NEW PEOPLES BANKSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data FINANCIAL STATEMENTS CONTENTS Page Report of Independent Registered Public Accounting Firm 38 Consolidated Balance Sheets December 31, 2021 and 2020 40 Consolidated Statements of Income – Years Ended December 31, 2021 and 2020 41 Consolidated Statements of Comprehensive Income – Years Ended December 31, 2021 and 2020 42 Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2021 and 2020 43 Consolidated Statements of Cash Flows – Years Ended December 31, 2021 and 2020 44 Notes to Consolidated Financial Statements 45 37 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of New Peoples Bankshares, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of New Peoples Bankshares, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 38 elliottdavis.com Allowance for Loan Losses As described in Note 6 and Note 7 to the Company’s financial statements, the Company’s loan portfolio and associated allowance for loan losses (the “Allowance”) totaled approximately $593.7 million and $6.7 million, respectively, at December 31, 2021. As described in Note 1 and Note 7 to the financial statements, the Company’s Allowance is an estimate of probable credit losses as of the balance sheet date and considers both unimpaired and impaired loans. Management’s determination of the allowance for loan losses related to the Company’s loan portfolio segment is generally based on the credit risk ratings and historical loss experience of individual borrowers, supplemented, as necessary, by credit judgment to address observed changes in trends and conditions, and other relevant environmental and economic factors such as concentrations of credit risk (geographic, large borrower, and industry), economic trends and conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of net charge-offs (qualitative factor adjustments). Auditing the Company’s Allowance involved a high degree of subjectivity due to the judgment involved in management’s identification and measurement of qualitative factor adjustments included in the estimate of the Allowance for loan losses. The primary procedures we performed to address this critical audit matter included the following, among others: We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans. We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered. Analytical procedures were performed to evaluate changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment. /s/ Elliott Davis, LLC Firm ID 149 We have served as the Company's auditor since 2011. Greenville, South Carolina March 31, 2022 39 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2021 AND 2020 (in thousands except share data) ASSETS 2021 2020 Cash and due from banks $ 14,952 $ 16,023 Interest-bearing deposits with banks 45,766 76,105 Federal funds sold 228 222 Total Cash and Cash Equivalents 60,946 92,350 Investment securities available-for-sale 107,358 48,406 Loans held for sale — 389 Loans receivable 593,744 575,566 Allowance for loan losses ( 6,735 ) ( 7,191 ) Net Loans 587,009 568,375 Bank premises and equipment, net 20,735 22,174 Other real estate owned 1,361 3,334 Accrued interest receivable 2,112 2,392 Deferred taxes, net 1,673 3,126 Right-of-use assets – operating leases 4,062 5,439 Other assets 9,391 10,317 Total Assets $ 794,647 $ 756,302 LIABILITIES Deposits Noninterest bearing $ 251,257 $ 223,725 Interest-bearing 456,256 444,287 Total Deposits 707,513 668,012 Borrowed funds 16,496 21,496 Lease liabilities – operating leases 4,062 5,439 Accrued interest payable 272 436 Accrued expenses and other liabilities 2,673 2,742 Total Liabilities 731,016 698,125 Commitments and Contingent Liabilities (Notes 19 and 20) STOCKHOLDERS’ EQUITY Common stock - $ 2.00 par value; 50,000,000 shares authorized; 23,922,086 shares issued and outstanding at December 31, 2021 and 2020, respectively 47,844 47,844 Additional paid-in capital 14,570 14,570 Retained earnings (deficit) 2,031 ( 4,979 ) Accumulated other comprehensive (loss) income ( 814 ) 742 Total Stockholders’ Equity 63,631 58,177 Total Liabilities and Stockholders’ Equity $ 794,647 $ 756,302 The accompanying notes are an integral part of these financial statements. 40 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (in thousands except share and per share data) INTEREST AND DIVIDEND INCOME 2021 2020 Loans including fees $ 28,323 $ 28,638 Federal funds sold — 1 Interest-earning deposits with banks 95 208 Investments 1,377 1,048 Dividends on equity securities (restricted) 117 141 Total Interest and Dividend Income 29,912 30,036 INTEREST EXPENSE Deposits 2,248 4,284 Borrowed funds 453 609 Total Interest Expense 2,701 4,893 NET INTEREST INCOME 27,211 25,143 PROVISION FOR LOAN LOSSES 372 2,300 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 26,839 22,843 NONINTEREST INCOME Service charges and fees 3,724 3,217 Card processing and interchange income 3,871 3,314 Insurance and investment fees 1,029 716 Net gain on sales of available-for-sale securities 322 4 Other noninterest income 1,034 896 Total Noninterest Income 9,980 8,147 NONINTEREST EXPENSES Salaries and employee benefits 12,662 13,228 Occupancy and equipment expenses 5,785 4,536 Data processing and telecommunications 2,444 2,497 Other operating expenses 6,976 6,736 Total Noninterest Expenses 27,867 26,997 INCOME BEFORE INCOME TAXES 8,952 3,993 INCOME TAX EXPENSE 1,942 1,103 NET INCOME $ 7,010 $ 2,890 Income Per Share Basic and Diluted $ 0.29 $ 0.12 Average Weighted Shares of Common Stock Basic and Diluted 23,922,086 23,922,086 The accompanying notes are an integral part of these financial statements. 41 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (Dollars in thousands) 2021 2020 NET INCOME $ 7,010 $ 2,890 Other comprehensive income: Investment securities activity: Unrealized (losses) gains arising during the year ( 1,647 ) 871 Reclassification adjustment for net gains included in net income ( 322 ) ( 4 ) Other comprehensive (losses) gains on investment securities ( 1,969 ) 867 Related tax benefit (expense) 413 ( 182 ) TOTAL OTHER COMPREHENSIVE (LOSS) INCOME ( 1,556 ) 685 TOTAL COMPREHENSIVE INCOME $ 5,454 $ 3,575 The accompanying notes are an integral part of these financial statements. 42 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (in thousands including share data) Shares of Common Stock Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Accumu-lated Other Compre-hensive Income (Loss) Total Stockholders’ Equity Balance, December 31, 2019 23,922 $ 47,844 $ 14,570 $ ( 7,869 ) $ 57 $ 54,602 Net income — — — 2,890 — 2,890 Other comprehensive income, net of tax — — — — 685 685 Balance, December 31, 2020 23,922 $ 47,844 $ 14,570 $ ( 4,979 ) $ 742 $ 58,177 Net income — — — 7,010 — 7,010 Other comprehensive loss, net of tax — — — — ( 1,556 ) ( 1,556 ) Balance, December 31, 2021 23,922 $ 47,844 $ 14,570 $ 2,031 $ ( 814 ) $ 63,631 The accompanying notes are an integral part of these financial statements. 43 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (Dollars are in thousands) 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,010 $ 2,890 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,097 2,189 Provision for loan losses 372 2,300 Income on bank owned life insurance (32 ) (77 ) Gain on sale of securities available-for-sale (322 ) (4 ) Gain on sale of mortgage loans ( 104 ) ( 174 ) Loss on sale or disposal of premises and equipment 1,098 19 Gain on sale of foreclosed real estate and repossessed assets ( 126 ) ( 58 ) Loans originated for sale ( 5,814 ) ( 11,948 ) Proceeds from sales of loans originated for sale 6,307 11,735 Adjustment of carrying value of foreclosed real estate and repossessed assets 466 165 Net amortization/accretion of bond premiums/discounts 482 419 Deferred tax expense 1,866 1,103 Net change in: Interest receivable 280 ( 277 ) Other assets 403 77 Accrued interest payable ( 164 ) ( 258 ) Accrued expenses and other liabilities ( 19 ) 473 Net Cash Provided by Operating Activities 13,800 8,574 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (18,987 ) (14,199 ) Purchase of securities available-for-sale ( 85,082 ) ( 9,584 ) Proceeds from sale of investment securities available-for-sale 7,686 1,025 Proceeds from repayments and maturities of securities available-for-sale 16,315 11,254 Net sale (purchase) of equity securities (restricted) 555 (22 ) Payments for the purchase of premises and equipment ( 4,094 ) ( 2,141 ) Proceeds from sale of