What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-11-14 compared with 2022-08-15 · 738 added, 782 removed, 677 unchanged (69% of the section changed)

4 unchanged sentences

THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

Cash and due from banks

Interest-bearing deposits with banks

Federal funds sold

Total Cash and Cash Equivalents

Investment securities available-for-sale

Loans held for sale

Loans receivable

Allowance for loan losses

Bank premises and equipment, net

Other real estate owned

Accrued interest receivable

Deferred taxes, net

Bank owned life insurance

Right-of-use assets –

and due from banks

Interest-bearing

deposits with banks

Cash and Cash Equivalents

securities available-for-sale

for loan losses

premises and equipment, net

real estate owned

interest receivable

owned life insurance

assets –

operating leases

Noninterest bearing

Interest-bearing

Total Deposits

Borrowed funds

Lease liabilities –

liabilities –

operating leases

Accrued interest payable

Accrued expenses and other liabilities

Total Liabilities

interest payable

expenses and other liabilities

SHAREHOLDERS’

Common stock - $2.00 par value;

stock - $2.00 par value;

50,000,000 shares authorized;

and 23,922,086 shares issued and outstanding at

June 30, 2022 and December 31, 2021, respectively

Additional paid-in-capital

Retained earnings

Accumulated other comprehensive loss

Total Shareholders’

Total Liabilities and Shareholders’

30, 2022 and December 31, 2021, respectively

paid-in-capital

other comprehensive loss

Shareholders’

Liabilities and Shareholders’

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

1 unchanged sentence

STATEMENTS OF INCOME

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

THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

For the Three Months Ended

For the Six Months Ended

the Three Months Ended

the Nine Months Ended

AND DIVIDEND INCOME

including fees

Interest-earning

deposits with banks

on equity securities (restricted)

Interest and Dividend Income

Loans including fees

Federal funds sold

Interest-earning deposits with banks

Dividends on equity securities (restricted)

Total Interest and Dividend Income

Interest Expense

Borrowed funds

Total Interest Expense

NET INTEREST INCOME

PROVISION FOR LOAN LOSSES

NET INTEREST INCOME AFTER

PROVISION FOR LOAN LOSSES

INTEREST INCOME

FOR LOAN LOSSES

INTEREST INCOME AFTER

FOR LOAN LOSSES

charges and fees

processing and interchange

and investment fees

on sales of available-for-sale securities

noninterest income

Service charges and fees

Card processing and interchange

Insurance and investment fees

Other noninterest income

Total Noninterest Income

Noninterest Income

and employee benefits

and equipment expense

processing and telecommunications

operating expenses

Noninterest Expenses

Salaries and employee benefits

Occupancy and equipment expense

Data processing and telecommunications

Other operating expenses

Total Noninterest Expenses

INCOME BEFORE INCOME TAXES

INCOME TAX EXPENSE

Earnings per share

Basic and diluted

Average Weighted Shares of Common Stock

Basic and diluted

BEFORE INCOME TAXES

Weighted Shares of Common Stock

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

1 unchanged sentence

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

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

For the three months ended

For the six months ended

Other comprehensive (loss) income:

Investment securities activity

Unrealized losses arising during the period

Other comprehensive loss on investment securities

Related tax benefit

TOTAL OTHER COMPREHENSIVE LOSS

TOTAL COMPREHENSIVE (LOSS) INCOME

THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

the Three Months Ended

the Nine Months Ended

comprehensive (loss) income:

securities activity

losses arising during the period

Reclassification

adjustment for net gains included

comprehensive loss on investment securities

OTHER COMPREHENSIVE LOSS

COMPREHENSIVE (LOSS) INCOME

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

1 unchanged sentence

STATEMENTS OF CHANGES IN SHAREHOLDERS’

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

THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

THOUSANDS INCLUDING SHARE DATA)

Shares of Common Stock

Additional Paid-in- Capital

Accumulated Other

Comprehensive Income (Loss)

Total Shareholders’

of Common Stock

Paid-in- Capital

Comprehensive

Income (Loss)

Shareholders’

Balance, December

Other comprehensive loss, net of tax

comprehensive loss, net of tax

Balance, March 31, 2021

Other comprehensive loss, net of tax

comprehensive loss, net of tax

Balance, June 30, 2021

comprehensive loss, net of tax

September 30, 2021

Balance, December 31, 2021

Other comprehensive loss, net of tax

Cash dividend declared ($0.05 per share)

comprehensive loss, net of tax

dividend declared ($0.05 per share)

Balance, March 31, 2022

Other comprehensive loss, net of tax

Repurchase of common stock

comprehensive loss, net of tax

of common stock

Balance, June 30, 2022

comprehensive loss, net of tax

of common stock

September 30, 2022

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

1 unchanged sentence

STATEMENTS OF CASH FLOWS

THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net income to net cash provided by

operating activities:

Provision for loan losses

THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

FLOWS FROM OPERATING ACTIVITIES

to reconcile net income to net cash provided by

for loan losses

(income) on bank owned life insurance

Net gain on sale of securities available-for-sale

Gain on sale of mortgage loans

Loss on sale or disposal of premises and equipment

(Gain) loss on sale of other real estate owned

Loans originated for sale

Proceeds from sales of loans originated for sale

Adjustment of carrying value of other real estate owned

Adjustment of carrying value of repossessed assets

Net amortization/accretion of bond premiums/discounts

Deferred tax expense

Net change in:

Accrued interest receivable

Accrued interest payable

Accrued expenses and other liabilities

Net Cash Provided by Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES

Net decrease (increase) in loans

Purchase of securities available-for-sale

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

Net (purchase) redemption of equity securities (restricted)

Payments for the purchase of premises and equipment

Proceeds from sales of other real estate owned

Net Cash Used in Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in short term borrowings

Net change in noninterest bearing deposits

Net change in interest bearing deposits

Dividends paid

Repurchase of common stock

Net Cash Provided by Financing Activities

Net increase (decrease) in cash and cash equivalents

Cash and Cash Equivalents, Beginning of the Period

Cash and Cash Equivalents, End of the Period

Supplemental Disclosure of Cash Paid During the Period for:

Supplemental Disclosure of Non-cash Transactions:

