NEW PEOPLES BANKSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data FINANCIAL STATEMENTS CONTENTS Page Report of Independent Registered Public Accounting Firm 38 Consolidated Balance Sheets December 31, 2021 and 2020 39 Consolidated Statements of Income – Years Ended December 31, 2021 and 2020 40 Consolidated Statements of Comprehensive Income – Years Ended December 31, 2021 and 2020 41 Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2021 and 2020 42 Consolidated Statements of Cash Flows – Years Ended December 31, 2021 and 2020 43 Notes to Consolidated Financial Statements 44 35 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of New Peoples Bankshares, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of New Peoples Bankshares, Inc. and its subsidiaries (the Company) as of December 31, 2022, the related consolidated statements of income, comprehensive (loss) income, shareholders’ equity and cash flows, for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses – Loans Collectively Evaluated for Impairment - Qualitative Factors Description of the Matter As described in Note 2 (Summary of significant accounting policies) and Note 7 (Allowance for Loan Losses) to the consolidated financial statements, the Company maintains an allowance for loan losses that represents management’s estimate of the probable losses inherent in the Company’s loan portfolio. The Company’s allowance for loan losses has two basic components: the general allowance and the specific allowance. At December 31, 2022, the general allowance represented $6,641,000 of the total allowance for loan losses of $6,727,000. The general allowance is applied to non-impaired loans and uses historical loss experience along with qualitative factors, including changes in lending policies and procedures, the nature and volume of the portfolio, experience of lending management, levels and trends in delinquencies, nonaccrual loans, charge-offs and adversely rated loans, the loan review system, portfolio concentrations, economic conditions, collateral values, and the competitive and legal environment. The qualitative adjustments to the historical loss rates are established by applying an additional loss factor to the loan segments identified by management based on their assessment of shared risk characteristics within similar groups of non-impaired loans. Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio and contribute significantly to the allowance for loan losses. 36 Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates. How We Addressed the Matter in Our Audit The primary audit procedures we performed to address this critical audit matter included: · Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included: o Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors. o Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors. o Evaluating the qualitative factors for directional consistency and for reasonableness. o Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors. /s/ Yount, Hyde & Barbour, P.C. We have served as the Company’s auditor since 2022. Roanoke, Virginia March 31, 2023 37 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of New Peoples Bankshares, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of New Peoples Bankshares, Inc. and Subsidiaries (the Company) as of December 31, 2021, the related consolidated statement of income, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Elliott Davis, LLC Firm ID 149 We served as the Company's auditor from 2011 to 2021. Greenville, South Carolina March 31, 2022 elliottdavis.com 38 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2022 AND 2021 (in thousands except share data) ASSETS 2022 2021 Cash and due from banks $ 13,979 $ 14,952 Interest-bearing deposits with banks 46,747 45,766 Federal funds sold 960 228 Total cash and cash equivalents 61,686 60,946 Investment securities available-for-sale 96,076 107,358 Loans receivable 584,613 593,744 Allowance for loan losses ( 6,727 ) ( 6,735 ) Net loans 577,886 587,009 Bank premises and equipment, net 19,290 20,735 Other real estate owned 261 1,361 Accrued interest receivable 2,555 2,112 Deferred taxes, net 4,623 1,673 Bank owned life insurance 4,549 4,685 Right-of-use assets – operating leases 3,725 4,062 Other assets 4,707 4,706 Total assets $ 775,358 $ 794,647 LIABILITIES Deposits Noninterest bearing $ 249,924 $ 251,257 Interest-bearing 442,783 456,256 Total deposits 692,707 707,513 Borrowed funds 16,496 16,496 Lease liabilities – operating leases 3,725 4,062 Accrued interest payable 526 272 Accrued expenses and other liabilities 4,685 2,673 Total liabilities 718,139 731,016 Commitments and Contingent Liabilities (Notes 19 and 20) SHAREHOLDERS’ EQUITY Common stock - $ 2.00 par value; 50,000,000 shares authorized; 23,848,491 and 23,922,086 shares issued and outstanding at December 31, 2022 and 2021, respectively 47,697 47,844 Additional paid-in capital 14,546 14,570 Retained earnings 8,917 2,031 Accumulated other comprehensive loss ( 13,941 ) ( 814 ) Total shareholders’ equity 57,219 63,631 Total liabilities and shareholders’ equity $ 775,358 $ 794,647 The accompanying notes are an integral part of these financial statements. 39 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (in thousands except share and per share data) INTEREST AND DIVIDEND INCOME 2022 2021 Loans including fees $ 27,739 $ 28,323 Federal funds sold 8 — Interest-earning deposits with banks 1,514 95 Investments 1,983 1,377 Dividends on equity securities (restricted) 146 117 Total interest and dividend income 31,390 29,912 INTEREST EXPENSE Deposits 1,875 2,248 Borrowed funds 1,230 453 Total interest expense 3,105 2,701 NET INTEREST INCOME 28,285 27,211 PROVISION FOR LOAN LOSSES 625 372 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 27,660 26,839 NONINTEREST INCOME Service charges and fees 3,969 3,724 Card processing and interchange income 3,769 3,871 Insurance and investment fees 954 1,029 Net gain on sales of available-for-sale securities — 322 Other noninterest income 548 1,034 Total noninterest income 9,240 9,980 NONINTEREST EXPENSES Salaries and employee benefits 13,365 12,662 Occupancy and equipment expenses 4,135 5,785 Data processing and telecommunications 2,369 2,444 Other operating expenses 6,650 6,976 Total noninterest expenses 26,519 27,867 INCOME BEFORE INCOME TAXES 10,381 8,952 INCOME TAX EXPENSE 2,299 1,942 NET INCOME $ 8,082 $ 7,010 Income Per Share Basic and Diluted $ 0.34 $ 0.29 Average Weighted Shares of Common Stock Basic and Diluted 23,898,185 23,922,086 The accompanying notes are an integral part of these financial statements. 40 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (Dollars in thousands) 2022 2021 NET INCOME $ 8,082 $ 7,010 Other comprehensive loss: Investment securities activity: Unrealized losses arising during the year ( 16,617 ) ( 1,647 ) Reclassification adjustment for net gains included in net income — ( 322 ) Other comprehensive losses on investment securities ( 16,617 ) ( 1,969 ) Related tax benefit 3,490 413 TOTAL OTHER COMPREHENSIVE LOSS ( 13,127 ) ( 1,556 ) TOTAL COMPREHENSIVE (LOSS) INCOME $ ( 5,045 ) $ 5,454 The accompanying notes are an integral part of these financial statements. 41 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (in thousands including share data) Shares of Common Stock Common Stock Additional Paid-in- Capital Retained Earnings (Deficit) Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Balance, December 31, 2020 23,922 $ 47,844 $ 14,570 $ ( 4,979 ) $ 742 $ 58,177 Net income — — — 7,010 — 7,010 Other comprehensive loss, net of tax — — — — ( 1,556 ) ( 1,556 ) Balance, December 31, 2021 23,922 $ 47,844 $ 14,570 $ 2,031 $ ( 814 ) $ 63,631 Net income — $ — $ — $ 8,082 $ — $ 8,082 Other comprehensive loss, net of tax — — — — ( 13,127 ) ( 13,127 ) Cash dividend declared ($0.05 per share) — — — ( 1,196 ) — ( 1,196 ) Repurchase of common stock ( 74 ) ( 147 ) ( 24 ) — — ( 171 ) Balance, December 31, 2022 23,848 $ 47,697 $ 14,546 $ 8,917 $ ( 13,941 ) $ 57,219 The accompanying notes are an integral part of these financial statements. 