What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-31 · 470 added, 591 removed, 322 unchanged (77% of the section changed)

9 unchanged sentences

looking statements.

The forward-looking information is based on various factors and was derived using numerous assumptions.

These forward-looking statements are based on various factors and were derived using numerous assumptions as of the

date of this Form 10-K, and are subject to significant risks.

factors that may cause actual results to differ from projections include:

17 unchanged sentences

development and acceptance of new products and services we have offered or may offer;

flows and competition for deposits;

effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation,

interest rate, market and monetary fluctuations;

occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the ongoing

novel coronavirus (COVID-19) outbreak and the associated efforts to limit the spread of the disease), and other catastrophic events;

occurrence of significant natural disasters, including severe weather conditions, floods, health related issues (including the lingering

impact of the novel coronavirus (COVID-19) outbreak and other catastrophic events;

conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S.

5 unchanged sentences

in generally accepted accounting principles;

in the allowance for loan losses resulting from the adoption and implementation of the CECL methodology;

transition from the use of the LIBOR index;

in governmental regulations, tax rates and similar matters;

4 unchanged sentences

or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

following commentary discusses major components of our business and presents an overview of our consolidated financial position at December

31, 2021 and 2020, as well as results of operations for the years ended December 31, 2021 and 2020.

This discussion should be reviewed

in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere

in this Form 10-K.

following commentary discusses major components of our business and presents an overview of our consolidated financial position as of

December 31, 2022 and 2021, as well as results of operations for the years ended December 31, 2022 and 2021.

This discussion should be

reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented

elsewhere in this Form 10-K.

Peoples generates a significant amount of its income from the net interest income earned by the Bank.

1 unchanged sentence

between interest income and interest expense.

Interest income depends on the volume

of interest-earning assets outstanding during the period and the interest rates earned thereon.

The Bank's interest expense is a function

of the average amount of interest-bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon.

The quality of the assets further influences the amount of interest income lost on nonaccruing loans and the amount of provision expense

added to the allowance for loan losses.

The Bank also generates noninterest income from service charges on deposit accounts, debit and

credit card interchange income, and commissions on insurance and investment products sold.

Interest income depends on the volume of interest-earning assets outstanding during the

period and the interest rates earned thereon.

The Bank's interest expense is a function of the average amount of interest-bearing deposits

and borrowed money outstanding during the period and the interest rates paid thereon.

The quality of the assets further influences the

amount of interest income lost on nonaccruing loans and the amount of provision expense added to the allowance for loan losses.

also generates noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions

on insurance and investment products sold.

Accounting Policies

7 unchanged sentences

for loan losses, we refer you to the section on “Allowance for Loan Losses” in this discussion.

tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities

using the enacted marginal tax rate.

A valuation allowance on net deferred tax assets would be provided if it was deemed more likely

than not such assets would not be realized.

At December 31, 2021 and 2020, the Company had no valuation allowance on its net deferred

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

on examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial

statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized

upon settlement.

For further discussion of the deferred tax asset and valuation allowance, we refer you to the section on “Income

Taxes and Deferred Tax Assets” in this discussion.

further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated

Financial Statements, found in Item 8 to this annual report on Form 10-K.

financial statements, contained in Item 8 of this Form 10-K.

Company, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions,

10 unchanged sentences

be no assurance that it or its subsidiaries will not suffer such losses in the future.

The Company’s risk and exposure to these

matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our

e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and

how they want to be served.

As a result, cyber security and the continued development and enhancement of the Company’s controls,

processes and practices, designed to protect its and its subsidiaries’ systems, computers, software, data and networks from attack,

damage or unauthorized access, remain a priority for the Company.

As cyber threats continue to evolve, the Company may be required to

expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any

information security vulnerabilities.

discussed in the Supervision and Regulation section, the federal banking agencies have issued a joint rule that requires banking organizations

to notify their primary regulator as soon as possible and no later than 36 hours after any cyber-security incident has occurred.

new rule takes effect on April 1, 2022, with full compliance extended to May 1, 2022.

date, we have not experienced a significant compromise, significant data loss or any material financial losses related to cyber-attacks,

but our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could

experience a significant event in the future.

March 2020, the COVID-19 pandemic has adversely affected our communities and the way we do business, as well as, economic activity globally,

nationally and locally.

Among other things, interest rates declined, unemployment increased and economic output slowed dramatically during

the last year, as restrictions related to the pandemic eased, employment increased and pent-up demand was released, creating global supply

chain issues and shortages of goods, which in turn has triggered price inflation we have not seen in over 30 years.

In an effort to address

inflation, the Federal Open Market Committee (the “FOMC”) has slowed monetary accommodation and on March 16, 2022 increased

the federal funds rate 25 bps, in the first of what is expected to be a series of rate increases during 2022.

to economic uncertainty and increased inflationary pressures are military actions taken by Russia against Ukraine commencing in February

2022, which have added stress to existing supply chain concerns and placed upward pressure on oil and natural gas prices.

this time, we cannot reasonably estimate the term or intensity of any possible adverse impact on our financial position, operations or

liquidity, resulting from economic disruption and uncertainty related to COVID-19 variants, trade and supply chain disruption, continuing

inflationary pressures, ongoing military actions against Ukraine, and the uncertainty of the timing and extent of potential actions that

might be taken by the FOMC.

Company made significant progress during 2021 resulting in a record consolidated net income for the year ended December 31, 2021, of

$7.0 million, or basic income per share of $0.29, as compared to a net income of $2.9 million, or basic income per share of $0.12, for

the year ended December 31, 2020, an improvement of $4.1 million, or 142.6%.

Retained earnings stood at $2.0 million at December 31,

2021, the first time it has been positive since 2010.

improvement is due to an increase of $2.1 million in net interest income, a decrease of $1.9 million in provision for loan loss expense,

and an increase of $1.8 million in noninterest income, offset by an $870 thousand increase in noninterest expense.

The increase of $2.1

million in net interest income was due primarily to a decrease of $2.0 million in interest expense on deposits, plus an increase of $329

thousand in interest income on investments, partially offset by a $315,000 decrease in interest income on loans, including fees.

reduction in both interest income and interest expense was driven mainly by lower market rates, which remained low throughout 2020 and

The decrease of $1.9 million in provision for loan loss expense is due to improving asset quality, as exhibited by reductions in

past due loans, classified loans and nonaccrual loans, along with improving employment and non-inflation related economic conditions.

The $1.8 million increase in noninterest income was driven by an additional $507 thousand in service charges and fees, a $557 thousand

increase in card processing and interchange income, a $313 thousand increase in financial services fees, plus nonrecurring gains on sales

of investment securities of $322 thousand.

Noninterest expense grew by $870 thousand primarily due to valuation adjustments of $1.1 million

on three former branch office locations, which were transferred into other real estate owned, offset by a $566 thousand reduction in

salaries and benefit expense.

the year ended December 31, 2021, total assets grew $38.3 million, or 5.1%, to $794.6 million.

Loan balances increased $18.2 million,

Excluding the net impact of $25.3 million in PPP loan originations and $53.6 million of PPP loan repayments, the remaining loan

portfolio grew $46.6 million, due largely to our new Boone loan production office, which opened during the fourth quarter of 2020.

grew $39.5 million, or 5.9%, due to the impact of stimulus payments and PPP loan funds during the first half of the year, combined with

residual liquidity that remains in the financial markets.

This deposit growth, combined with a decrease of $30.3 million in interest

bearing deposits in other banks, funded a net increase in the investment portfolio of $59.0 million.

On June 15, 2022, we experienced a cybersecurity

incident that temporarily interrupted the operability of our computer systems.

Limited operations were restored June 17, 2022, and full

operations were restored June 21, 2022.

Since that date, restoration efforts have been completed and normal operations have resumed.

The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these

threats, our plans to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity

solutions to serve our customers when and how they want to be served.

As a result, cyber security and the continued development and enhancement

of the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software,

data and networks from attack, damage or unauthorized access, remain a priority for the Company.