Other real estate acquired in settlement of foreclosed loans

Loans made to finance sale of other real estate owned

Change in unrealized losses on securities available for sale

on sale of securities available-for-sale

on sale of mortgage loans

(gain) on sale or disposal of premises and equipment

on sale of other real estate owned

originated for sale

from sales of loans originated for sale

to carrying value of premises transferred to other real estate owned

of carrying value of other real estate owned

Net amortization/accretion

of bond premiums/discounts

interest receivable

interest payable

expenses and other liabilities

Cash Provided by Operating Activities

FLOWS FROM INVESTING ACTIVITIES

of securities available-for-sale

from sale of investment securities available-for-sale

from repayments and maturities of securities available-for-sale

Net (purchase)

redemption of equity securities (restricted)

for the purchase of premises and equipment

from sale of premises and equipment

from insurance claims on other real estate owned or premises

from sales of other real estate owned

Cash Provided by (Used) in Investing Activities

FLOWS FROM FINANCING ACTIVITIES

in short term borrowings

in noninterest bearing deposits

in interest bearing deposits

of common stock

Cash Provided by Financing Activities

(decrease) in cash and cash equivalents

and Cash Equivalents, Beginning of the Period

and Cash Equivalents, End of the Period

Disclosure of Cash Paid During the Period for:

Disclosure of Non-cash Transactions:

real estate acquired in settlement of foreclosed loans

made to finance sale of other real estate owned

of premises and equipment to other real estate

in unrealized losses on securities available for sale

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

18 unchanged sentences

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

accruals) necessary to present fairly the Company’s financial position at 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.

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

of operations for the three- and nine-month periods ended September 30, 2022 and 2021.

The Notes included herein should be read in conjunction

15 unchanged sentences

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

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

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

6 unchanged sentences

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

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

Basic and diluted net income

per common share calculations follows:

(Dollars in Thousands, Except

Share and Per Share Data)

For the three months

ended June 30,

For the six months

ended June 30,

Weighted average shares outstanding

Weighted average dilutive shares outstanding

Basic and diluted Earnings per share

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

Basic and diluted net

income per common share calculations follows:

in Thousands, Except

and Per Share Data)

the three months

September 30,

the Nine months

September 30,

average shares outstanding

average dilutive shares outstanding

and diluted Earnings per share

Requirements and Ratios

18 unchanged sentences

The capital conservation buffer required is 2.50%.

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

At September 30, 2022, the Bank had a capital conservation

buffer of 8.35%.

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

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

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

corrective action regulations provide five classifications:

5 unchanged sentences

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

At June 30, 2022, the most recent regulatory notifications

At September 30, 2022, the most recent regulatory notifications

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

2 unchanged sentences

The Bank’s actual capital amounts and

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

Minimum Capital Requirement

Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions

(Dollars are in thousands)

June 30, 2022:

Total Capital to Risk Weighted Assets

Tier 1 Capital to Risk Weighted Assets

Tier 1 Capital to Average Assets

Common Equity Tier 1 Capital

to Risk Weighted Assets

December 31, 2021:

Total Capital to Risk Weighted Assets

Tier 1 Capital to Risk Weighted Assets

Tier 1 Capital to Average Assets

Common Equity Tier 1 Capital

to Risk Weighted Assets

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

Capital Requirement

to Be Well Capitalized Under Prompt Corrective Action Provisions

are in thousands)

September 30,

Capital to Risk Weighted Assets

1 Capital to Risk Weighted Assets

1 Capital to Average Assets

Equity Tier 1 Capital

Risk Weighted Assets

Capital to Risk Weighted Assets

1 Capital to Risk Weighted Assets

1 Capital to Average Assets

Equity Tier 1 Capital

Risk Weighted Assets

5 INVESTMENT SECURITIES

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

(Dollars are in thousands)

June 30, 2022

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

are in thousands)

Government Agencies

Taxable municipals

Corporate bonds

Mortgage backed securities

Total Securities available for sale

December 31, 2021

backed securities

Securities available for sale

Government Agencies

Taxable municipals

Corporate bonds

Mortgage backed securities

Total Securities available for sale

backed securities

Securities available for sale

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.

Less than 12 Months

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

than 12 Months

Months or More

(Dollars are in thousands)

June 30, 2022

are in thousands)

Government Agencies

Taxable municipals

Corporate bonds

Mortgage backed securities

Total Securities available for sale

December 31, 2021

backed securities

Securities available for sale

Government Agencies

Taxable municipals

Corporate bonds

Mortgage backed securities

Total Securities available for sale

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

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

not a result of credit deterioration.

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

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

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

backed securities

Securities available for sale

September 30, 2022, there were 216 securities in a loss position, of which 100 have been in a loss position for twelve months or more.

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

and are not a result of credit deterioration.

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

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

securities with a carrying value of $28.3 million and $12.1 million at September 30, 2022 and December 31, 2021, respectively, were pledged

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

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

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

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

are in thousands)

provision (benefit)

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

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

2 unchanged sentences

Securities Available-for-Sale

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

in one year or less

one year through five years

five years through ten years

after ten years

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

2 unchanged sentences

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

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

The stock has no quoted market value and no ready

market exists.

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

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

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

(Dollars are in thousands)

December 31, 2021

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer installment loans

All other loans

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

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

included in total loans above are deferred loan fees of $1.7 million and $1.8 million at 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.

of $3.0 million and $2.0 million at September 30, 2022 and December 31, 2021, respectively.

The stock has no quoted market value and

no ready market exists.

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

are in thousands)

estate secured:

and land development

real estate loans

installment loans

in commercial loans at September 30, 2022 and December 31, 2021 were $298 thousand and $6.4 million of Paycheck Protection Program (PPP)

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

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

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

Income from net deferred

2 unchanged sentences

any unamortized fee or costs is recognized at that time.

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

(Dollars are in thousands)

December 31, 2021

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer installment loans and other loans

Total loans receivable on nonaccrual status

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.

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

December 31, 2021:

As of June 30, 2022

(Dollars are in thousands)

Unpaid Principal Balance

With no related allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

With an allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

As of December 31, 2021

(Dollars are in thousands)

Unpaid Principal Balance

With no related allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

With an allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

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

are in thousands)

estate secured:

and land development

real estate loans

installment loans and other loans

loans receivable on nonaccrual status

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

and $445 thousand, respectively.