42 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (Dollars are in thousands) 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,082 $ 7,010 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,741 2,097 Provision for loan losses 625 372 Loss (income) on bank owned life insurance 136 ( 32 ) Gain on sale of securities available-for-sale — ( 322 ) Gain on sale of mortgage loans ( 29 ) ( 104 ) Loss on sale or disposal of premises and equipment 201 1,098 Gain on sale of foreclosed real estate and repossessed assets ( 70 ) ( 126 ) Loans originated for sale ( 1,577 ) ( 5,814 ) Proceeds from sales of loans originated for sale 1,606 6,307 Adjustment of carrying value of foreclosed real estate and repossessed assets 197 466 Net amortization/accretion of bond premiums/discounts 474 482 Deferred tax expense 540 1,866 Net change in: Interest receivable ( 443 ) 280 Other assets 26 403 Accrued interest payable 254 ( 164 ) Accrued expenses and other liabilities 2,068 ( 19 ) Net Cash Provided by Operating Activities 13,831 13,800 CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in loans 9,209 ( 18,987 ) Purchase of securities available-for-sale ( 19,790 ) ( 85,082 ) Proceeds from sale of investment securities available-for-sale — 7,686 Proceeds from repayments and maturities of securities available-for-sale 13,980 16,315 Net (purchase) sale of equity securities (restricted) ( 27 ) 555 Payments for the purchase of premises and equipment ( 548 ) ( 4,094 ) Proceeds from sale of premises and equipment — 1,203 Proceeds from insurance claims on other real estate owned or premises 51 54 Proceeds from sales of other real estate owned 207 2,645 Net Cash Provided by (Used in) Investing Activities 3,082 ( 79,705 ) CASH FLOWS FROM FINANCING ACTIVIES Net change in short term borrowings — ( 5,000 ) Net change in noninterest bearing deposits ( 1,333 ) 27,532 Net change in interest bearing deposits ( 13,473 ) 11,969 Dividends paid ( 1,196 ) — Repurchase of common stock ( 171 ) — Net Cash (Used in) Provided by Financing Activities ( 16,173 ) 34,501 Net increase (decrease) in cash and cash equivalents 740 ( 31,404 ) Cash and Cash Equivalents, Beginning of the Year 60,946 92,350 Cash and Cash Equivalents, End of the Year $ 61,686 $ 60,946 Supplemental Disclosure of Cash Paid During the Year for: Interest $ 2,851 $ 2,865 Taxes 650 — Supplemental Disclosure of Non-Cash Transactions: Right-of-use assets obtained in exchange for new operating lease liabilities — 86 Loan made to finance sale of premises and equipment — 185 Other real estate acquired in settlement of foreclosed loans — 566 Loans made to finance sale of foreclosed real estate 711 400 Transfer of premises and equipment to other real estate — 950 Change in unrealized losses on securities available for sale ( 16,617 ) ( 1,969 ) The accompanying notes are an integral part of these financial statements. 43 NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS Nature of Operations – New Peoples Bankshares, Inc. (New Peoples) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are each organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, northeastern Tennessee and western North Carolina. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation - The consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (Hereinafter, collectively referred to as the Company, we, us, or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles of the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Cash and Cash Equivalents – Cash and cash equivalents as used in the cash flow statements include cash and due from banks, interest-bearing deposits with banks, federal funds sold and investment securities maturing within three months. Investment Securities – Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities not intended to be held to maturity are classified as available-for-sale and carried at fair value. Securities available-for-sale are intended to be used as part of the Company’s asset and liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other similar factors. The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity for discounts and the earlier of call date or maturity for premiums. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive loss. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive loss, net of tax, whereas realized gains and losses flow through the statements of income. Loans held for sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance through earnings. Mortgage loans held for sale are generally sold with servicing released. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related loan sold. Loans – Loans are carried on the balance sheet at unpaid principal balance, net of any unearned interest and the allowance for loan losses. Interest income on loans is computed using the effective interest method, except where serious doubt exists as to the collectability of the loan, in which case accrual of the income is discontinued. 44 It is the Company’s policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, except in the case of a nonaccrual loan that is well secured and in the process of collection, in which case, the interest accrued but not collected is not reversed. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual status. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Significant Group Concentrations of Credit Risk – The Company identifies a concentration as any obligation, direct or indirect, of the same or affiliated interests which represent 25% or more of the Company’s capital structure, or $14.3 million as of December 31, 2022. Most of the Company’s activities are with customers located within southwest Virginia, southern West Virginia, northeastern Tennessee region and western North Carolina. Certain concentrations may pose credit risk. The Company does not have any significant concentrations to any one industry or customer. Allowance for Loan Losses – The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The loan portfolio is analyzed periodically and loans are assigned a risk rating. Allowances for impaired loans are generally determined based on collateral values or the present value of expected cash flows. A general allowance is made for all other loans not considered impaired as deemed appropriate by management. In determining the adequacy of the allowance, management considers the following factors: the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, the estimated value of any underlying collateral, prevailing environmental factors and economic conditions, and other inherent risks. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in collateral values and changes in estimates of cash flows on impaired loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Past due status is determined based on contractual terms. In regard to our consumer and consumer real estate loan portfolio, the Company uses the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. For non-1-4 family residential loans that are 90 days past due or greater, or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues. 45 Bank Premises and Equipment – Land, buildings and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives: Schedule of estimated useful lives Type Estimated useful life Buildings 39 years Paving and landscaping 15 years Computer equipment and software 3 to 5 years Vehicles 5 years Furniture and other equipment 5 to 10 years Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of noninterest expense as incurred. Other Real Estate Owned – Other real estate owned represents properties acquired through foreclosure or deeds taken in lieu of foreclosure and former branch sites that have been closed and for which there are no intentions to re-open or otherwise use the location. At the time of acquisition, these properties are recorded at fair value less estimated costs to sell. Expenses incurred in connection with operating these properties and subsequent write-downs, if any, are charged to operations. Subsequent to foreclosure, management periodically considers the adequacy of the reserve for losses on the property. Gains and losses on the sales of these properties are credited or charged to income in the year of the sale. Bank Owned Life Insurance (BOLI) – The Bank purchased life insurance policies on certain, now-former, key officers and employees. Changes in the cash surrender value are recorded in noninterest income. Leases – A right-of-use asset and related lease liability is recognized for operating leases the Bank has entered into for certain office facilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management. If it is determined that it is reasonably certain that the Bank will exercise renewal options, the additional term is included in the calculation of the lease liability. As most of our leases do not provide an implicit rate, we use the fully collateralized Federal Home Loan Bank borrowing rate, commensurate with the lease terms at the lease commencement date, in determining the present value of the lease payments. Income Taxes – Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company provides a valuation allowance on its net deferred tax assets where it is more likely than not such assets will not be realized. As of December 31, 2022 and 2021, the Company had no valuation allowance on its net deferred tax assets. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 10, Income Taxes, for additional information. The Company records any penalties and interest attributed to uncertain tax positions as a component of income tax expenses. Income Per Share – Basic income per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Financial Instruments – Off-balance-sheet instruments - In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded. Financial Instruments – Fair Value – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully discussed in Note 22. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risks, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect these estimates. 46 Comprehensive (Loss) Income – GAAP require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive (loss) income. The change in unrealized gains and losses on available-for-sale securities is the Company’s only component of other comprehensive loss. Revenue from Contracts with Customers - The Company generally satisfies its performance obligations fully on its contracts with customers as services are rendered; and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Advertising Cost – Advertising costs are expensed in the period incurred. Those costs, which are included in Advertising, sponsorships and donations in Note 24 totaled $ 162,000 and $ 252,000 , for the years ended December 31, 2022 and 2021, respectively. Reclassification – Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications. Subsequent Events – The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. See Note 25 Subsequent Events for additional information. NOTE 3 INCOME PER SHARE Basic income per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the years ended December 31, 2022 and 2021, there were no dilutive potential common shares. Basic and diluted net income per common share calculations follows: Schedule of basic and diluted net loss per common share calculations (Amounts in thousands, except For the year ended share and per share data) December 31, 2022 2021 Net income $ 8,082 $ 7,010 Weighted average shares outstanding 23,898,185 23,922,086 Weighted average dilutive shares outstanding 23,898,185 23,992,086 Basic and diluted income per share $ 0.34 $ 0.29 NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS The Bank had federal funds sold and interest-bearing cash on deposit with the Federal Reserve Bank of Richmond (the Federal Reserve Bank) and other commercial banks amounting to $ 47.7 million and $ 46.0 million as of December 31, 2022 and 2021, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits. Effective March 26, 2020, the Board of Governors of the Federal Reserve System set reserve requirements to zero. Therefore, the Bank is no longer required to maintain minimum reserve balances with the Federal Reserve Bank. The Bank has a total of $ 30.0 million in unsecured fed funds lines of credit facilities from three correspondent banks that were available at December 31, 2022 and 2021, respectively. Of these total commitments, all were available at December 31, 2022 and 2021. As a condition for $5.0 million of one of the unsecured fed funds line of credit, the Bank maintains a minimum deposit balance of $250,000 with this correspondent bank. As of December 31, 2022 and 2021, the Bank was in compliance with this requirement. 47 NOTE 5 INVESTMENT SECURITIES The amortized cost and estimated fair value of securities (all available-for-sale) as of December 31, 2022 and December 31, 2021 are as follows: Schedule of securities amortized cost and estimated fair value Gross Gross Approximate Amortized Unrealized Unrealized Fair (Dollars are in thousands) Cost Gains Losses Value December 31, 2022 U.S. Treasuries $ 12,642 $ — $ 957 $ 11,685 U.S. Government Agencies 10,129 4 734 9,399 Taxable municipals 23,022 — 6,207 16,815 Corporate bonds 3,512 — 376 3,136 Mortgage backed securities 64,419 — 9,378 55,041 Total Securities available for sale $ 113,724 $ 4 $ 17,652 $ 96,076 December 31, 2021 U.S. Treasuries $ 7,791 $ 2 $ 122 $ 7,671 U.S. Government Agencies 9,098 77 86 9,089 Taxable municipals 23,075 159 254 22,980 Corporate bonds 2,014 23 18 2,019 Mortgage backed securities 66,410 143 954 65,599 Total Securities available for sale $ 108,388 $ 404 $ 1,434 $ 107,358 The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2022 and December 31, 2021. Schedule of fair value and gross unrealized losses on investment securities Less than 12 Months 12 Months or More Total (Dollars are in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2022 U.S. Treasuries $ 4,761 $ 145 $ 6,922 $ 812 $ 11,683 $ 957 U.S. Government Agencies 5,925 348 3,295 386 9,220 734 Taxable municipals 3,689 1,113 13,127 5,094 16,816 6,207 Corporate bonds 2,375 136 761 240 3,136 376 Mortgage backed securities 11,338 861 43,612 8,517 54,950 9,378 Total $ 28,088 $ 2,603 $ 67,717 $ 15,049 $ 95,805 $ 17,652 December 31, 2021 U.S. Treasuries $ 6,200 $ 122 $ — $ — $ 6,200 $ 122 U.S. Government Agencies 977 10 3,434 76 4,411 86 Taxable municipals 13,040 237 387 17 13,427 254 Corporate bonds 1,482 18 — — 1,482 18 Mortgage backed securities 52,180 758 6,282 196 58,462 954 Total $ 73,879 $ 1,145 $ 10,103 $ 289 $ 83,982 $ 1,434 As of December 31, 2022, the available-for-sale portfolio included 221 investments for which the fair market value was less than amortized cost. As of December 31, 2021, the available-for-sale portfolio included 113 investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had other-than-temporary impairment at December 31, 2022 or December 31, 2021. Investment securities with a carrying value of $ 27.3 million 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. There were no securities sold during the year ended December 31, 2022. During the year ended December 31, 2021, $7.7 million of securities were sold, realizing $322,000 in gains. 48 The amortized cost and fair value of investment securities as of December 31, 2022, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Also, actual maturities may differ from scheduled maturities on amortizing securities, such as mortgage-backed securities and collateralized mortgage obligations, because the underlying collateral on these types of securities may be repaid prior to the scheduled maturity date. Schedule of amortized cost and fair value of investment securities contractual maturity Weighted (Dollars are in thousands) Amortized Fair Average Securities Available for Sale Cost Value Yield Due in one year or less $ 1,482 $ 1,475 4.51 % Due after one year through five years 16,696 15,674 2.12 % Due after five years through ten years 15,315 13,409 2.11 % Due after ten years 80,231 65,518 1.86 % Total $ 113,724 $ 96,076 1.97 % The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $ 2.1 million and $ 2.0 million as of December 31, 2022 and 2021, respectively. The stock has no quoted market value and no ready market exists. NOTE 6 LOANS Loans receivable outstanding as of December 31, 2022 and 2021, are summarized as follows: Summary of loans receivable outstanding December 31, (Dollars are in thousands) 2022 2021 Real estate secured: Commercial $ 197,069 $ 206,162 Construction and land development 42,470 32,325 Residential 1-4 family 227,232 224,530 Multifamily 29,710 33,048 Farmland 17,744 18,735 Total real estate loans 514,225 514,800 Commercial 46,697 54,325 Agriculture 3,756 4,021 Consumer installment loans 19,309 18,756 All other loans 626 1,842 Total loans $ 584,613 $ 593,744 Included in commercial loans as of December 31, 2022 and 2021, were approximately $ 273,000 and $ 6.4 million of PPP loans that are guaranteed by the SBA. Also included in total loans above are deferred loan fees of $ 1.6 million and $ 1.8 million, as of December 31, 2022 and 2021, respectively, which include net deferred PPP loan fees. Total deferred loan costs were $ 1.9 million and $ 2.0 million, as of December 31, 2022 and 2021, respectively. Income or expense from net deferred fees and costs is recognized as income or expense over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or cost is recognized at that time. As a result of PPP originations, net deferred fees totaling $3.2 million were received. The Company recognized approximately $211,000 and $2.0 million, respectively, during the years ended December 31, 2022 and 2021. 