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.

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).

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.

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).

The number of shares outstanding of the registrant’s common stock was 23,872,311 as of November 10, 2022.

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

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.

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 30, 2022 and December 31, 2021, and the results of operations for the three- and nine-month periods ended September 30, 2022 and 2021. 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. 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 losses and the determination of the deferred tax asset are 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.

Basic 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 periods ended September 30, 2022 and 2021, there were no potential common shares. Basic and diluted net income per common share calculations follows:

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 30, 2022, the Bank had a capital conservation buffer of 8.35%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management believes as of September 30, 2022, 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 30, 2022, 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. The Bank’s actual capital amounts and ratios are presented in the following table as of September 30, 2022 and December 31, 2021, respectively.

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

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 30, 2022 and December 31, 2021.

At September 30, 2022, there were 216 securities in a loss position, of which 100 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.

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

The following table summarizes sales of AFS debt securities for the nine months-ended September 30,

The amortized cost and fair value of investment securities at September 30, 2022, 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.

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 on the consolidated balance sheet, are restricted from trading and are recorded at a cost of ~~$3.0~~$3.0 million and ~~$2.0~~$2.0 million at September 30, 2022 and December 31, 2021, respectively. The stock has no quoted market value and no ready market exists.

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

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

Also included in total loans above are deferred loan fees of ~~$1.7~~$1.7 million and ~~$1.8~~$1.8 million at September 30, 2022 and December 31, 2021, respectively. Deferred loan costs were ~~$2.1~~$2.1 million and ~~$2.0~~$2.0 million, at September 30, 2022 and December 31, 2021, 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.

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

Total interest income not recognized on nonaccrual loans for the nine months ended September 30, 2022, and September 30, 2021, was $22 thousand and $445 thousand, respectively.

The following tables presents information concerning the Company’s investment in loans considered impaired as of September 30, 2022, and December 31, 2021:

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

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 loans and interest recognized on those impaired loans, for the periods indicated:

	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
With no related allowance recorded:
Real estate secured:
Commercial	$	132	$	4	$	281	$	—
Construction and land development		25		13		75		9
Residential 1-4 family		1,578		37		1,773		24
Multifamily		—		—		—		—
Farmland		322		18		467		14
Commercial		12		1		—		—
Agriculture		—		—		—		—
Consumer installment loans		1		—		3		—
All other loans		—		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		442		3		1,010		3
Construction and land development		364		17		—		—
Residential 1-4 family		243		6		338		6
Multifamily		25		—		—		—
Farmland		79		—		102		4
Commercial		34		1		129		1
Agriculture		—		—		—		—
Consumer installment loans		—		—		—		—
All other loans		—		—		—		—
Total	$	3,257	$	100	$	4,178	$	61

	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:
Real estate secured:
Commercial	$	94	$	4	$	122	$	—
Construction and land development		9		9		56		5
Residential 1-4 family		1,553		23		1,764		10
Multifamily		—		—		—		—
Farmland		275		9		452		5
Commercial		25		1		—		—
Agriculture		—		—		—		—
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

An age analysis of past due loans receivable as of September 30, 2022, and December 31, 2021, is below. At September 30, 2022 and December 31, 2021, no loans over 90 days past due were accruing.

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

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.

Based on the most recent analysis performed, the risk categories of loans receivable as of September 30, 2022, and December 31, 2021, was as follows:


Summary of risk category of loans receivable
As of September 30, 2022 (Dollars are in thousands)	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		Total
Real estate secured:
Commercial	$	193,557	$	4,271	$	273	$	—	$	198,101	$	193,557	$	4,271	$	273	$	—	$	198,101
Construction and land development		37,738		126		734		—		38,598		37,738		126		734		—		38,598
Residential 1-4 family		223,593		493		2,620		—		226,706		223,593		493		2,620		—		226,706
Multifamily		28,852		210		—		—		29,062		28,852		210		—		—		29,062
Farmland		16,538		886		43		—		17,467		16,538		886		43		—		17,467
Total real estate loans		500,278		5,986		3,670		—		509,934		500,278		5,986		3,670		—		509,934
Commercial		44,208		903		15		—		45,126		44,208		903		15		—		45,126
Agriculture		3,799		—		—		—		3,799		3,799		—		—		—		3,799
Consumer installment loans		19,595		3		4		—		19,602		19,595		3		4		—		19,602
All other loans		1,413		—		—		—		1,413		1,413		—		—		—		1,413
Total	$	569,293	$	6,892	$	3,689	$	—	$	579,874	$	569,293	$	6,892	$	3,689	$	—	$	579,874

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

NOTE 7 ALLOWANCE FOR LOAN LOSSES

In determining the amount of our allowance for loan 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 activity in the allowance for loan losses for the nine- and three-month periods ended September 30, 2022 and 2021, respectively. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of September 30, 2022, and December 31, 2021, respectively.

