What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-08-14 compared with 2023-05-15 · 444 added, 819 removed, 810 unchanged (61% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE

MARCH 31, 2023

AND DECEMBER 31, 2022

JUNE 30, 2023 AND

DECEMBER 31, 2022

THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

and due from banks

Interest-bearing

deposits with banks

due from banks

Interest-bearing deposits

cash and cash equivalents

securities available-for-sale

Investment securities

available-for-sale

Loans receivable

for credit losses

premises and equipment, net

real estate owned

interest receivable

owned life insurance

assets –

Bank premises and equipment,

Other real estate owned

Accrued interest receivable

Deferred taxes, net

Bank owned life insurance

Right-of-use assets –

operating leases

Interest-bearing

liabilities –

Borrowed funds

Lease liabilities –

operating leases

interest payable

Accrued interest payable

expenses and other liabilities

SHAREHOLDERS’

Common stock - $2.00 par

SHAREHOLDERS’

Common stock - $ 2.00 par value;

shares authorized;

and 23,848,491 shares issued and outstanding at

March 31, 2023 and December 31, 2022, respectively

paid-in-capital

23,802,857 and 23,848,491

shares issued and outstanding at

June 30, 2023 and December 31, 2022, respectively

Additional paid-in-capital

Retained earnings

other comprehensive loss

shareholders’

liabilities and shareholders’

shareholders’ equity

liabilities and shareholders’ equity

The accompanying notes

2 unchanged sentences

STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED MARCH 31, 2023 AND 2022

FOR THE THREE AND

SIX MONTHS ENDED JUNE 30, 2023 AND 2022

THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

the Three Months Ended

For the Three Months Ended

For the Six Months Ended

AND DIVIDEND INCOME

including fees

Interest-earning

deposits with banks

Loans including

Federal funds sold

Interest-earning deposits

on equity securities (restricted)

5 unchanged sentences

FOR CREDIT LOSSES

charges and fees

processing and interchange

and investment fees

on sale and disposal of premise and equipment

Service charges and fees

Card processing and interchange

Insurance and investment

noninterest income

and employee benefits

and equipment expense

processing and telecommunications

Salaries and employee

Occupancy and equipment

Data processing and telecommunications

operating expenses

1 unchanged sentence

BEFORE INCOME TAXES

weighted shares of common stock

Earnings per share

Average Weighted Shares

of Common Stock

The accompanying

3 unchanged sentences

OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS

ENDED MARCH 31, 2023 AND 2022

FOR THE THREE AND

SIX MONTHS ENDED JUNE 30, 2023 AND 2022

the Three Months Ended

the Six Months Ended

comprehensive income (loss):

securities activity

gains (losses) arising during the period

comprehensive income (loss) on investment securities

tax (expense) benefit

(losses) gains arising during the period

tax benefit (expense)

OTHER COMPREHENSIVE INCOME (LOSS)

4 unchanged sentences

CONSOLIDATED STATEMENTS

OF CHANGES IN SHAREHOLDERS’

FOR THE THREE MONTHS

ENDED MARCH 31, 2023 AND 2022

OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE AND

SIX MONTHS ENDED JUNE 30, 2023 AND 2022

(IN THOUSANDS INCLUDING

2 unchanged sentences

Comprehensive Income (Loss)

Shareholders’

Shareholders’ Equity

Balance, December 31, 2021

comprehensive loss, net of tax

dividend declared ($0.05 per share)

March 31, 2022

Other comprehensive loss,

Cash dividend declared

($0.05 per share)

Balance, March 31, 2022

Other comprehensive loss,

of common stock

Balance, June 30,

Balance, December 31, 2022

Adoption of ASU 2016-13

comprehensive income, net of tax

Other comprehensive income,

Repurchase of common stock

dividend declared ($0.06 per share)

March 31, 2023

Cash dividend declared

($0.06 per share)

Balance, March 31, 2023

Other comprehensive loss,

of common stock

Balance, June 30,

The accompanying notes

3 unchanged sentences

OF CASH FLOWS

FOR THE THREE MONTHS

ENDED MARCH 31, 2023 AND 2022

FOR THE SIX MONTHS

ENDED JUNE 30, 2023 AND 2022

FLOWS FROM OPERATING ACTIVITIES

to reconcile net income to net cash provided by

Adjustments to reconcile

net income to net cash provided by

operating activities:

for credit losses

on bank owned life insurance

on sale of mortgage loans

on sale or disposal of premises and equipment

on sale of other real estate owned

originated for sale

from sales of loans originated for sale

of carrying value of other real estate owned

Provision for credit losses

Income on bank owned life

Gain on sale of mortgage

Gain on sale or disposal

of premises and equipment

Gain on sale of other

real estate owned

Loans originated for sale

Proceeds from sales of

loans originated for sale

Adjustment of carrying

value of other real estate owned

Net amortization/accretion

of bond premiums/discounts

tax (benefit) expense

interest receivable

interest payable

Deferred tax (benefit)

Net change in:

Accrued interest receivable

Accrued interest payable

expenses and other liabilities

1 unchanged sentence

FLOWS FROM INVESTING ACTIVITIES

of securities available-for-sale

from repayments and maturities of securities available-for-sale

Net redemption

(purchase) of equity securities (restricted)

for the purchase of premises and equipment

from sale of premises and equipment

Net (increase) decrease

Purchase of securities

available-for-sale

Proceeds from repayments

and maturities of securities available-for-sale

Net purchase of equity

securities (restricted)

Payments for the purchase

of premises and equipment

Proceeds from sales of

premises and equipment

from sales of other real estate owned

1 unchanged sentence

FLOWS FROM FINANCING ACTIVITIES

in noninterest bearing deposits

in interest bearing deposits

Net change in short term

Issuance of long-term

Net change in noninterest

bearing deposits

Net change in interest

bearing deposits

Dividends paid

of common stock

cash provided by financing activities

in cash and cash equivalents

Net increase in cash and

cash equivalents

and cash equivalents, beginning of the period

and cash equivalents, end of the period

Disclosure of cash paid during the period for:

Disclosure of Non-cash Transactions:

made to finance sale of other real estate owned

in unrealized losses on securities available for sale, net

Supplemental disclosure

of cash paid during the period for:

Supplemental disclosure

of non-cash transactions:

Loans made to finance

sale of other real estate owned

Change in unrealized losses

on securities available-for-sale

The accompanying notes

23 unchanged sentences

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

necessary to present fairly the Company’s financial position as of March 31, 2023 and December 31, 2022, and the results of operations

for the three months ended March 31, 2023 and 2022.

The Notes included herein should be read in conjunction with the notes to the consolidated

financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

The results of

operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any

future period.

necessary to present fairly the Company’s financial position as of June 30, 2023 and December 31, 2022, and the results of operations

for the three- and six-month periods ended June 30, 2023 and 2022.

