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. ~~[ ]~~o

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~~23,823,503 as of ~~November 10, 2022.~~May 5, 2023.

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

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

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2023 AND 2022 ~~AND 2021~~

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

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

FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2023 AND 2022 ~~AND 2021~~

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

FOR THE ~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2023 AND 2022 ~~AND 2021~~

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~~as of March 31, 2023 and December 31, ~~2021,~~2022, and the results of operations for the ~~three-~~three months ended March 31, 2023 and ~~nine-month periods ended September 30, 2022 and 2021.~~2022. The Notes included herein should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

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

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

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

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

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

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

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

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

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

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

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

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

Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. As of March 31, 2023, there was no allowance for credit loss related to the available for sale portfolio.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $1.9 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

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

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

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

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

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

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

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

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

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

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

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

Basic ~~Earnings~~earnings per share computations are based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the three-month period ended March 31, 2023 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%. ~~At September 30, 2022,~~As of March 31, 2023, the Bank had a capital conservation buffer of ~~8.35%~~8.58%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management believes as of ~~September 30, 2022,~~March 31, 2023, the Bank met all capital adequacy requirements to which it was subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. ~~At September 30, 2022,~~As of March 31, 2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category.

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

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

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

The following table details unrealized losses and related fair values in the ~~AFS portfolio.~~available-for-sale portfolio, for which no allowance for credit loss is recorded. 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~~March 31, 2023 and December 31, ~~2021.~~2022.

~~At September 30, 2022,~~As of March 31, 2023, there were ~~216~~218 securities in a loss position, of which ~~100~~200 have been in a loss position for twelve months or more. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are not a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities referenced in the table above before recovery of their amortized cost. None of the individual securities held are past due as to principal or interest payments and a number of these securities held have explicit or implicit payment guarantees. The remaining securities have credit ratings at or above that necessary to be considered “bank qualified”.

Investment securities with a carrying value of ~~$28.3~~$37.9 million and ~~$12.1~~$27.3 million ~~at September 30, 2022~~as of March 31, 2023 and December 31, ~~2021,~~2022, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

~~The following table summarizes~~There were no sales of ~~AFS debt~~available for sale investment securities ~~for~~during the ~~nine months-ended September 30,~~three months ended March 31, 2023 and 2022.

The amortized cost and fair value of investment securities ~~at September 30, 2022,~~as of March 31, 2023, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The Bank, as a member bank of the Federal Reserve Bank of Richmond (Federal Reserve Bank) and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in ~~Other Assets~~other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of ~~$3.0~~$2.0 million and ~~$2.0~~$2.1 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The stock has no quoted market value and no ready market exists.

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

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

Also included in total loans above are deferred loan fees of ~~$1.7~~$1.6 million ~~and $1.8 million at September 30, 2022~~as of March 31, 2023 and December 31, ~~2021, respectively.~~2022. Deferred loan costs were ~~$2.1~~$1.9 million, ~~and $2.0 million, at September 30, 2022~~as of March 31, 2023 and December 31, ~~2021, respectively.~~2022. 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~~cost is recognized at that time.

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

Total interest income not recognized on nonaccrual loans for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, was $13,000 and ~~September 30, 2021, was $22 thousand and $445 thousand,~~$5,000, respectively.

~~The following tables presents information concerning~~Prior to the ~~Company’s investment in~~adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of ~~September 30, 2022,~~global cash flow sufficient to pay all debt obligations and ~~December 31, 2021:~~an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all nonaccrual loans greater than $250,000 and all troubled debt restructurings, whether or not currently classified as such. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

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~~table presents loans individually evaluated for impairment by class of loans as of December 31, 2022:

As of December 31, 2022 (Dollars are in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
With no related allowance recorded:
Real estate secured:
Commercial	$	90	$	131	$	—	$	124
Construction and land development		471		491		—		114
Residential 1-4 family		1,617		1,972		—		1,585
Multifamily		—		—		—		—
Farmland		248		417		—		307
Commercial		23		31		—		14
Agriculture		—		—		—		—
Consumer installment loans		—		—		—		1
All other loans		—		—		—		—
With an allowance recorded:
Real estate secured:
Commercial		268		338		63		407
Construction and land development		—		—		—		291
Residential 1-4 family		32		48		23		201
Multifamily		—		—		—		20
Farmland		—		—		—		63
Commercial		—		—		—		27
Agriculture		—		—		—		—
Consumer installment loans		—		—		—		—
All other loans		—		—		—		—
Total	$	2,749	$	3,428	$	86	$	3,154

Upon adoption of ASU 2016-13 the ~~Company’s average impaired~~Company began evaluating loans that do not share risk characteristics on an individual basis utilizing the collateral or discounted cash flow methods as described in Note 2 Summary of Significant Accounting Policies. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and ~~interest recognized on~~the related ACL allocated to those ~~impaired~~ loans ~~for the periods indicated:~~as March 31, 2023:

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

As of March 31, 2023 (Dollars are in thousands)	Unpaid Principal Balance		Related Allowance
Real estate secured:
Commercial	$	268	$	64
Construction and land development		447		—
Residential 1-4 family		—		—
Multifamily		—		—
Farmland		—		—
Total real estate secured		715
Commercial		—		—
Agriculture		—		—
Consumer installment loans		—		—
Total	$	715	$	64

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

AnThe following table is an age analysis of past due loans receivable as of ~~September 30, 2022, and~~March 31, 2023, segregated by class:

As of March 31, 2023 (Dollars are in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
Real estate secured:
Commercial	$	—	$	—	$	268	$	268	$	197,552	$	197,820
Construction and land development		6		—		—		6		42,736		42,742
Residential 1-4 family		1,174		475		260		1,909		226,818		228,727
Multifamily		207		—		—		207		33,960		34,167
Farmland		10		—		—		10		16,882		16,892
Total real estate loans		1,397		475		528		2,400		517,948		520,348
Commercial		75		—		—		75		46,263		46,338
Agriculture		2		—		—		2		3,929		3,931
Consumer installment loans		54		22		36		112		19,159		19,271
All other loans		—		—		—		—		602		602
Total loans	$	1,528	$	497	$	564	$	2,589	$	587,901	$	590,490

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

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
As of December 31, 2022 (Dollars are in thousands)													Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
Real estate secured:
Commercial	$	—	$	—	$	—	$	—	$	198,101	$	198,101	$	268	$	—	$	—	$	268	$	196,801	$	197,069
Construction and land development		50		—		710		760		37,838		38,598		89		—		—		89		42,381		42,470
Residential 1-4 family		1,879		361		551		2,791		223,915		226,706		3,521		543		341		4,405		222,827		227,232
Multifamily		—		—		—		—		29,062		29,062		229		—		—		229		29,481		29,710
Farmland		43		—		—		43		17,424		17,467		285		—		—		285		17,459		17,744
Total real estate loans		1,972		361		1,261		3,594		506,340		509,934		4,392		543		341		5,276		508,949		514,225
Commercial		65		—		15		80		45,046		45,126		56		—		—		56		46,641		46,697
Agriculture		—		—		—		—		3,799		3,799		—		—		—		—		3,756		3,756
Consumer installment loans		28		32		4		64		19,538		19,602
Consumer installment Loans														73		17		17		107		19,202		19,309
All other loans		28		—		—		28		1,385		1,413		59		—		—		59		567		626
Total loans	$	2,093	$	393	$	1,280	$	3,766	$	576,108	$	579,874	$	4,580	$	560	$	358	$	5,498	$	579,115	$	584,613

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

Loans
30-59
Days
Past
Due

Loans
60-89
Days
Past
Due

Loans
90 or
More
Days
Past
Due

Total
Past
Due
Loans

Current
Loans

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

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

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

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

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

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

~~Based on~~

The following table present the ~~most recent analysis performed, the~~credit risk ~~categories~~grade of loans ~~receivable~~by origination year as of ~~September 30, 2022, and~~March 31, 2023:



As of March 31, 2023
Dollars in thousands	2023			2022			2021			2020		2019		Prior		Revolving		Total
Commercial real estate
Pass	$	5,884		$	41,352		$	48,047		$	31,056	$	22,063	$	47,937	$	1,112	$	197,451
Special mention		—			—			—			—		—		101		—		101
Substandard		—			—			—			—		—		268		—		268
Total commercial real estate	$	5,884		$	41,352		$	48,047		$	31,056	$	22,063	$	48,306	$	1,112	$	197,820

Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—	$	—	$	—

Construction and Land Development
Pass	$	1,531		$	20,860		$	11,315		$	4,643	$	1,558	$	2,204	$	71	$	42,182
Special mention		—			—			—			—		—		113		—		113
Substandard		—			—			—			—		447		—		—		447
Total construction and land development	$	1,531		$	20,860		$	11,315		$	4,643	$	2,005	$	2,317	$	71	$	42,742

Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—	$	—	$	—

Residential 1-4 family
Pass	$	6,741		$	34,122		$	44,471		$	14,619	$	14,799	$	92,868	$	18,922	$	226,542
Special mention		—			—			—			—		—		316		—		316
Substandard		—			—			152			—		41		1,620		56		1,869
Total residential 1-4 family	$	6,741		$	34,122		$	44,623		$	14,619	$	14,840	$	94,804	$	18,978	$	228,727

Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—	$	—	$	—

Multifamily
Pass	$	3,766		$	12,142		$	8,320		$	2,714	$	1,117	$	5,901	$	—	$	33,960
Special mention		—			—			—			—		—		—		—		—
Substandard		—			—			—			—		—		207		—		207
Total multifamily	$	3,766		$	12,142		$	8,320		$	2,714	$	1,117	$	6,108	$	—	$	34,167

Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—	$	—	$	—

Farmland
Pass	$	171		$	2,280		$	3,637		$	849	$	1,246	$	8,507	$	—	$	16,690
Special mention		—			—			—			—		1		201		—		202
Substandard		—			—			—			—		—		—		—		—
Total farmland	$	171		$	2,280		$	3,637		$	849	$	1,247	$	8,708	$	—	$	16,892

Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—	$	—	$	—

Commercial
Pass	$	4,925		$	13,233		$	7,513		$	2,124	$	2,886	$	7,894	$	7,760	$	46,335
Special mention		—			—			—			—		—		3		—		3
Substandard		—			—			—			—		—		—		—		—
Total commercial	$	4,925		$	13,233		$	7,513		$	2,124	$	2,886	$	7,897	$	7,760	$	46,338

Current period gross charge-offs	$	—		$	(5	)	$	—		$	—	$	—	$	—	$	—	$	(5	)

Agriculture
Pass	$	239		$	711		$	517		$	906	$	151	$	1,178	$	229	$	3,931
Special mention		—			—			—			—		—		—		—		—
Substandard		—			—			—			—		—		—		—		—
Total agriculture	$	239		$	711		$	517		$	906	$	151	$	1,178	$	229	$	3,931

Current period gross charge-offs	$	—		$	—		$	—		$	—	$	—	$	—	$	—	$	—

Consumer and All Other
Pass	$	2,165		$	7,860		$	3,934		$	1,461	$	954	$	1,429	$	2,032	$	19,835
Special mention		—			2			—			—		—		—		—		2
Substandard		—			—			17			—		—		19		—		36
Total consumer and all other	$	2,165		$	7,862		$	3,951		$	1,461	$	954	$	1,448	$	2,032	$	19,873

Current period gross charge-offs	$	(58	)	$	(17	)	$	(3	)	$	—	$	—	$	—			$	(78	)

Total	$	25,422		$	132,562		$	127,923		$	58,372	$	45,263	$	170,766	$	30,182	$	590,490
Total current period gross charge-offs	$	(58	)	$	(22	)	$	(3	)	$	—	$	—	$	—	$	—	$	(83	)

The following table presents the credit risk grade of loans as of December 31, ~~2021, was as follows:~~2022, prior to the adoption of ASU 2016-13, under the incurred loss model:


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

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

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

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

The following table presents a disaggregated analysis of activity in the allowance for credit losses as of March 31, 2023:


		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
Three months ended March 31, 2023
Beginning balance	$	2,364	$	345	$	2,364	$	262	$	153	$	381	$	32	$	386	$	440	$	6,727
Adjustment to allowance for adoption of ASU 2016-13		(299)		164		275		12		75		241		(5)		(103)		(440)		(80)
Charge-offs		-		-		-		-		-		(5)		-		(78)		-		(83)
Recoveries		-		5		9		-		-		1		-		58		-		73
Provision for credit losses		92		(42)		(29)		28		(36)		(30)		4		37		-		24
Ending balance	$	2,157	$	472	$	2,619	$	302	$	192	$	588	$	31	$	300	$	-	$	6,661

The following tables present a disaggregated analysis of activity in the allowance for loan losses, for comparative periods, prior to the ~~nine- and three-month periods ended September 30, 2022 and 2021, respectively. Additionally, the allocation~~adoption of ~~the allowance by recorded portfolio segment and impairment method is presented as of September 30, 2022, and December 31, 2021, respectively.~~ASU 2016-13:



		Real estate secured
(Dollars are in thousands)		Commercial		Construction and Land Development		Residential 1-4 family		Multifamily		Farmland		Commercial		Agriculture		Consumer and All Other		Unallocated		Total
Year ended December 31, 2022
Beginning balance	$	2,134	$	189	$	2,237	$	254	$	149	$	1,099	$	28	$	108	$	537	$	6,735
Charge-offs		(5)		(149)		(64)		(111)		(1)		(45)		(1)		(559)		-		(935)
Recoveries		33		6		100		2		14		31		1		115		-		302
Provision		202		299		91		117		(9)		(704)		4		722		(97)		625
Ending balance	$	2,364	$	345	$	2,364	$	262	$	153	$	381	$	32	$	386	$	440	$	6,727

Allowance for loan losses at December 31, 2022
Individually evaluated for impairment	$	63	$	-	$	23	$	-	$	-	$	-	$	-	$	-	$	-	$	86
Collectively evaluated for impairment		2,301		345		2,341		262		153		381		32		386		440		6,641
	$	2,364	$	345	$	2,364	$	262	$	153	$	381	$	32	$	386	$	440	$	6,727

Loans at December 31, 2022
Individually evaluated for impairment	$	358	$	471	$	1,649	$	-	$	248	$	23	$	-	$	-	$	-	$	2,749
Collectively evaluated for impairment		196,711		41,999		225,583		29,710		17,496		46,965		3,756		19,644		-		581,864
	$	197,069	$	42,470	$	227,232	$	29,710	$	17,744	$	46,988	$	3,756	$	19,644	$	-	$	584,613


	Real estate secured
(Dollars are in thousands)	Commercial			Construction and Land Development		Residential 1-4 family			Multifamily			Farmland			Commercial			Agriculture		Consumer and All Other			Unallocated		Total
For the three months ended March 31, 2022
Beginning balance	$	2,134		$	189	$	2,237		$	254		$	149		$	1,099		$	28	$	108		$	537	$	6,735
Charge-offs		—			—		—			(61	)		—			(28	)		—		(14	)		—		(103	)
Recoveries		—			—		14			—			—			11			—		2			—		27
Provision		(2	)		40		(53	)		120			(6	)		(77	)		—		16			62		100
Ending balance	$	2,132		$	229	$	2,198		$	313		$	143		$	1,005		$	28	$	112		$	599	$	6,759

Allowance for loan losses as of March 31, 2022
Individually evaluated for impairment	$	86		$	—	$	49		$	50		$	13		$	1		$	—	$	—		$	—	$	199
Collectively evaluated for impairment		2,046			229		2,149			263			130			1,004			28		112			599		6,560
	$	2,132		$	229	$	2,198		$	313		$	143		$	1,005		$	28	$	112		$	599	$	6,759

Loans as of March 31, 2022
Individually evaluated for impairment	$	404		$	17	$	1,786		$	50		$	494		$	26		$	—	$	1		$	—	$	2,778
Collectively evaluated for impairment		206,935			38,829		222,692			34,359			17,613			47,594			3,916		20,416			—		592,354
	$	207,339		$	38,846	$	224,478		$	34,409		$	18,107		$	47,620		$	3,916	$	20,417		$	—	$	595,132

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

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

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

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

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

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

There were ~~$2.1 million and $2.5~~no loans modified to borrowers experiencing financial difficulty in the three months ended March 31, 2023. Additionally, there were no loans that had a payment default during the quarter that were modified in the previous 12 months.

