What changed in this filing

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Item 1. Financial Statements

2022-08-15 compared with 2022-05-16 · 753 added, 518 removed, 706 unchanged (64% of the section changed)

2 unchanged sentences

BALANCE SHEETS

30, 2022 AND DECEMBER 31, 2021

THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

3 unchanged sentences

Total Cash and Cash Equivalents

Investment securities available-for-sale, at fair value

Investment securities available-for-sale

Loans held for sale

20 unchanged sentences

50,000,000 shares authorized;

23,922,086 shares issued and outstanding at

March 31, 2022 and December 31, 2021

23,905,576 and 23,922,086 shares issued and outstanding at

June 30, 2022 and December 31, 2021, respectively

Additional paid-in-capital

6 unchanged sentences

STATEMENTS OF INCOME

THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

For the Three Months Ended

For the Six Months Ended

INTEREST AND DIVIDEND INCOME

Loans including fees

Federal funds sold

Interest-earning deposits with banks

28 unchanged sentences

PEOPLES BANKSHARES, INC.

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

For the three months ended

Other comprehensive income:

For the six months ended

Other comprehensive (loss) income:

Investment securities activity

Unrealized losses arising during the period

Other comprehensive losses on investment securities

Other comprehensive loss on investment securities

Related tax benefit

4 unchanged sentences

STATEMENTS OF CHANGES IN SHAREHOLDERS’

THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

THOUSANDS INCLUDING SHARE DATA)

7 unchanged sentences

Balance, March 31, 2021

Other comprehensive loss, net of tax

Balance, June 30, 2021

Balance, December 31, 2021

2 unchanged sentences

Balance, March 31, 2022

Other comprehensive loss, net of tax

Repurchase of common stock

Balance, June 30, 2022

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

1 unchanged sentence

STATEMENTS OF CASH FLOWS

THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

CASH FLOWS FROM OPERATING ACTIVITIES

3 unchanged sentences

Income on bank owned life insurance

Net gain on sale of securities available-for-sale

Gain on sale of mortgage loans

Loss on sale of premises and equipment

Loss on sale or disposal of premises and equipment

(Gain) loss on sale of other real estate owned

2 unchanged sentences

Adjustment of carrying value of other real estate owned

Amortization of bond premiums

Deferred tax benefit

Adjustment of carrying value of repossessed assets

Net amortization/accretion of bond premiums/discounts

Deferred tax expense

Net change in:

4 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES

Net increase in loans

Net decrease (increase) in loans

Purchase of securities available-for-sale

Proceeds from repayments and maturities of securities available-for-sale

Net purchase of equity securities (restricted)

Net (purchase) redemption of equity securities (restricted)

Payments for the purchase of premises and equipment

2 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in short term borrowings

Net change in noninterest bearing deposits

1 unchanged sentence

Dividends paid

Repurchase of common stock

Net Cash Provided by Financing Activities

Net increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and Cash Equivalents, Beginning of the Period

11 unchanged sentences

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.

New Peoples and the Bank are organized and incorporated under

the laws of the Commonwealth of Virginia.

(New Peoples or the Company) is a financial holding company whose principal activity

is the ownership and management of a community bank, New Peoples Bank, Inc.

New Peoples and the Bank are organized and incorporated

under the laws of the Commonwealth of Virginia.

As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau

8 unchanged sentences

In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring

accruals) necessary to present fairly the Company’s financial position at March 31, 2022 and December 31, 2021, and the results

of operations for the three month periods ended March 31, 2022 and 2021.

The notes included herein should be read in conjunction with

the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December

The results of operations for interim periods are not necessarily indicative of the results of operations that may be expected

for a full year or any future period.

accruals) necessary to present fairly the Company’s financial position at June 30, 2022 and December 31, 2021, and the results

of operations for the three- and six-month periods ended June 30, 2022 and 2021.

The Notes included herein should be read in conjunction

with the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended

December 31, 2021.

The results of operations for interim periods are not necessarily indicative of the results of operations that may

be expected for a full year or any future period.

consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc.

10 unchanged sentences

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.

the adequacy of the allowance for loan losses and the determination of the deferred tax asset and are based on estimates that are particularly

susceptible to significant changes in the economic environment and market conditions.

reclassifications have been made to prior period amounts to conform to current period presentation.

5 unchanged sentences

share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued.

the three month periods ended March 31, 2022 and 2021, there were no potential common shares.

Basic and diluted net earnings per common

share calculations follow:

the three-month and six-month periods ended June 30, 2022 and 2021, there were no potential common shares.

Basic and diluted net income

per common share calculations follows:

(Dollars in Thousands, Except

Share and Per Share Data)

For the three months ended

For the three months

ended June 30,

For the six months

ended June 30,

Weighted average shares outstanding

Weighted average diluted shares outstanding

Basic and diluted income per share

Weighted average dilutive shares outstanding

Basic and diluted Earnings per share

Requirements and Ratios

Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding

Company Policy Statement issued in February 2015 and, therefore, is not obligated to report consolidated regulatory capital.

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.

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 March 31, 2022, the Bank meets all capital adequacy requirements to which it is subject.

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

and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.

Capital adequacy

guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and

certain off-balance sheet items calculated under regulatory accounting practices.

Capital amounts and classifications are also subject

to qualitative judgments by regulators.

Failure to meet capital requirements can initiate regulatory action.

qualify as a "Small Bank Holding Company"

under federal regulations, a bank must have consolidated assets of $3 billion or

The primary benefit of being deemed a "Small Bank Holding Company"

is the exemption from the requirement to maintain

consolidated regulatory capital ratios;

instead, regulatory capital ratios only apply at the subsidiary bank level.

final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S.

banks (BASEL III rules) became fully

phased in on January 1, 2019.

Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized

risk-based capital ratios.

The capital conservation buffer required is 2.50%.

At June 30, 2022, the Bank had a capital conservation buffer

Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital.

believes as of June 30, 2022, the Bank met all capital adequacy requirements to which it was subject.

corrective action regulations provide five classifications:

well capitalized, adequately capitalized, undercapitalized, significantly

undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition.

If adequately

capitalized, regulatory approval is required to accept brokered deposits.

If undercapitalized, capital distributions are limited, as

is asset growth and expansion, and capital restoration plans are required.

At June 30, 2022, the most recent regulatory notifications

categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events

since that notification that management believes have changed the institution's category.

The Bank’s actual capital amounts and

ratios are presented in the following table as of June 30, 2022 and December 31, 2021, respectively.

Minimum Capital Requirement

1 unchanged sentence

(Dollars are in thousands)

March 31, 2022:

June 30, 2022:

Total Capital to Risk Weighted Assets

9 unchanged sentences

to Risk Weighted Assets

as of March 31, 2022 and December 31, 2021, 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.

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

(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 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.

All ratios shown in the table

above exceed the minimum requirements.

The Bank’s capital conservation buffer as of March 31, 2022 was 7.90%.

5 INVESTMENT SECURITIES

amortized cost and estimated fair value of available-for-sale (AFS) securities as of March 31, 2022 and December 31, 2021 are as follows:

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

(Dollars are in thousands)

March 31, 2022

June 30, 2022

Government Agencies

2 unchanged sentences

Mortgage backed securities

Total Securities AFS

Total Securities available for sale

December 31, 2021

6 unchanged sentences

This information is aggregated by the length

of time that individual securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021.

of time that individual securities have been in a continuous unrealized loss position as of June 30, 2022 and December 31, 2021.

Less than 12 Months

1 unchanged sentence

(Dollars are in thousands)

March 31, 2022

June 30, 2022

Government Agencies

2 unchanged sentences

Mortgage backed securities

Total Securities AFS

Total Securities available for sale

December 31, 2021

3 unchanged sentences

Mortgage backed securities

Total Securities AFS

March 31, 2022, there were 192 securities in a loss position, of which 33 have been in a loss position for twelve months or more.

believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and not

as a result of credit deterioration.

Total Securities available for sale

June 30, 2022, there were 215 securities in a loss position, of which 47 have been in a loss position for twelve months or more.

believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are

not a result of credit deterioration.

Management does not intend to sell, and it is not likely that the Bank will be required to sell

any of the securities referenced in the table above before recovery of their amortized cost.

securities with a carrying value of $11.1 million and $12.1 million at March 31, 2022 and December 31, 2021, respectively, were pledged

securities with a carrying value of $29.7 million and $12.1 million at June 30, 2022 and December 31, 2021, respectively, were pledged

as collateral to secure public deposits and for other purposes required by law.

AFS debt securities were sold during the three months ended March 31, 2022 and 2021.

amortized cost and fair value of investment securities at March 31, 2022, by contractual maturity, are shown in the following schedule.

AFS debt securities were sold during the three and six months ended June 30, 2022 and 2022.

amortized cost and fair value of investment securities at June 30, 2022, by contractual maturity, are shown in the following schedule.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or

6 unchanged sentences

Due after ten years

Bank, as a member of the Federal Reserve Bank of Richmond (the Reserve Bank) and the Federal Home Loan Bank (the FHLB) of Atlanta, is

required to hold stock in each.

