NEW PEOPLES BANKSHARES INC 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number: 000-33411 NEW PEOPLES BANKSHARES, INC. (Exact name of registrant as specified in its charter) Virginia (State or other jurisdiction of incorporation or organization) 31-1804543 (I.R.S. Employer Identification No.) 67 Commerce Drive , Honaker , Virginia (Address of principal executive offices) 24260 (Zip Code) ( 276 ) 873-7000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ( (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X[ Smaller reporting company [X] Emerging growth company [ ] If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The number of shares outstanding of the registrant’s common stock was 23,769,561 as of November 8, 2023. NEW PEOPLES BANKSHARES, INC. INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2023 (Unaudited) and December 31, 2022 3 Consolidated Statements of Income – Three and nine months ended September 30, 2023 and 2022 (Unaudited) 4 Consolidated Statements of Comprehensive Income (Loss) – Three and nine months ended September 30, 2023 and 2022 (Unaudited) 5 Consolidated Statements of Changes in Stockholders’ Equity – Three and nine months ended September 30, 2023 and 2022 (Unaudited) 6 Consolidated Statements of Cash Flows – Nine months ended September 30, 2023 and 2022 (Unaudited) 7 Notes to Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30 Item 3. Quantitative and Qualitative Disclosures about Market Risk 39 Item 4. Controls and Procedures 39 PART II OTHER INFORMATION Item 1. Legal Proceedings 40 Item 1A. Risk Factors 40 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40 Item 3. Defaults upon Senior Securities 41 Item 4. Mine Safety Disclosures 41 Item 5. Other Information 41 Item 6. Exhibits 41 SIGNATURES 42 Part I Financial Information Item 1 Financial Statements NEW PEOPLES BANKSHARES, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2023 AND DECEMBER 31, 2022 (IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA) (UNAUDITED) September 30, December 31, 2023 2022 ASSETS Cash and due from banks 15,670 $ 13,979 Interest-bearing deposits with banks 37,142 46,747 Federal funds sold 65 960 Total cash and cash equivalents 52,877 61,686 Investment securities available-for-sale 87,452 96,076 Loans receivable 626,203 584,613 Allowance for credit losses ( 6,908 ) ( 6,727 ) Net loans 619,295 577,886 Bank premises and equipment, net 18,554 19,290 Other real estate owned 261 261 Accrued interest receivable 2,749 2,555 Deferred taxes, net 4,973 4,623 Bank owned life insurance 4,593 4,549 Right-of-use assets – operating leases 3,472 3,725 Other assets 5,727 4,707 Total assets 799,953 $ 775,358 LIABILITIES Deposits: Noninterest bearing 240,283 $ 249,924 Interest-bearing 464,539 442,783 Total deposits 704,822 692,707 Borrowed funds 26,496 16,496 Lease liabilities – operating leases 3,472 3,725 Accrued interest payable 1,097 526 Accrued expenses and other liabilities 4,108 4,685 Total liabilities 739,995 718,139 SHAREHOLDERS’ EQUITY Common stock - $ 2.00 par value; 50,000,000 shares authorized; 23,783,104 and 23,848,491 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively 47,566 47,697 Additional paid-in-capital 14,530 14,546 Retained earnings 12,909 8,917 Accumulated other comprehensive loss ( 15,047 ) ( 13,941 ) Total shareholders’ equity 59,958 57,219 Total liabilities and shareholders’ equity 799,953 $ 775,358 The accompanying notes are an integral part of these consolidated financial statements. 3 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) For the Three Months Ended For the Nine Months Ended September 30, September 30, INTEREST AND DIVIDEND INCOME 2023 2022 2023 2022 Loans including fees $ 8,453 7,010 $ 23,711 $ 20,476 Federal funds sold 4 2 20 3 Interest-earning deposits with banks 559 559 1,642 738 Investments 535 505 1,642 1,422 Dividends on equity securities (restricted) 34 34 110 88 Total interest and dividend income 9,585 8,110 27,125 22,727 INTEREST EXPENSE Deposits 2,110 418 4,902 1,252 Borrowed funds 434 492 1,115 810 Total interest expense 2,544 910 6,017 2,062 NET INTEREST INCOME 7,041 7,200 21,108 20,665 PROVISION FOR CREDIT LOSSES 155 225 304 400 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 6,886 6,975 20,804 20,265 NONINTEREST INCOME Service charges and fees 1,020 1,069 2,896 2,973 Card processing and interchange 942 915 2,784 2,858 Insurance and investment fees 268 167 830 650 Other noninterest income 206 38 727 425 Total noninterest income 2,436 2,189 7,237 6,906 NONINTEREST EXPENSES Salaries and employee benefits 3,567 3,290 10,768 9,947 Occupancy and equipment expense 945 1,177 2,881 3,200 Data processing and telecommunications 618 607 1,877 1,762 Other operating expenses 1,753 1,525 5,259 4,787 Total noninterest expenses 6,883 6,599 20,785 19,696 INCOME BEFORE INCOME TAXES 2,439 2,565 7,256 7,475 INCOME TAX EXPENSE 549 579 1,621 1,645 NET INCOME $ 1,890 1,986 $ 5,635 $ 5,830 Earnings per share Basic and diluted $ 0.08 0.08 $ 0.24 $ 0.24 Average Weighted Shares of Common Stock Basic and diluted 23,793,170 23,893,224 23,817,236 23,910,287 The accompanying notes are an integral part of these consolidated financial statements. 4 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 (IN THOUSANDS) (UNAUDITED) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 NET INCOME $ 1,890 $ 1,986 $ 5,635 $ 5,830 Other comprehensive (loss) income: Investment securities activity Unrealized losses arising during the period ( 2,585 ) ( 3,614 ) ( 1,398 ) ( 16,369 ) Related tax benefit 542 759 292 3,437 TOTAL OTHER COMPREHENSIVE LOSS ( 2,043 ) ( 2,855 ) ( 1,106 ) ( 12,932 ) TOTAL COMPREHENSIVE (LOSS) INCOME $ ( 153 ) $ ( 869 ) $ 4,529 $ ( 7,102 ) The accompanying notes are an integral part of these consolidated financial statements. 5 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 (IN THOUSANDS INCLUDING SHARE DATA) (UNAUDITED) Shares of Common Stock Common Stock Additional Paid-in- Capital Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance, June 30, 2022 23,906 $ 47,811 $ 14,565 $ 4,679 $ ( 10,891 ) $ 56,164 Net income — — — 1,986 — 1,986 Other comprehensive loss, net of tax — — — — ( 2,855 ) ( 2,855 ) Repurchase of common stock ( 28 ) ( 56 ) ( 9 ) — — ( 65 ) Balance, September 30, 2022 23,878 $ 47,755 $ 14,556 $ 6,665 $ ( 13,746 ) $ 55,230 Balance, December 31, 2021 23,922 $ 47,844 $ 14,570 $ 2,756 $ ( 814 ) $ 63,631 Net income — — — 5,830 — 5,830 Other comprehensive loss, net of tax — — — — ( 12,932 ) ( 12,932 ) Cash dividend declared ($0.05 per share) — — — ( 1,196 ) — ( 1,196 ) Repurchase of common stock ( 44 ) ( 89 ) ( 14 ) — — ( 103 ) Balance, September 30, 2022 23,878 $ 47,755 $ 14,556 $ 6,665 $ ( 13,746 ) $ 55,230 Balance, June 30, 2023 23,803 $ 47,606 $ 14,536 $ 11,019 $ ( 13,004 ) $ 60,157 Net income — — — 1,890 — 1,890 Other comprehensive loss, net of tax — — — — ( 2,043 ) ( 2,043 ) Repurchase of common stock ( 20 ) ( 40 ) ( 6 ) — — ( 46 ) Balance, September 30, 2023 23,783 $ 47,566 $ 14,530 $ 12,909 $ ( 15,047 ) $ 59,958 Balance, December 31, 2022 23,848 $ 47,697 $ 14,546 $ 8,917 $ ( 13,941 ) $ 57,219 Adoption of ASU 2016-13 — — — ( 212 ) — ( 212 ) Net income — — — 5,635 — 5,635 Other comprehensive loss, net of tax — — — — ( 1,106 ) ( 1,106 ) Repurchase of common stock ( 65 ) ( 131 ) ( 16 ) — — ( 147 ) Cash dividend declared ($0.06 per share) — — — ( 1,431 ) — ( 1,431 ) Balance, September 30, 2023 23,783 $ 47,566 $ 14,530 $ 12,909 $ ( 15,047 ) $ 59,958 The accompanying notes are an integral part of these consolidated financial statements. 6 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022 (IN THOUSANDS) (UNAUDITED) 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,635 $ 5,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,203 1,337 Provision for credit losses 304 400 Income (loss) on bank owned life insurance ( 44 ) 83 Gain on sale of mortgage loans ( 4 ) ( 27 ) Gain (loss) on sale or disposal of premises and equipment ( 117 ) 195 Gain on sale of other real estate owned — ( 70 ) Loans originated for sale ( 81 ) ( 1,503 ) Proceeds from sales of loans originated for sale 85 1,530 Adjustment of carrying value of other real estate owned — 137 Net amortization/accretion of bond premiums/discounts 225 392 Deferred tax (benefit) expense ( 2 ) 540 Net change in: Accrued interest receivable ( 194 ) ( 62 ) Other assets ( 395 ) ( 693 ) Accrued interest payable 571 83 Accrued expenses and other liabilities ( 852 ) 1,136 Net cash provided by operating activities 6,334 9,308 CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in loans ( 41,706 ) 14,039 Purchase of securities available-for-sale ( 500 ) ( 19,790 ) Proceeds from repayments and maturities of securities available-for-sale 7,501 11,542 Net purchase of equity securities (restricted) ( 625 ) ( 964 ) Payments for the purchase of premises and equipment ( 1,159 ) ( 478 ) Proceeds from sale of premises and equipment 809 6 Proceeds from sales of other real estate owned — 207 Net cash (used in) provided by investing activities ( 35,680 ) 4,562 CASH FLOWS FROM FINANCING ACTIVITIES Net change in short term borrowings — 25,000 Issuance of long-term debt 10,000 — Net change in noninterest bearing deposits ( 9,641 ) 17,795 Net change in interest-bearing deposits 21,756 ( 1,394 ) Dividends paid ( 1,431 ) ( 1,196 ) Repurchase of common stock ( 147 ) ( 103 ) Net cash provided by financing activities 20,537 40,102 Net (decrease) increase in cash and cash equivalents ( 8,809 ) 53,972 Cash and cash equivalents, beginning of the period 61,686 60,946 Cash and cash equivalents, end of the period $ 52,877 $ 114,918 Supplemental disclosure of cash paid during the period for: Interest $ 5,446 $ 1,979 Taxes 2,925 325 Supplemental disclosure of non-cash transactions: Loans made to finance sale of other real estate owned — 711 Change in unrealized losses on securities available-for-sale ( 1,398 ) ( 16,369 ) The accompanying notes are an integral part of these consolidated financial statements. 