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

~~One loan totaling $6 thousand, secured by residential real estate, previously modified as a troubled debt restructuring, was in default during~~For the three months ended ~~September 30, 2022. Two~~March 31, 2022, there were no loans ~~totaling $73 thousand, previously~~ modified as a troubled debt restructuring that subsequently defaulted ~~during the first nine~~within twelve months of ~~2022, were in compliance with~~ the terms of the restructuring at September 30, 2022. During the nine months ended September 30, 2021, two loans to the same borrower, previously modified as troubled debt restructurings, totaling $1.1 million defaulted, resulting in charge-offs totaling $835 thousand.loan modification. Generally, a restructured troubled debt is considered to be in default once it becomes 90 days or more past due following a modification.

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

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

On January 1, 2023, the Company recorded an adjustment to initiate an allowance ~~or charge-offs may be taken~~for credit losses for unfunded commitments of $348,000 for the adoptions of ASC Topic 326. For the three months ended March 31, 2023, the Company recorded a reversal to ~~further write down~~ the ~~carrying value~~provision for credit losses for unfunded commitments of $24,000. At March 31, 2023, the ~~loan.~~liability for credit losses on off-balance-sheet credit exposures included in other liabilities was $324,000.

NOTE 910 OTHER REAL ESTATE OWNED

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

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

(Dollars are in thousands)	March 31, 2023		December 31, 2022
Balance, beginning of period	$	261	$	1,361
Additions		—		—
Transfers from premises and equipment		—		—
Proceeds from sales		—		(207	)
Proceeds from insurance claims		—		—
Loans made to finance sales		—		(711	)
Adjustment of carrying value		—		(197	)
Net gains from sales		—		15
Balance, end of period	$	261	$	261

NOTE 1011 FAIR VALUES

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

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

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

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

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

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

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

Investment Securities Available for Sale - 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~~$96.7 million and ~~$107.4~~$96.1 million ~~at September 30, 2022~~as of March 31, 2023 and December 31, ~~2021,~~2022, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

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

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

Assets and liabilities measured at fair value are as follows as of March 31, 2023:


March 31, 2023 (Dollars are in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
(On a recurring basis) Available for sale investments
U.S. Treasuries	$	—	$	11,902	$	—
U.S. Government Agencies		—		9,113		—
Taxable municipals		—		17,819		—
Corporate bonds		—		3,162		—
Mortgage-backed securities		—		54,726		—

(On a non-recurring basis) Other real estate owned		—		—		261
Collateral dependent loans with ACL:
Commercial real estate		—		—		204
Total	$	—	$	96,722	$	465

1922

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

September 30, 2022
(Dollars are in thousands)

Quoted market price in active markets
(Level 1)

Significant other observable inputs
(Level 2)

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

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

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

December 31, 2021
(Dollars are in thousands)

Quoted market price in active markets
(Level 1)

Significant other observable inputs
(Level 2)

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

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


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

(On a non-recurring basis) Other real estate owned		—		—		261
Impaired loans		—		—		213
Total	$	—	$	96,076	$	474

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

(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 March 31, 2023

Fair Value at

December 31,

2022

Valuation Technique

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

Impaired Loans

2,818

2,667

Appraised Value

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

0 – 18%

Collateral dependent loans with ACL:

Commercial real estate

204

213

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%

261

Appraised Value/Comparable Sales/Other Estimates from Independent Sources

Discounts to reflect current market conditions and estimated costs to sell

0 – 18%

Fair Value of Financial Instruments

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

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

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

Fair Value Measurements

(Dollars are in thousands)

Carrying
Amount

Fair
Value

Quoted market price in active markets
(Level 1)

Significant other observable inputs
(Level 2)

Significant unobservable inputs
(Level 3)

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

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

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

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

					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)

March 31, 2023
Financial Instruments – Assets
Net Loans	$	583,829	$	563,647	$	—	$	—	$	563,647

Financial Instruments – Liabilities
Time Deposits		207,283		206,206		—		206,206		—
Borrowed funds		16,496		15,063		—		15,063		—

December 31, 2022
Financial Instruments – Assets
Net Loans	$	577,886	$	552,675	$	—	$	552,462	$	213

Financial Instruments – Liabilities
Time Deposits		188,233		187,179		—		187,179		—
Borrowed funds		16,496		14,825		—		14,825		—

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

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

The carrying values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities 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~~as of March 31, 2023 and December 31, ~~2021,~~2022, represent an approximation of exit price; however, an actual exit price may differ.

NOTE 1112 LEASING ACTIVITIES

As of ~~September 30, 2022,~~March 31, 2023, the Bank leases four branch ~~office sites resulting from sale leaseback transactions entered into in 2017~~offices and ~~a sublet~~sublets of a lot adjacent to another branch office. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms at ~~September 30, 2022~~March 31, 2023 was ~~9.87~~9.35 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~~as of March 31, 2023 was ~~3.24%~~3.29%.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ operating lease expenses were ~~$342 thousand~~$114,000 and ~~$421 thousand,~~$114,000, respectively.

The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. ~~At September 30, 2022,~~As of March 31, 2023, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):

2022 $ 114
2023 455
2024 455
2025 455
2026 455
Thereafter 2,698
Total lease payments 4,632
Less imputed interest 844
Total $ 3,788

~~NOTE 12 BORROWED FUNDS~~

Included in Borrowed Funds is a short-term FHLB Advance totaling $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.

2023	$	342
2024		456
2025		456
2026		456
2027		477
Thereafter		2,226
Total lease payments		4,413
Less imputed interest		772
Total	$	3,641

NOTE 13 REVENUE FROM CONTRACTS WITH CUSTOMERS

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

For the three months
ended

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

⁽¹⁾

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

	For the Three Months Ended March 31,
(Dollars in thousands)	2023		2022
Service charges and fees	$	917	$	1,007
Card processing and interchange income		899		916
Insurance and investment fees		257		241
Other noninterest income		326		205
Total noninterest income	$	2,399	$	2,369

NOTE 14 NONINTEREST EXPENSES

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

	For the three months ended September 30,					For the Nine months ended September 30,				For the Three Months Ended March 31,
(Dollars are in thousands)	2022			2021		2022		2021		2023		2022
Advertising	$	23		$	85	$	115	$	193
Advertising, sponsorships and donations										$	35	$	28
ATM network expense		806			368		1,553		1,113		360		367
Legal, accounting and professional fees		258			254		746		842		335		231
Consulting fees		98			58		227		206		91		67
Loan related expenses		65			198		265		448		88		97
Printing and supplies		35			29		107		89		42		33
FDIC insurance premiums		56			81		159		218		88		49
Other real estate owned expenses, net		(35	)		301		110		439		6		130
Other operating expenses		219			630		1,505		1,765		674		602
Total other operating expenses	$	1,525		$	2,004	$	4,787	$	5,313	$	1,719	$	1,604

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~~The Company adopted this guidance on January 1, 2023. The Company recognized an adjustment to retained earnings in the amount of $212,000, and recorded an adjustment to the allowance for credit losses in loans and unfunded commitments on loans in the amount of $80,000 and $348,000, respectively.

In June 2022, the FASB issued ASU ~~No. 2019-10, implementation~~2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for ~~the Company is delayed until reporting~~fiscal years, including interim periods within those fiscal years, beginning after December 15, ~~2022.~~2023. Early adoption is ~~permitted for all organizations for periods beginning after December 15, 2018.~~permitted. The Company ~~is currently evaluating~~does not expect the ~~effect that implementation~~adoption of ~~the new standard will~~ASU 2022-03 to 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 consolidated financial statements.

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

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

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

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

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.

2426

Item 2.