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 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

There were ~~$2.1~~$2.1 million and ~~$2.5~~$2.5 million in loans classified as troubled debt restructurings at September 30, 2022 and December 31, 2021, respectively. 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 months ended September 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 the three months ended September 30, 2022. Two loans totaling $73 thousand, previously modified as a troubled debt restructuring, that defaulted during the first nine 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. 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 allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of the loan.

NOTE 9 OTHER REAL ESTATE OWNED

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

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

NOTE 10 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 - Investment securities 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 securities, totaling ~~$98.8~~$98.8 million and ~~$107.4~~$107.4 million at September 30, 2022 and December 31, 2021, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair value of the underlying real estate collateral. Where there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates to determine whether or not the fair value of the collateral is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets.

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 September 30, 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)		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	$	—	$	—	$	11,646	$	—
U.S. Government Agencies		—		9,760		—		—		9,760		—
Taxable municipals		—		17,778		—		—		17,778		—
Corporate bonds		—		3,175		—		—		3,175		—
Mortgage-backed securities		—		56,486		—		—		56,486		—
(On a non-recurring basis) Other real estate owned		—		—		321		—		—		321
Impaired loans		—		—		2,818		—		—		2,818
Total	$	—	$	98,845	$	3,139	$	—	$	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)		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		—			$	7,671		—		-
U.S. Government Agencies		—		9,089	$	—		—		9,089	$	—
Taxable municipals		—		22,980		—		—		22,980		—
Corporate bonds		—		2,019		—		—		2,019		—
Mortgage-backed securities		—		65,599		—		—		65,599		—
						—						—
(On a non-recurring basis) Other real estate owned		—		—		1,361		—		—		1,361
Impaired loans		—		—		2,667		—		—		2,667
Total	$	—	$	107,358	$	4,028	$	—	$	107,358	$	4,028

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2022 and December 31, 2021, 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

Fair Value at September 30, 2022

Fair Value at

December 31,

2021

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%

2,818

2,667

Appraised Value

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

0 – 18%

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%

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%

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 30, 2022, and December 31, 2021, are as follows:


Schedule of estimated fair value of financial instruments

					Fair Value Measurements										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)		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	$	573,281	$	554,800	$	—	$	—	$	554,800

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

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

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

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 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 30, 2022 and December 31, 2021, represent an approximation of exit price; however, an actual exit price may differ.

NOTE 11 LEASING ACTIVITIES

As of September 30, 2022, the Bank leases four branch office sites resulting from sale leaseback transactions entered into in 2017 and a sublet of a lot adjacent to another 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 30, 2022 was 9.87 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 30, 2022 was ~~3.24%~~3.24%.

For the nine months ended September 30, 2022 and 2021, operating lease expenses were ~~$342~~$342 thousand and ~~$421~~$421 thousand, respectively.

The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At September 30, 2022, 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	$	114
2023		455		455
2024		455		455
2025		455		455
2026		455		455
Thereafter		2,698		2,698
Total lease payments		4,632		4,632
Less imputed interest		844		844
Total	$	3,788	$	3,788

NOTE 12 BORROWED FUNDS

Included in Borrowed Funds is a short-term FHLB Advance totaling ~~$25~~$25 million at September 30, 2022. No short-term borrowings were outstanding at December 31, 2021. The outstanding advance at September 30, 2022, of $25 million, has a fixed rate of 2.60%, and matures December 19, 2022.

