NEW PEOPLES BANKSHARES INC 10-Q/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number: 000-33411 NEW PEOPLES BANKSHARES, INC. (Exact name of registrant as specified in its charter) Virginia (State or other jurisdiction of incorporation or organization) 31-1804543 (I.R.S. Employer Identification No.) 67 Commerce Drive , Honaker , Virginia (Address of principal executive offices) 24260 (Zip Code) ( 276 ) 873-7000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ( (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company [X] Emerging growth company [ ] If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of the registrant’s common stock was 23,899,856 as of August 10, 2022. NEW PEOPLES BANKSHARES, INC. INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2022 (Unaudited) and December 31, 2021 3 Consolidated Statements of Income – Three and six months ended June 30, 2022 and 2021 (Unaudited) 4 Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended June 30, 2022 and 2021 (Unaudited) 5 Consolidated Statements of Changes in Stockholders’ Equity – Three and six months ended June 30, 2022 and 2021 (Unaudited) 6 Consolidated Statements of Cash Flows – Six months ended June 30, 2022 and 2021 (Unaudited) 7 Notes to Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures about Market Risk 37 Item 4. Controls and Procedures 37 PART II OTHER INFORMATION Item 1. Legal Proceedings 38 Item 1A. Risk Factors 38 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38 Item 3. Defaults upon Senior Securities 38 Item 4. Mine Safety Disclosures 38 Item 5. Other Information 39 Item 6. Exhibits 39 SIGNATURES 40 Part I Financial Information Item 1 Financial Statements NEW PEOPLES BANKSHARES, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2022 AND DECEMBER 31, 2021 (IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA) (UNAUDITED) June 30, December 31, 2022 2021 ASSETS Cash and due from banks 17,886 $ 14,952 Interest-bearing deposits with banks 105,778 45,766 Federal funds sold 387 228 Total Cash and Cash Equivalents 124,051 60,946 Investment securities available-for-sale 100,616 107,358 Loans held for sale 62 — Loans receivable 585,631 593,744 Allowance for loan losses ( 6,816 ) ( 6,735 ) Net loans 578,815 587,009 Bank premises and equipment, net 20,211 20,735 Other real estate owned 321 1,361 Accrued interest receivable 2,239 2,112 Deferred taxes, net 3,708 1,673 Bank owned life insurance 4,697 4,685 Right-of-use assets – operating leases 3,899 4,062 Other assets 8,409 4,706 Total Assets 847,028 $ 794,647 LIABILITIES Deposits: Noninterest bearing 259,991 $ 251,257 Interest-bearing 447,073 456,256 Total Deposits 707,064 707,513 Borrowed funds 76,496 16,496 Lease liabilities – operating leases 3,899 4,062 Accrued interest payable 333 272 Accrued expenses and other liabilities 3,072 2,673 Total Liabilities 790,864 731,016 SHAREHOLDERS’ EQUITY Common stock - $ 2.00 par value; 50,000,000 shares authorized; 23,905,576 and 23,922,086 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively 47,811 47,844 Additional paid-in-capital 14,565 14,570 Retained earnings 4,679 2,031 Accumulated other comprehensive loss ( 10,891 ) ( 814 ) Total Shareholders’ Equity 56,164 63,631 Total Liabilities and Shareholders’ Equity 847,028 $ 794,647 The accompanying notes are an integral part of these consolidated financial statements. 3 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) For the Three Months Ended For the Six Months Ended June 30, June 30, INTEREST AND DIVIDEND INCOME 2022 2021 2022 2021 Loans including fees $ 6,792 6,960 $ 13,466 $ 13,881 Federal funds sold 1 — 1 — Interest-earning deposits with banks 158 22 179 41 Investments 482 334 917 581 Dividends on equity securities (restricted) 27 32 54 64 Total Interest and Dividend Income 7,460 7,348 14,617 14,567 INTEREST EXPENSE Deposits 404 575 834 1,258 Borrowed funds 212 122 318 245 Total Interest Expense 616 697 1,152 1,503 NET INTEREST INCOME 6,844 6,651 13,465 13,064 PROVISION FOR LOAN LOSSES 75 186 175 372 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,769 6,465 13,290 12,692 NONINTEREST INCOME Service charges and fees 897 841 1,904 1,673 Card processing and interchange 1,027 1,072 1,943 1,936 Insurance and investment fees 242 275 483 501 Other noninterest income 182 190 387 397 Total Noninterest Income 2,348 2,378 4,717 4,507 NONINTEREST EXPENSES Salaries and employee benefits 3,382 3,099 6,657 6,178 Occupancy and equipment expense 1,017 1,184 2,023 2,360 Data processing and telecommunications 601 653 1,155 1,226 Other operating expenses 1,658 1,788 3,262 3,309 Total Noninterest Expenses 6,658 6,724 13,097 13,073 INCOME BEFORE INCOME TAXES 2,459 2,119 4,910 4,126 INCOME TAX EXPENSE 536 456 1,066 878 NET INCOME $ 1,923 1,663 $ 3,844 $ 3,248 Earnings per share Basic and diluted $ 0.08 0.07 $ 0.16 $ 0.14 Average Weighted Shares of Common Stock Basic and diluted 23,915,869 23,922,086 23,918,960 23,922,086 The accompanying notes are an integral part of these consolidated financial statements. 4 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (IN THOUSANDS) (UNAUDITED) For the three months ended June 30, For the six months ended June 30, 2022 2021 2022 2021 NET INCOME $ 1,923 $ 1,663 $ 3,844 $ 3,248 Other comprehensive (loss) income: Investment securities activity Unrealized losses arising during the period ( 5,865 ) ( 58 ) ( 12,756 ) ( 584 ) Other comprehensive loss on investment securities ( 5,865 ) ( 58 ) ( 12,756 ) ( 584 ) Related tax benefit 1,232 12 2,679 123 TOTAL OTHER COMPREHENSIVE LOSS ( 4,633 ) ( 46 ) ( 10,077 ) ( 461 ) TOTAL COMPREHENSIVE (LOSS) INCOME $ ( 2,710 ) $ 1,617 $ ( 6,233 ) $ 2,787 The accompanying notes are an integral part of these consolidated financial statements. 5 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (IN THOUSANDS INCLUDING SHARE DATA) (UNAUDITED) Shares of Common Stock Common Stock Additional Paid-in- Capital Retained Earnings (Deficit) Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance, December 31, 2020 23,922 $ 47,844 $ 14,570 $ ( 4,979 ) $ 742 $ 58,177 Net income — — — 1,585 — 1,585 Other comprehensive loss, net of tax — — — — ( 415 ) ( 415 ) Balance, March 31, 2021 23,922 $ 47,844 $ 14,570 $ ( 3,394 ) $ 327 $ 59,347 Net income — — — 1,663 — 1,663 Other comprehensive loss, net of tax — — — — ( 46 ) ( 46 ) Balance, June 30, 2021 23,922 $ 47,844 $ 14,570 $ ( 1,731 ) $ 281 $ 60,964 Balance, December 31, 2021 23,922 $ 47,844 $ 14,570 $ 2,031 $ ( 814 ) $ 63,631 Net income — — — 1,921 — 1,921 Other comprehensive loss, net of tax — — — — ( 5,444 ) ( 5,444 ) Cash dividend declared ($0.05 per share) — — — ( 1,196 ) — ( 1,196 ) Balance, March 31, 2022 23,922 $ 47,844 $ 14,570 $ 2,756 $ ( 6,258 ) $ 58,912 Net income — — — 1,923 — 1,923 Other comprehensive loss, net of tax — — — — ( 4,633 ) ( 4,633 ) Repurchase of common stock ( 16 ) ( 33 ) ( 5 ) — — ( 38 ) Balance, June 30, 2022 23,906 $ 47,811 $ 14,565 $ 4,679 $ ( 10,891 ) $ 56,164 The accompanying notes are an integral part of these consolidated financial statements. 