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

Caution About Forward-Looking Statements

We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for ~~loan~~credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,��” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from projections include:

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

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

Critical Accounting Policies

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

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

Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At September 30, 2022 and December 31, 2021, the Company had no valuation allowance on its net deferred tax assets.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

~~For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below.~~

Overview and Highlights

~~For~~Net income for the three months ended ~~September 30, 2022, net income of~~March 31, 2023 was $2.0 million, ~~was recorded;~~ an increase of ~~$141,000,~~$100,000, or ~~7.6%~~5.2%, from the same period in ~~2021.~~2022. The increase was primarily due to improvement in the net interest margin to 3.83% for the first quarter of 2023 compared to 3.53% for the first quarter of 2022 due to the increase in asset yields outpacing increases in funding costs in the rising interest rate environment throughout 2022 and 2023. The primary driver for the improved earnings was an increase in net interest income of $447,000 and a ~~decrease~~reduction of the provision for credit losses of $100,000, offset by an increase in total noninterest expense of ~~$1.5 million due largely~~$431,000. The increase in total non-interest expense is related to increases in salaries and employee benefits as well as data processing and telecommunications expenses. The increase in salaries and employee benefits related to bonus accruals and performance raises, and benefits enhancements made in 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 thirdfirst 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.2023.

The balance sheet grew to ~~$828.6~~$793.6 million as of ~~September 30, 2022,~~March 31, 2023, from ~~$794.6~~$775.4 million as of December 31, ~~2021,~~2022, funded by deposits which increased $16.1 million to $708.8 million as of March 31, 2023 from $692.7 million as of December 31, 2022. These deposits funded an increase of $10.3 million in interest bearing deposits in other banks and an increase of $5.88 million in gross loans. The increase in gross loans is due to ~~Federal Home Loan Bank advances taken,~~a moderate increase in ~~the second quarter of 2022, as a precautionary measure in response~~loan demand and less prepayment activity due 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.higher interest rate environment.

During the second quarter of 2022, we initiated a previously announced stock repurchase program. Through ~~September 30, 2022, 44,485~~March 31, 2023, 93,527 shares have been repurchased at an average price of ~~$2.30~~$2.32 per share.

Comparison of the Three Months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

Quarter-to-date highlights include:

Returns on average assets and equity of ~~0.94%~~1.07% and ~~13.70~~14.05 % for the ~~third~~first quarter of ~~2022,~~2023, compared to ~~0.91%~~0.97% and ~~11.75%~~12.35% for the ~~third~~first quarter of ~~2021,~~2022, respectively;

Net interest income was ~~$7.2~~$7.0 million for the ~~third~~first quarter of ~~2022, a decrease~~2023, an increase of ~~$218 thousand,~~$447,000, or ~~2.9%~~6.8%, compared to the ~~third~~first quarter of ~~2021;~~2022;

~~Provision~~No provision for ~~loan~~credit losses ~~was $225,000~~ for the ~~third~~first quarter of ~~2022, and $0~~2023 compared to $100,000 for the ~~third~~first quarter of ~~2021;~~2022;

Noninterest income was ~~$2.2~~$2.4 million, ~~a decrease~~an increase of ~~$781 thousand,~~$30,000, or ~~26.3%~~1.3%, during the ~~third~~first quarter of ~~2022~~2023 compared to the ~~third~~first quarter of ~~2021;~~2022; and

Noninterest expense was ~~$6.6~~$6.9 million, ~~a decrease~~an increase of ~~$1.5 million,~~$430,000, or ~~18.2%~~6.7%, for the ~~third~~first quarter of ~~2022~~2023 compared to the ~~third~~first quarter of ~~2021.~~2022.

The Company’s primary source of income is net interest income, which ~~decreased~~increased by ~~$218 thousand,~~$447,000, or ~~2.9%~~6.8%, to ~~$7.2~~$7.0 million for the ~~third~~first quarter of ~~2022~~2023 compared to ~~$7.4~~$6.6 million for the ~~third~~first quarter of ~~2021.~~2022. Interest income increased ~~$66 thousand~~$1.4 million 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~~and higher yielding loans resulting from ~~FHLB advances as we maintained additional liquidity as we monitored customer reaction to~~ the ~~cybersecurity incident. Additionally, the 2022 increases~~increase in ~~the~~ fed funds ~~rate partially offset the decline in accelerated fee recognition when PPP loans are forgiven.~~rate. Total interest expense increased ~~$284 thousand~~$918,000 driven primarily by ~~a $388 thousand~~the increase in the cost of interest-bearing liabilities, which rose 81 bps to 1.27% from 0.46% for comparative three months ended March 31, 2023 and 2022. The increase in interest ~~on borrowed funds due to~~rates more than offset the ~~FHLB advances combined with increased interest rates paid on trust preferred securities. Increased borrowing expenses were partially offset by a~~modest decrease of $9.4 million, or 1.98% in ~~interest on deposits which decreased $104 thousand, or 19.9%,~~average interest-bearing liabilities 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.comparative three-month period. Overall there was a 1253 basis-point (“bp”) increase in the cost of funds to 4683 bps while the net interest margin ~~decreased 38~~increased 30 bps to ~~3.55%~~3.83%. During the ~~third~~first quarter of ~~2022,~~2023, the Federal Reserve’s Open Market Committee (FOMC) increased the discount rate two times for a total of ~~150~~50 bps, bringing the number of rate increases ~~for~~to eight since the ~~first nine months of 2022 to five, totaling 300 bps.~~quarter ended March 31, 2022. The Company experienced benefits of the rate increases during the ~~third~~first quarter, but the full impact will be somewhat lagging as certain loans, investments, and borrowings through 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 not yet to the extent of new loan rates and rates earned on overnight funds. 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.~~

2728

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	Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates															Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates
(Dollars in thousands)	(Dollars in thousands)															(Dollars in thousands)
Three Months Ended September 30,
Three Months Ended March 31,																Three Months Ended March 31,
				2022							2021								2023							2022
				Average		Income/		Yields/		Average			Income/		Yields/				Average		Income/		Yields/		Average			Income/		Yields/
				Balance		Expense		Rates		Balance			Expense		Rates				Balance		Expense		Rates		Balance			Expense		Rates
ASSETS	ASSETS															ASSETS
	Loans ^{(1) (2) (3)}		$	590,090	$	7,010		4.72%	$	581,517		$	7,602		5.19%	Loans ^{(1) (2) (3)}		$	586,116	$	7,382		5.11%	$	596,060		$	6,674		4.54%
	Federal funds sold			353		2		2.34%		209			-		0.12%	Federal funds sold			631		7		4.67%		218			-		0.15%
	Interest bearing deposits in other banks			98,657		559		2.25%		72,549			28		0.15%	Interest bearing deposits in other banks			47,944		533		4.50%		53,809			21		0.16%
	Taxable investment securities			117,628		539		1.83%		96,136			414		1.72%	Taxable investment securities			112,739		600		2.13%		110,435			462		1.67%
	Total earning assets			806,728		8,110		3.99%		750,411			8,044		4.26%	Total earning assets			747,430		8,522		4.62%		760,522			7,157		3.82%
	Less: Allowance for loans losses			(6,738)						(6,778)						Less: allowance for credit losses			(6,861)						(6,848)
	Non-earning assets			41,134						58,972						Non-earning assets			36,812						49,332
		Total Assets	$	841,124					$	802,605							Total assets	$	777,381					$	803,006

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY															LIABILITIES AND SHAREHOLDERS’ EQUITY
	Interest-bearing demand deposits		$	75,151	$	23		0.12%	$	60,289		$	15		0.10%	Interest-bearing demand deposits		$	80,331	$	95		0.48%	$	67,217		$	16		0.10%
	Savings and money market deposits			192,550		52		0.11%		184,155			36		0.08%	Savings and money market deposits			166,550		222		0.54%		194,195			38		0.08%
	Time deposits			181,480		343		0.75%		212,712			471		0.88%	Time deposits			199,858		829		1.68%		196,283			376		0.78%
	Total interest-bearing deposits			449,181		418		0.37%		457,156			522		0.45%	Total interest-bearing deposits			446,739		1,146		1.04%		457,695			430		0.38%
	Short-term borrowings			46,793		287		2.40%		-			-		-%	Short-term borrowings			1,556		19		4.95%		-			-		-%
	Trust preferred securities			16,496		205		4.85%		16,496			104		2.47%	Trust preferred securities			16,496		289		7.11%		16,496			106		2.58%
	Total interest-bearing liabilities			512,470		910		0.70%		473,652			626		0.52%	Total interest-bearing liabilities			464,791		1,454		1.27%		474,191			536		0.46%
	Non-interest-bearing deposits			262,244		-		-%		258,251			-		- %	Non-interest-bearing deposits			245,010		-		-%		258,157			-		- %
	Total deposit liabilities and cost of funds			774,714		910		0.46%		731,903			626		0.34%	Total deposit liabilities and cost of funds			709,801		1,454		0.83%		732,348			536		0.30%
	Other liabilities			8,904						8,399						Other liabilities			8,606						7,575
		Total Liabilities		783,618						740,302							Total liabilities		718,407						739,923
	Shareholders’ Equity			57,506						62,303						Shareholders’ equity			58,974						63,083
		Total Liabilities and Shareholders’ Equity	$	841,124					$	802,605							Total liabilities and shareholders’ equity	$	777,381					$	803,006
	Net Interest Income				$	7,200						$	7,418			Net interest income				$	7,068						$	6,621
	Net Interest Margin						3.55%							3.93%		Net interest margin						3.83%							3.53%
	Net Interest Spread						3.29%							3.74%		Net interest spread						3.35%							3.36%

