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 March 31, 2024 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 23,695,001 as of May 07, 2024. NEW PEOPLES BANKSHARES, INC. INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2024 (Unaudited) and December 31, 2023 3 Consolidated Statements of Income – Three months ended March 31, 2024 and 2023 (Unaudited) 4 Consolidated Statements of Comprehensive Income – Three months ended March 31, 2024 and 2023 (Unaudited) 5 Consolidated Statements of Changes in Stockholders’ Equity – Three months ended March 31, 2024 and 2023 (Unaudited) 6 Consolidated Statements of Cash Flows – Three months ended March 31, 2024 and 2022 (Unaudited) 7 Notes to Consolidated Financial Statements 8 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 31 Item 4. Controls and Procedures 31 PART II OTHER INFORMATION Item 1. Legal Proceedings 32 Item 1A. Risk Factors 32 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32 Item 3. Defaults upon Senior Securities 32 Item 4. Mine Safety Disclosures 32 Item 5. Other Information 32 Item 6. Exhibits 33 SIGNATURES 34 Part I Financial Information Item 1 Financial Statements NEW PEOPLES BANKSHARES, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2024 AND DECEMBER 31, 2023 (IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA) (UNAUDITED) March 31, December 31, 2024 2023 ASSETS Cash and due from banks 15,932 $ 14,596 Interest-bearing deposits with banks 72,803 50,363 Federal funds sold 114 18 Total cash and cash equivalents 88,849 64,977 Investment securities available-for-sale 89,014 89,805 Loans receivable 638,594 638,111 Allowance for credit losses ( 7,406 ) ( 7,256 ) Net loans 631,188 630,855 Bank premises and equipment, net 18,140 18,265 Other real estate owned 157 157 Accrued interest receivable 3,048 3,029 Deferred taxes, net 4,943 4,461 Bank owned life insurance 4,607 4,589 Right-of-use assets – operating leases 3,738 3,852 Other assets 6,804 6,323 Total assets 850,488 $ 826,313 LIABILITIES Deposits: Noninterest bearing 234,669 $ 233,878 Interest-bearing 506,110 482,589 Total deposits 740,779 716,467 Borrowed funds 36,186 36,186 Lease liabilities – operating leases 3,738 3,852 Accrued interest payable 1,751 1,447 Accrued expenses and other liabilities 4,018 3,550 Total liabilities 786,472 761,502 SHAREHOLDERS’ EQUITY Common stock - $ 2.00 par value; 50,000,000 shares authorized; 23,711,787 and 23,745,900 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively 47,423 47,492 Additional paid-in-capital 14,498 14,514 Retained earnings 14,583 14,458 Accumulated other comprehensive loss ( 12,488 ) ( 11,653 ) Total shareholders’ equity 64,016 64,811 Total liabilities and shareholders’ equity 850,488 $ 826,313 The accompanying notes are an integral part of these consolidated financial statements. 3 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED) For the Three Months Ended March 31, INTEREST AND DIVIDEND INCOME 2024 2023 Loans including fees $ 9,213 $ 7,382 Federal funds sold 2 7 Interest-earning deposits with banks 826 533 Investments 530 560 Dividends on equity securities (restricted) 43 40 Total interest and dividend income 10,614 8,522 INTEREST EXPENSE Deposits 3,151 1,146 Borrowed funds 533 308 Total interest expense 3,684 1,454 NET INTEREST INCOME 6,930 7,068 (RECOVERY OF) PROVISION FOR CREDIT LOSSES ( 43 ) — NET INTEREST INCOME AFTER (RECOVERY OF) PROVISION FOR CREDIT LOSSES 6,973 7,068 NONINTEREST INCOME Service charges and fees 915 917 Card processing and interchange 895 899 Financial services fees 322 257 Net (loss) gain on sale and disposal of premises and equipment ( 33 ) 129 Other noninterest income 222 197 Total noninterest income 2,321 2,399 NONINTEREST EXPENSES Salaries and employee benefits 3,647 3,550 Occupancy and equipment expense 971 960 Data processing and telecommunications 644 641 Other operating expenses 1,715 1,719 Total noninterest expenses 6,977 6,870 INCOME BEFORE INCOME TAXES 2,317 2,597 INCOME TAX EXPENSE 531 576 NET INCOME $ 1,786 $ 2,021 Earnings per share Basic and diluted $ 0.08 $ 0.08 Average Weighted Shares of Common Stock Basic and diluted 23,736,387 23,841,162 The accompanying notes are an integral part of these consolidated financial statements. 4 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (IN THOUSANDS) (UNAUDITED) For the Three Months Ended March 31, 2024 2023 NET INCOME $ 1,786 $ 2,021 Other comprehensive (loss) income: Investment securities activity Unrealized (losses) gains arising during the period ( 1,056 ) 2,706 Related tax benefit (expense) 221 ( 570 ) TOTAL OTHER COMPREHENSIVE (LOSS) INCOME ( 835 ) 2,136 TOTAL COMPREHENSIVE INCOME $ 951 $ 4,157 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 MONTHS ENDED MARCH 31, 2024 AND 2023 (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, December 31, 2022 23,848 $ 47,697 $ 14,546 $ 8,917 $ ( 13,941 ) $ 57,219 Adoption of ASU 2016-13 — — — ( 212 ) — ( 212 ) Net Income — — — 2,021 — 2,021 Other comprehensive income, net of tax — — — — 2,136 2,136 Cash dividend declared ($0.06 per share) — — — ( 1,430 ) — ( 1,430 ) Repurchase of common stock ( 20 ) ( 40 ) ( 6 ) — — ( 46 ) Balance, March 31, 2023 23,828 $ 47,657 $ 14,540 $ 9,296 $ ( 11,805 ) $ 59,688 Balance, December 31, 2023 23,746 $ 47,492 $ 14,514 $ 14,458 $ ( 11,653 ) $ 64,811 Net income — — — 1,786 — 1,786 Other comprehensive loss, net of tax — — — — ( 835 ) ( 835 ) Cash dividend declared ($0.07 per share) — — — ( 1,661 ) — ( 1,661 ) Repurchase of common stock ( 34 ) ( 69 ) ( 16 ) — — ( 85 ) Balance, March 31, 2024 23,712 $ 47,423 $ 14,498 $ 14,583 $ ( 12,488 ) $ 64,016 The accompanying notes are an integral part of these consolidated financial statements. 