NOTE 13 REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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

⁽¹⁾

^–Not within the scope of ASU 2014-19

NOTE 14 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,				For the three months ended September 30,					For the Nine months ended September 30,
(Dollars are in thousands)	2022			2021		2022		2021		2022			2021		2022		2021
Advertising	$	23		$	85	$	115	$	193	$	23		$	85	$	115	$	193
ATM network expense		806			368		1,553		1,113		806			368		1,553		1,113
Legal, accounting and professional fees		258			254		746		842		258			254		746		842
Consulting fees		98			58		227		206		98			58		227		206
Loan related expenses		65			198		265		448		65			198		265		448
Printing and supplies		35			29		107		89		35			29		107		89
FDIC insurance premiums		56			81		159		218		56			81		159		218
Other real estate owned expenses, net		(35	)		301		110		439		(35	)		301		110		439
Other operating expenses		219			630		1,505		1,765		219			630		1,505		1,765
Total other operating expenses	$	1,525		$	2,004	$	4,787	$	5,313	$	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.

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 on its financial position, results of operations, and cash flows. The Company has contracted with a software vendor 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 parallel to the current allowance methodology, and will be assessing the comparative results for the first three quarterly calculations during the fourth quarter of 2022.

In March 2020, the FASB released ASU 2020-04, ‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting,’ which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. 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 are effective for the Company as of March 12, 2020 through December 31, 2022. The Company is working through implementation of this guidance, and to date this amendment has not had a material impact on its 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 is currently assessing the impact that ASU 2022-02 will have 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.

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 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 Form 10-K). 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 for loan losses and the calculation of our deferred tax asset.

The allowance represents an amount that, in the Company's judgment, will be adequate to absorb probable 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 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 the three months ended September 30, 2022, net income of $2.0 million was recorded; an increase of $141,000, or 7.6%, 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. Net interest income decreased $218,000, a result of deferred loan fees earned from the forgiveness of Paycheck Protection Program (PPP) loans of $1.1 million during the third quarter of 2021 not being replicated in 2022, resulting in a net 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 to $5.1 million or $0.21 per share for the same nine-month period in 2021. Interest income was slightly higher and interest expense was slightly lower, resulting in an improvement 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.

The balance sheet grew to $828.6 million as of September 30, 2022, from $794.6 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 increased $16.4 million to $723.9 million at September 30, 2022 from $707.5 million at December 31, 2021. Loans decreased $13.9 million to $579.9 million during the first nine months 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.

During the second quarter of 2022, we initiated a previously announced stock repurchase program. Through September 30, 2022, 44,485 shares have been repurchased at an average price of $2.30 per share.

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

Quarter-to-date highlights include:

Returns on average assets and equity of 0.94% and 13.70 % for the third quarter of 2022, compared to 0.91% and 11.75% for the third quarter of 2021, respectively;

Net interest income was $7.2 million for the third quarter of 2022, a decrease of $218 thousand, or 2.9%, compared to the third quarter of 2021;

Provision for loan losses was $225,000 for the third quarter of 2022, and $0 for the third quarter of 2021;

Noninterest income was $2.2 million, a decrease of $781 thousand, or 26.3%, during the third quarter of 2022 compared to the third quarter of 2021; and

Noninterest expense was $6.6 million, a decrease of $1.5 million, or 18.2%, for the third quarter of 2022 compared to the third quarter of 2021.

The Company’s primary source of income is net interest income, which decreased by $218 thousand, or 2.9%, to $7.2 million for the third quarter of 2022 compared to $7.4 million for the third quarter of 2021. Interest income increased $66 thousand due to a $56 million increase in the average balance of earning assets, a shift of funds to higher-yielding investment securities; and increased interest earning deposits with banks funded from FHLB advances as we maintained additional liquidity as we monitored customer reaction to the cybersecurity incident. Additionally, the 2022 increases in the fed funds rate partially 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-point increase in the cost of funds to 46 bps while the net interest margin decreased 38 bps to 3.55%. During the third quarter of 2022, 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 during the third quarter, but the full impact will be somewhat lagging as certain loans, investments, and trust preferred securities will not reprice until the individual instruments next interest rate repricing date. Deposit rates have not yet been significantly impacted by the rate increases, but 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 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 30, 2022, as compared to the three months ended September 30, 2021.