(1) Nonaccrual loans and loans held for sale have been included in average loan balances	(1) Nonaccrual loans and loans held for sale have been included in average loan balances															(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	(2) Tax exempt income is not significant and has been treated as fully taxable (3) Includes mortgage loans held for sale															(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,~~March 31, 2023, as compared to the three months ended ~~September 30, 2021.~~March 31, 2022.

~~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 )

Volume and Rate Analysis
Increase (decrease)

		Three Months Ended March 31, 2023 versus March 31, 2022
(Dollars in thousands)			Volume Effect		Rate Effect		Change in Interest Income/ Expense
Interest income:
	Loans	$	(236)	$	944	$	708
	Federal funds sold		-		7		7
	Interest bearing deposits in other banks		(2)		514		512
	Taxable investment securities		32		106		138
	Total earning assets		(206)		1,571		1,365

Interest expense:
	Interest-bearing demand deposits		5		74		79
	Savings and money market deposits		(7)		191		184
	Time deposits		10		443		453
	Short-term borrowings		19		-		19
	Trust preferred securities		-		183		183
	Total interest-bearing liabilities		27		891		918
	Change in net interest income	$	(233)	$	680	$	447

Based on our current assessment of the loan portfolio aand related unfunded commitments, there was no provision ~~of $225 thousand was~~for credit losses made in the ~~third~~first quarter of ~~2022,~~2023, compared to ~~zero~~$100,000 for the ~~third~~first quarter of ~~2021, due~~2022. Subsequent to ~~a combination~~adoption of ~~factors, including~~ASU 2016-13 on January 1, 2023, based on management's analysis since the ~~rising interest rate environment, overdraft charge-offs related to~~implementation date through March 31, 2023, no further provision for credit losses was required for the ~~cybersecurity incident realized during the third quarter of 2022, and uncertain economic trends.~~first quarter. The allowance for ~~loan~~credit losses as a percentage of loans ~~increased~~decreased from ~~1.13%~~1.15% at December 31, ~~2021~~2022 to ~~1.14%~~1.13% as of ~~September 30, 2022.~~March 31, 2023. For a discussion of the factors affecting the allowance for ~~loan~~credit losses, including provision expense, refer to Note 7, Allowance for ~~Loan~~Credit Losses for Loans, in Item 1 of this Form 10-Q.

~~Total noninterest~~Non-interest income ~~decreased $781,000 in the third quarter of 2022 compared~~increased $30,000 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$2.4 million for the ~~comparative three-month periods~~quarter ended ~~September 30, 2022 and 2021 as operations returned to normal operations after the cybersecurity incident. Card processing and interchange revenue decreased $67 thousand~~March 31, 2023 from $2.4 million for the ~~three months ended September 30, 2022, as compared to~~comparable quarter in 2022. The primary driver of the ~~same period~~increase was the sale of the former call center building in ~~2021, due to~~Bristol, Virginia, and 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~~in Big Stone Gap, Virginia, which resulted in a combined gain of $130,000. This was offset by decreases in service charge income and card processing fees totaling a combined $107,000 during the period. Service charge income decreased due to ~~other real estate owned, which is reflected~~changes made in ~~occupancy~~2022 in assessing certain charges, that reduced the number of transactions subject to such fees. Fees from debit card activity declined, as stimulus funds payments resulting from tax credits and ~~equipment~~direct payments have been curtailed.

Non-interest expense was $6.9 million for the quarter ended March 31, 2023 compared to $6.4 million for the quarter ended March 31, 2022. The $431,000 increase was impacted by increases in salaries and ~~$395,000 of write-downs on OREO, which is reflected~~employee benefits as well as data processing and telecommunications expenses. The increase in ~~other operating expense. These charges more than exceeded the $195,000 charge~~salaries and employee benefits related to ~~the closure of two branch offices~~bonus accruals and performance raises, and benefits enhancements made during the ~~third~~first quarter of ~~2022, which is included in occupancy expenses. Salaries and benefits remained virtually flat~~2023. As previously reported, the Company approved a Long-Term Cash Incentive Plan (the “Plan”), effective February 27, 2023, for ~~the comparative three-month period in 2022 versus 2021. This was due in part~~cash incentive awards to ~~an adjustment to reduce the liability for our self-insured insurance plan of $100,000 during the third quarter of 2022,~~Plan participants based on ~~a rolling assessment~~quarterly earnings per share 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.common stock.

The efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, ~~improved~~increased to ~~70.3%~~72.56% for ~~third~~first three months of 2023 from 71.59% for the first quarter of ~~2022 from 77.6% for the third quarter of 2021.~~2022. We continue to assess our operational procedures and structure to improve efficiencies and contain costs. ~~A review of deposit operations was performed during the third quarter of 2022, and based on this assessment, several processes will be modified or reassigned to improve operational efficiencies.~~

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

Income tax expense for the ~~third~~first quarter of ~~2022~~2023 totaled ~~$579 thousand,~~$576,000, an increase of ~~$103 thousand,~~$46,000, or ~~21.6%~~8.68% from the ~~$476 thousand~~$530,000 recorded during the same period in ~~2021.~~2022. The effective tax rate for the three months ended ~~September 30, 2022,~~March 31, 2023, was ~~22.6%~~22.2%, compared to ~~20.5%~~21.6% for the same period in ~~2021.~~2022. 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.

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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~~as of March 31, 2023 were $793.6 million, an increase of $18.3 million, or ~~4.3%~~2.4%, ~~to $828.6~~from $775.4 million ~~at September 30, 2022 from $794.6 million at~~as of December 31, ~~2021. This growth was primarily driven by the FHLB advances, now totaling $25.0~~2022. Gross loans increased $5.9 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~~or 1.0%, during 2023, due to a ~~combination of factors including customer reaction~~moderate increase in loan demand, combined with less incentive for prepayments, by borrowers, due to the ~~cybersecurity incident, time deposit customers seeking~~ higher interest ~~rates~~rate environment. Investment securities increased $646,000 during 2023 primarily due to a decrease of $2.7 million in the unrealized loss position offset by a decrease in mortgage-backed securities, agencies, and ~~actions taken by customers at the two branch locations closed in August 2022. The FHLB advance funds were transferred~~collateralized mortgage obligations of $2.1 million, collectively, due to ~~interest bearing deposits with other banks which increased $51.6 million year-to-date.~~principal repayments of amortizing investments.

~~Total investments decreased $8.5~~Gross loans increased $5.9 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%~~1.0% during the first ~~nine~~three months of ~~2022. Commercial~~2023. The increase is primarily related to multifamily and residential 1-4 family real estate ~~and multifamily~~secured loans. Multifamily real estate loans ~~decreased $8.1~~increased $4.5 million, or ~~3.9% and $4.0~~15%, from $29.7 as of December 31, 2022 to $34.2 million as of March 31, 2023. Residential 1-4 family real estate increased $1.5 million, or ~~12.1%~~0.7% from $227.2 million as of December 31, 2022 to ~~$198.1~~$228.7 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.March 31, 2023. 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~~Deposits were $708.8 million as of March 31, 2023 compared to $692.7 million as of December 31, 2022. The increase of the $16.1 million, or 2.3%, was due 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 responseefforts to ~~the cybersecurity incident. Additionally, other factors also influenced customers’ deposit activities, including interest rates available for~~attract and retain time deposits, combined with cyclical funds inflows primarily attributed to tax refunds, 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 accountspension and ~~depositors. Specifically, time deposit runoff totaled $16.6 million, or 8.4%, during the first nine months of 2022. The decrease in time~~social security deposits, ~~was offset~~received 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.customers.