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

and December 31, 2021:

of September 30, 2022

are in thousands)

Principal Balance

no related allowance recorded:

estate secured:

and land development

installment loans

an allowance recorded:

estate secured:

and land development

installment loans

of December 31, 2021

are in thousands)

Principal Balance

no related allowance recorded:

estate secured:

and land development

installment loans

an allowance recorded:

estate secured:

and land development

installment loans

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)

With no related allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

With an allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

Three Months Ended

June 30, 2022

June 30, 2021

(Dollars are in thousands)

With no related allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

With an allowance recorded:

Real estate secured:

Construction and land development

Residential 1-4 family

Consumer installment loans

All other loans

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,

are in thousands)

no related allowance recorded:

estate secured:

and land development

installment loans

an allowance recorded:

estate secured:

and land development

installment loans

are in thousands)

no related allowance recorded:

estate secured:

and land development

installment loans

an allowance recorded:

estate secured:

and land development

installment loans

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

At September 30, 2022 and December

31, 2021, no loans over 90 days past due were accruing.

As of June 30, 2022

(Dollars are in thousands)

Real estate secured:

Construction and land

Residential 1-4 family

Total real estate loans

Consumer installment

All other loans

As of December 31, 2021

(Dollars are in thousands)

Real estate secured:

Construction and land

Residential 1-4 family

Total real estate loans

Consumer installment

All other loans

of September 30, 2022

are in thousands)

estate secured:

real estate loans

of December 31, 2021

are in thousands)

estate secured:

real estate loans

Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their

22 unchanged sentences

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

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

As of June 30, 2022

(Dollars are in thousands)

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer installment loans

All other loans

As of December 31, 2021

(Dollars are in thousands)

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer installment loans

All other loans

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

of September 30, 2022

are in thousands)

estate secured:

and land development

real estate loans

installment loans

of December 31, 2021

are in thousands)

estate secured:

and land development

real estate loans

installment loans

7 ALLOWANCE FOR LOAN LOSSES

4 unchanged sentences

Due to the underlying SBA guarantee provided for PPP loans,

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

Additionally,

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

were revised accordingly.

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

factors, specifically, unemployment and other economic factors.

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

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

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

factors were revised accordingly.

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

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

following table presents activity in the allowance for loan losses for the nine- and three-month periods ended September 30, 2022 and

2021, respectively.

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

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

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

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

estate secured

2 unchanged sentences

and All Other

Six months ended June

Beginning balance

Nine months ended September

Ending balance

Three months ended June

Three months ended September

Beginning balance

Ending balance

Allowance for loan

losses at June 30, 2022

Individually evluated for impairment

Collectively evaluated for impairment

Loans at June 30, 2022

Individually evluated for impairment

Collectively evaluated for impairment

for loan losses at September 30, 2022

Individually evaluated

for impairment

evaluated for impairment

Loans at September

Individually evaluated

for impairment

evaluated for impairment

estate secured

3 unchanged sentences

for loan losses at December 31, 2021

Individually evaluated

for impairment

Collectively evaluated

for impairment

at December 31, 2021

evaluated for impairment

Loans at December 31,

Individually evaluated

for impairment

Collectively evaluated

for impairment

estate secured

evaluated for impairment

Real estate secured

(Dollars are in thousands)

and Land Development

and All Other

Six months ended June

Construction and Land Development

Residential 1-4 family

Consumer and All Other

Nine months ended September 30, 2021

Beginning balance

Ending balance

Three months ended June

Three months ended September 30, 2021

Beginning balance

2 unchanged sentences

8 TROUBLED DEBT RESTRUCTURINGS

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

were $2.1 million and $2.5 million in loans classified as troubled debt restructurings at September 30, 2022 and December 31, 2021, respectively.

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

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

restructurings.

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

the three months ended June 30, 2022.

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

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

During the three months

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

resulting in charge-offs totaling $835 thousand.

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

three months of 2021.

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

following a modification.

No loans modified during the three and nine months ended September 30, 2022 or September 30, 2021, were considered to be

troubled debt restructurings.

loan totaling $6 thousand, secured by residential real estate, previously modified as a troubled debt restructuring, was in default during

the three months ended September 30, 2022.

Two loans totaling $73 thousand, previously modified as a troubled debt restructuring, that

defaulted during the first nine months of 2022, were in compliance with the terms of the restructuring at September 30, 2022.

the nine months ended September 30, 2021, two loans to the same borrower, previously modified as troubled debt restructurings, totaling

$1.1 million defaulted, resulting in charge-offs totaling $835 thousand.

Generally, a restructured troubled debt is considered to be

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

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

5 unchanged sentences

9 OTHER REAL ESTATE OWNED

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

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

(Dollars are in thousands)

September 30,

December 31, 2021

45 unchanged sentences

The Company’s available for sale securities, totaling $98.8 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.

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

Level 2 inputs from an independent pricing service.

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

16 unchanged sentences

The Company records foreclosed assets as nonrecurring Level 3.

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

of the related allowance):

June 30, 2022

and liabilities measured at fair value are as follows as of September 30, 2022 (for purpose of this table the impaired loans are shown

net of the related allowance):

September 30, 2022

(Dollars are in thousands)

13 unchanged sentences

net of the related allowance):

are in thousands)

market price in active markets

other observable inputs

unobservable inputs

a recurring basis)

for sale investments

December 31, 2021

(Dollars are in thousands)

Quoted market price in active markets

Significant other observable inputs

Significant unobservable inputs

(On a recurring basis)

Available for sale investments

Government Agencies

Mortgage-backed

a non-recurring basis)

real estate owned

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

Taxable municipals

Corporate bonds

Mortgage-backed securities

(On a non-recurring basis)

Other real estate owned

Impaired loans

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

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

in thousands)

Value at June 30, 2022

Value at September 30, 2022

Unobservable Inputs

19 unchanged sentences

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:

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

Fair Value Measurements

3 unchanged sentences

Significant unobservable inputs

June 30, 2022

September 30, 2022

Financial Instruments –

8 unchanged sentences

value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.

These estimates do not reflect any premium or discount that could result from offering for sale at one

the Company’s entire holdings of a particular financial instrument.

Because no market exists for a significant portion of the Company’s

financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions,

risk characteristics of various financial instruments and other factors.

These estimates are subjective in nature and involve uncertainties

and matters of significant judgment and therefore cannot be determined with precision.