premises and equipment 1,203 1 Proceeds from insurance claims on other real estate owned 54 — Proceeds from sales of other real estate owned 2,645 760 Net Cash Used in Investing Activities ( 79,705 ) ( 12,906 ) CASH FLOWS FROM FINANCING ACTIVIES Net change in short term borrowings (5,000 ) — Net change in noninterest bearing deposits 27,532 52,943 Net change in interest bearing deposits 11,969 (6,408 ) Net Cash Provided by Financing Activities 34,501 46,535 Net (decrease) increase in cash and cash equivalents ( 31,404 ) 42,203 Cash and Cash Equivalents, Beginning of the Year 92,350 50,147 Cash and Cash Equivalents, End of the Year $ 60,946 $ 92,350 Supplemental Disclosure of Cash Paid During the Year for: Interest $ 2,865 $ 5,151 Taxes $ — $ ( 166 ) Supplemental Disclosure of Non-Cash Transactions: Right-of-use assets obtained in exchange for new operating lease liabilities $ 86 $ — Loan made to finance sale of premises and equipment $ 185 $ — Other real estate acquired in settlement of foreclosed loans $ 566 $ 1,128 Loans made to finance sale of foreclosed real estate $ 400 $ 428 Transfer of premises and equipment to other real estate $ 950 $ — Change in unrealized gains on securities available for sale $ (1,969 ) $ 867 The accompanying notes are an integral part of these financial statements. 44 NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS Nature of Operations – New Peoples Bankshares, Inc. (New Peoples) 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 each 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 Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, northeastern Tennessee and western North Carolina. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation - 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. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles of the United States (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 and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Cash and Cash Equivalents – Cash and cash equivalents as used in the cash flow statements include cash and due from banks, interest-bearing deposits with banks, federal funds sold and investment securities maturing within three months. Investment Securities – Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities not intended to be held to maturity are classified as available-for-sale and carried at fair value. Securities available-for-sale are intended to be used as part of the Company’s asset and liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other similar factors. The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity for discounts and the earlier of call date or maturity for premiums. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, net of tax, whereas realized gains and losses flow through the statements of income. Loans held for sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance through earnings. Mortgage loans held for sale are generally sold with servicing released. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related loan sold. Loans – Loans are carried on the balance sheet at unpaid principal balance, net of any unearned interest and the allowance for loan losses. Interest income on loans is computed using the effective interest method, except where serious doubt exists as to the collectability of the loan, in which case accrual of the income is discontinued. 45 It is the Company’s policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, except in the case of a nonaccrual loan that is well secured and in the process of collection, in which case, the interest accrued but not collected is not reversed. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual status. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Significant Group Concentrations of Credit Risk – The Company identifies a concentration as any obligation, direct or indirect, of the same or affiliated interests which represent 25% or more of the Company’s capital structure, or $ 15.9 million as of December 31, 2021. Most of the Company’s activities are with customers located within southwest Virginia, southern West Virginia, northeastern Tennessee region and western North Carolina. Certain concentrations may pose credit risk. The Company does not have any significant concentrations to any one industry or customer. Allowance for Loan Losses – The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The loan portfolio is analyzed periodically and loans are assigned a risk rating. Allowances for impaired loans are generally determined based on collateral values or the present value of expected cash flows. A general allowance is made for all other loans not considered impaired as deemed appropriate by management. In determining the adequacy of the allowance, management considers the following factors: the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, the estimated value of any underlying collateral, prevailing environmental factors and economic conditions, and other inherent risks. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in collateral values and changes in estimates of cash flows on impaired loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Past due status is determined based on contractual terms. In regard to our consumer and consumer real estate loan portfolio, the Company uses the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. For non-1-4 family residential loans that are 90 days past due or greater, or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues. 46 Bank Premises and Equipment – Land, buildings and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives: Schedule of estimated useful lives Type Estimated useful life Buildings 39 years Paving and landscaping 15 years Computer equipment and software 3 to 5 years Vehicles 5 years Furniture and other equipment 5 to 10 years Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of noninterest expense as incurred. Other Real Estate Owned – Other real estate owned represents properties acquired through foreclosure or deeds taken in lieu of foreclosure and former branch sites that have been closed and for which there are no intentions to re-open or otherwise use the location. At the time of acquisition, these properties are recorded at fair value less estimated costs to sell. Expenses incurred in connection with operating these properties and subsequent write-downs, if any, are charged to operations. Subsequent to foreclosure, management periodically considers the adequacy of the reserve for losses on the property. Gains and losses on the sales of these properties are credited or charged to income in the year of the sale. Bank Owned Life Insurance (BOLI) – The Bank purchased life insurance policies on certain, now-former, key officers and employees. BOLI is recorded at the cash surrender value. Tax-exempt income from changes in the net cash surrender value are recorded in noninterest income. Leases – A right-of-use asset and related lease liability is recognized for operating leases the Bank has entered into for certain office facilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management. If it is determined that it is reasonably certain that the Bank will exercise renewal options, the additional term is included in the calculation of the lease liability. As most of our leases do not provide an implicit rate, we use the fully collateralized Federal Home Loan Bank borrowing rate, commensurate with the lease terms at the lease commencement date in determining the present value of the lease payments. Income Taxes – 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. The Company provides a valuation allowance on its net deferred tax assets where it is more likely than not such assets will not be realized. At December 31, 2021 and 2020, 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. See Note 10, Income Taxes, for additional information. The Company records any penalties and interest attributed to uncertain tax positions as a component of income tax expenses. Income Per Share – Basic income per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Financial Instruments – Off-balance-sheet instruments - In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded. Financial Instruments – Fair Value – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully discussed in Note 22. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risks, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect these estimates. 