49 Loans receivable on nonaccrual status as of December 31, 2022 and 2021 are summarized as follows: Summary of loans receivable on nonaccrual status (Dollars are in thousands) 2022 2021 Real estate secured: Commercial $ — $ 415 Construction and land development 471 37 Residential 1-4 family 2,597 2,314 Multi-family 268 111 Farmland 41 48 Total real estate loans 3,377 2,925 Commercial — 9 Consumer installment and other loans 36 7 Total loans receivable on nonaccrual status $ 3,413 $ 2,941 Total interest income not recognized on nonaccrual loans for 2022 and 2021 was approximately $10,000 and $223,000, respectively. The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2022 and December 31, 2021: Summary of impaired loans As of December 31, 2022 (Dollars are in thousands) Average Recorded Investment Interest Income Recognized Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Real estate secured: Commercial $ 124 $ 6 $ 90 $ 131 $ — Construction and land development 114 17 471 491 — Residential 1-4 family 1,585 48 1,617 1,972 — Multifamily — — — — — Farmland 307 24 248 417 — Commercial 14 1 23 31 — Agriculture — — — — — Consumer installment loans 1 — — — All other loans — — — — — With an allowance recorded: Real estate secured: Commercial 407 2 268 338 63 Construction and land development 291 — — — — Residential 1-4 family 201 6 32 48 23 Multifamily 20 — — — — Farmland 63 — — — — Commercial 27 1 — — — Agriculture — — — — — Consumer installment loans — — — — — All other loans — — — — — Total $ 3,154 $ 105 $ 2,749 $ 3,428 $ 86 50 As of December 31, 2021 (Dollars are in thousands) Average Recorded Investment Interest Income Recognized Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Real estate secured: Commercial $ 245 $ — $ 99 $ 140 $ — Construction and land development 64 18 24 298 — Residential 1-4 family 1,720 24 1,508 1,791 — Multifamily — — — — — Farmland 438 14 320 490 — Commercial — — — — — Agriculture — — — — — Consumer installment loans 3 — 2 2 — All other loans — — — — — With an allowance recorded: Real estate secured: Commercial 871 3 315 372 94 Construction and land development — — — — — Residential 1-4 family 338 6 340 372 53 Multifamily — — — — — Farmland 121 4 197 209 17 Commercial 109 1 28 35 2 Agriculture — — — — — Consumer installment loans — — — — — All other loans — — — — — Total $ 3,909 $ 70 $ 2,833 $ 3,709 $ 166 An age analysis of past due loans receivable is below. As of December 31, 2022 and 2021, there were no loans over 90 days past due that were accruing. Summary of age analysis of past due loans receivable As of December 31, 2022 (Dollars are in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Real estate secured: Commercial $ 268 $ — $ — $ 268 $ 196,801 $ 197,069 Construction and land development 89 — — 89 42,381 42,470 Residential 1-4 family 3,521 543 341 4,405 222,827 227,232 Multifamily 229 — — 229 29,481 29,710 Farmland 285 — — 285 17,459 17,744 Total real estate loans 4,392 543 341 5,276 508,949 514,225 Commercial 56 — — 56 46,641 46,697 Agriculture — — — — 3,756 3,756 Consumer installment loans 73 17 17 107 19,202 19,309 All other loans 59 — — 59 567 626 Total loans $ 4,580 $ 560 $ 358 $ 5,498 $ 579,115 $ 584,613 51 As of December 31, 2021 (Dollars are in thousands) Loans 30-59 Days Past Due Loans 60-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Real estate secured: Commercial $ — $ — $ — $ — $ 206,162 $ 206,162 Construction and land development 7 — 7 14 32,311 32,325 Residential 1-4 family 2,473 240 486 3,199 221,331 224,530 Multifamily — — 111 111 32,937 33,048 Farmland — — — — 18,735 18,735 Total real estate loans 2,480 240 604 3,324 511,476 514,800 Commercial 5 — — 5 54,320 54,325 Agriculture — — — — 4,021 4,021 Consumer installment loans 56 5 — 61 18,695 18,756 All other loans — — — — 1,842 1,842 Total loans $ 2,541 $ 245 $ 604 $ 3,390 $ 590,354 $ 593,744 The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings: Pass - Loans in this category are considered to have a low likelihood of loss based on analysis of relevant information about the ability of the borrowers to service their debt and other factors. Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date. Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. There were no loans classified as doubtful at either December 31, 2022 or 2021. 52 Based on the most recent analysis performed, the risk category of loans receivable was as follows: Summary of risk category of loans receivable As of December 31, 2022 (Dollars are in thousands) Pass Special Mention Substandard Doubtful Total Real estate secured: Commercial $ 195,376 $ 1,425 $ 268 $ — $ 197,069 Construction and land development 41,882 117 471 — 42,470 Residential 1-4 family 224,228 406 2,598 — 227,232 Multifamily 29,503 207 — — 29,710 Farmland 16,848 855 41 — 17,744 Total real estate loans 507,837 3,010 3,378 — 514,225 Commercial 46,471 226 — — 46,697 Agriculture 3,756 — — — 3,756 Consumer installment loans 19,272 2 35 — 19,309 All other loans 626 — — — 626 Total $ 577,962 $ 3,238 $ 3,413 $ — $ 584,613 As of December 31, 2021 (Dollars are in thousands) Pass Special Mention Substandard Doubtful Total Real estate secured: Commercial $ 198,022 $ 7,725 $ 415 $ — $ 206,162 Construction and land development 31,366 922 37 — 32,325 Residential 1-4 family 221,342 915 2,273 — 224,530 Multifamily 32,499 438 111 — 33,048 Farmland 18,137 550 48 — 18,735 Total real estate loans 501,366 10,550 2,884 — 514,800 Commercial 53,162 1,154 9 — 54,325 Agriculture 4,021 — — — 4,021 Consumer installment loans 18,746 2 8 — 18,756 All other loans 1,842 — — — 1,842 Total $ 579,137 $ 11,706 $ 2,901 $ — $ 593,744 NOTE 7 ALLOWANCE FOR LOAN LOSSES The following tables present activity in the allowance for loan losses for the years ended December 31, 2022 and 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of December 31, 2022 and 2021. Schedule of allocation of portion of allowance Real estate secured (Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total Year ended December 31, 2022 Beginning balance $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Charge-offs ( 5 ) ( 149 ) ( 64 ) ( 111 ) ( 1 ) ( 45 ) ( 1 ) ( 559 ) - ( 935 ) Recoveries 33 6 100 2 14 31 1 115 - 302 Provision 202 299 91 117 ( 9 ) ( 704 ) 4 722 ( 97 ) 625 Ending balance $ 2,364 $ 345 $ 2,364 $ 262 $ 153 $ 381 $ 32 $ 386 $ 440 $ 6,727 Allowance for loan losses at December 31, 2022 Individually evluated for impairment $ 63 $ - $ 23 $ - $ - $ - $ - $ - $ - $ 86 Collectively evaluated for impairment 2,301 345 2,341 262 153 381 32 386 440 6,641 $ 2,364 $ 345 $ 2,364 $ 262 $ 153 $ 381 $ 32 $ 386 $ 440 $ 6,727 Loans at December 31, 2022 Individually evluated for impairment $ 358 $ 471 $ 1,649 $ - $ 248 $ 23 $ - $ - $ - $ 2,749 Collectively evaluated for impairment 196,711 41,999 225,583 29,710 17,496 46,965 3,756 19,644 - 581,864 $ 197,069 $ 42,470 $ 227,232 $ 29,710 $ 17,744 $ 46,988 $ 3,756 $ 19,644 $ - $ 584,613 53 Real estate secured (Dollars are in thousands) Commercial Construction and Land Development Residential 1-4 family Multifamily Farmland Commercial Agriculture Consumer and All Other Unallocated Total Year ended December 31, 2021 Beginning