As cyber threats continue to evolve,

the Company has expended resources and may be required to expend significant additional resources to continue to modify or enhance its

protective measures or to investigate and remediate any information security vulnerabilities.

discussed under the heading “Supervision and Regulation” in Item 1 of this Form 10-K, the federal banking agencies have issued

a joint rule that requires banking organizations to notify their primary regulator as soon as possible and no later than 36 hours after

any cyber-security incident has occurred.

Company made significant progress during 2022 resulting in the highest annual consolidated net income in the history of the Company.

For the year ended December 31, 2022, net income was $8.1 million, or basic and diluted net income per share of $0.34, compared to a

net income of $7.0 million, or basic and diluted net income per share of $0.29, for the year ended December 31, 2021, an improvement

of $1.1 million, or 15.3%.

Retained earnings increased to $8.9 million as of December 31, 2022 from $2.0 million as of December 31, 2021,

an increase of $6.9 million or 339.0%.

interest income for the year ended December 31, 2022 was $28.3 million compared to $27.2 million for the year ended December 31, 2021.

The improvement of $1.1 million in net interest income was primarily attributable to a $33.8 million increase in average earning assets

and rising market interest rates during the year, partially offset by a decrease in loan origination fees compared to 2021 as PPP loans

were forgiven and an increase in costs of our variable rate trust preferred securities in 2022.

Net interest margin was 3.62% compared

to 3.64% for the year ended December 31, 2022, and 2021, respectively.

income was $9.2 million for the year ended December 31, 2022 compared to $10.0 million for the year ended December 31, 2021.

decrease was attributable to $322,000 of gains on the sales of investment securities during the year ended December 31, 2021, $190,000

of gains on the sales of three former branch locations during the year December 31, 2021, as well as a write-down of bank owned life

insurance (BOLI) of $158,000 during the year ended December 31, 2022, and a decrease in gains and commissions on mortgage loan originations

and sales of approximately $162,000 due to the impact of rising interest rates on mortgage demand.

expense was $26.5 million for the year ended December 31, 2022 compared to $27.9 million for the year ended December 31, 2021.

million decrease was primarily due to valuation adjustments of other real estate owned during the year ended December 31, 2021, which

consisted of $1.1 million related to former branch locations and approximately $390,000 in net losses and write-downs on the sales of

other real estate owned.

This was offset by an increase of approximately $703,000 in salaries and benefits during the year ended December

31, 2022, which is attributed to higher bonus accruals based on the Company’s performance, annual wage adjustments, and adjustments

to the minimum starting salaries of employees to reflect rising costs to attract and retain talent.

the year ended December 31, 2022, total assets decreased $19.3 million, or 2.4%, to $775.4 million.

Loans receivable decreased $9.1

million, or 1.5%, during 2022, which is partly attributable to several large borrowers selling their businesses or collateral and paying

off the related loans.

Additionally, loan pricing remains very competitive in the Company’s market and has impacted loan originations.

Investment securities decreased $11.0 million in 2022, which is primarily due to the decline in the market value of the investment portfolio

due to rising interest rates.

deposits declined $14.8 million, or 2.1%, during 2022, with most of the decline occurring during the fourth quarter as competition for

funding intensified.

Peoples Bank remains well-capitalized.

Leverage ratio improved to 10.40%.

Company’s key performance indicators are as follows:

Year ended December 31,

Return on average assets

Return on average equity

Average equity to average assets ratio

from the year 2021 include:

income improved 142.6% to a historical Company record of $7.0 million, or $0.29 per share,

in 2021 compared to $2.9 million, or $0.12 per share, in 2020;

assets increased $38.3 million, or 5.1%, to $794.6 million at December 31, 2021 compared

to $756.3 million at December 31, 2020;

value per share was $2.66 as of December 31, 2021 and $2.43 as of December 31, 2020;

interest income was $27.2 million, an increase of $2.1 million compared to 2020, as described

net interest margin was 3.64%, a reduction of 1 basis points compared to 3.65% for the year

ended December 31,

loans increased $18.2 million, or 3.2%, to $593.7 million during the year ended December

available for sale increased $59.0 million, or 121.8%, to $107.4 million during the year

ended December 31, 2021;

deposits increased $39.5 million, or 5.9%, to $707.5 million during the year ended December

31, 2021, primarily due to PPP loan funds and federal stimulus payments;

· Noninterest

income was $10.0 million, an increase of $1.8 million compared to 2020;

and employee benefits expense was $12.7 million, a reduction of $566 thousand compared to

2020, which was due mainly to the restructuring announced in May of 2020 and the overall

reduction in staff;

the fourth quarter of 2021, we began implementing a plan to increase our minimum wage to

$15.00 per hour.;

· Nonperforming

assets, which include nonaccrual loans and other real estate owned, totaled $4.3 million

at December 31, 2021, a decrease of $4.6 million, or 51.6% during the year ended December

· Nonperforming

assets as a percentage of total assets was 0.54% at December 31, 2021, compared to 1.17%

at December 31,2020;

net charge offs as a percentage of average loans were 0.14% during 2021, compared to 0.08%

allowance for loan losses as a percentage to total loans was 1.13% at December 31, 2021,

as compared to 1.25% at December 31, 2020.

detail on the above highlighted items, refer to their related following sections.

on average assets

on average shareholders’ equity

shareholders’ equity to average assets ratio

Interest Income and Net Interest Margin

Company’s primary source of income is net interest income, which increased $1.1 million, or 3.95%, in 2022 compared to 2021 due

primarily to a decrease of $2.0 million in interest expense on deposits, plus an increase of $329,000 in interest income on investments,

partially offset by a $315,000 decrease in interest income on loans, including fees.

The reduction in interest expense on deposits is

due to reduced rates on time deposits and a reduction of $34.7 million in average time deposit balances.

The increase in interest income

on investments is due to an increase in average balances of $33.6 million, as we redeployed excess funds into investment securities,

which generally provide higher yields than federal funds or interest-earning correspondent accounts.

The decrease in interest income

on loans, including fees, was driven by a decrease of $1.4 million in interest on loans, offset by an increase in fees of $1.1 million,

resulting from PPP loan forgiveness.

primarily to a $33.8 million increase in average earning assets and rising market interest rates during the year.

This was offset by

an increase in interest expense on borrowed funds of approximately $777,000, or 171.5%, related to the increase in variable rates on

trust preferred securities as well as an increase in borrowings from the Federal Home Loan Bank (FHLB) during the year.

in interest income on loans, including fees, was driven by a decrease in fees of $1.8 million resulting from PPP loan forgiveness in

2021 that did not reoccur during 2022.

following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.

16 unchanged sentences

deposit liabilities and cost of funds

Stockholders’

Liabilities and Stockholders’ Equity

Shareholders’

liabilities and shareholders’ equity

interest income

7 unchanged sentences

to rates, volume and a combination of rates and volume, for the periods indicated.

Volume and Rate Analysis

Increase (decrease)

Year 2021 Compared to 2020

(Dollars in thousands)

Volume Effect

Rate and Volume Effect

Change in Interest Income/ Expense

Interest Income:

Federal funds sold

Interest bearing deposits in other banks

Taxable investment securities

Total Earning Assets

Interest Expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Short-term borrowings

Trust preferred securities

Total Interest-bearing Liabilities

Change in Net Interest Income

Year 2020 Compared to 2019

(Dollars in thousands)

Volume Effect

Rate and Volume Effect

Change in Interest Income/ Expense

Interest Income:

Federal funds sold

Interest bearing deposits in other banks

Taxable investment securities

Total Earning Assets

Interest Expense:

Interest-bearing demand deposits

Savings and money market deposits

Time deposits

Short-term borrowings

Trust preferred securities

Total Interest-bearing Liabilities

Change in Net Interest Income

reduction in interest income and interest expense during both 2021 and 2020 was driven mainly by lower market rates, which have fallen

throughout both years.