7 NEW PEOPLES BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 NATURE OF OPERATIONS Nature of Operations – New Peoples Bankshares, Inc. (New Peoples or the Company) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (the Federal Reserve). The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, western North Carolina and northeastern Tennessee. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements conform to U. S. generally accepted accounting principles (GAAP) and to general industry practices. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2023 and December 31, 2022, and the results of operations for the three- and nine-month periods ended September 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 financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (hereinafter, collectively referred to as the Company, we, us or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services – Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for credit losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income. 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. There have been no significant changes to the application of significant accounting policies since December 31, 2022 except for the following: Accounting Standards Adopted in 2023 On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). 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 the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included a decrease in the allowance for credit losses on loans of $80,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $348,000, which is recorded within other liabilities. The Company recorded a net decrease to retained earnings of $212,000 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning 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”). 8 The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available-for-sale securities was not deemed material. The following table 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 January 1, 2023 As Reported Under ASC 326 December 31, 2022 Pre-ASC 326 Adoption Impact of ASC 326 Adoption (Dollars in thousands) Assets: Loans, at amortized cost $ 584,613 $ 584,613 $ — Allowance for credit losses on loans: Real estate secured: Commercial 2,065 2,364 ( 299 ) Construction and land development 509 345 164 Residential 1-4 family 2,639 2,364 275 Multifamily 274 262 12 Farmland 228 153 75 Total real estate loans 5,715 5,488 227 Commercial 622 381 241 Agriculture 27 32 ( 5 ) Consumer and other loans 283 386 ( 103 ) Unallocated — 440 ( 440 ) Total allowance for credit losses for loans 6,647 6,727 ( 80 ) Deferred tax asset 4,679 4,623 56 Liabilities: Allowance for credit losses for unfunded commitments 348 — 348 The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. 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 or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income (loss). 9 Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available-for-sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. As of September 30, 2023, there was no allowance for credit loss related to the available-for-sale portfolio. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans totaled $2.2 million at September 30, 2023 and was reported in accrued interest receivable on the consolidated balance sheets. 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. The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date. All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured. Allowance for Credit Losses – Loans The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. 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 measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a discounted cash flow methodology: · Commercial Loans. We make commercial loans to qualified businesses in our market area. Our commercial lending consists primarily of commercial and industrial loans to finance accounts receivable, inventory, property, plant and equipment. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. 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 whose value tends to be easily ascertainable. 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. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate. To manage these risks, our underwriting guidelines generally require us to secure commercial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition, we actively monitor certain measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. 10 · Residential Mortgage Loans. Our residential mortgage loans consist of residential first and second mortgage loans, residential construction loans, home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. We make mortgage loans with a variety of terms, including fixed and floating or variable rates and a variety of maturities. 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 whose value tends to be easily ascertainable. These loans are made consistent with our appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities. · Construction Loans. Construction lending entails significant additional risks compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate the total loan funds required to complete a project and related loan-to-value ratios accurately. To minimize the risks associated with construction lending, loan-to-value limitations for residential, multi-family and non-residential construction loans are in place. These are in addition to the usual credit analyses of borrowers. Management feels that the loan-to-value ratios help to minimize the risk of loss and to compensate for normal fluctuations in the real estate market. Maturities for construction loans generally range from 4 to 12 months for residential property and from 6 to 18 months for non-residential and multi-family properties. · Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance due to the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. 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. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. A borrower may also be able to assert against the Bank as an assignee any claims and defenses that it has against the seller of the underlying collateral. Loans that do not share risk characteristics are evaluated on an individual basis. 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”) 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 collateral method is applied to individually evaluated loans for which foreclosure is probable. The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral (“collateral dependent”). The allowance for credit loss is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, the allowance for credit loss is calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the allowance for credit loss is calculated as the amount by which the loan's amortized cost basis exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit loss may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan. · The DCF method is applied to individually evaluated loans that do not meet the criteria for collateral method measurement. Cash flows are projected and discounted using the same method as for collectively evaluated loans, and the Company considers default and prepayment assumptions. Allowance for Credit Losses – Unfunded Commitments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer 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. Such financial instruments are recorded when they are funded. The Company records 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. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets. 11 On January 1, 2023, concurrent with its adoption of ASU No. 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 and restructurings made with borrowers experiencing financial difficulty. Disclosures about periods prior to adoption will be presented under GAAP applicable for that period. Similar to its policy under previous GAAP, the Company continues to identify modifications to loans and to determine whether the borrower is experiencing financial difficulty. 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. Under previous GAAP, modifications to loans when the borrower was experiencing financial difficulty were designated as TDRs and were individually evaluated for the duration of the loan. Under CECL, if a previously modified loan with financial difficulty is subsequently upgraded to a pass rating, it will no longer be individually evaluated. NOTE 3 EARNINGS PER SHARE Basic earnings per share computations are based on the weighted average number of shares outstanding during each period. Diluted earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the three-month and nine-month periods ended September 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 in thousands, except share and per share data) For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Net income $ 1,890 $ 1,986 $ 5,635 $ 5,830 Weighted average shares outstanding 23,793,170 23,893,224 23,817,236 23,910,287 Weighted average dilutive shares outstanding 23,793,170 23,893,224 23,817,236 23,910,287 Basic and diluted earnings per share $ 0.08 $ 0.08 $ 0.24 $ 0.24 NOTE 4 CAPITAL Capital Requirements and Ratios Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. To qualify as a "Small Bank Holding Company" under federal regulations, a bank must have consolidated assets of $3.0 billion or less. The primary benefit of being deemed a "Small Bank Holding Company" is the exemption from the requirement to maintain consolidated regulatory capital ratios; instead, regulatory capital ratios only apply at the subsidiary bank level. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BASEL III rules) became fully phased in on January 1, 2019. Under the BASEL III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer required is 2.50 % . At September 30, 2023, the Bank had a capital conservation buffer of 8.46%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management believes as of September 30, 2023, the Bank met all capital adequacy requirements to which it was subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. 