~loan losses and the calculation of our deferred tax asset.~~credit losses.

The allowance for credit losses represents an amount that, in the Company's judgment, will be adequate to absorb ~~probable~~expected and estimable losses inherent in the loan portfolio. The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current, reasonable and supportable forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.

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 September 30, 2022 and December 31, 2021, 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 “Deferred Tax Asset and Income Taxes” below.~~

Overview and Highlights

~~For~~Net income for the three months ended ~~September~~June 30, ~~2022, net income~~2023 was $1.7 million, a decrease of ~~$2.0 million was recorded; an increase of $141,000,~~$200,000, or ~~7.6%~~10.40%, from the same period in 2021. The primary driver for the improved earnings was a decrease in total noninterest expense of $1.5 million due largely to the $1.0 million decline in occupancy expenses. This year-over-year decrease in occupancy expenses offset decreases in net interest income and noninterest income of $218,000 and $781,000, respectively.2022. Net interest income ~~decreased $218,000, a result of deferred loan fees earned~~improved 2.28%, or $156,000, from $6.8 million for the quarter ended June 30, 2022 to $7.0 million for the quarter ended June 30, 2023. While non-interest income also increased $56,000, or 2.39%, from the ~~forgiveness of Paycheck Protection Program (PPP) loans of $1.1 million during the third~~second quarter ~~of 2021 not being replicated~~ in 2022, ~~resulting in a net~~the decrease in interest and fees on loans of $592,000, or 7.8%. The decrease in loan fees was largely offset by increased earnings on interest bearing deposits in banks and investments, which increased $531,000 and $117,000, respectively. For the comparative three-month periods of 2022 and 2021, interest expense increased $284,000, as interest on borrowed funds increased $388,000, offset by a decrease in interest expense on deposits of $104,000.

~~For the nine months ended September 30, 2022,~~ net income ~~totaled $5.8 million or $0.24 per share compared~~is related to ~~$5.1 million or $0.21 per share~~increases in non-interest expense of $337,000 and the provision for ~~the same nine-month period in 2021. Interest income was slightly higher and interest expense was slightly lower, resulting in an improvement~~credit losses of $183,000 in net interest income. Other drivers of the improvement were reduced noninterest expense, which declined $1.4 million, due largely to charges foe the write down of closed and former branch office sites during the third quarters of 2022 and 2021. Updated valuations of the two branch offices closed in 2022, resulted in a charge of $195,000 that is included in noninterest expense. During the same period in 2021, three former branch office sites were sold, resulting in gains of $190,000, and three more former branch office sites were transferred to other real estate owned, resulting in a combined loss of $1.1 million.

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. On June 29, 2022, we issued a press release outlining the timeline, restoration efforts and communications, services and safeguards being offered to our customers in response to this incident, and filed a Current Report on Form 8-K relating to the incident. Since that date, restoration efforts have been completed and normal operations have resumed. Reference to the cybersecurity event is made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations.$74,000.

The balance sheet grew to ~~$828.6~~$803.0 million in total assets as of ~~September~~June 30, ~~2022,~~2023, from ~~$794.6~~$775.4 million as of December 31, ~~2021, due to Federal Home Loan Bank advances taken, in the second quarter of 2022, as a precautionary measure in response to the cybersecurity incident. Total deposits~~2022. Gross loans increased ~~$16.4~~$24.4 million to ~~$723.9~~$609.0 million ~~at September~~as of June 30, ~~2022 from $707.5 million at December 31, 2021. Loans decreased $13.9~~2023. Additionally, interest-bearing deposits in other banks increased $5.6 million to ~~$579.9~~$52.4 million ~~during the first nine months~~as of ~~2022, due to repayments of several large commercial real estate loans combined with PPP loan repayments of approximately $6.1 million.~~

In August of 2022, branch offices in Big Stone Gap and Chilhowie, Virginia were closed and the loan and deposit accounts were transferred to nearby office locations. Affected personnel were reassigned to other branches or departments.June 30, 2023.

During the second quarter of 2022, we initiated a previously announced stock repurchase ~~program.~~program, which continues through March 31, 2024. Through ~~September~~June 30, ~~2022, 44,485~~2023, the Company has repurchased 119,229 shares ~~have been repurchased~~ at an average price of ~~$2.30~~$2.29 per share.

Comparison of the Three Months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022

Quarter-to-date highlights include:

Returns on average assets and equity, annualized, of 0.88% and 11.62% for the second quarter of 2023, compared to 0.94% and ~~13.70 %~~13.45% for the ~~third~~second quarter of 2022, ~~compared to 0.91% and 11.75% for the third quarter of 2021,~~ respectively;

Net interest income was ~~$7.2~~$7.0 million for the ~~third~~second quarter of ~~2022, a decrease~~2023, an improvement of ~~$218 thousand,~~$156,000, or ~~2.9%~~2.28%, compared to the ~~third~~second quarter of ~~2021;~~2022;

Provision for ~~loan~~credit losses was ~~$225,000~~$149,000 for the ~~third~~second quarter of ~~2022, and $0 for~~2023, an increase of $74,000, or 98.67%, compared to the ~~third~~second quarter of ~~2021;~~2022;

Noninterest income was ~~$2.2~~$2.4 million, ~~a decrease~~an increase of ~~$781 thousand,~~$56,000, or ~~26.3%~~2.39%, during the ~~third~~second quarter of ~~2022~~2023 compared to the ~~third~~second quarter of ~~2021;~~2022; and

Noninterest expense was ~~$6.6~~$7.0 million, ~~a decrease~~an increase of ~~$1.5 million,~~$377,000, or ~~18.2%~~5.66%, for the ~~third~~second quarter of ~~2022~~2023 compared to the ~~third~~second quarter of ~~2021.~~2022.

The Company’s primary source of income is net interest income, which ~~decreased~~increased by ~~$218 thousand,~~$156,000, or ~~2.9%~~2.28%, to ~~$7.2~~$7.0 million for the ~~third~~second quarter of 2023 compared to $6.8 million for the second quarter of 2022. The increase was primarily due to improvement in the net interest margin to 3.71% for the second quarter of 2023 compared to 3.50% for the second quarter of 2022 ~~compared to $7.4 million for the third quarter of 2021. Interest income increased $66 thousand~~ due to ~~a $56 million~~the increase in asset yields outpacing increases in funding costs in the rising interest rate environment throughout 2022 and 2023. The loan portfolio was the primary contributor to the improvement in the net interest margin due to the 70 bp increase in the ~~average balance of earning assets, a shift of~~quarterly yield on loans to 5.26%. The yield on overnight funds improved 406 bps to ~~higher-yielding investment securities;~~4.99% for the quarter ended June 30, 2023 and ~~increased interest earning deposits with banks funded from FHLB advances as we maintained additional liquidity as we monitored customer reaction~~also contributed to the ~~cybersecurity incident. Additionally, the 2022 increases~~increase in the ~~fed~~net interest margin. The loan portfolio and overnight funds ~~rate partially~~contributions offset the decline in accelerated fee recognition when PPP loans are forgiven. Total interest expense increased $284 thousand driven primarily by a $388 thousand increase in interest on borrowed funds due to the FHLB advances combined with increased interest rates paid on trust preferred securities. Increased borrowing expenses were partially offset by a decrease in interest on deposits which decreased $104 thousand, or 19.9%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The lower deposit interest expense resulted largely from reduced time deposit interest expense due to a decrease in both volume and interest rates. Overall there was a 12 basis-point79 bp increase in the cost of funds which rose to 461.12% for the quarter ended June 30, 2023. Total interest expense increased $1.4 million driven primarily by the increase in the cost of interest-bearing liabilities, which rose 119 bps ~~while~~to 1.70% from 0.51% for the comparative three months ended June 30, 2023 and 2022. The net interest margin ~~decreased 38~~increased 21 bps to ~~3.55%. During~~3.71% from 3.50% as of June 30, 2023 and 2022, respectively. There was one increase in the ~~third quarter of 2022,~~federal funds interest rate by the Federal Reserve’s Open Market Committee (FOMC) increased the discount rate two times for a total of 150 bps, bringing the number of rate increases for the first nine months of 2022 to five, totaling 300 bps. The Company experienced benefits of the rate increases(“FOMC”) during the ~~third~~ quarter ~~but~~ended June 30, 2023. Through June 30, 2023, the ~~full impact will be somewhat lagging as certain loans, investments, and trust preferred securities will not reprice until~~FOMC has increased this rate seven times since the ~~individual instruments next interest rate repricing date. Deposit rates have not yet been significantly impacted by the rate increases, but the~~quarter ended June 30, 2022. The Company continues to evaluate rate adjustments for factors, including competitive pressure within the local markets, funding needs to support growth, and other needs. ~~During the third quarter of 2022, in response to rising interest rates, we initiated some promotional time deposit products.~~

The following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated:

Net Interest Margin Analysis
Average Balances, Income and Expense, and Yields and Rates