Volume and Rate Analysis

Increase (decrease)

	Three Months Ended September 30, 2022 versus 2021
(Dollars in thousands)	Volume Effect			Rate Effect			Change in Interest Income/ Expense
Interest Income:
Loans	$	(972	)	$	380		$	(592	)
Federal funds sold		—			2			2
Interest bearing deposits in other banks		13			518			531
Taxable investment securities		92			33			125
Total Earning Assets		(867	)		933			66
Interest Expense:
Interest-bearing demand deposits		5			3			8
Savings and money market deposits		3			13			16
Time deposits		(65	)		(63	)		(128	)
Short-term borrowings		287			—			287
Trust preferred securities		—			101			101
Total Interest-bearing Liabilities		230			54			284
Change in Net Interest Income	$	(1,097	)	$	879		$	(218	)

Based on our current assessment of the loan portfolio, a provision of $225 thousand was made in the third 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. The allowance for loan losses as a percentage of loans increased from 1.13% at December 31, 2021 to 1.14% as of September 30, 2022. For a discussion of the factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for Loan Losses, in Item 1 of this Form 10-Q.

Total noninterest income decreased $781,000 in the third quarter of 2022 compared to the third quarter 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 of 2022.

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 to 70.3% for third quarter of 2022 from 77.6% for the third quarter of 2021. 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 quarter of 2022 totaled $579 thousand, an increase of $103 thousand, or 21.6% from the $476 thousand recorded during the same period in 2021. The effective tax rate for the three months ended September 30, 2022, was 22.6%, compared to 20.5% for the same period in 2021. The year-over-year, quarterly increase generally approximates the percentage increase of pre-tax earnings.

Comparison of the Nine Months ended September 30, 2022 and 2021

Year-to-date highlights include:

Net interest income improved to $20.7 million for the first nine months of 2022, an improvement of $183 thousand, or 0.9%, compared to the first nine months of 2021;

Net interest margin was 3.53% for the first nine months of 2022, a decrease of 15 bps compared to 3.68% for the first nine months of 2021;

Provision for loans losses was $400 thousand for the first nine months of 2022, an increase of $28 thousand, or 7.5%, compared to the first nine months of 2021;

Noninterest income was $6.9 million, a decrease of $571 thousand, or 7.6%, compared to the first nine months of 2021;

Salaries and employee benefits expense was $9.9 million, an increase of $530 thousand, or 5.6%, compared to the first nine months of 2021; and

Total noninterest expense was $19.7 million, a decrease of $1.4 million, or 6.8%, compared to the first nine months of 2021.

Overall, during the nine months ended September 30, 2022, compared to the same period in 2021, net income improved 14.5% to $5.8 million from $5.1 million. Although interest income was virtually unchanged, increasing $116 thousand, reduced interest expense of $67 thousand contributed to an improvement of $183 thousand in net interest income. 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
(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 months ended September 30, 2022, as compared to the nine months ended September 30, 2021.

Volume and Rate Analysis

Increase (decrease)

	Nine Months Ended September 30, 2022 versus 2021
(Dollars in thousands)	Volume Effect			Rate Effect			Change in Interest Income/ Expense
Interest Income:
Loans	$	(1,382	)	$	375		$	(1,007	)
Federal funds sold		—			3			3
Interest bearing deposits in other banks		(9	)		678			669
Taxable investment securities		484			(33	)		451
Total Earning Assets		(907	)		1,023			116
Interest Expense:
Interest-bearing demand deposits		13			—			13
Savings and money market deposits		15			6			21
Time deposits		(226	)		(336	)		(562	)
Short-term borrowings		284			41			325
Trust preferred securities		—			136			136
Total Interest-bearing Liabilities		86			(153	)		(67	)
Change in Net Interest Income	$	(993	)	$	1,176		$	183

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 was provided to the allowance for loan losses during the first nine months of 2022 compared to $372 thousand provided during the same period in 2021. For more information on the factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for loan 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 income decreased $571,000 for the first nine months of 2022, compared 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 recorded in 2022, as previously discussed. Aside from these individual events, financial services and secondary market mortgage lending activities were 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 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 period 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 efforts in addressing the cybersecurity incident.

Income taxes increased $291,000, or 21.5%, to $1.6 million, which generally correlates to the increase in pretax earnings.

The efficiency ratio, a non-GAAP measure, improved to 71.4% for the first nine months of 2022 from 77.6.% for the same period of 2021.