balance $ 2,281 $ 233 $ 1,951 $ 151 $ 97 $ 2,275 $ 40 $ 163 $ - $ 7,191 Charge-offs ( 915 ) - ( 48 ) - - ( 92 ) - ( 78 ) - ( 1,133 ) Recoveries 2 6 85 - 29 137 1 45 - 305 Provision 766 ( 50 ) 249 103 23 ( 1,221 ) ( 13 ) ( 22 ) 537 372 Ending balance $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Allowance for loan losses at December 31, 2021 Individually evluated for impairment $ 94 $ - $ 53 $ - $ 17 $ 2 $ - $ - $ - $ 166 Collectively evaluated for impairment 2,040 189 2,184 254 132 1,097 28 108 537 6,569 $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Loans at December 31, 2021 Individually evluated for impairment $ 414 $ 24 $ 1,848 $ - $ 517 $ 28 $ - $ 2 $ - $ 2,833 Collectively evaluated for impairment 205,748 32,301 222,682 33,048 18,218 54,297 4,021 20,596 - 590,911 $ 206,162 $ 32,325 $ 224,530 $ 33,048 $ 18,735 $ 54,325 $ 4,021 $ 20,598 $ - $ 593,744 In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in the portfolio segment or impairment calculations. Additionally, due to uncertainties presented by the lingering impact of the pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. In 2022 and 2021, external qualitative factors were adjusted to consider the impact of inflation. NOTE 8 TROUBLED DEBT RESTRUCTURINGS As of December 31, 2022, loans classified as troubled debt restructurings (TDRs) totaled $ 2.0 million compared to $ 2.5 million as of December 31, 2021. The following table presents information related to loans modified as troubled debt restructurings during the years ended December 31, 2022 and 2021. Schedule of loans modified as troubled debt restructurings December 31, 2022 December 31, 2021 (Dollars are in thousands) # of Loans Pre-Mod. Recorded Investment Post-Mod. Recorded Investment # of Loans Pre-Mod. Recorded Investment Post-Mod. Recorded Investment Real estate secured: Commercial — $ — $ — — $ — $ — Construction and land Development — — — — — — Residential 1-4 family — — — 1 35 35 Multifamily — — — — — — Farmland — — — — — — Total real estate loans — — — 1 35 35 Commercial — — — — — — Agriculture — — — — — — Consumer installment loans — — — — — — All other loans — — — — — — Total — $ — $ — 1 $ 35 $ 35 There were no loans modified that resulted in a troubled debt restructuring during the year ended December 31, 2022. During the year ended December 31, 2021, one loan was modified for which the modification was considered to be a troubled debt restructuring. 54 For the year ended December 31, 2022 there were no TDRs that subsequently defaulted within twelve months of the loan modification. For the year ended December 31, 2021, there were two TDRs with a modified balance of $56,000 that subsequently defaulted within twelve months of the loan modification. Generally, a TDR is considered to be in default once it becomes 90 days or more past due following a modification. When determining the level of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of these loans. NOTE 9 BANK PREMISES AND EQUIPMENT Depreciation expense for 2022 and 2021 was $1.7 million and $2.1 million, respectively. Bank premises and equipment as of December 31, 2022 and 2021 are summarized as follows: Schedule of bank premises and equipment (Dollars are in thousands) 2022 2021 Land $ 7,371 $ 7,424 Buildings and improvements 15,972 16,252 Furniture and equipment 13,965 14,139 37,308 37,815 Less accumulated depreciation ( 18,018 ) ( 17,080 ) Bank Premises and Equipment $ 19,290 $ 20,735 As presented in Note 14 Other Real Estate Owned, the bank sold three former branch locations during 2022. These properties with a combined carrying value of $2.0 million, were transferred to other real estate owned during 2021, resulting in an increase to OREO of $950,000, and disposal and valuation costs of approximately $1.1 million. Equipment with a combined net book value of $188,000 was written off in 2021. During the year ended December 31, 2021, the Bank sold four other former branch locations, with net book values of approximately $1.1 million, resulting in approximately $173 thousand of net gains on sales. During 2021, we opened one new branch office, in Bristol, Virginia, resulting in a net increase of $1.7 million in premises and equipment. As presented in Note 17 Leasing Activities, during 2021, the Bank repurchased the branch office located in Lebanon, Virginia, which had previously been sold and leased back. NOTE 10 INCOME TAXES The Company files a consolidated federal income tax return. The following summarizes the provision for income taxes and the related deferred tax components for the years ended December 31, 2022 and 2021. Income tax expense is summarized as follows for the years ended December 31, 2022 and 2021: Schedule of pre-tax book income (Dollars are in thousands) 2022 2021 Current income tax expense (benefit) Federal $ 1,759 $ ( 172 ) State — — Total current income tax expense (benefit) 1,759 ( 172 ) Deferred income tax expense Federal 500 2,067 State 40 47 Total deferred income tax expense 540 2,114 Income tax expense $ 2,299 $ 1,942 55 The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 21% for years ended December 31, 2022 and 2021, respectively: Schedule of reconciliation of income tax expense (Dollars are in thousands) 2022 2021 Income tax expense (benefit) at the applicable federal rate $ 2,180 $ 1,879 Permanent differences resulting from: Nondeductible expenses 9 7 Tax exempt interest income ( 3 ) ( 4 ) Bank owned life insurance 29 ( 7 ) Other adjustments 84 67 Income tax expense $ 2,299 $ 1,942 The net deferred tax assets and liabilities resulting from temporary differences as of December 31, 2022 and 2021, are summarized as follows: Schedule of net deferred tax assets and liabilities (Dollars are in thousands) 2022 2021 Deferred tax assets Allowance for loan losses $ 1,498 $ 1,500 Deferred compensation 80 85 Nonaccrual loan interest 543 532 Unrealized loss on securities available for sale 3,706 216 Other real estate owned 48 305 Amortization of core deposits — 6 Amortization of goodwill — 31 Capitalized interest and repair expense 22 23 Net operating loss carryforward — 460 Other 57 98 Total assets, gross 5,954 3,256 Deferred tax liabilities Accelerated depreciation 896 1,105 Prepaid expenses 17 27 Deferred loan costs 418 451 Total liabilities, gross 1,331 1,583 Net deferred tax asset $ 4,623 $ 1,673 In accordance with applicable accounting guidance, the Company determined that it was not required to establish a valuation allowance for deferred tax assets as it is more likely than not that the deferred tax asset will be realized through future taxable income, future reversals of existing taxable temporary differences and tax strategies. The Company’s net deferred tax asset is recorded in the consolidated financial statements separately. As of December 31, 2022 and 2021, the Company had no unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to increase significantly over the next twelve months. The company recognizes interest and penalties as a component of income tax expense. The Company and Bank are subject to U. S. federal income tax, a capital-based franchise tax in the Commonwealth of Virginia; and income and excise taxes in West Virginia, Tennessee and North Carolina, respectively, based on earnings realized from business activities within each state. Years prior to 2019 are no longer subject to examination by taxing authorities. 