(Dollars in thousands)
Three Months Ended September 30,
2022 2021
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
ASSETS
Loans ^{(1) (2) (3)} $ 590,090 $ 7,010 4.72% $ 581,517 $ 7,602 5.19%
Federal funds sold 353 2 2.34% 209 - 0.12%
Interest bearing deposits in other banks 98,657 559 2.25% 72,549 28 0.15%
Taxable investment securities 117,628 539 1.83% 96,136 414 1.72%
Total earning assets 806,728 8,110 3.99% 750,411 8,044 4.26%
Less:  Allowance for loans losses (6,738) (6,778)
Non-earning assets 41,134 58,972
Total Assets $ 841,124 $ 802,605

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits $ 75,151 $ 23 0.12% $ 60,289 $ 15 0.10%
Savings and money market deposits 192,550 52 0.11% 184,155 36 0.08%
Time deposits 181,480 343 0.75% 212,712 471 0.88%
   Total interest-bearing deposits 449,181 418 0.37% 457,156 522 0.45%
Short-term borrowings 46,793 287 2.40% - - -%
Trust preferred securities 16,496 205 4.85% 16,496 104 2.47%
   Total interest-bearing liabilities 512,470 910 0.70% 473,652 626 0.52%
Non-interest-bearing deposits 262,244 - -% 258,251 - - %
   Total deposit liabilities and cost of funds 774,714 910 0.46% 731,903 626 0.34%
Other liabilities 8,904 8,399
Total Liabilities 783,618 740,302
Shareholders’ Equity 57,506 62,303
Total Liabilities and Shareholders’ Equity $ 841,124 $ 802,605
Net Interest Income $ 7,200 $ 7,418
Net Interest Margin 3.55% 3.93%
Net Interest Spread 3.29% 3.74%

(1)  Nonaccrual loans and loans held for sale have been included in average loan balances
(2) Tax exempt income is not significant and has been treated as fully taxable
(3) Includes mortgage loans held for sale

Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
Three Months Ended June 30,
				2023							2022
				Average		Income/		Yields/		Average			Income/		Yields/
(Dollars are in thousands)				Balance		Expense		Rates		Balance			Expense		Rates
ASSETS
	Loans (1) (2)		$	600,712	$	7,876		5.26%	$	597,570		$	6,791		4.56%
	Mortgage loans held for sale			-		-		-%		124			1		4.17%
	Federal funds sold			673		8		4.77%		189			1		0.87%
	Interest bearing deposits in other banks			44,325		551		4.99%		68,298			158		0.93%
	Taxable investment securities			110,698		583		2.11%		117,905			509		1.73%
	Total earning assets			756,408		9,018		4.78%		784,086			7,460		3.82%
	Less: Allowance for loans losses			(6,816)						(6,887)
	Non-earning assets			37,914						43,371
		Total assets	$	787,506					$	820,570

LIABILITIES AND SHAREHOLDERS’ EQUITY
	Interest-bearing demand deposits		$	75,847	$	112		0.59%	$	71,805		$	19		0.10%
	Savings and money market deposits			162,652		293		0.72%		197,346			40		0.08%
	Time deposits			214,029		1,240		2.32%		187,891			345		0.74%
	Total interest-bearing deposits			452,528		1,645		1.46%		457,042			404		0.35%
	FHLB advances			6,374		56		3.52%		12,692			71		2.21%
	Trust preferred securities			16,496		317		7.71%		16,496			141		3.38%
	Total interest-bearing liabilities			475,398		2,018		1.70%		486,230			616		0.51%
	Non-interest-bearing deposits			243,974		-		-%		268,802			-		-%
	Total deposit liabilities and cost of funds			719,372		2,018		1.13%		755,032			616		0.33%
	Other liabilities			8,675						8,213
		Total liabilities		728,047						763,245
	Shareholders’ equity			59,459						57,325
		Total liabilities and shareholders’ equity	$	787,506					$	820,570
	Net interest income				$	7,000						$	6,844
	Net interest margin						3.71%							3.50%
	Net interest spread						3.08%							3.31%

(1) Nonaccrual loans and loans held for sale have been included in average loan balances.
(2) Tax exempt income is not significant and has been treated as fully taxable.

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 table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the three months ended ~~September~~June 30, ~~2022,~~2023, as compared to the three months ended ~~September~~June 30, ~~2021.~~2022.

Volume and Rate Analysis

Increase (decrease)

	Three Months Ended September 30, 2022 versus 2021									Three Months Ended June 30, 2023 versus 2022
(Dollars in thousands)	Volume Effect			Rate Effect			Change in Interest Income/ Expense
Interest Income:
(Dollars are in thousands)										Volume Effect			Rate Effect		Change in Interest Income/ Expense
Interest income:
Loans	$	(972	)	$	380		$	(592	)	$	(18	)	$	1,103	$	1,085
Mortgage loans held for sale											(1	)		—		(1	)
Federal funds sold		—			2			2			3			4		7
Interest bearing deposits in other banks		13			518			531			(74	)		467		393
Taxable investment securities		92			33			125			(10	)		84		74
Total Earning Assets		(867	)		933			66
Interest Expense:
Total earning assets											(100	)		1,658		1,558
Interest expense:
Interest-bearing demand deposits		5			3			8			1			92		93
Savings and money market deposits		3			13			16			(8	)		261		253
Time deposits		(65	)		(63	)		(128	)		69			826		895
Short-term borrowings		287			—			287
FHLB advances											(47	)		32		(15	)
Trust preferred securities		—			101			101			—			176		176
Total Interest-bearing Liabilities		230			54			284
Change in Net Interest Income	$	(1,097	)	$	879		$	(218	)
Total interest-bearing liabilities											15			1,387		1,402
Change in net interest income										$	(115	)	$	271	$	156

Based on our current assessment of the loan portfolio and related unfunded commitments, a provision of ~~$225 thousand~~$149,000 was made in the ~~third~~second quarter of 2022, compared to zero for the third quarter of 2021, due to a combination of factors, including the rising interest rate environment, overdraft charge-offs related to the cybersecurity incident realized during the third quarter of 2022, and uncertain economic trends.2023. The allowance for ~~loan~~credit losses as a percentage of loans ~~increased~~decreased from ~~1.13%~~1.15% at December 31, ~~2021~~2022 to ~~1.14%~~1.12% as of ~~September~~June 30, ~~2022.~~2023. For a discussion of the factors affecting the allowance for ~~loan~~credit losses, including provision expense, refer to Note 2, Summary of Significant Accounting Polices and Note 7, Allowance for ~~Loan~~Credit Losses, in Item 1 of this Form 10-Q.

~~Total noninterest~~Non-interest income ~~decreased $781,000~~increased $56,000 to $2.4 million for the quarter ended June 30, 2023 from $2.3 million for the comparable quarter in 2022. This increase is due largely to the ~~third~~reduction in certain fee and other income during the second quarter of 2022, ~~compared to~~resulting from the ~~third quarter~~impact of 2021. The primary drivers of the quarter-over-quarter decline were $322,000 of gains on sales of investment securities and $190,000 of gains on sale of bank premises in 2021 that were not repeated in 2022. In addition, the Company recorded a $100,000 write-down of bank owned life insurance (BOLI) and a period-over-period decrease in gains and commissions on mortgage loan originations of $82,000, during the third quarter of 2022. The BOLI charge resulted from a decrease in the market value of the underlying investments supporting the policy due to increased interest rates. Service charge revenue increased $68 thousand, or 6.8%, to $1.1 million for the comparative three-month periods ended September 30, 2022 and 2021 as operations returned to normal operations after the cybersecurity incident. Card processing and interchange revenue decreased $67 thousand for the three months ended September 30, 2022, as compared to the same period in 2021, due to a decline in transaction volume. The increased interest rate environment also contributed to the reduced mortgage revenue as mortgage originations and refinancings have slowed.

Total noninterest expense decreased $1.5 million in the third quarter of 2022 compared to the same period of 2021, due primarily to charges recorded in 2021 of $1.1 million related to the transfer of three former branch office locations to other real estate owned, which is reflected in occupancy and equipment expense, and $395,000 of write-downs on OREO, which is reflected in other operating expense. These charges more than exceeded the $195,000 charge related to the closure of two branch offices during the third quarter of 2022, which is included in occupancy expenses. Salaries and benefits remained virtually flat for the comparative three-month period in 2022 versus 2021. This was due in part to an adjustment to reduce the liability for our self-insured insurance plan of $100,000 during the third quarter of 2022, based on a rolling assessment of claims made against the plan. This liability adjustment offset employee appreciation bonus payments, totaling $89,000, during the third quarter in recognition of employee response to the cybersecurity incident in June 2022. During the period immediately after the cybersecurity incident, we temporarily stopped assessing overdraft and certain other service charges. Additionally, financial services revenue was impacted as we were limited in executing client transactions, especially new account activity during the disruption. For the three-months ended June 30, 2023, increases to service charges and fee income of $64,000 and insurance and investment revenue of $64,000 were offset by decreases in card processing fees of $84,000 and mortgage income of $34,000, as compared to the three-months ended June 30, 2022.