The Notes included herein should be read in conjunction with the notes

to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

full year or any future period.

The consolidated

4 unchanged sentences

In accordance

with Accounting Standards Codification (ASC) 942, Financial Services –

Depository and Lending, NPB Capital Trust I and 2 are not

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.

5 unchanged sentences

The determination of the adequacy

of the allowance for credit is based on estimates that are particularly susceptible to significant changes in the economic environment

of the allowance for credit losses is based on estimates that are particularly susceptible to significant changes in the economic environment

and market conditions.

3 unchanged sentences

and have no impact on net income.

The Company’s

significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in the Company’s

The Company’s

significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in the Company’s

Annual report on Form 10-K.

3 unchanged sentences

On January 1, 2023,

the Company adopted ASU 2016-13 Financial Instruments –

Credit Losses (Topic 326):

the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments

This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current

expected credit loss (“CECL”) methodology.

CECL requires an estimate of credit losses for the remaining estimated life of

19 unchanged sentences

after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable

accounting standards (“Incurred Loss”).

The Company adopted

5 unchanged sentences

illustrates the impact on the allowance for credit losses from the adoption of ASC 326:

Schedule of allowance for credit losses on available for sale securities

As Reported Under ASC 326

1 unchanged sentence

of ASC 326 Adoption

in thousands)

at amortized cost

for credit losses on loans:

and land development

are in thousands)

Loans, at amortized

Allowance for credit losses

Real estate secured:

Construction and land development

Residential 1-4 family

real estate loans

and other loans

Consumer and other loans

allowance for credit losses for loans

for credit losses for unfunded commitments

Deferred tax asset

Allowance for credit

losses for unfunded commitments

The Company elected

4 unchanged sentences

Allowance for

Credit Losses –

Available for Sale Securities

For available for

sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic

Credit Losses – Available-for-sale Securities

For available-for-sale

securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic

or market conditions warrant such evaluation.

10 unchanged sentences

Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive

income (loss).

Changes in the allowance

3 unchanged sentences

intent or requirement to sell is met.

As of March 31, 2023, there was no allowance for credit loss related to the available for sale

As of June 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio.

Loans that management

3 unchanged sentences

Accrued interest receivable

related to loans totaled $1.9 million at March 31, 2023 and was reported in accrued interest receivable on the consolidated balance sheets.

related to loans totaled $2.0 million as of June 30, 2023 and was reported in accrued interest receivable on the consolidated balance

Interest income is accrued on the unpaid principal balance.

Loan origination fees, net of certain direct origination costs, are deferred

and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

Loan origination fees, net of certain direct origination costs, are

deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

The accrual of interest

14 unchanged sentences

Allowance for

Credit Losses –

Credit Losses – Loans

The allowance for

6 unchanged sentences

The allowance for

credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date.

The allowance

20 unchanged sentences

degree of risk than residential mortgage loans, but have commensurately higher yields.

mortgage loans are generally made on the basis of the borrower’s ability to make repayment

from employment and other income and are secured by real estate whose value tends to be easily

1 unchanged sentence

In contrast, commercial business loans typically are made on the basis of

the borrower’s ability to make repayment from cash flow from its business and are secured

by business assets, such as commercial real estate, accounts receivable, equipment and inventory.

19 unchanged sentences

Under our underwriting

guidelines, residential mortgage loans are generally made on the basis of the borrower’s

ability to make repayment from employment and other income and are secured by real estate

35 unchanged sentences

In addition, consumer

loan collections are dependent on the borrower’s continuing financial stability, and

thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

6 unchanged sentences

The Company designates loan relationships of $250,000 or more that have

been determined to meet the regulatory definitions of “special mention”

or “classified”

(together known as “criticized”)

been determined to meet the regulatory definitions of “special mention” or “classified” (together known as “criticized”)

as individually evaluated.

The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral

method”) or the DCF method.

The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral

method”) or the DCF method.

collateral method is applied to individually evaluated loans for which foreclosure is probable.

1 unchanged sentence

experiencing financial difficulty and repayment is expected to be provided substantially

through the operation or sale of the collateral (“collateral dependent”).

allowance for credit loss is measured based on the difference between the fair value of the

15 unchanged sentences

Allowance for

Credit Losses –

Unfunded Commitments

Credit Losses – Unfunded Commitments

Financial instruments

1 unchanged sentence

financing needs.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument

for off-balance sheet loan commitments is represented by the contractual amount of those instruments.

3 unchanged sentences

an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable,

through a charge to provision for unfunded commitments, which is included in the provision for credit losses, in the Company’s

income statements.

3 unchanged sentences

The allowance for unfunded commitments is included in other

liabilities on the Company’s consolidated balance sheets.

On January 1, 2023,

1 unchanged sentence

2016-13, the Company adopted ASU No.

2022-02, “Financial Instruments-Credit Losses (Topic

326), Troubled Debt Restructurings and Vintage Disclosures.”

The amendments eliminate the accounting guidance for troubled debt

restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings

2022-02, “Financial Instruments-Credit Losses (Topic

326), Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate the accounting guidance for troubled debt

restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings

and restructurings made with borrowers experiencing financial difficulty.

4 unchanged sentences

If the Company determines that the borrower is experiencing financial difficulty, the loan's risk rating is evaluated to

determine whether it falls within the regulatory definition of “criticized”

and requires individual evaluation.

determine whether it falls within the regulatory definition of “criticized” and requires individual evaluation.

Under previous

9 unchanged sentences

For the three-month

period ended March 31, 2023 and 2022, there were no potential common shares.

Basic and diluted net income per common share calculations

in Thousands, Except

and six-month periods ended June 30, 2023 and 2022, there were no potential common shares.

Basic and diluted net income per common share

calculations follows:

Schedule of basic and diluted net loss per common share calculations

(Dollars are in thousands,

share and per share data)

the three months

Ended March 31,

ended June 30,

the six months

ended June 30,

average shares outstanding

average dilutive shares outstanding

Weighted average

dilutive shares outstanding

and diluted earnings per share

9 unchanged sentences

Failure to meet capital requirements can initiate regulatory action.

as a "Small Bank Holding Company"

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

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

is the exemption from the requirement to maintain consolidated

as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3 billion or less.

primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated

regulatory capital ratios;

1 unchanged sentence

The final rules

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

banks (BASEL III rules) became fully phased in

3 unchanged sentences

The capital conservation buffer required is 2.50 % .

As of March 31, 2023, the Bank had a capital conservation buffer of

As of June 30, 2023, the Bank had a capital conservation buffer of

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

believes as of March 31, 2023, the Bank met all capital adequacy requirements to which it was subject.

believes as of June 30, 2023, the Bank met all capital adequacy requirements to which it was subject.