Overall, our net interest margin decreased 1 basis point to 3.64%in 2021 compared to 3.65% in 2020.

yield on average assets decreased 37 basis points, to 4.00% from 4.37%, the cost of funds decreased 35 basis points, to 0.37% from 0.72%.

reduction in market rates was a direct result of actions taken by the FMOC, which, in response to the economic impact of the pandemic,

reduced the target federal funds rate twice in March 2020, by 150 bps.

As a result, the target federal funds rate stood at 0.00% - 0.25%

and the prime interest rate stands at 3.25%.

In March 2022, the FMOC increased the target federal funds rate 25 bps, resulting in the

prime interest rate increasing to 3.50%.

It is the general consensus that this increase is the first of a series of increases that the

FOMC will effect in 2022.

decrease in interest income is primarily attributed to reduced yield on loans, not including fees, which was mainly driven by lower market

rates, as noted above, plus materially lower rates earned on PPP loans.

The yield on PPP loans is 1.00%, excluding the impact of deferred

Although loan fees earned and recognized on PPP loans has been material during 2021 and 2020, it does not completely make

up for the reduced yield.

The increase in loan fee income is a result of recognition of net deferred fees on PPP loans totaling $2.0

million in 2021, and $994 thousand in 2020.

Total loan fees recognized as part of the yield calculation on loans was $2.4 million during

2021 and $1.3 million during 2020.

Overall, loan interest income, including fees, was lower in 2021 than 2020 by $315 thousand.

PPP ended in June 2021, and remaining PPP loan balances totaled only $6.4 million at December 31, 2021.

Therefore, the remaining PPP

loans and net unearned fees are not expected to have a material impact on future earnings.

income was positively impacted by an additional $305 thousand of interest earned on investment securities, all of which are taxable,

due to additional average balances of $33.6 million, as we redeployed excess funds into investment securities, which generally provide

higher yields than federal funds sold or interest-bearing deposits in other banks.

This improvement in interest income on investments

offset the negative effect of reduced interest income from loans.

The yield on investment securities decreased to 1.83% in 2021 from

2.47% in 2020, due to lower market rates, as noted above.

expense decreased $2.2 million, which more than offset the decrease of $124 thousand in interest income, driving a $2.1 million improvement

and Rate Analysis

2022 Compared to 2021

in thousands)

and Volume Effect

in Interest Income/ Expense

bearing deposits in other banks

investment securities

Earning Assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

Interest-bearing Liabilities

in Net Interest Income

The primary driver of the improvement in interest expense, and overall cost of funds, was the reduced cost of

time deposits, which decreased to 0.95% in 2021 compared to 1.53% in 2020, along with increased average balances in all other types of

deposit accounts, which generally have lower rates.

change in the mix of our deposits has supported the reduction in our average cost of funds to 0.37% during 2021, compared to 0.72% during

Average balances of time deposits decreased $37.1 million while average balances of interest-bearing demand deposits grew $13.9

million, average balances of savings and money market deposits grew $34.4 million, and average balances of noninterest-bearing deposits

grew $44.1 million.

Increases in average balances of both interest-bearing and noninterest-bearing deposits is primarily due to stimulus

payments and PPP funds, which are generally deposited into customer deposit accounts.

to the increased deposit balances, additional borrowings from the FHLB have not been necessary.

The Company paid off the last remaining

FHLB advance of $5.0 million in June 2021, when it matured.

and Rate Analysis

2021 Compared to 2020

in thousands)

and Volume Effect

in Interest Income/ Expense

bearing deposits in other banks

investment securities

Earning Assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

Interest-bearing Liabilities

in Net Interest Income

increases in interest income and interest expense during 2022 were driven mainly by increased interest rates, as short-term assets and

liabilities tied to short-term rates adjusted to market rate increases throughout the year, new production at higher rates, and asset

yields outpacing increases in funding costs in the rising interest rate environment.

Overall, our net interest margin decreased 2 basis

points to 3.62% in 2022 compared to 3.64% in 2021.

increase in interest income is primarily attributed to an increase in yields on overnight deposits with banks, which was mainly driven

by higher market rates, as noted above, combined with a reinvesting of funds in investment securities at higher rates.

This increased

income offset a decrease in loan interest Overall, loan interest income, including fees, decreased $584,000 during the year ended December

31, 2022 compared to December 31, 2021, due to the impact of PPP loan fees recognized in 2021, that was not repeated in 2022.

expense increased $404,000, due primarily to an increase in the average balance of FHLB advances of $20.4 million during the year, combined

with increased market rates on trust preferred securities.

This was offset by a decrease in interest expense on time deposits due to

a reduction in volume and rate.

While rates on time deposits reset at lower rates during 2022, this trend is not expected to continue

into 2023, due to the continuing increase in interest rates, combined with the competitive pressures to acquire and retain deposits.

future interest rate structure has been impacted by the commencement of the end of the use of LIBOR, which will completely phase-out

We use LIBOR in pricing some of our interest earning assets and liabilities, including our trust preferred securities.

loan and investment products ceased using LIBOR in 2021, for new contracts and commitments.

Most of these contracts have been, or will

be, replaced with the secured overnight funding rate (SOFR).

We use LIBOR in pricing some of a limited number of our interest earning assets and liabilities, including our trust preferred

Certain loan and investment products ceased using LIBOR in 2021, for new contracts and commitments.

Most of these contracts

have been, or will be, replaced with the secured overnight funding rate (SOFR).

primary source of income is interest earned on loans.

Total loan balances increased $18.2 million during 2021, or 3.2%, to $593.7 million

at December 31, 2021 as compared to $575.6 million at December 31, 2020.

The primary drivers of this increase in total loans were $26.8

million of growth in commercial loans secured by real estate, and $16.5 million of growth in multifamily loans secured by real estate.

Commercial loan balances decreased $31.7 million, due mainly to a decrease in PPP loan balances of $28.4 million.

PPP loans totaled $6.4

million at December 31, 2021.

For more detail on loan balances, refer to Note 6 of the Consolidated Financial Statements and Notes in

Item 8 of this Form 10-K.

loan balances decreased $2.6 million during 2021 to $2.9 million at December 31, 2021.

Nonaccrual loans negatively affect interest income

as these loans are nonearning assets.

When doubt about the collectability of a loan exists, it

is the Bank’s policy to stop accruing interest on that loan under the following circumstances:

(a) whenever we are

advised by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of

principal and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well

secured and in the process of collection.

All interest accrued but not collected on loans that

are placed on nonaccrual is charged off and reversed against interest income in the current period.

In the case of a nonaccrual loan

that is well secured and in the process of collection, the interest accrued but not collected is not reversed.

Interest received on these

loans is accounted for on the cash basis or cost-recovery method until qualifying for return to accrual.

Generally, loans are returned

to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments

are made, and prospects for future contractual payments are reasonably assured.

For more detail on nonaccrual loans, refer to Note 6

of the Consolidated Financial Statements and Notes in Item 8 of this Form 10-K.

loan balances also decreased during 2021, to $2.8 million at December 31, 2021, from $5.1 million at December 31, 2020.

Total gross loans decreased $9.1 million during 2022, or 1.54%, to $584.6 million

as of December 31, 2022 as compared to $593.7 million at December 31, 2021.

The primary drivers of this decrease in total loans were

a reduction in commercial real estate loans, multifamily, and commercial loans of $9.1 million, $3.3 million, and $7.6 million, respectively.

This was offset by an increase in construction and land development loans of $10.1 million in comparison to December 31, 2021.

in commercial real estate and commercial loans was partly attributable to several large borrowers selling their businesses or collateral

and paying off the related loans.

For more detail on loan balances, refer to Note 6 of the consolidated financial statements contained

in Item 8 of this Form 10-K.

loans increased approximately $472,000 during 2022 from $2.9 million as of December 31, 2021 to $3.4 million as of December 31, 2022.