Non-interest expense was $7.0 million for the quarter ended June 30, 2023 compared to $6.7 million for the quarter ended June 30, 2022. The $377,000 increase was impacted by increases in salaries and employee benefits, which increased $270,000, as well as other operating expenses, which increased $131,000. The increase in salaries and employee benefits related to performance raises and benefits enhancements initiated in the first quarter of 2023. The quarter-over-quarter increase in other operating expenses was due to increases in deposit insurance premium, professional fees, marketing and business development costs, and data processing and telecommunication costs. These quarter-over-quarter increases were due to a combination of adjustments due to contractual or inflationary factors, along with decisions to increase or incur certain costs as part of our overall strategic plan.

The efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, ~~improved~~increased to ~~70.3%~~74.81% for ~~third~~the second quarter of ~~2022~~2023 from ~~77.6%~~72.43% for the ~~third~~second quarter of ~~2021.~~2022. We continue to assess our operational procedures and structure to improve efficiencies and contain costs. ~~A review of deposit operations was performed during the third quarter of 2022, and based on this assessment, several processes will be modified or reassigned to improve operational efficiencies.~~

In August 2022, the Bank closed branch offices in Big Stone Gap and Chilhowie, Virginia. Accounts serviced at these offices were transferred to nearby branches, and employees were reassigned to other positions or offices, as available. Interactive teller machines at these locations will remain in service for the foreseeable future. This restructuring of the branch network should improve the efficiency of services to the customers of these communities.

Income tax expense for the ~~third~~second quarter of ~~2022~~2023 totaled ~~$579 thousand, an increase~~$497,000, a decrease of ~~$103 thousand,~~$39,000, or ~~21.6%~~7.28% from ~~the $476 thousand~~$536,000 recorded during the same period in ~~2021.~~2022. The effective tax rate for the three months ended ~~September~~June 30, ~~2022,~~2023, was ~~22.6%~~22.39%, compared to ~~20.5%~~21.80% for the same period in ~~2021. The year-over-year, quarterly increase generally approximates the percentage increase of pre-tax earnings.~~2022.

Comparison of the ~~Nine~~Six Months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022

Year-to-date highlights include:

Net interest income improved to ~~$20.7~~$14.1 million for the first ~~nine months~~half of ~~2022,~~2023, an improvement of ~~$183 thousand,~~$602,000 or ~~0.9%~~4.47%, compared to the first ~~nine months~~half of ~~2021;~~2022;

Net interest margin was ~~3.53%~~3.77% for the first ~~nine months~~half of ~~2022, a decrease~~2023, an increase of 1525 bps compared to ~~3.68%~~3.52% for the first ~~nine months~~half of ~~2021;~~2022;

Provision for ~~loans~~credit losses was ~~$400 thousand~~$149,000 for the first ~~nine months~~half of ~~2022, an increase~~2023, a reduction of ~~$28 thousand,~~$26,000, or ~~7.5%~~14.86%, compared to the first ~~nine months~~half of ~~2021;~~2022;

Noninterest income was ~~$6.9~~$4.8 million, ~~a decrease~~an increase of ~~$571 thousand,~~$85,000, or ~~7.6%~~1.80%, compared to the first ~~nine months~~half of ~~2021;~~2022;

Salaries and employee benefits expense was ~~$9.9~~$7.2 million, an increase of ~~$530 thousand,~~$545,000, or ~~5.6%~~8.19%, compared to the first ~~nine months~~half of ~~2021;~~2022; and

Total noninterest expense was ~~$19.7~~$13.9 million, ~~a decrease~~an increase of ~~$1.4 million,~~$806,000, or ~~6.8%~~6.15%, compared to the first ~~nine months~~half of ~~2021.~~2022.

~~Overall, during~~During the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to the same period in ~~2021,~~2022, net income ~~improved 14.5%~~decreased 2.60% to ~~$5.8~~$3.7 million from ~~$5.1~~$3.8 million. Although net interest income ~~was virtually unchanged, increasing $116 thousand, reduced interest~~and non-interest income increased, total non-interest expense ~~of $67 thousand contributed to an improvement of $183 thousand in net interest income.~~increased at a greater percentage. The following table presents the rates earned on earning assets and paid on interest-bearing liabilities for the periods indicated.

Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
Six Months Ended June 30,
				2023							2022
				Average		Income/		Yields/		Average			Income/		Yields/
(Dollars are in thousands)				Balance		Expense		Rates		Balance			Expense		Rates
ASSETS
	Loans (1) (2)		$	593,455	$	15,258		5.18%	$	596,813		$	13,465		4.55%
	Mortgage loans held for sale			2		-		-%		69			1		4.33%
	Federal funds sold			652		16		4.95%		203			1		0.49%
	Interest bearing deposits in other banks			46,125		1,083		4.73%		61,094			179		0.59%
	Taxable investment securities			111,713		1,183		2.14%		114,190			971		1.70%
	Total earning assets			751,947		17,540		4.70%		772,369			14,617		3.82%
	Less: Allowance for loans losses			(6,864)						(6,867)
	Non-earning assets			37,388			��			46,335
		Total assets	$	782,471					$	811,837

LIABILITIES AND SHAREHOLDERS’ EQUITY
	Interest-bearing demand deposits		$	78,077	$	208		0.54%	$	69,523		$	35		0.10%
	Savings and money market deposits			164,590		515		0.63%		195,780			78		0.08%
	Time deposits			206,983		2,068		2.01%		192,064			720		0.76%
	Total interest-bearing deposits			449,650		2,791		1.25%		457,367			833		0.37%
	FHLB advances			3,978		76		3.85%		6,381			71		2.21%
	Trust preferred securities			16,496		606		7.41%		16,496			248		2.98%
	Total interest-bearing liabilities			470,124		3,473		1.49%		480,244			1,152		0.48%
	Non-interest-bearing deposits			244,489		-		-%		263,509			-		-%
	Total deposit liabilities and cost of funds			714,613		3,473		0.97%		743,753			1,152		0.31%
	Other liabilities			8,632						7,773
		Total liabilities		723,245						751,526
	Shareholders’ equity			59,226						60,188
		Total liabilities and shareholders’ equity	$	782,471					$	811,714
	Net interest income				$	14,067						$	13,465
	Net interest margin						3.77%							3.52%
	Net interest spread						3.21%							3.33%

(1) Nonaccrual loans and loans held for sale have been included in average loan balances.
(2) Tax exempt income is not significant and has been treated as fully taxable.

3033

Net Interest Margin Analysis
Average Balances, Income and Expense, and Yields and Rates

(Dollars in thousands)
Nine Months Ended September 30,
2022 2021
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
ASSETS
Loans ^{(1) (2) (3)} $ 594,593 $ 20,476 4.61% $ 588,083 $ 21,483 4.89%
Federal funds sold 254 3 1.36% 208 - 0.09%
Interest bearing deposits in other banks 73,752 738 1.34% 83,153 69 0.11%
Taxable investment securities 115,349 1,510 1.74% 72,958 1,059 1.94%
Total earning assets 783,948 22,727 3.88% 744,402 22,611 4.06%
Less:  Allowance for loans losses (6,824) (7,143)
Non-earning assets 44,582 59,984
Total Assets $ 821,706 $ 797,243

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits $ 71,420 $ 58 0.11% $ 57,606 $ 45 0.10%
Savings and money market deposits 194,691 130 0.09% 175,668 109 0.08%
Time deposits 188,497 1,064 0.75% 222,186 1,626 0.98%
   Total interest-bearing liabilities 454,608 1,252 0.37% 455,460 1,780 0.52%
Short-term borrowings 20,000 358 2.36% 3,308 33 1.35%
Trust preferred securities 16,496 452 3.61% 16,496 316 2.52%
   Total interest-bearing liabilities 491,104 2,062 0.56% 475,264 2,129 0.60%
Non-interest-bearing deposits 263,083 - -% 252,985 - - %
   Total deposit liabilities and cost of funds 754,187 2,062 0.36% 728,249 2,129 0.39%
Other liabilities 8,235 8,726
Total Liabilities 762,422 736,975
Shareholders’ Equity 59,284 60,268
Total Liabilities and Shareholders’ Equity $ 821,706 $ 794,243
Net Interest Income $ 20,665 $ 20,482
Net Interest Margin 3.53% 3.68%
Net Interest Spread 3.32% 3.46%

(1)  Nonaccrual loans and loans held for sale have been included in average loan balances
(2)  Tax exempt income is not significant and has been treated as fully taxable

~~(3) Includes mortgage loans held for sale~~

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 table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022.