Prompt corrective

6 unchanged sentences

and expansion, and capital restoration plans are required.

As of March 31, 2023, the most recent regulatory notifications categorized

As of June 30, 2023, the most recent regulatory notifications categorized

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

11 unchanged sentences

not to phase in the effect of CECL on regulatory capital.

The Bank’s

actual capital amounts and ratios are presented in the following table as of March 31, 2023 and December 31, 2022, respectively.

actual capital amounts and ratios are presented in the following table as of June 30, 2023 and December 31, 2022, respectively.

Schedule of capital requirements

Capital Requirement

to Be Well Capitalized Under Prompt Corrective Action Provisions

are in thousands)

March 31, 2023:

capital to risk weighted assets

1 capital to risk weighted assets

1 capital to average assets

equity Tier 1 capital

risk weighted assets

capital to risk weighted assets

1 capital to risk weighted assets

1 capital to average assets

Equity Tier 1 capital

risk weighted assets

(Dollars are in thousands)

June 30, 2023:

Total capital

to risk weighted assets

Tier 1 capital to risk

weighted assets

Tier 1 capital to average

Common equity Tier 1

to risk weighted assets

December 31, 2022:

Total capital to risk

weighted assets

Tier 1 capital to risk

weighted assets

Tier 1 capital to average

Common equity Tier 1

to risk weighted assets

NOTE 5 INVESTMENT

The amortized cost and estimated fair

value of securities (all available-for-sale) as of March 31, 2023 and December 31, 2022 are as follows:

value of available-for-sale (“AFS”) securities as of June 30, 2023 and December 31, 2022 is as follows:

Schedule of securities amortized cost and estimated fair value

are in thousands)

March 31, 2023

June 30, 2023

Government Agencies

Taxable municipals

Corporate bonds

backed securities

securities available-for-sale

December 31, 2022

Government Agencies

Taxable municipals

Corporate bonds

backed securities

1 unchanged sentence

The following table

details unrealized losses and related fair values in the available-for-sale portfolio, for which no allowance for credit loss is recorded.

This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as

of March 31, 2023 and December 31, 2022.

details unrealized losses and related fair values in the AFS portfolio.

This information is aggregated by the length of time that individual

securities have been in a continuous unrealized loss position as of June 30, 2023 and December 31, 2022.

Schedule of fair value and gross unrealized losses on investment securities

than 12 Months

Months or More

are in thousands)

(Dollars are in thousands)

June 30, 2023

Government Agencies

Taxable municipals

Corporate bonds

backed securities

1 unchanged sentence

Government Agencies

Taxable municipals

Corporate bonds

backed securities

securities available-for-sale

As of March 31, 2023,

As of June 30, 2023,

there were 219 securities in a loss position, of which 202 have been in a loss position for twelve months or more.

2 unchanged sentences

of credit deterioration.

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

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

None of the individual securities held are past due as to principal

or interest payments and a number of these securities held have explicit or implicit payment guarantees.

The remaining securities have

credit ratings at or above that necessary to be considered “bank qualified”.

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

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

None of the individual securities are past due as to

principal or interest payments and a number of these securities have explicit or implicit payment guarantees.

The remaining securities

have credit ratings at or above that necessary to be considered “bank qualified”.

Investment securities

with a carrying value of $37.9 million and $27.3 million as of March 31, 2023 and December 31, 2022, respectively, were pledged as collateral

with a carrying value of $ 36.9 million and $ 27.3 million as of June 30, 2023 and December 31, 2022, respectively, were pledged as collateral

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

There were no sales

of available for sale investment securities during the three months ended March 31, 2023 and 2022.

of available-for-sale investment securities during the three and six months ended June 30, 2023 and 2022.

The amortized cost

and fair value of investment securities as of March 31, 2023, by contractual maturity, are shown in the following schedule.

maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without

call or prepayment penalties.

and fair value of investment securities as of June 30, 2023, 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

Schedule of amortized cost and fair value of investment securities contractual maturity

(Dollars are in thousands)

Securities Available-for-Sale

in one year or less

one year through five years

five years through ten years

Due after one year through

Due after five years through

after ten years

5 unchanged sentences

are included in other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $ 2.4 million

and $2.1 million at March 31, 2023 and December 31, 2022, respectively.

and $ 2.1 million as of June 30, 2023 and December 31, 2022, respectively.

The stock has no quoted market value and no ready market exists.

When evaluating these securities for impairment, their value is determined based on the ultimate recoverability of the par value rather

than by recognizing temporary declines in value.

Equity securities are viewed as long-term investments and management believes the Company

has the ability and the intent to hold these securities until their value is recovered

Loans receivable

outstanding as of March 31, 2023, and December 31, 2022, are summarized as follows:

are in thousands)

estate secured:

and land development

real estate loans

installment loans

outstanding as of June 30, 2023, and December 31, 2022, are summarized as follows:

Schedule of Loans receivable outstanding

(Dollars are in thousands)

Real estate secured:

Construction and land

Residential 1-4 family

Total real estate loans

Consumer installment

Also included in

total loans above are deferred loan fees of $1.6 million as of March 31, 2023 and December 31, 2022.

Deferred loan costs were $1.9 million,

as of March 31, 2023 and December 31, 2022.

Income from net deferred fees and costs is recognized over the lives of the respective loans

as a yield adjustment.

If loans repay prior to scheduled maturities, any unamortized fee or cost is recognized at that time.

total loans above are deferred loan fees of $ 1.7 million and $ 1.6 million as of June 30, 2023 and December 31, 2022, respectively.

loan costs were $ 1.9 million and $ 1.9 million, as of June 30, 2023 and December 31, 2022, respectively.

Income from net deferred fees

and costs is recognized over the lives of the respective loans as a yield adjustment.

If loans repay prior to scheduled maturities, any

unamortized fee or costs is recognized at that time.

Loans receivable

on nonaccrual status as of March 31, 2023, and December 31, 2022, are summarized as follows:

on nonaccrual status as of June 30, 2023, and December 31, 2022, are summarized as follows:

Summary of loans receivable on nonaccrual status

are in thousands)

5 unchanged sentences

Total interest income

not recognized on nonaccrual loans for the three months ended March 31, 2023 and 2022, was $13,000 and $5,000, respectively.

not recognized on nonaccrual loans for the six months ended June 30, 2023, and June 30, 2022, was $28,000 and $11,000, respectively.

Prior to the adoption

4 unchanged sentences

When determining if the Company would be unable to collect all principal

and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s

capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient

and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s

capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient

to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value.

3 unchanged sentences

If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the

present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was

expected solely from the collateral.