Bank, as a member bank of the Federal Reserve Bank of Richmond (Federal Reserve Bank) and the Federal Home Loan Bank of Atlanta (FHLB),

is required to hold stock in each.

The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank.

These equity securities,

which are included in Other Assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $2.1

million and $2.0 million at March 31, 2022 and December 31, 2021, respectively.

The stock has no quoted market value and no ready market

March 31, 2022, $100 thousand of loans were held for sale.

At December 31, 2021, no loans were held for sale, which represent mortgage

loans originated for sale.

securities, which are included in Other Assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost

of $4.3 million and $2.0 million at June 30, 2022 and December 31, 2021, respectively.

The stock has no quoted market value and no ready

market exists.

held for sale at June 30, 2022 and December 31, 2021, totaled $62 thousand and $0, respectively, which represents mortgage loans originated

These originations and sales are executed on a best-efforts basis.

receivable outstanding as of March 31, 2022 and December 31, 2021 are summarized as follows:

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

(Dollars are in thousands)

6 unchanged sentences

All other loans

in commercial loans at March 31, 2022 and December 31, 2021 were $2.8 million and $6.4 million of Paycheck Protection Program (PPP) loans,

in commercial loans at June 30, 2022 and December 31, 2021 were $845 thousand and $6.4 million of Paycheck Protection Program (PPP) loans,

respectively, that are guaranteed by the Small Business Administration (SBA).

included in total loans above are deferred loan fees of $1.7 million and $1.8 million at March 31, 2022 and December 31, 2021, respectively.

Deferred loan costs were $2.1 million and $2.0 million, at March 31, 2022 and December 31, 2021, respectively.

included in total loans above are deferred loan fees of $1.7 million and $1.8 million at June 30, 2022 and December 31, 2021, respectively.

Deferred loan costs were $2.1 million and $2.0 million, at June 30, 2022 and December 31, 2021, respectively.

Income from net deferred

2 unchanged sentences

any unamortized fee or costs is recognized at that time.

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

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

(Dollars are in thousands)

6 unchanged sentences

Total loans receivable on nonaccrual status

interest income not recognized on nonaccrual loans for the three months ended March 31, 2022 and March 31, 2021 was $5 thousand and $135

interest income not recognized on nonaccrual loans for the six months ended June 30, 2022, and June 30, 2021, was $11 thousand and $264

thousand, respectively.

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, during 2020.

At March 31, 2022 and December 31, 2021, no loans were subject

to pandemic related forbearance.

At March 31, 2022, 511 of the original 786 accounts remain, totaling $75.5 million.

Of these remaining

accounts, three loans totaling $133 thousand are past due 90 days or more.

following table presents information concerning the Company’s investment in loans considered impaired as of March 31, 2022 and

following tables presents information concerning the Company’s investment in loans considered impaired as of June 30, 2022, and

December 31, 2021:

As of March 31, 2022

As of June 30, 2022

(Dollars are in thousands)

29 unchanged sentences

loans, for the periods indicated:

Six Months Ended

June 30, 2022

June 30, 2021

(Dollars are in thousands)

With no related allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

With an allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

(Dollars are in thousands)

With no allowance recorded:

With no related allowance recorded:

Real estate secured:

9 unchanged sentences

All other loans

age analysis of past due loans receivable as of March 31, 2022 and December 31, 2021 is below.

At March 31, 2022 and December 31, 2021,

there were no loans over 90 days past due that were accruing.

As of March 31, 2022

age analysis of past due loans receivable as of June 30, 2022, and December 31, 2021, is below.

At June 30, 2022 and December 31, 2021,

no loans over 90 days past due were accruing.

As of June 30, 2022

(Dollars are in thousands)

3 unchanged sentences

Total real estate loans

Consumer installment loans

Consumer installment

All other loans

31 unchanged sentences

on the basis of currently existing facts, conditions, and values highly questionable and improbable.

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

As of March 31, 2022

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

As of June 30, 2022

(Dollars are in thousands)

19 unchanged sentences

Due to the underlying SBA guarantee provided for PPP loans,

these accounts were not included in either the portfolio segment or impairment calculations at March 31, 2022 and December 31, 2021.

Additionally, due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative

factors were revised accordingly.

This revision included reviewing our internal scoring related to loan modifications and extensions,

and external factors, specifically, unemployment and other economic factors.

following tables present activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2022

and 2021, respectively.

Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented

as of March 31, 2022, and December 31, 2021, respectively

(Dollars are in thousand)

secured Commercial

Construction and Land Development

Residential 1-4 family

Consumer and All Other

Three months ended March 31, 2022

these accounts were not included in either the portfolio segment or impairment calculations at June 30, 2022 and December 31, 2021.

Additionally,

due to uncertainties presented by the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors

were revised accordingly.

This revision included reviewing our internal scoring related to loan modifications and extensions, and external

factors, specifically, unemployment and other economic factors.

following table presents activity in the allowance for loan losses for the six- and three-month periods ended June 30, 2022 and 2021,

respectively.

Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of June

30, 2022, and December 31, 2021, respectively.

estate secured

are in thousands)

and Land Development

and All Other

Six months ended June

Beginning balance

Ending balance

Allowance for loan losses at March 31, 2022

Individually evaluated for impairment

Collectively evaluated for impairment

Loans at March 31, 2022

Individually evaluated for impairment

Collectively evaluated for impairment

(Dollars are in thousands)

estate secured Commercial

Construction and Land Development

Residential 1-4 family

Consumer and All Other

Allowance for loan losses at December 31, 2021

Individually evaluated for impairment

Three months ended June

Beginning balance

Ending balance

Allowance for loan

losses at June 30, 2022

Individually evluated for impairment

Collectively evaluated for impairment

Loans at December 31, 2021

Individually evaluated for impairment

Loans at June 30, 2022

Individually evluated for impairment

Collectively evaluated for impairment

estate secured

are in thousands)

and Land Development

and All Other

for loan losses at December 31, 2021

Individually evaluated

for impairment

Collectively evaluated

for impairment

at December 31, 2021

Individually evaluated

for impairment

Collectively evaluated

for impairment

estate secured

(Dollars are in thousands)

estate secured Commercial

Construction and Land Development

Residential 1-4 family

Consumer and All Other

Three months ended March 31, 2021

and Land Development

and All Other

Six months ended June

Beginning balance

Ending balance

Three months ended June

Beginning balance

Ending balance

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

8 TROUBLED DEBT RESTRUCTURINGS

were $2.4 million and $2.5 million in loans classified as troubled debt restructurings at March 31, 2022 and December 31, 2021, respectively.

were $2.2 million and $2.5 million in loans classified as troubled debt restructurings at June 30, 2022 and December 31, 2021, respectively.

All loans considered to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses

No loans modified during the three months ended March 31, 2022 or March 31, 2021, were considered to be troubled debt restructurings.

loan totaling $84 thousand, previously modified as a trouble debt restructuring, defaulted during the three months ended March 31, 2022.

No restructured notes defaulted during the three months ended March 31, 2021.

Generally, a restructured troubled debt is considered to

be in default once it becomes 90 days or more past due following a modification.

No loans modified during the three and six months ended June 30, 2022 or June 30, 2021, were considered to be troubled debt

restructurings.

loans totaling $84 thousand, secured by residential real estate, previously modified as troubled debt restructurings, defaulted during

the three months ended June 30, 2022.

One loan totaling $81 thousand, previously modified as a trouble debt restructuring, that defaulted

during the first three months of 2022, was in compliance with the terms of the restructuring at June 30, 2022.

During the three months

ended June 30, 2021, two loans to the same borrower, previously modified as troubled debt restructurings, totaling $1.1 million defaulted,

resulting in charge-offs totaling $835 thousand.

No loans previously modified as troubled debt restructurings defaulted during the first

three months of 2021.

Generally, a restructured troubled debt is considered to be in default once it becomes 90 days or more past due

following a modification.

determining the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings

5 unchanged sentences

9 OTHER REAL ESTATE OWNED

following table summarizes the activity in other real estate owned for the three months ended March 31, 2022 and the year ended December

following table summarizes the activity in other real estate owned for the six months ended June 30, 2022, and the year ended December

(Dollars are in thousands)

10 unchanged sentences

Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price

that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market

and in an orderly transaction between market participants at the measurement date.

Fair value is best determined based upon quoted market

However, in many instances, there are no quoted market prices for the Company's various financial instruments.

In cases where

quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques

are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

Accordingly, the

fair value estimates may not be realized in an immediate settlement of the instrument.

In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (the FASB) ASC, the fair

value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price)

in the principal or most advantageous market and in an orderly transaction between market participants at the measurement date.

value is best determined based upon quoted market prices.

However, in many instances, there are no quoted market prices for the Company's

various financial instruments.

In cases where quoted market prices are not available, fair values are based on estimates using present

value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate

and estimates of future cash flows.

Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous

23 unchanged sentences

The Company’s available for sale securities, totaling $100.6 million and $107.4 million

at March 31, 2022 and December 31, 2021, respectively, are the only assets whose fair values are measured on a recurring basis using

Level 2 inputs from an independent pricing service.

at June 30, 2022 and December 31, 2021, respectively, are the only assets whose fair values are measured on a recurring basis using Level

2 inputs from an independent pricing service.