47 Comprehensive Income – GAAP require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The change in unrealized gains and losses on available-for-sale securities is the Company’s only component of other comprehensive income. Revenue from Contracts with Customers - The Company generally satisfies its performance obligations fully on its contracts with customers as services are rendered; and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Advertising Cost – Advertising costs are expensed in the period incurred. Those costs, which are included in Advertising, sponsorships and donations in Note 24 totaled $252 thousand and $216 thousand, for the years ended December 31, 2021 and 2020, respectively. Reclassification – Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and stockholders’ equity previously reported were not affected by these reclassifications. Subsequent Events – The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. See Note 25 Subsequent Events for additional information. NOTE 3 INCOME PER SHARE Basic income per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the years ended December 31, 2021 and 2020, there were no dilutive potential common shares. Basic and diluted net income per common share calculations follows: Schedule of basic and diluted net loss per common share calculations (Amounts in thousands, except For the year ended share and per share data) December 31, 2021 2020 Net income $ 7,010 $ 2,890 Weighted average shares outstanding 23,922,086 23,922,086 Weighted average dilutive shares outstanding 23,992,086 23,992,086 Basic and diluted income per share $ 0.29 $ 0.12 NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS The Bank had federal funds sold and interest-bearing cash on deposit with other commercial banks amounting to $ 46.0 million and $ 76.3 million at December 31, 2021 and 2020, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits. Effective March 26, 2020, the Board of Governors of the Federal Reserve System set reserve requirements to zero. Therefore, the Bank is no longer required to maintain minimum reserve balances with the Federal Reserve Bank of Richmond (the Federal Reserve Bank). Prior to March 26, 2020, the minimum required reserve balance was computed by applying prescribed percentages to various types of deposits, either at the Bank or on deposit with the Federal Reserve Bank. The Bank has a total of $ 30.0 million and $ 20 million in unsecured fed funds lines of credit facilities from three correspondent banks that were available at December 31, 2021 and 2020. Of these total commitments, all were available at December 31, 2021 and 2020, respectively. As a condition for $5.0 million of one of the unsecured fed funds line of credit, the Bank maintains a minimum deposit balance of $250 thousand with this correspondent bank. At December 31, 2021 and 2020, the Bank was in compliance with this requirement. 48 NOTE 5 INVESTMENT SECURITIES The amortized cost and estimated fair value of securities (all available-for-sale) as of December 31, 2021 and December 31, 2020 are as follows: Schedule of securities amortized cost and estimated fair value Gross Gross Approximate Amortized Unrealized Unrealized Fair (Dollars are in thousands) Cost Gains Losses Value December 31, 2021 U.S. Treasuries 7,791 $ 2 $ 122 $ 7,671 U.S. Government Agencies 9,098 77 86 9,089 Taxable municipals 23,075 159 254 22,980 Corporate bonds 2,014 23 18 2,019 Mortgage backed securities 66,410 143 954 65,599 Total Securities available for sale 108,388 $ 404 $ 1,434 $ 107,358 December 31, 2020 U.S. Government Agencies 13,852 $ 322 $ 67 $ 14,107 Taxable municipals 5,157 188 — 5,345 Corporate bonds 5,893 186 31 6,048 Mortgage backed securities 22,565 388 47 22,906 Total Securities available for sale 47,467 $ 1,084 $ 145 $ 48,406 The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2021 and December 31, 2020. Schedule of fair value and gross unrealized losses on investment securities 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 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 Mtg. backed securities 52,180 758 6,282 196 58,462 954 Total Securities AFS $ 73,879 $ 1,145 $ 10,103 $ 289 $ 83,982 $ 1,434 December 31, 2020 U.S. Government Agencies $ 1,479 $ 12 $ 3,829 $ 55 $ 5,308 $ 67 Taxable municipals — — — — — — Corporate bonds 1,219 31 — — 1,219 31 Mtg. backed securities 7,517 44 218 3 7,735 47 Total Securities AFS $ 10,215 $ 87 $ 4,047 $ 58 $ 14,262 $ 145 At December 31, 2021, the available-for-sale portfolio included 113 investments for which the fair market value was less than amortized cost. At December 31, 2020, the available-for-sale portfolio included 42 investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had other-than-temporary impairment at December 31, 2021 or December 31, 2020. Investment securities with a carrying value of $ 12.1 million and $ 6.8 million at December 31, 2021 and 2020, respectively, were pledged to secure public deposits and for other purposes required by law. During the year ended December 31, 2021, $ 7.7 million of securities were sold, realizing $ 322 thousand in gains. During the year ended December 31, 2020, $ 1.0 million of securities were sold, realizing $ 4 thousand in gains. 49 The amortized cost and fair value of investment securities at December 31, 2021, 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. Also, actual maturities may differ from scheduled maturities on amortizing securities, such as mortgage-backed securities and collateralized mortgage obligations, because the underlying collateral on these types of securities may be repaid prior to the scheduled maturity date. Schedule of amortized cost and fair value of investment securities contractual maturity Weighted (Dollars are in thousands) Amortized Fair Average Securities Available for Sale Cost Value Yield Due in one year or less $ 1,051 $ 1,060 2.56 % Due after one year through five years 7,858 7,804 1.41 % Due after five years through ten years 12,819 12,747 1.54 % Due after ten years 86,660 85,747 1.61 % Total $ 108,388 $ 107,358 1.59 % The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in Other Assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $ 2.0 million and $ 2.6 million at December 31, 2021 and 2020, respectively. The stock has no quoted market value and no ready market exists. NOTE 6 LOANS Loans receivable outstanding at December 31, 2021 and 2020, are summarized as follows: Summary of loans receivable outstanding December 31, (Dollars are in thousands) 2021 2020 Real estate secured: Commercial $ 206,162 $ 179,381 Construction and land development 32,325 25,031 Residential 1-4 family 224,530 222,980 Multifamily 33,048 16,569 Farmland 18,735 18,368 Total real estate loans 514,800 462,329 Commercial 54,325 86,010 Agriculture 4,021 4,450 Consumer installment loans 18,756 20,632 All other loans 1,842 2,145 Total loans $ 593,744 $ 575,566 Included in commercial loans at December 31, 2021 and 2020, were $6.4 million and $34.8 million of PPP loans that are guaranteed by the SBA. Also included in total loans above are deferred loan fees of $1.8 million and $2.3 million, at December 31, 2021 and 2020, respectively, which include deferred PPP loan fees. Deferred loan costs were $2.0 million and $1.8 million, at December 31, 2021 and 2020, respectively. Income from net deferred fees and costs is recognized as income over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or cost is recognized at that time. As a result of PPP originations during 2021 and 2020, net deferred fees totaling $1.6 million and $1.6 million were received, respectively, and $2.0 million and $994 thousand was recognized through earnings, respectively. 