Balance Sheet

Total assets increased $33.9 million, or 4.3%, to $828.6 million at September 30, 2022 from $794.6 million at December 31, 2021. This growth was 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 of factors including customer reaction to the cybersecurity incident, time deposit customers seeking higher interest rates 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.

Total investments decreased $8.5 million, or 7.9%, to $98.8 million at September 30, 2022 due primarily to an increase 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 2022. Commercial real estate and multifamily loans decreased $8.1 million or 3.9% and $4.0 million or 12.1% to $198.1 million and $29.1 million, respectively at September 30, 2022, as several large commercial 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.

Total deposits increased $16.4 million, or 2.3%, to $723.9 million at September 30, 2022 from $707.5 million at December 31, 2021, as noninterest bearing deposits increased $17.8 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 the third quarter of 2022, an advance totaling $20.0 million matured and was repaid, and a $15.0 million partial prepayment was made on the remaining $40.0 million advance which matures in December 2022. We anticipate repaying the $25.0 million outstanding advance at maturity. Trust preferred securities of $16.5 million at September 30, 2022 were unchanged compared to December 31, 2021.

Total equity at September 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 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 investment securities, along with a cash dividend payment and repurchases of common shares. 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.

Asset Quality

Nonperforming assets include nonaccrual loans, other real estate owned (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 of farmland and residential lots.

Nonperforming assets decreased $275 thousand, or 6.4%, during the first nine months of 2022, driven by a decrease in OREO of $1.0 million, which offset an increase in nonaccrual loans of $765 thousand. The increase in nonaccrual loans is attributed to a single credit for a commercial construction loan. This account has been assessed as part of our determination of the adequacy of the allowance for loan losses, and collection efforts are ongoing. No loans 90 days or more past due are accruing interest. As a result, the ratio of nonperforming assets to total assets decreased to 0.49% at September 30, 2022 compared to 0.54% at December 31, 2021.

At September 30, 2022, OREO is primarily made up of farmland and land acquired through foreclosure. During 2022, two former branch sites that had been transferred to 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 mindful 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.

For detailed information for nonaccrual loans and other real estate owned as of September 30, 2022, and December 31, 2021, refer to Note 6 Loans and Note 9 Other Real Estate Owned in Item 1 of this Form 10-Q.

Loans rated substandard or below totaled $3.7 million at September 30, 2022, an increase 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 from $3.4 million at December 31, 2021. The past due loans at September 30, 2022, represent a decrease 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.

Our allowance for loan losses at September 30, 2022 was $6.6 million, or 1.14% of total loans, as compared to $6.7 million, or 1.13% of total loans, at December 31, 2021. Impaired loans totaled $3.1 million with an estimated related specific allowance of $269 thousand at September 30, 2022, as compared to $2.8 million of impaired loans with an estimated related allowance of $166 thousand at the end of 2021. A provision of $400 thousand was recorded for the first nine months of 2022 compared to $372 thousand during the first nine months of 2021.

In the first nine months of 2022, net charge-offs totaled $542 thousand, or 0.12% of average loans, annualized, as compared to $906 thousand, or 0.21% of average loans, 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. The allowance for loan 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 model to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures; however, future provisions may be deemed necessary. During the first nine months of 2022, we adjusted our external qualitative factors to reflect positive employment and home sales statistics, along with adjusting for the impact of historically high inflation. Those changes along with the assessment of the inherent and specific risks associated with the loan portfolio resulted in a provision to the allowance of $400 thousand for the first nine months 2022. The following table summarizes components of the allowance for loan losses and related loans as of September 30, 2022 and December 31, 2021:

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	%

We are in the process of implementing the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model. While we had estimated we would be running concurrent models by June 30, 2022, due 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.

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 $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

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:

	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

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 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. 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 months ended September 30, 2022, to the off-balance sheet items and the contractual obligations disclosed in our 2021 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 30, 2022, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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 30, 2022, 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 through March 31, 2023. Repurchases may be made through open market purchases or in privately negotiated transactions. Shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company.

Shares of the Company’s common stock were repurchased during the three months ended September 30, 2022, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 455,515 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

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, filed on March 31, 2022).
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 30, 2022, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive (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.