Changes in assumptions can significantly affect

the estimates.

These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire

holdings of a particular financial instrument.

Because no market exists for a significant portion of the Company’s financial instruments,

fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics

of various financial instruments and other factors.

These estimates are subjective in nature and involve uncertainties and matters of

significant judgment and therefore cannot be determined with precision.

Changes in assumptions can significantly affect the estimates.

fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports,

2 unchanged sentences

and assumptions are set forth below for the Company’s other financial instruments.

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

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

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

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

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

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

however, an actual exit

price may differ.

11 LEASING ACTIVITIES

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.

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

sublet of a lot adjacent to another office.

The lease agreements have maturity dates ranging from May 2032 to December 2041.

It is assumed that

there are currently no circumstances in which the leases would be terminated prior to expiration.

The weighted average remaining life

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

It is assumed

that there are currently no circumstances in which the leases would be terminated prior to expiration.

The weighted average remaining

life of the lease terms at September 30, 2022 was 9.87 years.

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

1 unchanged sentence

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

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

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

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

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

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

At June 30, 2022,

At September 30, 2022,

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

2 unchanged sentences

12 BORROWED FUNDS

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

No short-term borrowings were outstanding at

December 31, 2021.

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

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

in Borrowed Funds is a short-term FHLB Advance totaling $25 million at September 30, 2022.

No short-term borrowings were outstanding

at December 31, 2021.

The outstanding advance at September 30, 2022, of $25 million, has a fixed rate of 2.60%, and matures December

13 REVENUE FROM CONTRACTS WITH CUSTOMERS

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:

the three months ended

the six months ended

Refer to Note 23 in our Annual

Report on Form 10-K for the year ended December 31, 2021 for a description of how each revenue stream is accounted for under ASC 606.

The following table presents Noninterest income by revenue stream for the three and nine months ended September 30, 2022 and 2021:

the three months

For the nine months

in thousands)

1 unchanged sentence

Processing and interchange income

on sale of securities available-for-sale (1)

and investment fees

1 unchanged sentence

Noninterest Income

Not within the scope of ASU 2014-19

14 NONINTEREST EXPENSES

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

For the three months ended June 30,

For the six months ended June 30,

For the three months ended September 30,

For the Nine months ended September 30,

(Dollars are in thousands)

33 unchanged sentences

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,

The Company is running the new

methodology parallel to the current allowance methodology, and will be assessing the comparative results for the first three quarterly

calculations during the fourth quarter of 2022.

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

114 unchanged sentences

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

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

allowance on its net deferred tax assets.

6 unchanged sentences

and Highlights

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

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

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

Limited branch operations resumed on June

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

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

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

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

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

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

days that lobby service was restarted.

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

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

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

eliminated overdraft fees.

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

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

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

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

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

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

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

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

Consequently, income

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

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

the same six-month period in 2021.

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

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

and non-interest expense increased $24 thousand.

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

income before income taxes.

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

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

Total deposits decreased $449 thousand to $707.1

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

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

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

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

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

the three months ended September 30, 2022, net income of $2.0 million was recorded;

an increase of $141,000, or 7.6%, from the same period

The primary driver for the improved earnings was a decrease in total noninterest expense of $1.5 million due largely to the

$1.0 million decline in occupancy expenses.

This year-over-year decrease in occupancy expenses offset decreases in net interest income

and noninterest income of $218,000 and $781,000, respectively.

Net interest income decreased $218,000, a result of deferred loan fees

earned from the forgiveness of Paycheck Protection Program (PPP) loans of $1.1 million during the third quarter of 2021 not being replicated

in 2022, resulting in a net decrease in interest and fees on loans of $592,000, or 7.8%.

The decrease in loan fees was largely offset

by increased earnings on interest bearing deposits in banks and investments, which increased $531,000 and $117,000, respectively.

the comparative three-month periods of 2022 and 2021, interest expense increased $284,000, as interest on borrowed funds increased $388,000,

offset by a decrease in interest expense on deposits of $104,000.

the nine months ended September 30, 2022, net income totaled $5.8 million or $0.24 per share compared to $5.1 million or $0.21 per share

for the same nine-month period in 2021.

Interest income was slightly higher and interest expense was slightly lower, resulting in an

improvement of $183,000 in net interest income.

Other drivers of the improvement were reduced noninterest expense, which declined $1.4

million, due largely to charges foe the write down of closed and former branch office sites during the third quarters of 2022 and 2021.

Updated valuations of the two branch offices closed in 2022, resulted in a charge of $195,000 that is included in noninterest expense.

During the same period in 2021, three former branch office sites were sold, resulting in gains of $190,000, and three more former branch

office sites were transferred to other real estate owned, resulting in a combined loss of $1.1 million.

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

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

On June 29, 2022, we issued a press release

outlining the timeline, restoration efforts and communications, services and safeguards being offered to our customers in response to

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

Since that date, restoration efforts have been completed

and normal operations have resumed.

Reference to the cybersecurity event is made throughout this Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

balance sheet grew to $828.6 million as of September 30, 2022, from $794.6 million as of December 31, 2021, due to Federal Home Loan

Bank advances taken, in the second quarter of 2022, as a precautionary measure in response to the cybersecurity

Total deposits increased $16.4 million to $723.9 million at September 30, 2022 from $707.5 million at December 31, 2021.

decreased $13.9 million to $579.9 million during the first nine months of 2022, due to repayments of several large commercial real estate

loans combined with PPP loan repayments of approximately $6.1 million.

August of 2022, branch offices in Big Stone Gap and Chilhowie, Virginia were closed and the loan and deposit accounts were transferred

to nearby office locations.

Affected personnel were reassigned to other branches or departments.

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

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

repurchased at an average price of $2.28 per share.

of the Three Months ended June 30, 2022 and 2021

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

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

Through September 30, 2022, 44,485 shares have

been repurchased at an average price of $2.30 per share.

of the Three Months ended September 30, 2022 and 2021

Quarter-to-date

highlights include:

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

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

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

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

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

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

on average assets and equity of 0.94% and 13.70 % for the third quarter of 2022, compared

to 0.91% and 11.75% for the third quarter of 2021, respectively;

interest income was $7.2 million for the third quarter of 2022, a decrease of $218 thousand,

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

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

· 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;

income was $2.2 million, a decrease of $781 thousand, or 26.3%, during the third quarter

of 2022 compared to the third quarter of 2021;

· Noninterest

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

2022 compared to the second quarter of 2021.