50 Loans receivable on nonaccrual status at December 31, 2021 and 2020 are summarized as follows: Summary of loans receivable on nonaccrual status (Dollars are in thousands) 2021 2020 Real estate secured: Commercial $ 415 $ 2,225 Construction and land development 37 57 Residential 1-4 family 2,314 2,700 Multi-family 111 — Farmland 48 101 Total real estate loans 2,925 5,083 Commercial 9 453 Consumer installment and other loans 7 12 Total loans receivable on nonaccrual status $ 2,941 $ 5,548 Total interest income not recognized on nonaccrual loans for 2021 and 2020 was $223 thousand and $494 thousand, respectively. No accounts received pandemic related forbearance in 2021. During the year ended December 31, 2020, under the provisions of the CARES Act or related guidance issued by banking regulators, modifications, mainly in the form of short-term payment deferrals, were granted on 786 loans totaling $119.6 million. At December 31, 2021, 543 accounts totaling $82.4 million remain, of which 538 accounts totaling $82.3 million are current or less than 90 days past due. All of these accounts are subject to a normal repayment schedule. No accounts at December 31, 2021 were subject to pandemic related forbearance. At December 31, 2020, 673 loans totaling $110.7 million had completed their forbearance period and resumed a normal payment schedule, and 15 loans totaling $836 thousand remained in forbearance. At December 31, 2020, the remaining 98 accounts had been repaid in full or refinanced at market terms and conditions. Of the accounts that received some form of forbearance during 2020, at December 31, 2021, $15.2 million were to lessors of residential properties, $12.8 to lessors of nonresidential properties and $6.7 million to hotels and restaurants; while at December 31, 2020, $21.4 million were to lessors of residential properties, $16.0 million to lessors of non-residential properties, $12.4 million to hotels and restaurants, and $6.0 million to coal and gas mining operations. The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2021 and December 31, 2020: Summary of impaired loans As of December 31, 2021 (Dollars are in thousands) Average Recorded Investment Interest Income Recognized Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Real estate secured: Commercial $ 245 $ — $ 99 $ 140 $ — Construction and land development 64 18 24 298 — Residential 1-4 family 1,720 24 1,508 1,791 — Multifamily — — — — — Farmland 438 14 320 490 — Commercial — — — — — Agriculture — — — — — Consumer installment loans 3 — 2 2 — All other loans — — — — — With an allowance recorded: Real estate secured: Commercial 871 3 315 372 94 Construction and land development — — — — — Residential 1-4 family 338 6 340 372 53 Multifamily — — — — — Farmland 121 4 197 209 17 Commercial 109 1 28 35 2 Agriculture — — — — — Consumer installment loans — — — — — All other loans — — — — — Total $ 3,909 $ 70 $ 2,833 $ 3,709 $ 166 51 As of December 31, 2020 (Dollars are in thousands) Average Recorded Investment Interest Income Recognized Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Real estate secured: Commercial $ 1,680 $ 16 $ 385 $ 386 $ — Construction and land development 89 18 99 376 — Residential 1-4 family 1,788 53 1,662 1,898 — Multifamily — — — — — Farmland 550 59 391 560 — Commercial 59 — — — — Agriculture — — — — — Consumer installment loans 4 — 5 6 — All other loans — — — — — With an allowance recorded: Real estate secured: Commercial 707 — 1,566 1,678 574 Construction and land development — — — — — Residential 1-4 family 150 3 337 365 72 Multifamily — — — — — Farmland 212 9 208 220 2 Commercial 214 12 429 437 404 Agriculture — — — — — Consumer installment loans — — — — — All other loans — — — — — Total $ 5,453 $ 170 $ 5,082 $ 5,926 $ 1,052 An age analysis of past due loans receivable is below. At December 31, 2021 and 2020, there were no loans over 90 days past due that were accruing. Summary of age analysis of past due loans receivable 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 52 As of December 31, 2020 (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 $ 969 $ — $ — $ 969 $ 178,412 $ 179,381 Construction and land development 64 — — 64 24,967 25,031 Residential 1-4 family 5,717 615 690 7,022 215,958 222,980 Multifamily — — — — 16,569 16,569 Farmland 57 — — 57 18,311 18,368 Total real estate loans 6,807 615 690 8,112 454,217 462,329 Commercial 214 — — 214 85,796 86,010 Agriculture 7 1 — 8 4,442 4,450 Consumer installment Loans 214 22 — 236 20,396 20,632 All other loans — — — — 2,145 2,145 Total loans $ 7,242 $ 638 $ 690 $ 8,570 $ 566,996 $ 575,566 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 and leases 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 analysis of relevant information 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 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. There were no loans classified as doubtful at either December 31, 2021 or 2020. 53 Based on the most recent analysis performed, the risk category of loans receivable was as follows: Summary of risk category of loans receivable 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 As of December 31, 2020 (Dollars are in thousands) Pass Special Mention Substandard Doubtful Total Real estate secured: Commercial $ 171,212 $ 6,112 $ 2,057 $ — $ 179,381 Construction and land development 23,168 1,806 57 — 25,031 Residential 1-4 family 218,947 1,304 2,729 — 222,980 Multifamily 16,337 232 — — 16,569 Farmland 17,019 1,249 100 — 18,368 Total real estate loans 446,683 10,703 4,943 — 462,329 Commercial 81,846 3,711 453 — 86,010 Agriculture 4,255 195 — — 4,450 Consumer installment loans 20,615 5 12 — 20,632 All other loans 2,145 — — — 2,145 Total $ 555,544 $ 14,614 $ 5,408 $ — $ 575,566 NOTE 7 ALLOWANCE FOR LOAN LOSSES The following tables present activity in the allowance for loan losses for the years ended December 30, 2021 and 2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of December 30, 2021 and 2020. 54 Schedule of allocation of portion of allowance Real estate secured (Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total Year ended December 31, 2021 Beginning balance $ 2,281 $ 233 $ 1,951 $ 151 $ 97 $ 2,275 $ 40 $ 163 $ - $ 7,191 Charge-offs (915) - (48) - - (92) - (78) - (1,133) Recoveries 2 6 85 - 29 137 1 45 - 305 Provision 766 (50) 249 103 23 (1,221) (13) (22) 537 372 Ending balance $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Allowance for loan losses at December 31, 2021 Individually evluated 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 Total $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Loans at December 31, 2021 Individually evluated 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 Total $ 206,162 $ 32,325 $ 224,530 $ 33,048 $ 18,735 $ 54,325 $ 4,021 $ 20,598 $ - $ 593,744 Real estate secured (Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total Year ended December 31, 2020 Beginning balance $ 1,248 $ 158 $ 1,736 $ 104 $ 109 $ 1,789 $ 27 $ 195 $ 2 $ 5,368 Charge-offs (65) - (165) - (42) (329) (15) (85) - (701) Recoveries 57 - 38 - 33 40 1 55 - 224 Provision 1,041 75 342 47 (3) 775 27 (2) (2) 2,300 Ending balance $ 2,281 $ 233 $ 1,951 $ 151 $ 97 $ 2,275 $ 40 $ 163 $ - $ 7,191 Allowance for loan losses at December 31, 2020 Individually evluated for impairment $ 574 $ - $ 72 $ - $ 2 $ 404 $ - $ - $ - $ 1,052 Collectively evaluated for impairment 1,707 233 1,879 151 95 1,871 40 163 - 6,139 Total $ 2,281 $ 233 $ 1,951 $ 151 $ 97 $ 2,275 $ 40 $ 163 $ - $ 7,191 Loans at December 31, 2020 Individually evluated for impairment $ 1,951 $ 99 $ 1,999 $ - $ 599 $ 429 $ - $ 5 $ - $ 5,082 Collectively evaluated for impairment 177,430 24,932 220,981 16,569 17,769 85,581 4,450 22,772 - 570,484 Total $ 179,381 $ 25,031 $ 222,980 $ 16,569 $ 18,368 $ 86,010 $ 4,450 $ 22,777 $ - $ 575,566 In determining the amount of our allowance, 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 December 31, 2021 and 2020. Additionally, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. For 2021, external qualitative factors were adjusted to consider the impact of inflation. NOTE 8 TROUBLED DEBT RESTRUCTURINGS At December 31, 2021, loans classified as troubled debt restructurings totaled $2.5 million compared to $4.0 million at December 31, 2020. The following table presents information related to loans modified as troubled debt restructurings during the years ended December 31, 2021 and 2020. 