12 In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three-year period the Day 1 adverse regulatory capital effects of the CECL accounting standard. Additionally, in March 2020, the U.S. federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years. The final rule was adopted and became effective in September 2020. The Company implemented the CECL model commending January 1, 2023, and elected 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 September 30, 2023 and December 31, 2022, respectively. Schedule of capital requirements Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio September 30, 2023: Total capital to risk weighted assets 97,384 16.46 % $ 47,342 8.00 % $ 59,178 10.00 % Tier 1 capital to risk weighted assets 90,201 15.24 % 35,507 6.00 % 47,342 8.00 % Tier 1 capital to average assets 90,201 11.06 % 32,625 4.00 % 40,781 5.00 % Common equity Tier 1 capital to risk weighted assets 90,201 15.24 % 26,630 4.50 % 38,465 6.50 % December 31, 2022: Total capital to risk weighted assets 93,028 16.50 % $ 45,106 8.00 % $ 56,382 10.00 % Tier 1 capital to risk weighted assets 86,301 15.31 % 33,829 6.00 % 45,106 8.00 % Tier 1 capital to average assets 86,301 10.40 % 33,206 4.00 % 41,508 5.00 % Common equity Tier 1 capital to risk weighted assets 86,301 15.31 % 25,372 4.50 % 36,648 6.50 % NOTE 5 INVESTMENT SECURITIES The amortized cost and estimated fair value of available-for-sale (“AFS”) securities as of September 30, 2023 and December 31, 2022 are as follows: Schedule of securities amortized cost and estimated fair value Gross Gross Approximate Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value September 30, 2023 U.S. Treasuries $ 11,649 $ — $ 919 $ 10,730 U.S. Government Agencies 9,619 3 843 8,779 Taxable municipals 22,989 — 6,259 16,730 Corporate bonds 3,003 — 390 2,613 Mortgage backed securities 59,238 — 10,638 48,600 Total securities available-for-sale $ 106,498 $ 3 $ 19,049 $ 87,452 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 13 The following table details unrealized losses and related fair values in the AFS portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2023 and December 31, 2022. Schedule of fair value and gross unrealized losses on investment securities Less than 12 Months 12 Months or More Total (Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses September 30, 2023 U. S. Treasuries $ — $ — $ 10,730 $ 919 $ 10,730 $ 919 U.S. Government Agencies — — 8,081 843 8,081 843 Taxable municipals 464 36 16,266 6,223 16,730 6,259 Corporate bonds 481 19 2,132 371 2,613 390 Mortgage backed securities 50 1 48,550 10,637 48,600 10,638 Total securities available-for-sale $ 995 $ 56 $ 85,759 $ 18,993 $ 86,754 $ 19,049 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 securities available-for-sale $ 28,088 $ 2,603 $ 67,717 $ 15,049 $ 95,805 $ 17,652 As of September 30, 2023, there were 212 securities in a loss position, of which 209 have been in a loss position for twelve months or more. Management believes that all unrealized losses have resulted from temporary changes in the interest rates and current market conditions and are not a result of credit deterioration. Management does not plan 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 $ 35.3 million and $ 27.3 million as of September 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 and nine months ended September 30, 2023 and 2022. The amortized cost and fair value of investment securities as of September 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 penalties. Schedule of amortized cost and fair value of investment securities contractual maturity Weighted (Dollars in thousands) Amortized Fair Average Securities Available-for-Sale Cost Value Yield Due in one year or less $ 2,003 $ 1,966 2.33 % Due after one year through five years 14,691 13,714 2.11 % Due after five years through ten years 17,932 15,239 2.17 % Due after ten years 71,872 56,533 1.90 % Total $ 106,498 $ 87,452 1.99 % The Bank, as a member bank of the Federal Reserve Bank of Richmond (Federal Reserve Bank) and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $ 2.7 million and $ 2.1 million as of September 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. 14 NOTE 6 LOANS Loans receivable outstanding as of September 30, 2023, and December 31, 2022, are summarized as follows: Schedule of Loans receivable outstanding (Dollars in thousands) September 30, 2023 December 31, 2022 Real estate secured: Commercial $ 222,119 $ 197,069 Construction and land development 42,278 42,470 Residential 1-4 family 235,584 227,232 Multifamily 34,072 29,710 Farmland 17,599 17,744 Total real estate loans 551,652 514,225 Commercial 48,943 46,697 Agriculture 3,180 3,756 Consumer installment loans 21,871 19,309 All other loans 557 626 Total loans $ 626,203 $ 584,613 Also included in total loans above are deferred loan fees of $1.8 million and $1.6 million as of September 30, 2023 and December 31, 2022, respectively. Deferred loan costs were $2.0 million and $1.9 million, as of September 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. 15 Loans receivable on nonaccrual status as of September 30, 2023, and December 31, 2022, are summarized as follows: Summary of loans receivable on nonaccrual status CECL Incurred Loss September 30, 2023 December 31, 2022 (Dollars in thousands) With No Allowance With an Allowance Total Real estate secured: Commercial $ - $ 268 $ 268 $ - Construction and land development - - - 471 Residential 1-4 family 2,342 - 2,342 2,597 Multifamily 199 - 199 268 Farmland - - - 41 Total real estate loans 2,541 268 2,809 3,377 Commercial - - - - Consumer installment loans and other loans 3 - 3 36 Total loans receivable on nonaccrual status $ 2,544 $ 268 $ 2,812 $ 3,413 Total interest income not recognized on nonaccrual loans for the nine months ended September 30, 2023, and September 30, 2022, was $33,000 and $22,000, respectively. Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans included loans on nonaccrual status and accruing troubled debt restructurings. 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 to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all nonaccrual loans greater than $250,000 and all troubled debt restructurings, whether or not currently classified as such. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. 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. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis. 16 The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2022: Schedule of summary of impaired loans As of December 31, 2022 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment With no related allowance recorded: Real estate secured: Commercial $ 90 $ 131 $ — $ 124 Construction and land development 471 491 — 114 Residential 1-4 family 1,617 1,972 — 1,585 Multifamily — — — — Farmland 248 417 — 307 Commercial 23 31 — 14 Agriculture — — — — Consumer installment loans — — — 1 All other loans — — — — With an allowance recorded: Real estate secured: Commercial 268 338 63 407 Construction and land development — — — 291 Residential 1-4 family 32 48 23 201 Multifamily — — — 20 Farmland — — — 63 Commercial — — — 27 Agriculture — — — — Consumer installment loans — — — — All other loans — — — — Total $ 2,749 $ 3,428 $ 86 $ 3,154 Upon adoption of ASU 2016-13 the Company began evaluating loans that do not share risk characteristics on an individual basis utilizing the collateral or discounted cash flow methods as described in Note 2 Summary of Significant Accounting Policies. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to those loans as September 30, 2023: As of September 30, 2023 (Dollars in thousands) Unpaid Principal Balance Related Allowance Real estate secured: Commercial $ 268 $ 64 Construction and land development — — Residential 1-4 family — — Multifamily — — Farmland — — Total real estate secured 268 64 Commercial — — Agriculture 77 51 Consumer installment loans — — Total $ 345 $ 115 17 The following table is an age analysis of past due loans receivable as of September 30, 2023, segregated by class: Summary age analysis of past due loans receivable September 30, 2023 (Dollars 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 $ 306 $ — $ 268 $ 574 $ 221,545 $ 222,119 Construction and land development 5 — — 5 42,273 42,278 Residential 1-4 family 1,769 624 556 2,949 232,635 235,584 Multifamily — — 199 199 33,873 34,072 Farmland 345 — — 345 17,254 17,599 Total real estate loans 2,425 624 1,023 4,072 547,580 551,652 Commercial 157 — — 157 48,786 48,943 Agriculture 124 — — 124 3,056 3,180 Consumer installment loans 92 7 2 101 21,770 21,871 All other loans — — — — 557 557 Total loans $ 2,798 $ 631 $ 1,025 $ 4,454 $ 621,749 $ 626,203 The following table is an age analysis of past due loans receivable as of December 31, 2022, segregated by class: December 31, 2022 (Dollars 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 The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings: Pass - Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors. Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date. Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful - Loans classified doubtful have all the weaknesses inherent in loans classified as substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The following table presents the credit risk grade of loans by origination year as of September 30, 2023: 18 Summary of risk category of loans receivable As of September 30, 2023 (Dollars are in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total Commercial real estate Pass $ 31,740 $ 46,199 $ 45,916 $ 30,444 $ 21,379 $ 45,068 $ 1,008 $ 221,754 Special mention — — — — — 96 — 96 Substandard — — — — — 269 — 269 Total commercial real estate $ 31,740 $ 46,199 $ 45,916 $ 30,444 $ 21,379 $ 45,433 $ 1,008 $ 222,119 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Construction and Land Development Pass $ 9,626 $ 14,121 $ 10,137 $ 4,535 $ 1,853 $ 1,839 $ 61 $ 42,172 Special mention — — — — — 106 — 106 Substandard — — — — — — — — Total construction and land development $ 9,626 $ 14,121 $ 10,137 $ 4,535 $ 1,853 $ 1,945 $ 61 $ 42,278 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential 1-4 family Pass $ 21,278 $ 35,304 $ 42,333 $ 13,941 $ 14,261 $ 84,352 $ 21,598 $ 233,067 Special mention — — — — — 171 — 171 Substandard 87 — 104 — 39 2,086 30 2,346 Total residential 1-4 family $ 21,365 $ 35,304 $ 42,437 $ 13,941 $ 14,300 $ 86,609 $ 21,628 $ 235,584 Current period gross charge-offs $ — $ — $ — $ — $ — $ ( 6 ) $ — $ ( 6 ) Multifamily Pass $ 4,815 $ 11,699 $ 8,053 $ 2,657 $ 1,093 $ 5,556 $ — $ 33,873 Special mention — — — — — — — — Substandard — — — — — 199 — 199 Total multifamily $ 4,815 $ 11,699 $ 8,053 $ 2,657 $ 1,093 $ 5,755 $ — $ 34,072 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Farmland Pass $ 1,770 $ 2,236 $ 3,444 $ 797 $ 1,218 $ 7,944 $ — $ 17,409 Special mention — — — — 1 189 — 190 Substandard — — — — — — — — Total farmland $ 1,770 $ 2,236 $ 3,444 $ 797 $ 1,219 $ 8,133 $ — $ 17,599 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial Pass $ 13,321 $ 11,212 $ 6,173 $ 1,746 $ 2,285 $ 3,256 $ 10,947 $ 48,940 Special mention — — — — — 3 — 3 Substandard — — — — — — — — Total commercial $ 13,321 $ 11,212 $ 6,173 $ 1,746 $ 2,285 $ 3,259 $ 10,947 $ 48,943 Current period gross charge-offs $ — $ ( 5 ) $ — $ — $ — $ — $ — $ ( 5 ) Agriculture Pass $ 491 $ 562 $ 475 $ 148 $ 94 $ 648 $ 762 $ 3,180 Special mention — — — — — — — — Substandard — — — — — — — — Total agriculture $ 491 $ 562 $ 475 $ 148 $ 94 $ 648 $ 762 $ 3,180 Current period gross charge-offs $ — $ — $ — $ — $ — $ ( 59 ) $ — $ ( 59 ) Consumer and All Other Pass $ 9,076 $ 5,708 $ 2,815 $ 1,081 $ 721 $ 1,251 $ 1,774 $ 22,426 Special mention — 1 — — — — — 1 Substandard — — 1 — — — — 1 Total consumer and all other $ 9,076 $ 5,709 $ 2,816 $ 1,081 $ 721 $ 1,251 $ 1,774 $ 22,428 Current period gross charge-offs $ ( 140 ) $ ( 47 ) $ ( 11 ) $ — $ — $ ( 46 ) $ — $ ( 244 ) Total $ 92,204 $ 127,042 $ 119,451 $ 55,349 $ 42,944 $ 153,033 $ 36,180 $ 626,203 Total current period gross charge-offs $ ( 140 ) $ ( 52 ) $ ( 11 ) $ — $ — $ ( 111 ) $ — $ ( 314 ) 19 The following table presents the credit risk grade of loans as of December 31, 2022, prior to the adoption of ASU 2016-13, under the incurred loss model: As of December 31, 2022 (Dollars 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 NOTE 7 ALLOWANCE FOR CREDIT LOSSES FOR LOANS (“ACLL”) In determining the amount of our allowance for credit losses, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. The following table presents a disaggregated analysis of activity in the allowance for credit losses for loans as of September 30, 2023: 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 Nine months ended September 30, 2023 Beginning balance $ 2,364 $ 345 $ 2,364 $ 262 $ 153 $ 381 $ 32 $ 386 $ 440 $ 6,727 Adjustment to allowance for adoption of ASU 2016-13 ( 299 ) 164 275 12 75 241 ( 5 ) ( 103 ) ( 440 ) ( 80 ) Charge-offs — — ( 6 ) — — ( 5 ) ( 59 ) ( 244 ) — ( 314 ) Recoveries — 31 26 — — 8 — 133 — 198 Provision for credit losses 332 ( 107 ) ( 46 ) 54 ( 46 ) ( 34 ) 60 164 — 377 Ending balance $ 2,397 $ 433 $ 2,613 $ 328 $ 182 $ 591 $ 28 $ 336 $ — $ 6,908 Three months ended September 30, 2023 Beginning balance $ 2,277 $ 498 $ 2,583 $ 290 $ 192 $ 576 $ 85 $ 313 $ — $ 6,814 Charge-offs — — ( 6 ) — — — ( 59 ) ( 71 ) — ( 136 ) Recoveries — 15 11 — — 7 — 36 — 69 Provision for credit losses 120 ( 80 ) 25 38 ( 10 ) 8 2 58 — 161 Ending balance $ 2,397 $ 433 $ 2,613 $ 328 $ 182 $ 591 $ 28 $ 336 $ — $ 6,908 20 The following tables present a disaggregated analysis of activity in the allowance for loan losses, for comparative periods, prior to the adoption of ASU 2016-13: 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 evaluated 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 evaluated 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 21 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 Nine months ended September 30, 2022 Beginning balance $ 2,134 $ 189 $ 2,237 $ 254 $ 149 $ 1,099 $ 28 $ 108 $ 537 $ 6,735 Charge-offs ( 5 ) ( 149 ) ( 52 ) ( 111 ) ( 2 ) ( 29 ) — ( 454 ) — ( 802 ) Recoveries 33 3 87 2 14 29 — 92 — 260 Provision 42 394 ( 107 ) 97 ( 24 ) ( 429 ) 1 565 ( 139 ) 400 Ending balance $ 2,204 $ 437 $ 2,165 $ 242 $ 137 $ 670 $ 29 $ 311 $ 398 $ 6,593 Three months ended September 30, 2022 Beginning balance $ 2,162 $ 450 $ 2,239 $ 408 $ 141 $ 853 $ 29 $ 170 $ 364 $ 6,816 Charge-offs ( 5 ) ( 149 ) ( 28 ) ( 50 ) ( 2 ) ( 1 ) — ( 409 ) — ( 644 ) Recoveries 33 3 65 2 14 15 — 64 — 196 Provision 14 133 ( 111 ) ( 118 ) ( 16 ) ( 197 ) — 486 34 225 Ending balance $ 2,204 $ 437 $ 2,165 $ 242 $ 137 $ 670 $ 29 $ 311 $ 398 $ 6,593 Allowance for loan losses as of June 30, 2022 Individually evaluated for impairment $ 69 $ 174 $ 26 $ — $ — $ — $ — $ — $ — $ 269 Collectively evaluated for impairment 2,135 263 2,139 242 137 670 29 311 398 6,324 $ 2,204 $ 437 $ 2,165 $ 242 $ 137 $ 670 $ 29 $ 311 $ 398 $ 6,593 Loans as of September 30, 2022 Individually evaluated for impairment $ 383 $ 716 $ 1,696 $ — $ 268 $ 24 $ — $ — $ — $ 3,087 Collectively evaluated for impairment 197,718 37,882 225,010 29,062 17,199 45,102 3,799 21,015 — 576,787 $ 198,101 $ 38,598 $ 226,706 $ 29,062 $ 17,467 $ 45,126 $ 3,799 $ 21,015 $ — $ 579,874 Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. 22 NOTE 8 MODIFICATIONS MADE TO BORROWERS EXPERIENCING FINANCIAL DIFFICULTY The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. The Company uses a discounted cash flow methodology to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. There were no loans modified to borrowers experiencing financial difficulty in the three or nine months ended September 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 of ASC 2022-02, there were $2.0 million in loans classified as troubled debt restructurings as of December 31, 2022. All loans considered to be troubled debt restructurings are individually evaluated for impairment as part of the allowance for loan losses calculation. No loans modified during the three and nine months ended September 30, 2022 were considered to be troubled debt restructurings. During the three months ended September 30, 2022, one loan modified as a troubled debt restructuring totaling $6,000 defaulted within twelve months of the loan modification. During the nine months ended September 30, 2022, two loans modified as troubled debt restructurings totaling $73,000 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 ALLOWANCE FOR UNFUNDED COMMITMENTS The Company maintains a separate allowance for credit losses on off-balance-sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the consolidated balance sheet. The allowance for credit losses for off-balance-sheet credit exposures is adjusted through a provision for credit losses in the income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life, utilizing the same models and approaches for the Company's other loan portfolio segments described above, as these unfunded commitments share similar risk characteristics as its loan portfolio segments. The Company has identified the unfunded portion of certain lines of credit as unconditionally cancellable credit exposures, meaning the Company can cancel the unfunded commitment at any time. No credit loss estimate is reported for off-balance-sheet credit exposures that are unconditionally cancellable by the Company or for undrawn amounts under such arrangements that may be drawn prior to the cancellation of the arrangement. On January 1, 2023, 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 nine months ended September 30, 2023, the Company recorded a reversal to the provision for credit losses for unfunded commitments of $6,000, and $73,000, respectively. As of September 30, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other liabilities was $275,000. NOTE 10 OTHER REAL ESTATE OWNED The following table summarizes the activity in other real estate owned for the nine months ended September 30, 2023, and the year ended December 31, 2022: Schedule of other real estate owned (Dollars in thousands) September 30, 2023 December 31, 2022 Balance, beginning of period $ 261 $ 1,361 Additions — — Transfers from premises and equipment — — Proceeds from sales — ( 207 ) Proceeds from insurance claims — — Loans made to finance sales — ( 711 ) Adjustment of carrying value — ( 197 ) Net gains from sales — 15 Balance, end of period $ 261 $ 261 As of September 30, 2023, two loans totaling $109,145 were in the process of foreclosure. 23 NOTE 11 FAIR VALUES The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of Financial Accounting Standards Board (the FASB) ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market and in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market and in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are valued using other financial instruments, the parameters of which can be directly observed. Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows: Investment Securities Available-for-sale - Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available-for-sale securities, totaling $ 87.5 million and $ 96.1 million as of September 30, 2023 and December 31, 2022, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service. Collateral Dependent Loans with an ACL - In accordance with ASC 326, we may determine that an individual loan exhibits unique risk characteristics which differentiate it from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower's ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower's industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. 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. 