- The Company does not record loans at fair value on a recurring basis.

16 unchanged sentences

The Company records foreclosed assets as nonrecurring Level 3.

and liabilities measured at fair value are as follows as of March 31, 2022 (for purpose of this table the impaired loans are shown net

and liabilities measured at fair value are as follows as of June 31, 2022 (for purpose of this table the impaired loans are shown net

of the related allowance):

March 31, 2022

June 30, 2022

(Dollars are in thousands)

13 unchanged sentences

net of the related allowance):

December 31, 2021

(Dollars are in thousands)

Quoted market price in active markets

Significant other observable inputs

Significant unobservable inputs

(On a recurring basis)

Available for sale investments

are in thousands)

market price in active markets

other observable inputs

unobservable inputs

a recurring basis)

for sale investments

Government Agencies

Taxable municipals

Corporate bonds

Mortgage backed securities

(On a non-recurring basis)

Other real estate owned

Impaired loans

Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2022 and December 31, 2021, the significant

Mortgage-backed

a non-recurring basis)

real estate owned

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

unobservable inputs used in the fair value measurements were as follows:

in thousands)

Value at March 31, 2022

Value at June 30, 2022

Unobservable Inputs

Range of Significant Unobservable Input Values

Value/ Market Value of Note

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

3 unchanged sentences

Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial

liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis.

ASC 825 excludes certain

financial instruments and all nonfinancial instruments from its disclosure requirements.

Accordingly, the aggregate fair value amounts

presented may not necessarily represent the underlying fair value of the Company.

The carrying values of cash and due from banks, federal

funds sold, interest-bearing deposits, deposits with no stated maturities and accrued interest approximates fair value and are excluded

from the table below.

estimated fair values, and related carrying or notional amounts, of the Company's financial instruments and their placement in the fair

value hierarchy at March 31, 2022 and December 31, 2021 was as follows (in thousands):

value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate

the value is based upon the characteristics of the instruments and relevant market information.

Financial instruments include cash, evidence

of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or

deliver cash for another financial instrument.

following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments

presented below.

The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results

may not be precise.

Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and

interest rates, all of which are subject to change.

Since the fair value is estimated as of the balance sheet date, the amounts that

will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair

value on a recurring basis as of June 30, 2022, and December 31, 2021, are as follows:

Fair Value Measurements

3 unchanged sentences

Significant unobservable inputs

March 31, 2022

June 30, 2022

Financial Instruments –

7 unchanged sentences

Borrowed funds

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

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.

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.

carrying values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust

preferred securities and accrued interest approximates fair value and are excluded from the table above.

accordance with our adoption of Accounting Standards Update (ASU) 2016-01 in 2018, the methods utilized to measure the fair value of

financial instruments at June 30, 2022 and December 31, 2021, represent an approximation of exit price;

however, an actual exit price

11 LEASING ACTIVITIES

of March 31, 2022, the Bank leases four branch office sites resulting from sale leaseback transactions entered into in 2017 and a sublet

of June 30, 2022, the Bank leases four branch office sites resulting from sale leaseback transactions entered into in 2017 and a sublet

of a lot adjacent to another office.

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The weighted average remaining life

of the lease terms at March 31, 2022 was 10.36 years.

of the lease terms at June 30, 2022 was 10.12 years.

discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to

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This methodology is expected to be used for any other subsequent lease agreements.

average discount rate for the leases at March 31, 2022 was 3.24%.

Company’s operating lease costs for the three months ended March 31, 2022 and 2021, as the result of the transactions discussed

above, were $114 thousand and $138 thousand, respectively.

average discount rate for the leases at June 30, 2022 was 3.24%.

the six months ended June 30, 2022 and 2021, operating lease expenses were $228 thousand and $275 thousand, respectively.

Company’s other operating leases were evaluated and determined to be immaterial to the financial statements.

At March 31, 2022,

At June 30, 2022,

future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):

Total lease payments

Less imputed interest

lease payments

imputed interest

12 BORROWED FUNDS

in Borrowed Funds are two short-term FHLB Advances totaling $60 million at June 30, 2022.

No short-term borrowings were outstanding at

December 31, 2021.

Of the outstanding advances at June 30, 2022, $20 million, at an interest rate of 2.05%, matures September 16, 2022;

and $40 million, at a rate of 2.60%, matures December 19, 2022.

13 REVENUE FROM CONTRACTS WITH CUSTOMERS

1 unchanged sentence

The following table presents

Noninterest income by revenue stream for the three months ended March 31, 2022 and 2021:

Noninterest income by revenue stream for the three and six months ended June 30, 2022 and 2021:

the three months ended

the six months ended

in thousands)

6 unchanged sentences

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

For the three months ended

For the three months ended June 30,

For the six months ended June 30,

(Dollars are in thousands)

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FDIC insurance premiums

Other real estate owned, net

Other real estate owned expenses, net

Other operating expenses

Total other operating expenses

15 SUBSEQUENT EVENTS

April 20, 2022, the United States District Court for the Western District of Virginia issued summary judgment, in favor of the Bank,

dismissing all remaining claims made in a lawsuit filed by a former employee in January 2021, alleging wrongful termination based on

gender, religion and age.

April 28, 2022 the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding

common stock through March 31, 2023.

The actual means and timing of any purchases, number of shares and prices or range of prices will

be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s

common stock, general market and economic conditions, and applicable legal and regulatory requirements.

There is no assurance that the

Company will purchase any shares under this program.

events are events or transactions that occur after the balance sheet date but before financial statements are issued.

Recognized subsequent

events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including

the estimates inherent in the process of preparing financial statements.

Non-recognized subsequent events are events that provide evidence

about conditions that did not exist at the date of the balance sheet but arose after that date.

There were no subsequent events requiring

recognition or disclosure.

16 RECENT ACCOUNTING DEVELOPMENTS

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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.

the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt

Subsequently, per ASU No.

2019-10, implementation for the Company is delayed

until reporting periods beginning after December 15, 2022.

Early adoption is permitted for all organizations for periods beginning after

December 15, 2018.

The Company is currently evaluating the effect that implementation of the new standard will have on its financial

position, results of operations, and cash flows.

The Company has contracted with a software vendor and is currently working through the

implementation process.

It is anticipated the Company will run the new methodology parallel to the current allowance methodology for

several periods before full implementation.

2019-10, implementation for the Company is delayed until reporting periods beginning after December

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.

has contracted with a software vendor and is currently working through the implementation process.

The new model has been constructed,

initial assumptions have been input and historical loan and loss activity has been input and validated.

The Company will run the new

methodology parallel to the current allowance methodology for several periods before full implementation, beginning with the June 30,

March 2020, the FASB released ASU 2020-04, ‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform

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utilized by us;

ability to successfully manage cyber security;

ability to successfully manage cybersecurity;

reliance on third-party vendors and correspondent banks;

1 unchanged sentence

in governmental regulations, tax rates and similar matters;

risks, which may be described, from time to time, in our filings with the SEC.

risks, which may be described, from time to time, in our filings with the Securities and Exchange Commission.

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

4 unchanged sentences

discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2021 (the 2021

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our

financial statements.

Our most critical accounting policies relate to the allowance for loan losses and the related provision for

loan losses and the calculation of our deferred tax asset and related valuation allowance.

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial

Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset.

allowance represents an amount that, in the Company's judgment, will be adequate to absorb probable and estimable losses inherent in

8 unchanged sentences

using the enacted marginal tax rate.

In the past, the Company provided a valuation

allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized.

At March 31, 2022

and December 31, 2021, the Company had no valuation allowance on its net deferred tax assets.

In the past, the Company provided a valuation allowance on its net deferred tax assets where it

was deemed more likely than not such assets would not be realized.

At June 30, 2022 and December 31, 2021, the Company had no valuation

allowance on its net deferred tax assets.

Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained

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and Highlights

Company generated net income for the three months ended March 31, 2022 of $1.9 million, or basic and diluted net income per share of

$0.08, as compared to the three months ended March 31, 2021 when the Company had net income of $1.6 million, or $0.07 basic and diluted

net income per share.

The primary drivers for the increase were increases in net interest income of $208 thousand, a reduction in the

provision for loan losses of $86 thousand, and an increase in total noninterest income of $241 thousand.

interest income increased $208 thousand due to a $270 thousand decrease in interest expense, which more than offset a $62 thousand decrease

in interest income.

Although year-over-year there was a $36.3 million increase in the volume of earning assets, due largely to growth

in the investment and loan portfolios of $60.7 million and $9.3 million, respectively, interest income attributed to the increased volume

of earning assets increased only $43 thousand.

There are a couple of primary reasons for the results.

One, the net increase was negatively

impacted comparative to the prior year due to a $312 thousand decrease in loan fee income resulting from the forgiveness in PPP loans

in 2021 which was not replicated in 2022.

We anticipate loan interest income to be less in the second and third quarters of 2022 as compared

to the same periods in 2021 for the same reasons related to the PPP loan fee income cessation.

Secondly, interest income was negatively

impacted by the repricing of earning assets at lower interest rates which caused a year-over-year, rate related, decline of $105 thousand.