Volume and Rate Analysis

Increase (decrease)

	Nine Months Ended September 30, 2022 versus 2021									Six Months Ended June 30, 2023 versus 2022
(Dollars in thousands)	Volume Effect			Rate Effect			Change in Interest Income/ Expense
Interest Income:
(Dollars are in thousands)										Volume Effect			Rate Effect		Change in Interest Income/ Expense
Interest income:
Loans	$	(1,382	)	$	375		$	(1,007	)	$	(254	)	$	2,047	$	1,793
Mortgage loans held for sale											(1	)		—		(1	)
Federal funds sold		—			3			3			3			12		15
Interest bearing deposits in other banks		(9	)		678			669			(54	)		958		904
Taxable investment securities		484			(33	)		451			23			189		212
Total Earning Assets		(907	)		1,023			116
Interest Expense:
Total earning assets											(283	)		3,206		2,923
Interest expense:
Interest-bearing demand deposits		13			—			13			7			166		173
Savings and money market deposits		15			6			21			(16	)		453		437
Time deposits		(226	)		(336	)		(562	)		76			1,272		1,348
Short-term borrowings		284			41			325
FHLB advances											(14	)		19		5
Trust preferred securities		—			136			136			—			358		358
Total Interest-bearing Liabilities		86			(153	)		(67	)
Change in Net Interest Income	$	(993	)	$	1,176		$	183
Total interest-bearing liabilities											53			2,268		2,321
Change in net interest income										$	(336	)	$	938	$	602

During the first nine months of 2022 compared to the same period of 2021, net interest income increased $183 thousand primarily due to a reduction in interest expense on deposits of $528 thousand, largely offset by increases to the cost of borrowed funds of $461 thousand. The increase in expense for borrowed funds was due to $95 million of FHLB advances taken during the second quarter, combined with rate increases on trust preferred securities. The reduction in interest expense on deposits was driven mainly by a reduction in the average cost of retail time deposits, which declined 23 basis points, to 0.75% from 0.98%, plus a decrease in average balances of $33.7 million. There was a modest increase in interest income of $116 thousand due to increases to the investment portfolio and increased rates paid on deposits with other banks. These improvements offset reductions in loan interest and fees due principally to the reduction in fees from PPP loan repayments as these fees fell $1.6 million during the comparative nine-month periods. As a result, the net interest margin for the first nine months of 2022 was 3.53%, a reduction of 15 bps compared to 3.68% for the first nine months of 2021.

During the first nine months of 2022, the FOMC increased the discount rate five times for a total of 300 bps. This increased interest rate environment has improved returns on certain assets that immediately adjust as these changes are made, such as interest-bearing deposits in other banks, credit cards, home equity lines of credit and certain commercial and commercial real estate loans. It is anticipated that yields on these assets will improve moving forward. Conversely, it is expected that there will be a need to adjust, upward, rates paid on deposit accounts, which will increase our overall cost of funds. Additionally, in response to the June 2022 cybersecurity incident, during the third quarter of 2022, we began offering a customer appreciation time deposit product to recognize the patience and loyalty of our customers. This promotional product pays a higher rate than is currently offered on similar non-promotional products and is expected to contribute to an increased cost of funds going forward.

Based on our current assessment of the loan portfolio ~~$400 thousand~~and related unfunded commitments, a provision of $149,000 was ~~provided to~~made for the six months ended June 30, 2023. The allowance for ~~loan~~credit losses ~~during the first nine months~~as a percentage of loans decreased from 1.15% at December 31, 2022 ~~compared~~ to ~~$372 thousand provided during the same period in 2021.~~1.12% as of June 30, 2023. For ~~more information on~~a discussion of the factors affecting the allowance for ~~loan~~credit losses, including provision expense, refer to Note 2, Summary of Significant Accounting Polices and Note 7, Allowance for ~~loan~~Credit Losses, in Item 1 of this Form 10-Q. Depending on changes to economic conditions and the impact those changes may have on individual borrowers, it is possible that additional provisions may be needed beyond those necessary to support organic growth of the loan portfolio.

~~Total noninterest~~Non-interest income increased $85,000 to $4.8 million for the six months ended June 30, 2023 from $4.7 million for the comparable period in 2022. The primary drivers of the increase were the sales of the former call center building in Bristol, Virginia and a former branch office in Big Stone Gap, Virginia, which resulted in a combined gain of $130,000, and an increase in brokerage revenue of $84,000. This was offset by decreases in service charge income and card processing fees totaling a combined $128,000 during the period. Service charge income decreased ~~$571,000 for the first nine months of 2022, compared~~due to the same period in 2021, to $6.9 million. Net gains on the sale of investment securities and a gain on the sale of bank premises in 2021 account for $322,000 and $190,000, respectively, of the decrease, as those earnings were not replicated in 2022. Additionally, a BOLI adjustment of $100,000 was recordedchanges made in 2022 in assessing certain charges that reduced the number of transactions subject to such fees. Fees from debit card activity declined as customer discretionary funds have begun to decline and customer spending habits have begun to normalize. In addition, as discussed previously, ~~discussed. Aside from these individual events, financial services~~certain service fees and ~~secondary market mortgage lending activities were~~other revenues, adversely impacted by the cybersecurity event and the rising interest rate environment, showing year-over-year revenue declines of $74,000 and $116,000, respectively. These declines were offset by increased service charge revenue which increased $299,000, despite a period during the cybersecurity event where service charges were waived for all accounts.

~~For the nine months ended September 30, 2022, compared to the same period~~incident in 2021, total noninterest expense decreased $1.4 million to $19.7 million, primarily due to a $1.4 million decrease in occupancy and equipment expense that was driven nearly entirely by the $1.1 million in losses on three former branch office locations discussed above, which were transferred into other real estate owned in 2021, partially offset by a similar $195,000 charge recorded in 2022. Due to the reduction in the number of branch office locations, year-over-year depreciation expense decreased $286,000. Salaries and benefits increased $530,000, or 5.6%, to $9.9 million for the comparative nine-month periodJune of 2022, versus 2021, as salary adjustments, accruals for performance bonus and profit sharing programs, along with costs for new or amended benefits, accounted for approximately $485,000 of the increase, along with approximately $89,000 of employee appreciation bonus payments, made to all employees, as a result of their effortsrecovered in ~~addressing the cybersecurity incident.~~2023.

~~Income taxes increased $291,000, or 21.5%,~~Non-interest expense was $13.9 million for the six months ended June 30, 2023 compared to ~~$1.6~~$13.1 million for the six months ended June 30, 2022. The $806,000 increase was impacted by increases in salaries and employee benefits of $545,000 as well as data processing and telecommunications expenses of $106,000, professional fees of $203,000, and deposit insurance of $73,000. These increases were partially offset by decreases in occupancy expenses of $88,000, and costs associated with other real estate owned, which ~~generally correlates to~~decreased $129,000 over the ~~increase in pretax earnings.~~comparative six-month period.

The efficiency ratio, a non-GAAP measure, ~~improved~~increased to ~~71.4%~~73.68% for the ~~first nine~~six months ended June 30, 2023 from 72.03% for the six months ended June 30, 2022.

Income tax expense for the six months ended June 30, 2023 totaled $1.1 million, an increase of ~~2022~~$7,000, or 0.66% from ~~77.6.%~~$1.1 million recorded during the same period in 2022. The effective tax rate for the six months ended June 30, 2023, was 22.28%, compared to 21.71% for the same period ~~of 2021.~~in 2022.

Balance Sheet

Total assets ~~increased $33.9~~as of June 30, 2023 were $803.0 million, an increase of $27.6 million, or ~~4.3%~~3.6%, ~~to $828.6~~from $775.4 million ~~at September 30, 2022 from $794.6 million at~~as of December 31, ~~2021. This growth was~~2022. Gross loans increased $24.4 million, or 4.2%, during 2023, due to continued loan demand with less incentives for prepayments by borrowers due to the higher interest rate environment. Investment securities decreased $3.0 million during 2023 primarily driven by the FHLB advances, now totaling $25.0 million, and total deposits which increased $16.4 million, as noninterest-bearing deposits increased $17.8 million while interest-bearing deposits decreased $1.4 million. The year-to-date deposit activity is due to a ~~combination~~decrease of ~~factors including customer reaction to~~$1.2 million in the ~~cybersecurity incident, time deposit customers seeking higher interest rates~~unrealized loss position, offset by principal repayments of amortizing investments of $3.4 million and ~~actions taken by customers at~~ the ~~two branch locations closed in August 2022. The FHLB advance funds were transferred to interest bearing deposits with other banks which increased $51.6 million year-to-date.~~maturity of U.S. government agency securities of $732,000. All of the Company’s investments are designated as available-for-sale.

~~Total investments decreased $8.5~~Gross loans receivable increased $24.4 million ~~or 7.9%,~~ to ~~$98.8~~$609.0 million ~~at September~~as of June 30, ~~2022 due primarily to an increase~~2023 from $584.6 million as of $16.4 million in net unrealized losses and $11.5 million of repayments and maturities, which more than offset purchases of $19.8 million. Future purchases of investment securities will depend on a number of factors, including changes in loans and deposits, liquidity needs and the results of the Company’s interest rate risk modeling.

~~Loans decreased $13.9 million, or 2.3% during the first nine months of~~December 31, 2022. Commercial real estate loans increased $12.7 million, or 6.50%, from December 31, 2022 to June 30, 2023. Residential 1-4 family and multifamily loans, ~~decreased $8.1~~each, increased $4.4 million ~~or 3.9% and $4.0 million or 12.1%~~individually from December 31, 2022 to ~~$198.1 million and $29.1 million, respectively at September~~June 30, ~~2022, as several large commercial~~2023. These increases were a result of continuing loan borrowers liquidated their holdings in projects we financed and repaid the corresponding loans. These repayments were partially offset by increases in construction and development loans, and residential real estate which increased $6.3 million, or 19.4%, and $2.2 million, or 1.0%, respectively. Commercial loans decreased $9.2 million or 16.9% to $45.1 million at September 30, 2022, due largely to repayments and forgiveness of PPP loans which declined $6.1 million during the first nine months of 2022. At September 30, 2022, PPP loans totaled $298 thousand and no longer represent a significant component of our loan portfolio. Loan originations, specifically commercial real estate and multi-family loans, continue to be positively impacted by our Boone, NC, loan production office, as well as originations in the Kingsport and Johnson City, Tennessee markets.demand.