6 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021 (IN THOUSANDS) (UNAUDITED) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,844 $ 3,248 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 916 1,109 Provision for loan losses 175 372 Income on bank owned life insurance ( 12 ) ( 20 ) Net gain on sale of securities available-for-sale — — Gain on sale of mortgage loans ( 20 ) ( 80 ) Loss on sale or disposal of premises and equipment — 40 (Gain) loss on sale of other real estate owned ( 25 ) 16 Loans originated for sale ( 1,134 ) ( 4,856 ) Proceeds from sales of loans originated for sale 1,092 5,325 Adjustment of carrying value of other real estate owned 137 28 Adjustment of carrying value of repossessed assets — — Net amortization/accretion of bond premiums/discounts 276 199 Deferred tax expense 644 876 Net change in: Accrued interest receivable ( 127 ) 133 Other assets ( 1,426 ) ( 1,835 ) Accrued interest payable 61 ( 127 ) Accrued expenses and other liabilities 409 511 Net Cash Provided by Operating Activities 4,810 4,939 CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in loans 8,730 ( 17,728 ) Purchase of securities available-for-sale ( 14,861 ) ( 55,853 ) Proceeds from repayments and maturities of securities available-for-sale 8,571 7,445 Net (purchase) redemption of equity securities (restricted) ( 2,277 ) 585 Payments for the purchase of premises and equipment ( 392 ) ( 1,921 ) Proceeds from sales of other real estate owned 207 1,485 Net Cash Used in Investing Activities ( 22 ) ( 65,987 ) CASH FLOWS FROM FINANCING ACTIVITIES Net change in short term borrowings 60,000 ( 5,000 ) Net change in noninterest bearing deposits 8,734 31,542 Net change in interest bearing deposits ( 9,183 ) 11,813 Dividends paid ( 1,196 ) — Repurchase of common stock ( 38 ) — Net Cash Provided by Financing Activities 58,317 38,355 Net increase (decrease) in cash and cash equivalents 63,105 ( 22,693 ) Cash and Cash Equivalents, Beginning of the Period 60,946 92,350 Cash and Cash Equivalents, End of the Period $ 124,051 $ 69,657 Supplemental Disclosure of Cash Paid During the Period for: Interest $ 1,091 $ 1,630 Taxes $ 325 $ — Supplemental Disclosure of Non-cash Transactions: Other real estate acquired in settlement of foreclosed loans $ — $ 513 Loans made to finance sale of other real estate owned $ 711 $ — Change in unrealized losses on securities available for sale $ ( 12,756 ) $ ( 584 ) The accompanying notes are an integral part of these consolidated financial statements. 7 NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS Nature of Operations – New Peoples Bankshares, Inc. (New Peoples or the Company) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (the Federal Reserve). The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, western North Carolina and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements conform to U. S. generally accepted accounting principles (GAAP) and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position at 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. The consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (hereinafter, collectively referred to as the Company, we, us or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income. NOTE 3 EARNINGS PER SHARE Basic Earnings per share computations are based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the three-month and 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: Schedule of basic and diluted net loss per common share calculations (Dollars in Thousands, Except Share and Per Share Data) For the three months ended June 30, For the six months ended June 30, 2022 2021 2022 2021 Net income $ 1,923 $ 1,663 $ 3,844 $ 3,248 Weighted average shares outstanding 23,915,869 23,922,086 23,918,960 23,922,086 Weighted average dilutive shares outstanding 23,915,869 23,922,086 23,918,960 23,922,086 Basic and diluted Earnings per share $ 0.08 $ 0.07 $ 0.16 $ 0.14 8 NOTE 4 CAPITAL Capital Requirements and Ratios Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. To qualify as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3 billion or less. The primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer required is 2.50 %. At June 30, 2022, the Bank had a capital conservation buffer of 8.21%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management believes as of June 30, 2022, the Bank met all capital adequacy requirements to which it was subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At 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. Schedule of capital requirements Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions (Dollars are in thousands) Amount Ratio Amount Ratio Amount Ratio June 30, 2022: Total Capital to Risk Weighted Assets 88,990 16.21 % $ 43,908 8.0 % $ 54,885 10.0 % Tier 1 Capital to Risk Weighted Assets 82,174 14.97 % 32,931 6.0 % 43,908 8.0 % Tier 1 Capital to Average Assets 82,174 9.88 % 33,252 4.0 % 41,565 5.0 % Common Equity Tier 1 Capital to Risk Weighted Assets 82,174 14.97 % 24,698 4.5 % 35,675 6.5 % December 31, 2021: Total Capital to Risk Weighted Assets 85,890 16.23 % $ 42,332 8.0 % $ 52,915 10.0 % Tier 1 Capital to Risk Weighted Assets 79,274 14.98 % 31,749 6.0 % 42,332 8.0 % Tier 1 Capital to Average Assets 79,274 9.86 % 32,145 4.0 % 40,181 5.0 % Common Equity Tier 1 Capital to Risk Weighted Assets 79,274 14.98 % 23,812 4.5 % 34,395 6.5 % 9 NOTE 5 INVESTMENT SECURITIES The amortized cost and estimated fair value of available-for-sale (AFS) securities as of June 30, 2022 and December 31, 2021 is as follows: Schedule of securities amortized cost and estimated fair value Gross Gross Approximate Amortized Unrealized Unrealized Fair (Dollars are in thousands) Cost Gains Losses Value June 30, 2022 U.S. Treasuries $ 11,680 $ 3 $ 729 $ 10,954 U.S. Government Agencies 10,142 6 455 9,693 Taxable municipals 23,350 2 4,508 18,844 Corporate bonds 3,019 4 257 2,766 Mortgage backed securities 66,211 — 7,852 58,359 Total Securities available for sale $ 114,402 $ 15 $ 13,801 $ 100,616 December 31, 2021 U.S. Treasuries $ 7,791 $ 2 $ 122 $ 7,671 U.S. Government Agencies 9,098 77 86 9,089 Taxable municipals 23,075 159 254 22,980 Corporate bonds 2,014 23 18 2,019 Mortgage backed securities 66,410 143 954 65,599 Total Securities available for sale $ 108,388 $ 404 $ 1,434 $ 107,358 The following table details unrealized losses and related fair values in the AFS portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2022 and December 31, 2021. Schedule of fair value and gross unrealized losses on investment securities Less than 12 Months 12 Months or More Total (Dollars are in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses June 30, 2022 U. S. Treasuries $ 10,496 $ 729 $ — $ — $ 10,496 $ 729 U.S. Government Agencies 5,464 300 2,755 155 8,219 455 Taxable municipals 17,363 4,325 678 183 18,041 4,508 Corporate bonds 2,252 257 500 — 2,752 257 Mortgage backed securities 40,768 5,152 17,592 2,700 58,360 7,852 Total Securities available for sale $ 76,343 $ 10,763 $ 21,525 $ 3,038 $ 97,868 $ 13,801 December 31, 2021 U.S. Treasuries $ 6,200 $ 122 $ — $ — $ 6,200 $ 122 U.S. Government Agencies 977 10 3,434 76 4,411 86 Taxable municipals 13,040 237 387 17 13,427 254 Corporate bonds 1,482 18 — — 1,482 18 Mortgage backed securities 52,180 758 6,282 196 58,462 954 Total Securities available for sale $ 73,879 $ 1,145 $ 10,103 $ 289 $ 83,982 $ 1,434 At 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. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are not a result of credit deterioration. Management does not intend to sell, and it is not likely that the Bank will be required to sell any of the securities referenced in the table above before recovery of their amortized cost. Investment securities with a carrying value of $ 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. No AFS debt securities were sold during the three and six months ended June 30, 2022 and 2022. 10 The 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 without call or prepayment penalties. Schedule of amortized cost and fair value of investment securities contractual maturity Weighted (Dollars are in thousands) Amortized Fair Average Securities Available-for-Sale Cost Value Yield Due in one year or less $ 300 $ 302 3.46 % Due after one year through five years 16,021 15,339 2.04 % Due after five years through ten years 13,547 12,202 1.83 % Due after ten years 84,534 72,773 1.71 % Total $ 114,402 $ 100,616 1.77 % The Bank, as a member bank of the Federal Reserve Bank of Richmond (Federal Reserve Bank) and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in Other Assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $ 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. NOTE 6 LOANS Loans held for sale at June 30, 2022 and December 31, 2021, totaled $ 62 thousand and $ 0 , respectively, which represents mortgage loans originated for sale. These originations and sales are executed on a best-efforts basis. Loans receivable outstanding as of June 30, 2022, and December 31, 2021, are summarized as follows: Schedule of Loans receivable outstanding (Dollars are in thousands) June 30, 2022 December 31, 2021 Real estate secured: Commercial $ 196,610 $ 206,162 Construction and land development 37,690 32,325 Residential 1-4 family 223,722 224,530 Multifamily 37,611 33,048 Farmland 18,055 18,735 Total real estate loans 513,688 514,800 Commercial 46,697 54,325 Agriculture 3,623 4,021 Consumer installment loans 19,561 18,756 All other loans 2,062 1,842 Total loans $ 585,631 $ 593,744 Included 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). Also 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 fees and costs is recognized over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or costs is recognized at that time. 11 Loans receivable on nonaccrual status as of June 30, 2022, and December 31, 2021, are summarized as follows: Summary of loans receivable on nonaccrual status (Dollars are in thousands) June 30, 2022 December 31, 2021 Real estate secured: Commercial $ 281 $ 415 Construction and land development 778 37 Residential 1-4 family 2,478 2,314 Multifamily 50 111 Farmland 44 48 Total real estate loans 3,631 2,925 Commercial — 9 Consumer installment loans and other loans 3 7 Total loans receivable on nonaccrual status $ 3,634 $ 2,941 Total 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 following tables presents information concerning the Company’s investment in loans considered impaired as of June 30, 2022, and December 31, 2021: Schedule of summary of impaired loans As of June 30, 2022 (Dollars are in thousands) Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Real estate secured: Commercial $ 95 $ 135 $ — Construction and land development 11 285 — Residential 1-4 family 1,444 1,761 — Multifamily — — — Farmland 281 451 — Commercial 25 33 — Agriculture — — — Consumer installment loans — 1 — All other loans — — — With an allowance recorded: Real estate secured: Commercial 299 364 77 Construction and land development 744 744 207 Residential 1-4 family 299 328 47 Multifamily 50 111 50 Farmland — — — Commercial — — — Agriculture — — — Consumer installment loans — — — All other loans — — — Total $ 3,248 $ 4,213 $ 381 12 As of December 31, 2021 (Dollars are in thousands) Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Real estate secured: Commercial $ 99 $ 140 $ — Construction and land development 24 298 — Residential 1-4 family 1,508 1,791 — Multifamily — — — Farmland 320 490 — Commercial — — — Agriculture — — — Consumer installment loans 2 2 — All other loans — — — With an allowance recorded: Real estate secured: Commercial 315 372 94 Construction and land development — — — Residential 1-4 family 340 372 53 Multifamily — — — Farmland 197 209 17 Commercial 28 35 2 Agriculture — — — Consumer installment loans — — — All other loans — — — Total $ 2,833 $ 3,709 $ 166 The following tables present information concerning the Company’s average impaired loans and interest recognized on those impaired loans, for the periods indicated: Six Months Ended June 30, 2022 June 30, 2021 (Dollars are in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Real estate secured: Commercial $ 146 $ 3 $ 341 $ — Construction and land development 31 8 89 9 Residential 1-4 family 1,549 22 1,828 29 Multifamily — — — — Farmland 340 12 508 18 Commercial 8 — — — Agriculture — — — — Consumer installment loans 1 — 4 — All other loans — — — — With an allowance recorded: Real estate secured: Commercial 492 3 1,235 3 Construction and land development 248 17 — — Residential 1-4 family 313 6 288 — Multifamily 33 — — — Farmland 105 — 69 — Commercial 45 1 163 1 Agriculture — — — — Consumer installment loans — — — — All other loans — — — — Total $ 3,311 $ 72 $ 4,525 $ 60 13 Three Months Ended June 30, 2022 June 30, 2021 (Dollars are in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Real estate secured: Commercial $ 96 $ 3 $ 319 $ — Construction and land development 14 4 85 5 Residential 1-4 family 1,464 8 1,912 15 Multifamily — — — — Farmland 291 3 567 9 Commercial 13 1 — — Agriculture — — — — Consumer installment loans 1 — 3 — All other loans — — — — With an allowance recorded: Real estate secured: Commercial 303 — 1,070 — Construction and land development 372 17 — — Residential 1-4 family 301 6 264 — Multifamily 50 — — — Farmland 97 — — — Commercial 13 — 30 — Agriculture — — — — Consumer installment loans — — — — All other loans — — — — Total $ 3,015 $ 42 $ 4,250 $ 29 An 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. Summary age analysis of past due loans receivable As of June 30, 2022 (Dollars are in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Real estate secured: Commercial $ 5,018 $ — $ — $ 5,018 $ 191,592 $ 196,610 Construction and land development 744 — 7 751 36,939 37,690 Residential 1-4 family 2,092 554 634 3,280 220,442 223,722 Multifamily 235 — 50 285 37,326 37,611 Farmland 282 — — 282 17,773 18,055 Total real estate loans 8,371 554 691 9,616 504,072 513,688 Commercial 270 — — 270 46,427 46,697 Agriculture — — — — 3,623 3,623 Consumer installment loans 65 15 1 81 19,480 19,561 All other loans 49 — — 49 2,013 2,062 Total loans $ 8,755 $ 569 $ 692 $ 10,016 $ 575,615 $ 585,631 14 As of December 31, 2021 (Dollars are in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Real estate secured: Commercial $ — $ — $ — $ — $ 206,162 $ 206,162 Construction and land development 7 — 7 14 32,311 32,325 Residential 1-4 family 2,473 240 486 3,199 221,331 224,530 Multifamily — — 111 111 32,937 33,048 Farmland — — — — 18,735 18,735 Total real estate loans 2,480 240 604 3,324 511,476 514,800 Commercial 5 — — 5 54,320 54,325 Agriculture — — — — 4,021 4,021 Consumer installment Loans 56 5 — 61 18,695 18,756 All other loans — — — — 1,842 1,842 Total loans $ 2,541 $ 245 $ 604 $ 3,390 $ 590,354 $ 593,744 The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings: Pass - Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors. Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date. Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified doubtful have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. 15 Based on the most recent analysis performed, the risk categories of loans receivable as of June 30, 2022, and December 31, 2021, was as follows: Summary of risk category of loans receivable As of June 30, 2022 (Dollars are in thousands) Pass Special Mention Substandard Doubtful Total Real estate secured: Commercial $ 191,879 $ 4,450 $ 281 $ — $ 196,610 Construction and land development 36,777 135 778 — 37,690 Residential 1-4 family 220,714 530 2,478 — 223,722 Multifamily 37,349 212 50 — 37,611 Farmland 17,098 913 44 — 18,055 Total real estate loans 503,817 6,240 3,631 — 513,688 Commercial 45,755 942 — — 46,697 Agriculture 3,623 — — — 3,623 Consumer installment loans 19,558 — 3 — 19,561 All other loans 2,062 — — — 2,062 Total $ 574,815 $ 7,182 $ 3,634 $ — $ 585,631 As of December 31, 2021 (Dollars are in thousands) Pass Special Mention Substandard Doubtful Total Real estate secured: Commercial $ 198,022 $ 7,725 $ 415 $ — $ 206,162 Construction and land development 31,366 922 37 — 32,325 Residential 1-4 family 221,342 915 2,273 — 224,530 Multifamily 32,499 438 111 — 33,048 Farmland 18,137 550 48 — 18,735 Total real estate loans 501,366 10,550 2,884 — 514,800 Commercial 53,162 1,154 9 — 54,325 Agriculture 4,021 — — — 4,021 Consumer installment loans 18,746 2 8 — 18,756 All other loans 1,842 — — — 1,842 Total $ 579,137 $ 11,706 $ 2,901 $ — $ 593,744 NOTE 7 ALLOWANCE FOR LOAN LOSSES In determining the amount of our allowance for loan losses, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in either the portfolio segment or impairment calculations at 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. The 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. 16 Schedule of allocation of portion of allowance Real estate secured (Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total Six months ended June 30, 2022 Beginning balance $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Charge-offs - - ( 24 ) ( 61 ) - ( 28 ) - ( 45 ) - ( 158 ) Recoveries - - 22 - - 14 - 28 - 64 Provision 28 261 4 215 ( 8 ) ( 232 ) 1 79 ( 173 ) 175 Ending balance $ 2,162 $ 450 $ 2,239 $ 408 $ 141 $ 853 $ 29 $ 170 $ 364 $ 6,816 Three months ended June 30, 2022 Beginning balance $ 2,132 $ 229 $ 2,198 $ 313 $ 143 $ 1,005 $ 28 $ 112 $ 599 $ 6,759 Charge-offs - - ( 24 ) - - - - ( 31 ) - ( 55 ) Recoveries - - 8 - - 3 - 26 - 37 Provision 30 221 57 95 ( 2 ) ( 155 ) 1 63 ( 235 ) 75 Ending balance $ 2,162 $ 450 $ 2,239 $ 408 $ 141 $ 853 $ 29 $ 170 $ 364 $ 6,816 Allowance for loan losses at June 30, 2022 Individually evluated for impairment $ 77 $ 207 $ 47 $ 50 $ - $ - $ - $ - $ - $ 381 Collectively evaluated for impairment 2,085 243 2,192 358 141 853 29 170 364 6,435 $ 2,162 $ 450 $ 2,239 $ 408 $ 141 $ 853 $ 29 $ 170 $ 364 $ 6,816 Loans at June 30, 2022 Individually evluated for impairment $ 394 $ 755 $ 1,743 $ 50 $ 281 $ 25 $ - $ - $ - $ 3,248 Collectively evaluated for impairment 196,216 36,935 221,979 37,561 17,774 46,672 3,623 21,623 - 582,383 $ 196,610 $ 37,690 $ 223,722 $ 37,611 $ 18,055 $ 46,697 $ 3,623 $ 21,623 $ - $ 585,631 Real estate secured (Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total Allowance for loan losses at December 31, 2021 Individually evaluated for impairment $ 94 $ - $ 53 $ - $ 17 $ 2 $ - $ - $ - $ 166 Collectively evaluated for impairment 2,040 189 2,184 254 132 1,097 28 108 537 6,569 $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Loans at December 31, 2021 Individually evaluated for impairment $ 414 $ 24 $ 1,848 $ - $ 517 $ 28 $ - $ 2 $ - $ 2,833 Collectively evaluated for impairment 205,748 32,301 222,682 33,048 18,218 54,297 4,021 20,596 - 590,911 $ 206,162 $ 32,325 $ 224,530 $ 33,048 $ 18,735 $ 54,325 $ 4,021 $ 20,598 $ - $ 593,744 17 Real estate secured (Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total Six months ended June 30, 2021 Beginning balance $ 2,281 $ 233 $ 1,951 $ 151 $ 97 $ 2,275 $ 40 $ 163 $ - $ 7,191 Charge-offs ( 915 ) - ( 10 ) - - ( 92 ) - ( 28 ) - ( 1,045 ) Recoveries 2 - 17 - - 131 1 27 - 178 Provision 783 ( 78 ) 88 9 40 ( 398 ) ( 13 ) ( 59 ) - 372 Ending balance $ 2,151 $ 155 $ 2,046 $ 160 $ 137 $ 1,916 $ 28 $ 103 $ - $ 6,696 Three months ended June 30, 2021 Beginning balance $ 2,461 $ 186 $ 2,283 $ 165 $ 156 $ 1,885 $ 33 $ 124 $ - $ 7,293 Charge-offs ( 915 ) - ( 4 ) - - - - ( 15 ) - ( 934 ) Recoveries - - 9 - - 131 1 10 - 151 Provision 605 ( 31 ) ( 242 ) ( 5 ) ( 19 ) ( 100 ) ( 6 ) ( 16 ) - 186 Ending balance $ 2,151 $ 155 $ 2,046 $ 160 $ 137 $ 1,916 $ 28 $ 103 $ - $ 6,696 Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. NOTE 8 TROUBLED DEBT RESTRUCTURINGS There were $ 2.2 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 calculation. No loans modified during the three and six months ended June 30, 2022 or June 30, 2021, were considered to be troubled debt restructurings. Three 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. In determining the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of the loan. 18 NOTE 9 OTHER REAL ESTATE OWNED The following table summarizes the activity in other real estate owned for the six months ended June 30, 2022, and the year ended December 31, 2021: Schedule of other real estate owned (Dollars are in thousands) June 30, 2022 December 31, 2021 Balance, beginning of period $ 1,361 $ 3,334 Additions — 566 Transfers from premises and equipment — 950 Proceeds from sales ( 207 ) ( 2,645 ) Proceeds from insurance claims — ( 54 ) Loans made to finance sales ( 711 ) ( 400 ) Adjustment of carrying value ( 137 ) ( 466 ) Net gains from sales 15 76 Balance, end of period $ 321 $ 1,361 NOTE 10 FAIR VALUES The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (the FASB) ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market and in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are valued using other financial instruments, the parameters of which can be directly observed. Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows: Investment Securities Available for Sale - Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $ 100.6 million and $ 107.4 million 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. Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair value of the underlying real estate collateral. Where there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates to determine whether or not the fair value of the collateral is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets. 19 Other Real Estate Owned –Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned. These assets are carried at the lower of their carrying value or fair value. Fair value is based upon observable market prices, when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable market prices are not available, management determines the fair value of the foreclosed asset using independent third-party appraisals, evaluated to determine whether or not the property is further impaired below the appraised value, and adjusts for estimated costs of disposition. The Company records foreclosed assets as nonrecurring Level 3. Assets and liabilities measured at fair value are as follows as of June 31, 2022 (for purpose of this table the impaired loans are shown net of the related allowance): Schedule of summary of assets and liabilities measured at fair value June 30, 2022 (Dollars are in thousands) Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) (On a recurring basis) Available for sale investments U.S. Treasuries $ — $ 10,954 $ — U.S. Government Agencies — 9,693 — Taxable municipals — 18,844 — Corporate bonds — 2,766 — Mortgage-backed securities — 58,359 — (On a non-recurring basis) Other real estate owned — — 321 Impaired loans — — 2,867 Total $ — $ 100,616 $ 3,188 Assets and liabilities measured at fair value are as follows as of December 31, 2021 (for purpose of this table the impaired loans are shown net of the related allowance): December 31, 2021 (Dollars are in thousands) Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) (On a recurring basis) Available for sale investments U.S. Treasuries $ - $ 7,671 - U.S. Government Agencies - 9,089 $ - Taxable municipals - 22,980 - Corporate bonds - 2,019 - Mortgage-backed securities - 65,599 - - (On a non-recurring basis) Other real estate owned - - 1,361 Impaired loans - - 2,667 Total $ - $ 107,358 $ 4,028 20 For 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: Schedule of significant unobservable inputs In level 3 assets (Dollars in thousands) Fair Value at June 30, 2022 Fair Value at December 31, 2021 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Impaired Loans $ 2,867 $ 2,667 Appraised Value Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0 – 18 % Other Real Estate Owned $ 321 $ 1,361 Appraised Value/Comparable Sales/Other Estimates from Independent Sources Discounts to reflect current market conditions and estimated costs to sell 0 – 18 % Fair Value of Financial Instruments Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different. The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis as of June 30, 2022, and December 31, 2021, are as follows: Schedule of estimated fair value of financial instruments Fair Value Measurements (Dollars are in thousands) Carrying Amount Fair Value Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) June 30, 2022 Financial Instruments – Assets Net Loans $ 578,815 $ 566,308 $ — $ — $ 566,308 Financial Instruments – Liabilities Time Deposits 179,092 180,445 — 180,445 — Borrowed funds 76,496 75,523 — 75,523 — December 31, 2021 Financial Instruments – Assets Net Loans $ 587,009 $ 580,024 $ — $ — $ 580,024 Financial Instruments – Liabilities Time Deposits 196,285 198,353 — 198,353 — Borrowed funds 16,496 15,649 — 15,649 — Fair value 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 21 time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates. Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments. The carrying values of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value and are excluded from the table above. In accordance with our adoption of Accounting Standards Update (ASU) 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at June 30, 2022 and December 31, 2021, represent an approximation of exit price; however, an actual exit price may differ. NOTE 11 LEASING ACTIVITIES As of 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. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms at June 30, 2022 was 10.12 years. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted average discount rate for the leases at June 30, 2022 was 3.24 %. For the six months ended June 30, 2022 and 2021, operating lease expenses were $ 228 thousand and $ 275 thousand, respectively. The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. At June 30, 2022, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands): Schedule of future minimum rental commitments under the non-cancellable operating leases 2022 $ 228 2023 455 2024 455 2025 455 2026 455 Thereafter 2,698 Total lease payments 4,746 Less imputed interest 847 Total $ 3,899 NOTE 12 BORROWED FUNDS Included 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. 22 NOTE 13 REVENUE FROM CONTRACTS WITH CUSTOMERS All our revenue from contracts with customers as defined in ASC 606 is recognized within Noninterest income. The following table presents Noninterest income by revenue stream for the three and six months ended June 30, 2022 and 2021: Schedule of revenue from contracts with customers For the three months ended For the six months ended June 30, June 30, (Dollars in thousands) 2022 2021 2022 2021 Service charges and fees $ 897 $ 841 $ 1,904 $ 1,673 Card Processing and interchange income 1,027 1,072 1,943 1,936 Insurance and investment fees 242 275 483 501 Other noninterest income 182 190 387 397 Total Noninterest Income $ 2,348 $ 2,378 $ 4,717 $ 4,507 NOTE 14 NONINTEREST EXPENSES Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented: Schedule of noninterest expenses For the three months ended June 30, For the six months ended June 30, (Dollars are in thousands) 2022 2021 2022 2021 Advertising $ 64 $ 73 $ 92 $ 108 ATM network expense 380 403 747 745 Legal, accounting and professional fees 257 303 488 588 Consulting fees 62 93 129 148 Loan related expenses 103 143 200 250 Printing and supplies 39 24 72 60 FDIC insurance premiums 54 67 103 137 Other real estate owned expenses, net 15 41 145 138 Other operating expenses 684 641 1,286 1,135 Total other operating expenses $ 1,658 $ 1,788 $ 3,262 $ 3,309 NOTE 15 SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. There were no subsequent events requiring recognition or disclosure. NOTE 16 RECENT ACCOUNTING DEVELOPMENTS The following is a summary of recent authoritative announcements: In June 2016, per ASU No. 2016-13, ‘Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,’ the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. Subsequently, per ASU No. 2019-10, implementation for the Company is delayed until reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. The Company has contracted with a software vendor and is currently working through the implementation process. The new model has been constructed, initial assumptions have been input and historical loan and loss activity has been input and validated. The Company will run the new methodology parallel to the current allowance methodology for several periods before full implementation, beginning with the June 30, 2022 data. 23 In March 2020, the FASB released ASU 2020-04, ‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting,’ which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this Update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offering Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in the Update are effective for the Company as of March 12, 2020 through December 31, 2022. The Company is working through implementation of this guidance, and to date this amendment has not had a material impact on its financial statements. In January 2021, the FASB released ASU 2021-01, ‘Reference Rate Reform (Topic 848),’ which clarifies that certain optional expedients and exceptions in topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition related to reference rate reform. The amendments in this Update are effective