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 ~~14,~~15, 2022

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

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


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)

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


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


	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 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

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

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

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

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

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

	Consolidated Statements of Cash Flows – Nine months ended September 30, 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	25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	37

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	38

Item 6.	Exhibits	39

SIGNATURES		40


	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


	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


	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	)

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,				For the three months ended September 30,				For the Nine months ended September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
Net income	$	1,986	$	1,845	$	5,830	$	5,093	$	1,986	$	1,845	$	5,830	$	5,093
Weighted average shares outstanding		23,893,224		23,922,086		23,910,287		23,922,086		23,893,224		23,922,086		23,910,287		23,922,086
Weighted average dilutive shares outstanding		23,893,224		23,922,086		23,910,287		23,922,086		23,893,224		23,922,086		23,910,287		23,922,086

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


Schedule of capital requirements
		Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions						Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands)		Amount		Ratio			Amount		Ratio			Amount		Ratio				Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2022:	September 30, 2022:																September 30, 2022:
Total Capital to Risk Weighted Assets			90,849		16.35	%	$	44,465		8.0	%	$	55,582		10.0	%			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	%			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	%			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	%			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	%			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	%			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	%			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	%			79,274		14.98	%		23,812		4.5	%		34,395		6.5	%

Schedule of securities amortized cost and estimated fair value
				Gross		Gross		Approximate				Gross		Gross		Approximate
		Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(Dollars are in thousands)	(Dollars are in thousands)	Cost		Gains		Losses		Value	(Dollars are in thousands)	Cost		Gains		Losses		Value
September 30, 2022	September 30, 2022								September 30, 2022
U.S. Treasuries	$	12,639	$	-	$	993	$	11,646	$	12,639	$	-	$	993	$	11,646
U.S. Government Agencies		10,451		4		695		9,760		10,451		4		695		9,760
Taxable municipals	Taxable municipals	23,338	-		5,560		17,778		Taxable municipals	23,338	-		5,560		17,778
Corporate bonds	Corporate bonds	3,515	-		340		3,175		Corporate bonds	3,515	-		340		3,175
Mortgage backed securities	Mortgage backed securities	66,301	-		9,815		56,486		Mortgage backed securities	66,301	-		9,815		56,486
Total Securities available for sale	$	116,244	$	4	$	17,403	$	98,845	$	116,244	$	4	$	17,403	$	98,845

December 31, 2021	December 31, 2021								December 31, 2021
U.S. Treasuries	$	7,791	$	2	$	122	$	7,671	$	7,791	$	2	$	122	$	7,671
U.S. Government Agencies		9,098		77		86		9,089		9,098		77		86		9,089
Taxable municipals		23,075		159		254		22,980		23,075		159		254		22,980
Corporate bonds		2,014		23		18		2,019		2,014		23		18		2,019
Mortgage backed securities		66,410		143		954		65,599		66,410		143		954		65,599
Total Securities available for sale	$	108,388	$	404	$	1,434	$	107,358	$	108,388	$	404	$	1,434	$	107,358


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
U.S. Treasuries	$	5,115	$	283	$	5,564	$	710	$	10,679	$	993	$	5,115	$	283	$	5,564	$	710	$	10,679	$	993
U.S. Government Agencies		5,450		362		3,120		333		8,570		695		5,450		362		3,120		333		8,570		695
Taxable municipals		7,009		2,131		9,969		3,429		16,978		5,560		7,009		2,131		9,969		3,429		16,978		5,560
Corporate bonds		2,288		228		388		112		2,676		340		2,288		228		388		112		2,676		340
Mortgage backed securities		14,463		1,759		39,512		8,056		53,975		9,815		14,463		1,759		39,512		8,056		53,975		9,815
Total Securities available for sale	$	34,325	$	4,763	$	58,553	$	12,640	$	92,878	$	17,403	$	34,325	$	4,763	$	58,553	$	12,640	$	92,878	$	17,403

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

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


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	%	$	1,777	$	1,776		4.30	%
Due after one year through five years		16,829		15,805		2.09	%		16,829		15,805		2.09	%
Due after five years through ten years		14,663		12,832		1.98	%		14,663		12,832		1.98	%
Due after ten years		82,975		68,432		1.82	%		82,975		68,432		1.82	%
Total	$	116,244	$	98,845		1.92	%	$	116,244	$	98,845		1.92	%


Yes	[ ]		No	[X]

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


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

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