3 unchanged sentences

presents loans individually evaluated for impairment by class of loans as of December 31, 2022:

Schedule of summary of impaired loans

of December 31, 2022

1 unchanged sentence

Principal Balance

no related allowance recorded:

estate secured:

and land development

installment loans

an allowance recorded:

estate secured:

and land development

installment loans

With no related allowance

Real estate secured:

Construction and land

Residential 1-4 family

Consumer installment loans

All other loans

With an allowance recorded:

Real estate secured:

Construction and land

Residential 1-4 family

Consumer installment loans

Upon adoption of

3 unchanged sentences

cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated

to those loans as March 31, 2023:

of March 31, 2023

to those loans as June 30, 2023:

of June 30, 2023

are in thousands)

Principal Balance

estate secured:

and land development

Real estate secured:

Construction and land

Residential 1-4 family

Total real estate secured

installment loans

The following table

is an age analysis of past due loans receivable as of March 31, 2023, segregated by class:

of March 31, 2023

is an age analysis of past due loans receivable as of June 30, 2023, segregated by class:

Summary age analysis of past due loans receivable

of June 30, 2023

are in thousands)

estate secured:

real estate loans

Real estate secured:

Construction and land

Residential 1-4 family

Total real estate loans

Consumer installment

The following

2 unchanged sentences

are in thousands)

estate secured:

real estate loans

Real estate secured:

Construction and land

Residential 1-4 family

Total real estate loans

Consumer installment

The Company categorizes

7 unchanged sentences

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.

3 unchanged sentences

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.

- A substandard loan is inadequately protected by the current sound net worth and paying capacity of the

8 unchanged sentences

The following table

present the credit risk grade of loans by origination year as of March 31, 2023:

As of March 31, 2023

present the credit risk grade of loans by origination year as of June 30, 2023:

Summary of risk category of loans receivable

As of June 30, 2023

are in thousands

commercial real estate

17 unchanged sentences

are in thousands)

estate secured:

Real estate secured:

and land development

real estate loans

installment loans

Total real estate loans

Consumer installment loans

NOTE 7 ALLOWANCE

FOR CREDIT LOSSES FOR LOANS (“ACLL”)

In determining the

4 unchanged sentences

The following

table presents a disaggregated analysis of activity in the allowance for credit losses as of March 31, 2023:

table presents a disaggregated analysis of activity in the allowance for credit losses as of June 30, 2023:

Schedule of allocation of portion of allowance

estate secured

(Dollars are in thousands)

are in thousands)

and Land Development

and All Other

Three months ended

March 31, 2023

Six months ended June 30,

Beginning balance

Adjustment to allowance for adoption of ASU 2016-13

Provision for credit losses

Adjustment to allowance for

adoption of ASU 2016-13

for credit losses

Ending balance

Three months ended June 30,

Beginning balance

for credit losses

Ending balance

The following

2 unchanged sentences

estate secured

(Dollars are in thousands)

are in thousands)

and Land Development

4 unchanged sentences

for loan losses at December 31, 2022

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for

evaluated for impairment

Loans at December 31, 2022

Individually evaluated for impairment

Collectively evaluated for impairment

Individually evaluated for

evaluated for impairment

estate secured

2 unchanged sentences

and All Other

For the three

months ended March 31, 2022

For the six months ended

June 30, 2022

Beginning balance

Ending balance

Allowance for loan

losses as of March 31, 2022

Individually evaluated

for impairment

For the three months ended

June 30, 2022

Beginning balance

Ending balance

Allowance for loan losses

as of June 30, 2022

Individually evaluated for

evaluated for impairment

Loans as of March 31,

Individually evaluated

for impairment

Loans as of June 30, 2022

Individually evaluated for

evaluated for impairment

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There were no loans

modified to borrowers experiencing financial difficulty in the three months ended March 31, 2023.

Additionally, there were no loans that

had a payment default during the quarter that were modified in the previous 12 months.

modified to borrowers experiencing financial difficulty in the three or six months ended June 30, 2023.

Additionally, there were no loans

that had a payment default during the quarter that were modified in the previous 12 months.

Prior to adoption

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to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation.

loans modified during the three months ended March 31, 2022, were considered to be troubled debt restructurings.

For the three months

ended March 31, 2022, there were no loans modified as a troubled debt restructuring that subsequently defaulted within twelve months

of the loan modification.

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

due following a modification.

loans modified during the three and six months ended June 30, 2022 were considered to be troubled debt restructurings.

For the three and

six months ended June 30, 2022, there were no loans modified as a troubled debt restructuring that subsequently defaulted within twelve

months of the loan modification.

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

past due following a modification.

NOTE 9 CREDIT

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On January 1, 2023,

the Company recorded an adjustment to initiate an allowance for credit losses for unfunded commitments of $348,000 for the adoptions

of ASC Topic 326.

For the three months ended March 31, 2023, the Company recorded a reversal to the provision for credit losses for unfunded

commitments of $24,000.

At March 31, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other liabilities

was $324,000.

the Company recorded an adjustment to initiate an allowance for credit losses for unfunded commitments of $348,000 for the adoption of

ASC Topic 326.

For the three and six months ended June 30, 2023, the Company recorded a reversal to the provision for credit losses for

unfunded commitments of $43,000, and $66,000, respectively.

As of June 30, 2023, the liability for credit losses on off-balance-sheet

credit exposures included in other liabilities was $282,000.

NOTE 10 OTHER

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The following table

summarizes the activity in other real estate owned for the three months ended March 31, 2023, and the year ended December 31, 2022:

summarizes the activity in other real estate owned for the six months ended June 30, 2023, and the year ended December 31, 2022:

Schedule of other real estate owned

are in thousands)

beginning of period

from premises and equipment

from insurance claims

made to finance sales

of carrying value

Transfers from premises

and equipment

Proceeds from sales

Loans made to finance

Adjustment of carrying

gains from sales

end of period

As of June 30, 2023, four loans totaling

$383,000 were in the process of foreclosure.

NOTE 11 FAIR VALUES

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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.

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is based upon quoted prices.

The Company’s available for sale securities, totaling $96.7 million and $96.1 million as of March

The Company’s available-for-sale securities, totaling $ 93.1 million and $ 96.1 million as of June 30,

2023 and December 31, 2022, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs

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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

These assets are carried at the lower of their carrying value or fair value.