24 Assets and liabilities measured at fair value are as follows as of September 30, 2023: Schedule of summary of assets and liabilities measured at fair value September 30, 2023 (Dollars in thousands) Quoted market price in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) (On a recurring basis) Available-for-sale investments U.S. Treasuries $ — $ 10,730 $ — U.S. Government Agencies — 8,779 — Taxable municipals — 16,730 — Corporate bonds — 2,613 — Mortgage-backed securities — 48,600 — (On a non-recurring basis) Other real estate owned — — 261 Collateral dependent loans with ACL: Commercial real estate — — 205 Agriculture 26 Total $ — $ 87,452 $ 492 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): December 31, 2022 (Dollars 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 — — 213 Total $ — $ 96,076 $ 474 25 For Level 3 assets measured at fair value on a recurring or non-recurring basis as of September 30, 2023 and December 31, 2022, 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 September 30, 2023 Fair Value at December 31, 2022 Valuation Technique 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 0 – 18 % Commercial real estate $ 205 $ 213 Agriculture 26 - Other Real Estate Owned $ 261 $ 261 Appraised Value/Comparable Sales/Other Estimates from Independent Sources Discounts to reflect current market conditions and estimated costs to sell 0 – 18 % Fair Value of Financial Instruments Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different. The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis as of September 30, 2023, and December 31, 2022, are as follows: Schedule of estimated fair value of financial instruments Fair Value Measurements (Dollars 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) September 30, 2023 Financial instruments – assets Net loans $ 619,295 $ 590,220 $ — $ — $ 590,220 Financial instruments – liabilities Time deposits 224,841 221,937 — 221,937 — Borrowed funds 26,496 24,102 — 24,102 — 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 — 26 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 values of cash and due from banks, federal funds sold, deposits with no stated maturities, 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 September 30, 2023 and December 31, 2022, represent an approximation of exit price; however, an actual exit price may differ. NOTE 12 LEASING ACTIVITIES As of September 30, 2023, 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 September 30, 2023 was 8.85 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 September 30, 2023 was 3.29 % . For the three and nine months ended September 30, 2023, operating lease expenses were $ 117,000 and $ 341,000 , respectively. For the three and nine months ended September 30, 2022, operating lease expenses were $ 115,000 and $ 342,000 respectively. The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. As of September 30, 2023, 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 $ 114 2024 456 2025 456 2026 456 2027 477 Thereafter 2,226 Total lease payments 4,185 Less: imputed interest ( 713 ) Total $ 3,472 NOTE 13 BORROWED FUNDS Included in Borrowed Funds is one FHLB Advance of $ 10.0 million as of September 30, 2023 bearing an interest rate of 3.51 % maturing on May 4, 2028 . No FHLB advances were outstanding as of 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. NOTE 14 REVENUE FROM CONTRACTS WITH CUSTOMERS All our revenue from contracts with customers as defined in ASC 606 is recognized within noninterest income. Refer to Note 23 in our Annual 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 and nine months ended September 30, 2023 and 2022: 27 Schedule of revenue from contracts with customers For the three months ended For the nine months ended September 30, September 30, (Dollars in thousands) 2023 2022 2023 2022 Service charges and fees $ 1,020 $ 1,069 $ 2,896 $ 2,973 Card processing and interchange income 942 915 2,784 2,858 Insurance and investment fees 268 167 830 650 Other noninterest income 206 38 727 425 Total noninterest income $ 2,436 $ 2,189 $ 7,237 $ 6,906 NOTE 15 NONINTEREST EXPENSES Other operating expenses, included as part of noninterest expenses, consisted of the following for the periods presented: Schedule of noninterest expenses For the three months ended September 30, For the nine months ended September 30, (Dollars in thousands) 2023 2022 2023 2022 Other operating expenses $ 726 $ 663 $ 2,265 $ 2,003 ATM network expense 386 355 1,116 1,102 Legal, accounting, and professional fees 305 233 964 695 Loan related expenses 187 65 403 265 FDIC insurance premiums 89 56 265 159 Consulting fees 44 98 176 227 Advertising 43 55 150 119 Printing and supplies 38 35 127 107 Other real estate owned expenses, net 7 ( 35 ) 23 110 Total other operating expenses $ 1,825 $ 1,525 $ 5,489 $ 4,787 NOTE 16 RECENT ACCOUNTING DEVELOPMENTS The following is a summary of recent authoritative announcements: 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 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 completed its transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference rate. This transition had no material impact on earnings or capital. 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. 28 In October 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023-06 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. 29 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Caution About Forward-Looking Statements We make forward-looking statements in this quarterly report on Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include statements regarding expectations, intentions, projections and beliefs concerning our profitability, liquidity, and allowance for 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: the success or failure of our efforts to implement our business plan; any required increase in our regulatory capital ratios; satisfying other regulatory requirements that may arise from examinations, changes in the law and other similar factors; deterioration of asset quality; changes in the level of our nonperforming assets and charge-offs; fluctuations of real estate values in our markets; our ability to attract and retain talent; demographical changes in our markets which negatively impact the local economy; the uncertain outcome of current or future legislation or regulations or policies of state and federal regulators; the successful management of interest rate risk; the successful management of liquidity; changes in general economic and business conditions in our market area and the United States in general; credit risks inherent in making loans such as changes in a borrower’s ability to repay and our management of such risks; competition with other banks and financial institutions, and companies outside of the banking industry, including online lenders and those companies that have substantially greater access to capital and other resources; demand, development and acceptance of new products and services we have offered or may offer; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rate, market and monetary fluctuations; the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events; technology utilized by us; our ability to successfully manage cybersecurity; our reliance on third-party vendors and correspondent banks; changes in generally accepted accounting principles; changes in governmental regulations, tax rates and similar matters; and, other risks, which may be described, from time to time, in our filings with the Securities and Exchange Commission. Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 30 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 for credit losses represents an amount that, in the Company's judgment, will be adequate to absorb expected and estimable losses inherent in the loan portfolio. The judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current 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 September 30, 2023 was $1.9 million, a decrease of $96,000, or 4.83%, from the same period in 2022. Net interest income declined 2.21%, or $159,000, from $7.2 million for the quarter ended September 30, 2022 to $7.0 million for the quarter ended September 30, 2023. The decrease was primarily due to an increase in the cost of interest-bearing liabilities of 135 basis points (“bps”) to 2.05% during the quarter ended September 30, 2023 compared to 0.70% during the quarter ended September 30, 2022. The balance sheet grew to $800.0 million in total assets as of September 30, 2023, from $775.4 million as of December 31, 2022. Gross loans increased $41.6 million to $626.2 million as of September 30, 2023. Additionally, interest-bearing deposits in other banks decreased $9.6 million to $37.1 million as of September 30, 2023. During the second quarter of 2022, we initiated a previously announced stock repurchase program, which continues through March 31, 2024. Through September 30, 2023, the Company has repurchased 138,982 shares at an average price of $2.29 per share. Comparison of the Three Months ended September 30, 2023 and 2022 Quarter-to-date highlights include: · Returns on average assets and equity of 0.94% and 12.38% for the third quarter of 2023, compared to 0.94% and 13.70% for the third quarter of 2022, respectively; · Net interest income was $7.0 million for the third quarter of 2023, a decrease of $159,000, or 2.21%, compared to the third quarter of 2022; · Provision for credit losses was $155,000 for the third quarter of 2023, a decrease of $70,000, or 31.11%, compared to the third quarter of 2022; · Noninterest income was $2.4 million, an increase of $247,000, or 11.28%, during the third quarter of 2023 compared to the third quarter of 2022; and · Noninterest expense was $6.9 million, an increase of $284,000, or 4.30%, for the third quarter of 2023 compared to the third quarter of 2022. The Company’s primary source of income is net interest income, which decreased by $159,000, or 2.21%, to $7.0 million for the third quarter of 