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

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

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

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

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

PPP loans are forgiven.

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

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

This decrease in deposit interest expense offset increases for borrowed

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

preferred securities.

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

2 bps to 3.50%.

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

two times for a total of 125 bps.

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

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

expense was $6.6 million, a decrease of $1.5 million, or 18.2%, for the third quarter of

2022 compared to the third quarter of 2021.

Company’s primary source of income is net interest income, which decreased by $218 thousand, or 2.9%, to $7.2 million for the third

quarter of 2022 compared to $7.4 million for the third quarter of 2021.

Interest income increased $66 thousand due to a $56 million increase

in the average balance of earning assets, a shift of funds to higher-yielding investment securities;

and increased interest earning deposits

with banks funded from FHLB advances as we maintained additional liquidity as we monitored customer reaction to the cybersecurity incident.

Additionally, the 2022 increases in the fed funds rate partially offset the decline in accelerated fee recognition when PPP loans are

Total interest expense increased $284 thousand driven primarily by a $388 thousand increase in interest on borrowed funds due

to the FHLB advances combined with increased interest rates paid on trust preferred securities.

Increased borrowing expenses were partially

offset by a decrease in interest on deposits which decreased $104 thousand, or 19.9%, for the three months ended September 30, 2022 compared

to the three months ended September 30, 2021.

The lower deposit interest expense resulted largely from reduced time deposit interest

expense due to a decrease in both volume and interest rates.

Overall there was a 12 basis-point increase in the cost of funds to 46 bps

while the net interest margin decreased 38 bps to 3.55%.

During the third quarter of 2022, the Federal Reserve’s Open Market Committee

(FOMC) increased the discount rate two times for a total of 150 bps, bringing the number of rate increases for the first nine months

of 2022 to five, totaling 300 bps.

The Company experienced benefits of the rate increases during the third quarter, but the full impact

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

next interest rate repricing date.

Deposit rates 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

Deposit rates have not yet been significantly impacted by the rate increases, but the Company continues

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

During the third quarter of 2022, in response to rising interest rates, we initiated some promotional time deposit products.

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

2 unchanged sentences

in thousands)

Months Ended June 30,

loans held for sale

Months Ended September 30,

bearing deposits in other banks

6 unchanged sentences

and money market deposits

interest-bearing deposits

preferred securities

9 unchanged sentences

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

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

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

Includes mortgage loans held for sale

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

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

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

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

Volume and Rate Analysis

Increase (decrease)

Three Months Ended June 30,

2022 versus 2021

Three Months Ended September 30, 2022 versus 2021

(Dollars in thousands)

2 unchanged sentences

Interest Income:

Mortgage loans held for sale

Federal funds sold

10 unchanged sentences

Change in Net Interest Income

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

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

These increases

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

Although the provision declined

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

as of June 30, 2022.

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

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

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

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

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

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

Card processing

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

to a decline in transaction volume.

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

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

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

Increases to salaries and

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

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

The increase to salaries and benefits was due to the impact

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

had not yet been implemented in 2021.

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

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

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

The decrease in other nonoperating expenses was due

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

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

recorded during the second quarter of 2022.

on our current assessment of the loan portfolio, a provision of $225 thousand was made in the third quarter of 2022, compared to zero

for the third quarter of 2021, due to a combination of factors, including the rising interest rate environment, overdraft charge-offs

related to the cybersecurity incident realized during the third quarter of 2022, and uncertain economic trends.

The allowance for loan

losses as a percentage of loans increased from 1.13% at December 31, 2021 to 1.14% as of September 30, 2022.

For a discussion of the

factors affecting the allowance for loan losses, including provision expense, refer to Note 7, Allowance for Loan Losses, in Item 1 of

this Form 10-Q.

noninterest income decreased $781,000 in the third quarter of 2022 compared to the third quarter of 2021.

The primary drivers of the

quarter-over-quarter decline were $322,000 of gains on sales of investment securities and $190,000 of gains on sale of bank premises

in 2021 that were not repeated in 2022.

In addition, the Company recorded a $100,000 write-down of bank owned life insurance (BOLI) and

a period-over-period decrease in gains and commissions on mortgage loan originations of $82,000, during the third quarter of 2022.

BOLI charge resulted from a decrease in the market value of the underlying investments supporting the policy due to increased interest

Service charge revenue increased $68 thousand, or 6.8%, to $1.1 million for the comparative three-month periods ended September

30, 2022 and 2021 as operations returned to normal operations after the cybersecurity incident.

Card processing and interchange revenue

decreased $67 thousand for the three months ended September 30, 2022, as compared to the same period in 2021, due to a decline in transaction

The increased interest rate environment also contributed to the reduced mortgage revenue as mortgage originations and refinancings

noninterest expense decreased $1.5 million in the third quarter of 2022 compared to the same period of 2021, due primarily to charges

recorded in 2021 of $1.1 million related to the transfer of three former branch office locations to other real estate owned, which is

reflected in occupancy and equipment expense, and $395,000 of write-downs on OREO, which is reflected in other operating expense.

charges more than exceeded the $195,000 charge related to the closure of two branch offices during the third quarter of 2022, which is

included in occupancy expenses.

Salaries and benefits remained virtually flat for the comparative three-month period in 2022 versus 2021.

This was due in part to an adjustment to reduce the liability for our self-insured insurance plan of $100,000 during the third quarter

of 2022, based on a rolling assessment of claims made against the plan.

This liability adjustment offset employee appreciation bonus

payments, totaling $89,000, during the third quarter in recognition of employee response to the cybersecurity incident in June of 2022.

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

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

We continue to assess our operational

procedures and structure to improve efficiencies and contain costs.

A review of deposit operations is scheduled for the third quarter

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

on August 12, 2022.

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

positions or offices, as available.

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

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

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

income, improved to 70.3% for third quarter of 2022 from 77.6% for the third quarter of 2021.

We continue to assess our operational procedures

and structure to improve efficiencies and contain costs.

A review of deposit operations was performed during the third quarter of 2022,

and based on this assessment, several processes will be modified or reassigned to improve operational efficiencies.

August 2022, the Bank closed branch offices in Big Stone Gap and Chilhowie, Virginia.