Nonaccrual loans negatively affect interest income as these loans are nonearning assets.

about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following

circumstances:

(a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when

conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent

for 90 days and is not both well secured and in the process of collection.

All interest accrued but not collected on loans that are placed

on nonaccrual is charged off and reversed against interest income in the current period.

In the case of a nonaccrual loan that is well

secured and in the process of collection, the interest accrued but not collected is not reversed.

Interest received on these loans is

accounted for on the cash basis or cost-recovery method until qualifying for return to accrual.

Generally, loans are returned to accrual

status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and

prospects for future contractual payments are reasonably assured.

For more detail on nonaccrual loans, refer to Note 6 of the consolidated

financial statements in Item 8 of this Form 10-K.

loan balances decreased during 2022, to $2.7 million as of December 31, 2022, from $2.8 million as of December 31, 2021.

income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status.

impaired loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method.

more detail on impaired loan balances, refer to Note 6 of the Consolidated Financial Statements and Notes in Item 8 of this Form 10-K.

more detail on impaired loan balances, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K.

following table presents the dollar composition and percentage of our loan portfolio as of December 31:

Loan Composition

(Dollars in thousands)

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer installment loans

All other loans

in thousands)

estate secured:

and land development

real estate loans

installment loans

allowance for loan losses

loan maturities, and distribution between fixed and variable rate loans as of December 31, 2021 are shown in the following table:

Maturities of Loans

(Dollars in thousands)

Less than One Year

One to Five Years

Five to Fifteen Years

After Fifteen Years

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer installment loans

All other loans

loan maturities, and distribution between fixed and variable rate loans as of December 31, 2022 are shown in the following tables :

in thousands)

than One Year

to Five Years

to Fifteen Years

Fifteen Years

estate secured:

and land development

real estate loans

installment loans

following table presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December

(Dollars in thousands)

Variable Rate

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer installment loans

All other loans

in thousands)

estate secured:

and land development

real estate loans

installment loans

maturities of loans do not reflect the actual term of our loan portfolio.

17 unchanged sentences

internal and external factors such as general economic conditions.

2020, in response to the impact of the pandemic, changes to the allowance model included reviewing our internal scoring related to loan

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

During the fourth quarter of

2021, in response to rising price inflation, this factor has been added to the economic factors considered in the model.

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.

the fourth quarter of 2021, in response to rising price inflation, we added inflation to the economic factors considered in the model.

Throughout 2022, we continued to adjust external factors impacting the allowance for loan loss model to best reflect changes in the general

and local economies, the increasing interest rate environment, and the risks in the portfolio.

allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries.

1 unchanged sentence

Subsequent to charging off a loan, management makes best efforts to recover any charged-off balances.

allowance for loan losses decreased to $6.7 million at December 31, 2021 as compared to $7.2 million at December 31, 2020.

The allowance

for loan losses at the end of 2021 was approximately 1.13% of total loans as compared to 1.25% at the end of 2020.

Provisions for loan

losses of $372 thousand and $2.3 million were recorded during 2021 and 2020, respectively.

Loans charged off, net of recoveries, totaled

$828 thousand, or 0.28% of average loans, for the year ended December 31, 2021, compared to $477 thousand, or 0.08% of average loans,

The low percentage in 2020 is primarily related to the moratorium on foreclosures that existed for most of 2020.

The allowance

for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments

within the loan portfolio whether or not the losses are actually ever realized.

loans present higher risks of default, and we have experienced a decrease in these loans during 2021.

At December 31, 2021, there were

65 nonaccrual loans totaling $2.9 million, or 0.50% of total loans.

At December 31, 2020, there were 75 nonaccrual loans totaling $5.5

million, or 0.96% of total loans.

The amount of interest income that would have been recognized on these loans had they been accruing

interest was $223 thousand and $494 thousand in the years 2021 and 2020, respectively.

There were no loans past due 90 days or greater

and still accruing interest at either December 31, 2021 or 2020.

There are no commitments to lend additional funds to non-performing

allowance for loan losses remained at $6.7 million as of December 31, 2022.

The allowance for loan losses at the end of 2022 was approximately

1.15% of total loans as compared to 1.13% at the end of 2021.

Provisions for loan losses of approximately $625,000 and $372,000 were

recorded during the years ended December 31, 2022 and 2021, respectively.

Loans charged off, net of recoveries, totaled approximately

$633,000, or 0.11% of average loans, for the year ended December 31, 2022, compared to approximately $828,000, or 0.14% of average loans,

The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future

losses and known impairments within the loan portfolio whether or not the losses are actually ever realized.

loans present higher risks of default, and we have experienced an increase in the volume of these loans during 2022, while the number

of nonaccrual loans decreased.

As of December 31, 2022, there were 41 nonaccrual loans totaling $3.4 million, or 0.58% of total loans.

As of December 31, 2021, there were 65 nonaccrual loans totaling $2.9 million, or 0.50% of total loans.

The amount of interest income

that would have been recognized on these loans had they been accruing interest was approximately $10,000 and $223,000 in the years ended

December 31, 2022 and 2021, respectively.

There were no loans past due 90 days or greater and still accruing interest at either December

31, 2022 or 2021.

There are no commitments to lend additional funds to non-performing borrowers.

majority of our loans are collateralized by real estate located in our market area.

4 unchanged sentences

As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries.

As a result of the economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased risk.

Specifically,

residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been adversely impacted

by the global and domestic economic slowdown.

We are monitoring these industries and consider these segments to be the primary higher

risks in the loan portfolio.

As a result of the lingering economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased

Specifically, residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been

adversely impacted by the global and domestic economic slowdown coupled with rising inflation.

We are monitoring these industries and

consider these segments to be the primary higher risks in the loan portfolio.

and commercial real estate loans are initially risk rated by the originating loan officer.

If deterioration in the financial condition

of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer.

Guidance for risk rate

grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance.

Classifications

used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.

of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer or our watch list committee.

Guidance for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for

Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.

regard to the Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification

6 unchanged sentences

non-1-4 family residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation

costs is compared to the loan balance to calculate any potential deficiency.

If the collateral is sufficient, then no charge-off is necessary.

If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance

for loan loss.

In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value

is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency.

Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days

costs are compared to the loan balance to calculate any potential deficiency.

If the collateral is sufficient, then no charge-off is

If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against

the allowance for loan loss.

In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a

current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate

any deficiency.

Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually

180 days past due.

If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off

2 unchanged sentences

liquidation ensues.

loans classified as substandard, doubtful or loss are individually reviewed for impairment in accordance with Accounting Standards Codification

(ASC) 310-10-35.

In evaluating impairment, a current appraisal is generally used to determine if the collateral is sufficient.

are typically less than a year old and must be independently reviewed to be relied upon.

If the appraisal is not current, we perform

a useful life review of the appraisal to determine if it is reasonable.

If this review determines that the appraisal is not reasonable,

then a new appraisal is ordered.

Loans considered impaired decreased to $2.8 million with $880 thousand requiring a valuation allowance

of $166 thousand at December 31, 2021, as compared to $5.1 million with $2.5 million requiring a valuation allowance of $1.1 million

at December 31, 2020.

Management is aggressively working to reduce the impaired credits at minimal loss.

loans of $250,000 or more, along with selected other credits, classified as substandard, doubtful or loss are individually reviewed for

impairment in accordance with Accounting Standards Codification (ASC) 310-10-35.

The increase in the threshold to $250,000 during 2022,

did not significantly impact level of loans assessment for impairment.

In evaluating impairment, a current appraisal is generally used

to determine if the collateral is sufficient.

Appraisals are typically less than a year old and must be independently reviewed to be

If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable.

If this review determines that the appraisal is not reasonable, then a new appraisal is ordered.

Impaired loan balances decreased during

2022, to $2.7 million, with a related allowance of approximately $86,000, as of December 31, 2022, from $2.8 million, with a related

allowance of approximately $166,000, as of December 31, 2021.