immediately for all entities. An entity may elect to apply the amendments in the Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company does not expect this amendment to have a material effect on its financial statements. In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows. 24 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Caution About Forward-Looking Statements We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from projections include: the success or failure of our efforts to implement our business plan; any required increase in our regulatory capital ratios; satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors; deterioration of asset quality; changes in the level of our nonperforming assets and charge-offs; fluctuations of real estate values in our markets; our ability to attract and retain talent; demographical changes in our markets which negatively impact the local economy; the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators; the successful management of interest rate risk; the successful management of liquidity; changes in general economic and business conditions in our market area and the United States in general; credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks; competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources; demand, development and acceptance of new products and services we have offered or may offer; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations; the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the ongoing novel coronavirus (COVID-19) outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events; technology utilized by us; our ability to successfully manage cybersecurity; our reliance on third-party vendors and correspondent banks; changes in generally accepted accounting principles; changes in governmental regulations, tax rates and similar matters; and, other risks, which may be described, from time to time, in our filings with the Securities and Exchange Commission. Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 25 Critical Accounting Policies For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2021 (the 2021 Form 10-K). Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting policies relate to our provision for loan losses and the calculation of our deferred tax asset. The allowance represents an amount that, in the Company's judgment, will be adequate to absorb probable and estimable losses inherent in the loan portfolio. The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower's ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. In the past, the Company provided a valuation allowance on its net deferred tax assets where it was deemed more likely than not such assets would not be realized. At June 30, 2022 and December 31, 2021, the Company had no valuation allowance on its net deferred tax assets. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Deferred Tax Asset and Income Taxes” below. Overview and Highlights On June 15, 2022, we became aware of a cybersecurity incident that temporarily interrupted the operability of our computer systems. As 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 coverage. To 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. For 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. For 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. 26 The 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 million. During the second quarter of 2022, plans were announced for the closure of branch offices in Big Stone Gap and Chilhowie, Virginia in mid-August 2022. Affected personnel will be reassigned, and customer accounts will be transferred to nearby offices. During 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. Comparison of the Three Months ended June 30, 2022 and 2021 While 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: · Returns 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; · Net 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; · Provision 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; and · 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. The 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 needs. 27 The following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated: Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates (Dollars in thousands) Three Months Ended June 30, 2022 2021 Average Income/ Yields/ Average Income/ Yields/ Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 597,570 $ 6,791 4.56% $ 595,870 $ 6,958 4.69% Mortgage loans held for sale 124 1 4.17% 187 2 4.40% Federal funds sold 189 1 0.87% 188 - 0.08% Interest bearing deposits in other banks 68,298 158 0.93% 89,540 22 0.10% Taxable investment securities 117,905 509 1.73% 72,540 366 2.02% Total earning assets 784,086 7,460 3.82% 758,325 7,348 3.89% Less: Allowance for loans losses (6,887) (7,355) Non-earning assets 43,371 61,054 Total Assets $ 820,570 $ 812,024 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 71,805 $ 19 0.10% $ 59,449 $ 16 0.11% Savings and money market deposits 197,346 40 0.08% 178,369 36 0.08% Time deposits 187,891 345 0.74% 221,131 523 0.95% Short-term borrowings 12,692 71 2.21% 4,979 17 1.35% Trust preferred securities 16,496 141 3.38% 16,496 105 2.52% Total interest-bearing liabilities 486,230 616 0.51% 480,424 697 0.69% Non-interest-bearing deposits 268,802 - -% 263,023 - - % Total deposit liabilities and cost of funds 755,032 616 0.33% 743,447 697 0.46% Other liabilities 8,213 8,755 Total Liabilities 763,245 752,202 Shareholders’ Equity 57,325 59,822 Total Liabilities and Shareholders’ Equity $ 820,570 $ 812,024 Net Interest Income $ 6,844 $ 6,651 Net Interest Margin 3.50% 3.52% Net Interest Spread 3.31% 3.31% (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) Tax exempt income is not significant and has been treated as fully taxable. Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021. 28 Volume and Rate Analysis Increase (decrease) Three Months Ended June 30, 2022 versus 2021 (Dollars in thousands) Volume Effect Rate Effect Change in Interest Income/ Expense Interest Income: Loans $ (249 ) $ 82 $ (167 ) Mortgage loans held for sale (1 ) — (1 ) Federal funds sold — 1 1 Interest bearing deposits in other banks (6 ) 142 136 Taxable investment securities 172 (29 ) 143 Total Earning Assets (84 ) 196 112 Interest Expense: Interest-bearing demand deposits 4 (1 ) 3 Savings and money market deposits 4 — 4 Time deposits (73 ) (105 ) (178 ) Short-term borrowings 41 13 54 Trust preferred securities — 36 36 Total Interest-bearing Liabilities (24 ) (57 ) (81 ) Change in Net Interest Income $ (60 ) $ 253 $ 193 Based 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. Noninterest 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 charges. 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. Total 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 benefits. 