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Assets and liabilities

measured at fair value are as follows as of March 31, 2023:

measured at fair value are as follows as of June 30, 2023:

Schedule of summary of assets and liabilities measured at fair value

are in thousands)

2 unchanged sentences

unobservable inputs

recurring basis)

(On a recurring basis)

Available-for-sale investments

1 unchanged sentence

Mortgage-backed

non-recurring basis)

(On a non-recurring basis)

Other real estate owned

dependent loans with ACL:

Collateral dependent loans

Assets and liabilities

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unobservable inputs

recurring basis)

(On a recurring basis)

Available-for-sale investments

1 unchanged sentence

Mortgage-backed

non-recurring basis)

(On a non-recurring basis)

Other real estate owned

For Level 3 assets

measured at fair value on a recurring or non-recurring basis as of March 31, 2023 and December 31, 2022, the significant unobservable

measured at fair value on a recurring or non-recurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable

inputs used in the fair value measurements were as follows:

(Dollars in thousands)

at March 31, 2023

Schedule of significant unobservable inputs In level 3 assets

(Dollars are in thousands)

Fair Value at June 30,

Fair Value at

Valuation Technique

Unobservable Inputs

Range of Significant Unobservable Input Values

dependent loans with ACL:

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

Real Estate Owned

Value/Comparable Sales/Other Estimates from Independent Sources

to reflect current market conditions and estimated costs to sell

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

Collateral dependent loans with ACL:

Appraised Value

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

Commercial real estate

Other Real Estate Owned

Appraised Value/Comparable Sales/Other Estimates from Independent Sources

Discounts to reflect current market conditions and estimated costs to sell

of Financial Instruments

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for another financial instrument.

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

presented below.

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The carrying amount

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

basis as of March 31, 2023, and December 31, 2022, are as follows:

Value Measurements

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

basis as of June 30, 2023, and December 31, 2022, are as follows:

Schedule of estimated fair value of financial instruments

Fair Value Measurements

are in thousands)

2 unchanged sentences

unobservable inputs

Instruments –

Financial instruments

– liabilities

Financial instruments

– liabilities

Fair value estimates

1 unchanged sentence

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

4 unchanged sentences

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 Company’s fair value estimates, methods and assumptions are

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

The carrying values

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

fair value and are excluded from the table above.

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

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

In accordance with

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

as of March 31, 2023 and December 31, 2022, represent an approximation of exit price;

as of June 30, 2023 and December 31, 2022, represent an approximation of exit price;

however, an actual exit price may differ.

NOTE 12 LEASING

of March 31, 2023, the Bank leases four branch offices and sublets of a lot adjacent to another branch office.

of June 30, 2023, the Bank leases four branch offices and sublets a lot adjacent to another branch office.

The lease agreements have

2 unchanged sentences

be terminated prior to expiration.

The weighted average remaining life of the lease terms at March 31, 2023 was 9.35 years.

The weighted average remaining life of the lease terms as of June 30, 2023 was 9.11 years.

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

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

average discount rate for the leases as of March 31, 2023 was 3.29%.

For the three months

ended March 31, 2023 and 2022, operating lease expenses were $114,000 and $114,000, respectively.

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

As of March 31, 2023,

average discount rate for the leases as of June 30, 2023 was 3.29 % .

For the six months

ended June 30, 2023 and 2022, operating lease expenses were $ 224,000 and $ 228,000 , respectively.

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

As of June 30, 2023,

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

lease payments

Schedule of future minimum rental commitments under the non-cancellable operating leases

Total lease payments

imputed interest

13 BORROWED FUNDS

in Borrowed Funds is an FHLB Advance of $ 10.0 million as of June 30, 2023, bearing an interest rate of 3.51 % maturing on May 4, 2028 .

No FHLB Advances were outstanding at December 31, 2022.

For additional information on borrowed funds, refer to Note 18 in Item 8 of Form

10-K for the year ended December 31, 2022.

14 REVENUE FROM CONTRACTS WITH CUSTOMERS

2 unchanged sentences

Report on Form 10-K for the year ended December 31, 2022 for a description of how each revenue stream is accounted for under ASC 606.

The following table presents Noninterest income by revenue stream for the three months ended March 31, 2023 and 2022:

the Three Months

Ended March 31,

in thousands)

The following table presents noninterest income by revenue stream for the three and six months ended June 30, 2023 and 2022:

Schedule of revenue from contracts with customers

the three months ended

the six months ended

are in thousands)

charges and fees

6 unchanged sentences

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

the Three Months

Ended March 31,

are in thousands)

sponsorships and donations

accounting and professional fees

related expenses

insurance premiums

real estate owned expenses, net

operating expenses

Schedule of noninterest expenses

For the three months ended June 30,

For the six months ended June 30,

(Dollars are in thousands)

ATM network expense

Legal, accounting and professional fees

Consulting fees

Loan related expenses

Printing and supplies

FDIC insurance premiums

Other real estate owned expenses, net

Other operating expenses

NOTE 15 SUBSEQUENT

Subsequent events

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

Recognized subsequent

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

the estimates inherent in the process of preparing financial statements.

Non-recognized subsequent events are events that provide evidence

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

There were no subsequent events requiring

recognition or disclosure.

Total other operating expenses

NOTE 16 RECENT

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In June 2016, per

2016-13, ‘Financial Instruments –

Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,’

2016-13, ‘Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,’

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

4 unchanged sentences

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

6 unchanged sentences

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

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.

19 unchanged sentences

In December 2022,

the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848”.

the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848”.

ASU 2022-06 extends

9 unchanged sentences

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

In July 2023, the

Financial Accounting Standards Board (FASB) issued ASU 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting

Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock

Compensation (Topic 718)”.

This ASU amends the FASB Accounting Standards Codification for SEC paragraphs pursuant to SEC Staff

Accounting Bulletin No.

120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting

Series Release 280—General Revision of Regulation S-X:

Income or Loss Applicable to Common Stock.

ASU 2023-03 is effective upon

addition to the FASB Codification.

The Company does not expect the adoption of ASU 2023-03 to have a material impact on its consolidated

financial statements.

Other accounting

standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact

on the Company’s financial position, results of operations or cash flows.

Management’s

Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward-Looking Statements

We make forward-looking

statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties.

These forward-looking statements include

statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for credit

losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals.

The words “believes,”

“expects,”

“may,”

“will,”

“should,”

“projects,”

“contemplates,”

“anticipates,”

“forecasts,”

“intends,”

or other similar words or terms are intended to identify forward looking statements.

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

Important factors that may cause

actual results to differ from projections include:

or failure of our efforts to implement our business plan;

increase in our regulatory capital ratios;

other regulatory requirements that may arise from examinations, changes in the law and other similar factors;

deterioration

of asset quality;

the level of our nonperforming assets and charge-offs;

of real estate values in our markets;

to attract and retain talent;

demographical

changes in our markets which negatively impact the local economy;

the uncertain

outcome of current or future legislation or regulations or policies of state and federal regulators;

the successful

management of interest rate risk;

the successful

management of liquidity;

general economic and business conditions in our market area and the United States in general;

inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks;

with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies

that have substantially greater access to capital and other resources;

demand, development

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

deposit flows

and competition for deposits;

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

interest rate, market and monetary fluctuations;

the occurrence

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

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

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

or other governments in response

to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S.

utilized by us;

to successfully manage cyber security;

on third-party vendors and correspondent banks;

generally accepted accounting principles;

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

the transition

from the use of the LIBOR index;

governmental regulations, tax rates and similar matters;

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

Because of these

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

In addition, our past results of operations do not necessarily indicate our future results.