Accounts serviced at these offices were transferred

to nearby branches, and employees were reassigned to other positions or offices, as available.

Interactive teller machines at these locations

will remain in service for the foreseeable future.

This restructuring of the branch network should improve the efficiency of services

to the customers of these communities.

tax expense for the third quarter of 2022 totaled $579 thousand, an increase of $103 thousand, or 21.6% from the $476 thousand recorded

during the same period in 2021.

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

same period in 2021.

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

of the Six Months ended June 30, 2022 and 2021

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

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

The effective tax rate for the three months ended September 30, 2022, was 22.6%, compared to 20.5% for

the same period in 2021.

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

of the Nine Months ended September 30, 2022 and 2021

highlights include:

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

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

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

for the first half of 2021;

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

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

interest income improved to $20.7 million for the first nine months of 2022, an improvement

of $183 thousand, or 0.9%, compared to the first nine months of 2021;

interest margin was 3.53% for the first nine months of 2022, a decrease of 15 bps compared

to 3.68% for the first nine months of 2021;

for loans losses was $400 thousand for the first nine months of 2022, an increase of $28

thousand, or 7.5%, compared to the first nine months of 2021;

· Noninterest

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

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

months of 2021;

and employee benefits expense was $9.9 million, an increase of $530 thousand, or 5.6%, compared

to the first half of 2021;

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

the first half of 2021.

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

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

improvement of $401 thousand in net interest income.

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

liabilities for the periods indicated.

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

to the first nine months of 2021;

noninterest expense was $19.7 million, a decrease of $1.4 million, or 6.8%, compared to the

first nine months of 2021.

during the nine months ended September 30, 2022, compared to the same period in 2021, net income improved 14.5% to $5.8 million from

$5.1 million.

Although interest income was virtually unchanged, increasing $116 thousand, reduced interest expense of $67 thousand contributed

to an improvement of $183 thousand in net interest income.

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

interest-bearing liabilities for the periods indicated.

Interest Margin Analysis

Balances, Income and Expense, and Yields and Rates

in thousands)

Months Ended June 30,

loans held for sale

Months Ended September 30,

bearing deposits in other banks

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and money market deposits

interest-bearing liabilities

preferred securities

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

Includes mortgage loans held for sale

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

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

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

to rates and volume for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.

Volume and Rate Analysis

Increase (decrease)

Six Months Ended June 30, 2022 versus 2021

Nine Months Ended September 30, 2022 versus 2021

(Dollars in thousands)

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Interest Income:

Mortgage loans held for sale

Federal funds sold

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Change in Net Interest Income

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

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

the first nine months of 2022 compared to the same period of 2021, net interest income increased $183 thousand primarily due to a reduction

in interest expense on deposits of $528 thousand, largely offset by increases to the cost of borrowed funds of $461 thousand.

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

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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.

repayments as these fees fell $1.6 million during the comparative nine-month periods.

As a result, the net interest margin for the first

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

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

nine months of 2022 was 3.53%, a reduction of 15 bps compared to 3.68% for the first nine months of 2021.

the first nine months of 2022, the FOMC increased the discount rate five times for a total of 300 bps.

This increased interest rate environment

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accounts, which will increase our overall cost of funds.

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

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

This product pays

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

going forward.

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

Additionally, in response to the June 2022 cybersecurity incident, during the

third quarter of 2022, we began offering a customer appreciation time deposit product to recognize the patience and loyalty of our customers.

This promotional product pays a higher rate than is currently offered on similar non-promotional products and is expected to contribute

to an increased cost of funds going forward.

on our current assessment of the loan portfolio, $400 thousand was provided to the allowance for loan losses during the first nine months

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

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

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

This improvement

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

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

Card processing and interchange

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

payments and the effects of historic inflation.

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

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

uncertain whether those lost opportunities can be recovered.

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

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

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

As discussed previously, salaries

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

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

Also, as discussed, occupancy costs

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

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

It is anticipated that the branch closings scheduled for August

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

Data processing and telecommunication costs decreased due to negotiated

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

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

Other noninterest expenses benefited from reduced costs associated

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

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

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

from the cybersecurity incident.

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

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

on hand at various branch locations.

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

prior to June 30, 2022.

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

This growth was

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

while interest-bearing deposits decreased $9.2 million.

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

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

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

The FHLB advance funds were transferred to interest bearing deposits

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

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

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

Purchases are expected

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

the interest rate risk and liquidity of the balance sheet.

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

These loans are originated for sale into the

secondary market on a best efforts basis.

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

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

liquidating properties held as collateral.

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

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

Commercial loans decreased

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

during the first six months of 2022.

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

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

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

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

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

While we have experienced deposit runoff in response to the cybersecurity

incident, other factors have also influenced customers’

activities, including interest rates available for time deposits and the

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

Additionally, some of this deposit activity is due to normal

churn of deposit accounts and depositors.

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

deposits decreased $17.1 million or 8.6%.

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

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

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

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

While it is likely that recent and expected

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

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

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

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

as a precautionary measure related to the cybersecurity incident.

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

and $40 million in December 2022.

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

Trust preferred securities of

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

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

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

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

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

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

noninterest income decreased $571,000 for the first nine months of 2022, compared to the same period in 2021, to $6.9 million.

on the sale of investment securities and a gain on the sale of bank premises in 2021 account for $322,000 and $190,000, respectively,

of the decrease, as those earnings were not replicated in 2022.

Additionally, a BOLI adjustment of $100,000 was recorded in 2022, as

previously discussed.

Aside from these individual events, financial services and secondary market mortgage lending activities were impacted

by the cybersecurity event and the rising interest rate environment, showing year-over-year revenue declines of $74,000 and $116,000,

respectively.

These declines were offset by increased service charge revenue which increased $299,000, despite a period during the cybersecurity

event where service charges were waived for all accounts.

the nine months ended September 30, 2022, compared to the same period in 2021, total noninterest expense decreased $1.4 million to $19.7

million, primarily due to a $1.4 million decrease in occupancy and equipment expense that was driven nearly entirely by the $1.1 million

in losses on three former branch office locations discussed above, which were transferred into other real estate owned in 2021, partially

offset by a similar $195,000 charge recorded in 2022.

Due to the reduction in the number of branch office locations, year-over-year depreciation

expense decreased $286,000.