56 NOTE 11 TIME DEPOSITS The aggregate amount of time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) Insurance limit of $250,000 was $26.8 million and $28.6 million as of December 31, 2022 and 2021, respectively. We had no brokered time deposits at either December 31, 2022 or 2021. As of December 31, 2022, the scheduled maturities of time deposits are as follows (dollars are in thousands): Schedule of maturities 2023 $ 123,270 2024 20,683 2025 29,987 2026 8,185 2027 6,108 After five years - Total $ 188,233 NOTE 12 RELATED PARTY TRANSACTIONS Officers, directors (and companies controlled by them), principal shareholders, and associates were customers of and had loan transactions with the Bank in the normal course of business. The following table summarizes these transactions, which were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk. Schedule of related party For the year ended December 31, (Dollars in thousands) 2022 2021 Beginning balance $ 3,419 $ 4,187 New loans and advances on lines 2,636 2,620 Payments and other reductions ( 4,496 ) ( 3,388 ) Ending balance $ 1,559 $ 3,419 Total related party deposits held at the Bank were $29.0 million and $24.8 million as of December 31, 2022 and 2021, respectively. NPB Insurance Services, Inc. holds a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company. In August 2021, the Bank sold a parcel of land, adjacent to the Grundy, Virginia office to a director for $150 thousand, which approximated the fair value of the property. A gain of approximately $17,000 was recorded from this transaction. NOTE 13 RETIREMENT PLANS The Company has established a qualified defined contribution plan that covers all full-time employees. The Company matches employee contributions up to a maximum of 3% of their salary. The Company contributed approximately $235,000 and $246,000 to the defined contribution plan during the years ended December 31, 2022 and 2021, respectively. The Bank maintains a salary continuation plan for key executives which was established in 2002 and is funded by single premium life insurance policies. Expenses related to the plan were approximately $27,000 and $29,000 for the years ended December 31, 2022 and 2021, respectively. 57 NOTE 14 OTHER REAL ESTATE OWNED The following table summarizes the activity in other real estate owned for the years ended December 31, 2022 and 2021: Schedule of other real estate owned 2022 2021 (Dollars are in thousands) Balance, beginning of year $ 1,361 $ 3,334 Additions — 566 Transfers from premises and equipment — 950 Proceeds from sales ( 207 ) ( 2,645 ) Proceeds from insurance claims — ( 54 ) Loans made to finance sales ( 711 ) ( 400 ) Adjustment of carrying value ( 197 ) ( 466 ) Gains (losses) from sales 15 76 Balance, end of year $ 261 $ 1,361 During 2022, three former branch offices that were transferred from premises to other real estate owned during 2021, were sold, resulting in valuation adjustments of $137,000 and net losses totaling $5,000, respectively. NOTE 15 BANK OWNED LIFE INSURANCE As 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. The Company recorded a net write-down of approximately $136,000 during the year ended December 31, 2022. The Company recognized income of approximately $32,000 during the year ended December 31, 2021. NOTE 16 DIVIDEND LIMITATIONS ON SUBSIDIARY BANK A principal source of funds for the Company is dividends paid by the Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years. Virginia law restricts the amount of dividends a Virginia corporation may pay. Generally, a Virginia corporation may not authorize and make distributions if, after giving effect to the distribution, it would be unable to meet its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if it were dissolved at that time, to satisfy the preferential rights of shareholders whose rights are superior to the rights of those receiving the distribution. In addition, the payment of distributions to shareholders is subject to any prior rights of outstanding preferred stock. NOTE 17 LEASING ACTIVITIES As of December 31, 2022, the Bank leases four branch offices and sublets a lot adjacent to another branch office. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms as of December 31, 2022, was 9.60 years. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted average discount rate for the leases as of December 31, 2022 was 3.28 % . The Company’s operating lease costs for the years ended December 31, 2022 and 2021, as a result of the transactions discussed above, was $ 456,000 and $ 528,000 , respectively. During 2021, the Bank repurchased its branch office located in Lebanon, Virginia, for $1.3 million. This branch had previously been sold and leased back in September 2019. As a result of the repurchase, the lease with a remaining term of 12.9 years was cancelled. 58 The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. As of December 31, 2022, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands): Schedule of future minimum rental commitments under the non-cancellable operating leases 2023 $ 456 2024 456 2025 456 2026 456 2027 477 Thereafter 2,226 Total lease payments 4,527 Less imputed interest 802 Total $ 3,725 NOTE 18 BORROWED FUNDS The following table presents the breakdown of borrowed funds as of December 31, 2022 and 2021 (dollars in thousands): Schedule of breakdown of borrowed funds FHLB Revolving Advances (a) Federal Funds Lines (b) FHLB Term Loans Short-Term (c) FHLB Term Loans Long-Term (d) NPB Capital Trust I (e) NPB Capital Trust 2 (e) Total Balance December 31, 2022 $ - $ - $ - $ - $ 11,341 $ 5,155 $ 16,496 Highest balance at any month-end - - 60,000 - 11,341 5,155 Average weighted balance 863 - 19,507 - 11,341 5,155 36,866 Average interest rate: Paid during the year 1.68 % -% 2.48 % -% 4.63 % 3.79 % 3.31 % At year-end -% -% -% -% 6.68 % 5.85 % 6.42 % Balance December 31, 2021 $ - $ - $ - $ - $ 11,341 $ 5,155 $ 16,496 Highest balance at any month-end - 1,020 5,000 - 11,341 5,155 Average weighted balance - 8 2,466 - 11,341 5,155 18,970 Average interest rate: Paid during the year - % 2.51 % 1.36 % -% 2.81 % 1.97 % 2.39 % At year-end -% -% -% -% 2.72 % 1.89 % 2.46 % (a) - The Bank has the ability to borrow up to an additional $113.7 million from the FHLB under a line of credit which is secured by a blanket lien on residential real estate loans. With additional collateral, the Bank’s total credit availability would be $200.1 million. The Bank had no overnight borrowings subject to daily rate changes from the FHLB at December 31, 2022 or 2021. We have used our line of credit with FHLB to issue letters of credit totaling $7.0 million to the Treasury Board of Virginia for collateral on public funds deposited in the Bank. No draws on the letters of credit have been issued. The letters of credit are considered draws on our FHLB line of credit. (b) - Federal funds lines consist of $30.0 million in unsecured federal funds line of credit facilities with correspondent banks as of December 31, 2022 and 2021, respectively exclusive of any outstanding balance. The Company did not borrow from the lines other than to test the ability to access the lines. (c) – As of December 31, 2022, there are no short term FHLB advances outstanding. (d) – As of December 31, 2022 and 2021, there were no long term FHLB advances. (e) - TPS I - On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I (TPS I). The rate is determined quarterly and floats based on the 3-month LIBOR plus 260 basis points. 59 TPS 2 - On September 27, 2006, the Company completed the issuance of $5.2 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust 2 (TPS 2). The rate is determined quarterly and floats based on the 3-month LIBOR plus 177 basis points. Under the terms of the subordinated debt transactions, the securities have 30-year maturities and are redeemable, in whole or in part, without penalty, at the option of the Company after five years from the issuance date, and on a quarterly basis thereafter. Following are maturities of borrowed funds as of December 31, 2022 (dollars in thousands): Schedule of maturities of borrowed funds 2023 $ - 2024 - 2025 - 2026 - 2027 - 2028 and thereafter 16,496 $ 16,496 NOTE 19 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet. Financial instruments whose contract amount represents credit risk as of December 31, 2022 and 2021 were as follows: Schedule of financial instruments with credit risk 2022 2021 (Dollars in thousands) Commitments to extend credit $ 84,149 $ 69,015 Standby letters of credit 3,731 3,684 Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. NOTE 20 LEGAL CONTINGENCIES In the course of operations, we may become a party to legal proceedings in the normal course of business. At December 31, 2022, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, may materially impact the financial condition or liquidity of the Company. 