2023 compared to $7.2 million for the third quarter of 2022. Interest income increased $1.5 million due to higher yielding loans and interest-bearing deposits with banks resulting from the increase in the fed funds rate. Total interest expense increased $1.6 million driven primarily by the increase in the cost of interest-bearing liabilities, which rose 135 basis points (“bps”) to 2.05% from 0.70% for the comparative three months ended September 30, 2023 and 2022. The certificates of deposit portfolio was the primary contributor to the decline in net interest income, due to an increase of 197 bps in the quarterly cost on certificates of deposit to 2.72% and a $44.4 million increase in the average balance of certificates of deposit due to a shift in the mix from lower cost deposit products. Additionally, the cost of borrowed funds increased, as trust preferred securities costs rose 342 bps to 8.27% and Federal Home Loan Bank (“FHLB”) advance costs rose 117 bps to 3.57%. The impact of the FHLB advances rate increase was more than offset by a reduction of $36.8 million in the average outstanding balance, as borrowings advanced in response to the cybersecurity incident in 2022, were repaid and a separate advance of $10.0 million was taken in the second quarter of 2023. The increase in the cost of funds was offset by an increase of 95 bps in the yield on earning assets. The yield on loans increased 71 bps to 5.43%, helping to offset the increased cost of funding during the quarter ended September 30, 2023. These rate and volume activities combined to result in a decrease in net interest income of $159,000, while the net interest margin increased 8 bps, to 3.63% for the quarter ended September 30, 2023 as compared to the 3.55% margin for the same period in 2022. There was one increase in the federal funds interest rate by the Federal Reserve’s Open Market Committee (“FOMC”) during the quarter ended September 30, 2023, raising the rate to 5.50%. Through September 30, 2023, the FOMC has increased this rate six times since the quarter ended September 30, 2022. The Company continues to evaluate rate adjustments for factors, including competitive pressure within the local markets, funding needs to support growth, and other needs. 31 The following table shows the rates paid on earning assets and interest-bearing liabilities for the periods indicated: Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates Three Months Ended September 30, 2023 2022 Average Income/ Yields/ Average Income/ Yields/ (Dollars in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) (3) $ 618,008 $ 8,453 5.43% $ 590,090 $ 7,010 4.72% Federal funds sold 306 4 5.19% 353 2 2.34% Interest-bearing deposits in other banks 42,493 559 5.22% 98,657 559 2.25% Taxable investment securities 108,253 569 2.09% 117,628 539 1.83% Total earning assets 769,060 9,585 4.94% 806,728 8,110 3.99% Less: Allowance for credit losses (6,930) (6,738) Non-earning assets 37,104 41,134 Total assets $ 799,234 $ 841,124 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 72,208 $ 123 0.68% $ 75,151 $ 23 0.12% Savings and money market deposits 167,796 436 1.03% 192,550 52 0.11% Time deposits 225,921 1,551 2.72% 181,480 343 0.75% Total interest-bearing deposits 465,925 2,110 1.80% 449,181 418 0.37% FHLB advances 10,000 90 3.57% 46,793 287 2.40% Trust preferred securities 16,496 344 8.27% 16,496 205 4.85% Total interest-bearing liabilities 492,421 2,544 2.05% 512,470 910 0.70% Non-interest-bearing deposits 237,516 - -% 262,244 - -% Total deposit liabilities and cost of funds 729,937 2,544 1.38% 774,714 910 0.46% Other liabilities 8,712 8,904 Total liabilities 738,649 783,618 Shareholders’ equity 60,585 57,506 Total liabilities and shareholders’ equity $ 799,234 $ 841,124 Net interest income $ 7,041 $ 7,200 Net interest margin 3.63% 3.55% Net interest spread 2.89% 3.29% (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) Tax exempt income is not significant and has been treated as fully taxable. (3) Includes mortgage loans held for sale. Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. 32 Volume and Rate Analysis Increase (decrease) Three Months Ended September 30, 2023 versus 2022 (Dollars in thousands) Volume Effect Rate Effect Change in Interest Income/ Expense Interest income: Loans $ 348 $ 1,095 $ 1,443 Federal funds sold — 2 2 Interest-bearing deposits in other banks (445 ) 445 — Taxable investment securities (22 ) 52 30 Total earning assets (119 ) 1,594 1,475 Interest expense: Interest-bearing demand deposits — 100 100 Savings and money market deposits (2 ) 386 384 Time deposits 159 1,049 1,208 FHLB advances (291 ) 94 (197 ) Trust preferred securities — 139 139 Total interest-bearing liabilities (134 ) 1,768 1,634 Change in net interest income $ 15 $ (174 ) $ (159 ) Based on our current assessment of the loan portfolio and related unfunded commitments, a provision for credit losses of $155,000 was made in the third quarter of 2023. The allowance for credit losses as a percentage of loans decreased from 1.15% as of December 31, 2022 to 1.10% as of September 30, 2023. For a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 2, Summary of Significant Accounting Policies and Note 7, Allowance for Credit Losses for Loans, in Item 1 of this Form 10-Q. Non-interest income increased $247,000 to $2.4 million for the quarter ended September 30, 2023 from $2.2 million for the comparable quarter in 2022. The increase is due largely to the increase in financial services revenue and other noninterest income. Financial services revenue was impacted in the third quarter of 2022, due to the effect on production after the cybersecurity incident in June 2022, especially new account activity immediately after the disruption. For the three months ended September 30, 2023, insurance and investment fees increased $101,000, or 60.5%, compared to the three months ended September 30, 2022. Other noninterest income increased $168,000, or 442.1% due to a $100,000 nonrecurring write-down of bank owned life insurance recorded during the third quarter of 2022. Non-interest expense was $6.9 million for the quarter ended September 30, 2023 compared to $6.6 million for the quarter ended September 30, 2022. The $284,000 increase was impacted by the $277,000 increase in salaries and employee benefits, as well as other operating expenses, which increased $300,000. The increase in salaries and employee benefits was related to performance raises and benefits enhancements initiated in the first quarter of 2023. The increase in other noninterest expenses was due to increases in deposit insurance premium, professional fees, and marketing and business development costs. These increases were due to adjustments for contractual or inflationary factors, along with decisions to increase or incur certain costs as part of our overall strategic plan. The increases in salaries and employee benefits and other operating expenses were partially offset by a $232,000 decrease in occupancy costs, due largely to a write-down taken during the third quarter of 2022 related to the closure of two branches. 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 72.62% during the third quarter of 2023 from 70.25% for the third quarter of 2022. We continue to assess our operational procedures and structure to improve efficiencies and contain costs. Income tax expense for the third quarter of 2023 totaled $549,000, a decrease of $30,000, or 5.18% from $579,000 recorded during the same period in 2022. The effective tax rate for the three months ended September 30, 2023, was 22.51%, compared to 22.57% for the same period in 2022. 33 Comparison of the Nine Months ended September 30, 2023 and 2022 Year-to-date highlights include: · Net interest income increased to $21.1 million for the nine months ended September 30, 2023, an improvement of $443,000, or 2.14%, compared to the nine months ended September 30, 2022; · Net interest margin was 3.73% for the nine months ended September 30, 2023, an increase of 20 bps compared to 3.53% for the same period of 2022; · Provision for credit losses was $304,000 for the nine months ended September 30, 2023, a reduction of $96,000, or 24.00%, compared to the nine months ended September 30, 2022; · Noninterest income was $7.2 million, an increase of $331,000, or 4.79%, compared to the nine months ended September 30, 2022; · Salaries and employee benefits expense was $10.8 million, an increase of $821,000, or 8.25%, compared to the nine months ended September 30, 2022; and · Total noninterest expense was $20.8 million, an increase of $1.1 million, or 5.53%, compared to the nine months ended September 30, 2022 During the nine months ended September 30, 2023, compared to the same period in 2022, net income decreased 3.34% to $5.6 million from $5.8 million. Although net interest income and non-interest income increased, total non-interest expense increased more and at a greater percentage. The following table presents the rates earned on earning assets and paid on interest-bearing liabilities for the periods indicated. Net Interest Margin Analysis Average Balances, Income and Expense, and Yields and Rates Nine months Ended September 30, 2023 2022 Average Income/ Yields/ Average Income/ Yields/ (Dollars in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) (3) $ 601,729 $ 23,711 5.27% $ 594,593 $ 20,476 4.61% Federal funds sold 536 20 4.99% 254 3 1.36% Interest-bearing deposits in other banks 44,901 1,642 4.89% 73,752 738 1.34% Taxable investment securities 110,547 1,752 2.12% 115,349 1,510 1.74% Total earning assets 757,713 27,125 4.79% 783,948 22,727 3.88% Less: Allowance for credit losses (6,869) (6,824) Non-earning assets 37,273 44,582 Total assets $ 788,117 $ 821,706 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 76,099 $ 331 0.58% $ 71,420 $ 58 0.11% Savings and money market deposits 165,670 951 0.77% 194,691 130 0.09% Time deposits 213,365 3,620 2.27% 188,497 1,064 0.75% Total