6 NEW PEOPLES BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023 (IN THOUSANDS) (UNAUDITED) 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,786 $ 2,021 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 424 401 (Recovery of) provision for credit losses ( 43 ) — Income on bank owned life insurance ( 18 ) ( 14 ) Gain on sale of mortgage loans ( 4 ) ( 4 ) Loss (gain) on sale or disposal of premises and equipment 33 ( 129 ) Loans originated for sale ( 105 ) ( 81 ) Proceeds from sales of loans originated for sale 109 85 Net amortization/accretion of bond premiums/discounts 71 74 Deferred tax (benefit) expense ( 261 ) ( 2 ) Net change in: Accrued interest receivable ( 19 ) 137 Other assets ( 331 ) ( 575 ) Accrued interest payable 304 223 Accrued expenses and other liabilities 368 ( 766 ) Net cash provided by operating activities 2,314 1,370 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans ( 337 ) ( 5,886 ) Purchase of securities available-for-sale ( 3,098 ) — Proceeds from repayments and maturities of securities available-for-sale 2,762 1,986 Net (purchase) redemption of equity securities (restricted) ( 36 ) 10 Payments for the purchase of premises and equipment ( 299 ) ( 271 ) Proceeds from sale of premises and equipment — 804 Net cash used in investing activities ( 1,008 ) ( 3,357 ) CASH FLOWS FROM FINANCING ACTIVITIES Net change in noninterest bearing deposits 791 4,650 Net change in interest-bearing deposits 23,521 11,460 Dividends paid ( 1,661 ) ( 1,430 ) Repurchase of common stock ( 85 ) ( 46 ) Net cash provided by financing activities 22,566 14,634 Net increase in cash and cash equivalents 23,872 12,647 Cash and cash equivalents, beginning of the period 64,977 61,686 Cash and cash equivalents, end of the period $ 88,849 $ 74,333 Supplemental disclosure of cash paid during the period for: Interest $ 3,380 $ 1,231 Taxes — 1,225 Supplemental disclosure of non-cash transactions: Change in unrealized losses on securities available-for-sale ( 1,056 ) 2,706 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 March 31, 2024 and December 31, 2023, and the results of operations for the three-month periods ended March 31, 2024 and 2023. 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, 2023. 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, 2023 except for the following: Accounting Standards Adopted in 2024 – In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. ASU 2023-02 was effective for the Company on January 1, 2024. The adoption of ASU 2023-02 had no material impact on the consolidated financial statements. In March 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” These amendments require entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. ASU 2023-01 was effective for the Company on January 1, 2024. The adoption of ASU 2023-01 had no material impact on the consolidated financial statements. 8 In June 2022, the Financial Accounting Standards Board (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. ASU 2022-03 was effective for the Company on January 1, 2024. The adoption of ASU 2022-03 had no material impact on the consolidated financial statements. In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. In addition, the amendment updates the disclosure requirements for convertible instruments to increase the information transparency. ASU 2020-06 was effective for the Company on January 1, 2024. The adoption of ASU 2020-06 had no material impact on the consolidated financial statements. 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 periods ended March 31, 2024 and 2023, 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 March 31, 2024 2023 Net income $ 1,786 $ 2,021 Weighted average shares outstanding 23,736,387 23,841,162 Weighted average dilutive shares outstanding 23,736,387 23,841,162 Basic and diluted earnings per share $ 0.08 $ 0.08 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 March 31, 2024, the Bank had a capital conservation buffer of 8.54%. Amounts recorded to accumulated other comprehensive income (loss) are not included in computing regulatory capital. Management believes as of March 31, 2024, 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 9 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 March 31, 2024, 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. 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 Current Expected Credit Loss (“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 commencing 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 March 31, 2024 and December 31, 2023, respectively. Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio March 31, 2024: Total capital to risk weighted assets 99,231 16.54 % $ 48,002 8.00 % $ 60,003 10.00 % Tier 1 capital to risk weighted assets 91,729 15.29 % 36,002 6.00 % 48,002 8.00 % Tier 1 capital to average assets 91,729 10.81 % 33,955 4.00 % 42,444 5.00 % Common equity Tier 1 capital to risk weighted assets 91,729 15.29 % 27,001 4.50 % 39,002 6.50 % December 31, 2023: Total capital to risk weighted assets 99,246 16.58 % $ 47,873 8.00 % $ 59,842 10.00 % Tier 1 capital to risk weighted assets 91,765 15.33 % 35,905 6.00 % 47,873 8.00 % Tier 1 capital to average assets 91,765 11.11 % 33,040 4.00 % 41,300 5.00 % Common equity Tier 1 capital to risk weighted assets 91,765 15.33 % 26,929 4.50 % 38,897 6.50 % NOTE 5 INVESTMENT SECURITIES The amortized cost and estimated fair value of available-for-sale (“AFS”) securities as of March 31, 2024 and December 31, 2023 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 March 31, 2024 U.S. Treasuries $ 10,637 $ — $ 663 $ 9,974 U.S. Government Agencies 9,668 10 676 9,002 Taxable municipals 22,961 — 5,329 17,632 Corporate bonds 3,000 — 265 2,735 Mortgage backed securities 58,555 2 8,886 49,671 Total securities available-for-sale $ 104,821 $ 12 $ 15,819 $ 89,014 December 31, 2023 U.S. Treasuries $ 11,643 $ — $ 658 $ 10,985 U.S. Government Agencies 9,412 23 624 8,811 Taxable municipals 22,973 — 5,114 17,859 Corporate bonds 3,002 1 315 2,688 Mortgage backed securities 57,526 — 8,064 49,462 Total securities available-for-sale $ 104,556 $ 24 $ 14,775 $ 89,805 10 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 March 31, 2024 and December 31, 2023. 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 March 31, 2024 U. S. Treasuries $ — $ — $ 9,974 $ 663 $ 9,974 $ 663 U.S. Government Agencies 90 1 7,799 675 7,889 676 Taxable municipals — — 17,632 5,329 17,632 5,329 Corporate bonds 495 4 2,240 261 2,735 265 Mortgage backed securities 1,657 19 47,072 8,867 48,729 8,886 Total securities available-for-sale $ 2,242 $ 24 $ 84,717 $ 15,795 $ 86,959 $ 15,819 December 31, 2023 U.S. Treasuries $ — $ — $ 10,985 $ 658 $ 10,985 $ 658 U.S. Government Agencies 42 — 8,123 624 8,165 624 Taxable municipals 485 16 17,374 5,098 17,859 5,114 Corporate bonds — — 2,187 315 2,187 315 Mortgage backed securities — — 49,413 8,064 49,413 8,064 Total securities available-for-sale $ 527 $ 16 $ 88,082 $ 14,759 $ 88,609 $ 14,775 As of March 31, 2024, 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 $36.0 million and $36.8 million as of March 31, 2024 and December 31, 2023, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law. There were no sales of available-for-sale investment securities during the three months ended March 31, 2024 and 2023. The amortized cost and fair value of investment securities as of March 31, 2024, 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 $ 5,045 $ 4,935 1.99 % Due after one year through five years 12,329 11,531 2.08 % Due after five years through ten years 18,939 16,840 2.70 % Due after ten years 68,508 55,708 1.94 % Total $ 104,821 $ 89,014 2.10 % 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 $2.7 million as of March 31, 2024 and December 31, 2023, 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. 