Interest expense decreased driven by the continued low interest rate environment throughout 2021 and into the first quarter of 2022,

as our overall cost of funds fell 16 basis points year-over-year to 0.30% for the first quarter of 2022.

Also, the mix of deposits continues

to shift away from time deposits to lower, and noninterest, rate bearing deposits.

Furthermore, Federal Home Loan Bank advances were

paid off resulting in a decrease in interest expense of $96,000.

In March and May 2022, the Federal Open Market Committee raised the

target federal funds rate 25 and 50 basis points, respectively, in what is largely considered to be a series of rate increases during

Due to our interest rate sensitivity position, we anticipate interest income to increase as interest rates increase in the near

however, future year-over-year comparisons may not reflect the increase due to the impact of the PPP loan forgiveness in 2021.

year-over-year reduction in the provision for loan losses of $86 thousand is due to a combination of factors, including the improving

characteristics of the loan portfolio, as exhibited by the decline in nonperforming loans, combined with continued improving employment

Annualized net charge-offs to average loans remain at low levels and were 0.05% for the quarter ended March 31, 2022.

loans to total loans and nonperforming assets to total assets declined to 0.44% and 0.42%, respectively at March 31, 2022.

non-interest income increased $240,000 during the first quarter of 2022 compared to the first quarter of 2021 due to increases in service

charges and fees and card processing fees of $175 thousand and $52 thousand, respectively.

The service charges and fees increase relates

to increased volume in overdraft charges related to customer activity beginning to return to pre-pandemic levels as businesses reopened

and as customers spend savings from stimulus payments accumulated during the pandemic.

Card processing fee revenue is also volume related

for reasons similar to those impacting service charge income.

In addition, year-over-year, fees generated through financial and merchant

services increased $12 thousand and $11 thousand, respectively, due to increased volume from both new and existing customers using these

We continue efforts to increase noninterest income revenue through product enhancements and customer development.

non-interest expense increased $90 thousand, as salaries and benefits expense increased $196 thousand due to the impact of increasing

our minimum base hourly wage in the fourth quarter of 2021, targeted salary adjustments to retain and attract employees, combined with

normal annual wage adjustments and added accrued costs for performance incentive plans to be awarded in the first quarter of 2023, if

2022 goals are met.

Occupancy expense decreased $170 thousand due largely to the reduction in the number of buildings through sales or

transfers to other real estate owned.

Additionally, net depreciation costs for furniture, equipment and computer equipment decreased

$89 thousand as assets reached the end of their estimated economic useful lives, along with the decommissioning of a number of interactive

teller machines during the fourth quarter of 2021.

Other operating expenses increased $83 thousand year-over-year, primarily due to costs

related to the holding and disposal of other real estate owned, which increased from $33 thousand to $130 thousand in 2021 to 2022.

network expenses increased $25 thousand to $367 thousand, due to increased activity combined with general cost increases.

Miscellaneous

losses increased $69 thousand to $50 thousand in 2022, as compared to net recoveries of $19 thousand in 2021.

These increased expenses

were partially offset by decreases in data processing and telecommunications costs, and FDIC insurance which decreased $19 thousand and

$21 thousand, respectively.

Data processing and telecommunication costs decreased due to the reduction in the number of branch sites

and renegotiated contracts, while FDIC insurance decreased due to the improved risk factors considered in the premium assessment.

continue to decrease non-interest expenses of the Company and improve efficiency.

assets increased $18.9 million, or 2.4%, to $813.5 million at March 31, 2022 from $794.6 million at December 31, 2021, funded largely

by increased deposits as the low interest rate environment continues to provide liquidity.

Total loans increased $1.4 million, or 0.23%,

to $595.1 million at March 31, 2022 from $593.7 million at December 31, 2021.

Loan growth has resulted from to increases in construction

and land development loans, commercial loans secured by real estate and multi-family loans, which grew $6.5 million, $1.2 million and

$1.4 million, respectively.

Growth in these components of the portfolio offset a reduction in commercial loans of $6.7 million.

in commercial loans was largely the result of the repayment and forgiveness of PPP loans which declined $3.6 million during the first

three months of 2022.

Our loan production operation in Boone, North Carolina, continues to generate positive results, as well as our

Tri Cities area branches in Bristol, Virginia and Kingsport, Tennessee.

Total deposits increased $23.5 million, or 3.3%, to $731.0 million

at March 31, 2022 from $707.5 million at December 31, 2021, driven by liquidity resulting from the continuing low interest rate environment

and seasonal growth from income tax refunds.

March 31, 2022, shareholders’

equity totaled $58.9 million, a decrease of $4.7 million, or 7.4%, from December 31, 2021.

cause for the net decrease was the change in the net unrealized loss on investment securities available for sale, which increased $5.4

million, or 668.8%, during the first quarter of 2022, due to the impact of the change in interest rates.

Excluding the impact of the

unrealized loss, equity increased $725 thousand, due to net income of $1.9 million less the cash dividend payment of $1.2 million, which

was the first cash dividend paid by the Company.

as of and for the three month period ended March 31, 2022 include:

income for the first quarter of 2022 was $1.9 million, compared to $1.6 million for the first

quarter of 2021;

interest margin was 3.53% for the quarter, a decrease of 6 basis points compared to 3.59%

for the quarter ended March 31, 2021;

for loans losses was $100 thousand for the quarter, a reduction of $86 thousand compared

to the first quarter of 2021;

and employee benefits expense increased $196 thousand, or 6.4%, to $3.3 million for the first

quarter of 2022 compared to the same quarter in 2021;

assets grew $18.9 million to $813.5 million, during the first three months of 2022;

balances grew $23.5 million;

balances grew $1.4 million;

· Nonperforming

assets, which include nonaccrual loans and other real estate owned, totaled $3.4 million

at March 31, 2022, a decline of $867 thousand, or 20.2%, during the quarter.

of the Three Months ended March 31, 2022 to March 31, 2021

Company’s primary source of income is net interest income, which increased by $208 thousand, or 3.2%, to $6.6 million for the first

quarter of 2022 compared to $6.4 million for the first quarter of 2021.

While we had increases in average loan balances and investment

securities, those were impacted by the effect of decreases in interest rates and a decrease of $292 thousand in nonrecurring PPP loan

fees in 2022, causing interest income to decrease by $62 thousand.

However, total interest expense decreased $270 thousand, which more

than mitigated the decrease in interest income.

The decrease in interest expense was driven primarily by a $253 thousand decrease in

interest on deposits, a result of growth in noninterest bearing deposits and a 16 basis-point decrease in the cost of funds to 30 bps.

Overall, the net interest margin decreased 6 bps to 3.53%.

June 15, 2022, we became aware of a cybersecurity incident that temporarily interrupted the operability of our computer systems.

a result of this incident branch services could not be provided for two and one-half days, however, customers had access to our

Interactive Teller Machine (ITM) network and credit and debit card activity was available.

Limited branch operations resumed on June

17, 2022, and full operations were restored on June 21, 2022.

On June 29, 2022, we issued a press release outlining the timeline,

restoration efforts and communications, services and safeguards being offered to our customers in response to this incident, and

filed a Current Report on Form 8-K relating to the incident.

During the three months ended June 30, 2022, expenses related to the

cybersecurity incident were recorded for insurance deductibles along with costs for onsite security provided during the first few

days that lobby service was restarted.

Certain other direct costs for forensic, legal and recovery services, along with

communication management, will be disbursed during the third quarter and are expected to be recovered through insurance

minimize the inconvenience to our customers, we increased ITM withdrawal, and debit card transaction limits for all customers and temporarily

eliminated overdraft fees.

These actions resulted in an increase in overdrawn deposit accounts and a reduction of overdraft revenue that

impacted the second quarter of 2022, and is expected to have ongoing impact into the third quarter of 2022.

the three months ended June 30, 2022, we earned net income of $1.9 million, which equates to $0.08 per share, and is $260 thousand higher

than the $1.7 million net income during the same period in 2021.

All major components of the income statement improved, with the exception

of noninterest income, which was impacted by the cybersecurity incident.

Net interest income grew $193 thousand, provision for loan losses

decreased $111 thousand, non-interest income decreased $30 thousand, and non-interest expense decreased $66 thousand.

Consequently, income

tax expense increased $80 thousand due to the increase in income before income taxes.

the six months ended June 30, 2022, net income totaled $3.8 million or $0.16 per share compared to $3.2 million or $0.14 per share for

the same six-month period in 2021.

All major components of the income statement improved, with the exception of noninterest expense.

Net interest income grew $401 thousand, provision for loan losses decreased $197 thousand, non-interest income increased $210 thousand,

and non-interest expense increased $24 thousand.

Consequently, income tax expense increased $188 thousand due to the increase in net

income before income taxes.

balance sheet grew to $847.0 million as of June 30, 2022, from $794.6 million as of December 31, 2021, due to Federal Home Loan Bank

advances taken as a precautionary measure in response to the cybersecurity incident.

Total deposits decreased $449 thousand to $707.1

million at June 30, 2022 from $707.5 million at December 31, 2021.