We expressly disclaim any obligation to update

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

Critical Accounting Policies

For discussion of

our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2022, and Note 2 Summary of Significant

Accounting Policies, in Item 1 of this Form 10-Q.

Certain critical accounting policies affect the more significant judgments and estimates

used in the preparation of our financial statements.

Our most critical accounting policies relate to our allowance for credit losses.

The allowance represents

an amount that, in the Company's judgment, will be adequate to absorb expected and estimable losses inherent in the loan portfolio.

judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration

such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio,

current, reasonable and supportable forecasts of economic conditions that may affect a borrower's ability to repay and the value of collateral,

overall portfolio quality and review of specific potential losses.

This evaluation is inherently subjective because it requires estimates

that are susceptible to significant revision as more information becomes available.

Overview and Highlights

Net income for the

three months ended March 31, 2023 was $2.0 million, an increase of $100,000, or 5.2%, from the same period in 2022.

The increase was

primarily due to improvement in the net interest margin to 3.83% for the first quarter of 2023 compared to 3.53% for the first quarter

of 2022 due to the increase in asset yields outpacing increases in funding costs in the rising interest rate environment throughout 2022

The primary driver for the improved earnings was an increase in net interest income of $447,000 and a reduction of the provision

for credit losses of $100,000, offset by an increase in total noninterest expense of $431,000.

The increase in total non-interest expense

is related to increases in salaries and employee benefits as well as data processing and telecommunications expenses.

The increase in

salaries and employee benefits related to bonus accruals and performance raises, and benefits enhancements made in the first quarter

The balance sheet

grew to $793.6 million as of March 31, 2023, from $775.4 million as of December 31, 2022, funded by deposits which increased $16.1 million

to $708.8 million as of March 31, 2023 from $692.7 million as of December 31, 2022.

These deposits funded an increase of $10.3 million

in interest bearing deposits in other banks and an increase of $5.88 million in gross loans.

The increase in gross loans is due to a

moderate increase in loan demand and less prepayment activity due to the higher interest rate environment.

During the second

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

Through March 31, 2023, 93,527 shares have been repurchased

at an average price of $2.32 per share.

Comparison of

the Three Months ended March 31, 2023 and 2022

Quarter-to-date highlights

on average assets and equity of 1.07% and 14.05 % for the first quarter of 2023, compared

to 0.97% and 12.35% for the first quarter of 2022, respectively;

interest income was $7.0 million for the first quarter of 2023, an increase of $447,000,

or 6.8%, compared to the first quarter of 2022;

provision for credit losses for the first quarter of 2023 compared to $100,000 for the first

quarter of 2022;

· Noninterest

income was $2.4 million, an increase of $30,000, or 1.3%, during the first quarter of 2023

compared to the first quarter of 2022;

· Noninterest

expense was $6.9 million, an increase of $430,000, or 6.7%, for the first quarter of 2023

compared to the first quarter of 2022.

The Company’s

primary source of income is net interest income, which increased by $447,000, or 6.8%, to $7.0 million for the first quarter of 2023

compared to $6.6 million for the first quarter of 2022.

Interest income increased $1.4 million due to increased interest earning deposits

with banks and higher yielding loans resulting from the increase in fed funds rate.

Total interest expense increased $918,000 driven

primarily by the increase in the cost of interest-bearing liabilities, which rose 81 bps to 1.27% from 0.46% for comparative three months

ended March 31, 2023 and 2022.

The increase in interest rates more than offset the modest decrease of $9.4 million, or 1.98% in average

interest-bearing liabilities for the comparative three-month period.

Overall there was a 53 basis-point (“bp”) increase in

the cost of funds to 83 bps while the net interest margin increased 30 bps to 3.83%.

During the first quarter of 2023, the Federal Reserve’s

Open Market Committee (FOMC) increased the discount rate two times for a total of 50 bps, bringing the number of rate increases to eight

since the quarter ended March 31, 2022.

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

impact will be somewhat lagging as certain loans, investments, and borrowings through trust preferred securities will not reprice until

the individual instruments next interest rate repricing date.

Deposit rates have been impacted by the rate increases, but not yet to

the extent of new loan rates and rates earned on overnight funds.

The Company continues to evaluate rate adjustments for factors, including

competitive pressure within the local markets, funding needs to support growth and other needs.

The following table

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

Interest Margin Analysis

Average Balances,

Income and Expense, and Yields and Rates

in thousands)

Months Ended March 31,

bearing deposits in other banks

investment securities

earning assets

for credit losses

AND SHAREHOLDERS’

Interest-bearing

demand deposits

and money market deposits

interest-bearing deposits

preferred securities

interest-bearing liabilities

Non-interest-bearing

deposit liabilities and cost of funds

Shareholders’

liabilities and shareholders’

interest income

interest margin

interest spread

(1) Nonaccrual

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

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

(3) Includes mortgage loans held for

Net interest income

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

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

to rates and volume for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

and Rate Analysis

Months Ended March 31, 2023 versus

in thousands)

in Interest Income/ Expense

bearing deposits in other banks

investment securities

earning assets

Interest-bearing

demand deposits

and money market deposits

preferred securities

interest-bearing liabilities

in net interest income

Based on our current

assessment of the loan portfolio and related unfunded commitments, there was no provision for credit losses made in the first quarter

of 2023, compared to $100,000 for the first quarter of 2022.

Subsequent to adoption of ASU 2016-13 on January 1, 2023, based on management's

analysis since the implementation date through March 31, 2023, no further provision for credit losses was required for the first quarter.

The allowance for credit losses as a percentage of loans decreased from 1.15% at December 31, 2022 to 1.13% as of March 31, 2023.

a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 7, Allowance for Credit

Losses for Loans, in Item 1 of this Form 10-Q.

Non-interest income

increased $30,000 to $2.4 million for the quarter ended March 31, 2023 from $2.4 million for the comparable quarter in 2022.

driver of the increase was the sale of the former call center building in Bristol, Virginia, and a former branch office in Big Stone

Gap, Virginia, which resulted in a combined gain of $130,000.

This was offset by decreases in service charge income and card processing

fees totaling a combined $107,000 during the period.

Service charge income decreased due to changes made in 2022 in assessing certain

charges, that reduced the number of transactions subject to such fees.