Management is aggressively working to reduce the impaired credits at minimal

determining the component of our allowance in accordance with the Contingencies topic of the Accounting Standards Codification (ASC 450),

we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the

performance of loans with similar characteristics, external and internal risk factors.

performance of loans with similar characteristics, and external and internal risk factors.

We consider the overall quality of our underwriting

11 unchanged sentences

To calculate the economic conditions factor, we use current economic data which includes national and

local regional unemployment information, local housing price changes, gross domestic product growth, and interest rates.

Lastly, we evaluate

our internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices.

local unemployment information, local housing price changes, gross domestic product growth, and interest rates.

Lastly, we evaluate our

internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices.

As economic conditions, performance of our loans, and internal processes change, it is possible that future increases or decreases may

be needed to the allowance for loan losses.

Selected Credit Ratios

(Dollars in thousands)

Allowance for loan losses

Allowance for loan losses to total loans

Nonaccrual loans

Nonaccrual loans to total loans

Ratio of allowance for loan losses to nonaccrual loans

Charge-offs net of recoveries

Average loans

Net charge-offs to average loans

above table includes $1.1 million and $2.5 million in nonaccrual loans as of December 31, 2021 and 2020, respectively, which have been

classified as troubled debt restructurings.

No troubled debt restructurings were past due 90 days or more and still accruing interest

at December 31, 2021 and 2020.

There were $2.5 million in loans classified as troubled debt restructurings as of December 31, 2021, as

compared to $4.0 million in loans classified as troubled debt restructurings as of December 31, 2020.

For more detail on nonaccrual,

impaired, past due and restructured

loans, refer to Note 6 and Note 8 to the Consolidated Financial Statements and Notes in Item 8 of this Form 10-K.

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

Net charge-offs

to average loans

above table includes $823,000 and $1.1 million in nonaccrual loans as of December 31, 2022 and 2021, respectively, which have been classified

as troubled debt restructurings.

No troubled debt restructurings were past due 90 days or more and still accruing interest as of December

31, 2022 or 2021.

There were $2.0 million in loans classified as troubled debt restructurings as of December 31, 2022, as compared to

$2.5 million in loans classified as troubled debt restructurings as of December 31, 2021.

For more detail on nonaccrual, impaired, past

due and restructured loans, refer to Note 6 and Note 8 to the consolidated financial statements in Item 8 of this Form 10-K.

following table shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major

category of loans for the years ended December 31, 2022 and 2021:

December 31, 2021

in thousands)

9 unchanged sentences

of the Allowance for Loan Losses

December 31, 2021

December 31, 2020

(Dollars in thousands)

Real estate secured:

Construction and land development

Residential 1-4 family

Total real estate loans

Consumer and all other loans

in thousands)

estate secured:

and land development

real estate loans

and all other loans

have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being

6 unchanged sentences

allocated 35.1% of the allowance to commercial real estate loans, which constituted 33.7% of our loan portfolio at December 31, 2022.

This allocation is similar to the 31.8% in 2020 due primarily to reduction in problem credits in this category over the past several

We have allocated 16.3% of the allowance to commercial loans, which constituted 9.1% of our loan portfolio at December 31, 2021.

This allocation percentage increased compared to December 31, 2020 due to the significant reduction in PPP loans, which are included

in commercial loans, which

have guarantees provided by the SBA, which resulted in their being excluded from the allowance assessment of commercial loans.

This allocation increased slightly compared to the 31.7% in 2021, due primarily to the impact of the external factors considered as part

of the determination of the overall allowance for loan losses.

We have allocated 5.7% of the allowance to commercial loans, which constituted

8.0% of our loan portfolio at December 31, 2022.

This allocation percentage decreased compared to December 31, 2021, due to a lower loss

rate on commercial loans for the historical period assessed in the loan loss model for 2022.

residential and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable.

1 unchanged sentence

made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.

have allocated 2.8% of the allowance to real estate construction loans, which constituted 5.4% of our loan portfolio at December 31,

allocated 5.2% of the allowance to real estate construction loans, which constituted 7.3% of our loan portfolio as of December 31, 2022.

Construction loans are secured by real estate with values that are dependent upon market and economic conditions.

Additionally,

these credits are generally shorter-term projects, of eighteen months or less.

These loans are made consistent with appraisal policies

and real estate lending policies which detail maximum loan-to-value ratios and maturities.

have allocated 33.2% of the allowance to residential real estate loans, which constituted 37.8% of our loan portfolio at December 31,

Our allocation increased as a percentage of the allowance for loan losses due to the $1.6 million increase in residential real

estate loans during 2021.

have allocated 1.6% of the allowance to consumer and all other loans, which constituted 3.5% of our loan portfolio at December 31, 2021.

Our allocation decreased as a percentage of the allowance for loan losses due to these credits principally being loans to municipal and

other government entities, compared to the 2.3% allocation we had in 2020.

At December 31, 2021, we had an unallocated portion of the

allowance for loan losses totaling $537 thousand.

While our legacy loan loss model calculation did not fully allocate the entire allowance,

we believe that the lingering impact of the pandemic, combined with the recent impact of inflation warrant the maintenance of the allowance

for loan losses.

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

to be testing and running concurrent quarterly calculations of both our legacy and CECL models by the second quarter of 2022.

Additionally, these

credits are generally shorter-term projects, of eighteen months or less.

These loans are made consistent with appraisal policies and

real estate lending policies which detail maximum loan-to-value ratios and maturities.

allocated 35.1% of the allowance to residential real estate loans, which constituted 38.9% of our loan portfolio as of December 31, 2022.

allocated 5.74% of the allowance to consumer and all other loans, which constituted 3.41% of our loan portfolio as of December 31, 2022.

Our allocation increased as a percentage of the allowance for loan losses due to the impact of overdrawn deposit account losses resulting

from the cybersecurity incident, combined with a change in the treatment of deposit account charge-offs during 2022.

As of December 31,

2022, we had an unallocated portion of the allowance for loan losses totaling approximately $440,000.

While our legacy loan loss model

calculation did not fully allocate the entire allowance, we believe that the lingering impact of the pandemic, combined with the recent

impact of inflation warrant the maintenance of the allowance for loan losses.

implemented the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model for the first quarter of 2023.

The cumulative

effects of this implementation were immaterial.

Real Estate Owned

real estate owned decreased $2.0 million, or 59.2%, to $1.4 million at December 31, 2021 from $3.3 million at December 31, 2020.

properties are available for sale, primarily, by commercial and residential realtors under the direction of our Special Assets division.

Our aim is to reduce the level of OREO in order to reduce the level of nonperforming assets at the Bank, while keeping in mind the impact

to earnings and capital.

In 2021 and 2020, pricing adjustments were made to make certain properties more marketable, which, in some cases,

reduced the price below the fair value of the property (which is based on an appraisal less estimated disposition costs).

we recorded OREO write-downs of $466 thousand as compared to $132 thousand during 2020.

2021, we added $566 thousand in OREO properties as a result of settlement of foreclosed loans, offset by sales of $2.6 million with net

gains of $76 thousand.

During 2020, we added $1.1 million in OREO properties as a result of settlement of foreclosed loans, which was

offset by sales of $687 thousand with net gains totaling $60 thousand.

As noted previously, a moratorium on foreclosures was initiated

in Virginia during the first quarter of 2020 and remained in effect into the third quarter of 2020.

Additionally, during 2021, three

closed branch office facilities were transferred from bank premises to OREO at a value of $950 thousand.

As previously discussed, we

continue to take an aggressive approach toward liquidating properties to reduce our level of OREO properties by making pricing adjustments

and holding auctions on some of our older properties.

We expect to continue these efforts in 2022, which could result in additional losses,

while reducing future carrying costs.

the properties remain for sale and are actively marketed, we did have lease agreements on certain other real estate owned properties

which generated rental income at market rates.