Loans decreased $8.1 million to $585.6 million during the first six

months of 2022, due to repayments of several large commercial real estate loans combined with PPP loan repayments of approximately $5.6

the second quarter of 2022, plans were announced for the closure of branch offices in Big Stone Gap and Chilhowie, Virginia in mid-August

Affected personnel will be reassigned, and customer accounts will be transferred to nearby offices.

the second quarter of 2022, we initiated a previously announced stock repurchase program.

Through June 30, 2022, 16,510 shares have been

repurchased at an average price of $2.28 per share.

of the Three Months ended June 30, 2022 and 2021

the cybersecurity incident impacted branch operations and limited our abilities for loan and financial services production, the results

for the three months ended June 30, 2022 are favorable before considering the effect of the cybersecurity incident.

Quarter-to-date

highlights include:

on average assets and equity of 0.94% and 13.45 % for the second quarter of 2022, compared

to 0.82% and 11.15% for the second quarter of 2021, respectively;

interest income was $6.8 million for the second quarter of 2022, an improvement of $193 thousand,

or 2.9%, compared to the second quarter of 2021;

for loans losses was $75 thousand for the second quarter of 2022, a reduction of $111 thousand,

or 59.7%, compared to the second quarter of 2021;

· Noninterest

income was $2.3 million, a decrease of $30 thousand, or 1.3%, during the second quarter of

2022 compared to the second quarter of 2021;

· Noninterest

expense was $6.7 million, a decrease of $66 thousand, or 1.0%, for the second quarter of

2022 compared to the second quarter of 2021.

Company’s primary source of income is net interest income, which increased by $193 thousand, or 2.9%, to $6.8 million for the second

quarter of 2022 compared to $6.7 million for the second quarter of 2021.

Interest income increased $112 thousand due to a $26 million

increase in the average balance of earning assets, a shift of funds from interest bearing deposit balances at other banks to higher-yielding

investment securities, and the 2022 increases in the fed funds rate partially offset by a decline in accelerated fee recognition when

PPP loans are forgiven.

Additionally, total interest expense decreased $81 thousand driven primarily by a $171 thousand decrease in interest

on deposits, a result of growth in noninterest bearing deposits.

This decrease in deposit interest expense offset increases for borrowed

funds, resulting from FHLB advances taken during the second quarter of 2022, and increases to the interest rates associated with trust

preferred securities.

Overall there was a 13 basis-point decrease in the cost of funds to 33 bps, while the net interest margin decreased

2 bps to 3.50%.

During the second quarter of 2022, the Federal Reserve’s Open Market Committee (FOMC) increased the discount rate

two times for a total of 125 bps.

The Company experienced some benefit of the rate increases during the second quarter, but the full

impact will be somewhat lagging as certain loans, investments, and trust preferred securities will not reprice until the individual instruments

next interest rate repricing date.

Deposit rates were not immediately impacted by the rate increases, and the Company will continue to

evaluate rate adjustments for factors, including competitive pressure within the local markets, funding needs to support growth and other

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

2 unchanged sentences

in thousands)

Months Ended March 31,

Months Ended June 30,

loans held for sale

bearing deposits in other banks

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loans and loans held for sale have been included in average loan balances.

Tax exempt income is not significant and has been treated as fully taxable.

Includes loans held for sale

exempt income is not significant and has been treated as fully taxable.

interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing

The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates and volume for the period indicated:

to rates and volume for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.

Volume and Rate Analysis

Increase (decrease)

Months Ended March 31,

Three Months Ended June 30,

2022 versus 2021

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest Income:

Mortgage loans held for sale

Federal funds sold

Interest bearing deposits in other banks

Taxable investment securities

Total Earning Assets

Interest Expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Short-term borrowings

Trust preferred securities

Total Interest-bearing Liabilities

Change in Net Interest Income

on our current assessment of the loan portfolio, a lower provision of $75 thousand was made in the second quarter of 2022, after considering

the overall loan quality, despite increases to past due and nonaccrual loans during the three months ended June 30, 2022.

These increases

appear to be attributable to delays in providing account notices during the latter portion of June 2022.

Although the provision declined

from the same period of 2021, the allowance for loan losses as a percentage of loans increased from 1.13% at December 31, 2021 to 1.16%

as of June 30, 2022.

For a discussion of the factors affecting the allowance for loan losses, including provision expense, refer to Note

7, Allowance for Loan Losses, in Item 1 of this Form 10-Q.

income for the second quarter of 2022 was $2.3 million, a decrease of $30 thousand, or 1.3%, when compared to the same period in 2021.

During the period immediately after the cybersecurity incident, we temporarily stopped assessing overdraft and certain other service

While service charges for the three months ended June 30, 2022, exceeded the same three-month period in 2021 by $56 thousand,

we estimate that additional normalized charges of approximately $125 thousand would have been realized during this period.

Card processing

and interchange revenue decreased $45 thousand for the three months ended June 30, 2022, as compared to the same period in 2021, due

to a decline in transaction volume.

Revenue from financial services activities decreased $33 thousand, or 12.0%, as we were limited in

executing client transactions, especially new account activity during the disruption to our computer systems.

non-interest expense decreased $66 thousand, year-over-year for the three-month period ended June 30, 2022.

Increases to salaries and

benefits expenses of $283 thousand were largely offset by reduced occupancy expenses, data processing and other noninterest expenses

which decreased $167 thousand, $52 thousand and $130 thousand, respectively.

The increase to salaries and benefits was due to the impact

of overall salary adjustments implemented during the fourth quarter of 2021 and accruals for performance related payments in 2022 that

had not yet been implemented in 2021.

These changes accounted for $91 thousand and $72 thousand of the overall increase to salaries and

Occupancy expense benefitted from reduced depreciation and property tax expenses, which decreased $113 thousand and $15 thousand,

respectively, due to the disposals of real estate and equipment over the past year.

The decrease in other nonoperating expenses was due

largely to reduced costs associated with loan collections and costs associated with the foreclosure and holding of other real estate

In addition, certain costs associated with the recovery from the cyber security incident, including insurance deductibles, were

recorded during the second quarter of 2022.

efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest

income, improved to 72.4% for second quarter of 2022 from 74.5% for the second quarter of 2021.

We continue to assess our operational

procedures and structure to improve efficiencies and contain costs.

A review of deposit operations is scheduled for the third quarter

April 29, 2022, the Bank notified its principal regulators that it will be closing branch offices in Big Stone Gap and Chilhowie, Virginia,

on August 12, 2022.

Accounts serviced at these offices will be transferred to nearby branches, and employees will be reassigned to other

positions or offices, as available.

Interactive teller machines at these locations will remain in service for the foreseeable future.

This restructuring of the branch network should improve the efficiency of services to the customers of these communities.

tax expense for the second quarter of 2022 totaled $536 thousand, an increase of $80 thousand, or 17.5% from the $456 thousand recorded

during the same period in 2021.

The effective tax rate for the three months ended June 30, 2022, was 21.8%, compared to 21.5% for the

same period in 2021.

The year-over-year, quarterly increase approximates the percentage increase of pre-tax earnings.

of the Six Months ended June 30, 2022 and 2021

the cybersecurity incident impacted branch operations and limited our abilities for loan and financial services production, the results

for the six months ended June 30, 2022 are favorable to the six-month period ended June 30, 2021.

highlights include:

interest income improved to $13.5 million for the first half of 2022, an improvement of $401

thousand, or 3.1%, compared to the first half of 2021;

interest margin was 3.52% for the first half of 2022, a decrease of 3 bps compared to 3.55%

for the first half of 2021;

for loans losses was $175 thousand for the first half of 2022, a reduction of $197 thousand,

or 53.0%, compared to the first half of 2021;

· Noninterest

income was $4.7 million, an increase of $210 thousand, or 4.7%, compared to the first half

and employee benefits expense was $6.7 million, an increase of $479 thousand, or 7.8%, compared

to the first half of 2021;

noninterest expense was $13.1 million, a decrease of $24 thousand, or 0.18%, compared to

the first half of 2021.

during the six months ended June 30, 2022, compared to the same period in 2021, net income improved 18.4% to $3.8 million from $3.2 million.

Although interest income was virtually unchanged, increasing $50 thousand, reduced interest expense of $351 thousand contributed to an

improvement of $401 thousand in net interest income.

The following table presents the rates earned on earning assets and paid on interest-bearing

liabilities for the periods indicated.

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

in thousands)

in Interest Income/ Expense

Months Ended June 30,

loans held for sale

bearing deposits in other banks

1 unchanged sentence

earning assets

for loans losses

AND SHAREHOLDERS’

Interest-bearing

3 unchanged sentences

interest-bearing liabilities

in Net Interest Income

on our current assessment of the loan portfolio, a lower provision of $100 thousand was made in the first quarter of 2022, after considering

the continued improvement in loan quality, exhibited by reductions in past due and nonaccrual loans and classified assets.

For a discussion

of the factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for Loan Losses, in Item

1 of this Form 10-Q.

income for the first quarter of 2022 was $2.4 million, an increase of $240 thousand, or 11.3%, when compared to the same period in 2021.

As discussed previously, increased revenues from service charges and card servicing fees, which increased $175 thousand and $52 thousand,

respectively, were the primary drivers of this improvement.

Revenue from financial services activities increased $12 thousand, or 5.3%,

while merchant services income increased $11 thousand or 37.6%, as we continue to develop, or expand existing, customer relationships

in these service sectors.

non-interest expense increased $90 thousand, year-over-year for the three month period ending March 31, 2022.