Fees from debit card activity declined, as stimulus funds payments

resulting from tax credits and direct payments have been curtailed.

Non-interest expense

was $6.9 million for the quarter ended March 31, 2023 compared to $6.4 million for the quarter ended March 31, 2022.

The $431,000 increase

was impacted by increases in salaries and employee benefits as well as data processing and telecommunications expenses.

in salaries and employee benefits related to bonus accruals and performance raises, and benefits enhancements made during the first quarter

As previously reported, the Company approved a Long-Term Cash Incentive Plan (the “Plan”), effective February 27,

2023, for cash incentive awards to Plan participants based on quarterly earnings per share of common stock.

The efficiency ratio,

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

to 72.56% for first three months of 2023 from 71.59% for the first quarter of 2022.

We continue to assess our operational procedures

and structure to improve efficiencies and contain costs.

Income tax expense

for the first quarter of 2023 totaled $576,000, an increase of $46,000, or 8.68% from the $530,000 recorded during the same period in

The effective tax rate for the three months ended March 31, 2023, was 22.2%, compared to 21.6% for the same period in 2022.

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

Balance Sheet

Total assets as of

March 31, 2023 were $793.6 million, an increase of $18.3 million, or 2.4%, from $775.4 million as of December 31, 2022.

Gross loans increased

$5.9 million, or 1.0%, during 2023, due to a moderate increase in loan demand, combined with less incentive for prepayments, by borrowers,

due to the higher interest rate environment.

Investment securities increased $646,000 during 2023 primarily due to a decrease of $2.7

million in the unrealized loss position offset by a decrease in mortgage-backed securities, agencies, and collateralized mortgage obligations

of $2.1 million, collectively, due to principal repayments of amortizing investments.

Gross loans increased

$5.9 million, or 1.0% during the first three months of 2023.

The increase is primarily related to multifamily and residential 1-4 family

real estate secured loans.

Multifamily real estate loans increased $4.5 million, or 15%, from $29.7 as of December 31, 2022 to $34.2

million as of March 31, 2023.

Residential 1-4 family real estate increased $1.5 million, or 0.7% from $227.2 million as of December 31,

2022 to $228.7 million as of March 31, 2023.

Loan originations, specifically commercial real estate and multi-family loans, continue

to be positively impacted by our Boone, NC, loan production office, as well as originations in the Kingsport and Johnson City, Tennessee

Deposits were $708.8

million as of March 31, 2023 compared to $692.7 million as of December 31, 2022.

The increase of the $16.1 million, or 2.3%, was due

to efforts to attract and retain time deposits, combined with cyclical funds inflows primarily attributed to tax refunds, and pension

and social security deposits, received by customers.

Trust preferred securities

of $16.5 million at March 31, 2023 were unchanged compared to December 31, 2022.

Total equity as of

March 31, 2023 was $59.7 million, an increase of $2.5 million, or 4.3%, compared to $57.2 million as of December 31, 2022.

previously and in the Capital Resources section below, the primary driver of the increase was related to the decrease of $2.1 million

in the net unrealized loss on available-for-sale investment securities combined with the quarter-to-date earnings of $2.0 million, offset

by a cash dividend payment of $1.4 million, and the repurchase of common stock totaling $46,000.

Additionally, the implementation of

the CECL methodology, resulted in a onetime net of tax, direct charge to retained earnings of $212,000.

Asset Quality

Nonperforming assets

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

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

The makeup of the nonaccrual loans is primarily those

secured by residential mortgages and commercial real estate.

OREO is primarily made up of residential and commercial lots.

Nonperforming assets

decreased $586,000, or 15.9%, during the first three months of 2023, driven by a decrease of $586,000 in nonaccrual loans.

in nonaccrual loans is attributed to a general improvement in the performance of nonaccrual loans, resulting in several accounts being

returned to accruing status.

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

As a result, the ratio of nonperforming assets

to total assets decreased to 0.39% at March 31, 2023 compared to 0.47% at December 31, 2022.

As of March 31, 2023,

OREO is primarily made up of residential and commercial lots acquired through foreclosure.

It remained consistent with a balance of $261,000

as of March 31, 2023 and December 31, 2022.

Expenses associated with OREO were $6,000 for the quarter ended March 31, 2023, compared

to $130,000 during the quarter ended March 31, 2022, due to costs associated with the sale of other real estate owned during the first

three months of 2022.

We continue to work to reduce nonperforming and under-performing assets.

For detailed information

for nonaccrual loans and other real estate owned as of March 31, 2023, and December 31, 2022, refer to Note 6 Loans and Note 9 Other

Real Estate Owned in Item 1 of this Form 10-Q.

Loans rated substandard

or below totaled $2.8 million as of March 31, 2023, a decrease of $586,000 from $3.4 million at December 31, 2022.

Total past due loans

decreased $2.9 million, to $2.6 million at March 31, 2023 from $5.5 million at December 31, 2022.

As discussed in Note

2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted CECL effective January 1, 2023.

The transition

adjustment for the adoption of CECL resulted in a decrease to the allowance for credit losses on loans of $80,000.

Our allowance for

credit losses for loans as of March 31, 2023 was $6.7 million, or 1.13% of total loans, as compared to $6.7 million, or 1.15% of total

loans, at December 31, 2022.

Individually evaluated loans totaled $715,000 with an estimated related specific allowance of $64,000 at

March 31, 2023, as compared to $2.7 million as of December 31, 2022 with an estimated related specific allowance of $86,000 of impaired

loans at the end of 2022.

There was no provision for credit losses recorded during the three months ended March 31, 2023, compared to

a provision for loan losses of $100,000 recorded in the three months ended March 31, 2022, which was under the incurred loss model.

the three-months ended March 31, 2023, the net provision for credit losses of zero, was comprised of a provision of $24,000 to the allowance

for credit losses for loans and reversal of $24,000 from the allowance for unfunded loan commitments.

In the first three

months of 2023, net charge-offs totaled $10,000, or 0.01% of average loans, annualized, as compared to $76,000, or 0.05% of average loans,

for the same period in 2022.

The allowance for credit losses is maintained at a level that management deems appropriate to absorb any

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

our quarterly assessment, we continue to adjust the CECL model to best reflect the characteristics in the portfolio.

However, future

provisions may be deemed necessary.

During the first three months of 2023, we made modest adjustments to our qualitative factors as part

of our CECL implementation.

Those changes, along with the assessment of the historical and specific risks associated with the loan portfolio,

resulted in a net provision for credit losses of zero, with offsetting adjustments to the loan and loan commitment components recorded

during the first three months of 2023.