Rental income on OREO properties was $24 thousand and $54 thousand in 2021 and

2020, respectively.

investment securities increased $59.0 million, or 121.8%, to $107.4 million at December 31, 2021, Prior to their sale in 2021, from

$48.4 million at December 31, 2020.

real estate owned decreased $1.1 million, or 80.82%, to approximately $261,000 as of December 31, 2022 from $1.4 million as of December

All properties are available for sale, primarily, by commercial and residential realtors under the direction of our Special

Assets division.

Our aim is to reduce the level of OREO in order to reduce the level of nonperforming assets at the Bank, while keeping

in mind the impact to earnings and capital.

During 2022, three former branch locations transferred to OREO in 2021 were sold, which decreased

OREO approximately $912,000.

the levels of problem credits and foreclosed properties have been reduced significantly over the past several years, 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 losses as we expedite the resolution of these problem assets.

investment securities decreased $11.3 million, or 10.51%, to $96.1 million as of December 31, 2022 from $107.4 million as of December

All securities are classified as available-for-sale for liquidity purposes.

Sales of securities

during 2021 totaled $7.7 million, with $322 thousand in gains realized, while sales of securities in 2020 totaled $1.1 million, with

$4 thousand in gains realized.

During 2021, maturities, calls and paydowns totaled $16.3 million, and purchases of securities

totaled $85.1 million.

Investment securities with a carrying value of $12.1 million and $6.8 million at December 31, 2021 and 2020,

respectively, were pledged to secure public deposits and for other purposes required by law.

There were no sales of securities during the year

ended December 31, 2022.

Sales of securities during 2021 totaled $7.7 million, with gains of approximately $322,000 realized.

the year ended December 31, 2022 and 2021, there were maturities, calls and paydowns of $14.0 million and $16.3 million, respectively.

The Company purchased $19.8 million and $85.1 million in investment securities during the year ended December 31, 2022 and 2021, respectively.

Investment securities with a carrying value of $27.3 and $12.1 million as of December 31, 2022 and 2021, respectively, were pledged to

secure public deposits and for other purposes required, or permitted, by law.

strategy is to invest excess funds in investment securities, which typically yield more interest income than other short-term investment

options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.

fair value of our investment portfolio is substantially affected by changes in interest rates, which could result in realized losses

if we need to sell the securities and recognize the loss in a rising interest rate environment due to Federal Reserve actions, U.S.

policies or other factors affecting market interest rates.

At December 31, 2021, we had a net unrealized loss in our investment portfolio

totaling $1.0 million as compared to a $938 thousand gain at December 31, 2020.

As interest rates increase the level of unrealized losses

fair value of our investment portfolio is substantially affected by changes in interest rates.

Losses could be realized if liquidity

and/or business strategy necessitate the sale of securities in a loss position, due to Federal Reserve actions, U.S.

fiscal policies

or other factors affecting market interest rates.

As of December 31, 2022, we had a net unrealized loss in our investment portfolio totaling

$17.6 million as compared to a $1.0 million loss as of December 31, 2021.

As market interest rates increase the level of unrealized losses

could change substantially.

However, these changes would have no impact on earnings or regulatory capital, unless the underlying securities

were sold at a loss.

However, these changes would have no impact on earnings or regulatory capital, unless the securities were

sold at a loss.

We have reviewed our investment portfolio and no investment security is deemed to have other than temporary impairment.

We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings.

fair value and weighted average yield of investment securities at December 31, 2021 are shown in the following schedule by contractual

fair value and weighted average yield of investment securities as of December 31, 2022 are shown in the following schedule by contractual

maturity and do not reflect principal paydowns for amortizing securities.

3 unchanged sentences

are calculated by dividing the contractual interest for each time period by the average amortized contractual cost.

than One Year

to Five Years

in thousands)

Less than One Year

One to Five Years

Five to ten years

After ten years

(Dollars in thousands)

Average Yield

U.S Treasuries

2 unchanged sentences

Corporate bonds

backed securities

Mortgage backed securities

Owned Life Insurance

both December 31, 2021 and 2020, we had an aggregate total cash surrender value of $4.7 million on life insurance policies covering former

key officers.

income for the policies during 2021 and 2020 was $32 thousand and $77 thousand, respectively.

deposits were $707.5 million at December 31, 2021, an increase of $39.5 million, or 5.9%, from $668.0 million at December 31, 2020.

of the increase was driven by savings and money market deposits, which grew $34.6 million, or 21.9%, to $192.0 million during 2021.

Noninterest-bearing

demand deposits grew by $27.5 million, or 12.3%, to $251.3 million.

Interest-bearing demand deposits also grew, by $15.6 million, or

31.3%, to $65.2 million.

Generally, PPP loan disbursements and federal stimulus payments received by customers are deposited into noninterest-bearing

or interest-bearing demand deposit accounts, which primarily explains the increases in those types of accounts.

Due to the large influx

of non-interest-bearing balances, we allowed attrition of time deposit balances, which decreased by $38.1 million and allowed us to reduce

our average cost of funds.

of December 31, 2022 and 2021, the Bank had an aggregate total cash surrender value of $4.5 million and $4.7 million, respectively, on

life insurance policies covering former key officers.

Company recorded a loss of $136,000 due to a write-down of approximately $158,000, partially offset by earnings of $22,000, during the

year ended December 31, 2022.

The write-down was due to the impact of rising interest rates on the value of the underlying assets supporting

the policies.

The Company recognized income of approximately $32,000 during the year ended December 31, 2021.

deposits were $692.7 million as of December 31, 2022, a decrease of $14.8 million, or 2.1%, from $707.5 million as of December 31, 2021.

Most of the decrease was driven by savings and money market deposits, which decreased $20.6 million, or 10.7%, to $171.5 million as of

December 31, 2022.

The majority of the decline occurred during the fourth quarter of 2022 as competition for funds for lending and other

needs intensified among banks and non-banks in the Company’s markets.

detailing average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained

1 unchanged sentence

deposits are considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings

products, all of which saw growth in 2021.

Overall, we continue to maintain core deposits through attractive consumer and commercial

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

products, all of which decreased in 2022.

Overall, we continue to maintain core deposits through attractive consumer and commercial deposit

products and strong ties with our customer base and communities.

deposits of $250,000 or more equaled approximately 3.87% of deposits at the end of 2022 and 4.00% of deposits at the end of 2021.

December 31, 2021 and 2020, uninsured deposits are estimated to be $93.8 million and $79.4 million, respectively.

of December 31, 2022 and 2021, uninsured deposits are estimated to be $87.5 million and $93.8 million, respectively.

Included in estimated

2 unchanged sentences

following table shows maturities of all time deposits considered uninsured by the FDIC or otherwise.

Maturities of Uninsured Time Deposits

(Dollars in thousands)

December 31, 2021

Three months or less

Over three months through six months

Over six months through twelve months

Over one year

December 31, 2021 and 2020, $12.1 million and $6.8 million of securities, respectively, were pledged to collateralize public deposits,

of Uninsured Time Deposits

in thousands)

months or less

three months through six months

six months through twelve months

of December 31, 2022 and 2021, $27.3 million and $12.1 million of securities, respectively, were pledged to collateralize public deposits,

including time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB.

Additionally,

we held letters of credit from the FHLB for $12.0 million at both December 31, 2021 and 2020, to secure public deposits, including time

deposits, held in our Virginia offices.

held no brokered deposits at December 31, 2021 and 2020.

we held letters of credit from the FHLB for $7.0 million and $12.0 million at December 31, 2022 and 2021, respectively, to secure public

deposits, including time deposits, held in our Virginia offices.

held no brokered deposits at December 31, 2022 or 2021.

Internet accounts are limited to customers located in our primary market area

1 unchanged sentence

The average balance of and the average rate paid on deposits is shown in the net interest margin

analysis table in the “Net Interest Income and Net Interest Margin” section above.

Total Certificate of Deposit Registry

Service (CDARS) time deposits were $5.8 million and $9.6 million at December 31, 2021 and 2020, respectively.

the year ended December 31, 2021, noninterest income improved $1.8 million, or 22.5%, to $10.0 million, or 1.25% of average assets, from

$8.1 million, or 1.10% of average assets, for the same period in 2020.