11 NOTE 6 LOANS Loans receivable outstanding as of March 31, 2024, and December 31, 2023, are summarized as follows: Summary of loans receivable outstanding (Dollars in thousands) March 31, 2024 December 31, 2023 Real estate secured: Commercial $ 239,600 $ 240,187 Construction and land development 29,475 28,830 Residential 1-4 family 237,425 238,233 Multifamily 34,494 34,571 Farmland 16,455 16,401 Total real estate loans 557,449 558,222 Commercial 52,063 53,230 Agriculture 3,607 3,508 Consumer installment loans 25,058 22,639 All other loans 417 512 Total loans $ 638,594 $ 638,111 Also included in total loans above are deferred loan fees of $1.8 million and $1.8 million as of March 31, 2024 and December 31, 2023, respectively. Deferred loan costs were $2.0 million and $2.0 million, as of March 31, 2024 and December 31, 2023, respectively. Income from net deferred fees and costs is recognized over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or costs is recognized at that time. Loans receivable on nonaccrual status as of March 31, 2024, and December 31, 2023, are summarized as follows: Summary of loans receivable on nonaccrual status March 31, 2024 December 31, 2023 With No Allowance With an Allowance Total With No Allowance With an Allowance Total (Dollars in thousands) Real estate secured: Commercial $ 2,096 $ 142 $ 2,238 $ 544 $ 268 $ 812 Residential 1-4 family 3,002 — 3,002 2,495 — 2,495 Multifamily 179 — 179 199 — 199 Total real estate loans 5,277 142 5,419 3,238 268 3,506 Commercial — 98 98 — — — Consumer installment loans and other loans 32 — 32 28 — 28 Total loans receivable on nonaccrual status $ 5,309 $ 240 $ 5,549 $ 3,266 $ 268 $ 3,534 Total interest income not recognized on nonaccrual loans for the three months ended March 31, 2024, and March 31, 2023, was $26,000 and $13,000, respectively. The Company evaluates loans that do not share risk characteristics on an individual basis utilizing the collateral or discounted cash flow methods. The following table presents the unpaid principal balance of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to those loans as March 31, 2024 and December 31, 2023: 12 Schedule of summary of impaired loans March 31, 2024 December 31, 2023 Unpaid Principal Balance Related Allowance Unpaid Principal Balance Related Allowance (Dollars in thousands) Real estate secured: Commercial $ 2,550 $ 1 $ 812 $ 64 Residential 1-4 family 307 — 312 — Total real estate loans 2,857 1 1,124 64 Commercial 241 111 — — Total $ 3,098 $ 112 $ 1,124 $ 64 The following table is an age analysis of past due loans receivable as of March 31, 2024, segregated by class: March 31, 2024 (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 $ 1,305 $ 337 $ 268 $ 1,910 $ 237,690 $ 239,600 Construction and land development 5 — — 5 29,470 29,475 Residential 1-4 family 2,371 664 792 3,827 233,598 237,425 Multifamily — — — — 34,494 34,494 Farmland 301 — — 301 16,154 16,455 Total real estate loans 3,982 1,001 1,060 6,043 551,406 557,449 Commercial 490 — — 490 51,573 52,063 Agriculture — — — — 3,607 3,607 Consumer installment Loans 112 71 5 188 24,870 25,058 All other loans — — — — 417 417 Total loans $ 4,584 $ 1,072 $ 1,065 $ 6,721 $ 631,873 $ 638,594 The following table is an age analysis of past due loans receivable as of December 31, 2023, segregated by class: December 31, 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 $ 878 $ — $ 268 $ 1,146 $ 239,041 $ 240,187 Construction and land development 85 4 — 89 28,741 28,830 Residential 1-4 family 2,628 1,119 886 4,633 233,600 238,233 Multifamily — — 199 199 34,372 34,571 Farmland — — — — 16,401 16,401 Total real estate loans 3,591 1,123 1,353 6,067 552,155 558,222 Commercial — 20 — 20 53,210 53,230 Agriculture 8 — — 8 3,500 3,508 Consumer installment Loans 140 11 1 152 22,487 22,639 All other loans — — — — 512 512 Total loans $ 3,739 $ 1,154 $ 1,354 $ 6,247 $ 631,864 $ 638,111 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: 13 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. 14 The following table presents the credit risk grade of loans by origination year as of March 31, 2024: As of March 31, 2024 (Dollars are in thousands) 2024 2023 2022 2021 2020 Prior Revolving Total Commercial real estate Pass $ 2,769 $ 46,559 $ 49,038 $ 48,397 $ 27,901 $ 61,331 $ 965 $ 236,960 Special mention — — — — — 362 — 362 Substandard — — — 1,166 313 799 — 2,278 Total commercial real estate $ 2,769 $ 46,559 $ 49,038 $ 49,563 $ 28,214 $ 62,492 $ 965 $ 239,600 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Construction and Land Development Pass $ 1,365 $ 12,980 $ 3,841 $ 4,739 $ 2,468 $ 4,082 $ — $ 29,475 Special mention — — — — — — — — Substandard — — — — — — — — Total construction and land development $ 1,365 $ 12,980 $ 3,841 $ 4,739 $ 2,468 $ 4,082 $ — $ 29,475 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Residential 1-4 family Pass $ 5,957 $ 27,646 $ 32,317 $ 40,234 $ 13,139 $ 91,408 $ 23,855 $ 234,556 Special mention — — — — — 254 — 254 Substandard — 87 — 123 — 2,271 134 2,615 Total residential 1-4 family $ 5,957 $ 27,733 $ 32,317 $ 40,357 $ 13,139 $ 93,933 $ 23,989 $ 237,425 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Multifamily Pass $ 597 $ 6,262 $ 10,482 $ 7,997 $ 2,596 $ 6,381 $ — $ 34,315 Special mention — — — — — — — — Substandard — 54 — — — 125 — 179 Total multifamily $ 597 $ 6,316 $ 10,482 $ 7,997 $ 2,596 $ 6,506 $ — $ 34,494 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Farmland Pass $ 413 $ 1,795 $ 2,251 $ 3,330 $ 768 $ 7,734 $ — $ 16,291 Special mention — — — — — 164 — 164 Substandard — — — — — — — — Total farmland $ 413 $ 1,795 $ 2,251 $ 3,330 $ 768 $ 7,898 $ — $ 16,455 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial Pass $ 4,822 $ 17,921 $ 7,729 $ 5,084 $ 1,434 $ 3,076 $ 11,819 $ 51,885 Special mention — — — — — 3 — 3 Substandard — 77 98 — — — — 175 Total commercial $ 4,822 $ 17,998 $ 7,827 $ 5,084 $ 1,434 $ 3,079 $ 11,819 $ 52,063 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Agriculture Pass $ 168 $ 515 $ 483 $ 337 $ 103 $ 591 $ 1,392 $ 3,589 Special mention — — — — — — — — Substandard — — — — — 18 — 18 Total agriculture $ 168 $ 515 $ 483 $ 337 $ 103 $ 609 $ 1,392 $ 3,607 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer and All Other Pass $ 5,176 $ 10,818 $ 4,175 $ 2,041 $ 762 $ 1,239 $ 1,249 $ 25,460 Special mention — — 1 — — — — 1 Substandard 6 5 — 1 2 — — 14 Total consumer and all other $ 5,182 $ 10,823 $ 4,176 $ 2,042 $ 764 $ 1,239 $ 1,249 $ 25,475 Current period gross charge-offs $ ( 46 ) $ (10 ) $ (2 ) $ (6 ) $ — $ — $ (6 ) $ (70 ) Total $ 21,273 $ 124,719 $ 110,415 $ 113,449 $ 49,486 $ 179,838 $ 39,414 $ 638,594 Total current period gross charge-offs $ ( 46 ) $ (10 ) $ (2 ) $ (6 ) $ — $ — $ (6 ) $ (70 ) 15 The following table presents the credit risk grade of loans by origination year as of December 31, 2023: As of December 31, 2023 (Dollars are in thousands) 2023 2022 2021 2020 2019 Prior Revolving Total Commercial real estate Pass $ 46,616 $ 49,061 $ 48,943 $ 28,651 $ 20,004 $ 43,524 $ 997 $ 237,796 Special mention - - 1,171 314 - 92 - 1,577 Substandard - - - - 429 385 - 814 Total commercial real estate $ 46,616 $ 49,061 $ 50,114 $ 28,965 $ 20,433 $ 44,001 $ 997 $ 240,187 Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Construction and Land Development Pass $ 12,043 $ 5,990 $ 4,738 $ 2,521 $ 1,799 $ 1,637 $ - $ 28,728 Special mention - - - - - 102 - 102 Substandard - - - - - - - - Total construction and land development $ 12,043 $ 5,990 $ 4,738 $ 2,521 $ 1,799 $ 1,739 $ - $ 28,830 Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Residential 1-4 family Pass $ 29,006 $ 33,986 $ 41,214 $ 13,566 $ 13,662 $ 80,087 $ 23,553 $ 235,074 Special mention - - - - - 259 - 259 Substandard 87 - 49 - 38 2,662 64 2,900 Total residential 1-4 family $ 29,093 $ 33,986 $ 41,263 $ 13,566 $ 13,700 $ 83,008 $ 23,617 $ 238,233 Current period gross charge-offs $ - $ - $ ( 30 ) $ - $ - $ ( 21 ) $ - $ ( 51 ) Multifamily Pass $ 5,779 $ 11,483 $ 7,965 $ 2,626 $ 1,081 $ 5,438 $ - $ 34,372 Special mention - - - - - - - - Substandard - - - - - 199 - 199 Total multifamily $ 5,779 $ 11,483 $ 7,965 $ 2,626 $ 1,081 $ 5,637 $ - $ 34,571 Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Farmland Pass $ 1,807 $ 2,222 $ 3,414 $ 776 $ 1,205 $ 6,793 $ - $ 16,217 Special mention - - - - - 184 - 184 Substandard - - - - - - - - Total farmland $ 1,807 $ 2,222 $ 3,414 $ 776 $ 1,205 $ 6,977 $ - $ 16,401 Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - Commercial Pass $ 19,306 $ 10,228 $ 5,638 $ 1,591 $ 2,167 $ 1,342 $ 12,777 $ 53,049 Special mention 78 100 - - - 3 - 181 Substandard - - - - - - - - Total commercial $ 19,384 $ 10,328 $ 5,638 $ 1,591 $ 2,167 $ 1,345 $ 12,777 $ 53,230 Current period gross charge-offs $ - $ ( 5 ) $ ( 14 ) $ - $ ( 26 ) $ - $ - $ ( 45 ) Agriculture Pass $ 565 $ 518 $ 347 $ 127 $ 67 $ 649 $ 1,217 $ 3,490 Special mention - - - - - - - - Substandard - - - - - 18 - 18 Total agriculture $ 565 $ 518 $ 347 $ 127 $ 67 $ 667 $ 1,217 $ 3,508 Current period gross charge-offs $ - $ - $ - $ - $ - $ ( 59 ) $ - $ ( 59 ) Consumer and All Other Pass $ 12,352 $ 4,822 $ 2,408 $ 864 $ 594 $ 761 $ 1,339 $ 23,140 Special mention - 1 - - - - - 1 Substandard 4 - 1 3 1 1 - 10 Total consumer and all other $ 12,356 $ 4,823 $ 2,409 $ 867 $ 595 $ 762 $ 1,339 $ 23,151 Current period gross charge-offs $ ( 198 ) $ ( 49 ) $ ( 13 ) $ - $ - $ ( 2 ) $ ( 59 ) $ ( 321 ) Total $ 127,643 $ 118,411 $ 115,888 $ 51,039 $ 41,047 $ 144,136 $ 39,947 $ 638,111 Total current period gross charge-offs $ ( 198 ) $ ( 54 ) $ ( 57 ) $ - $ ( 26 ) $ ( 82 ) $ ( 59 ) $ ( 476 ) 16 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 March 31, 2024 and December 31, 2023: 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 Three months ended March 31, 2024 Beginning balance $ 2,518 $ 300 $ 2,666 $ 509 $ 163 $ 673 $ 33 $ 394 $ - $ 7,256 Charge-offs - - - - - - - ( 70 ) - ( 70 ) Recoveries 26 15 9 - 117 - - 49 - 216 Provision for credit losses ( 44 ) ( 20 ) 74 ( 20 ) ( 118 ) 50 3 79 - 4 Ending balance $ 2,500 $ 295 $ 2,749 $ 489 $ 162 $ 723 $ 36 $ 452 $ - $ 7,406 (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, 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 - - ( 51 ) - - ( 45 ) ( 59 ) ( 321 ) - ( 476 ) Recoveries - 35 37 111 - 19 5 166 - 373 Provision for credit losses 453 ( 244 ) 41 124 ( 65 ) 77 60 266 - 712 Ending balance $ 2,518 $ 300 $ 2,666 $ 509 $ 163 $ 673 $ 33 $ 394 $ - $ 7,256 Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. 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 months ended March 31, 2024 and March 31, 2023, respectively. Additionally, there were no loans that had a payment default during the three months ended March 31, 2024 and March 31, 2023, respectively that were modified in the previous 12 months. 17 NOTE 9 CREDIT ALLOWANCE FOR UNFUNDED COMMITMENT S 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. As of March 31, 2024 and December 31, 2023, the liability for credit losses on off-balance-sheet credit exposures included in other liabilities was $238,000 and $285,000, respectively. During the three months ended March 31, 2024, a recovery totaling $47,000 was included in the (Recovery of) Provision for Credit Losses. NOTE 10 OTHER REAL ESTATE OWNE D The following table summarizes the activity in other real estate owned for the three months ended March 31, 2024, and the year ended December 31, 2023: (Dollars in thousands) March 31, 2024 December 31, 2023 Balance, beginning of period $ 157 $ 261 Additions — 124 Proceeds from sales — ( 132 ) Net gains from sales — ( 96 ) Balance, end of period $ 157 $ 157 As of March 31, 2024 six loans totaling $516,000 were in the process of foreclosure, of which five loans totaling $242,000 were secured by residential real estate. 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. 18 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 $89.0 million and $89.8 million as of March 31, 2024 and December 31, 2023, 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. Assets and liabilities measured at fair value are as follows as of March 31, 2024 and December 31, 2023: March 31, 2024 (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 $ — $ 9,974 $ — U.S. Government Agencies — 9,002 — Taxable municipals — 17,632 — Corporate bonds — 2,735 — Mortgage-backed securities — 49,671 — (On a non-recurring basis) Other real estate owned — — 157 Collateral dependent loans with ACL: Commercial real estate — — 141 Commercial 132 Total $ — $ 89,014 $ 430 19 December 31, 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 $ — $ 10,985 — U.S. Government Agencies — 8,811 $ — Taxable municipals — 17,859 — Corporate bonds — 2,688 — Mortgage-backed securities — 49,462 — (On a non-recurring basis) Other real estate owned — — 157 Collateral dependent loans with ACL: Commercial real estate — — 204 Total $ — $ 89,805 $ 361 For Level 3 assets measured at fair value on a recurring or non-recurring basis as of March 31, 2024 and December 31, 2023, 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 March 31, 2024 Fair Value at December 31, 2023 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Collateral dependent loans with ACL: Commercial real estate $ 141 $ 204 Apprised Value Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0 – 18 % Commercial 132 - Appraised Value/Other estimates from Independent Sources Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell 0 – 18 % Other Real Estate Owned $ 157 $ 157 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. 20 The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis as of March 31, 2024, and December 31, 2023, are as follows: 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) March 31, 2024 Financial instruments – assets Net loans $ 631,188 $ 604,185 $ — $ — $ 604,185 Financial instruments – liabilities Time deposits 224,841 221,937 — 221,937 — Borrowed funds 36,186 34,095 — 34,095 — December 31, 2023 Financial instruments – assets Net loans $ 630,855 $ 604,736 $ — $ — $ 604,736 Financial instruments – liabilities Time deposits 252,316 249,941 — 249,941 — Borrowed funds 36,186 34,046 — 34,046 — 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, bank owned life insurance, deposits with no stated maturities, and accrued interest approximates fair value and are excluded from the table above. NOTE 12 LEASING ACTIVITIES As of March 31, 2024, the Bank leases four branch offices, one administrative office 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 March 31, 2024 was 9.10 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 March 31, 2024 was 3.37%. For the three months ended March 31, 2024 and 2023, operating lease expenses were $140,000 and $114,000, respectively. 21 The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. As of March 31, 2024, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands): 2024 $ 417 2025 557 2026 557 2027 578 2028 584 Thereafter 1,737 Total lease payments 4,430 Less: imputed interest ( 692 ) Total $ 3,738 NOTE 13 BORROWED FUNDS Borrowed funds totaled $36,186 and $36,186 as of March 31, 2024 and December 31, 2023, respectively. For additional information on borrowed funds, refer to Note 18 in Item 8 of Form 10-K for the year ended December 31, 2023. 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 24 in our Annual Report on Form 10-K for the year ended December 31, 2023 for a description of how each revenue stream is accounted for under ASC 606. The following table presents noninterest income by revenue stream for the three months ended March 31, 2024 and 2023: Schedule of revenue from contracts with customers For the three months ended March 31, (Dollars in thousands) 2024 2023 Service charges and fees 915 $ 917 Card processing and interchange income 895 899 Insurance and investment fees 322 257 Other noninterest income 189 326 Total noninterest income 2,321 $ 2,399 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 March 31, (Dollars in thousands) 2024 2023 Other operating expenses $ 780 $ 727 ATM network expense 376 360 Legal, accounting, and professional fees 234 280 Loan related expenses 94 88 FDIC insurance premiums 92 88 Advertising 53 37 Printing and supplies 42 42 Consulting fees 40 91 Other real estate owned expenses, net 4 6 Total other operating expenses $ 1,715 $ 1,719 22 NOTE 16 RECENT ACCOUNTING DEVELOPMENTS The following is a summary of recent authoritative announcements: 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. 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. In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its consolidated financial statements. In March 2024, the Financial Accounting Standards Board (FASB) issued ASU 2024-02, “Codification Improvements – Amendments to Remove References to the Concepts Statements”. This ASU contains amendments to the Codification that remove references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior Statements to provide guidance in certain topical areas. This ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied prospectively to all new transactions recognized on or after the date that the entity first applies the amendments or retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. If an entity adopts the amendments retrospectively, it should adjust the opening balance of retained earnings as of the beginning of the earliest comparative period presented. The Company does not expect the adoption of ASU 2024-02 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. 23 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; deposit flows and competition for deposits; 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; geopolitical conditions, including acts or threats of terrorism, international hostilities, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the U.S. and abroad; 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 SEC. 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. 24 Critical Accounting Policies For discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2023, 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 reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional provisions could be required. For further discussion of the estimates used in determining the allowance for credit losses, we refer you to the section on “Asset Quality” in this discussion. Overview and Highlights Net income for the three months ended March 31, 2024 was $1.8 million, a decrease of $235,000, or 11.63%, from the same period in 2023. Net interest income declined 1.95%, or $138,000, from $7.1 million for the quarter ended March 31, 2023 to $6.9 million for the quarter ended March 31, 2024. The decrease was primarily due to an increase in the cost of interest-bearing liabilities of 150 basis points (“bps”) to 2.77% during the quarter ended March 31, 2024 compared to 1.27% during the quarter ended March 31, 2023. The balance sheet grew to $850.5 million in total assets as of March 31, 2024, from $826.3 million as of December 31, 2023. Gross loans increased $483,000 to $638.6 million as of March 31, 2024. Additionally, interest-bearing deposits in other banks increased $22.4 million to $72.8 million as of March 31, 2024. During the first three months of 2024 total deposits increased $24.3 million or 3.39% to $740.8 million. A dividend of $0.07 per share was paid to shareholders during the first quarter of 2024, a 16.7% increase over the dividend paid in 2023. During the first quarter of 2024, we extended a previously announced stock repurchase program, to continue through March 31, 2025. Since the inception of the program through March 31, 2024, the Company has repurchased 210,299 shares at an average price of $2.34 per share. Comparison of the Three Months ended March 31, 2024 and 2023 Quarter-to-date highlights include: · Returns on average assets and equity of 0.86% and 11.11% for the first quarter of 2024, compared to 1.05% and 13.90% for the first quarter of 2023, respectively; · Net interest income was $6.9 million for the first quarter of 2024, a decrease of $138,000, or 1.95%, compared to the first quarter of 2023; · The recovery of credit losses was $43,000 for the three months ended March 31, 2024 compared to no provision for credit losses for the three months ended March 31, 2023; · Noninterest income was $2.3 million, an decrease of $78,000, or 3.25%, during the first quarter of 2024 compared to the first quarter of 2023; and · Noninterest expense was $7.0 million, an increase of $107,000, or 1.56%, for the first quarter of 2024 compared to the first quarter of 2023. Net interest income for the quarter ended March 31, 2024 was $6.9 million compared to $7.1 million for the quarter ended March 31, 2023. The decrease was primarily due to an increase in the cost of interest-bearing liabilities of 150 bps to 2.77% during the quarter ended March 31, 2024 compared to 1.27% during the quarter ended March 31, 2023. The time deposits portfolio was the primary contributor to the decline in the net interest income, due to an increase of 209 bps in the quarterly cost of time deposits to 3.77% and a $64.1 million increase in the average balance of time deposits due to a combination of new deposits and a shift in the mix from lower cost deposit products. Additionally, while the average cost of borrowed funds decreased 101 bps to 5.82%, the related interest expense increased $190,000 due to the increased average balance related to a Federal Home Loan Bank advance and a Federal Reserve Bank Bank Term Funding Program borrowing, taken in the second and fourth quarters of 2023, respectively, which increased the overall outstanding average balance $18.1 million. The increase in the cost of funds was offset in part by an increase of 70 bps in the yield on earning assets. The yield on loans increased 72 bps to 5.83%, partially assisted by recovery of interest on prior nonperforming loans, combined with an increase in the average balance of $49.5 million and interest rate increases on loan renewals and interest rate reset dates, helping to offset the increased cost of funding during the quarter ended March 31, 2024. These rate and volume activities combined to result in a decrease in net interest income of $138,000, as the net interest margin decreased 35 bps, to 3.48% for the quarter ending March 31, 2024 as compared to the 3.83% margin for the same period in 2023. 25 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 March 31, 2024 2023 Average Income/ Yields/ Average Income/ Yields/ (Dollars are in thousands) Balance Expense Rates Balance Expense Rates ASSETS Loans (1) (2) $ 635,571 $ 9,213 5.83% $ 586,116 $ 7,382 5.11% Federal funds sold 121 2 5.31% 631 7 4.67% Interest bearing deposits in other banks 61,940 826 5.36% 47,944 533 4.50% Taxable investment securities 104,566 573 2.19% 112,739 600 2.13% Total earning assets 802,198 10,614 5.32% 747,430 8,522 4.62% Less: Allowance for credit losses (7,426) (6,861) Non-earning assets 38,791 36,812 Total assets $ 833,563 $ 777,381 LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing demand deposits $ 72,144 $ 137 0.76% $ 80,331 $ 95 0.48% Savings and money market deposits 160,832 543 1.36% 166,550 222 0.54% Time deposits 263,972 2,471 3.77% 199,858 829 1.68% Total interest-bearing deposits 496,948 3,151 2.55% 446,739 1,146 1.04% Other borrowings 20,000 209 4.13% 1,556 19 4.95% Trust preferred securities 16,186 324 7.91% 16,496 289 7.11% Total interest-bearing liabilities 533,134 3,684 2.77% 464,791 1,454 1.27% Non-interest-bearing deposits 226,246 245,010 Other liabilities 9,519 8,606 Total liabilities 768,899 718,407 Shareholders’ equity 64,664 58,974 Total liabilities and shareholders’ equity $ 833,563 $ 777,381 Net interest income $ 6,930 $ 7,068 Net interest margin 3.48% 3.83% Net interest spread 2.55% 3.35% (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. 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 March 31, 2024, as compared to the three months ended March 31, 2023. 26 Volume and Rate Analysis Increase (decrease) Three Months Ended 2024 Compared to 2023 (Dollars in thousands) Volume Effect Rate Effect Rate and Volume Effect Change in Interest Income/ Expense Interest income: Loans $ 623 $ 1,114 $ 94 $ 1,831 Federal funds sold (6 ) 3 (2 ) (5 ) Interest bearing deposits in other banks 156 106 31 293 Taxable investment securities (43 ) 18 (2 ) (27 ) Total earning assets 730 1,241 121 2,092 Interest expense: Interest-bearing demand deposits (10 ) 58 (6 ) 42 Savings and money market deposits (8 ) 340 (11 ) 321 Time deposits 266 1,042 334 1,642 Other borrowings 225 (3 ) (32 ) 190 Trust preferred securities (5 ) 41 (1 ) 35 Total interest-bearing liabilities 468 1,478 284 2,230 Change in net interest income $ 262 $ (237 ) $ (163 ) $ (138 ) The recovery of credit losses charged to the income statement for the quarter ended March 31, 2024 was $43,000 compared to a provision of $0 for the three months ended March 31, 2023. The amount of the provision for credit losses was impacted by net loan recoveries of $146,000 during the quarter ended March 31, 2024. For a discussion of the factors affecting the allowance for credit losses, including provision expense, refer to Note 7, Allowance for Credit Losses for Loans, in Item 1 of this Form 10-Q. Noninterest income decreased $78,000 to $2.3 million for the quarter ended March 31, 2024 from $2.4 million for the comparable quarter in 2023. The decrease is due largely to the sales of bank properties in 2024 and 2023. During the first quarter of 2024, a sales agreement for a former branch office was executed resulting in a loss of $33,000. During the same period of 2023, two former office facilities were sold resulting in a net gain of $130,000. The net year-over-year change of $163,000 resulting from these sales, included in other noninterest income, was partially offset by an increase in financial services revenue of $65,000. Service charge income and revenue from card processing of $915,000 and $895,000, respectively, for the first three months of 2024, remained relatively unchanged from the same period of 2023. Noninterest expense was $7.0 million for the quarter ended March 31, 2024 compared to $6.9 million for the quarter ended March 31, 2023. The $107,000 increase was impacted by the $97,000 increase in salaries and employee benefits, as well as occupancy expenses, which increased $11,000. The increase in salaries and employee benefits related to performance raises, along with severance costs and other contractual payments associated with the recent retirement of the previous chief executive officer and the elimination of several positions during the first quarter of 2024. The increase in occupancy costs are related to the opening of a branch office in Boone, North Carolina during the first quarter of 2024. The efficiency ratio, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, increased to 75.42% during the first quarter of 2024 from 72.56% for the first quarter of 2023. We continue to assess our operational procedures and structure to improve efficiencies and contain costs. Income tax expense for the first quarter of 2024 totaled $531,000, a decrease of $45,000, or 7.81% from $576,000 recorded during the same period in 2023. The effective tax rate for the three months ended March 31, 2024, was 22.92%, compared to 22.18% for the same period in 2023. Balance Sheet Total assets as of March 31, 2024 were $850.5 million, an increase of $24.2 million, or 2.9%, from $826.3 million as of December 31, 2023. Gross loans at March 31, 2024 of $638.6 million were largely unchanged from $638.1 million at December 31, 2023. Liquid assets in the form of interest-bearing deposits with banks increased $22.4 million, or 44.6% during the first quarter of 2024. Investment securities decreased $791,000 during the first quarter of 2024 due to a $1.1 million increase in the unrealized loss on securities available for sale during the quarter, which, combined with payments and amortization of $2.8 million, more than offset purchases of $3.1 million. 27 Gross loans receivable increased $483,000 to $638.6 million as of March 31, 2024 from $638.1 million as of December 31, 2023. Consumer loans increased $2.4 million or 10.69% which included the purchase of $1.0 million of individual loans during the quarter. Commercial real estate and commercial loans decreased $587,000 and $1.2 million, respectively, during the first quarter of 2024. Residential 1-4 family loans and multifamily loans decreased $808,000 and $77,000, respectively, from December 31, 2023 to March 31, 2024. Loan originations during the first quarter of 2024 were impacted by higher interest rates affecting borrower requests, combined with retrenching from the $11.9 million increase in loans during the fourth quarter of 2023. Total deposits were $740.8 million as of March 31, 2024 compared to $716.5 million as of December 31, 2023. The increase of $24.3 million, or 3.4%, was due to efforts to attract and retain time deposits and money market account relationships, combined with cyclical funds inflows. As a result of these efforts, total time deposits increased $15.5 million, including $3.0 million of brokered time deposits, and money market accounts increased $4.8 million during the first three months of 2024, respectively. The increase in time and money market deposits contributed to the increase in our cost of funds, as previously discussed, due to the continuing rising interest rate environment combined with ongoing competition for deposits. Total borrowings consisting of Trust preferred securities of $16.2 million, Federal Home Loan Bank advances of $10.0 million and Federal Reserve Bank Bank Term Funding Program Loan of $10.0 million as of March 31, 2024 remained unchanged in comparison to December 31, 2023. During the first three months of 2024 total shareholders’ equity decreased $795,000 to $64.0 million as of March 31, 2024, due to earnings of $1.8 million which were offset by dividends paid of $1.7 million, the $835,000 increase in the net unrealized loss on available-for-sale investment securities, and the repurchase of common stock totaling $85,000. Consequently, book value per share decreased to $2.70 as of March 31, 2024 compared to $2.73 at December 31, 2023. The Bank remains well capitalized per regulatory guidance. As previously announced, the Board extended the repurchase of up to 500,000 shares of the Company’s common stock through March 31, 2025. As of March 31, 2024, the Company had repurchased 34,113 shares during the first three months of 2024 at an average price of $2.48 per share. Since the commencement of the repurchase plan, 210,299 shares have been repurchased at an average price of $2.34. Asset Quality The allowance for credit losses as a percentage of total loans was 1.16%, or $7.4 million, as of March 31, 2024, and 1.14%, or $7.3 million, as of December 31, 2023. The allowance for credit losses on unfunded commitments was $238,000 at March 31, 2024 as compared to $285,000 at December 31, 2023. Annualized net charge-offs (recoveries), as a percentage of average loans, was (0.09)% during the first quarter of 2024, compared 0.01% in the first quarter of 2023. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $5.7 million as of March 31, 2024, an increase of $2.0 million, or 55.6%, since year-end 2023. Nonperforming assets as a percentage of total assets were 0.67% as of March 31, 2024, and 0.45% as of December 31, 2023. Other real estate owned of $157,000 as of March 31, 2024 is unchanged from December 31, 2023. Expenses associated with other real estate owned were $4,000 for the three months ended March 31, 2024, compared to $6,000 during the three months ended March 31, 2023. Nonaccrual loans increased $2.0 million to $5.5 million as of March 31, 2024 from $3.5 million at December 31, 2023, due largely to a single loan relationship that was downgraded and placed in nonaccrual status during the first quarter of 2024. For detailed information on nonaccrual loans and other real estate owned as of March 31, 2024 and December 31, 2023, 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 $5.5 million as of March 31, 2024, an increase of $2.0 million from $3.5 million as of December 31, 2023. Total past due loans increased to $6.7 million as of March 31, 2024 from $6.2 million as of December 31, 2023. 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. 28 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 three months of 2024, we maintained the adjustments to our qualitative factors initiated in 2023, to consider risk factors associated with commercial real estate and residential mortgage loans. Those changes, along with recoveries of loans previously charged off and the assessment of the historical and specific risks associated with the loan portfolio, resulted in a recovery of credit losses of $43,000, of which $4,000 was a provision for the loan portfolio; offset by a reduction of the allowance for unfunded commitments of $47,000. The following table summarizes components of the allowance for credit losses and related loans as of March 31, 2024 and December 31, 2023: Selected Credit Ratios March 31, December 31, (Dollars in thousands) 2024 2023 Allowance for credit losses - loans $ 7,406 $ 7,256 Total loans 638,594 638,111 Allowance for credit losses to total loans 1.16 % 1.14 % Nonaccrual loans $ 5,549 $ 3,534 Nonaccrual loans to total loans 0.87 % 0.55 % Ratio of allowance for credit losses loans to nonaccrual loans 1.33 X 2.05 X Charge-offs net of recoveries $ (146 ) $ 103 Average loans $ 635,571 $ 608,705 Net (recoveries) charge-offs to average loans 1 (0.09 )% 0.02 % 1 - Annualized Deferred Tax Asset and Income Taxes Due to timing differences between the book and tax treatments 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 $3.3 million and $3.1 million, existed as of March 31, 2024 and December 31, 2023, 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. 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 March 31, 2024, 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 $2.70 and $2.73 as of March 31, 2024 and December 31, 2023, respectively. The modest decrease in book value was due to the dividend payment of $0.07 per share paid during the first quarter of 2024, combined with the $835,000 increase in unrealized loss on available for sale investment securities and the $85,000 repurchase of common shares during the quarter. 29 Other key performance indicators are as follows: Three months ended March 31, 2024 2023 Return on average assets 1 0.86 % 1.05 % Return on average shareholders’ equity 1 11.11 % 13.90 % Average equity to average assets 7.76 % 7.59 % 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 2024, the Company paid a cash dividend of $0.07 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, 2025. The actual means and timing of any purchases, number of shares and prices or range of prices will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. As of March 31, 2024, the Company has repurchased 210,299 shares at an average price of $2.34 per share since inception of the plan. During the quarter ended March 31, 2024, the Company repurchased 34,113 shares at an average price of $2.48 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 March 31, 2024, all of our investment securities were classified as available-for-sale. These investments provide a source of liquidity in the amount of $53.0 million, which is net of the $36.0 million of securities pledged as collateral. Investment securities available-for-sale serve as a source of liquidity and interest rate risk management while generally 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 86.21% and 89.06% as of March 31, 2024 and December 31, 2023, respectively. Generally, our policy has been to manage this ratio at or below 90.00%. Available third-party sources of liquidity as of March 31, 2024 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. 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 the FHLB, through a fixed rate 5-year advance, to support loan fundings and other general liquidity needs. In December 2023 we borrowed $10.0 million through the Federal Reserve Bank Bank Term Funding Program for one year, which can be prepaid prior to maturity without penalty. An additional $184.6 million was available as of March 31, 2024 on the $206.6 million line of credit, of which $96.4 million is secured by a blanket lien on our residential real estate loans. Full use of the FHLB borrowing capacity would require the Company to pledge additional assets. 30 During the first quarter of 2024 we accepted $3.0 million of brokered time deposits to augment our balance sheet liquidity. We held no brokered deposits as of December 31, 2023. 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 reciprocal Certificate of Deposit Registry Services (“CDARS”) time deposits were $6.8 million and $6.3 million as of March 31, 2024 and December 31, 2023, 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 March 31, 2024 approximately $24.9 million were placed in this product as compared to $20.5 million at December 31, 2023. Both the CDARS and ICS offerings assist us in maintaining deposit relationships, while assuring the depositors’ funds retain federal deposit insurance coverage. Additional liquidity is available through the Federal Reserve Bank discount window for overnight funding needs. We may collateralize this line with investment securities and loans at our discretion; however, while we do not anticipate using this as a primary funding source, securities with an estimated market value of $35.3 million were pledged as of March 31, 2024. Time deposits of $250,000 or more were approximately 6.96% of total deposits at March 31, 2024 and 7.36% of total deposits at December 31, 2023. 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 $434,000 in cash on deposit at the Bank at March 31, 2024. 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 three months ended March 31, 2024, to the off-balance sheet items and the contractual obligations disclosed in our 2023 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. 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 March 31, 2024, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. 31 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 March 31, 2024, 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, 2025. 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 March 31, 2024, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 289,701 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 January 31, 2024 5,759 $ 2.44 5,759 318,055 February 29, 2024 7,825 $ 2.49 7,825 310,230 March 31, 2024 20,529 $ 2.49 20,529 289,701 Total 34,113 $ 2.48 34,113 Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not Applicable. Item 5. Other Information None 32 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. The following exhibits are filed as part of this report or are incorporated by reference: 33 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/ JAMES W. KISER James W. Kiser President and Chief Executive Officer Date: May 15, 2024 By: /s/ CHRISTOPHER G. SPEAKS Christopher G. Speaks Executive Vice President and Chief Financial Officer Date: May 15, 2024 34