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 owned. In addition, certain costs associated with the recovery from the cyber security incident, including insurance deductibles, were recorded during the second quarter of 2022. The efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, improved to 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 of 2022 29 On 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. Income 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. Comparison of the Six Months ended June 30, 2022 and 2021 While 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. Year-to-date highlights include: · Net 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; · Net 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; · Provision 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 of 2021; · Salaries and employee benefits expense was $6.7 million, an increase of $479 thousand, or 7.8%, compared to the first half of 2021; and · Total noninterest expense was $13.1 million, a decrease of $24 thousand, or 0.18%, compared to the first half of 2021. Overall, 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. 30 Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates (Dollars in thousands) Six Months Ended June 30, 2022 2021 Average Income/ Yields/ Average Income/ Yields/ Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 596,813 $ 13,465 4.55% $ 591,066 $ 13,877 4.74% Mortgage loans held for sale 69 1 4.33% 355 4 2.40% Federal funds sold 203 1 0.49% 207 - 0.07% Interest bearing deposits in other banks 61,094 179 0.59% 88,543 41 0.09% Taxable investment securities 114,190 971 1.70% 61,177 645 2.11% Total earning assets 772,369 14,617 3.82% 741,348 14,567 3.96% Less: Allowance for loans losses (6,867) (7,329) Non-earning assets 46,335 60,499 Total Assets $ 811,837 $ 794,518 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 69,523 $ 35 0.10% $ 56,242 $ 30 0.11% Savings and money market deposits 195,780 78 0.08% 171,353 73 0.09% Time deposits 192,064 720 0.76% 227,002 1,155 1.03% Short-term borrowings 6,381 71 2.21% 4,989 33 1.35% Trust preferred securities 16,496 248 2.98% 16,496 212 2.55% Total interest-bearing liabilities 480,244 1,152 0.48% 476,082 1,503 0.64% Non-interest-bearing deposits 263,509 - -% 250,309 - - % Total deposit liabilities and cost of funds 743,753 1,152 0.31% 726,391 1,503 0.42% Other liabilities 7,773 8,898 Total Liabilities 751,526 794,523 Shareholders’ Equity 60,188 59,234 Total Liabilities and Shareholders’ Equity $ 811,714 $ 794,523 Net Interest Income $ 13,465 $ 13,064 Net Interest Margin 3.52% 3.55% Net Interest Spread 3.33% 3.32% (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) Tax exempt income is not significant and has been treated as fully taxable. Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021. 31 Volume and Rate Analysis Increase (decrease) Six Months Ended June 30, 2022 versus 2021 (Dollars in thousands) Volume Effect Rate Effect Change in Interest Income/ Expense Interest Income: Loans $ (408 ) $ (4 ) $ (412 ) Mortgage loans held for sale (3 ) — (3 ) Federal funds sold — 1 1 Interest bearing deposits in other banks (16 ) 154 138 Taxable investment securities 385 (59 ) 326 Total Earning Assets (42 ) 92 50 Interest Expense: Interest-bearing demand deposits 8 (3 ) 5 Savings and money market deposits 10 (5 ) 5 Time deposits (161 ) (273 ) (435 ) Short-term borrowings 15 22 37 Trust preferred securities — 36 36 Total Interest-bearing Liabilities (128 ) (223 ) (351 ) Change in Net Interest Income $ 86 $ 315 $ 401 During 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. The increase in expense for borrowed funds was due to $95 million of FHLB advances taken during the second quarter, combined with rate increases on trust preferred securities. The reduction in interest expense on deposits was driven mainly by a reduction in the average cost of retail time deposits, which declined 27 basis points, to 0.76% from 1.03%, plus a decrease in average balances of $34.9 million. There was a 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. During 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. Based 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. Total 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 3.6%. 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. 32 For the six months ended June 30, 2022, compared to the same period in 2021, total non-interest expense increased $24 thousand, to $13.1 million. 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. The 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. Balance Sheet Balance 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. Total 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 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. Total 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. There 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. Loans receivable decreased $8.1 million, or 1.4% during the first six months of 2022, due to repayments of commercial real estate and commercial loans. 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. Another factor influencing deposit retention is the dissipation of liquidity experienced by depositors, as stimulus and other economic support funds distributed during the height of the COVID-19 pandemic are spent or otherwise distributed. While it is likely that recent and expected increases to the federal funds rate will, at some point, impact liquidity, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities. 33 At 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. Total 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. As discussed 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 payment. The increase in other accumulated comprehensive loss is related to the recent increase in interest rates and is not related to any deterioration in the credit quality of any investment securities held. Asset Quality Nonperforming assets include nonaccrual loans, other real estate owned (OREO) and loans past due more than 90 days which are still accruing interest. Our policy is to place loans on nonaccrual status once they reach 90 days past due. The makeup of the nonaccrual loans is primarily those secured by residential mortgages and commercial real estate. OREO is primarily made up of 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. For 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. At 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. Loans 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. Our 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. In 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. 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. 34 The following table summarizes components of the allowance for loan losses and related loans as of June 30, 2022 and December 31, 2021: Selected Credit Ratios June 30, December 31, (Dollars in thousands) 2022 2021 Allowance for loan losses $ 6,816 $ 6,735 Total loans 585,631 593,744 Allowance for loan losses to total loans 1.16% 1.13% Nonaccrual loans $ 3,634 $ 2,941 Nonaccrual loans to total loans 0.62% 0.50% Ratio of allowance for loan losses to nonaccrual loans 1.88X 2.29X Charge-offs net of recoveries $ 94 $ 828 Average loans $ 596,813 $ 586,963 Net charge-offs to average loans 0.03% 0.14% We are in the process of preparing to implement the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model. While we had estimated we would be running concurrent models by June 30, 2022, due to the cybersecurity incident, we delayed the start of parallel runs. 