Total deposits increased ~~$16.4~~$15.4 million ~~or 2.3%, to $723.9~~from $692.7 million ~~at September 30, 2022 from $707.5 million at~~as of December 31, ~~2021, as noninterest bearing deposits increased $17.8~~2022 to $708.1 million or 7.1%. The increase in noninterest bearing deposits more than offset a decrease in interest bearing deposits which declined $1.4 million, or 0.3% during the first nine months of 2022. Despite the net increase in deposits, we experienced some deposit runoff in response to the cybersecurity incident. Additionally, other factors also influenced customers’ deposit activities, including interest rates available for time deposits and the closure of two branch offices in August 2022. Since the closure of the two branch offices, runoff of accounts from those offices has been minimal, totaling approximately $555 thousand through September 30, 2022. Additionally, some of this deposit activity is due to normal churn of deposit accounts and depositors. Specifically, time deposit runoff totaled $16.6 million, or 8.4%, during the first nine months of 2022. The decrease in time deposits was offset by increases in non-interest bearing and interest-bearing transaction accounts which increased $17.8 million, or 7.1%, and $15.3 million, or 5.9%, during the nine months ended September 30, 2022. Another factor influencing deposit retention is the dissipation of liquidity experienced by depositors, as stimulus and other economic support funds distributed during the height of the COVID-19 pandemic are spent or otherwise distributed. While it is likely that recent and expected increases to the federal funds rate will, at some point, impact liquidity, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.

At September 30, 2022, FHLB advances totaling $25 million were outstanding. As previously discussed, overnight and term advances totaling $95 million were taken in June 2022, as a precautionary measure related to the cybersecurity incident with $60 million outstanding as of June 30, ~~2022. During~~2023. The increase related primarily to interest-bearing deposits which increased $18.2 million. The increase was due to efforts to attract and retain time deposits, combined with cyclical funds inflows. As a result of these efforts, total time deposits increased $31.9 million during the ~~third quarter~~first six months of ~~2022,~~2023. The increase in time deposits contributed to the increase in our cost of funds, as previously discussed, due to the rising interest rate environment experienced over the past 18 months.

In May 2023, an advance ~~totaling $20.0~~from the Federal Home Loan Bank (“FHLB”) in the amount of $10.0 million ~~matured and~~ was ~~repaid,~~drawn with an interest rate of 3.51% and a ~~$15.0 million partial prepayment was made on the remaining $40.0 million advance which matures in~~maturity date of May 4, 2028 to support pending loan closings. There were no FHLB advances outstanding as of December 31, 2022. ~~We anticipate repaying the $25.0 million outstanding advance at maturity.~~

Trust preferred securities of $16.5 million ~~at September~~as of June 30, ~~2022 were~~2023 remained unchanged ~~compared~~in comparison to December 31, ~~2021.~~2022.

~~Total~~During the first six months of 2023 total shareholders’ equity ~~at September~~increased $2.9 million to $60.2 million as of June 30, ~~2022 was $55.2 million, a decrease of $8.4 million, or 13.2%, compared to $63.6 million at December 31, 2021. As discussed previously and in~~2023, as the ~~Capital Resources section below, the primary driver of the decline was the $12.9 million~~ net ~~increase in the accumulated other comprehensive loss, related to the~~ unrealized loss on ~~available for sale~~available-for-sale investment securities ~~along~~decreased $1.2 million, which when combined with year-to-date earnings of $3.7 million, more than offset a cash dividend payment of $1.4 million and ~~repurchases~~the repurchase of common ~~shares.~~stock totaling $101,000. Additionally, the implementation of the current expected credit loss (“CECL”) methodology, resulted in a one-time net of tax, direct charge to retained earnings of $212,000. Consequently, book value per share has increased to $2.53 as of June 30, 2023 compared to $2.40 at December 31, 2022. The ~~increase in other accumulated comprehensive loss is related to the recent increase in interest rates and is not related to any deterioration in the credit quality of any investment securities held.~~Bank remains well capitalized per regulatory guidance.

Asset Quality

Nonperforming assets include nonaccrual loans, other real estate owned ~~(OREO)~~(“OREO”) and loans past due more than 90 days which are still accruing interest. Our policy is to place loans on nonaccrual status once they reach 90 days past due. The makeup of the nonaccrual loans is primarily those secured by residential mortgages and commercial real estate. OREO is primarily ~~made up~~comprised of ~~farmland~~residential and ~~residential~~commercial lots.

Nonperforming assets ~~decreased $275 thousand,~~totaled $2.8 million as of June 30, 2023, a decline of $826,000, or ~~6.4%~~22.48%, ~~during the first nine months of~~since year-end 2022, driven by a decrease ~~in OREO~~ of ~~$1.0 million, which offset an increase~~$826,000 in nonaccrual ~~loans of $765 thousand.~~loans. The ~~increase~~decrease in nonaccrual loans is attributed to a ~~single credit for a commercial construction loan. This account has been assessed as part~~general improvement in the performance of ~~our determination of the adequacy of the allowance for loan losses, and collection efforts are ongoing.~~nonaccrual loans, resulting in several accounts being returned to accruing status. No loans 90 days or more past due are accruing interest. AsNonperforming assets as a ~~result, the ratio~~percentage of ~~nonperforming assets to~~ total assets ~~decreased to 0.49% at September~~were 0.35% as of June 30, ~~2022 compared to 0.54%~~2023, and 0.47% at December 31, ~~2021.~~2022.

~~At September~~As of June 30, ~~2022,~~2023, OREO is primarily made up of ~~farmland~~residential and ~~land~~commercial lots acquired through foreclosure. ~~During~~As of June 30, 2023, OREO totaled $261,000, unchanged from December 31, 2022. Expenses associated with OREO were $10,000 for the quarter ended June 30, 2023 compared to $15,000 for the quarter ended June 30, 2022, ~~two former branch sites that had been transferred~~due to costs associated with the sale of OREO in 2021, were sold bringing our OREO balance down to $321 thousand. We continue extensive and aggressive measures to work through problem credits and liquidate foreclosed properties in an effort to reduce nonperforming assets. We remain mindfulowned during the second quarter of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets. However, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.2022.

For detailed information ~~for~~on nonaccrual loans and other real estate owned as of ~~September~~June 30, ~~2022,~~2023 and December 31, ~~2021,~~2022, refer to Note 6 Loans and Note 910 Other Real Estate Owned in Item 1 of this Form 10-Q.

Loans rated substandard or below totaled ~~$3.7~~$2.6 million ~~at September~~as of June 30, ~~2022, an increase~~2023, a decrease of ~~$788 thousand from $2.9 million at December 31, 2021. Total past due loans increased slightly to $3.8 million at September 30, 2022~~$849,000 from $3.4 million at December 31, ~~2021. The~~2022. Total past due loans ~~at September 30, 2022, represent a decrease~~decreased to $3.7 million as of ~~$6.3 million, or 62.4%, from the $10.0 million reported at~~ June 30, ~~2022, as delays in loan billing and notice presentation related to the cybersecurity incident, during the second quarter of 2022, were addressed during the third quarter.~~2023 from $5.5 million at December 31, 2022.

Our allowance for ~~loan~~credit losses ~~at September~~as of June 30, ~~2022~~2023 was ~~$6.6~~$6.8 million or ~~1.14%~~1.12% of total loans as compared to $6.7 million, or ~~1.13%~~1.15% of total loans at December 31, ~~2021. Impaired~~2022. Individually evaluated loans totaled ~~$3.1 million~~$639,000 with an estimated related specific allowance of ~~$269 thousand at September~~$121,000 as of June 30, ~~2022,~~2023, as compared to ~~$2.8~~$2.7 million as of ~~impaired loans~~December 31, 2022 with an estimated related specific allowance of ~~$166 thousand~~$86,000 of impaired loans at the end of ~~2021.~~2022. A provision of ~~$400 thousand~~$149,000 was recorded for the first ~~nine~~six months of ~~2022~~2023 compared to ~~$372 thousand~~$175,000 during the first ~~nine~~six months of ~~2021.~~2022.