interest-bearing deposits 455,134 4,902 1.44% 454,608 1,252 0.37% FHLB advances 6,007 165 3.67% 20,000 358 2.36% Trust preferred securities 16,496 950 7.70% 16,496 452 3.61% Total interest-bearing liabilities 477,637 6,017 1.68% 491,104 2,062 0.36% Non-interest-bearing deposits 242,139 - -% 263,083 - -% Total deposit liabilities and cost of funds 719,776 6,017 1.12% 754,187 2,062 0.36% Other liabilities 8,657 8,235 Total liabilities 728,433 762,422 Shareholders’ equity 59,684 59,284 Total liabilities and shareholders’ equity $ 788,117 $ 821,706 Net interest income $ 21,108 $ 20,665 Net interest margin 3.73% 3.53% Net interest spread 3.67% 3.32% 34 (1) Nonaccrual loans and loans held for sale have been included in average loan balances. (2) Tax exempt income is not significant and has been treated as fully taxable. (3) Includes mortgage loans held for sale Net interest income is affected by changes in both average interest rates and average volumes (balances) of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total changes in interest income and interest expense which can be attributed to rates and volume for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. Volume and Rate Analysis Increase (decrease) Nine months Ended September 30, 2023 versus 2022 (Dollars in thousands) Volume Effect Rate Effect Change in Interest Income/ Expense Interest income: Loans $ 82 $ 3,153 $ 3,235 Federal funds sold 5 12 17 Interest-bearing deposits in other banks (387 ) 1,291 904 Taxable investment securities 2 240 242 Total earning assets (298 ) 4,696 4,398 Interest expense: Interest-bearing demand deposits 7 266 273 Savings and money market deposits (19 ) 840 821 Time deposits 214 2,342 2,556 FHLB advances (292 ) 99 (193 ) Trust preferred securities — 498 498 Total interest-bearing liabilities (90 ) 4,045 3,955 Change in net interest income $ (208 ) $ 651 $ 443 Based on our current assessment of the loan portfolio and related unfunded commitments, a provision of $304,000 was made for the nine months ended September 30, 2023. The allowance for credit losses as a percentage of loans decreased from 1.15% at December 31, 2022 to 1.10% as of September 30, 2023. For a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 2, Summary of Significant Accounting Policies and Note 7, Allowance for Credit Losses, in Item 1 of this Form 10-Q. Non-interest income increased $331,000 to $7.2 million for the nine months ended September 30, 2023 from $6.9 million for the comparable period in 2022. The primary drivers of the increase were the sales of a former operations facility and branch location, during the first quarter of 2023, resulting in a combined gain of $130,000; and an increase in financial services revenue of $180,000. This was offset by decreases in service charge income and card processing fees totaling a combined $151,000 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 customer deposit balances have begun to return to pre-pandemic levels and customer spending habits have also begun to normalize. Additional changes to our service charge structure will take effect during the fourth quarter of 2023. The elimination of these charges is not expected to have a material impact on operations or liquidity. Non-interest expense was $20.8 million for the nine months ended September 30, 2023 compared to $19.7 million for the nine months ended September 30, 2022. The $1.1 million increase was impacted by increases in salaries and employee benefits of $821,000 as well as professional fees of $269,000, and deposit insurance of $106,000. These increases were partially offset by decreases in occupancy expenses of $319,000, data processing and telecommunication costs of $115,000, and costs associated with other real estate owned, which decreased $87,000 over the comparative nine-month period. The efficiency ratio, a non-GAAP measure, increased to 73.33% for the nine months ended September 30, 2023 from 71.44% for the nine months ended September 30, 2022. 35 Income tax expense for the nine months ended September 30, 2023 totaled $1.6 million, a decrease of $24,000, or 1.46%, from $1.6 million recorded during the same period in 2022. The effective tax rate for the nine months ended September 30, 2023, was 22.34%, compared to 22.01% for the same period in 2022. Balance Sheet Total assets as of September 30, 2023 were $800.0 million, an increase of $24.6 million, or 3.2%, from $775.4 million as of December 31, 2022. Gross loans increased $41.6 million, or 7.1%, during 2023 due to continuing strong loan demand, combined with reductions in additional principal payments and refinancing due to the general increase in interest rates. Investment securities decreased $8.6 million during 2023 primarily due to et amortization, principal repayments of amortizing investments, and other security maturities of $7.7 million; combined with an increase of $1.4 million in the unrealized loss position, partially offset by $500,000 in purchases. All of the Company’s investments are designated as available-for-sale. Gross loans receivable increased $41.6 million to $626.2 million as of September 30, 2023 from $584.6 million as of December 31, 2022. Commercial real estate loans increased $25.1 million, or 12.7%, from December 31, 2022 to September 30, 2023. Residential 1-4 family loans and multifamily loans increased $8.4 million and $4.4 million, respectively, from December 31, 2022 to September 30, 2023. These increases were a result of continuing strong loan demand. Total deposits were $704.8 million as of September 30, 2023 compared to $692.7 million as of December 31, 2022. The increase of $12.1 million, or 1.7%, was due to efforts to attract and retain time deposits in an extremely competitive environment for deposits, combined with cyclical funds inflows. As a result of these efforts, total time deposits increased $36.6 million during the first nine months of 2023. The increase in time deposits contributed to the increase in our cost of funds, as previously discussed, due to the rising interest rate environment experienced over the past eighteen months. In May 2023, an advance from the Federal Home Loan Bank (“FHLB”) in the amount of $10.0 million was taken with an interest rate of 3.51% and a maturity date of May 4, 2028, to support pending loan closings. There were no FHLB advances outstanding as of December 31, 2022. Trust preferred securities of $16.5 million as of September 30, 2023 remained unchanged in comparison to December 31, 2022. During the first nine months of 2023 total shareholders’ equity increased $2.7 million to $60.0 million as of September 30, 2023, due to the year-to-date earnings of $5.6 million which was partially offset by the $1.1 million increase in the net unrealized loss on available-for-sale investment securities, a cash dividend payment of $1.4 million and the repurchase of common stock totaling $147,000. Additionally, the implementation of the current expected credit loss (“CECL”) methodology resulted in a one-time net of tax, direct charge to retained earnings of $212,000. Consequently, book value per share increased to $2.52 as of September 30, 2023 compared to $2.40 as of December 31, 2022. The Bank remains well capitalized per regulatory guidance. Asset Quality Nonperforming assets, which include nonaccrual loans and other real estate owned (“OREO”), totaled $3.1 million as of September 30, 2023, a decline of $601,000, or 16.36%, since year-end 2022. Nonperforming assets as a percentage of total assets were 0.38% as of September 30, 2023, and 0.47% as of December 31, 2022. Other real estate owned of $261,000 as of September 30, 2023, which consists primarily of residential and commercial lots, is unchanged from December 31, 2022. Expenses associated with other real estate owned were $23,000 for the nine months ended September 30, 2023, compared to $110,000 during the nine months ended September 30, 2022, due to costs associated with sale of other real estate owned during the first nine months of 2022. Nonaccrual loans decreased $601,000 to $2.8 million as of September 30, 2023 from $3.4 million at December 31, 2022, as we continue to work to reduce nonperforming and under-performing assets. For detailed information on nonaccrual loans and other real estate owned as of September 30, 2023 and December 31, 2022, refer to Note 6 Loans and Note 10 Other Real Estate Owned in Item 1 of this Form 10-Q. Loans rated substandard or below totaled $2.8 million as of September 30, 2023, a decrease of $600,000 from $3.4 million as of December 31, 2022. Total past due loans decreased to $4.5 million as of September 30, 2023 from $5.5 million as of December 31, 2022. 36 Our allowance for credit losses as of September 30, 2023 was $6.9 million or 1.10% of total loans as compared to $6.7 million, or 1.15% of total loans, at December 31, 2022. Individually evaluated loans totaled $346,000 with an estimated related specific allowance of $115,000 as of September 30, 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. A provision of $304,000 was recorded for the first nine months of 2023 compared to $400,000 during the first nine months of 2022. Annualized net charge-offs, as a percentage of average loans, was 0.03% during the first nine months of 2023, compared to 0.12% for the same period of 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. Through our quarterly assessment, we continue to adjust the CECL model to best reflect the risks in the portfolio. However, future provisions may be deemed necessary. During the first nine months of 2023, we made modest adjustments to our qualitative factors to consider risk factors associated with commercial real estate and residential mortgage loans. 