60 NOTE 21 CAPITAL Capital Requirements and Ratios The Company meets eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve System’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and Common Equity Tier 1 capital to risk-weighted assets. As of December 31, 2022, the Bank meets all capital adequacy requirements to which it is subject. The Bank’s actual capital amounts and ratios are presented in the following table as of December 31, 2022 and 2021, respectively. Schedule of capital requirements Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions (Dollars are in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2022: Total Capital to Risk Weighted Assets $ 93,028 16.50 % $ 45,106 8.0 % $ 56,382 10.0 % Tier 1 Capital to Risk Weighted Assets 86,301 15.31 % 33,829 6.0 % 45,106 8.0 % Tier 1 Capital to Average Assets 86,301 10.40 % 33,206 4.0 % 41,508 5.0 % Common Equity Tier 1 Capital to Risk Weighted Assets 86,301 15.31 % 25,372 4.5 % 36,648 6.5 % December 31, 2021: Total Capital to Risk Weighted Assets $ 85,890 16.23 % $ 42,332 8.0 % $ 52,915 10.0 % Tier 1 Capital to Risk Weighted Assets 79,274 14.98 % 31,749 6.0 % 42,332 8.0 % Tier 1 Capital to Average Assets 79,274 9.86 % 32,145 4.0 % 40,181 5.0 % Common Equity Tier 1 Capital to Risk Weighted Assets 79,274 14.98 % 23,812 4.5 % 34,395 6.5 % Accordingly, as of December 31, 2022 and 2021, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since such dates that management believes have changed the Bank’s category. The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 capital to risk-weighted assets ratio of at least 4.5 % , plus a 2.5 % “capital conservation buffer” (effectively resulting in a minimum Common Equity Tier 1 capital to risk-weighted assets ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The Bank’s capital conservation buffer was 8.50% at December 31, 2022. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a Common Equity Tier 1 capital to risk-weighted assets ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of both December 31, 2022 and 2021, the Common Equity Tier 1 Capital to Risk-weighted Assets ratio, the Tier 1 Capital to Risk-weighted Assets ratio, the Total Capital to Risk-weighted Assets ratio, and the Tier 1 Capital to Average Assets ratio of the Bank, all exceeded the minimum requirements. 61 NOTE 22 FAIR VALUES The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are: Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are valued using other financial instruments, the parameters of which can be directly observed. Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows: Investment Securities Available for Sale - Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $ 96.1 million and $ 107.4 million as of December 31, 2022 and 2021, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service. Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impaired and require a reserve, are primarily valued on a non-recurring basis at the fair value of the underlying real estate collateral. Where there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates to determine whether or not the fair value of the collateral is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets. The aggregate amount of impaired loans carried at fair value was $213,000 and $714,000 as of December 31, 2022 and 2021, respectively. Other Real Estate Owned – Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned. These assets are carried at the lower of their carrying value or fair value. Fair value is based upon observable market prices, when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable market prices are not available, management determines the fair value of the foreclosed asset using independent third-party appraisals, evaluated to determine whether or not the property is further impaired below the appraised value, and adjusts for estimated costs of disposition. The Company records foreclosed assets as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were approximately $261,000 and $1.4 million as of December 31, 2022 and 2021, respectively. 62 Assets and liabilities measured at fair value are as follows as of December 31, 2022 (for purpose of this table the impaired loans are shown net of the related allowance): Schedule of summary of assets and liabilities measured at fair value (Dollars are in thousands) Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) (On a recurring basis) Available for sale investments U.S. Treasuries $ — $ 11,685 $ U.S. Government Agencies — 9,399 — Taxable municipals — 16,815 — Corporate bonds — 3,136 — Mortgage backed securities — 55,041 — (On a non-recurring basis) Other real estate owned — — 261 Impaired loans: Real estate secured: Commercial — — 205 Construction and land development — — — Residential 1-4 family — — 8 Multifamily — — — Farmland — — — Commercial — — — Agriculture — — — Consumer installment loans — — — All other loans — — — Total $ — $ 96,076 $ 474 63 Assets and liabilities measured at fair value are as follows as of December 31, 2021 (for purpose of this table the impaired loans are shown net of the related allowance): (Dollars are in thousands) Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) (On a recurring basis) Available for sale investments U.S. Treasuries $ — $ 7,671 $ — U.S. Government Agencies — 9,089 — Taxable municipals — 22,980 — Corporate bonds — 2,019 — Mortgage backed securities — 65,599 — (On a non-recurring basis) Other real estate owned — — 1,361 Impaired loans: Real estate secured: Commercial — — 221 Construction and land development — — — Residential 1-4 family — — 287 Multifamily — — — Farmland — — 180 Commercial — — 26 Agriculture — — — Consumer installment loans — — — All other loans — — — Total $ — $ 107,358 $ 2,075 For Level 3 assets measured at fair value on a recurring or non-recurring basis as of December 31, 2022 and 2021, the significant unobservable inputs used in the fair value measurements were as follows: Schedule of significant unobservable inputs In level 3 assets (Dollars in thousands) Fair Value at December 31, 2022 Fair Value at December 31, 2021 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Impaired Loans $ 213 $ 714 Appraised Value Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0 – 18 % Other Real Estate Owned $ 261 $ 1,361 Appraised Value /Comparable Sales/Other Estimates from Independent Sources Discounts to reflect current market conditions and estimated costs to sell 0 – 18 % 64 Fair Value of Financial Instruments The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows: Schedule of estimated fair value of financial instruments Fair Value Measurements (Dollars are in thousands) Carrying Amount Fair Value Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) December 31, 2022 Financial instruments – assets Net loans $ 577,886 $ 552,675 $ — $ 552,462 $ 213 Financial instruments – liabilities Time deposits 188,233 187,179 — 187,179 — Borrowed funds 16,496 14,825 — 14,825 — December 31, 2021 Financial instruments – assets Net loans $ 587,009 $ 580,024 $ — $ 579,310 $ 714 Financial instruments – liabilities Time deposits 196,285 198,353 — 198,353 — Borrowed funds 16,496 15,649 — 15,649 — Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates. Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments. The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities and accrued interest approximates fair value and is excluded from the table above. The methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price may differ. NOTE 23 REVENUE FROM CONTRACTS WITH CUSTOMERS All of our revenue from contracts with customers as defined in ASC 606 is recognized within noninterest income. The following table presents Noninterest Income by revenue stream for the years ended December 31, 2022 and 2021. Schedule of revenue from contracts with customers (Dollars are in thousands) 2022 2021 Service charges and fees $ 3,969 $ 3,724 Card processing and interchange income 3,769 3,871 Insurance and investment fees 954 1,029 Gains on sales of available-for-sale securities (1) — 322 Other noninterest income 548 1,034 Total noninterest income $ 9,240 $ 9,980 (1) – Not within the scope of ASU 2014-9 65 Certain revenues are earned from contracts with customers. These revenues are recognized when the promised services are rendered to the customer and reflects the entitled consideration received in exchange for those services. Service charges and fees – revenue is recognized on deposit services based on published fees for the services provided. These fees may be collected on a transaction basis, at the time the service is rendered or periodically based on the period over which the service is provided. Transaction based fees include services such as stop payment requests, paper statement rendering and ITM usage fees. Periodic fees include such charges as monthly account maintenance fees. Overdraft fees are realized at the time the overdraft occurs. Card processing and interchange fees – Card-related interchange revenue is primarily comprised of debit and credit card income. Debit and credit card income is earned when customers’ debit or credit cards are processed through a card payment network. Card-related interchange income is recognized at the time the customer transactions settle. Insurance and investment fees - Insurance and investment fee income consists of commissions received on annuity and investment product sales through a third-party service provider. Performance is generally satisfied at the time an annuity policy is issued, or at the execution of an investment transaction. NOTE 24 NONINTEREST EXPENSES Other operating expenses, included as part of noninterest expenses, consisted of the following for the years ended December 31, 2022 and 2021: Schedule of noninterest expenses (Dollars are in thousands) 2022 2021 Advertising, sponsorships and donations $ 162 $ 252 ATM network expense 1,471 1,473 Legal and professional fees 1,120 922 Consulting fees 272 269 Loan related expenses 416 599 Printing and supplies 160 133 FDIC insurance premiums 217 266 Other real estate owned expenses, net 176 506 Other operating expenses 2,656 2,556 Total $ 6,650 $ 6,976 NOTE 25 SUBSEQUENT EVENTS Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and has identified the following as a non-recognized subsequent event. On February 27, 2023, the board of directors declared a dividend of $0.06 per share payable on March 31, 2023 to shareholders of record as of March 15, 2023. On February 27, 2023, the board of directors authorized the continuation of the Company’s repurchase of up to 500,000 shares of its common stock through March 31, 2024. This is a continuation of the repurchase program originally announced April 28, 2022, which was set to expire March 31, 2023. To the date of this announced continuation, 82,352 shares have been repurchased at an average price of $2.32 per share, leaving 417,648 shares available for repurchase. Repurchases made through this program will be made through open market purchases or in privately negotiated transactions. On February 27, 2023 the board of directors approved and adopted the New Peoples Bankshares, Inc. Long-Term Cash Incentive Plan (the Plan). The Plan, which became effective on February 27, 2023, provides for cash incentive awards to Plan participants based on the Company’s quarterly earnings per share of common stock over the period specified in the Plan. Certain members of management or highly compensated employees of the Company or the Bank are eligible to participate in the Plan. On February 28, 2023, the executive committee of the board of directors awarded a combined 500,000 notional shares to five members of management. Individual awards are settled solely in cash, determined by multiplying quarterly earnings per share by the number of notional shares covered by a Plan award. The Plan does not grant participants equity in the Company and does not create any shareholders rights. 66 NOTE 26 RECENT ACCOUNTING DEVELOPMENTS The following is a summary of recent authoritative announcements: In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard. The adjustment recorded at adoption, was not significant to the overall allowance for credit losses or shareholders’ equity as compared to December 31, 2022 and consisted of adjustments to the allowance for credit losses on loans, as well as an adjustment to the Company’s reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its allowance(s) for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of income. The Company is utilizing a third-party model to tabulate its estimate of current expected credit losses, using a loan-level probability of default / loss given default cash flow method with an exposure at default model methodology. In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics which included call report classification and risk rating. The Company primarily utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes to: lending policies and procedures, national and local economic conditions, the experience and ability of management and staff; the volume and severity of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements and competition. The Company’s CECL implementation process was overseen by the Audit and Risk Committee of the board of directors, and managed by credit, finance and risk management personnel, to include an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience. During 2022, the Company calculated its current expected credit losses model in parallel to its incurred loss model in order to further refine the methodology and model. In addition, the Company engaged a third-party to perform a comprehensive model validation. Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology. In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.The Company has adopted an alternative reference rate for loans based on LIBOR and is assessing alternatives for financial instruments referencing LIBOR that do not allow for the substitution of an alternative reference rate. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference rate. 67 In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements. In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023. To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference rate. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows. 68 NOTE 27 PARENT CORPORATION ONLY FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 2022 AND 2021 (Dollars in Thousands) Schedule of parent corporation only condensed balance sheets 2022 2021 ASSETS Due from banks $ 521 $ 187 Investment in subsidiaries 72,360 78,460 Other assets 1,150 1,645 Total assets $ 74,031 $ 80,292 LIABILITIES Accrued interest payable $ 277 $ 104 Accrued expenses and other liabilities 39 61 Trust preferred securities 16,496 16,496 Total liabilities 16,812 16,661 SHAREHOLDERS’ EQUITY Common stock - $2.00 par value, 50,000,000 shares authorized; 23,848,491 and 23,922,086 shares issued and outstanding at December 31, 2022 and 2021, respectively 47,697 47,844 Additional paid capital 14,546 14,570 Retained earnings 8,917 2,031 Accumulated other comprehensive loss ( 13,941 ) ( 814 ) Total shareholders’ equity 57,219 63,631 Total liabilities and shareholders’ equity $ 74,031 $ 80,292 CONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (Dollars in thousands) Schedule of parent corporation only condensed statements of income 2022 2021 Income Miscellaneous income $ 22 $ 13 Dividends from subsidiaries 1,749 430 Undistributed income of subsidiaries 7,027 7,026 Total income 8,798 7,469 Expenses Trust preferred securities interest expense 729 420 Professional fees 116 99 Other operating expenses 57 58 Total expenses 902 577 Income before income taxes 7,896 6,892 Income tax benefit ( 186 ) ( 118 ) Net income $ 8,082 $ 7,010 69 CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 (Dollars in thousands) Schedule of parent corporation only condensed statements of cash flows 2022 2021 Cash flows from operating activities Net income $ 8,082 $ 7,010 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries ( 7,027 ) ( 7,026 ) Net decrease in other assets 495 24 Net increase in other liabilities 151 ( 36 ) Net cash provided by (used in) operating activities 1,701 ( 28 ) Cash flows from financing activities: Repurchase of common stock ( 171 ) — Cash dividends paid ( 1,196 ) — Net cash used in financing activities ( 1,367 ) — Net increase (decrease) in cash and cash equivalents 334 ( 28 ) Cash and cash equivalents, beginning of year 187 215 Cash and cash equivalents, end of year $ 521 $ 187 70 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None