55 Schedule of loans modified as troubled debt restructurings December 31, 2021 December 31, 2020 (Dollars are in thousands) # of Loans Pre-Mod. Recorded Investment Post-Mod. Recorded Investment # of Loans Pre-Mod. Recorded Investment Post-Mod. Recorded Investment Real estate secured: Commercial — $ — $ — 3 $ 190 $ 190 Construction and land Development — — — — — — Residential 1-4 family 1 35 35 27 1,236 1,236 Multifamily — — — — — — Farmland — — — — — — Total real estate loans — — — 30 1,426 1,426 Commercial — — — — — — Agriculture — — — — — — Consumer installment loans — — — 2 7 7 All other loans — — — — — — Total 1 $ 35 $ 35 32 $ 1,433 $ 1,433 During the year ended December 31, 2021, one loan was modified for which the modification was considered to be a troubled dept restructuring. At December 31, 2021, two loans totaling $56.0 thousand are considered to be in default. Generally, a TDR is considered to be in default once it becomes 90 days or more past due following a modification. As discussed in Note 6, during the year ended December 31, 2020 modifications were granted on 786 loans with a gross aggregate balance of $119.6 million, under the provisions of the CARES Act. The characteristics of these modifications are considered short-term and did not result in a reclassification of the loans as troubled debt restructurings, as the accounts met the requirements stated in the CARES Act and had not been subject to prior modification. During the year ended December 31, 2020, the Company modified the terms of 32 loans for which the modification was considered to be a troubled debt restructuring. The interest rate was not modified on these loans; however, the payment terms or maturity date were changed. When determining the level of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of these loans. NOTE 9 BANK PREMISES AND EQUIPMENT Depreciation expense for 2021 and 2020 was $2.1 million and $2.2 million, respectively. Bank premises and equipment at December 31, 2021 and 2020 are summarized as follows: Schedule of bank premises and equipment (Dollars are in thousands) 2021 2020 Land $ 7,424 $ 7,796 Buildings and improvements 16,252 16,227 Furniture and equipment 14,139 16,253 Construction in progress — 1,025 37,815 43,008 Less accumulated depreciation ( 17,080 ) ( 18,726 ) Bank Premises and Equipment $ 20,735 $ 22,174 56 During the year ended December 31, 2021, the Bank sold four former branch locations, with net book values of approximately $1.1 million, resulting in approximately $173 thousand of net gains on sales. Also, during 2021, the Bank transferred three other former branch locations, with net book values totaling approximately $2.0 million, to other real estate owned, resulting in an increase to OREO of $950 thousand, and disposal and valuation costs of approximately $1.1 million. Subsequently, in December 2021, these OREO properties were written down to $912 thousand. Equipment with a combined net book value of $188 thousand were written off in 2021. One new branch office, in Bristol, Virginia, was opened in 2021, resulting in an increase of $2.7 million in premises and equipment. During 2020, the Bank opened a new branch office in Kingsport, Tennessee, and a loan production office in Boone, North Carolina. As presented in Note 17 Leasing Activities, during 2021, the Bank repurchased the branch office located in Lebanon, Virginia, which had previously been sold and leased back. NOTE 10 INCOME TAXES The Company files a consolidated federal income tax return. The following summarizes the provision for income taxes and the related deferred tax components for the years ended December 31, 2021 and 2020. The source of pre-tax book income is summarized as follows for the years ended December 31, 2021 and 2020: Schedule of pre-tax book income (Dollars are in thousands) 2021 2020 Pre-tax book income Domestic $ 8,952 $ 3,993 Total pre-tax book income $ 8,952 $ 3,993 Income tax expense is summarized as follows for the years ended December 31, 2021 and 2020: Schedule of components of income tax expense (Dollars are in thousands) 2021 2020 Current income tax expense (benefit) Federal $ ( 172 ) $ ( 200 ) State — — Total current income tax expense (benefit) ( 172 ) ( 200 ) Deferred income tax expense Federal 2,067 1,304 State 47 ( 1 ) Total deferred income tax expense 2,114 1,303 Income tax expense $ 1,942 $ 1,103 The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 21% for years ended December 31, 2021 and 2020, respectively: Schedule of reconciliation of income tax expense (Dollars are in thousands) 2021 2020 Income tax expense (benefit) at the applicable federal rate $ 1,879 $ 839 Permanent differences resulting from: Nondeductible expenses 7 8 Tax exempt interest income ( 4 ) ( 7 ) Bank owned life insurance (7 ) (16 ) Other adjustments 67 279 Income tax expense $ 1,942 $ 1,103 57 The net deferred tax assets and liabilities resulting from temporary differences as of December 31, 2021 and 2020, are summarized as follows: Schedule of net deferred tax assets and liabilities (Dollars are in thousands) 2021 2020 Deferred Tax Assets Allowance for loan losses $ 1,500 $ 1,568 Deferred compensation 85 92 Nonaccrual loan interest 532 490 Unrealized loss on securities available for sale 216 — Other real estate owned 305 83 Amortization of core deposits 6 18 Amortization of goodwill 31 90 Capitalized interest and repair expense 23 23 Net operating loss carryforward 460 2,172 Other 98 33 Total Assets, gross 3,256 4,569 Valuation allowance — — Total Assets, net 3,256 4,569 Deferred Tax Liabilities Accelerated depreciation 1,105 869 Unrealized gain on securities available for sale — 197 Prepaid expenses 27 22 Deferred loan costs 451 355 Total Liabilities, gross 1,583 1,443 Net Deferred Tax Asset $ 1,673 $ 3,126 In accordance with applicable accounting guidance, the Company determined that it was not required to establish a valuation allowance for deferred tax assets as it is more likely than not that the deferred tax asset will be realized through future taxable income, future reversals of existing taxable temporary differences and tax strategies. The Company’s net deferred tax asset is recorded in the consolidated financial statements separately. At December 31, 2021 and 2020, the Company had no unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to increase significantly over the next twelve months. The company recognizes interest and penalties as a component of income tax expense. The Company and Bank are subject to U. S. federal income tax, a capital-based franchise tax in the Commonwealth of Virginia; and income and excise taxes in West Virginia, Tennessee and North Carolina, respectively, based on earnings realized from business activities within each state. Years prior to 2018 are no longer subject to examination by taxing authorities. NOTE 11 TIME DEPOSITS The aggregate amount of time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) Insurance limit of $250,000 was $28.6 million and $34.8 million at December 31, 2021 and 2020, respectively. We had no brokered time deposits at either December 31, 2021 or 2020. At December 31, 2021, the scheduled maturities of time deposits are as follows (dollars are in thousands): Schedule of maturities 2022 $ 116,638 2023 39,197 2024 11,925 2025 18,095 2026 10,417 After five years - Total $ 196,272 58 NOTE 12 RELATED PARTY TRANSACTIONS Officers, directors (and companies controlled by them), principal shareholders, and associates were customers of and had loan transactions with the Bank in the normal course of business. The following table summarizes these transactions, which were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk. Schedule of related party For the year ended December 31, (Dollars in thousands) 2021 2020 Beginning balance $ 4,187 $ 2,457 New loans and advances on lines 2,620 4,567 Payments and other reductions ( 3,388 ) ( 2,837 ) Ending balance $ 3,419 $ 4,187 Total related party deposits held at the Bank were $24.8 million and $21.5 million as of December 31, 2021 and 2020, respectively. NPB Insurance Services, Inc. holds a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company. In August, 2021, the Bank sold a parcel of land, adjacent to the Grundy, Virginia office to a director for $150 thousand, which approximated the fair value of the property. A gain of $17 thousand was recorded from this transaction. NOTE 13 RETIREMENT PLANS The Company has established a qualified defined contribution plan that covers all full-time employees. The Company matches employee contributions up to a maximum of 3% of their salary. The Company contributed $246 thousand and $258 thousand to the defined contribution plan for 2021 and 2020, respectively. The Bank maintains a salary continuation plan for key executives which was established in 2002 and is funded by single premium life insurance policies. Expenses related to the plan were $29 thousand and $17 thousand for the years ended December 31, 2021 and 2020, respectively. NOTE 14 OTHER REAL ESTATE OWNED The following table summarizes the activity in other real estate owned for the years ended December 31, 2021 and 2020: Schedule of other real estate owned 2021 2020 (Dollars are in thousands) Balance, beginning of