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 $304,000, of which $377,000 was provided for the loan portfolio; offset by a reduction of the allowance for unfunded commitments of $73,000. The following table summarizes components of the allowance for credit losses and related loans as of September 30, 2023 and December 31, 2022: Selected Credit Ratios September 30, December 31, (Dollars in thousands) 2023 2022 Allowance for credit losses $ 6,908 $ 6,727 Total loans 626,203 584,613 Allowance for credit losses to total loans 1.10 % 1.15 % Nonaccrual loans $ 2,812 $ 3,413 Nonaccrual loans to total loans 0.45 % 0.58 % Ratio of allowance for credit losses to nonaccrual loans 2.46 X 1.97 X Charge-offs net of recoveries 1 $ 116 $ 633 Average loans $ 601,729 $ 591,179 Net charge-offs to average loans 1 0.03 % 0.11 % 1 - Annualized 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 $5.0 million and $4.6 million existed as of September 30, 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 one-time deferred tax charge of $56,000. Refer to Note 2 Summary of Significant Accounting Policies in Part 1 of this Form 10-Q. Capital Resources 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 in Note 4 in Item 1 of this Form 10-Q. As of September 30, 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 $2.52 and $2.40 as of September 30, 2023 and December 31, 2022, respectively. Other key performance indicators are as follows: 37 Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Return on average assets 1 0.94 % 0.94 % 0.96 % 0.95 % Return on average shareholders’ equity 1 12.38 % 13.70 % 12.62 % 13.15 % Average equity to average assets 7.58 % 6.84 % 7.57 % 7.21 % 1 - Annualized Under current economic conditions, we believe it is prudent to continue to retain capital sufficient to support planned asset growth while being able to absorb potential losses that may occur if asset quality deteriorates, and based upon projections, we believe our current capital levels will be sufficient. During the first quarter of 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 Company. On April 28, 2022 the board of directors of the Company authorized the repurchase of up to 500,000 shares of the Company’s outstanding common stock through March 31, 2023. 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 September 30, 2023, the Company has repurchased 138,982 shares at an average price of $2.29 per share. During the quarter ended September 30, 2023, the Company repurchased 19,753 shares at an average price of $2.29 per share. There is no assurance that the Company will purchase any additional shares under this program. Liquidity 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 securities. As of September 30, 2023, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $52.2 million, which is net of the $35.3 million of securities pledged as collateral. Investment securities available-for-sale serve as a source of liquidity while yielding a higher return versus other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank. 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 88.85% and 84.40% as of September 30, 2023 and December 31, 2022, respectively. Generally, our policy has been to manage this ratio at or below 90.00%. Available third-party sources of liquidity as of September 30, 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 arise. We also have the ability to borrow $30.0 million in unsecured federal funds through credit facilities extended by correspondent banks. We have used our line of credit with the FHLB to issue a letter of credit totaling $12.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on these letters of credit have been issued. The letters of credit are considered to be draws on our FHLB line of credit. In May 2023, we borrowed $10.0 million from FHLB, through a fixed rate 5-year advance, to support loan fundings and other general liquidity needs. An additional $178.8 million was available as of September 30, 2023 on the $200.8 million line of credit, of which $99.7 million is secured by a blanket lien on our residential real estate loans. We held no brokered deposits as of September 30, 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 tables. Total Certificate of Deposit Registry Services (“CDARS”) time deposits were $2.7 million and $1.4 million as of September 30, 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 through Intrafi Cash Service (“ICS”). As of September 30, 2023 approximately $27.0 million were placed in this product as compared to $23.9 million at December 31, 2022. Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit insurance coverage. 38 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 $35.3 million were pledged as of September 30, 2023. In March and May of 2023, three regional banks, each with assets in excess of $100.0 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 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. The concerns for First Republic Bank related to exposure to long-term jumbo mortgages made to preferred deposit customers and the impact to net interest income 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 these financial institutions our deposit fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates. Since the date of these receiverships, we have not experienced any significant or unusual deposit outflows and we took steps to successfully test certain liquidity facilities in the event of any future deposit outflows. Time deposits of $250,000 or more equaled approximately 5.97% of total deposits at September 30, 2023 and 3.87% of deposits at December 31, 2022. With the on-balance sheet liquidity and other external sources of funding, we believe the Bank has adequate liquidity and capital resources to meet our requirements and needs for the foreseeable future. However, liquidity can be further affected by a number of factors such as counterparty willingness or ability to extend credit, regulatory actions and customer preferences, etc., some of which are beyond our control. The bank holding company has approximately $743,000 in cash on deposit at the Bank at September 30, 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 discretionary principal 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 is authorized to repurchase 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 Obligations There have been no material changes during the nine months ended September 30, 2023, to the off-balance sheet items and the contractual obligations disclosed in our 2022 Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable. Item 4. Controls and Procedures We have carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (our CEO) and our Executive Vice President and Chief Financial Officer (our CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. 39 Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were operating effectively in providing reasonable assurance that (a) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2023, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. Part II Other Information Item 1. Legal Proceedings In the course of operations, we may become a party to legal proceedings in the normal course of business. At September 30, 2023, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries or to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, will materially impact the financial condition or liquidity of the Company. Item 1A. Risk Factors Not Applicable. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Sales of Unregistered Securities – None (b) Use of Proceeds – Not Applicable (c) Issuer Purchases of Securities Stock Repurchase Program The Company has an approved one-year stock repurchase program that authorizes the repurchase of up to 500,000 of the Company’s common shares that was extended through March 31, 2024. Repurchases may be made through open market purchases or in privately negotiated transactions. Shares repurchased will be returned to the status of authorized and unissued shares of common stock. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company. Shares of the Company’s common stock were repurchased during the three months ended September 30, 2023, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 361,018 shares of common stock. Period Beginning on First Day of Month Ended Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs July 31, 2023 8,556 $ 2.30 8,556 372,215 August 31, 2023 2,526 $ 2.25 2,526 369,689 September 30, 2023 8,671 $ 2.29 8,671 361,018 Total 19,753 $ 2.29 19,753 40 Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not Applicable. Item 5. Other Information None Item 6. Exhibits The following exhibits are filed as part of this report or are incorporated by reference: No . Description 3.1 Amended Articles of Incorporation of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarterly period ended June 30, 2008 filed on August 11, 2008). 3.2 Bylaws of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K filed on August 26, 2020). 4.1 Specimen Common Stock Certificate of New Peoples Bankshares, Inc. (incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarterly period ended June 30, 2012 filed on August 14, 2012). 4.2 Description of New Peoples Bankshares, Inc.’s Securities (incorporated by reference to Exhibit 4.2 to Form 10-K for the year ended December 31, 2022, filed on March 31,2023). 10.1 First Amendment, dated as of August 7, 2023, to the Employment Agreement, dated as of December 1, 2016, by and among New Peoples Bankshares, Inc., New Peoples Bank, Inc. and C. Todd Asbury. 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 32 Certification by Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002. 101 The following materials for the Company’s Form 10-Q for the quarterly period ended September 30, 2023, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text. 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW PEOPLES BANKSHARES, INC. (Registrant) By: /s/ C. TODD ASBURY C. Todd Asbury President and Chief Executive Officer Date: November 14, 2023 By: /s/ CHRISTOPHER G. SPEAKS Christopher G. Speaks Executive Vice President and Chief Financial Officer Date: November 14, 2023 42