In the first ~~nine~~six months of ~~2022,~~2023, net charge-offs totaled ~~$542 thousand,~~$49,000, or ~~0.12%~~0.02% of average loans, annualized, as compared to ~~$906 thousand,~~$94,000, or ~~0.21%~~0.03%, of average loans, annualized, for the same period in 2021. Of the net charge-offs recorded in 2022, approximately $320 thousand represents overdraft charge-offs resulting from customer activity during the several days of the cybersecurity event when we increased daily transaction limits for debit card and ATM activity to meet customer needs while core services were restored.2022. The allowance for ~~loan~~credit losses is 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. Through our quarterly assessment, we continue to adjust the ~~allowance for loan loss~~CECL model to best reflect the risks in the ~~portfolio and the improvements made in our internal policies and procedures; however,~~portfolio. However, future provisions may be deemed necessary. During the first ~~nine~~six months of ~~2022,~~2023, we ~~adjusted~~made modest adjustments to our ~~external~~ qualitative factors, to ~~reflect positive employment~~consider risk factors associated with commercial real estate and ~~home sales statistics, along with adjusting for the impact~~residential mortgage loans, as part of ~~historically high inflation.~~our CECL implementation. Those changes, along with the assessment of the ~~inherent~~historical and specific risks associated with the loan portfolio, resulted in a net provision tofor credit losses of $149,000, of which $216,000 was provided for the loan portfolio; offset by a reduction of the allowance for unfunded commitments of ~~$400 thousand for the first nine months 2022.~~$67,000. The following table summarizes components of the allowance for ~~loan~~credit losses and related loans as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021:~~

2022:

Selected Credit Ratios
September 30, December 31,
(Dollars in thousands) 2022 2021
Allowance for loan losses $ 6,593 $ 6,735
Total loans 579,874 593,744
Allowance for loan losses to total loans 1.14 % 1.13 %
Nonaccrual loans $ 3,706 $ 2,941
Nonaccrual loans to total loans 0.64 % 0.50 %

Ratio of allowance for loan losses to nonaccrual loans 1.78 X 2.29 X

Charge-offs net of recoveries $ 542 $ 828
Average loans $ 594,534 $ 586,963
Net charge-offs to average loans 0.12 % 0.14 %

WeJune 30, December 31,
(Dollars are in ~~the process~~thousands) 2023 2022
Allowance for loan losses $ 6,814 $ 6,727
Total loans 609,038 584,613
Allowance for credit losses to total loans 1.12% 1.15%
Nonaccrual loans $ 2,587 $ 3,413
Nonaccrual loans to total loans 0.42% 0.58%
Ratio of ~~implementing the Current Expected Credit Loss (CECL) model~~allowance for credit losses to ~~replace our legacy loan loss model. While we had estimated we would be running concurrent models by June 30, 2022, due~~nonaccrual loans 2.63X 1.97X
Charge-offs net of recoveries¹ $ 98 $ 633
Average loans $ 593,457 $ 591,179
Net charge-offs to the cybersecurity incident, we delayed the start of parallel runs, which began late in the third quarter of 2022. Initial CECL model runs have occurred using only historical loss information. Initial assumptions have been input and are being layered onto the initial runs of historical loan and loss activity. The Company will run the new methodology parallel to the current allowance methodology for the first three quarters of 2022 before full implementation. In addition, we have retained a third-party vendor to perform a validation of the CECL model implementation.average loans¹

~~Deferred Tax Asset and Income Taxes~~0.02%
Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized loss on securities available for sale, of $916 thousand and $1.5 million existed at September 30, 2022 and December 31, 2021, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses.

~~Capital Resources~~0.11%
Total shareholders’ equity at September 30, 2022 was $55.2 million compared to $63.6 million at December 31, 2021, a decrease of $8.4 million, or 13.2%. As previously discussed, this decline was driven by the $12.9 million net increase in the accumulated other comprehensive loss related to the unrealized loss on investment securities available-for-sale. Excluding the impact of the unrealized loss, equity increased $4.5 million, due to net income of $5.8 million less the cash dividend payment of $1.2 million and $103 thousand used for share repurchases.
The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.
~~The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented at Note 4 in Item 1 of this Form 10-Q.~~
At September 30, 2022, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.
Book value per common share was $2.31 at September 30, 2022, and $2.66 at December 31, 2021. Excluding the impact of the accumulated other comprehensive loss, book value per share was $2.89 and $2.69 at September 30, 2022 and December 31, 2021, respectively. Other key performance indicators are as follows:
35
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Return on average assets¹ 0.94% 0.91% 0.95% 0.85%
Return on average equity¹ 13.70% 11.75% 13.15% 11.30%
Average equity to average assets 6.84% 7.76% 7.21% 7.56%

¹- Annualized

Deferred Tax Asset and Income Taxes

Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized loss on securities available-for-sale, of $4.4 million and $4.6 million existed as of June 30, 2023 and December 31, 2022, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses. The implementation of the CECL methodology resulted in a one-time deferred tax charge of $56,000. Refer to Note 2 Summary of Significant Accounting Policies in Part 1 of this Form 10-Q

Capital Resources

Total shareholders’ equity as of June 30, 2023 was $60.2 million compared to $57.2 million at December 31, 2022, an increase of $2.9 million, or 5.1%. The increase was driven by a decrease in net unrealized loss on available-for-sale securities of $937,000, which, when combined with year-to-date earnings of $3.7 million, more than offset a cash dividend payment of $1.4 million and the repurchase of common stock totaling $101,000. Additionally, the implementation of the CECL methodology resulted in a onetime net of tax direct charge to retained earnings of $212,000.

The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.

The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented in Note 4 in Item 1 of this Form 10-Q.

As of June 30, 2023, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.

Book value per common share was $2.53 and $2.40 as of June 30, 2023 and December 31, 2022, respectively.

Other key performance indicators are as follows:

	Three months ended June 30,						Six months ended June 30,
	2023			2022			2023			2022
Return on average assets¹		0.88	%		0.94	%		0.96	%		0.95	%
Return on average shareholders’ equity¹		11.62	%		13.45	%		12.75	%		12.88	%
Average equity to average assets		7.55	%		6.99	%		7.57	%		7.41	%

¹- Annualized

Under current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will be sufficient.

During the first quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders. Earnings will continue to be retained to provide capital to support the planned growth and operations of the Company and to continue to pay any future dividends to shareholders.

~~During the second~~ quarter of 2023, the Company paid a cash dividend of $0.06 per common share to our shareholders. Future payments of cash dividends will depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the parent company.

On April 28, 2022, the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through March 31, 2023. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. During the third quarter of 2022, 26,831 shares were purchased at an average price of $2.32 per share; bringing the total shares repurchased through September 30, 2022 to 44,485 at an average price of $2.30 per share. There is no assurance that the Company will purchase any additional shares under this program.

~~Liquidity~~

As discussed previously, in response to the cybersecurity incident, during the second quarter of 2022, we took efforts to increase on balance sheet liquidity through a series of FHLB advances transferred to our account at Federal Reserve Bank and pledging additional investment securities as collateral against unused funding sources for emergency needs. The deposit runoff since the cybersecurity incident has not been significant. Based on the customer response and an assessment of our overall liquidity, during the third quarter of 2022, we repaid a maturing FHLB advance totaling $20.0 million, and partially prepaid $15.0 million on the remaining $40.0 million advance. We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments. Collectively, those balances were $185.5 million at September 30, 2022, an increase of $26.2 million from $159.3 million at December 31, 2021. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2022.

At September 30, 2022, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $70.5 million, which is net of the $28.3 million of securities pledged as collateral. Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. Due to the increase in the unrealized loss on securities available for sale, the sale of investments would not be considered a primary source of liquidity due to the immediate impact on regulatory capital; however, the majority of the portfolio is considered high credit quality investments and would be available to pledge against borrowings.

~~Our loan to deposit ratio was 80.1% at September 30, 2022 and 83.9% at December 31, 2021. We anticipate this ratio to remain at or below 90% for the foreseeable future.~~

Available third-party sources of liquidity at September 30, 2022 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks.

The Bank’s line of credit with the FHLB is $211.7 million, with unused availability at September 30, 2022 of $179.7 million. FHLB advances totaling $25 million were outstanding at September 30, 2022, but the credit line also secures a letter of credit totaling $7.0 million. The available line and the outstanding letters of credit are secured by a blanket lien on our residential real estate loans which amounted to $123.2 million at September 30, 2022.

The Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (CDARS). At September 30, 2022, we held no brokered deposits while $2.8 million in CDARS reciprocal time deposits and $23.1 million in ICS reciprocal interest-bearing demand deposits are outstanding.

Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, while we do not anticipate using this as a primary funding source, securities with an estimated market value of $24.4 million were pledged at September 30, 2022.

With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control.

The bank holding company has approximately $371 thousand in cash on deposit at the Bank at September 30, 2022. The holding company receives periodic dividend payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments, and to fund dividend payments to shareholders and repurchase shares. The Company makes quarterly interest payments on the trust preferred securities.

~~As discussed in the Capital Resources section,~~ the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through March 31, 2023. As previously reported, this plan was extended by the Board of Directors through March 31, 2024. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. As of June 30, 2023, the Company has repurchased 119,229 shares at an average price of $2.29 per share. During the quarter ended June 30, 2023, the Company repurchased 25,702 shares at an average price of $2.18 per share. There is no assurance that the Company will purchase any additional shares under this program.

Liquidity

We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available-for-sale securities.

As of June 30, 2023, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $56.2 million, which is net of the $36.9 million of securities pledged as collateral. Investment securities available-for-sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. Due to the unrealized loss on securities available-for-sale, the sale of investments would not be considered a primary source of liquidity due to the immediate impact on regulatory capital; however, the majority of the portfolio is considered high credit quality investments and would be available to pledge against borrowings.