As previously discussed,

increases to salaries and benefits expenses of $196 thousand were largely offset by reduced occupancy expenses which decreased $170 thousand.

efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest

income, improved to 71.6% for the first quarter of 2022 from 74.3% for the first quarter of 2022, as we continue to implement changes

to increase income and further control operating expenses.

April 29, 2022, the Bank notified its principal regulators that it will be closing branch offices in Big Stone Gap and Chilhowie, Virginia,

on August 12, 2022.

Accounts serviced at these offices will be transferred to nearby branches, and employees will be reassigned to other

positions or offices, as available.

Interactive teller machines at these locations will remain in service for the foreseeable future.

This restructuring of the branch network should improve the efficiency of service to the customers of these communities.

tax expense for the first quarter of 2022 totaled $530 thousand, an increase of $108 thousand, or 25.6% from the $422 thousand recorded

during the same period in 2021.

The year-over-year increase approximates the increase of pre-tax earnings.

assets increased $18.9 million, or 2.4%, to $813.5 million at March 31, 2022 from $794.6 million at December 31, 2021.

Non-interest-bearing

deposit liabilities and cost of funds

Shareholders’

Liabilities and Shareholders’

Interest Income

Interest Margin

Interest Spread

(1) Nonaccrual

loans and loans held for sale have been included in average loan balances.

exempt income is not significant and has been treated as fully taxable.

interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing

The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed

to rates and volume for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021.

Volume and Rate Analysis

Increase (decrease)

Six Months Ended June 30, 2022 versus 2021

(Dollars in thousands)

Volume Effect

Change in Interest Income/ Expense

Interest Income:

Mortgage loans held for sale

Federal funds sold

Interest bearing deposits in other banks

Taxable investment securities

Total Earning Assets

Interest Expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Short-term borrowings

Trust preferred securities

Total Interest-bearing Liabilities

Change in Net Interest Income

the first six months of 2022 compared to the first half of 2021, net interest income increased $401 thousand primarily due to a reduction

in interest expense on deposits of $424 thousand, partially offset by increases to the cost of borrowed funds of $73 thousand.

in expense for borrowed funds was due to $95 million of FHLB advances taken during the second quarter, combined with rate increases on

trust preferred securities.

The reduction in interest expense on deposits was driven mainly by a reduction in the average cost of retail

time deposits, which declined 27 basis points, to 0.76% from 1.03%, plus a decrease in average balances of $34.9 million.

modest increase in interest income of $50 thousand due to increases to the investment portfolio and increased rates paid on deposits

with other banks.

These improvements offset reductions in loan interest and fees due principally to the reduction in fees from PPP loan

repayments as these fees fell $535 thousand during the comparative six-month periods.

As a result, the net interest margin for the first

half of 2022 was 3.52%, a reduction of 3 bps compared to 3.55% for the first half of 2021.

the first six months of 2022, the FOMC increased the discount rate three times for a total of 150 bps.

This increased interest rate environment

has improved returns on certain assets that immediately adjust as these changes are made, such as interest-bearing deposits in other

banks, credit cards, home equity lines of credit and certain commercial and commercial real estate loans.

It is anticipated that yields

on these assets will improve moving forward.

Conversely, it is expected that there will be a need to adjust, upward, rates paid on deposit

accounts, which will increase our overall cost of funds.

Additionally, in response to the cybersecurity incident, in early August 2022,

we began offering a customer appreciation time deposit product to recognize the patience and loyalty of our customers.

This product pays

a higher rate than is currently offered on similar non-promotional products and is expected to contribute to an increased cost of funds

going forward.

on our current assessment of the loan portfolio, $175 thousand was provided to the allowance for loan losses during the first six months

of 2022 compared to $372 thousand provided during the same period in 2021.

For more information on the factors affecting the allowance

for loan losses, including provision expense, refer to Note 7, Allowance for loan Losses, in Item 1 of this Form 10-Q.

Depending on changes

to economic conditions and the impact those changes may have on individual borrowers, it is possible that additional provisions may be

needed beyond those necessary to support organic growth of the loan portfolio.

non-interest income for the first half of 2022 compared to the same period in 2021 grew by $210 thousand to $4.7 million.

This improvement

was driven by increases in service charges and fees which increased $231 thousand or 13.8%, despite the negative impact during the second

quarter resulting from foregoing certain charges during the cybersecurity incident, as previously discussed.

Card processing and interchange

income showed a slight increase of $7 thousand, as transaction volume has plateaued, as consumers respond to the cessation of stimulus

payments and the effects of historic inflation.

Financial services revenues of $483 thousand represent a decrease of $18 thousand or

As previously discussed, our ability to provide certain services was hampered during the latter portion of June 2022, and it is

uncertain whether those lost opportunities can be recovered.

the six months ended June 30, 2022, compared to the same period in 2021, total non-interest expense increased $24 thousand, to $13.1

The modest increase was due to reductions to occupancy, data processing and other noninterest expenses of $337 thousand, $71

thousand and $47 thousand, respectively which offset increases to salaries and benefits of $479 thousand.

As discussed previously, salaries

and benefits increased year-over-year due to the impact of overall salary adjustments implemented during the fourth quarter of 2021 and

accruals for performance related payments in 2022 that had not yet been fully initiated in 2021.

Also, as discussed, occupancy costs

decreased due to the reduction of depreciation and property tax costs from the reduction and disposition of branches and equipment, which

decreased year-over-year $208 thousand and $28 thousand, respectively.

It is anticipated that the branch closings scheduled for August

12, 2022 will serve to further reduce occupancy and related costs.

Data processing and telecommunication costs decreased due to negotiated

reductions for the cost, or elimination, of certain services, as local phone and data line costs decreased $30 thousand and data processing

costs decreased $37 thousand for the comparative year-to-date periods.

Other noninterest expenses benefited from reduced costs associated

with loan collection efforts which decreased $50 thousand for the first six months of 2022 as compared to the same period in 2021.

efficiency ratio, a non-GAAP measure, improved to 72.0% for the first half of 2022 from 74.4% for the first half of 2021.

sheet growth in 2022, specifically activity during the second quarter, was impacted by efforts to address any possible adverse impact

from the cybersecurity incident.

As a preventative measure against a possible surge in deposit withdrawal activity, we obtained FHLB

advances totaling $95 million, transferred additional funds to our account at the Federal Reserve Bank and temporarily increased cash

on hand at various branch locations.

As we moved from the immediate aftermath of the incident, we repaid $35 million of FHLB advances

prior to June 30, 2022.

assets increased $52.4 million, or 6.6%, to $847.0 million at June 30, 2022 from $794.6 million at December 31, 2021.

This growth was

primarily driven by the $23.5 million increase in deposits, which has increased

interest-bearing deposits in other banks and has helped fund loan growth which increased $16.0 million and $1.4 million, respectively.

investments decreased $538 thousand, or 0.5%, to $106.8 million at March 31, 2022 due primarily to an increase of $6.9 million in

net unrealized losses and $4.2 million of repayments and maturities, which were largely offset by purchases of $10.7 million.

expected that purchases will continue as we deploy excess liquidity, and use the investment portfolio to manage the balance sheet

and increase the return on earning assets.

were $100 thousand of loans held for sale at March 31, 2022 versus $0 at December 31, 2021.

These loans are originated for sale into

the secondary market on a best efforts basis.

receivable increased $1.4 million, or 0.2%, due

mainly to increases in construction and land development loans, commercial loans secured by real estate and multi-family loans, which

grew $6.5 million, $1.2 million and $1.4 million, respectively.

Growth in these components of the portfolio offset a reduction in commercial

loans of $6.7 million.

The decrease in commercial loans was largely the result of the repayment and forgiveness of PPP loans which declined

$3.6 million during the first three months of 2022.

At March 31, 2022, PPP loans totaled $2.8 million.

deposits increased $23.5 million, or 3.3%, to $731.0 million at March 31, 2022 from $707.5 million at December 31, 2021, due to increases

in noninterest-bearing demand deposits of $18.0 million, or 7.2%, and interest-bearing deposits of $5.5 million, or 1.2%.

The increase in deposits was driven mainly by increases in interest-bearing

NOW and demand deposits and other interest-bearing transaction accounts which increased $5.5 million and $5.6 million, respectively,

offset by a decrease in time deposits of $5.7 million.

The increase in deposits is something experienced across the industry, due to

the continuing low interest rate environment, combined with the lingering impact of various stimulus and liquidity measures implemented

by the government during the peak of the pandemic.

While it is likely that recent and expected increases to the federal funds rate will,

at some point, impact liquidity, we continue to maintain core deposits through attractive consumer and commercial deposit products and

strong ties with our customer base and communities.

preferred securities of $16.5 million at March 31, 2022 were unchanged compared to December 31, 2021.

equity at March 31, 2022 was $58.9 million, a decrease of $4.7 million, or 7.4%, compared to $63.6 million at December 31, 2021.

previously and in the Capital Resources section the primary driver of the decline was the $5.4 million net increase in the other accumulated

comprehensive loss, related to the unrealized loss on available for sale investment securities, along with a cash dividend payment.

increase in other accumulated comprehensive loss is related to the recent increase in interest rates and is not related to any deterioration

in the credit quality of any investment securities held.