Salaries and benefits increased $530,000, or 5.6%, to $9.9 million for the comparative nine-month period

of 2022 versus 2021, as salary adjustments, accruals for performance bonus and profit sharing programs, along with costs for new or amended

benefits, accounted for approximately $485,000 of the increase, along with approximately $89,000 of employee appreciation bonus payments,

made to all employees, as a result of their efforts in addressing the cybersecurity incident.

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

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

assets increased $33.9 million, or 4.3%, to $828.6 million at September 30, 2022 from $794.6 million at December 31, 2021.

was primarily driven by the FHLB advances, now totaling $25.0 million, and total deposits which increased $16.4 million, as noninterest-bearing

deposits increased $17.8 million while interest-bearing deposits decreased $1.4 million.

The year-to-date deposit activity is due to

a combination of factors including customer reaction to the cybersecurity incident, time deposit customers seeking higher interest rates

and actions taken by customers at the two branch locations closed in August 2022.

The FHLB advance funds were transferred to interest

bearing deposits with other banks which increased $51.6 million year-to-date.

investments decreased $8.5 million, or 7.9%, to $98.8 million at September 30, 2022 due primarily to an increase of $16.4 million in

net unrealized losses and $11.5 million of repayments and maturities, which more than offset purchases of $19.8 million.

Future purchases

of investment securities will depend on a number of factors, including changes in loans and deposits, liquidity needs and the results

of the Company’s interest rate risk modeling.

decreased $13.9 million, or 2.3% during the first nine months of 2022.

Commercial real estate and multifamily loans decreased $8.1 million

or 3.9% and $4.0 million or 12.1% to $198.1 million and $29.1 million, respectively at September 30, 2022, as several large commercial

loan borrowers liquidated their holdings in projects we financed and repaid the corresponding loans.

These repayments were partially

offset by increases in construction and development loans, and residential real estate which increased $6.3 million, or 19.4%, and $2.2

million, or 1.0%, respectively.

Commercial loans decreased $9.2 million or 16.9% to $45.1 million at September 30, 2022, due largely

to repayments and forgiveness of PPP loans which declined $6.1 million during the first nine months of 2022.

At September 30, 2022, PPP

loans totaled $298 thousand and no longer represent a significant component of our loan portfolio.

Loan originations, specifically commercial

real estate and multi-family loans, continue to be positively impacted by our Boone, NC, loan production office, as well as originations

in the Kingsport and Johnson City, Tennessee markets.

deposits increased $16.4 million, or 2.3%, to $723.9 million at September 30, 2022 from $707.5 million at December 31, 2021, as noninterest

bearing deposits increased $17.8 million, or 7.1%.

The increase in noninterest bearing deposits more than offset a decrease in interest

bearing deposits which declined $1.4 million, or 0.3% during the first nine months of 2022.

Despite the net increase in deposits, we

experienced some deposit runoff in response to the cybersecurity incident.

Additionally, other factors also influenced customers’

deposit activities, including interest rates available for time deposits and the closure of two branch offices in August 2022.

the closure of the two branch offices, runoff of accounts from those offices has been minimal, totaling approximately $555 thousand through

September 30, 2022.

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

Specifically,

time deposit runoff totaled $16.6 million, or 8.4%, during the first nine months of 2022.

The decrease in time deposits was offset by

increases in non-interest bearing and interest-bearing transaction accounts which increased $17.8 million, or 7.1%, and $15.3 million,

or 5.9%, during the nine months ended September 30, 2022.

Another factor influencing deposit retention is the dissipation of liquidity

experienced by depositors, as stimulus and other economic support funds distributed during the height of the COVID-19 pandemic are spent

or otherwise distributed.

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

liquidity, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our

customer base and communities.

September 30, 2022, FHLB advances totaling $25 million were outstanding.

As previously discussed, overnight and term advances totaling

$95 million were taken in June 2022, as a precautionary measure related to the cybersecurity incident with $60 million outstanding as

of June 30, 2022.

During the third quarter of 2022, an advance totaling $20.0 million matured and was repaid, and a $15.0 million partial

prepayment was made on the remaining $40.0 million advance which matures in December 2022.

We anticipate repaying the $25.0 million outstanding

advance at maturity.

Trust preferred securities of $16.5 million at September 30, 2022 were unchanged compared to December 31, 2021.

equity at September 30, 2022 was $55.2 million, a decrease of $8.4 million, or 13.2%, compared to $63.6 million at December 31, 2021.

As discussed previously and in the Capital Resources section below, the primary driver of the decline was the $12.9 million net increase

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

cash dividend payment and repurchases of common shares.

The increase in other accumulated comprehensive loss is related to the recent

increase in interest rates and is not related to any deterioration in the credit quality of any investment securities held.

Nonperforming

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secured by residential mortgages and commercial real estate.

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

OREO is primarily made up of farmland and residential lots.

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

assets decreased $275 thousand, or 6.4%, during the first nine months of 2022, driven by a decrease in OREO of $1.0 million, which offset

an increase in nonaccrual loans of $765 thousand.

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As a result, the ratio of nonperforming assets

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

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

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

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

During the second quarter of 2022, two former

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

We continue extensive

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

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

However, we may

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

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

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

As previously discussed this

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

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

at December 31, 2021.

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

to total assets decreased to 0.49% at September 30, 2022 compared to 0.54% at December 31, 2021.

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

During 2022, two former branch sites

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

We continue extensive and aggressive

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

We remain mindful

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

However, we may recognize some losses

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

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

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

rated substandard or below totaled $3.7 million at September 30, 2022, an increase of $788 thousand from $2.9 million at December 31,

Total past due loans increased slightly to $3.8 million at September 30, 2022 from $3.4 million at December 31, 2021.

due loans at September 30, 2022, represent a decrease of $6.3 million, or 62.4%, from the $10.0 million reported at June 30, 2022, as

delays in loan billing and notice presentation related to the cybersecurity incident, during the second quarter of 2022, were addressed

during the third quarter.

allowance for loan losses at September 30, 2022 was $6.6 million, or 1.14% of total loans, as compared to $6.7 million, or 1.13% of total

loans, at December 31, 2021.

Impaired loans totaled $3.1 million with an estimated related specific allowance of $269 thousand at September

30, 2022, as compared to $2.8 million of impaired loans with an estimated related allowance of $166 thousand at the end of 2021.