Our loan to deposit ratio was 86.01% and 84.40% as of June 30, 2023 and December 31, 2022, respectively. Generally, our policy has been to manage this ratio at or below 90.00%.

Available third-party sources of liquidity as of June 30, 2023 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. Additionally, in March 2023, the Federal Reserve Bank initiated a supplemental term funding program offering borrowings, of up to one year, secured by securities valued at par rather than market value. This program offers an additional source of liquidity against high quality securities, rather than liquidating securities should a need for additional funds arise. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks.

We have used our line of credit with the FHLB to issue a letter of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on the letter of credit have been issued. This letter of credit is considered to be a draw on our FHLB line of credit. In May 2023, we borrowed $10 million from FHLB, through a fixed rate 5-year advance, to support loan fundings and other general liquidity needs. An additional $176.5 million was available as of June 30, 2023 on the $198.5 million line of credit, of which $106.7 million is secured by a blanket lien on our residential real estate loans.

We held no brokered deposits as of June 30, 2023 and December 31, 2022. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the rate paid on deposits is shown in the net interest margin analysis tables. Total Certificate of Deposit Registry Services (“CDARS”) time deposits were $2.6 million and $1.4 million as of June 30, 2023 and December 31, 2022, respectively. Aside from the availability of CDARS time deposits, we also offer a similar deposit product for transaction account customers Intrafi Cash Service (“ICS”). As of June 30, 2023 approximately $27.3 million were placed in this product as compared to $23.9 million at December 31, 2022. Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit insurance coverage.

In March and May of 2023, three regional banks, each with assets in excess of $100.0 billion, were taken into receivership through FDIC and were sold in-whole, or in part to other financial institutions. Two of these banks, Silicon Valley Bank (“SVB”) headquartered in Santa Clara, California, and First Republic Bank headquartered in San Francisco, California, experienced significant outflows of deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits at both institutions. These concerns, in SVB’s case, related to unrealized losses in SVB’s investment portfolio combined with the long-term maturities of the investments and other earning assets held by SVB. The concerns for First Republic Bank related to exposure to long-term jumbo mortgages made to preferred deposit customers and the impact to net interest income and the value of those mortgages in the rising rate environment. While we, or any other financial institution, can be impacted by sudden changes in market conditions or customer sentiment, we believe that our funding and liquidity management strategies and procedures are sound. In addition, our deposit customer base is diverse without significant exposure to uninsured deposit relationships. Prior to receivership of these financial institutions our deposit fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates. Since the date of these receiverships, we have not experienced any significant or unusual deposit outflows and we took steps to successfully test certain liquidity facilities in the event of any future deposit outflows.

The bank holding company has approximately $449,000 in cash on deposit at the Bank as of June 30, 2023. The holding company receives periodic dividend payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments and discretionary principal payments, and to fund dividend payments to shareholders and repurchase shares. The Company makes quarterly interest payments on the trust preferred securities.

As discussed in the Capital Resources section, the Company is authorized to repurchase up to 500,000 shares of the Company’s outstanding common stock through March 31, 2024. Payments for any repurchases will be distributed from available funds, or from dividend payments from the Bank, and are not expected to have a material impact on available liquidity.

Off Balance Sheet Items and Contractual Obligations

There have been no material changes during the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, to the off-balance sheet items and the contractual obligations disclosed in our ~~2021~~2022 Form 10-K.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

Item 4.

Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our CEO) and our Executive Vice President and Chief Financial Officer (our CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended ~~September~~June 30, ~~2022,~~2023, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

3739

Part II Other Information

Item 1.

Legal Proceedings

In the course of operations, we may become a party to legal proceedings in the normal course of business. ~~At September~~As of June 30, ~~2022,~~2023, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries or to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, will materially impact the financial condition or liquidity of the Company.

Item 1A.

Risk Factors

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Sales of Unregistered Securities – None

(b)

Use of Proceeds – Not Applicable

(c)

Issuer Purchases of Securities

Stock Repurchase Program

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 that was extended through March 31, ~~2023.~~2024. 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 ~~September~~June 30, ~~2022,~~2023, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to ~~455,515~~380,771 shares of common stock.

Period Beginning on First Day of Month Ended Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs
July 31, 2022 5,720 $ 2.31 5,720 477,770
August 31, 2022 11,127 $ 2.35 11,127 466,643
September 30, 2022 11,128 $ 2.29 11,128 455,515
Total 27,975 $ 2.32 27,975

Period Beginning on First Day of Month Ended		Total Number of Shares Purchased		Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs
April 30, 2023		2,911	$	2.20	2,911	403,562
May 31, 2023		7,029	$	2.09	7,029	396,533
June 30, 2023		15,762	$	2.21	15,762	380,771
	Total	25,702	$	2.18	25,702

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

None

Item 6.

Exhibits

The following exhibits are filed as part of this report or are incorporated by reference:

No.	Description
3.1	Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008).
3.2	Bylaws of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K filed on August 26, 2020).
4.1	Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012).
4.2	Description of New Peoples Bankshares, Inc.’s Securities (incorporated by reference to Exhibit 4.2 to Form 10-K for the year ended December 31, ~~2021,~~2022, filed on March ~~31, 2022)~~31,2023).
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32	Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials for the Company’s Form 10-Q for the quarterly period ended ~~September~~June 30, ~~2022,~~2023, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss) ~~Income,~~, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

3941

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NEW PEOPLES BANKSHARES, INC.
		(Registrant)

	By:	/s/ C. TODD ASBURY
		C. Todd Asbury
		President and Chief Executive Officer

	Date:	~~November 15, 2022~~August 14, 2023

	By:	/s/ CHRISTOPHER G. SPEAKS
		Christopher G. Speaks
		Executive Vice President and Chief Financial Officer ~~and Treasurer~~

	Date:	~~November 15, 2022~~August 14, 2023


	September 30,			December 31,
	2022			2021
ASSETS
Cash and due from banks		17,134		$	14,952
Interest-bearing deposits with banks		97,406			45,766
Federal funds sold		378			228
Total Cash and Cash Equivalents		114,918			60,946
Investment securities available-for-sale		98,845			107,358
Loans receivable		579,874			593,744
Allowance for loan losses		(6,593	)		(6,735	)
Net loans		573,281			587,009
Bank premises and equipment, net		19,675			20,735
Other real estate owned		321			1,361
Accrued interest receivable		2,174			2,112
Deferred taxes, net		4,570			1,673
Bank owned life insurance		4,602			4,685
Right-of-use assets – operating leases		3,816			4,062
Other assets		6,363			4,706
Total Assets		828,565		$	794,647
LIABILITIES
Deposits:
Noninterest bearing		269,052		$	251,257
Interest-bearing		454,862			456,256
Total Deposits		723,914			707,513
Borrowed funds		41,496			16,496
Lease liabilities – operating leases		3,816			4,062
Accrued interest payable		355			272
Accrued expenses and other liabilities		3,754			2,673
Total Liabilities		773,335			731,016
SHAREHOLDERS’ EQUITY
Common stock - $2.00 par value; 50,000,000 shares authorized;
23,877,601 and 23,922,086 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		47,755			47,844
Additional paid-in-capital		14,556			14,570
Retained earnings		6,665			2,031
Accumulated other comprehensive loss		(13,746	)		(814	)
Total Shareholders’ Equity		55,230			63,631
Total Liabilities and Shareholders’ Equity		828,565		$	794,647


	For the Three Months Ended			For the Nine Months Ended
	September 30,			September 30,

INTEREST AND DIVIDEND INCOME		2022	2021		2022		2021
Loans including fees	$	7,010	7,602	$	20,476	$	21,483
Federal funds sold		2	—		3		—
Interest-earning deposits with banks		559	28		738		69
Investments		505	388		1,422		969
Dividends on equity securities (restricted)		34	26		88		90
Total Interest and Dividend Income		8,110	8,044		22,727		22,611

INTEREST EXPENSE
Deposits		418	522		1,252		1,780
Borrowed funds		492	104		810		349
Total Interest Expense		910	626		2,062		2,129

NET INTEREST INCOME		7,200	7,418		20,665		20,482

PROVISION FOR LOAN LOSSES		225	—		400		372

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		6,975	7,418		20,265		20,110

NONINTEREST INCOME
Service charges and fees		1,069	1,001		2,973		2,674
Card processing and interchange		915	982		2,858		2,918
Insurance and investment fees		167	222		650		723
Net gain on sales of available-for-sale securities		—	322		—		322
Other noninterest income		38	443		425		840
Total Noninterest Income		2,189	2,970		6,906		7,477

NONINTEREST EXPENSES
Salaries and employee benefits		3,290	3,239		9,947		9,417
Occupancy and equipment expense		1,177	2,215		3,200		4,575
Data processing and telecommunications		607	609		1,762		1,835
Other operating expenses		1,525	2,004		4,787		5,313
Total Noninterest Expenses		6,599	8,067		19,696		21,140

INCOME BEFORE INCOME TAXES		2,565	2,321		7,475		6,447

INCOME TAX EXPENSE		579	476		1,645		1,354

NET INCOME	$	1,986	1,845	$	5,830	$	5,093

Earnings per share
Basic and diluted	$	0.08	0.08	$	0.24	$	0.21

Average Weighted Shares of Common Stock
Basic and diluted		23,893,224	23,922,086		23,910,287		23,922,086