The improvement was driven by an increase of $507 thousand in

service charges and fees, a $557 thousand increase in card processing and interchange income, a $313 thousand increase in insurance and

investment fees, plus non-recurring gains on sales of investment securities of $322 thousand.

improvement in service charges and fees resulted from the fee schedule changes we made in August 2020.

The new fee schedule was implemented

as part of the overall assessment of products and processes undertaken in 2020.

The adjustment of the fee schedule was designed to allow

customers to avoid or minimize certain fees by taking advantage of certain services such as combined and online account statements.

improvement in card processing and interchange income resulted from increased volume and the related increase in interchange fees received.

to increase noninterest income revenues from financial services drove the improvement in insurance and investment fees, as we believe

this segment continues to show potential for continued growth.

non-interest income also increased, by $138 thousand, but after considering the non-recurring net gains on sales of fixed assets of $190

thousand in 2021 and the $220 thousand bonus payment received in 2020 from our card service provider, the increase in this component

would have been $168 thousand.

This increase can be explained primarily by an increase of $128 thousand from commissions and gains on

originations and sales of mortgage loans into the secondary market, partially driven by the loan production office we opened in Boone,

North Carolina in the fourth quarter of 2020 and the deployment of additional loan originators during 2021.

expenses increased $870 thousand, or 3.2%, to $27.9 million at December 31, 2021, compared to $27.0 million at December 31, 2020.

higher, noninterest expense as a percent of total average assets improved to 3.49% in 2021 from 3.63% in 2020.

The increase in noninterest

expense was primarily due to an increase of $1.2 million in occupancy and equipment expense, offset by a $566 thousand reduction in salaries

and benefit expense.

increase in occupancy and equipment expense was driven nearly entirely by $1.1 million in non-recurring losses on three former branch

analysis table in the “Net Interest Income and Net Interest Margin” section.

Total Certificate of Deposit Registry Service

(CDARS) time deposits were $1.4 million and $5.8 million at December 31, 2022 and 2021, respectively.

the year ended December 31, 2022, noninterest income decreased approximately $740,000, or 7.4%, to $9.2 million, or 1.1% of average assets,

from $10.0 million, or 1.3% of average assets, for the same period in 2021.

The decrease was primarily attributable to non-recurring

net gains on sales of investment securities of $322,000 in 2021 and net gains on sales of fixed assets of $190,000 in 2021.

period immediately after the cybersecurity incident, in June 2022, we temporarily stopped assessing overdraft and certain other service

we estimate that additional normalized charges of approximately $125,000 would have been realized during this period.

Additionally,

the Company recognized a write-down on BOLI of $158,000 during the year ended December 31, 2022 due to declines in the market value of

the underlying investments supporting the policy related to increased interest rates.

Gains and commissions on mortgage loan originations

decreased approximately $162,000 due to rising interest rates on mortgage loans.

expenses decreased $1.3 million, or 4.8%, to $26.5 million for the year ended December 31, 2022, compared to $27.9 million for the year

ended December 31, 2021.

Noninterest expense as a percent of total average assets decreased to 3.2% in 2022 from 3.5% in 2021.

in noninterest expense was primarily due to a decrease of $1.7 million in occupancy and equipment expense.

decrease in occupancy and equipment expense was driven nearly entirely by $1.1 million in non-recurring losses on three former branch

office locations, which were transferred into other real estate owned during the third quarter of 2021.

Excluding this loss, occupancy

and equipment expense would have increased $182 thousand, due largely to costs associated with the Kingsport office, which was opened

in the third quarter of 2020.

$566 thousand reduction in salaries and benefits expense is due to the restructuring implemented in May 2020, which included a combination

of eliminated positions, retirements or resignations representing 12% of the workforce.

Excluding the $358 thousand of severance costs

incurred in 2020, this reduction would have been $924 thousand.

operating expenses were up $240 thousand due to higher loan and other real estate expenses of $246 thousand and $199 thousand, respectively.

These increases offset decreases in FDIC insurance and consulting, which decreased $127 thousand and $235 thousand, respectively.

premiums decreased due to improvements in our risk assessment.

Consulting decreased due to costs incurred in 2020, which were not repeated

In addition, 2021 includes a $76 thousand increase in bank franchise taxes due to the increased tax base and added taxes for

other states.

decrease in occupancy and equipment was partially offset by a $703,000 increase in salaries and benefits expense attributable to higher

bonus accruals based on Company performance, annual performance raises, and adjustments to minimum starting salaries to reflect rising

costs to attract and retain talent.

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 70.6% in 2022 compared to 75.6% in 2021.

The decrease in this ratio is a result of improvements in both net interest

income and noninterest income, as discussed above and in the Net Interest Income and Net Interest Margin section earlier in this Item

The decrease in this ratio is a result of improvements in net interest income

and noninterest expense, as discussed above and in the “Net Interest Income and Net Interest Margin” section earlier in this

We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming

1 unchanged sentence

Taxes and Deferred Tax Assets

taxes were $1.9 million in 2021, compared to $1.1 million in 2020.

The effective tax rates were 21.7%, and 27.6% for 2021 and 2020, respectively.

The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally due the impact of the recapture

of operating loss carryforwards and applicable credits.

The higher effective tax rate in 2020 is the result of an increase in pre-tax

earnings in relation to the various tax preference items.

taxes were $2.3 million for the year ended December 31, 2022, compared to $1.9 million for the same period in 2021.

The effective tax

rates were 22.2%, and 21.7% for 2022 and 2021, respectively.

The effective tax rate for the periods differed from the federal statutory

rate of 21.0% principally due to the impact of the recapture of operating loss carryforwards and applicable credits, along with the effect

of certain state income taxes.

The higher effective tax rate in 2022 is the result of an increase in pre-tax earnings in relation to

the various tax preference items.

tax assets represent the future tax benefit of future deductible differences.

15 unchanged sentences

The Company classifies interest and penalties as a component of income tax expense.

of December 31, 2021, the Company had Federal net operating loss carry forward amounts of approximately $2.2 million.

These amounts are

not limited pursuant to Internal Revenue Code (IRC) Section 382.

The Company is subject to examination

in the United States and multiple state jurisdictions.

Open tax years for examination are 2018 – 2021.

total stockholders’ equity at the end of 2021 was $63.6 million compared to $58.2 million at the end of 2020.

The increase was

total shareholders’ equity at the end of 2022 was $57.2 million compared to $63.6 million at the end of 2021.

The decrease was

$6.4 million, or 10.1%.

Book value per common share was $2.40 at December 31, 2022 compared to $2.66 at December 31, 2021.

As previously

discussed, the year-over-year decline was primarily driven by the $13.1 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

$6.7 million.

2022, the board of directors authorized the repurchase of up to 500,000 shares of common stock through March 31, 2023.

Through December

31, 2022, 73,595 shares have been repurchased at an average price of $2.33 per share.

On February 27, 2023, the board of directors approved

an extension of the repurchase program through March 31, 2024.

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

19 unchanged sentences

it is subject.

assets increased in 2021 and we anticipate asset levels to increase in the future due to an emphasis on growing the loan portfolio and

the core deposit base of the Bank.

Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned

asset growth.

cash dividends have been paid historically due to our past retained deficit.

Earnings have accumulated over the last several years and

we attained retained earnings in 2021.

Subsequent to December 31, 2021, the Board of Directors declared a $0.05 cash dividend per share

payable on March 31, 2022 to stockholders of record on March 15, 2022.

This is the first cash dividend paid in the history of the Company.

Future payments of cash dividends, if any, will depend on a number of factors including but not limited to maintaining positive retained

earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to

allow payment of dividends to the parent company.

Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.

Company paid its first cash dividend of $0.05 per share in 2022.

On February 27, 2023, the board of directors declared a dividend of

$0.06 per share, to be paid on March 31, 2023.