The following table summarizes components of the allowance for credit losses and related loans

as of March 31, 2023 and December 31, 2022:

Credit Ratios

in thousands)

for credit losses

for credit losses to total loans

loans to total loans

of allowance for credit losses to nonaccrual loans

net of recoveries

net charge-offs to average loans

Deferred Tax Asset

and Income Taxes

Due to timing differences

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

unrealized loss on securities available for sale, of $4.1 thousand and $4.6 million existed as of March 31, 2023 and December 31, 2022,

respectively.

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

We have no significant nontaxable

income or nondeductible expenses.

The implementation of the CECL methodology resulted in a onetime deferred tax charge of $56,000.

to Note 2 Summary of Significant Accounting Policies in Part 1 of this Form 10-Q

Capital Resources

Total shareholders’

equity as of March 31, 2023 was $59.7 million compared to $57.2 million at December 31, 2022, an increase of $2.5 million, or 4.3%.

increase was driven by a decrease in net unrealized loss on available-for-sale investment securities of $2.1 million, which, when combined

with quarter-do-date earnings of $2.0 million, more than offset a cash dividend payment of $1.4 million and the repurchase of common

stock totaling $46,000.

Additionally, the implementation of the CECL methodology resulted in a onetime net of tax, direct charge to retained

earnings of $212,000.

The Company meets

the eligibility criteria to be classified as a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding

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

The Bank continues

to be subject to various capital requirements administered by banking agencies.

The Bank’s capital ratios along

with the minimum regulatory thresholds to be considered well-capitalized are presented at Note 4 in Item 1 of this Form 10-Q.

As of March 31, 2023,

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

The ratios mentioned above for the Bank

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

Book value per common

share was $2.50 as of March 31, 2023, and $2.40 at December 31, 2022.

Other key performance

indicators are as follows:

on average assets 1

on average equity 1

equity to average assets

Under current economic

conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb

potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will

be sufficient.

During the first

quarter of 2023, the Company paid a cash dividend of $0.06 per common share to our shareholders.

Future payments of cash dividends will

depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing

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

During the second

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

common stock through March 31, 2023.

As previously reported, this plan was extended by the Board of Directors through March 31, 2024.

The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its

discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and

economic conditions, and applicable legal and regulatory requirements.

As of March 31, 2023, the Company has repurchased 93,527 shares

at an average price of $2.32 per share.

During the quarter ended March 31, 2023, the Company repurchased 19,932 shares at an average

price of $2.28 per share.

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

We closely monitor

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

Collectively, those balances were $143.7 million as of March 31, 2023, an increase of $13.2 million from $130.5 million as of December

A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs during 2023.

As of March 31, 2023,

all of our investment securities were classified as available-for-sale.

These investments provide a source of liquidity in the amount

of $69.4 million, which is net of the $27.3 million of securities pledged to secure public funds and as collateral for advances against

the discount window.

Investment securities available for sale serve as a source of liquidity while yielding a higher return versus other

short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank.

Due to the unrealized

loss on securities available for sale, the sale of investments would not be considered a primary source of liquidity due to the immediate

impact on regulatory capital;

however, the majority of the portfolio is considered high credit quality investments and would be available

to pledge against borrowings.

Our loan to deposit

ratio was 83.3% as of March 31, 2023 and 84.4% at December 31, 2022.

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

Available third-party

sources of liquidity as of March 31, 2023 include the following:

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

markets and the discount window at the Federal Reserve Bank.

Additionally, in March 2023, the FRB, initiated a supplemental term funding

program offering borrowings, of up to one year, secured by securities valued at par rather than market value.

This program offers an

additional source of liquidity against high quality securities, rather than liquidating securities should a need for additional funds

We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent

We have used our

line of credit with FHLB to issue a letter of credit totaling $7.0 million to the Treasury Board of Virginia for collateral on public

No draws on the letter of credit have been issued.

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

An additional $186.8 million was available as of March 31, 2023 on the $193.8 million line of credit, of which $116.5 million is secured

by a blanket lien on our residential real estate loans.

We held no brokered

deposits as of March 31, 2023 and December 31, 2022.

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

the surrounding geographical area.

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

table in the “Net Interest Income and Net Interest Margin”

Total Certificate of Deposit Registry Services (“CDARS”)

time deposits were $2.5 million and $1.4 million as of March 31, 2023 and December 31, 2022, respectively.

Aside from the availability

of CDARS time deposits, we also offer a similar deposit product for transaction account customers Intrafi Cash Service (“ICS”).

At March 31, 2023 approximately $34.9 million were placed in this product as compared to $23.9 million at December 31, 2022.

CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’

funds retain federal deposit

insurance coverage.

Additional liquidity

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

We may collateralize this line with investment

securities and loans at our discretion;

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

estimated market value of $27.3 million were pledged at March 31, 2023.

In March and May,

2023, three regional banks, each with assets in excess of $100 billion, were taken into receivership through FDIC and were sold in-whole,

or in part to other financial institutions.

Two of these banks, Silicon Valley Bank (“SVB”) headquartered in Santa Clara,

California, and First Republic Bank (“FR”) headquartered in San Francisco, California, experienced significant outflows of

deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits

at both institutions.

These concerns, in SVB’s case, related to unrealized losses in SVB’s investment portfolio combined

with the long-term maturities of the investments and other earning assets held by SVB.

Concerns related to FR related to exposure to

long-term jumbo mortgages made to preferred deposit customers and the impact to net interest earnings and the value of those mortgages

in the rising rate environment.

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

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

In addition, our deposit

customer base is diverse without significant exposure to uninsured deposit relationships.

Prior to receivership of SVB and FR our deposit

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

the date of these receiverships, we have not experienced any significant or unusual deposit outflows and we have taken steps to successfully

test certain liquidity facilities in the event of any future deposit outflows.

With the on-balance

sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements

and needs for the foreseeable future.

However, liquidity can be further affected by a number of factors such as counterparty willingness

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

The bank holding

company has approximately $460,000 in cash on deposit at the Bank as of March 31, 2023.

The holding company receives periodic dividend

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

to shareholders and repurchase shares.

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

As discussed in the

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

through March 31, 2024.

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

and are not expected to have a material impact on available liquidity.

Off Balance Sheet Items and Contractual

There have been no

material changes during the three months ended March 31, 2023, to the off-balance sheet items and the contractual obligations disclosed

in our 2022 Form 10-K.

As discussed in Note 2 Summary of Significant Accounting Policies in Item 1 of this Form 10-Q, the Company adopted

CECL effective January 1, 2023 to include an assessment of off-balance sheet credit exposures.

The transition adjustment for the adoption

of CECL included establishment of an allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other

and Qualitative Disclosures About Market Risk

Not Applicable.

on the Company’s financial position, results of operations or cash flows.

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

What changed 10-Q

Item 1. Financial Statements