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021

NET INCOME	$	1,986		$	1,845		$	5,830		$	5,093

Other comprehensive (loss) income:
Investment securities activity
Unrealized losses arising during the period		(3,614	)		(45	)		(16,369	)		(629	)
Reclassification adjustment for net gains included
in net income		—			(322	)		—			(322	)
Other comprehensive loss on investment securities		(3,614	)		(367	)		(16,369	)		(951	)
Related tax benefit		759			76			3,437			199
TOTAL OTHER COMPREHENSIVE LOSS		(2,855	)		(291	)		(12,932	)		(752	)
TOTAL COMPREHENSIVE (LOSS) INCOME	$	(869	)	$	1,554		$	(7,102	)	$	4,341

Schedule of allocation of portion of allowance
		Real estate secured
(Dollars are in thousands)		Commercial			Construction and Land Development			Residential 1-4 family			Multifamily			Farmland			Commercial			Agriculture		Consumer and All Other			Unallocated			Total
Nine months ended September 30, 2022
Beginning balance	$	2,134		$	189		$	2,237		$	254		$	149		$	1,099		$	28	$	108		$	537		$	6,735
Charge-offs		(5	)		(149	)		(52	)		(111	)		(2	)		(29	)		—		(454	)		—			(802	)
Recoveries		33			3			87			2			14			29			—		92			—			260
Provision		42			394			(107	)		97			(24	)		(429	)		1		565			(139	)		400
Ending balance	$	2,204		$	437		$	2,165		$	242		$	137		$	670		$	29	$	311		$	398		$	6,593

Three months ended September 30, 2022
Beginning balance	$	2,162		$	450		$	2,239		$	408		$	141		$	853		$	29	$	170		$	364		$	6,816
Charge-offs		(5	)		(149	)		(28	)		(50	)		(2	)		(1	)		—		(409	)		—			(644	)
Recoveries		33			3			65			2			14			15			—		64			—			196
Provision		14			133			(111	)		(118	)		(16	)		(197	)		—		486			34			225
Ending balance	$	2,204		$	437		$	2,165		$	242		$	137		$	670		$	29	$	311		$	398		$	6,593

Allowance for loan losses at September 30, 2022
Individually evaluated for impairment	$	69		$	174		$	26		$	—		$	—		$	—		$	—	$	—		$	—		$	269
Collectively evaluated for impairment		2,135			263			2,139			242			137			670			29		311			398			6,324
	$	2,204		$	437		$	2,165		$	242		$	137		$	670		$	29	$	311		$	398		$	6,593

Loans at September 30, 2022
Individually evaluated for impairment	$	383		$	716		$	1,696		$	—		$	268		$	24		$	—	$	—		$	—		$	3,087
Collectively evaluated for impairment		197,718			37,882			225,010			29,062			17,199			45,102			3,799		21,015			—			576,787
	$	198,101		$	38,598		$	226,706		$	29,062		$	17,467		$	45,126		$	3,799	$	21,015		$	—		$	579,874

Schedule of summary of assets and liabilities measured at fair value
September 30, 2022 (Dollars are in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(On a recurring basis) Available for sale investments
U.S. Treasuries	$	—	$	11,646	$	—
U.S. Government Agencies		—		9,760		—
Taxable municipals		—		17,778		—
Corporate bonds		—		3,175		—
Mortgage-backed securities		—		56,486		—
(On a non-recurring basis) Other real estate owned		—		—		321
Impaired loans		—		—		2,818
Total	$	—	$	98,845	$	3,139

Schedule of revenue from contracts with customers
	For the three months ended				For the nine months ended
	September 30,				September 30,
(Dollars in thousands)		2022		2021			2022		2021
Service charges and fees	$	1,069	$	1,001		$	2,973	$		2,674
Card Processing and interchange income		915		982			2,858			2,918
Gain on sale of securities available-for-sale ⁽¹⁾		-		322			-			322
Insurance and investment fees		167		222			650			723
Other noninterest income		38		159			425			840
Total Noninterest Income	$	2,189	$	2,970		$	6,906	$		7,477

Schedule of noninterest expenses
	For the three months ended September 30,					For the Nine months ended September 30,
(Dollars are in thousands)	2022			2021		2022		2021
Advertising	$	23		$	85	$	115	$	193
ATM network expense		806			368		1,553		1,113
Legal, accounting and professional fees		258			254		746		842
Consulting fees		98			58		227		206
Loan related expenses		65			198		265		448
Printing and supplies		35			29		107		89
FDIC insurance premiums		56			81		159		218
Other real estate owned expenses, net		(35	)		301		110		439
Other operating expenses		219			630		1,505		1,765
Total other operating expenses	$	1,525		$	2,004	$	4,787	$	5,313

Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
(Dollars in thousands)
Three Months Ended September 30,
				2022							2021
				Average		Income/		Yields/		Average			Income/		Yields/
				Balance		Expense		Rates		Balance			Expense		Rates
ASSETS
	Loans ^{(1) (2) (3)}		$	590,090	$	7,010		4.72%	$	581,517		$	7,602		5.19%
	Federal funds sold			353		2		2.34%		209			-		0.12%
	Interest bearing deposits in other banks			98,657		559		2.25%		72,549			28		0.15%
	Taxable investment securities			117,628		539		1.83%		96,136			414		1.72%
	Total earning assets			806,728		8,110		3.99%		750,411			8,044		4.26%
	Less: Allowance for loans losses			(6,738)						(6,778)
	Non-earning assets			41,134						58,972
		Total Assets	$	841,124					$	802,605

LIABILITIES AND SHAREHOLDERS’ EQUITY
	Interest-bearing demand deposits		$	75,151	$	23		0.12%	$	60,289		$	15		0.10%
	Savings and money market deposits			192,550		52		0.11%		184,155			36		0.08%
	Time deposits			181,480		343		0.75%		212,712			471		0.88%
	Total interest-bearing deposits			449,181		418		0.37%		457,156			522		0.45%
	Short-term borrowings			46,793		287		2.40%		-			-		-%
	Trust preferred securities			16,496		205		4.85%		16,496			104		2.47%
	Total interest-bearing liabilities			512,470		910		0.70%		473,652			626		0.52%
	Non-interest-bearing deposits			262,244		-		-%		258,251			-		- %
	Total deposit liabilities and cost of funds			774,714		910		0.46%		731,903			626		0.34%
	Other liabilities			8,904						8,399
		Total Liabilities		783,618						740,302
	Shareholders’ Equity			57,506						62,303
		Total Liabilities and Shareholders’ Equity	$	841,124					$	802,605
	Net Interest Income				$	7,200						$	7,418
	Net Interest Margin						3.55%							3.93%
	Net Interest Spread						3.29%							3.74%

(1) Nonaccrual loans and loans held for sale have been included in average loan balances
(2) Tax exempt income is not significant and has been treated as fully taxable (3) Includes mortgage loans held for sale

Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
(Dollars in thousands)
Nine Months Ended September 30,
				2022							2021
				Average		Income/		Yields/		Average			Income/		Yields/
				Balance		Expense		Rates		Balance			Expense		Rates
ASSETS
	Loans ^{(1) (2) (3)}		$	594,593	$	20,476		4.61%	$	588,083		$	21,483		4.89%
	Federal funds sold			254		3		1.36%		208			-		0.09%
	Interest bearing deposits in other banks			73,752		738		1.34%		83,153			69		0.11%
	Taxable investment securities			115,349		1,510		1.74%		72,958			1,059		1.94%
	Total earning assets			783,948		22,727		3.88%		744,402			22,611		4.06%
	Less: Allowance for loans losses			(6,824)						(7,143)
	Non-earning assets			44,582						59,984
		Total Assets	$	821,706					$	797,243

LIABILITIES AND SHAREHOLDERS’ EQUITY
	Interest-bearing demand deposits		$	71,420	$	58		0.11%	$	57,606		$	45		0.10%
	Savings and money market deposits			194,691		130		0.09%		175,668			109		0.08%
	Time deposits			188,497		1,064		0.75%		222,186			1,626		0.98%
	Total interest-bearing liabilities			454,608		1,252		0.37%		455,460			1,780		0.52%
	Short-term borrowings			20,000		358		2.36%		3,308			33		1.35%
	Trust preferred securities			16,496		452		3.61%		16,496			316		2.52%
	Total interest-bearing liabilities			491,104		2,062		0.56%		475,264			2,129		0.60%
	Non-interest-bearing deposits			263,083		-		-%		252,985			-		- %
	Total deposit liabilities and cost of funds			754,187		2,062		0.36%		728,249			2,129		0.39%
	Other liabilities			8,235						8,726
		Total Liabilities		762,422						736,975
	Shareholders’ Equity			59,284						60,268
		Total Liabilities and Shareholders’ Equity	$	821,706					$	794,243
	Net Interest Income				$	20,665						$	20,482
	Net Interest Margin						3.53%							3.68%
	Net Interest Spread						3.32%							3.46%

(1) Nonaccrual loans and loans held for sale have been included in average loan balances
(2) Tax exempt income is not significant and has been treated as fully taxable