year $ 3,334 $ 3,393 Additions 566 1,128 Transfers from premises and equipment 950 — Proceeds from sales (2,645 ) (687 ) Proceeds from insurance claims (54 ) — Loans made to finance sales (400 ) (428 ) Adjustment of carrying value (466 ) (132 ) Gains (losses) from sales 76 60 Balance, end of year $ 1,361 $ 3,334 59 NOTE 15 BANK OWNED LIFE INSURANCE At December 31, 2021 and 2020, the Bank had an aggregate total cash surrender value of $4.7 million and $4.7 million, respectively, on life insurance policies covering former key officers. Total income for the policies during 2021 and 2020 was $32 thousand and $77 thousand, respectively. NOTE 16 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK A principal source of funds for the Company is dividends paid by the Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years. Virginia law restricts the amount of dividends a Virginia corporation may pay. Generally, a Virginia corporation may not authorize and make distributions if, after giving effect to the distribution, it would be unable to meet its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if it were dissolved at that time, to satisfy the preferential rights of shareholders whose rights are superior to the rights of those receiving the distribution. In addition, the payment of distributions to shareholders is subject to any prior rights of outstanding preferred stock. NOTE 17 LEASING ACTIVITIES During 2021, the Bank repurchased its branch office located in Lebanon, Virginia, for $1.3 million. This branch had previously been sold and leased back in September 2019. As a result of the repurchase, the lease with a remaining term of 12.9 years was cancelled. At December 31, 2021, the Bank leases four branch offices and sublets a lot adjacent to another branch office. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms at December 31, 2021, was 10.61 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 December 31, 2021 was 3.24%. The Company’s operating lease costs for the years ended December 31, 2021 and 2020, as a result of the transactions discussed above, was $528 thousand and $552 thousand, respectively. The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At December 31, 2021, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands): Schedule of future minimum rental commitments under the non-cancellable operating leases 2022 $ 441 2023 455 2024 455 2025 455 2026 455 Thereafter 2,698 Total lease payments 4,959 Less imputed interest 897 Total $ 4,062 60 NOTE 18 BORROWED FUNDS The following table presents the breakdown of borrowed funds as of December 31, 2021 and 2020 (dollars in thousands): Schedule of breakdown of borrowed funds FHLB Revolving Advances (a) Federal Funds Lines (b) FHLB Term Loans Short-Term (c) FHLB Term Loans Long-Term (d) NPB Capital Trust I (e) NPB Capital Trust 2 (e) Total Balance December 31, 2021 $ - $ - $ - $ - $ 11,341 $ 5,155 $ 16,496 Highest balance at any month-end - 1,020 5,000 - 11,341 5,155 Average weighted balance - 8 2,466 - 11,341 5,155 18,970 Average interest rate: Paid during the year - % 2.51 % 1.36 % - % 2.81 % 1.97 % 2.39 % At year-end -% -% -% - % 2.72 % 1.89 % 2.46 % Balance December 31, 2020 $ - $ - $ 5,000 $ - $ 11,341 $ 5,155 $ 21,496 Highest balance at any month-end - - 5,000 5,000 11,341 5,155 Average weighted balance - - 2,555 2,445 11,341 5,155 21,496 Average interest rate: Paid during the year - % -% 1.36 % 1.36 % 3.55 % 2.70 % 2.84 % At year-end -% -% 1.34 % - % 2.84 % 2.01 % 2.29 % (a) - The Bank has the ability to borrow up to an additional $111.6 million from the FHLB under a line of credit which is secured by a blanket lien on residential real estate loans. With additional collateral, the Bank’s total credit availability would be $187.9 million. The Bank had no overnight borrowings subject to daily rate changes from the FHLB at December 31, 2021 or 2020. We have used our line of credit with FHLB to issue letters of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public funds deposited in the Bank. No draws on the letters of credit have been issued. The letters of credit are considered draws on our FHLB line of credit. (b) - Federal funds lines consist of $30.0 million and $20.0 million in unsecured federal funds line of credit facilities with correspondent banks as of December 31, 2021 and 2020, respectively exclusive of any outstanding balance. (c) - At December 31, 2020, short term FHLB advances consisted of one $5.0 million advance with a fixed rate of 1.34% which matured and was paid off on June 30, 2021. (d) - At December 31, 2021 and 2020, there were no long term FHLB advances. (e) - TPS I - On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I (TPS I). The rate is determined quarterly and floats based on the 3-month LIBOR plus 260 basis points. TPS 2 - On September 27, 2006, the Company completed the issuance of $5.2 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust 2 (TPS 2). The rate is determined quarterly and floats based on the 3-month LIBOR plus 177 basis points. Under the terms of the subordinated debt transactions, the securities have 30-year maturities and are redeemable, in whole or in part, without penalty, at the option of the Company after five years from the issuance date, and on a quarterly basis thereafter. 61 Following are maturities of borrowed funds at December 31, 2021 (dollars in thousands): Schedule of maturities of borrowed funds 2022 $ - 2023 - 2024 - 2025 - 2026 - 2027 and thereafter 16,496 $ 16,496 NOTE 19 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet. Financial instruments whose contract amount represents credit risk at December 31, 2021 and 2020 were as follows: Schedule of financial instruments with credit risk 2021 2020 (Dollars in thousands) Commitments to extend credit $ 69,015 $ 57,334 Standby letters of credit 3,684 2,031 Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. NOTE 20 LEGAL CONTINGENCIES In the course of operations, we may become a party to legal proceedings in the normal course of business. At December 31, 2021, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, may materially impact the financial condition or liquidity of the Company. The Bank is a defendant in a complaint filed by a former employee in the United States District Court for the Western District of Virginia on January 1, 2021. The complaint alleges wrongful termination based on gender, religion and age. The Bank denies the allegations and intends to vigorously defend against these claims. The complaint does not specify the dollar amount of damage sought. The Bank has responded with a vigorous defense as to all claims and assertions. The amount of any possible loss cannot be estimated at this time. 62 NOTE 21 CAPITAL Capital Requirements and Ratios The Company meets eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve System’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and Common Equity Tier 1 capital to risk-weighted assets. As of December 31, 2021, the Bank meets all capital adequacy requirements to which it is subject. The Bank’s actual capital amounts and ratios are presented in the following table as of December 31, 2021 and 2020, respectively. Schedule of capital requirements Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions (Dollars are in thousands) Amount Ratio Amount Ratio Amount Ratio 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 % December 31, 2020: Total Capital to Risk Weighted Assets $ 77,133 16.41 % $ 37,603 8.0 % $ 47,028 10.0 % Tier 1 Capital to Risk Weighted Assets 71,241 15.16 % 28,202 6.0 % 37,603 8.0 % Tier 1 Capital to Average Assets 71,241 9.49 % 29,989 4.0 % 37,545 5.0 % Common Equity Tier 1 Capital to Risk Weighted Assets 71,241 15.16 % 30,036 4.5 % 30,552 6.5 % Accordingly, as of December 31, 2021 and 2020, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since such dates that management believes have changed the Bank’s category. The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 capital to risk-weighted assets ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum Common Equity Tier 1 capital to risk-weighted assets ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least, 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The Bank’s capital conservation buffer was 8.23% at December 31, 2021. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a Common Equity Tier 1 capital to risk-weighted assets ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of both December 31, 2021 and 2020, the Common Equity Tier 1 Capital to Risk-weighted Assets ratio, the Tier 1 Capital to Risk-weighted Assets ratio, the Total Capital to Risk-weighted Assets ratio, and the Tier 1 Capital to Average Assets ratio of the Bank, all exceeded the minimum requirements. 63 NOTE 22 FAIR VALUES The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are: 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 $107.4 million and $48.4 million at December 31, 2021 and 2020, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service. Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impaired and require a reserve, are primarily valued on a non-recurring basis at the fair value of the underlying real estate collateral. Where there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates to determine whether or not the fair value of the collateral is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets. The aggregate amount of impaired loans carried at fair value was $2.8 million and $4.0 million at December 31, 2021 and 2020, respectively. 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. The aggregate carrying amounts of foreclosed assets were $1.4 million and $3.3 million at December 31, 2021 and 2020, respectively. 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): 64 Schedule of summary of assets and liabilities measured at fair value (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: Real estate secured: Commercial - - 414 Construction and land development - - 24 Residential 1-4 family - - 1,848 Multifamily - - - Farmland - - 517 Commercial - - 28 Agriculture - - - Consumer installment loans - - 2 All other loans - - - Total $ - $ 107,358 $ 4,194 Assets and liabilities measured at fair value are as follows as of December 31, 2020 (for purpose of this table the impaired loans are shown net of the related allowance): (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. Government Agencies $ - $ 14,107 $ - Taxable municipals - 5,345 - Corporate bonds - 6,048 - Mortgage backed securities - 22,906 - (On a non-recurring basis) Other real estate owned - - 3,334 Impaired loans: Real estate secured: Commercial - - 1,377 Construction and land development - - 99 Residential 1-4 family - - 1,927 Multifamily - - - Farmland - - 597 Commercial - - 25 Agriculture - - - Consumer installment loans - - 5 All other loans - - - Total $ - $ 48,406 $ 7,364 65 For Level 3 assets measured at fair value on a recurring or non-recurring basis as of December 31, 2021 and 2020, the significant unobservable inputs used in the fair value measurements were as follows: Schedule of significant unobservable inputs In level 3 assets (Dollars in thousands) Fair Value at December 31, 2021 Fair Value at December 31, 2020 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Impaired Loans $ 2,667 $ 4,030 Appraised Value/Discounted Cash Flows/Market Value of Note Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0 – 18 % Other Real Estate Owned $ 1,361 $ 3,334 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 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 are as follows: Schedule of estimated fair value of financial instruments Fair Value Measurements (Dollars are in thousands) Carrying Amount Fair Value Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) December 31, 2021 Financial Instruments – Assets Net Loans $ 587,009 $ 580,024 $ - $ 577,357 $ 2,667 Financial Instruments – Liabilities Time Deposits 196,285 198,353 - 198,353 - Borrowed Funds 16,496 15,649 - 15,649 - December 31, 2020 Financial Instruments – Assets Net Loans $ 568,375 $ 564,664 $ - $ 560,634 $ 4,030 Financial Instruments – Liabilities Time Deposits 234,449 237,768 - 237,768 - Borrowed Funds 21,496 16,788 - 16,788 - 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 value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities and accrued interest approximates fair value and is excluded from the table above. 66 The methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price may differ. NOTE 23 REVENUE FROM CONTRACTS WITH CUSTOMERS All of our revenue from contracts with customers as defined in ASC 606 is recognized within Noninterest Income. The following table presents Noninterest Income by revenue stream for the years ended December 31, 2021 and 2020. Schedule of revenue from contracts with customers (Dollars are in thousands) 2021 2020 Service charges and fees $ 3,724 $ 3,217 Card processing and interchange income 3,871 3,314 Insurance and investment fees 1,029 716 Gains on sales of available-for-sale securities (1) 322 4 Other noninterest income 1,034 896 Total Noninterest Income $ 9,980 $ 8,147 (1) – Not within the scope of ASU 2014-9 Certain revenues are earned from contracts with customers. These revenues are recognized when the promised services are rendered to the customer and reflects the entitled consideration received in exchange for those services. Service charges and fees – revenue is recognized on deposit services based on published fees for the services provided. These fees may be collected on a transaction basis, at the time the service is rendered or periodically based on the period over which the service is provided. Transaction based fees include services such as stop payment requests, paper statement rendering and ITM usage fees. Periodic fees include such charges as monthly account maintenance fees. Overdraft fees are realized at the time the overdraft occurs. Card processing and interchange fees – Card related interchange revenue is primarily comprised of debit and credit card income. Debit and credit card income is earned when customers’ debit or credit cards are processed through a card payment network. Card related interchange income is recognized at the time the customer transactions settle. Insurance and investment fees - Insurance and investment fee income consists of commissions received on annuity and investment product sales through a third-party service provider. Performance is generally satisfied at the time an annuity policy is issued, or at the execution of an investment transaction. NOTE 24 NONINTEREST EXPENSES Other operating expenses, included as part of noninterest expenses, consisted of the following for the years ended December 31, 2021 and 2020: Schedule of noninterest expenses (Dollars are in thousands) 2021 2020 Advertising, sponsorships and donations $ 252 $ 216 ATM network expense 1,473 1,476 Legal and professional fees 922 839 Consulting fees 269 504 Loan related expenses 599 353 Printing and supplies 133 141 FDIC insurance premiums 266 393 Other real estate owned expenses, net 506 307 Other operating expenses 2,556 2,507 Total $ 6,976 $ 6,736 67 NOTE 25 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. Management has reviewed events occurring through the date the financial statements were available to be issued and has identified the following as a non-recognized subsequent event. On February 28, 2022, the board of directors declared a dividend of $0.05 per share payable on March 31, 2022 to shareholders of record as of March 15, 2022. At this time, we cannot state how the continuing economic uncertainty related to the pandemic and current geopolitical conditions will affect the financial position, operations or liquidity of the Company. NOTE 26 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 Financial Accounting Standards Board (the FASB) issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. In May 2019, the FASB issued targeted transition relief for entities which irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the amendments to the transition guidance for ASU 2016-13 will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2021. The Company is currently in the process of evaluating the impact of adoption of this guidance on its financial statements. In November 2019, the FASB released ASU 2019-10, ‘Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),’ in which the FASB shared a new philosophy to extend and simplify how effective dates for certain major Updates would be staggered between larger public companies (bucket one) and all other entities (bucket two). A major Update would first be effective for bucket-one entities. For bucket-two entities, including the Company, it is anticipated that the FASB will consider requiring an effective date staggered at least two years after bucket one for major Updates. Generally, it is expected that early application would continue to be allowed for all entities. The Company is considered a bucket-two entity due to its eligibility to be a smaller reporting company, per the Securities and Exchange Commission (the SEC). This Update applies to ASU 2016-13, as discussed above, ASU 2017-12, which does not apply to the Company, and ASU 2016-02, which the Company has already early-adopted. In December 2019, the FASB released ASU 2019-12, ‘Income Taxes (Topic 740),’ which simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, improve consistent application, and simplify GAAP for other areas of Topic 740. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect these amendments to have a material effect on its financial statements. In January 2020, the FASB released ASU 2020-01, ‘Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),’ which clarify certain interactions between the guidance to account for certain equity securities under Topic 321, 323 and 815, and improve current GAAP by reducing diversity in practice and increasing comparability of accounting. The amendments in this Update are effective for the Company for fiscal years beginning after December 31, 2021, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements. 68 In March 2020, the FASB released ASU 2020-03, ‘Codification Improvements to Financial Instruments,’ as part of its ongoing project for improving the Codification or correcting its unintended application. This Update is being issued to increase stakeholder awareness of these amendments. These amendments affect Fair Value Option Disclosures, Applicability of Portfolio Exception in Topic 820 to Nonfinancial Items, Disclosures for Depository and Lending Institutions, Cross-Reference to Line-of-Credit or Revolving-Debt Arrangements Guidance in Subtopic 470-50, Cross-Reference to Net Asset Value Practical Expedient in Subtopic 820-10, Interaction of Topic 842 and Topic 326, and Interaction of Topic 326 and Subtopic 860-20. The amendments in this update are effective immediately. The implementation of these amendments did not have a material effect on its financial statements. 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, but does not expect this amendment to have a material impact on its financial statements. In August 2020, the FASB released ASU 2020-06, ‘Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,’ which reduces the number of accounting models for convertible debt instruments and convertible preferred stock. The Board concluded that eliminating certain accounting models simplifies the accounting for convertible instruments, reduces complexity for preparers and practitioners, and improves the decision usefulness and relevance of the information provided to financial statement users. The amendments in this Update are effective for the Company for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The implementation of these amendments did not have a material effect on its financial statements. In January 2021, the FASB released ASU 2021-01, ‘Reference Rate Reform (Topic 848),’ which clarifies that certain optional expedients and exceptions in topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition related to reference rate reform. The amendments in this Update are effective immediately for all entities. An entity may elect to apply the amendments in the Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company does not expect this amendment to have a material effect on its financial statements. In July 2021, the FASB released ASU 2021-05, ‘Lessors – Certain Leases with Variable Lease Payments (Topic 842),’ which amends the lease classification requirements for lessors to align them with practice under Topic 840. The amendments in this Update amend Topic 842 and are effective for the Company for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 13, 2022. The Company may elect either (1) to retrospectively apply the amendments to leases that commenced or were modified on or after the adoption of Update 2016-02 or (2) prospectively to leases that commence or are modified on or after the date that the Company first applies the amendments. The Company does not expect this amendment to have a material effect on its financial statements. In August 2021, the FASB released ASU 2021-06, ‘Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946),’ which amends certain SEC paragraphs pursuant to SEC final rule releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses , and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants . These amendments become effective for fiscal years ending on or after December 15, 2021. The Company does not expect these amendments to have a material effect on its financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows. 69 NOTE 27 PARENT CORPORATION ONLY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2021 AND 2020 (Dollars in Thousands) Schedule of parent corporation only condensed balance sheets 2021 2020 ASSETS Due from banks $ 187 $ 215 Investment in subsidiaries 78,460 72,990 Other assets 1,645 1,669 Total Assets $ 80,292 $ 74,874 LIABILITIES Accrued interest payable $ 104 $ 109 Accrued expenses and other liabilities 61 92 Trust preferred securities 16,496 16,496 Total Liabilities 16,661 16,697 STOCKHOLDERS’ EQUITY Common stock - $2.00 par value, 50,000,000 shares authorized; 23,922,086 shares issued and outstanding at both December 31, 2021 and 2020 47,844 47,844 Additional paid capital 14,570 14,570 Retained earnings (deficit) 2,031 ( 4,979 ) Accumulated other comprehensive (loss) income ( 814 ) 742 Total Stockholders’ Equity 63,631 58,177 Total Liabilities and Stockholders’ Equity $ 80,292 $ 74,874 CONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (Dollars in thousands) Schedule of parent corporation only condensed statements of income 2021 2020 Income Miscellaneous income $ 13 $ 16 Dividends from subsidiaries 430 610 Undistributed income of subsidiaries 7,026 2,842 Total income 7,469 3,468 Expenses Trust preferred securities interest expense 420 541 Professional fees 99 114 Other operating expenses 58 19 Total Expenses 577 674 Income before Income Taxes 6,892 2,794 Income Tax Benefit ( 118 ) ( 96 ) Net Income $ 7,010 $ 2,890 70 CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020 (Dollars in thousands) Schedule of parent corporation only condensed statements of cash flows 2021 2020 Cash Flows From Operating Activities Net income $ 7,010 $ 2,890 Adjustments to reconcile net income to net cash used in operating activities: Equity in undistributed earnings of subsidiaries ( 6,580 ) ( 2,842 ) Net (increase) decrease in other assets ( 422 ) 67 Net decrease in other liabilities ( 36 ) ( 109 ) Net cash (used in) provided by operating activities ( 28 ) 6 Net (decrease) increase in Cash and Cash Equivalents ( 28 ) 6 Cash and Cash Equivalents, Beginning of year 215 209 Cash and Cash Equivalents, End of Year $ 187 $ 215 Supplemental Disclosure of Cash Paid During the Year for: Interest $ 425 $ 614 Taxes $ — $ ( 166 ) 71 NOTE 28 SELECTED QUARTERLY INFORMATION (UNAUDITED) Schedule of selected quarterly information 2021 QUARTERS (Dollars in thousands except per share data) Fourth Third Second First Income statement Net interest income $ 6,729 7,418 6,651 $ 6,413 Provision for loan losses — — 186 186 Noninterest income 2,503 2,970 2,378 2,129 Noninterest expense 6,727 8,067 6,724 6,349 Net income 1,917 1,845 1,663 1,585 Earnings per share, basic and diluted * 0.08 0.08 0.07 0.07 Period end balance sheet Total loans receivable $ 593,744 574,053 591,914 $ 594,454 Total assets 794,647 800,849 797,588 810,266 Total deposits 707,513 713,489 711,367 720,954 Total stockholders’ equity 63,631 62,518 60,964 59,347 2020 QUARTERS (Dollars in thousands except per share data) Fourth Third Second First Income statement Net interest income $ 6,447 6,414 $ 6,140 $ 6,142 Noninterest income 300 450 550 1,000 Provision for loan losses 2,234 2,116 1,628 2,165 Noninterest expense 6,272 6,282 7,192 7,251 Net income (loss) 1,391 1,424 29 46 Earnings (loss) per share, basic and diluted 0.06 0.06 0.00 0.00 Period end balance sheet Total loans receivable $ 575,566 585,122 $ 587,566 $ 560,468 Total assets 756,302 749,125 754,651 715,144 Total deposits 668,012 661,672 668,404 629,525 Total stockholders’ equity 58,177 56,919 55,473 55,251 * - For 2021, quarterly income per share does not total year-to-date income per share due to rounding. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None