Future payments of cash dividends will depend on a number of factors including but not

limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans,

and sufficient capital at the Bank to allow payment of dividends to the parent company.

closely 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 $159.3 million at December 31, 2021, down from $134.0 million at December 31, 2020.

discussed previously in this Form 10-K, this change is a direct result of redeployment of excess cash into investment securities, which

generally return higher yields, while still providing liquidity, as discussed below.

A surplus of short-term assets is maintained at

levels management deems adequate to meet potential liquidity needs.

Collectively, those balances were $130.5 million as of December 31, 2022, down from $159.3 million as of December 31, 2021.

As discussed previously in this Form 10-K, this change is a direct result of redeployment of excess cash into investment securities,

which generally return higher yields, while still providing liquidity, as discussed below, and the decrease in deposits.

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

Bank’s primary funding source is deposits from customers in the markets in which it provides banking services.

As discussed previously,

deposits declined during the fourth quarter of 2022 as competition for deposits intensified from both bank and non-bank institutions.

The Company expects that pressure on the rates paid on deposits will continue and that it may be required to increase the rates paid

on its deposit products, possibly faster and to a higher degree not currently projected, to retain existing customers and attract new

deposit relationships to fund loans and other activities.

As discussed below, the Company has other liquidity sources to manage its liquidity

needs as they arise.

December 31, 2022, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount

of $68.8 million, which is net of the $27.3 million of securities pledged as collateral.

This will serve as a source of liquidity while

yielding a higher return when compared to other short-term investment options, such as federal funds sold and overnight deposits with

the Federal Reserve Bank of Richmond.

Total investment securities increased $59.0 million, or 121.8%, during 2021 from $48.4 million

at December 31, 2020.

loan to deposit ratio was 83.92% at December 31, 2021 and 86.16% at December 31, 2020.

Generally, the investment portfolio serves as

a source of liquidity while yielding a higher return at the purchase date when compared to other short-term investment options, such

as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond.

Total investment securities decreased $11.3 million,

or 10.51%, during 2022 from $107.4 million as of December 31, 2021 to $96.1 million as of December 31, 2022.

loan to deposit ratio was 84.4% as of December 31, 2022 and 83.9% as of December 31, 2021.

third-party sources of liquidity remain intact at December 31, 2022 which includes the following:

4 unchanged sentences

as of December 31, 2022.

have used our line of credit with FHLB to issue letters of credit totaling $12.0 million to the Treasury Board of Virginia for collateral

have used our line of credit with FHLB to issue a letter of credit totaling $7.0 million to the Treasury Board of Virginia for collateral

on public funds.

No draws on the letters of credit have been issued.

The letters of credit are considered draws on our FHLB line of credit.

An additional $187.9 million was available on December 31, 2021 on the $199.9 million line of credit, of which $123.6 million is secured

by a blanket lien on our residential real estate loans.

we have access to the brokered deposits market, we held no brokered deposits at December 31, 2021 or 2020.

As of December 31, 2021, we

had $5.8 million in reciprocal CDARS time deposits, compared to $9.6 million at December 31, 2020.

No draws on the letter of credit have been issued.

This letter of credit is considered to be a draw on our FHLB line

An additional $200.1 million was available on December 31, 2022 on the $207.1 million line of credit, of which $113.7 million

is secured by a blanket lien on our residential real estate loans.

we have access to the brokered deposits market, we held no brokered deposits as of December 31, 2022 or 2021.

As of December 31, 2022,

we had $1.4 million in reciprocal CDARS time deposits, compared to $5.8 million as of December 31, 2021.

Bank has access to additional liquidity through the Federal Reserve Bank of Richmond’s Discount Window for overnight funding needs.

We may collateralize this line with investment securities and loans at our discretion;

however, we do not anticipate using this funding

source except as a last resort.

We have collateralized this line with investment securities;

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

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

2 unchanged sentences

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

With the current economic uncertainty resulting from the COVID-19 pandemic, inflation and the war in Ukraine, we continue monitoring

of our liquidity position, specifically cash on hand in order to meet customer demands.

Additionally, our contingency funding plan is

reviewed quarterly with our Asset Liability Committee.

With the current economic uncertainty resulting from recovering from the lingering effects of the COVID-19 pandemic, inflation and the

war in Ukraine, we continue monitoring our liquidity position, specifically cash on hand in order to meet customer demands.

Additionally,

our contingency funding plan is reviewed quarterly with our Asset Liability Committee.

March 10, 2023, Silicon Valley Bank (SVB) a regional banking company headquartered in Santa Clara, California, with total assets in excess

of $200 billion, was taken into receivership through FDIC, after the bank experienced a significant outflow of deposit funds fueled by

concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits at SVB.

These concerns

related to unrealized losses in SVB’s investment portfolio combined with the long-term maturities of the investments and other

earning assets held by SVB.

While we, or any other financial institution, can be impacted by sudden changes in market conditions or customer

sentiment, we believe that our funding and liquidity management strategies and procedures are sound.

In addition, our deposit customer

base is diverse without significant exposure to uninsured deposit relationships.

Prior to receivership of SVB our deposit fluctuations

were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates.

Since the date of the

receivership, we have not experienced any significant or unusual deposit outflows and we have taken steps to successfully test certain

liquidity facilities in the event of any future deposit outflows.

Instruments with Off-Balance-Sheet Risk

11 unchanged sentences

summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2022 and 2021 is as follows:

(Dollars in thousands)

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit

Standby letters of credit

in thousands)

to extend credit

letters of credit

to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract.

10 unchanged sentences

may not actually be drawn upon to the total extent to which the Bank is committed.

In response to two bank failures in March, 2023, and

liquidity concerns for other super-regional banks, we have not experienced any significant unusual activity by borrowers drawing against

their lines of credit, nor do we anticipate experiencing such demand that might cause us to limit customer access to these lines of credit.

letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.

4 unchanged sentences

is deemed necessary.

December 31, 2021, we had a negative cumulative gap rate sensitivity ratio of 12.97% for the one-year re-pricing period, compared to

21.46% at December 31, 2020.

of December 31, 2022, we had a negative cumulative gap rate sensitivity ratio of 17.89% for the one-year re-pricing period, compared

to 12.97% as of December 31, 2021.

A negative cumulative gap generally indicates that net interest income would decline in a rising interest

2 unchanged sentences

which interest rates are increasing.

The below table is based on contractual maturities and does not take into consideration prepayment

speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits.

When considering these prepayment

speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit portfolio,

we are in a position to increase interest income in a rising interest rate environment.

With the FOMC initiating a series of expected

rate increases, we believe our current interest risk profile remains acceptable.

Furthermore, we are implementing strategies to moderate

any potential adverse impact to our current interest rate risk profile, from what could be a sustained medium- to long-term environment

of rising interest rates.

The below table is based on contractual maturities and next repricing date and does not take into

consideration prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits.

considering these prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion

of the deposit portfolio, we are in a position to increase interest income in a rising interest rate environment;

however, the ability

to control the repricing of the deposit portfolio can be significantly impacted by competitive pressures, liquidity needs and access

to and availability of other funding sources.

With the FOMC initiating a series of rate increases, which are expected to continue into

2023, we believe our current interest risk profile remains acceptable.

Furthermore, we are implementing strategies to moderate any potential

adverse impact to our current interest rate risk profile, from what could be a sustained medium- to long-term environment of rising interest

Sensitivity Analysis

(In thousands

Uses of funds:

Federal funds sold

Deposits with banks

thousands of dollars)

owned life insurance

earning assets

Sources of funds:

Int Bearing DDA

Savings & MMDA

Time Deposits

Trust Preferred Securities

Federal funds purchased

Preferred Securities

funds purchased

interest bearing liabilities

Cumulative Gap as % of Total

Earning Assets

Quantitative and Qualitative Disclosures About Market Risk

Gap as % of Total Earning Assets

and Qualitative Disclosures About Market Risk

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-K

Item 7. Management’s Discussion and Analysis