Non-performing

assets decreased $867 thousand, or 20.2%, during the first three months of 2022, driven by a decrease in nonaccruing loan balances of

$301 thousand, a decrease in other real estate owned (OREO) of $566 thousand.

As a result, the ratio of nonperforming assets to total

assets decreased to 0.42% at March 31, 2022 compared to 0.54% at December 31, 2021.

primarily driven by the FHLB advances as total deposits decreased $449 thousand, as noninterest-bearing deposits increased $8.7 million

while interest-bearing deposits decreased $9.2 million.

The year-to-date deposit activity is due to a combination of factors including

customer reaction to the cybersecurity incident, time deposit customers seeking higher interest rates and actions taken by customers

at the two branch locations scheduled for closure in August 2022.

The FHLB advance funds were transferred to interest bearing deposits

with other banks which increased $60.0 million year-to-date.

investments decreased $6.7 million, or 6.3%, to $100.6 million at June 30, 2022 due primarily to an increase of $12.8 million in net

unrealized losses and $8.6 million of repayments and maturities, which more than offset purchases of $14.9 million.

Purchases are expected

to continue as we replace security repayments, deploy excess liquidity, and use the investment portfolio in the overall management of

the interest rate risk and liquidity of the balance sheet.

were $62 thousand of loans held for sale at June 30, 2022 versus $0 at December 31, 2021.

These loans are originated for sale into the

secondary market on a best efforts basis.

receivable decreased $8.1 million, or 1.4% during the first six months of 2022, due to repayments of commercial real estate and commercial

Commercial real estate loans decreased $9.6 million or 4.6%, to $196.6 million at June 30, 2022, due largely to several borrowers

liquidating properties held as collateral.

These repayments were offset by increases in construction and development loans, and loans

secured by multi-family real estate which increased $5.4 million or 16.6% and $4.6 million or 13.8%, respectively.

Commercial loans decreased

$7.6 million or 14.0% to $46.7 million at June 30, 2022, due largely to repayments and forgiveness of PPP loans which declined $5.6 million

during the first six months of 2022.

At June 30, 2022, PPP loans totaled $845 thousand.

Total deposits decreased $449 thousand or 0.1% to $707.1 million

at June 30, 2022 from $707.5 million at December 31, 2021.

While the year-to-date change is modest, during the second quarter of 2022,

deposits decreased $23.9 million from $731.0 million at March 31, 2022.

While we have experienced deposit runoff in response to the cybersecurity

incident, other factors have also influenced customers’

activities, including interest rates available for time deposits and the

previously announced closure of two branch offices scheduled for August 2022.

Additionally, some of this deposit activity is due to normal

churn of deposit accounts and depositors.

The year-to-date decrease in deposits is primarily due to time deposit runoff as total time

deposits decreased $17.1 million or 8.6%.

The decrease in time deposits was offset by increases in non-interest bearing and interest-bearing

transaction accounts which increased $8.7 million or 3.5% and $7.9 million or 3.1% during the six months ended June 30, 2022.

factor influencing deposit retention is the dissipation of liquidity experienced by depositors, as stimulus and other economic support

funds distributed during the height of the COVID-19 pandemic are spent or otherwise distributed.

While it is likely that recent and expected

increases to the federal funds rate will, at some point, impact liquidity, we continue to maintain core deposits through attractive consumer

and commercial deposit products and strong ties with our customer base and communities.

June 30, 2022, FHLB advances totaling $60 million were outstanding.

As previously discussed, these advances were taken in June 2022,

as a precautionary measure related to the cybersecurity incident.

The advances have schedule maturities of $20 million in September 2022,

and $40 million in December 2022.

On August 1, 2022, $15 million of the $40 million advance was repaid.

Trust preferred securities of

$16.5 million at June 30, 2022 were unchanged compared to December 31, 2021.

equity at June 30, 2022 was $56.2 million, a decrease of $7.5 million, or 11.7%, compared to $63.6 million at December 31, 2021.

previously and in the Capital Resources section below, the primary driver of the decline was the $10.1 million net increase in the other

accumulated comprehensive loss, related to the unrealized loss on available for sale investment securities, along with a cash dividend

The increase in other accumulated comprehensive loss is related to the recent increase in interest rates and is not related

to any deterioration in the credit quality of any investment securities held.

Nonperforming

assets include nonaccrual loans, OREO and loans past due more than 90 days which are still accruing interest.

Our policy is to place

loans on nonaccruing status once they reach 90 days past due.

The makeup of the nonaccruing loans is primarily those secured by residential

mortgages, and commercial real estate.

is primarily made up of commercial properties, farmland and land of which $475 thousand consists of former branch office sites that were

transferred to OREO in 2021.

Those two remaining branch sites at March 31, 2022, were sold in May 2022, bringing our OREO balance down

to $321 thousand.

We continue extensive and aggressive measures to work through problem credits and liquidate foreclosed properties in

an effort to reduce nonperforming assets.

We remain mindful of the impact on earnings and capital as we work to achieve our goal to reduce

nonperforming assets.

However, we may recognize some losses and reductions in the allowance for loan loss as we expedite the resolution

of these problem assets.

rated substandard or below totaled $2.6 million at March 31, 2022, a decrease of $261 thousand from $2.9 million at December 31, 2021.

Total past due loans decreased to $2.7 million at March 31, 2022 from $3.4 million at

December 31, 2021.

Please refer to Note 6 Loans in Section 1 of this Form 10-Q for additional details related to loan ratings and past

allowance for loan losses at March 31, 2022 was $6.8 million, or 1.14% of total loans as compared to $6.7 million, or 1.13%, of total

loans at December 31, 2021.

Impaired loans totaled $2.8 million with an estimated related specific allowance of $199 thousand for potential

losses at March 31, 2022 as compared to $2.8 million of impaired loans with an estimated related allowance of $166 thousand at the end

A provision of $100 thousand was recorded for the first quarter of 2022 compared to $186 thousand for the first three months

In the first three months of 2022, net charge-offs were $76 thousand, or 0.05% of average loans, annualized, as compared to

$84 thousand, or 0.06%, of average loans for the same period of 2021.

The allowance for loan losses is being maintained at a level that

management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the

losses are actually ever realized.

We continue to adjust the allowance for loan loss model to best reflect the risks in the portfolio

and the changes made in our internal policies and procedures;

assets include nonaccrual loans, other real estate owned (OREO) and loans past due more than 90 days which are still accruing interest.

Our policy is to place loans on nonaccrual status once they reach 90 days past due.

The makeup of the nonaccrual loans is primarily those

secured by residential mortgages and commercial real estate.

OREO is primarily made up of commercial and single-family residential properties.

Nonperforming

assets decreased $347 thousand, or 8.1%, during the first six months of 2022, driven by a decrease in OREO of $1.0 million, which offset

an increase in nonaccrual loans of $693 thousand.

The increase in nonaccrual loans is attributed to a single credit for a commercial

construction loan.

This account has been assessed as part of our determination of the adequacy of the allowance for loan losses, and

collection efforts are ongoing.

No loans 90 days or more past due are accruing interest.

As a result, the ratio of nonperforming assets

to total assets decreased to 0.50% at June 30, 2022 compared to 0.54% at December 31, 2021.

detailed information for nonaccrual loans and other real estate owned as of June 30, 2022, and December 31, 2021, refer to Note 6 Loans

and Note 9 Other Real Estate Owned in Item 1 of this Form 10-Q.

June 30, 2022, OREO is primarily made up of farmland and land acquired through foreclosure.

During the second quarter of 2022, two former

branch sites that had been transferred to OREO in 2021, were sold bringing our OREO balance down to $321 thousand.

We continue extensive

and aggressive measures to work through problem credits and liquidate foreclosed properties in an effort to reduce nonperforming assets.

We remain mindful of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets.

However, we may

recognize some losses and reductions in the allowance for loan loss as we expedite the resolution of these problem assets.

rated substandard or below totaled $3.6 million at June 30, 2022, an increase of $733 thousand from $2.9 million at December 31, 2021.

Total past due loans increased to $10.0 million at June 30, 2022 from $3.4 million at December 31, 2021.

As previously discussed this

increase is, in part, due to delays in providing loan account notices during the disruption to our computer systems.

allowance for loan losses at June 30, 2022 was $6.8 million or 1.16% of total loans as compared to $6.7 million, or 1.13% of total loans

at December 31, 2021.

Impaired loans totaled $3.2 million with an estimated related specific allowance of $381 thousand at June 30, 2022,

as compared to $2.8 million of impaired loans with an estimated related allowance of $166 thousand at the end of 2021.

A provision of

$175 thousand was recorded for the first six months of 2022 compared to $372 thousand during the first six months of 2021.

the first six months of 2022, net charge-offs totaled $94 thousand, or 0.03% of average loans, annualized, as compared to $867 thousand,

or 0.29%, of average loans for the same period in 2021.

The allowance for loan losses is maintained at a level that management deems

appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether or not the losses are actually

ever realized.