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~~March 31, 2023 were unchanged compared to December 31, ~~2021.~~2022.

Total equity ~~at September 30, 2022~~as of March 31, 2023 was ~~$55.2~~$59.7 million, ~~a decrease~~an increase of ~~$8.4~~$2.5 million, or ~~13.2%~~4.3%, compared to ~~$63.6~~$57.2 million atas of December 31, ~~2021.~~2022. As discussed previously and in the Capital Resources section below, the primary driver of the ~~decline~~increase was ~~the $12.9 million net increase in the accumulated other comprehensive loss,~~ related to the decrease of $2.1 million in the net unrealized loss on ~~available for sale~~available-for-sale investment securities ~~along~~combined with the quarter-to-date earnings of $2.0 million, offset by a cash dividend payment of $1.4 million, and ~~repurchases~~the repurchase of common ~~shares. The increase~~stock totaling $46,000. Additionally, the implementation of the CECL methodology, resulted in ~~other accumulated comprehensive loss is related~~a onetime net of tax, direct charge to ~~the recent increase in interest rates and is not related to any deterioration in the credit quality~~retained earnings of ~~any investment securities held.~~$212,000.

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~~residential and ~~residential~~commercial lots.

Nonperforming assets decreased ~~$275 thousand,~~$586,000, or ~~6.4%~~15.9%, during the first ~~nine~~three months of ~~2022,~~2023, driven by a decrease ~~in OREO~~ of ~~$1.0 million, which offset an increase~~$586,000 in nonaccrual ~~loans of $765 thousand.~~loans. The ~~increase~~decrease in nonaccrual loans is attributed to a ~~single credit for a commercial construction loan. This account has been assessed as part~~general improvement in the performance of ~~our determination of the adequacy of the allowance for loan losses, and collection efforts are ongoing.~~nonaccrual loans, resulting in several accounts being returned to accruing status. No loans 90 days or more past due are accruing interest. As a result, the ratio of nonperforming assets to total assets decreased to ~~0.49%~~0.39% at ~~September 30, 2022~~March 31, 2023 compared to ~~0.54%~~0.47% at December 31, ~~2021.~~2022.

~~At September 30, 2022,~~As of March 31, 2023, OREO is primarily made up of ~~farmland~~residential and ~~land~~commercial lots acquired through foreclosure. ~~During~~It remained consistent with a balance of $261,000 as of March 31, 2023 and December 31, 2022. Expenses associated with OREO were $6,000 for the quarter ended March 31, 2023, compared to $130,000 during the quarter ended March 31, 2022, ~~two former branch sites that had been transferred~~due to ~~OREO in 2021, were sold bringing our OREO balance down to $321 thousand.~~costs associated with the sale of other real estate owned during the first three months of 2022. 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 problemunder-performing assets.

For detailed information for nonaccrual loans and other real estate owned as of ~~September 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, 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~~$2.8 million ~~at September 30, 2022, an increase~~as of ~~$788 thousand from $2.9 million at December~~March 31, ~~2021. Total past due loans increased slightly to $3.8 million at September 30, 2022~~2023, a decrease of $586,000 from $3.4 million at December 31, ~~2021. The~~2022. Total past due loans decreased $2.9 million, to $2.6 million at ~~September 30, 2022, represent~~March 31, 2023 from $5.5 million at December 31, 2022.

As discussed in Note 2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted CECL effective January 1, 2023. The transition adjustment for the adoption of CECL resulted in 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~~allowance for credit losses on loans of ~~2022, were addressed during the third quarter.~~$80,000.

Our allowance for ~~loan~~credit losses ~~at September 30, 2022~~for loans as of March 31, 2023 was ~~$6.6~~$6.7 million, or ~~1.14%~~1.13% of total loans, as compared to $6.7 million, or ~~1.13%~~1.15% of total loans, at December 31, ~~2021. Impaired~~2022. Individually evaluated loans totaled ~~$3.1 million~~$715,000 with an estimated related specific allowance of ~~$269 thousand~~$64,000 at ~~September 30, 2022,~~March 31, 2023, as compared to ~~$2.8~~$2.7 million as of ~~impaired loans~~December 31, 2022 with an estimated related specific allowance of ~~$166 thousand~~$86,000 of impaired loans at the end of ~~2021. A~~2022. There was no provision for credit losses recorded during the three months ended March 31, 2023, compared to a provision for loan losses of $100,000 recorded in the three months ended March 31, 2022, which was under the incurred loss model. For the three-months ended March 31, 2023, the net provision for credit losses of zero, was comprised of a provision of ~~$400 thousand was recorded~~$24,000 to the allowance for credit losses for loans and reversal of $24,000 from the ~~first nine months of 2022 compared to $372 thousand during the first nine months of 2021.~~allowance for unfunded loan commitments.

In the first ~~nine~~three months of ~~2022,~~2023, net charge-offs totaled ~~$542 thousand,~~$10,000, or ~~0.12%~~0.01% of average loans, annualized, as compared to ~~$906 thousand,~~$76,000, or ~~0.21%~~0.05% 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.2022. The allowance for ~~loan~~credit losses is maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually ever realized. Through our quarterly assessment, we continue to adjust the ~~allowance for loan loss~~CECL model to best reflect the ~~risks~~characteristics in the ~~portfolio and the improvements made in our internal policies and procedures; however,~~portfolio. However, future provisions may be deemed necessary. During the first ~~nine~~three months of ~~2022,~~2023, we ~~adjusted~~made modest adjustments to our ~~external~~ qualitative factors ~~to reflect positive employment and home sales statistics, along with adjusting for the impact~~as part of ~~historically high inflation.~~our CECL implementation. Those changes, along with the assessment of the ~~inherent~~historical and specific risks associated with the loan portfolio, resulted in a net provision for credit losses of zero, with offsetting adjustments to the ~~allowance of $400 thousand for~~loan and loan commitment components recorded during the first ~~nine~~three months ~~2022.~~of 2023. The following table summarizes components of the allowance for ~~loan~~credit losses and related loans as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~

2022:

Selected Credit Ratios
		March 31,		December 31,
(Dollars in thousands)		2023		2022
Allowance for credit losses	$	6,661	$	6,727
Total loans		590,490		584,613
Allowance for credit losses to total loans		1.13%		1.15%
Nonaccrual loans	$	2,827	$	3,413
Nonaccrual loans to total loans		0.48%		0.58%

Ratio of allowance for credit losses to nonaccrual loans		2.36X		1.97X

Charge-offs net of recoveries	$	10	$	633
Average loans	$	586,116	$	591,179
Annualized net charge-offs to average loans		0.01%		0.11%

~~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~~$4.1 thousand and ~~$1.5~~$4.6 million existed ~~at September 30, 2022~~as of March 31, 2023 and December 31, ~~2021,~~2022, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses. The implementation of the CECL methodology resulted in a onetime deferred tax charge of $56,000. Refer to Note 2 Summary of Significant Accounting Policies in Part 1 of this Form 10-Q

Capital Resources

Total shareholders’ equity ~~at September 30, 2022~~as of March 31, 2023 was ~~$55.2~~$59.7 million compared to ~~$63.6~~$57.2 million at December 31, ~~2021, a decrease~~2022, an increase of ~~$8.4~~$2.5 million, or ~~13.2%~~4.3%. ~~As previously discussed, this decline~~The increase was driven by ~~the $12.9 million~~a decrease in net ~~increase in the accumulated other comprehensive loss related to the~~ unrealized loss on available-for-sale investment securities ~~available-for-sale. Excluding the impact~~ of ~~the unrealized loss, equity increased $4.5~~$2.1 million, ~~due to net income~~which, when combined with quarter-do-date earnings of ~~$5.8~~$2.0 million, ~~less the~~more than offset a cash dividend payment of ~~$1.2~~$1.4 million and ~~$103 thousand used for share repurchases.~~the repurchase of common stock totaling $46,000. Additionally, the implementation of the CECL methodology resulted in a onetime net of tax, direct charge to retained earnings of $212,000.

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

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

~~At September 30, 2022,~~As of March 31, 2023, the Bank remains well capitalized under the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.

Book value per common share was ~~$2.31 at September 30, 2022,~~$2.50 as of March 31, 2023, and ~~$2.66~~$2.40 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.~~ 2022.

Other key performance indicators are as follows:

	Three months ended September 30,		Nine months ended September 30,		Three Months Ended March 31,
	2022	2021	2022	2021	2023	2022
Return on average assets¹	0.94%	0.91%	0.95%	0.85%	1.07%	0.97%
Return on average equity¹	13.70%	11.75%	13.15%	11.30%	14.05%	12.35%
Average equity to average assets	6.84%	7.76%	7.21%	7.56%	7.59%	7.86%

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,~~2023, the Company paid ~~its first~~a cash dividend of ~~$0.05~~$0.06 per common share to our shareholders. ~~Earnings~~Future payments of cash dividends will ~~continue~~depend on a number of factors including but not limited to bemaintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to ~~provide capital to support the planned growth and operations~~allow payment of ~~the Company and to continue to pay any future~~ dividends to ~~shareholders.~~the parent company.

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. As previously reported, this plan was extended by the Board of Directors through March 31, 2024. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. ~~During~~As of March 31, 2023, the ~~third quarter of 2022, 26,831~~Company has repurchased 93,527 shares ~~were purchased~~ at an average price of $2.32 per ~~share; bringing~~share. During the ~~total~~quarter ended March 31, 2023, the Company repurchased 19,932 shares ~~repurchased through September 30, 2022 to 44,485~~ at an average price of ~~$2.30~~$2.28 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~~$143.7 million ~~at September 30, 2022,~~as of March 31, 2023, an increase of ~~$26.2~~$13.2 million from ~~$159.3~~$130.5 million atas of December 31, ~~2021.~~2022. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during ~~2022.~~2023.

~~At September 30, 2022,~~As of March 31, 2023, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of ~~$70.5~~$69.4 million, which is net of the ~~$28.3~~$27.3 million of securities pledged to secure public funds and as ~~collateral.~~collateral for advances against the discount window. 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~~83.3% as of March 31, 2023 and ~~83.9%~~84.4% at December 31, ~~2021.~~2022. We anticipate this ratio to remain at or below 90% for the foreseeable future.

Available third-party sources of liquidity ~~at September 30, 2022~~as of March 31, 2023 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. Additionally, in March 2023, the FRB, initiated a supplemental term funding program offering borrowings, of up to one year, secured by securities valued at par rather than market value. This program offers an additional source of liquidity against high quality securities, rather than liquidating securities should a need for additional funds arise. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks.

~~The Bank’s~~We have used our 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~~to issue a letter of credit totaling $7.0 ~~million. The available line and~~million to the ~~outstanding letters~~Treasury Board of Virginia for collateral on public funds. No draws on the letter of credit ~~are~~have been issued. This letter of credit is considered to be a draw on our FHLB line of credit. An additional $186.8 million was available as of March 31, 2023 on the $193.8 million line of credit, of which $116.5 million is secured by a blanket lien on our residential real estate ~~loans which amounted to $123.2 million at September 30, 2022.~~loans.

3633

~~The Bank also has access to the~~

We held no brokered deposits as of March 31, 2023 and December 31, 2022. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the rate paid on deposits is shown in the net interest margin analysis table in the “Net Interest Income and Net Interest Margin” section. Total Certificate of Deposit Registry Services (“CDARS”) time deposits were $2.5 million and $1.4 million as of March 31, 2023 and December 31, 2022, respectively. Aside from the availability of CDARS time deposits, we also offer a similar deposit product for transaction account customers Intrafi Cash Service ~~(CDARS)~~(“ICS”). At ~~September 30, 2022, we held no brokered deposits~~March 31, 2023 approximately $34.9 million were placed in this product as compared to $23.9 million at December 31, 2022. Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while ~~$2.8 million in CDARS reciprocal time deposits and $23.1 million in ICS reciprocal interest-bearing demand deposits are outstanding.~~assuring the depositors’ funds retain federal deposit insurance coverage.

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~~$27.3 million were pledged at ~~September 30, 2022.~~March 31, 2023.

In March and May, 2023, three regional banks, each with assets in excess of $100 billion, were taken into receivership through FDIC and were sold in-whole, or in part to other financial institutions. Two of these banks, Silicon Valley Bank (“SVB”) headquartered in Santa Clara, California, and First Republic Bank (“FR”) headquartered in San Francisco, California, experienced significant outflows of deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits at both institutions. These concerns, in SVB’s case, related to unrealized losses in SVB’s investment portfolio combined with the long-term maturities of the investments and other earning assets held by SVB. Concerns related to FR related to exposure to long-term jumbo mortgages made to preferred deposit customers and the impact to net interest earnings and the value of those mortgages in the rising rate environment. While we, or any other financial institution, can be impacted by sudden changes in market conditions or customer sentiment, we believe that our funding and liquidity management strategies and procedures are sound. In addition, our deposit customer base is diverse without significant exposure to uninsured deposit relationships. Prior to receivership of SVB and FR our deposit fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates. Since the date of these receiverships, we have not experienced any significant or unusual deposit outflows and we have taken steps to successfully test certain liquidity facilities in the event of any future deposit outflows.

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~~$460,000 in cash on deposit at the Bank ~~at September 30, 2022.~~as of March 31, 2023. The holding company receives periodic dividend payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments, and 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.~~2024. Payments for any repurchases will be distributed from available funds, or from dividend payments from the Bank, and are not expected to have a material impact on available liquidity.

Off Balance Sheet Items and Contractual Obligations

There have been no material changes during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, to the off-balance sheet items and the contractual obligations disclosed in our ~~2021~~2022 Form 10-K. As discussed in Note 2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted CECL effective January 1, 2023 to include an assessment of off-balance sheet credit exposures. The transition adjustment for the adoption of CECL included establishment of an allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other liabilities.

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

The Company adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related updates, as described further in Note 2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, effective January 1, 2023. Related to the adoption of these new accounting standards, the Company modified certain internal controls and designed and implemented certain new internal controls over the measurement of the allowance for credit losses on loans and the reserve for unfunded commitments and related disclosures. New internal controls related primarily to the modeling of expected credit losses on loans, including controls over critical data and other inputs and model results. There were no other changes in the Company’s internal control over financial reporting ~~(as defined in Rule 13a-15(f) under the Exchange Act)~~ during the ~~quarter~~three months ended ~~September 30, 2022,~~March 31, 2023 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,~~March 31, 2023, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries or to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, will materially impact the financial condition or liquidity of the Company.

Item 1A.

Risk Factors

Not Applicable.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Sales of Unregistered Securities – None

(b)

Use of Proceeds – Not Applicable

(c)

Issuer Purchases of Securities

Stock Repurchase Program

The Company has an approved one-year stock repurchase program that authorizes the repurchase of up to 500,000 of the Company’s common shares 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,~~March 31, 2023, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to ~~455,515~~406,473 shares of common stock. On February 27, 2023, the board of directors approved an extension of the repurchase program through March 31, 2024.

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

Period Beginning on First Day of Month Ended		Total Number of Shares Purchased		Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs
January 31, 2023		6,970	$	2.30	6,970	419,435
February 28, 2023		1,787	$	2.41	1,787	417,648
March 31, 2023		11,175	$	2.26	11,175	406,473
	Total	19,932	$	2.28	19,932

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

None

Item 6.

Exhibits

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

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

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, 2022~~May 15, 2023

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

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


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]
		Emerging growth company [ ]

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

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

	Consolidated Statements of Income – Three ~~and Nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (Unaudited)	4

	Consolidated Statements of Comprehensive Income (Loss) – Three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~ (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity – Three ~~and Nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (Unaudited)	6

	Consolidated Statements of Cash Flows – ~~Nine~~Three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (Unaudited)	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2527

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3735

Item 4.	Controls and Procedures	3735

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	3835

Item 1A.	Risk Factors	3835

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3835

Item 3.	Defaults upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 3.5.	~~Defaults upon Senior Securities~~Other Information	3836

Item 4.6.	~~Mine Safety Disclosures~~Exhibits	3836

~~Item 5.~~SIGNATURES		~~Other Information~~	38

~~Item 6.~~	~~Exhibits~~	39

~~SIGNATURES~~		4037

	September 30,			December 31,			March 31,			December 31,
	2022			2021			2023			2022
ASSETS
Cash and due from banks		17,134		$	14,952			16,908		$	13,979
Interest-bearing deposits with banks		97,406			45,766			57,047			46,747
Federal funds sold		378			228			378			960
Total Cash and Cash Equivalents		114,918			60,946
Total cash and cash equivalents								74,333			61,686
Investment securities available-for-sale		98,845			107,358			96,722			96,076
Loans receivable		579,874			593,744			590,490			584,613
Allowance for loan losses		(6,593	)		(6,735	)
Allowance for credit losses								(6,661	)		(6,727	)
Net loans		573,281			587,009			583,829			577,886
Bank premises and equipment, net		19,675			20,735			18,485			19,290
Other real estate owned		321			1,361			261			261
Accrued interest receivable		2,174			2,112			2,418			2,555
Deferred taxes, net		4,570			1,673			4,111			4,623
Bank owned life insurance		4,602			4,685			4,563			4,549
Right-of-use assets – operating leases		3,816			4,062			3,641			3,725
Other assets		6,363			4,706			5,272			4,707
Total Assets		828,565		$	794,647
Total assets								793,635		$	775,358
LIABILITIES
Deposits:
Noninterest bearing		269,052		$	251,257			254,574		$	249,924
Interest-bearing		454,862			456,256			454,243			442,783
Total Deposits		723,914			707,513
Total deposits								708,817			692,707
Borrowed funds		41,496			16,496			16,496			16,496
Lease liabilities – operating leases		3,816			4,062			3,641			3,725
Accrued interest payable		355			272			749			526
Accrued expenses and other liabilities		3,754			2,673			4,244			4,685
Total Liabilities		773,335			731,016
Total liabilities								733,947			718,139
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
23,828,559 and 23,848,491 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively								47,657			47,697
Additional paid-in-capital		14,556			14,570			14,540			14,546
Retained earnings		6,665			2,031			9,296			8,917
Accumulated other comprehensive loss		(13,746	)		(814	)		(11,805	)		(13,941	)
Total Shareholders’ Equity		55,230			63,631
Total Liabilities and Shareholders’ Equity		828,565		$	794,647
Total shareholders’ equity								59,688			57,219
Total liabilities and shareholders’ equity								793,635		$	775,358

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

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

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

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

PROVISION FOR LOAN LOSSES		225	—		400		372

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

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

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

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

INCOME TAX EXPENSE		579	476		1,645		1,354

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

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

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



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

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

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

	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



	For the Three Months Ended March 31,
	2023			2022

NET INCOME	$	2,021		$	1,921

Other comprehensive income (loss):
Investment securities activity
Unrealized gains (losses) arising during the period		2,706			(6,892	)
Other comprehensive income (loss) on investment securities		2,706			(6,892	)
Related tax (expense) benefit		(570	)		1,448
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		2,136			(5,444	)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	4,157		$	(3,523	)

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

(Dollars in Thousands, Except Share and Per Share Data)	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
Weighted average shares outstanding		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

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

(Dollars in Thousands, Except Share and Per Share Data)	For the Three Months Ended March 31,
	2023		2022
Net income	$	2,021	$	1,921
Weighted average shares outstanding		23,841,162		23,922,086
Weighted average dilutive shares outstanding		23,841,162		23,922,086
Basic and diluted earnings per share	$	0.08	$	0.08


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

December 31, 2021:
Total Capital to Risk Weighted Assets		85,890		16.23	%	$	42,332		8.0	%	$	52,915		10.0	%
Tier 1 Capital to Risk Weighted Assets		79,274		14.98	%		31,749		6.0	%		42,332		8.0	%
Tier 1 Capital to Average Assets		79,274		9.86	%		32,145		4.0	%		40,181		5.0	%
Common Equity Tier 1 Capital
to Risk Weighted Assets		79,274		14.98	%		23,812		4.5	%		34,395		6.5	%

				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	Cost		Gains		Losses		Value
September 30, 2022
March 31, 2023
U.S. Treasuries	$	12,639	$	-	$	993	$	11,646	$	12,645	$	—	$	743	$	11,902
U.S. Government Agencies		10,451		4		695		9,760		9,678		4		569		9,113
Taxable municipals	Taxable municipals	23,338	-		5,560		17,778			23,011		—		5,192		17,819
Corporate bonds	Corporate bonds	3,515	-		340		3,175			3,508		—		346		3,162
Mortgage backed securities	Mortgage backed securities	66,301	-		9,815		56,486			62,822		2		8,098		54,726
Total Securities available for sale	$	116,244	$	4	$	17,403	$	98,845

December 31, 2021
Total securities available for sale									$	111,664	$	6	$	14,948	$	96,722
December 31, 2022
U.S. Treasuries	$	7,791	$	2	$	122	$	7,671	$	12,642	$	—	$	957	$	11,685
U.S. Government Agencies		9,098		77		86		9,089		10,129		4		734		9,399
Taxable municipals		23,075		159		254		22,980		23,022		—		6,207		16,815
Corporate bonds		2,014		23		18		2,019		3,512		—		376		3,136
Mortgage backed securities		66,410		143		954		65,599		64,419		—		9,378		55,041
Total Securities available for sale	$	108,388	$	404	$	1,434	$	107,358
Total securities available for sale									$	113,724	$	4	$	17,652	$	96,076


	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
September 30, 2022
U.S. Treasuries	$	5,115	$	283	$	5,564	$	710	$	10,679	$	993
U.S. Government Agencies		5,450		362		3,120		333		8,570		695
Taxable municipals		7,009		2,131		9,969		3,429		16,978		5,560
Corporate bonds		2,288		228		388		112		2,676		340
Mortgage backed securities		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

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


Yes	[ ]		No	[X]


					Weighted							Weighted
(Dollars are in thousands)	Amortized		Fair		Average			Amortized		Fair		Average
Securities Available-for-Sale	Cost		Value		Yield			Cost		Value		Yield
Due in one year or less	$	1,777	$	1,776		4.30	%	$	2,488	$	2,454		3.31	%
Due after one year through five years		16,829		15,805		2.09	%		15,775		15,032		2.18	%
Due after five years through ten years		14,663		12,832		1.98	%		17,139		15,225		2.09	%
Due after ten years		82,975		68,432		1.82	%		76,262		64,011		1.91	%
Total	$	116,244	$	98,845		1.92	%	$	111,664	$	96,722		2.01	%

(Dollars are in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Real estate secured:
Commercial	$	198,101	$	206,162		197,820	$	197,069
Construction and land development		38,598		32,325		42,742		42,470
Residential 1-4 family		226,706		224,530		228,727		227,232
Multifamily		29,062		33,048		34,167		29,710
Farmland		17,467		18,735		16,892		17,744
Total real estate loans		509,934		514,800		520,348		514,225
Commercial		45,126		54,325		46,338		46,697
Agriculture		3,799		4,021		3,931		3,756
Consumer installment loans		19,602		18,756		19,271		19,309
All other loans		1,413		1,842		602		626
Total loans	$	579,874	$	593,744		590,490	$	584,613

				CECL						Incurred Loss
				March 31, 2023						December 31, 2022
(Dollars are in thousands)				With No Allowance		With an Allowance		Total
Real estate secured:
	Commercial		$	-	$	268	$	268	$	-
	Construction and land development			447		-		447		471
	Residential 1-4 family			1,869		-		1,869		2,597
	Multifamily			207		-		207		268
	Farmland			-		-		-		41
		Total real estate loans		2,523		268		2,791		3,377
Commercial				-		-		-		-
Consumer installment loans and other loans				36		-		36		36
Total loans receivable on nonaccrual status			$	2,559	$	268	$	2,827	$	3,413

	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

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