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. Deferred Tax Asset and Income Taxes Due to timing differences between book and tax treatment of several income and expense items, a net deferred tax asset, excluding the deferred tax asset on the unrealized loss on securities available for sale, of $813 thousand and $1.5 million existed at June 30, 2022 and December 31, 2021, respectively. Our income tax expense was computed at the corporate income tax rate of 21% of taxable income. We have no significant nontaxable income or nondeductible expenses. Capital Resources Total shareholders’ equity at June 30, 2022 was $56.2 million compared to $63.6 million at December 31, 2021, a decrease of $7.5 million, or 11.7%. 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 $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. The Company meets the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and is therefore not obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies. The Bank’s capital ratios along with the minimum regulatory thresholds to be considered well-capitalized are presented at Note 4 in Item 1 of this Form 10-Q. At 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. Book 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 $2.80 at June 30, 2022, and $2.69 and December 31, 2021, respectively. Other key performance indicators are as follows: 35 Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Return on average assets 1 0.94% 0.82% 0.95% 0.82% Return on average equity 1 13.45% 11.15% 12.88% 11.06% Average equity to average assets 6.99% 7.37% 7.41 7.46% 1 - Annualized Under current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will be sufficient. During the first quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders. Earnings will continue to be retained to provide capital to support the planned growth and operations of the Company and to continue to pay any future dividends to shareholders. On April 28, 2022 the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through March 31, 2023. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. During the 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 program. Liquidity As 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. We closely monitor our liquidity and our liquid assets in the form of cash, due from banks, federal funds sold, and unpledged available for sale investments. Collectively, those balances were $184.7 million at June 30, 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 during 2022. At June 30, 2022, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $70.9 million, which is net of the $29.7 million of securities pledged as collateral. Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. Our 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. While 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. Available third-party sources of liquidity at June 30, 2022 include the following: a line of credit with the FHLB, access to brokered certificates of deposit markets and the discount window at the Federal Reserve Bank. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks. The Bank’s line of credit with the FHLB is $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. The 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. The Bank also has access to the brokered deposits market and the Certificate of Deposit Registry Service (CDARS). 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. 36 Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, while we do not anticipate using this as a primary funding source, securities with an estimated market value of $25.6 million were pledged at June 30, 2022. With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control. The bank holding company has approximately $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, to pay trust preferred interest payments, and to fund dividend payments to shareholders and repurchase shares. The Company makes quarterly interest payments on the trust preferred securities. As discussed in the Capital Resources section, the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through March 31, 2023. Payments for any repurchases will be distributed from available funds, or from dividends payments from the Bank, and are not expected to have a material impact on available liquidity. Off Balance Sheet Items and Contractual Obligations There have been no material changes during the six months ended June 30, 2022, to the off-balance sheet items and the contractual obligations disclosed in our 2021 Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. Item 4. Controls and Procedures We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our CEO) and our Executive Vice President and Chief Financial Officer (our CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2022, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. 37 Part II Other Information Item 1. Legal Proceedings In the course of operations, we may become a party to legal proceedings in the normal course of business. At June 30, 2022, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries or to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, will materially impact the financial condition or liquidity of the Company. On 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. This proceeding is now concluded. Item 1A. Risk Factors Not Applicable. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Sales of Unregistered Securities – None (b) Use of Proceeds – Not Applicable (c) Issuer Purchases of Securities Stock Repurchase Program The Company has an approved one-year stock repurchase program that authorizes the repurchase of up to 500,000 of the Company’s common shares through March 31, 2023. Repurchases may be made through open market purchases or in privately negotiated transactions. Shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company. Shares of the Company’s common stock were repurchased during the three months ended June 30, 2022, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 483,490 shares of common stock. Period Beginning on First Day of Month Ended Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs April 30, 2022 - - - 500,000 May 31, 2022 13,949 $ 2.27 13,949 486,051 June 30, 2022 2,561 $ 2.29 2,561 483,490 Total 16,510 $ 2.28 16,510 Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not Applicable. 38 Item 5. Other Information None Item 6. Exhibits The following exhibits are filed as part of this report or are incorporated by reference: No . Description 3.1 Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008). 3.2 Bylaws of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K filed on August 26, 2020). 4.1 Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012). 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 32 Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002. 101 The following materials for the Company’s 10-Q Report for the quarterly period ended March 31, 2022, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text. 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW PEOPLES BANKSHARES, INC. (Registrant) By: /s/ C. TODD ASBURY C. Todd Asbury President and Chief Executive Officer Date: August 16, 2022 By: /s/ CHRISTOPHER G. SPEAKS Christopher G. Speaks Executive Vice President, Chief Financial Officer and Treasurer Date: August 16, 2022 40