A provision of

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

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

of $400 thousand was recorded for the first nine months of 2022 compared to $372 thousand during the first nine months of 2021.

the first nine months of 2022, net charge-offs totaled $542 thousand, or 0.12% of average loans, annualized, as compared to $906 thousand,

or 0.21% of average loans, for the same period in 2021.

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.

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

Credit Ratios

in thousands)

for loan losses

for loan losses to total loans

loans to total loans

of allowance for loan losses to nonaccrual loans

net of recoveries

charge-offs to average loans

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

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

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

has been input and validated.

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

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

Of the net charge-offs recorded in 2022, approximately $320 thousand represents

overdraft charge-offs resulting from customer activity during the several days of the cybersecurity event when we increased daily transaction

limits for debit card and ATM activity to meet customer needs while core services were restored.

The allowance for loan losses is maintained

at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio, whether

or not the losses are actually ever realized.

Through our quarterly assessment, we continue to adjust the allowance for loan loss model

to best reflect the risks in the portfolio and the improvements made in our internal policies and procedures;

however, future provisions

may be deemed necessary.

During the first nine months of 2022, we adjusted our external qualitative factors to reflect positive employment

and home sales statistics, along with adjusting for the impact of historically high inflation.

Those changes along with the assessment

of the inherent and specific risks associated with the loan portfolio resulted in a

provision to the allowance of $400 thousand for the first nine months 2022.

The following table summarizes components of the allowance

for loan losses and related loans as of September 30, 2022 and December 31, 2021:

Selected Credit Ratios

September 30,

(Dollars in thousands)

Allowance for loan losses

Allowance for loan losses to total loans

Nonaccrual loans

Nonaccrual loans to total loans

Ratio of allowance for loan losses to nonaccrual loans

Charge-offs net of recoveries

Average loans

Net charge-offs to average loans

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

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

runs, which began late in the third quarter of 2022.

Initial CECL model runs have occurred using only historical loss information.

assumptions have been input and are being layered onto the initial runs of historical loan and loss activity.

The Company will run the

new methodology parallel to the current allowance methodology for the first three quarters of 2022 before full implementation.

we have retained a third-party vendor to perform a validation of the CECL model implementation.

Tax Asset and Income Taxes

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

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

31, 2021, respectively.

tax asset on the unrealized loss on securities available for sale, of $916 thousand and $1.5 million existed at September 30, 2022 and

December 31, 2021, respectively.

Our income tax expense was computed at the corporate income tax rate of 21% of taxable income.

We have no significant

nontaxable income or nondeductible expenses.

no significant nontaxable income or nondeductible expenses.

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,

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.

equity at September 30, 2022 was $55.2 million compared to $63.6 million at December 31, 2021, a decrease of $8.4

million, or 13.2%.

As previously discussed, this decline was driven by the $12.9 million net increase in the accumulated other comprehensive

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

Excluding the impact of the unrealized loss, equity

increased $4.5 million, due to net income of $5.8 million less the cash dividend payment of $1.2 million and $103 thousand used for share

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

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Item 1 of this Form 10-Q.

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

The ratios mentioned above

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

value per common share was $2.35 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:

months ended June 30,

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

The ratios mentioned

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

value per common share was $2.31 at September 30, 2022, and $2.66 at December 31, 2021.

Excluding the impact of the accumulated other

comprehensive loss, book value per share was $2.89 and $2.69 at September 30, 2022 and December 31, 2021, respectively.

Other key performance

indicators are as follows:

months ended September 30,

on average assets 1

8 unchanged sentences

to shareholders.

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

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

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

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

unused funding sources for emergency needs.

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

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

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

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

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

the second quarter of 2022, the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s

outstanding common stock through March 31, 2023.

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

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

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

During the third

quarter of 2022, 26,831 shares were purchased at an average price of $2.32 per share;

bringing the total shares repurchased through September

30, 2022 to 44,485 at an average price of $2.30 per share.

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

under this program.

discussed previously, in response to the cybersecurity incident, during the second quarter of 2022, we took efforts to increase on balance

sheet liquidity through a series of FHLB advances transferred to our account at Federal Reserve Bank and pledging additional investment

securities as collateral against unused funding sources for emergency needs.

The deposit runoff since the cybersecurity incident has

not been significant.

Based on the customer response and an assessment of our overall liquidity, during the third quarter of 2022, we

repaid a maturing FHLB advance totaling $20.0 million, and partially prepaid $15.0 million on the remaining $40.0 million advance.

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

for sale investments.

Collectively, those balances were $185.5 million at September 30, 2022, an increase of $26.2 million from $159.3

million at December 31, 2021.

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

needs during 2022.

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

These investments provide a source of liquidity

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sold and overnight deposits with the Federal Reserve Bank.

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

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

the foreseeable future.

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

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

for August 2022.

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

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

Due to the increase in the unrealized loss on securities available for sale,

the sale of investments would not be considered a primary source of liquidity due to the immediate impact on regulatory capital;

the majority of the portfolio is considered high credit quality investments and would be available to pledge against borrowings.

loan to deposit ratio was 80.1% at September 30, 2022 and 83.9% at December 31, 2021.

We anticipate this ratio to remain at or below

90% for the foreseeable future.

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

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

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federal funds through credit facilities extended by correspondent banks.

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

Bank’s line of credit with the FHLB is $211.7 million, with unused availability at September 30, 2022 of $179.7 million.

FHLB advances

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

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

to $129.2 million at June 30, 2022.

totaling $25 million were outstanding at September 30, 2022, but the credit line also secures a letter of credit totaling $7.0 million.

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

to $123.2 million at September 30, 2022.

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.

At September 30, 2022,

we held no brokered deposits while $2.8 million in CDARS reciprocal time deposits and $23.1 million in ICS reciprocal interest-bearing

demand deposits are outstanding.

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

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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 an estimated market value of $24.4 million were pledged at September 30, 2022.

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

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

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.

bank holding company has approximately $371 thousand in cash on deposit at the Bank at September 30, 2022.

The holding company receives

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

dividend payments to shareholders and repurchase shares.

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

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common stock through March 31, 2023.

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

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

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

Balance Sheet Items and Contractual Obligations

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

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

disclosed in our 2021 Form 10-K.

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

What changed 10-Q

Item 1. Financial Statements