Through our quarterly assessment, we continue to adjust the allowance for loan loss model to best reflect the risks in

the portfolio and the improvements made in our internal policies and procedures;

however, future provisions may be deemed necessary.

Due to uncertainties

related to the ongoing pandemic and the resulting economic uncertainty, internal and external qualitative factors that were revised early

in the pandemic remain largely in place.

These revisions included reviewing our internal scoring related to loan modifications and extensions,

and external factors, specifically, unemployment and other economic factors.

have commenced the process of preparing to implement the Current Expected Credit Loss (CECL) model to replace our

legacy loan loss model.

We are on schedule to be testing and running concurrent quarterly calculations of both the legacy and CECL

models by the end of the second quarter 2022.

Selected Credit Ratios

(Dollars in thousands)

Allowance for loan losses

Allowance for loan losses to total loans

Nonaccrual loans

Nonaccrual loans to total loans

Ratio of allowance for loan losses to nonaccrual loans

Charge-offs net of recoveries

Average loans

Net charge-offs to average loans

During the first six months of 2022, we adjusted our external qualitative factors to reflect positive employment and home sales statistics,

along with adjusting for the impact of historically high inflation.

Those changes along with the assessment of the inherent and specific

risks associated with the loan portfolio resulted in a provision to the allowance of $175 thousand for the first six months 2022.

following table summarizes components of the allowance for loan losses and related loans as of June 30, 2022 and December 31, 2021:

Credit Ratios

in thousands)

for loan losses

for loan losses to total loans

loans to total loans

of allowance for loan losses to nonaccrual loans

net of recoveries

charge-offs to average loans

are in the process of preparing to implement the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model.

we had estimated we would be running concurrent models by June 30, 2022, due to the cybersecurity incident, we delayed the start of parallel

We have recovered and the new model has been constructed, initial assumptions have been input and historical loan and loss activity

has been input and validated.

Starting in August 2022, the Company will run the new methodology parallel to the current allowance methodology

for several periods before full implementation, beginning with the June 30, 2022 data.

Tax Asset and Income Taxes

to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred

tax asset on the unrealized loss on securities available for sale, of $2.6 million and $1.7 million existed at March 31, 2022 and December

tax asset on the unrealized loss on securities available for sale, of $813 thousand and $1.5 million existed at June 30, 2022 and December

31, 2021, respectively.

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shareholders’

equity at March 31, 2022 was $58.9 million compared to $63.6 million at December 31, 2021, a decrease of $4.7 million,

As previously discussed, this decline was driven by the $5.4 million net increase in the accumulated comprehensive loss related

to the unrealized loss on investment securities available- for-sale.

equity at June 30, 2022 was $56.2 million compared to $63.6 million at December 31, 2021, a decrease of $7.5 million,

As previously discussed, this decline was driven by the $10.1 million net increase in the accumulated other comprehensive loss

related to the unrealized loss on investment securities available-for-sale.

Excluding the impact of the unrealized loss, equity increased

thousand, due to net income of $1.9 million less the cash dividend payment of $1.2 million.

$2.6 million, due to net income of $3.8 million less the cash dividend payment of $1.2 million and $38 thousand used for share repurchases.

Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s

3 unchanged sentences

Item 1 of this Form 10-Q.

March 31, 2022, the Bank remains well capitalized under the regulatory framework for prompt corrective action.

June 30, 2022, the Bank remains well capitalized under the regulatory framework for prompt corrective action.

The ratios mentioned above

for the Bank comply with the Federal Reserve rules to align with the Basel III Capital requirements.

value per common share was $2.46 at March 31, 2022, and $2.66 at December 31, 2021.

value per common share was $2.35 at June 30, 2022, and $2.66 at December 31, 2021.

Excluding the impact of the accumulated other comprehensive

loss, book value per share was $2.72 and $2.69 at March 31, 2022 and December 31, 2021, respectively.

loss, book value per share was $2.80 at June 30, 2022, and $2.69 and December 31, 2021, respectively.

Other key performance indicators

are as follows:

months ended March 31,

months ended June 30,

on average assets 1

4 unchanged sentences

capital levels will be sufficient.

the first quarter of 2022, the Company paid its first cash dividend of $0.05 to shareholders.

Earnings will continue to be retained to

provide capital to support the planned growth and operations of the Company and to continue to pay any future dividends to shareholders.

the first quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders.

Earnings will continue

to be retained to provide capital to support the planned growth and operations of the Company and to continue to pay any future dividends

to shareholders.

April 28, 2022 the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding

3 unchanged sentences

common stock, general market and economic conditions, and applicable legal and regulatory requirements.

There is no assurance that the

Company will purchase any shares under this program

closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available

for sale investments.

Collectively, those balances were $184.7 million at March 31, 2022, an increase of $25.4 million from $159.3 million

at December 31, 2021.

A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs

March 31, 2022, all of our investment securities were classified as available-for-sale.

During the second quarter of

2022, 16,510 shares were purchased at an average price of $2.28 per share;

and, during the third quarter 2022, through August 10, 2022

an additional 5,720 shares have been purchased.

There is no assurance that the Company will purchase any additional shares under this

discussed previously, in response to the cybersecurity incident we took efforts to increase on balance sheet liquidity through a series

of FHLB advances transferred to our account at Federal Reserve Bank and pledging additional investment securities as collateral against

unused funding sources for emergency needs.

The deposit runoff since the cybersecurity incident has not been significant.

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

Collectively, those balances were $184.7 million at June 30, 2022, an increase of $25.4 million from $159.3 million at December

A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2022.

June 30, 2022, all of our investment securities were classified as available-for-sale.

These investments provide a source of liquidity

3 unchanged sentences

sold and overnight deposits with the Federal Reserve Bank.

loan to deposit ratio was 81.4% at March 31, 2022 and 83.9% at December 31, 2021.

We anticipate this ratio to remain at or below 90%

for the foreseeable future.

third-party sources of liquidity at March 31, 2022 include the following:

loan to deposit ratio was 82.8% at June 30, 2022 and 83.9% at December 31, 2021.

We anticipate this ratio to remain at or below 90% for

the foreseeable future.

we have experienced some deposit runoff in response to the cybersecurity incident, other factors have also influenced customers’

activities, including interest rates available for time deposits and the previously announced closure of two branch offices scheduled

for August 2022.

Additionally, some of this deposit activity is due to normal churn of deposit accounts and depositors.

third-party sources of liquidity at June 30, 2022 include the following:

a line of credit with the FHLB, access to brokered certificates

2 unchanged sentences

federal funds through credit facilities extended by correspondent banks.

Bank’s line of credit with the FHLB is $198.6 million, with unused availability at March 31, 2022 of $186.6 million.

No FHLB advances

were outstanding at March 31, 2022, but the credit line also secures letters of credit totaling $12.0 million.

The available line and

the outstanding letters of credit are secured by a blanket lien on our residential real estate loans which amounted to $132.0 million

at March 31, 2022.

Bank’s line of credit with the FHLB is $203.3 million, with unused availability at June 30, 2022 of $136.3 million.

FHLB advances

totaling $60 million were outstanding at June 30, 2022, but the credit line also secures a letter of credit totaling $7.0 million.

available line and the outstanding letters of credit are secured by a blanket lien on our residential real estate loans which amounted

to $129.2 million at June 30, 2022.

Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (CDARS).

At March 31, 2022, we held

no brokered deposits and $4.4 million in CDARS reciprocal time deposits.

At June 30, 2022, we held

no brokered deposits and $2.8 million in CDARS reciprocal time deposits and $10.6 million in ICS reciprocal interest-bearing demand deposits.

liquidity is available through the Federal Reserve Bank discount window for overnight funding needs.

1 unchanged sentence

investment securities and loans at our discretion;

however, we do not anticipate using this funding source except as a last resort.

however, while we do not anticipate using this as a primary funding source, securities

with an estimated market value of $25.6 million were pledged at June 30, 2022.

the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources

2 unchanged sentences

as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond

bank holding company has approximately $748 thousand in cash on deposit at the Bank at March 31, 2022.

bank holding company has approximately $523 thousand in cash on deposit at the Bank at June 30, 2022.

The holding company receives periodic

dividend payments from the Bank which are used to pay operating expenses, trust preferred interest payments, and fund dividend payments

to shareholders.

dividend payments from the Bank which are used to pay operating expenses, to pay trust preferred interest payments, and to fund dividend

payments to shareholders and repurchase shares.

The Company makes quarterly interest payments on the trust preferred securities.

discussed in the Capital Resources section, on April 28, 2022, the board of directors of the Company authorized the repurchase of up

to 500,000 shares of the Company’s outstanding common stock through March 31, 2023.

Payments for any repurchases will be distributed

from available funds, or from dividends payments from the Bank.

discussed in the Capital Resources section, the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding

common stock through March 31, 2023.

Payments for any repurchases will be distributed from available funds, or from dividends payments

from the Bank, and are not expected to have a material impact on available liquidity.

Balance Sheet Items and Contractual Obligations

have been no material changes during the quarter ended March 31, 2022 to the off-balance sheet items and the contractual obligations

have been no material changes during the six months ended June 30, 2022, to the off-balance sheet items and the contractual obligations

disclosed in our 2021 Form 10-K.

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements