EDGAR 10-K Filing

Company CIK: 1163389
Filing Year: 2023
Filename: 1163389_10-K_2023_0001903596-23-000257.json

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ITEM 1. BUSINESS
Item 1. Business
General
New Peoples Bankshares, Inc. (New Peoples, the Company, we, us or our) is a Virginia financial holding company headquartered in Honaker, Virginia. Our business is conducted primarily through New Peoples Bank, Inc., a Virginia banking corporation (the “Bank”). The Bank has a division doing business as New Peoples Financial Services which offers investment services through its broker-dealer relationship with Infinex Investments, Inc. NPB Insurance Services, Inc. (“NPB Insurance”) is a subsidiary of the Bank and generates revenue through the referral of insurance services.
The Bank, headquartered in Honaker, Virginia, offers a range of banking and related financial services focused primarily on serving individuals, small to medium size businesses, and the professional community. We strive to serve the banking needs of our customers while developing personal, hometown relationships with them. Our board of directors believes that marketing customized banking services enables us to establish a niche in the financial services marketplace where we do business.
We provide professionals and small to medium size businesses in our market area with responsive and technologically enabled banking services. These services include loans that are priced on a deposit relationship basis, easy access to our decision makers, and quick and innovative action necessary to meet a customer’s banking needs. Our capitalization and lending limit enable us to satisfy the credit needs of a large portion of the targeted market segment. When a customer needs a loan that exceeds our lending limit, we try to find other financial institutions to participate in the loan with us.
Our History
The Bank was incorporated under the laws of the Commonwealth of Virginia on December 9, 1997 and began operations on October 28, 1998. On September 27, 2001, the shareholders of the Bank approved a plan of reorganization under which they exchanged their shares of Bank common stock for shares of New Peoples common stock. On November 30, 2001, the reorganization was completed and the Bank became New Peoples’ wholly-owned subsidiary.
In June 2003, New Peoples formed two new wholly-owned subsidiaries, NPB Financial Services, Inc. (renamed NPB Insurance Services, Inc. in June 2012) and NPB Web Services, Inc., an inactive web design and hosting company.
The Bank, through its division New Peoples Financial Services, offers fixed and variable annuities, fee-based asset management and other investment products through a broker/dealer relationship with Infinex Investments, Inc.
In July 2004, NPB Capital Trust I was formed by New Peoples to issue $11.3 million in trust preferred securities.
In September 2006, NPB Capital Trust 2 was formed by New Peoples to issue $5.2 million in trust preferred securities.
On June 7, 2017, NPB Insurance Services, Inc. purchased a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company.
Branch Locations
We have 17 full-service branches located in three states: Virginia - Abingdon, Bluefield, Bristol (2), Castlewood, Clintwood, Gate City, Grundy, Haysi, Honaker, Lebanon, Pounding Mill, Tazewell and Wise; West Virginia - Princeton (2); and Tennessee - Kingsport. Additionally, we have a loan production office in Boone, North Carolina.
Our Market Areas
Our primary market area consists of southwestern Virginia, southern West Virginia, northeastern Tennessee, and western North Carolina. Specifically, we operate in the southwestern Virginia counties of Russell, Scott, Washington, Tazewell, Buchanan, Dickenson, and Wise; in the southern West Virginia county of Mercer and the northeastern Tennessee county of Sullivan (collectively, the “Tri-State Area”). In North Carolina, our loan production office is in the county of Watauga. The close proximity and mobile nature of individuals and businesses in adjoining counties and nearby cities in Virginia, West Virginia, Tennessee and North Carolina place these markets within our Bank’s targeted trade area, as well.
Accessibility to Interstates I-77, I-81, I-26, I-64, I40 and I-75, as well as major state and U.S. highways including US 19, US 23, US 58, US 460 and US 421, make the area an ideal location for businesses to serve markets in the Mid-Atlantic, Southeast and Midwest. The area is strategically located midway between Atlanta-Pittsburgh, Charlotte-Cincinnati, and Richmond-Louisville, and is within a day’s drive of more than half of the U.S. population. A regional airport located in Bristol, Tennessee serves the area with commercial flights to and from major cities in the United States. Commercial rail service providers include CSX Transportation and Norfolk Southern Railways.
The Tri-State Area has a diversified economy supported by natural resources, which include coal, natural gas, limestone, and timber; agriculture; healthcare; education; technology; manufacturing and services industries. Predominantly, the market is comprised of locally owned and operated small businesses. Considerable investments in high-technology communications, high-speed broadband network and infrastructure have been made which has opened the area to large technology companies and future business development potential for new and existing businesses. Businesses are taking advantage of the low cost of doing business, training opportunities, available workforce and an exceptional quality of life experience for employers and employees alike.
Internet Site
Our internet banking site can be accessed at www.newpeoples.bank. The site includes a customer service area that contains branch and Interactive Teller Machine (ITM) locations, product descriptions and current interest rates offered on deposit accounts. Customers with internet access can apply for loans and credit cards, open deposit accounts online, access account balances, make transfers between accounts, enter stop payment orders, order checks, and use an optional bill paying service.
Available Information
We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (the SEC). The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, like us, that file electronically with the SEC. Our SEC filings are filed electronically and are available to the public online at the SEC’s web site at www.sec.gov. We also provide a link to our filings on the SEC website, free of charge, through our internet website https://newpeoples.bank/Bankshares-About-Us under "Investor Relations." Information on the websites of the Company and the Bank is not a part of, and is not incorporated into, this report or any other filings the Company makes with the SEC.
Banking Services
General. We accept deposits, make consumer and commercial loans, issue drafts, and provide other services customarily offered by a commercial bank, such as business and personal checking and savings accounts, walk-up tellers, drive-in windows, and 24-hour ITMs. The Bank is a member of the Federal Reserve System and its deposits are insured under the Federal Deposit Insurance Act (the FDIA) to the maximum limit.
Loans. Generally, we offer a full range of short-, medium- and longer-term commercial, 1-4 family residential mortgages and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans may include secured and unsecured loans for financing automobiles, home improvements, education, personal investments and other purposes.
Our lending activities are subject to a variety of lending limits imposed by state law. While differing limits may apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower’s relationship to the Bank), the Bank generally is subject to a loans-to-one-borrower limit of an amount equal to 15% of its capital and surplus plus the allowance for loan losses. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit.
We obtain short-, medium- and longer-term commercial and personal loans through direct solicitation of business owners and continued business from existing customers. Completed loan applications are reviewed by our loan officers. As part of the application process, information is obtained concerning the income, financial condition, employment and credit history of the applicant. If commercial real estate is involved, information is also obtained concerning cash flow after debt service. Loan quality is analyzed based on the Bank’s experience and its credit underwriting guidelines.
Commercial Loans. We make commercial loans to qualified businesses in our market area. Our commercial lending consists primarily of commercial and industrial loans to finance accounts receivable, inventory, property, plant and equipment. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself.
Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate. To manage these risks, our underwriting guidelines generally require us to secure commercial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition, we actively monitor certain measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors.
Residential Mortgage Loans. Our residential mortgage loans consist of residential first and second mortgage loans, residential construction loans, home equity lines of credit and term loans secured by first and second mortgages on the residences of borrowers for home improvements, education and other personal expenditures. We make mortgage loans with a variety of terms, including fixed and floating or variable rates and a variety of maturities.
Under our underwriting guidelines, residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with our appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.
Construction Loans. Construction lending entails significant additional risks compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate the total loan funds required to complete a project and related loan-to-value ratios accurately. To minimize the risks associated with construction lending, loan-to-value limitations for residential, multi-family and non-residential construction loans are in place. These are in addition to the usual credit analyses of borrowers. Management feels that the loan-to-value ratios help to minimize the risk of loss and to compensate for normal fluctuations in the real estate market. Maturities for construction loans generally range from 4 to 12 months for residential property and from 6 to 18 months for non-residential and multi-family properties.
Consumer Loans. Our consumer loans consist primarily of installment loans to individuals for personal, family and household purposes. The specific types of consumer loans that we make include home improvement loans, debt consolidation loans and general consumer lending. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance due to the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. A borrower may also be able to assert against the Bank as an assignee any claims and defenses that it has against the seller of the underlying collateral.
Our underwriting policy for consumer loans seeks to limit risk and minimize losses, primarily through a careful analysis of the borrower’s creditworthiness. In evaluating consumer loans, we require our lending officers to review the borrower’s level and stability of income, past credit history and the impact of these factors on the ability of the borrower to repay the loan in a timely manner. In addition, we maintain an appropriate margin between the loan amount and collateral value.
Deposits. We offer a variety of deposit products for both individual and business customers. These include demand deposit, interest-bearing demand deposit, savings deposit, money market, health savings and individual retirement (IRA) deposit accounts. In addition, we offer certificates of deposit with terms ranging from 7 days to 60 months, including IRAs with terms ranging from 12 months to 60 months.
Investment Services. We offer a variety of investment services for both individual and business customers. These services include fixed income products, variable annuities, mutual funds, indexed certificates of deposit, individual retirement accounts, long term care insurance, employee group benefit plans, college savings plans, financial planning, managed money accounts, and estate planning. We offer these services through our broker-dealer relationship with Infinex Investments, Inc.
Other Bank Services. Other bank services include safe deposit boxes, cashier’s checks, certain cash management services, direct deposit of payroll and social security checks and automatic drafts for various accounts. We offer ITM and debit card services that can be used by our customers throughout our service area and other regions. We also offer consumer and commercial VISA credit card services. Electronic banking services include debit cards, internet banking, telephone banking, mobile banking, remote deposit capture; merchant transaction processing and wire transfers.
We do not presently anticipate obtaining trust powers, but we are able to provide similar services through our affiliation with Infinex Investments, Inc. Additionally, we have initiated programs of differentiator presentations focusing on such issues as financial literacy and elder abuse. We believe that these types of programs assist our local communities and highlight the skills of our financial service providers.
Competition
The financial services business is highly competitive. We compete as a financial intermediary with other commercial banks, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating in the southwestern Virginia, southern West Virginia, eastern Tennessee, and western North Carolina market areas and elsewhere, including online financial services providers. Our market area is a highly competitive, highly branched banking market.
Competition in the market area for loans to small businesses and professionals, the Bank’s target market, is intense, and pricing is important. Many of our larger competitors have substantially greater resources and lending limits than we have. They offer certain services, such as extensive and established branch networks and trust services, that we do not provide or do not expect to provide in the near future. Moreover, larger institutions operating in the market area have access to borrowed funds at lower costs than are available to us. Deposit competition among institutions in our market area is strong, resulting in the possibility of our paying above-market rates to attract or retain deposits. As the pandemic waned, funds received into our customers’ deposit accounts from PPP loans and stimulus payments were drawn down. This decreased customer liquidity, combined with increased interest rates, has resulted in increased competition for deposits.
While pricing is important, our principal method of countering the competition is service. As a community banking organization, we strive to serve the banking needs of our customers while developing personal, hometown relationships with them. Additionally, we continue to add and enhance digital banking services. As a result, we provide a significant amount of service and a range of products through multiple channels at reasonable fees.
According to a market share report prepared by the Federal Deposit Insurance Corporation (the “FDIC”), as of June 30, 2022, the most recent date for which market share information is available, the Bank’s deposits as a percentage of total deposits in its major market areas were as follows:
County or City
% of Market
Dickenson County, VA
33.95%
Scott County, VA
31.75%
Russell County, VA
23.62%
Buchanan County, VA
10.92%
Tazewell County, VA
8.59%
Wise County, VA
6.13%
Washington County, VA
6.13%
Mercer County, WV
5.51%
City of Bristol, VA
5.31%
Smyth County, VA*
3.77%
City of Kingsport, TN
2.17%
* - In August 2022, we closed our branch operation in Smyth County, Virginia, and transferred those deposits to our office in Washington County, Virginia
Employees
As of December 31, 2022, we had 194 full-time equivalent employees. None of our employees is covered by a collective bargaining agreement, and we consider relations with employees to be excellent.
Supervision and Regulation
General. As a financial holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as amended (BHCA), and the examination and reporting requirements of the Federal Reserve. We are also subject to the provisions of the Code of Virginia governing bank holding companies. As a state-chartered commercial bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions (BFI). As a member of the Federal Reserve System, the Bank is also subject to regulation, supervision and examination by the Federal Reserve. Other federal and state laws, including various consumer protection and compliance laws, also govern the activities of the Bank.
The following description summarizes the most significant federal and state laws applicable to New Peoples and its subsidiaries. To the extent that statutory or regulatory provisions are described, the description is qualified in its entirety by reference to that particular statutory or regulatory provision.
The Bank Holding Company Act. Under the BHCA, the Federal Reserve examines New Peoples periodically. New Peoples is also required to file periodic reports and provide any additional information that the Federal Reserve may require. Activities at the bank holding company level are generally limited to:
• banking, managing or controlling banks;
• furnishing services to or performing services for its subsidiaries; and
• engaging in other activities that the Federal Reserve has determined by
regulation or order to be so closely related to banking as to be a proper
incident to these activities.
Thus, the activities we can engage in are restricted as a matter of law.
With some limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before:
• acquiring substantially all the assets of any bank;
• acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares); or
• merging or consolidating with another bank holding company.
As a result, our ability to engage in certain strategic activities is conditioned on regulatory approval.
In addition, and subject to some exceptions, the BHCA and the Change in Bank Control Act require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company as defined in the statutes and regulations. These requirements make it more difficult for control of our company to change or for us to acquire substantial investments.
Financial Holding Company. As of March 4, 2016, the Company elected to become qualified as a financial holding company (FHC). The Gramm-Leach-Bliley Act (GLBA) created this category of bank holding companies. FHC’s may directly or indirectly through subsidiaries engage in financial activities and activities “incidental” or “complementary” to financial activities. Generally, an FHC need not give prior notice of such activities, but must notify the Federal Reserve within 30 days after an event.
The BHCA provides a long list of “financial” activities that may be engaged in by FHCs such as underwriting, brokering or selling insurance; providing financial or investment advice or underwriting, dealing in or making a market in securities.
There are other potential “financial” activities in which the Federal Reserve is permitted to designate as permitted financial or incidental to financial activities.
We do not currently undertake activities specifically permitted to us as an FHC that are not otherwise permissible for bank holding companies not qualified as FHCs.
Bureau of Financial Institutions. As a bank holding company registered with BFI, we must provide the BFI with information concerning our financial condition, operations and management, among other reports required by the BFI. New Peoples is also examined by the BFI in addition to its Federal Reserve examinations. Similar to the BHCA, the Code of Virginia requires that the BFI approve the acquisition of direct or indirect ownership or control of more than 5% of the voting shares of any Virginia bank or bank holding company like us.
Payment of Dividends. New Peoples is a separate legal entity that derives the majority of its revenues from dividends paid to it by its subsidiaries. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, both New Peoples and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FDIC has the general authority to limit the dividends paid by FDIC insured banks if the FDIC deems the payment to be an unsafe and unsound practice. The FDIC has indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice.
Capital Adequacy. The federal banking regulators have issued substantially similar capital requirements applicable to all banks and bank holding companies. In addition, those regulators may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth.
The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February, 2015 and does not report consolidated regulatory capital. With respect to the Bank, the “prompt corrective action” regulations pursuant to Section 38 of the FDIA are set forth in the following table:
Total Risk
Tier 1 Risk
CET1 Risk
Based Capital
Based Capital
Based Capital
Leverage
Ratio
Ratio
Ratio
Ratio
Well Capitalized ≥ 10%
≥ 8%
≥ 6.5%
≥ 5%
Adequately Capitalized ≥ 8%
≥ 6%
≥ 4.5%
≥ 4%
Undercapitalized < 8%
< 6%
< 4.5%
< 4%
Significantly Undercapitalized < 6%
< 4%
< 3%
< 3%
Critically Undercapitalized Tangible equity to total assets ≤ 2%
The FDIA requires the federal banking regulators to take “prompt corrective action” if a depository institution does not meet minimum capital requirements as set forth above. Generally, a receiver or conservator for a bank that is “critically undercapitalized” must be appointed within specific time frames. The regulations also provide that a capital restoration plan must be filed within 45 days of the date a bank is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for a bank required to submit a capital restoration plan must guarantee the lesser of (i) an amount equal to 5% of the bank’s assets at the time it was notified or deemed to be undercapitalized by a regulator, or (ii) the amount necessary to restore the bank to adequately capitalized status. This guarantee remains in place until the bank is notified that it has maintained adequately capitalized status for specified time periods. Additional measures with respect to undercapitalized institutions include a prohibition on capital distributions, growth limits and restrictions on activities.
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The final rules established minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The final provisions for banks with $250 billion or less in total assets, such as the Bank, are set forth in the following table:
Minimum Leverage Ratio
4.00%
Minimum CET1 Risk Based Capital Ratio
4.50%
Capital Conservation Buffer (1)
2.50%
Minimum CET1 Risk Based Capital Ratio with Capital Conservation Buffer
7.00%
Minimum Tier 1 Risk Based Capital Ratio
6.00%
Minimum Tier 1 Risk Based Capital Ratio with Capital Conservation Buffer
8.50%
Minimum Total Risk Based Capital Ratio
8.00%
Minimum Total Risk Based Capital Ratio with Capital Conservation Buffer
10.50%
(1) The capital conservation buffer must be maintained in order for a banking organization to avoid being subject to limitations on capital distributions, including dividend payments, and discretionary bonus payments to executive officers.
The final rules include comprehensive guidance with respect to the measurement of risk-weighted assets. For residential mortgages, Basel III retains the risk-weights contained in the prior capital rules, which assign a risk-weight of 50% to most first-lien exposures and 100% to other residential mortgage exposures. The final rule increased the risk-weights associated with certain on-balance sheet assets, such as high volatility commercial real estate loans, and loans that are more than 90 days past due or in nonaccrual status. Capital requirements also increased for certain off-balance sheet exposures including, for example, loan commitments with an original maturity of one year or less.
Under the final rules, certain banking organizations, including the Company and the Bank, were permitted to make a one-time election to continue the prior treatment of excluding from regulatory capital most accumulated other comprehensive income (AOCI) components, including amounts relating to unrealized gains and losses on available-for-sale debt securities and amounts attributable to defined benefit post-retirement plans. Institutions that elected to exclude most AOCI components from regulatory capital under Basel III will be able to avoid volatility that would otherwise be caused by things such as the impact of fluctuations in interest rates on the fair value of available-for-sale debt securities. The Company and the Bank elected to exclude AOCI components from regulatory capital under Basel III.
Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements as set forth above.
On September 17, 2019, the federal banking regulators jointly issued a final rule required by the Economic Growth, Regulatory Reform and Consumer Protection Act (EGRRCPA) that permits qualifying banks and bank holding companies that have less than $10 billion in consolidated assets, such as New Peoples and the Bank, to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (commonly referred to as the community bank leverage ratio or CBLR). Under the rule, which became effective on January 1, 2020, banks and bank holding companies that opt into the CBLR framework and maintain a CBLR of greater than 9% are not subject to other risk-based and leverage capital requirements under the Basel III rules and would be deemed to have met the well capitalized ratio requirements under the “prompt corrective action” framework.
For further detail on capital and capital ratios, see discussion contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” sections “Capital Resources” and “Liquidity,” and in Item 8, “Financial Statements and Supplementary Data,” “Consolidated Financial Statements and Notes,” Note 21, “Capital.”
Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on banks and financial or bank holding companies and their bank subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, the Federal Reserve requires a bank or financial or bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. These requirements can restrict the ability of bank holding companies to deploy their capital as they otherwise might.
Interstate Banking and Branching. Banks in Virginia may branch without geographic restriction. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Bank holding companies may acquire banks in any state without regard to state law except for state laws requiring a minimum time a bank must be in existence to be acquired. The Code of Virginia generally permits out of state bank holding companies or banks to acquire Virginia banks or bank holding companies subject to regulatory approval. These laws have the effect of increasing competition in banking markets.
Monetary Policy. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. The Federal Reserve’s monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of unsettled conditions in the national and international political environment, economy and money markets, as well as governmental fiscal and monetary policies, their impact on interest rates, deposit levels, loan demand or the business and earnings of the Bank is unpredictable.
Federal Reserve System. Depository institutions that maintain transaction accounts or nonpersonal time deposits are subject to reserve requirements. These reserve requirements are subject to adjustment by the Federal Reserve. Because required reserves must be maintained in the form of vault cash or in a non-interest-bearing account at, or on behalf of, a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets.
Transactions with Affiliates. Transactions between banks and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. These provisions restrict the amount of, and provide conditions with respect to, loans, investments, transfers of assets and other transactions between New Peoples and the Bank.
Loans to Insiders. The Bank is subject to rules on the amount, terms and risks associated with loans to executive officers, directors, principal shareholders and their related interests.
Community Reinvestment Act. Under the Community Reinvestment Act, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practices. The Community Reinvestment Act emphasizes the delivery of bank products and services through branch locations in a bank’s market areas and requires banks to keep data reflecting their efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under the GLBA (see below) may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “Satisfactory” rating in its latest Community Reinvestment Act examination. The Bank received a rating of “Satisfactory” at its last Community Reinvestment Act performance evaluation, as of August 1, 2022.
In May 2022, the federal bank regulatory agencies jointly issued a proposed rule intended to strengthen and modernize the CRA regulatory framework. If implemented, the rule would, among other things, (i) expand access to credit, investment and basic banking services in low- and moderate-income communities, (ii) adapt to changes in the banking industry, including internet and mobile banking, (iii) provide greater clarity, consistency and transparency in the application of the regulations and (iv) tailor performance standards to account for differences in bank size, business model, and local conditions.
Gramm-Leach-Bliley Act of 1999. The GLBA covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. For example, the GLBA permits unrestricted affiliations between banks and securities firms. It also permits bank holding companies to elect to become FHCs, which can engage in a broad range of financial services as described above. In order to become an FHC, a bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed and have at least a satisfactory Community Reinvestment Act rating. On March 4, 2016 the Federal Reserve Bank of Richmond approved New Peoples’ election to become an FHC.
The GLBA also provides that the states continue to have the authority to regulate insurance activities, but prohibits the states, in most instances, from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities.
Anti-Money Laundering Legislation. New Peoples is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020. Among other things, these laws and regulations require New Peoples to take steps to prevent the use of New Peoples for facilitating the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. The Company is also required to carry out a comprehensive anti-money laundering compliance program. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.
Privacy and Fair Credit Reporting. Financial institutions, such as the Bank, are required to disclose their privacy policies to customers and consumers and require that such customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of nonpublic personal information about them with nonaffiliated third persons. The Bank also requires business partners with whom it shares such information to assure the Bank that they have adequate security safeguards and to abide by the redisclosure and reuse provisions of applicable law. In addition to adopting federal requirements regarding privacy, individual states are authorized to enact more stringent laws relating to the use of customer information. The Virginia Consumer Data Protection Act, passed in 2021, became effective January 1, 2023 These privacy laws create compliance obligations and potential liability for the Bank.
Mortgage Banking Regulation. The Bank is subject to rules and regulations related to mortgage loans that, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. The Bank is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. The Bank’s mortgage origination activities are subject to the Federal Reserve’s Regulation Z, which implements the Truth in Lending Act. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. To the extent that we make mortgage loans, we are required to comply with these rules, subject to available exceptions.
Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) is intended to increase corporate responsibility, provide enhanced penalties for accounting and auditing improprieties by publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities law. The changes required by the Sarbanes-Oxley Act and its implementing regulations are intended to allow shareholders to monitor the performance of companies and their directors more easily and effectively.
The Sarbanes-Oxley Act generally applies to all domestic companies, such as New Peoples, that file periodic reports with the SEC under the Securities Exchange Act of 1934, as amended. The Sarbanes-Oxley Act includes significant additional disclosure requirements and expanded corporate governance rules and the SEC has adopted extensive additional disclosures, corporate governance provisions and other related rules pursuant to it. New Peoples has expended, and will continue to expend, considerable time and money in complying with the Sarbanes-Oxley Act.
Federal Deposit Insurance Corporation. The Bank’s deposits are insured by the Deposit Insurance Fund, as administered by the FDIC, to the maximum amount permitted by law, which is $250,000 per depositor. The FDIC uses a “financial ratios method” based on “CAMELS” composite ratings to determine deposit insurance assessment rates for small established institutions with less than $10 billion in assets, such as the Bank. The CAMELS rating system is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk (CAMELS). CAMELS composite ratings set a maximum assessment for banks rated CAMELS 1 and 2, and set minimum assessments for lower rated institutions. In 2022 and 2021, the Company recorded expense of $216 thousand and $266 thousand, respectively, for FDIC insurance premiums.
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide-ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the American financial services industry. Among the provisions of the Dodd-Frank Act that directly impacted the Company was the creation of an independent Consumer Financial Protection Bureau (CFPB), which has the ability to write rules for consumer protections governing all financial institutions. All consumer protection responsibility formerly handled by other banking regulators is consolidated in the CFPB. It also oversees the enforcement of all federal laws intended to ensure fair access to credit. Smaller financial institutions, such as the Company and the Bank, continued to be examined primarily by their primary regulators.
The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages. The EGRRCPA modified a number of these requirements, including, for smaller institutions (under $10 billion in total assets) that qualify, a safe harbor for compliance with the “ability to pay” requirements for consumer mortgage loans. The CFPB has implemented mortgage lending regulations to carry out its mandate. In addition, the Federal Reserve has issued rules limiting the fees charged to merchants by credit card companies for debit card transactions. The result of these rules is to limit the amount of interchange fee income available explicitly to larger banks and indirectly to us. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.
The Dodd-Frank Act has had, and may in the future have, a material impact on New Peoples’ operations, particularly through increased compliance costs resulting from new and possible future consumer and fair lending regulations. Any future changes resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business practices, impose more stringent regulatory requirements or otherwise adversely affect the business and financial condition of New Peoples and the Bank. These changes may also require New Peoples to invest significant management attention and resources to evaluate and make necessary changes to comply with new statutory and regulatory requirements.
The Economic Growth, Regulatory Reform and Consumer Protection Act of 2018. The EGRRCPA, which became effective in May 2018, amended provisions of the Dodd-Frank Act and other statutes administered by banking regulators. Among these amendments are provisions exempting insured depository institutions (and their parent companies) with less than $10 billion in consolidated assets and meeting certain other asset and liabilities trading tests from the Volker Rule, which prohibits banks from conducting certain investment activities with their own accounts. The EGRRCPA required the regulators to promulgate rules establishing the new CBLR, as described above. The EGRRCPA increased the asset threshold from $1 billion to $3 billion for financial institutions to qualify for a less burdensome 18-month on-site examination schedule. The EGRRCPA made numerous other changes in regulatory requirements based on the size and complexity of financial institutions, particularly benefiting smaller institutions like the Company.
Cyber Security. Federal regulators expect that financial institutions design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. Additionally, a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is expected to maintain appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or any of its critical service providers fall victim to this type of cyber-attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
Federal bank regulators issued a joint rule, effective in 2022, establishing computer-security incident notification requirements for banking organizations and their bank service providers. The rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. In addition, the final rule requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. The rule defines computer-security incident as an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.
Limitations on Incentive Compensation. The federal bank regulatory agencies have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company and the Bank, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the institution’s safety and soundness, and the financial institution is not taking prompt and effective measures to correct the deficiencies. As of December 31, 2022, the Company and the Bank have not been made aware of any instances of noncompliance with this guidance.
Other Laws. Banks and other depository institutions also are subject to other numerous consumer-oriented laws and regulations. These laws, which include the Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act of 2003 and the Fair Housing Act, require compliance by depository institutions with various disclosure and consumer information handling requirements. These and other similar laws result in significant costs and create potential liability for financial institutions, including the imposition of regulatory penalties for inadequate compliance.
Future Regulatory Uncertainty. Because federal and state regulation of financial institutions changes regularly and is the subject of constant legislative debate, New Peoples cannot forecast how regulation of financial institutions may change in the future and impact its operations. New Peoples fully expects that the financial institution industry will remain heavily regulated notwithstanding the regulatory relief that has been recently adopted.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Not required.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
As of December 31, 2022, the Company's net investment in premises and equipment was $19.3 million. Our main office and operations center are in Honaker, Virginia, which includes a full-service branch, and a separate administration and operations center.
The Bank owns 13 of its 17 full-service branch offices, including its headquarters office. In addition to the headquarters in Honaker, Virginia we own or lease branch offices located in Virginia, West Virginia, Tennessee, and a loan production office in North Carolina. Additionally, the Bank owns an operations building housing its network and other support operations. The bank owns two former branch offices that were closed in 2022, and the facility that formerly housed ITM network and call center operations, that was closed in 2021. The former ITM network and call center facility was sold in March, 2023. We also own a warehouse facility in Honaker, Virginia. Our loan production office operates from a building in Boone, North Carolina under a short-term lease renewed in June 2022.
A former branch office located in Jonesborough, Tennessee is used as a hub for meeting with prospective loan customers.
During 2022, two branch locations were closed, Big Stone Gap, Virginia and Chilhowie, Virginia, with customer accounts transferred to nearby offices. ITM services remain available at these two locations. Three former branch offices that were transferred to other real estate owned in 2021, were sold in 2022.
We continue to assess our branch network as we look to improve the efficiency of our branch operations while seeking to increase market share.
We believe that all of our properties are maintained in good operating condition and are suitable and adequate for our operational needs.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
In the normal course of operations, we may become a party to legal proceedings, as discussed in Note 20 Legal Contingencies to the consolidated financial statements contained in Item 8 of this form 10-K.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
Computershare Investor Services is the stock transfer agent for New Peoples Bankshares, Inc. The common stock of New Peoples is quoted on the OTC Market’s Pink Open Market under the symbol “NWPP”. The volume of trading of shares of common stock is very limited. Trades in our common stock occur sporadically on a local basis and typically in small volumes. Over-the-Counter market quotations reflect inter-dealer prices without retail mark up, mark down or commissions and may not necessarily represent actual transactions.
The most recent sales price of which management is aware was $2.25 per share on March 20, 2023.
(b) Holders
On March 22, 2023, there were approximately 4,060 shareholders of record.
(c) Dividends
Any declaration of dividends in the future will depend on our earnings, capital requirements, growth strategies, and compliance with regulatory mandates, principally at the Bank level, since the Company’s primary source of income is dividends paid by the Bank. During the first quarter of 2022, the Company paid its first cash dividend of $0.05 per common share to our shareholders. On February 27, 2023, the Company declared a dividend of $0.06 per share, payable March 31, 2023 to shareholders of record as of March 15, 2023.
We are subject to certain dividend restrictions and capital requirements imposed by the Federal Reserve Bank as well as Virginia statutes and regulations. See Note 16, Dividend Limitations on Subsidiary Bank, and Note 21, Capital, to the consolidated financial statements contained in Item 8 of this Form 10-K.
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 through March 31, 2023. 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 December 31, 2022, as detailed below. Under the terms of the stock repurchase program, the Company has the remaining authority to repurchase up to 426,405 shares of common stock. On February 27, 2023, the board of directors approved an extension of the repurchase program through March 31, 2024.
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
October 31, 2022
5,290
$
2.30
5,290
450,225
November 30, 2022
7,436
$
2.31
7,436
442,789
December 31, 2022
16,384
$
2.40
16,384
426,405
Total
29,110
$
2.36
29,110

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution About Forward Looking Statements
We make forward looking statements in this annual report on Form 10-K 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 loan 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. These forward-looking statements are based on various factors and were derived using numerous assumptions as of the date of this Form 10-K, and are subject to significant risks.
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 (including the lingering impact of the novel coronavirus (COVID-19) outbreak 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 cyber security;
our reliance on third-party vendors and correspondent banks;
changes in generally accepted accounting principles;
changes in the allowance for loan losses resulting from the adoption and implementation of the CECL methodology;
the transition from the use of the LIBOR index;
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.
General
The following commentary discusses major components of our business and presents an overview of our consolidated financial position as of December 31, 2022 and 2021, as well as results of operations for the years ended December 31, 2022 and 2021. This discussion should be reviewed in conjunction with the consolidated financial statements and accompanying notes and other statistical information presented elsewhere in this Form 10-K.
New Peoples generates a significant amount of its income from the net interest income earned by the Bank. Net interest income is the difference between interest income and interest expense. Interest income depends on the volume of interest-earning assets outstanding during the period and the interest rates earned thereon. The Bank's interest expense is a function of the average amount of interest-bearing deposits and borrowed money outstanding during the period and the interest rates paid thereon. The quality of the assets further influences the amount of interest income lost on nonaccruing loans and the amount of provision expense added to the allowance for loan losses. The Bank also generates noninterest income from service charges and fees on deposit accounts, debit and credit card interchange income, and commissions on insurance and investment products sold.
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. Our most critical accounting estimates relate to our provision for loan losses and the calculation of our deferred tax asset and any related valuation allowance.
The provision for loan 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 loan losses, we refer you to the section on “Allowance for Loan Losses” in this discussion.
For further discussion of our other critical accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements, contained in Item 8 of this Form 10-K.
Cyber Security
The Company, primarily through the Bank, depends on its ability to continuously process, record and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, the Company’s and its subsidiaries’ operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Although the Company has business continuity plans and other safeguards in place, disruptions or failures in the physical infrastructure or operating systems that support its businesses and customers, or cyber-attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that customers use to access the Company’s and its subsidiaries’ products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Company’s results of operations or financial condition.
Although to date the Company has not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that it or its subsidiaries will not suffer such losses in the future. On June 15, 2022, we experienced a cybersecurity incident that temporarily interrupted the operability of our computer systems. Limited operations were restored June 17, 2022, and full operations were restored June 21, 2022. Since that date, restoration efforts have been completed and normal operations have resumed. The Company’s risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our e-banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served. As a result, cyber security and the continued development and enhancement of the Company’s controls, processes and practices, designed to protect its and its subsidiaries’ systems, computers, software, data and networks from attack, damage or unauthorized access, remain a priority for the Company. As cyber threats continue to evolve, the Company has expended resources and may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities.
As discussed under the heading “Supervision and Regulation” in Item 1 of this Form 10-K, the federal banking agencies have issued a joint rule that requires banking organizations to notify their primary regulator as soon as possible and no later than 36 hours after any cyber-security incident has occurred.
Overview
The Company made significant progress during 2022 resulting in the highest annual consolidated net income in the history of the Company. For the year ended December 31, 2022, net income was $8.1 million, or basic and diluted net income per share of $0.34, compared to a net income of $7.0 million, or basic and diluted net income per share of $0.29, for the year ended December 31, 2021, an improvement of $1.1 million, or 15.3%. Retained earnings increased to $8.9 million as of December 31, 2022 from $2.0 million as of December 31, 2021, an increase of $6.9 million or 339.0%.
Net interest income for the year ended December 31, 2022 was $28.3 million compared to $27.2 million for the year ended December 31, 2021. The improvement of $1.1 million in net interest income was primarily attributable to a $33.8 million increase in average earning assets and rising market interest rates during the year, partially offset by a decrease in loan origination fees compared to 2021 as PPP loans were forgiven and an increase in costs of our variable rate trust preferred securities in 2022. Net interest margin was 3.62% compared to 3.64% for the year ended December 31, 2022, and 2021, respectively.
Noninterest income was $9.2 million for the year ended December 31, 2022 compared to $10.0 million for the year ended December 31, 2021. The $740,000 decrease was attributable to $322,000 of gains on the sales of investment securities during the year ended December 31, 2021, $190,000 of gains on the sales of three former branch locations during the year December 31, 2021, as well as a write-down of bank owned life insurance (BOLI) of $158,000 during the year ended December 31, 2022, and a decrease in gains and commissions on mortgage loan originations and sales of approximately $162,000 due to the impact of rising interest rates on mortgage demand.
Noninterest expense was $26.5 million for the year ended December 31, 2022 compared to $27.9 million for the year ended December 31, 2021. The $1.3 million decrease was primarily due to valuation adjustments of other real estate owned during the year ended December 31, 2021, which consisted of $1.1 million related to former branch locations and approximately $390,000 in net losses and write-downs on the sales of other real estate owned. This was offset by an increase of approximately $703,000 in salaries and benefits during the year ended December 31, 2022, which is attributed to higher bonus accruals based on the Company’s performance, annual wage adjustments, and adjustments to the minimum starting salaries of employees to reflect rising costs to attract and retain talent.
During the year ended December 31, 2022, total assets decreased $19.3 million, or 2.4%, to $775.4 million. Loans receivable decreased $9.1 million, or 1.5%, during 2022, which is partly attributable to several large borrowers selling their businesses or collateral and paying off the related loans. Additionally, loan pricing remains very competitive in the Company’s market and has impacted loan originations. Investment securities decreased $11.0 million in 2022, which is primarily due to the decline in the market value of the investment portfolio due to rising interest rates.
Total deposits declined $14.8 million, or 2.1%, during 2022, with most of the decline occurring during the fourth quarter as competition for funding intensified.
New Peoples Bank remains well-capitalized. Leverage ratio improved to 10.40%.
The Company’s key performance indicators are as follows:
Year ended December 31,
Return on average assets 0.99 % 0.88 %
Return on average shareholders’ equity 13.89 % 11.52 %
Average shareholders’ equity to average assets ratio 7.10 % 7.62 %
Net Interest Income and Net Interest Margin
The Company’s primary source of income is net interest income, which increased $1.1 million, or 3.95%, in 2022 compared to 2021 due primarily to a $33.8 million increase in average earning assets and rising market interest rates during the year. This was offset by an increase in interest expense on borrowed funds of approximately $777,000, or 171.5%, related to the increase in variable rates on trust preferred securities as well as an increase in borrowings from the Federal Home Loan Bank (FHLB) during the year. The decrease in interest income on loans, including fees, was driven by a decrease in fees of $1.8 million resulting from PPP loan forgiveness in 2021 that did not reoccur during 2022.
The following table shows the rates paid on earning assets and deposit liabilities for the periods indicated.
Net Interest Margin Analysis
Average Balances, Income and Expense, and Yields and Rates
(Dollars in thousands)
For the year ended
For the year ended
December 31, 2022
December 31, 2021
Average
Income/
Yields/
Average
Income/
Yields/
Balance
Expense
Rates
Balance
Expense
Rates
ASSETS
Loans (1) (2) $ 591,179 $ 27,739
4.69% $ 586,963 $ 28,323
4.83%
Federal funds sold
2.41%
-
0.10%
Interest bearing deposits in other banks
76,560
1,514
1.98%
78,583
0.12%
Taxable investment securities
113,141
2,129
1.88%
81,635
1,494
1.83%
Total earning assets
781,212
31,390
4.02%
747,393
29,912
4.00%
Less: allowance for loans losses
(6,790)
(7,034)
Non-earning assets
40,657
58,398
Total assets $ 815,079
$ 798,757
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing demand deposits $ 74,786 $
0.13% $ 59,154 $
0.10%
Savings and money market deposits
191,136
0.13%
181,736
0.08%
Time deposits
188,010
1,517
0.81%
214,937
2,041
0.95%
Short-term borrowings
20,370
2.46%
2,474
1.33%
Trust preferred securities
16,496
4.42%
16,496
2.55%
Total interest-bearing liabilities
490,798
3,105
0.63%
474,797
2,701
0.57%
Non-interest-bearing deposits
261,834
-
-%
254,911
-
- %
Total deposit liabilities and cost of funds
752,632
3,105
0.41%
729,708
2,701
0.37%
Other liabilities
4,248
8,178
Total liabilities
756,880
737,886
Shareholders’ equity
58,199
60,871
Total liabilities and shareholders’ equity $ 815,079
$ 798,757
Net interest income
$ 28,285
$ 27,211
Net interest margin 3.62%
3.64%
Net interest spread 3.39%
3.43%
(1) Nonaccrual loans 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 tables set forth the amounts of the total changes in interest income and interest expense which can be attributed to rates, volume and a combination of rates and volume, for the periods indicated.
Volume and Rate Analysis
Increase (decrease)
	 Year 2022 Compared to 2021
(Dollars in thousands)
Volume Effect
Rate Effect
Rate and Volume Effect
Change in Interest Income/ Expense
Interest Income:
Loans $ $ (784) $ (6) $ (584)
Federal funds sold
-
Interest bearing deposits in other banks
(2)
1,459
(38)
1,419
Taxable investment securities
Total Earning Assets
(25)
1,478
Interest Expense:
Interest-bearing demand deposits
Savings and money market deposits
Time deposits
(282)
(281)
(524)
Short-term borrowings
Trust preferred securities
-
-
Total Interest-bearing Liabilities
(19)
Change in Net Interest Income $ $ $ (274) $ 1,074
Volume and Rate Analysis
Increase (decrease)
	 Year 2021 Compared to 2020
(Dollars in thousands)
Volume Effect
Rate Effect
Rate and Volume Effect
Change in Interest Income/ Expense
Interest Income:
Loans $ $ (700) $ (10) $ (315)
Federal funds sold
-
(1)
-
(1)
Interest bearing deposits in other banks
(134)
(38)
(113)
Taxable investment securities
(309)
(216)
Total Earning Assets
1,284
(1,144)
(264)
(124)
Interest Expense:
Interest-bearing demand deposits
(25)
(7)
(11)
Savings and money market deposits
(239)
(54)
(212)
Time deposits
(568)
(1,460)
(1,813)
Short-term borrowings
(34)
(1)
-
(35)
Trust preferred securities
-
(121)
-
(121)
Total Interest-bearing Liabilities
(500)
(1,846)
(2,192)
Change in Net Interest Income $ 1,784 $ $ (418) $ 2.068
The increases in interest income and interest expense during 2022 were driven mainly by increased interest rates, as short-term assets and liabilities tied to short-term rates adjusted to market rate increases throughout the year, new production at higher rates, and asset yields outpacing increases in funding costs in the rising interest rate environment. Overall, our net interest margin decreased 2 basis points to 3.62% in 2022 compared to 3.64% in 2021.
The increase in interest income is primarily attributed to an increase in yields on overnight deposits with banks, which was mainly driven by higher market rates, as noted above, combined with a reinvesting of funds in investment securities at higher rates. This increased income offset a decrease in loan interest Overall, loan interest income, including fees, decreased $584,000 during the year ended December 31, 2022 compared to December 31, 2021, due to the impact of PPP loan fees recognized in 2021, that was not repeated in 2022.
Interest expense increased $404,000, due primarily to an increase in the average balance of FHLB advances of $20.4 million during the year, combined with increased market rates on trust preferred securities. This was offset by a decrease in interest expense on time deposits due to a reduction in volume and rate. While rates on time deposits reset at lower rates during 2022, this trend is not expected to continue into 2023, due to the continuing increase in interest rates, combined with the competitive pressures to acquire and retain deposits.
Our future interest rate structure has been impacted by the commencement of the end of the use of LIBOR, which will completely phase-out in 2023. We use LIBOR in pricing some of a limited number of our interest earning assets and liabilities, including our trust preferred securities. Certain loan and investment products ceased using LIBOR in 2021, for new contracts and commitments. Most of these contracts have been, or will be, replaced with the secured overnight funding rate (SOFR).
Loans
Our primary source of income is interest earned on loans. Total gross loans decreased $9.1 million during 2022, or 1.54%, to $584.6 million as of December 31, 2022 as compared to $593.7 million at December 31, 2021. The primary drivers of this decrease in total loans were a reduction in commercial real estate loans, multifamily, and commercial loans of $9.1 million, $3.3 million, and $7.6 million, respectively. This was offset by an increase in construction and land development loans of $10.1 million in comparison to December 31, 2021. The decrease in commercial real estate and commercial loans was partly attributable to several large borrowers selling their businesses or collateral and paying off the related loans. For more detail on loan balances, refer to Note 6 of the consolidated financial statements contained in Item 8 of this Form 10-K.
Nonaccrual loans increased approximately $472,000 during 2022 from $2.9 million as of December 31, 2021 to $3.4 million as of December 31, 2022. Nonaccrual loans negatively affect interest income as these loans are nonearning assets. When doubt about the collectability of a loan exists, it is the Bank’s policy to stop accruing interest on that loan under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when conditions indicate that payment of principal and interest can no longer be expected, or (c) when any such loan becomes delinquent for 90 days and is not both well secured and in the process of collection. All interest accrued but not collected on loans that are placed on nonaccrual is charged off and reversed against interest income in the current period. In the case of a nonaccrual loan that is well secured and in the process of collection, the interest accrued but not collected is not reversed. Interest received on these loans is accounted for on the cash basis or cost-recovery method until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured. For more detail on nonaccrual loans, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K.
Impaired loan balances decreased during 2022, to $2.7 million as of December 31, 2022, from $2.8 million as of December 31, 2021. Interest income and cash receipts on impaired loans are handled differently depending on whether or not the loan is on nonaccrual status. If the impaired loan is not on nonaccrual status, the interest income on the loan is computed using the effective interest method. For more detail on impaired loan balances, refer to Note 6 of the consolidated financial statements in Item 8 of this Form 10-K.
The following table presents the dollar composition and percentage of our loan portfolio as of December 31:
Loan Composition
(Dollars in thousands) $ % $ %
Real estate secured:
Commercial $ 197,069 33.7 % $ 206,162 34.7 %
Construction and land development 42,470 7.3 % 32,325 5.4 %
Residential 1-4 family 227,232 38.9 % 224,530 37.8 %
Multifamily 29,710 5.1 % 33,048 5.6 %
Farmland 17,744 3.0 % 18,735 3.2 %
Total real estate loans 514,225 88.0 % 514,800 86.7 %
Commercial 46,697 8.0 % 54,325 9.1 %
Agriculture 3,756 0.6 % 4,021 0.7 %
Consumer installment loans 19,309 3.3 % 18,756 3.2 %
All other loans 0.1 % 1,842 0.3 %
Total loans 584,613 100.0 % 593,744 100.0 %
Less: allowance for loan losses 6,727
6,735
Total $ 577,886
$ 587,009
Our loan maturities, and distribution between fixed and variable rate loans as of December 31, 2022 are shown in the following tables :
Maturities of Loans
(Dollars in thousands) Less than One Year One to Five Years Five to Fifteen Years After Fifteen Years Total
Real estate secured:
Commercial $ 11,285 $ 39,525 $ 73,958 $ 72,301 $ 197,069
Construction and land development 7,511 10,491 10,664 13,804 42,470
Residential 1-4 family 7,255 22,850 85,214 111,913 227,232
Multifamily 1,152 5,342 11,178 12,038 29,710
Farmland 1,995 2,843 8,400 4,506 17,744
Total real estate loans 29,198 81,051 189,414 214,562 514,225
Commercial 15,853 22,929 5,487 2,428 46,697
Agriculture 1,276 2,324 - 3,756
Consumer installment loans 3,192 14,804 1,293 19,309
All other loans - -
Total $ 49,814 $ 121,439 $ 196,194 $ 217,166 $ 584,613
The following table presents the dollar amount of fixed rate and variable rate loans with maturities greater than one year as of December 31, 2022:
(Dollars in thousands) Fixed Rate Variable Rate
Real estate secured:
Commercial $ 75,192 $ 110,592
Construction and land development 17,756 17,203
Residential 1-4 family 90,416 129,561
Multifamily 12,651 15,907
Farmland 3,069 12,680
Total real estate loans 199,084 285,943
Commercial 23,975 6,869
Agriculture 2,287
Consumer installment loans 15,032 1,085
All other loans -
Total $ 240,709 $ 294,090
Contractual maturities of loans do not reflect the actual term of our loan portfolio. The average life of mortgage loans is substantially less than the contractual life due to prepayments and enforcement of due on sale clauses. Scheduled principal amortization also reduces the average life of the loan portfolio. The average life of mortgage loans tends to increase when current market mortgage rates are substantially above rates on existing loans while the average life decreases when rates on existing loans are substantially above current market rates.
Some variable rate loans may not reprice, or fully reprice, at their next reset date due to instances where the reset rate may not be above the rate floor, or may be more than the allowable rate increase under the terms of the loan. In these instances, it may take several reset periods before these loans are fully adjusted.
Allowance for Loan Losses
The methodology we use to calculate the allowance for loan losses is considered a critical accounting policy. The adequacy of the allowance for loan losses is based upon management’s judgment and analysis. The following factors are included in our evaluation of determining the adequacy of the allowance: risk characteristics of the loan portfolio, current and historical loss experience, concentrations, and internal and external factors such as general economic conditions.
During the fourth quarter of 2021, in response to rising price inflation, we added inflation to the economic factors considered in the model. Throughout 2022, we continued to adjust external factors impacting the allowance for loan loss model to best reflect changes in the general and local economies, the increasing interest rate environment, and the risks in the portfolio.
The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Subsequent to charging off a loan, management makes best efforts to recover any charged-off balances.
The allowance for loan losses remained at $6.7 million as of December 31, 2022. The allowance for loan losses at the end of 2022 was approximately 1.15% of total loans as compared to 1.13% at the end of 2021. Provisions for loan losses of approximately $625,000 and $372,000 were recorded during the years ended December 31, 2022 and 2021, respectively. Loans charged off, net of recoveries, totaled approximately $633,000, or 0.11% of average loans, for the year ended December 31, 2022, compared to approximately $828,000, or 0.14% of average loans, in 2021. The allowance for loan losses is being maintained at a level that management deems appropriate to absorb any potential future losses and known impairments within the loan portfolio whether or not the losses are actually ever realized.
Nonaccrual loans present higher risks of default, and we have experienced an increase in the volume of these loans during 2022, while the number of nonaccrual loans decreased. As of December 31, 2022, there were 41 nonaccrual loans totaling $3.4 million, or 0.58% of total loans. As of December 31, 2021, there were 65 nonaccrual loans totaling $2.9 million, or 0.50% of total loans. The amount of interest income that would have been recognized on these loans had they been accruing interest was approximately $10,000 and $223,000 in the years ended December 31, 2022 and 2021, respectively. There were no loans past due 90 days or greater and still accruing interest at either December 31, 2022 or 2021. There are no commitments to lend additional funds to non-performing borrowers.
A majority of our loans are collateralized by real estate located in our market area. It is our policy to sufficiently collateralize loans to help minimize exposure to losses in cases of default. Increasing real estate values in our area have reduced this exposure somewhat. However, while we consider our market area to be somewhat diverse, certain areas are more reliant upon agriculture, coal mining and natural gas. As a result, increased risk of loan impairments is possible due to the volatile nature of the coal mining and natural gas industries. As a result of the lingering economic impact of the COVID-19 pandemic, a number of industries have been identified as posing increased risk. Specifically, residential and commercial rentals, hotels, restaurants and entertainment, and the coal and gas industries have been adversely impacted by the global and domestic economic slowdown coupled with rising inflation. We are monitoring these industries and consider these segments to be the primary higher risks in the loan portfolio.
Commercial and commercial real estate loans are initially risk rated by the originating loan officer. If deterioration in the financial condition of the borrower and/or their capacity to repay the debt occurs, the loan may be downgraded by the loan officer or our watch list committee. Guidance for risk rate grading is established by the regulatory authorities who periodically review the Bank’s loan portfolio for compliance. Classifications used by the Bank are Pass, Special Mention, Substandard, Doubtful and Loss.
With regard to the Bank’s consumer and consumer real estate loan portfolio, we use the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured upon being deemed Substandard, the entire loan amount is charged-off.
For non-1-4 family residential loans that are 90 days or more past due or in bankruptcy, the collateral value less estimated liquidation costs are compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient, then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.
All loans of $250,000 or more, along with selected other credits, classified as substandard, doubtful or loss are individually reviewed for impairment in accordance with Accounting Standards Codification (ASC) 310-10-35. The increase in the threshold to $250,000 during 2022, did not significantly impact level of loans assessment for impairment. In evaluating impairment, a current appraisal is generally used to determine if the collateral is sufficient. Appraisals are typically less than a year old and must be independently reviewed to be relied upon. If the appraisal is not current, we perform a useful life review of the appraisal to determine if it is reasonable. If this review determines that the appraisal is not reasonable, then a new appraisal is ordered. Impaired loan balances decreased during 2022, to $2.7 million, with a related allowance of approximately $86,000, as of December 31, 2022, from $2.8 million, with a related allowance of approximately $166,000, as of December 31, 2021. Management is aggressively working to reduce the impaired credits at minimal loss.
In determining the component of our allowance in accordance with the Contingencies topic of the Accounting Standards Codification (ASC 450), we do not directly consider the potential for outdated appraisals since that portion of our allowance is based on the analysis of the performance of loans with similar characteristics, and external and internal risk factors. We consider the overall quality of our underwriting process in our internal risk factors, but the need to update appraisals is associated with loans identified as impaired under the Receivables topic of the Accounting Standards Codification (ASC 310). If an appraisal is older than one year, a new external certified appraisal may be obtained and used to determine impairment. If an exposure exists, a specific allowance is directly made in the amount of the potential loss, in addition to estimated liquidation and disposal costs. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
In addition to impaired loans, the remaining loan portfolio is evaluated based on net charge-off history, economic conditions, and internal processes. To calculate the net charge-off history factor, we perform a 12-quarter look-back and use the average net charge offs as a percentage of the loan balances. To calculate the economic conditions factor, we use current economic data which includes national and local unemployment information, local housing price changes, gross domestic product growth, and interest rates. Lastly, we evaluate our internal processes of underwriting and consider the inherent risks present in the portfolio due to past and present lending practices. As economic conditions, performance of our loans, and internal processes change, it is possible that future increases or decreases may be needed to the allowance for loan losses.
Selected Credit Ratios
December 31,
(Dollars in thousands)
Allowance for loan losses $ 6,727 $ 6,735
Total loans 584,613 593,744
Allowance for loan losses to total loans 1.15 % 1.13 %
Nonaccrual loans $ 3,413 $ 2,941
Nonaccrual loans to total loans 0.58 % 0.50 %
Ratio of allowance for loan losses to nonaccrual loans 1.97 X 2.29 X
Charge-offs net of recoveries $ 633 $ 828
Average loans $ 591,179 $ 586,963
Net charge-offs to average loans 0.11 % 0.14 %
The above table includes $823,000 and $1.1 million in nonaccrual loans as of December 31, 2022 and 2021, respectively, which have been classified as troubled debt restructurings. No troubled debt restructurings were past due 90 days or more and still accruing interest as of December 31, 2022 or 2021. There were $2.0 million in loans classified as troubled debt restructurings as of December 31, 2022, as compared to $2.5 million in loans classified as troubled debt restructurings as of December 31, 2021. For more detail on nonaccrual, impaired, past due and restructured loans, refer to Note 6 and Note 8 to the consolidated financial statements in Item 8 of this Form 10-K.
The following table shows the average balance, net charge-offs or recoveries and percentage of net charge-offs or recoveries by each major category of loans for the years ended December 31, 2022 and 2021:
December 31, 2022 December 31, 2021
(Dollars in thousands) Average Balance Net Charge-offs (Recoveries) Net Charge-offs (Recoveries) as % of Average Loan Type Average Balance Net Charge-offs (Recoveries) Net Charge-offs (Recoveries) as % of Average Loan Type
Real estate secured:
Commercial $ 202,435 $ (28 ) -0.01 % $ 194,517 $ 913 0.47 %
Construction and land development 39,986 0.36 % 28,820 (6 ) -0.02 %
Residential 1-4 family 225,334 (36 ) -0.02 % 220,524 (37 ) -0.02 %
Multifamily 32,768 0.33 % 23,840 - 0.00 %
Farmland 18,022 (13 ) -0.07 % 19,144 (29 ) -0.15 %
Total real estate loans 518,545 0.03 % 486,845 0.17 %
Commercial 48,093 0.03 % 74,711 (45 ) -0.06 %
Agriculture 3,823 - 0.00 % 4,095 (1 ) -0.02 %
Consumer and all other loans 19,235 2.31 % 19,441 0.17 %
Unallocated 1,483 - 0.00 % 1,871 - 0.00 %
Total loans $ 591,179 $ 633 0.11 % $ 586,963 $ 828 0.14 %
The following table shows the balance and percentage of our allowance for loan losses allocated to each major category of loans.
Allocation of the Allowance for Loan Losses
December 31, 2022 December 31, 2021
(Dollars in thousands) Amount % of ALLL % of Loans Amount % of ALLL % of Loans
Real estate secured:
Commercial $ 2,364 35.1 33.7 $ 2,134 31.7 34.7
Construction and land development 5.2 7.3 2.8 5.4
Residential 1-4 family 2,364 35.1 38.9 2,237 33.2 37.8
Multifamily 3.9 5.1 3.8 5.6
Farmland 2.3 3.0 2.2 3.2
Total real estate loans 5,488 81.6 88.00 4,963 73.7 86.7
Commercial 5.7 8.0 1,099 16.3 9.1
Agriculture 0.5 0.6 0.4 0.7
Consumer and all other loans 5.7 3.4 1.6 3.5
Unallocated 6.5 - 8.0 -
Total $ 6,727 100.0 100.0 $ 6,735 100.0 100.0
We have allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
The allocation of the allowance for loan losses is based on our judgment of the relative risk associated with each type of loan. We have allocated 35.1% of the allowance to commercial real estate loans, which constituted 33.7% of our loan portfolio at December 31, 2022. This allocation increased slightly compared to the 31.7% in 2021, due primarily to the impact of the external factors considered as part of the determination of the overall allowance for loan losses. We have allocated 5.7% of the allowance to commercial loans, which constituted 8.0% of our loan portfolio at December 31, 2022. This allocation percentage decreased compared to December 31, 2021, due to a lower loss rate on commercial loans for the historical period assessed in the loan loss model for 2022.
Both residential and commercial real estate loans are secured by real estate whose value tends to be easily ascertainable. These loans are made consistent with appraisal policies and real estate lending policies, which detail maximum loan-to-value ratios and maturities.
We allocated 5.2% of the allowance to real estate construction loans, which constituted 7.3% of our loan portfolio as of December 31, 2022. Construction loans are secured by real estate with values that are dependent upon market and economic conditions. Additionally, these credits are generally shorter-term projects, of eighteen months or less. These loans are made consistent with appraisal policies and real estate lending policies which detail maximum loan-to-value ratios and maturities.
We allocated 35.1% of the allowance to residential real estate loans, which constituted 38.9% of our loan portfolio as of December 31, 2022.
We allocated 5.74% of the allowance to consumer and all other loans, which constituted 3.41% of our loan portfolio as of December 31, 2022. Our allocation increased as a percentage of the allowance for loan losses due to the impact of overdrawn deposit account losses resulting from the cybersecurity incident, combined with a change in the treatment of deposit account charge-offs during 2022. As of December 31, 2022, we had an unallocated portion of the allowance for loan losses totaling approximately $440,000. While our legacy loan loss model calculation did not fully allocate the entire allowance, we believe that the lingering impact of the pandemic, combined with the recent impact of inflation warrant the maintenance of the allowance for loan losses.
We implemented the Current Expected Credit Loss (CECL) model to replace our legacy loan loss model for the first quarter of 2023. The cumulative effects of this implementation were immaterial.
Other Real Estate Owned
Other real estate owned decreased $1.1 million, or 80.82%, to approximately $261,000 as of December 31, 2022 from $1.4 million as of December 31, 2021. All properties are available for sale, primarily, by commercial and residential realtors under the direction of our Special Assets division. Our aim is to reduce the level of OREO in order to reduce the level of nonperforming assets at the Bank, while keeping in mind the impact to earnings and capital. During 2022, three former branch locations transferred to OREO in 2021 were sold, which decreased OREO approximately $912,000.
While the levels of problem credits and foreclosed properties have been reduced significantly over the past several years, we remain mindful of the impact on earnings and capital as we work to achieve our goal to reduce nonperforming assets. However, we may recognize some losses and reductions in the allowance for loan losses as we expedite the resolution of these problem assets.
Investment Securities
Total investment securities decreased $11.3 million, or 10.51%, to $96.1 million as of December 31, 2022 from $107.4 million as of December 31, 2021. All securities are classified as available-for-sale for liquidity purposes. There were no sales of securities during the year ended December 31, 2022. Sales of securities during 2021 totaled $7.7 million, with gains of approximately $322,000 realized. During the year ended December 31, 2022 and 2021, there were maturities, calls and paydowns of $14.0 million and $16.3 million, respectively. The Company purchased $19.8 million and $85.1 million in investment securities during the year ended December 31, 2022 and 2021, respectively. Investment securities with a carrying value of $27.3 and $12.1 million as of December 31, 2022 and 2021, respectively, were pledged to secure public deposits and for other purposes required, or permitted, by law.
Our strategy is to invest excess funds in investment securities, which typically yield more interest income than other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond, but which still provide liquidity.
The fair value of our investment portfolio is substantially affected by changes in interest rates. Losses could be realized if liquidity and/or business strategy necessitate the sale of securities in a loss position, due to Federal Reserve actions, U.S. fiscal policies or other factors affecting market interest rates. As of December 31, 2022, we had a net unrealized loss in our investment portfolio totaling $17.6 million as compared to a $1.0 million loss as of December 31, 2021. As market interest rates increase the level of unrealized losses could change substantially. However, these changes would have no impact on earnings or regulatory capital, unless the securities were sold at a loss. We have reviewed our investment portfolio and no investment security is deemed to have other than temporary impairment. We monitor our portfolio regularly and use it to maintain liquidity, manage interest rate risk and enhance earnings.
The fair value and weighted average yield of investment securities as of December 31, 2022 are shown in the following schedule by contractual maturity and do not reflect principal paydowns for amortizing securities. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields are calculated by dividing the contractual interest for each time period by the average amortized contractual cost.
Less than One Year One to Five Years Five to ten years After ten years Total
(Dollars in thousands) Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield Fair Value Average Yield
U.S Treasuries $ 971 3.87 % $ 9,281 1.39 % $ 1,433 1.04 % $ - - % $ 11,685 1.54 %
U.S. Government Agencies 4.56 % 2,992 3.76 % 2,091 3.12 % 4,315 2.60 % 9,399 3.08 %
Taxable municipals - - % 2.95 % 3,476 2.30 % 12,835 2.33 % 16,815 2.33 %
Corporate bonds 5.48 % 1,427 3.49 % 1,206 2.58 % - - % 3,136 3.43 %
Mortgage backed securities - - % 1,470 1.92 % 5,203 1.77 % 48,368 1.66 % 55,041 1.68 %
$ 1,475 4.51 % $ 15,674 2.12 % $ 13,409 2.11 % $ 65,518 1.86 % $ 96,076 1.97 %
Bank Owned Life Insurance
As of December 31, 2022 and 2021, the Bank had an aggregate total cash surrender value of $4.5 million and $4.7 million, respectively, on life insurance policies covering former key officers.
The Company recorded a loss of $136,000 due to a write-down of approximately $158,000, partially offset by earnings of $22,000, during the year ended December 31, 2022. The write-down was due to the impact of rising interest rates on the value of the underlying assets supporting the policies. The Company recognized income of approximately $32,000 during the year ended December 31, 2021.
Deposits
Total deposits were $692.7 million as of December 31, 2022, a decrease of $14.8 million, or 2.1%, from $707.5 million as of December 31, 2021. Most of the decrease was driven by savings and money market deposits, which decreased $20.6 million, or 10.7%, to $171.5 million as of December 31, 2022. The majority of the decline occurred during the fourth quarter of 2022 as competition for funds for lending and other needs intensified among banks and non-banks in the Company’s markets.
Information detailing average deposit balances and average rates paid on deposits is presented in the Net Interest Margin Analysis table contained in the “Net Interest Income and Net Interest Margin” section.
Core deposits are considered to include demand deposits and other types of transaction accounts, such as commercial relationships and savings products, all of which decreased in 2022. Overall, we continue to maintain core deposits through attractive consumer and commercial deposit products and strong ties with our customer base and communities.
Time deposits of $250,000 or more equaled approximately 3.87% of deposits at the end of 2022 and 4.00% of deposits at the end of 2021.
As of December 31, 2022 and 2021, uninsured deposits are estimated to be $87.5 million and $93.8 million, respectively. Included in estimated uninsured deposits are $14.4 million and $13.6 million of public funds, for such respective periods, considered secured via pledged securities or letters of credit we have with the FHLB.
The following table shows maturities of all time deposits considered uninsured by the FDIC or otherwise.
Maturities of Uninsured Time Deposits
(Dollars in thousands)
December 31,
Three months or less $ 2,339
Over three months through six months 3,078
Over six months through twelve months 10,374
Over one year 5,252
Total $ 21,043
As of December 31, 2022 and 2021, $27.3 million and $12.1 million of securities, respectively, were pledged to collateralize public deposits, including time deposits, held in our Tennessee offices, and as collateral for credit facilities available through FRB. Additionally, we held letters of credit from the FHLB for $7.0 million and $12.0 million at December 31, 2022 and 2021, respectively, to secure public deposits, including time deposits, held in our Virginia offices.
We held no brokered deposits at December 31, 2022 or 2021. Internet accounts are limited to customers located in our primary market area and the surrounding geographical area. The average balance of and the average rate paid on deposits is shown in the net interest margin analysis table in the “Net Interest Income and Net Interest Margin” section. Total Certificate of Deposit Registry Service (CDARS) time deposits were $1.4 million and $5.8 million at December 31, 2022 and 2021, respectively.
Noninterest Income
For the year ended December 31, 2022, noninterest income decreased approximately $740,000, or 7.4%, to $9.2 million, or 1.1% of average assets, from $10.0 million, or 1.3% of average assets, for the same period in 2021. The decrease was primarily attributable to non-recurring net gains on sales of investment securities of $322,000 in 2021 and net gains on sales of fixed assets of $190,000 in 2021. During the period immediately after the cybersecurity incident, in June 2022, we temporarily stopped assessing overdraft and certain other service charges. we estimate that additional normalized charges of approximately $125,000 would have been realized during this period. Additionally, the Company recognized a write-down on BOLI of $158,000 during the year ended December 31, 2022 due to declines in the market value of the underlying investments supporting the policy related to increased interest rates. Gains and commissions on mortgage loan originations decreased approximately $162,000 due to rising interest rates on mortgage loans.
Noninterest Expense
Noninterest expenses decreased $1.3 million, or 4.8%, to $26.5 million for the year ended December 31, 2022, compared to $27.9 million for the year ended December 31, 2021. Noninterest expense as a percent of total average assets decreased to 3.2% in 2022 from 3.5% in 2021. The decrease in noninterest expense was primarily due to a decrease of $1.7 million in occupancy and equipment expense.
The decrease in occupancy and equipment expense was driven nearly entirely by $1.1 million in non-recurring losses on three former branch office locations, which were transferred into other real estate owned during the third quarter of 2021.
The decrease in occupancy and equipment was partially offset by a $703,000 increase in salaries and benefits expense attributable to higher bonus accruals based on Company performance, annual performance raises, and adjustments to minimum starting salaries to reflect rising costs to attract and retain talent.
Our efficiency ratio, a non-GAAP measure, which is defined as noninterest expense divided by the sum of net interest income plus noninterest income, improved to 70.6% in 2022 compared to 75.6% in 2021. The decrease in this ratio is a result of improvements in net interest income and noninterest expense, as discussed above and in the “Net Interest Income and Net Interest Margin” section earlier in this Item 7. We continue to seek opportunities to operate more efficiently through the use of technology, improving processes, reducing nonperforming assets and increasing productivity.
Income Taxes and Deferred Tax Assets
Income taxes were $2.3 million for the year ended December 31, 2022, compared to $1.9 million for the same period in 2021. The effective tax rates were 22.2%, and 21.7% for 2022 and 2021, respectively. The effective tax rate for the periods differed from the federal statutory rate of 21.0% principally due to the impact of the recapture of operating loss carryforwards and applicable credits, along with the effect of certain state income taxes. The higher effective tax rate in 2022 is the result of an increase in pre-tax earnings in relation to the various tax preference items.
Deferred tax assets represent the future tax benefit of future deductible differences. If it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. The Company has evaluated positive and negative evidence to assess the realizability of its deferred taxes. Based on the evidence, including taxable income projections, the Company believes it is more likely than not that its deferred tax assets will be realizable. Accordingly, the Company did not include a valuation allowance against its deferred tax assets as of December 31, 2022 or 2021.
Tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a position will be sustained upon examination. If a tax position meets the more likely than not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being recognized. The Company classifies interest and penalties as a component of income tax expense.
Capital Resources
Our total shareholders’ equity at the end of 2022 was $57.2 million compared to $63.6 million at the end of 2021. The decrease was $6.4 million, or 10.1%. Book value per common share was $2.40 at December 31, 2022 compared to $2.66 at December 31, 2021. As previously discussed, the year-over-year decline was primarily driven by the $13.1 million net increase in the accumulated other comprehensive loss related to the unrealized loss on investment securities available-for-sale. Excluding the impact of the unrealized loss, equity increased $6.7 million.
During 2022, the board of directors authorized the repurchase of up to 500,000 shares of common stock through March 31, 2023. Through December 31, 2022, 73,595 shares have been repurchased at an average price of $2.33 per share. On February 27, 2023, the board of directors approved an extension of the repurchase program through March 31, 2024.
The Company meets the eligibility criteria to be considered a small bank holding company in accordance with the Federal Reserve’s Small Bank Holding Company Policy Statement issued in February 2015 and does not report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies.
The Bank is characterized as "well capitalized" under the “prompt corrective action” regulations pursuant to Section 38 of the FDIA. The capital adequacy ratios for the Bank, including the minimum ratios to be considered “well capitalized,” are set forth in Note 21, Capital, to the consolidated financial statements in Item 8 of this Form 10-K.
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 (CET1) ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum CET1 ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a CET1 ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of December 31, 2022, the Bank meets all capital adequacy requirements to which it is subject. Based upon projections, we believe our earnings will be sufficient to support the Bank’s planned asset growth.
The Company paid its first cash dividend of $0.05 per share in 2022. On February 27, 2023, the board of directors declared a dividend of $0.06 per share, to be paid on March 31, 2023. Future payments of cash dividends will depend on a number of factors including but not limited to maintaining positive retained earnings, compliance with regulatory rules governing the payment of dividends, strategic plans, and sufficient capital at the Bank to allow payment of dividends to the parent company.
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 investments. Collectively, those balances were $130.5 million as of December 31, 2022, down from $159.3 million as of December 31, 2021. As discussed previously in this Form 10-K, this change is a direct result of redeployment of excess cash into investment securities, which generally return higher yields, while still providing liquidity, as discussed below, and the decrease in deposits. A surplus of short-term assets is maintained at levels management deems adequate to meet potential liquidity needs.
The Bank’s primary funding source is deposits from customers in the markets in which it provides banking services. As discussed previously, deposits declined during the fourth quarter of 2022 as competition for deposits intensified from both bank and non-bank institutions. The Company expects that pressure on the rates paid on deposits will continue and that it may be required to increase the rates paid on its deposit products, possibly faster and to a higher degree not currently projected, to retain existing customers and attract new deposit relationships to fund loans and other activities. As discussed below, the Company has other liquidity sources to manage its liquidity needs as they arise.
At December 31, 2022, all of our investments are classified as available-for-sale, providing an additional source of liquidity in the amount of $68.8 million, which is net of the $27.3 million of securities pledged as collateral. Generally, the investment portfolio serves as a source of liquidity while yielding a higher return at the purchase date when compared to other short-term investment options, such as federal funds sold and overnight deposits with the Federal Reserve Bank of Richmond. Total investment securities decreased $11.3 million, or 10.51%, during 2022 from $107.4 million as of December 31, 2021 to $96.1 million as of December 31, 2022.
Our loan to deposit ratio was 84.4% as of December 31, 2022 and 83.9% as of December 31, 2021.
Available third-party sources of liquidity remain intact at December 31, 2022 which includes the following: our line of credit with the FHLB totaling $200.1 million, the brokered certificates of deposit markets, internet certificates of deposit, and the discount window at the Federal Reserve Bank of Richmond. We also have $30.0 million in unsecured federal funds lines of credit available from three correspondent banks as of December 31, 2022.
We have used our line of credit with FHLB to issue a letter of credit totaling $7.0 million to the Treasury Board of Virginia for collateral on public funds. No draws on the letter of credit have been issued. This letter of credit is considered to be a draw on our FHLB line of credit. An additional $200.1 million was available on December 31, 2022 on the $207.1 million line of credit, of which $113.7 million is secured by a blanket lien on our residential real estate loans.
While we have access to the brokered deposits market, we held no brokered deposits as of December 31, 2022 or 2021. As of December 31, 2022, we had $1.4 million in reciprocal CDARS time deposits, compared to $5.8 million as of December 31, 2021.
The Bank has access to additional liquidity through the Federal Reserve Bank of Richmond’s Discount Window for overnight funding needs. We have collateralized this line with investment securities; however, we do not anticipate using this funding source except as a last resort.
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, some of which are beyond our control. With the current economic uncertainty resulting from recovering from the lingering effects of the COVID-19 pandemic, inflation and the war in Ukraine, we continue monitoring our liquidity position, specifically cash on hand in order to meet customer demands. Additionally, our contingency funding plan is reviewed quarterly with our Asset Liability Committee.
On March 10, 2023, Silicon Valley Bank (SVB) a regional banking company headquartered in Santa Clara, California, with total assets in excess of $200 billion, was taken into receivership through FDIC, after the bank experienced a significant outflow of deposit funds fueled by concerns of large commercial and retail deposit customers holding funds far in excess of the FDIC insured limits at SVB. These concerns related to unrealized losses in SVB’s investment portfolio combined with the long-term maturities of the investments and other earning assets held by SVB. While we, or any other financial institution, can be impacted by sudden changes in market conditions or customer sentiment, we believe that our funding and liquidity management strategies and procedures are sound. In addition, our deposit customer base is diverse without significant exposure to uninsured deposit relationships. Prior to receivership of SVB our deposit fluctuations were largely tied to cyclical events and inflows and outflows related to customers seeking higher interest rates. Since the date of the receivership, we have not experienced any significant or unusual deposit outflows and we have taken steps to successfully test certain liquidity facilities in the event of any future deposit outflows.
Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract amount of the Bank’s exposure to off-balance-sheet risk as of December 31, 2022 and 2021 is as follows:
(Dollars in thousands)
Commitments to extend credit $ 84,149 $ 69,015
Standby letters of credit 3,751 3,684
Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. Those lines of credit may not actually be drawn upon to the total extent to which the Bank is committed. In response to two bank failures in March, 2023, and liquidity concerns for other super-regional banks, we have not experienced any significant unusual activity by borrowers drawing against their lines of credit, nor do we anticipate experiencing such demand that might cause us to limit customer access to these lines of credit.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds certificates of deposit, deposit accounts, and real estate as collateral supporting those commitments for which collateral is deemed necessary.
Interest Sensitivity
As of December 31, 2022, we had a negative cumulative gap rate sensitivity ratio of 17.89% for the one-year re-pricing period, compared to 12.97% as of December 31, 2021. A negative cumulative gap generally indicates that net interest income would decline in a rising interest rate environment as liabilities re-price more quickly than assets. Conversely, net interest income would likely increase in periods during which interest rates are increasing. The below table is based on contractual maturities and next repricing date and does not take into consideration prepayment speeds of investment securities and loans, nor does it consider decay rates for non-maturity deposits. When considering these prepayment speed and decay rate assumptions, along with our ability to control the repricing of a significant portion of the deposit portfolio, we are in a position to increase interest income in a rising interest rate environment; however, the ability to control the repricing of the deposit portfolio can be significantly impacted by competitive pressures, liquidity needs and access to and availability of other funding sources. With the FOMC initiating a series of rate increases, which are expected to continue into 2023, we believe our current interest risk profile remains acceptable. Furthermore, we are implementing strategies to moderate any potential adverse impact to our current interest rate risk profile, from what could be a sustained medium- to long-term environment of rising interest rates.
Interest Sensitivity Analysis
December 31, 2022
(In thousands of dollars)
- 90 Days 91-365 Days - 3 Years 4-5 Years 6-10 Years Over 10 years Total
Uses of funds:
Loans $ 104,724 $ 92,065 $ 170,703 $ 135,643 $ 60,156 $ 21,322 $ 584,613
Federal funds sold - - - - -
Deposits with banks 46,497 -
- - 46,747
Investments 3,614 7,636 23,440 18,406 28,082 32,546 113,724
Bank owned life insurance 4,549 - - - - - 4,549
Total earning assets $ 160,344 $ 99,701 $ 194,393 $ 154,049 $ 88,238 $ 53,868 $ 750,593
Sources of funds:
Int Bearing DDA 80,299 - - - - - 80,299
Savings & MMDA 174,251 - - - - - 174,251
Time Deposits 28,982 94,288 50,670 14,293 - - 188,233
Trust Preferred Securities 16,496 - - - - - 16,496
Federal funds purchased -
-
Other Borrowings - - - - - - -
Total interest bearing liabilities $ 300,028 $ 94,288 $ 50,670 $ 14,293 $ - $ - $ 459,279
Discrete Gap $ (139,684 ) $ 5,413 $ 143,723 $ 139,756 $ 88,238 $ 53,868 $ 291,314
Cumulative Gap $ (139,684 ) $ (134,271 ) $ 9,452 $ 149,208 $ 237,446 $ 291,314
Cumulative Gap as % of Total Earning Assets -18.61 % -17.89 % 1.26 % 19.88 % 31.63 % 38.81 %

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
CONTENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets December 31, 2021 and 2020
Consolidated Statements of Income - Years Ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity - Years Ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows - Years Ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of New Peoples Bankshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of New Peoples Bankshares, Inc. and its subsidiaries (the Company) as of December 31, 2022, the related consolidated statements of income, comprehensive (loss) income, shareholders’ equity and cash flows, for the year then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Loans Collectively Evaluated for Impairment - Qualitative Factors
Description of the Matter
As described in Note 2 (Summary of significant accounting policies) and Note 7 (Allowance for Loan Losses) to the consolidated financial statements, the Company maintains an allowance for loan losses that represents management’s estimate of the probable losses inherent in the Company’s loan portfolio. The Company’s allowance for loan losses has two basic components: the general allowance and the specific allowance. At December 31, 2022, the general allowance represented $6,641,000 of the total allowance for loan losses of $6,727,000. The general allowance is applied to non-impaired loans and uses historical loss experience along with qualitative factors, including changes in lending policies and procedures, the nature and volume of the portfolio, experience of lending management, levels and trends in delinquencies, nonaccrual loans, charge-offs and adversely rated loans, the loan review system, portfolio concentrations, economic conditions, collateral values, and the competitive and legal environment. The qualitative adjustments to the historical loss rates are established by applying an additional loss factor to the loan segments identified by management based on their assessment of shared risk characteristics within similar groups of non-impaired loans. Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio and contribute significantly to the allowance for loan losses.
Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.
How We Addressed the Matter in Our Audit
The primary audit procedures we performed to address this critical audit matter included:
· Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:
o Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.
o Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors.
o Evaluating the qualitative factors for directional consistency and for reasonableness.
o Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.
/s/ Yount, Hyde & Barbour, P.C.
We have served as the Company’s auditor since 2022.
Roanoke, Virginia
March 31, 2023
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of New Peoples Bankshares, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of New Peoples Bankshares, Inc. and Subsidiaries (the Company) as of December 31, 2021, the related consolidated statement of income, comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Elliott Davis, LLC
Firm ID 149
We served as the Company's auditor from 2011 to 2021.
Greenville, South Carolina
March 31, 2022
elliottdavis.com
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2022 AND 2021
(in thousands except share data)
ASSETS
Cash and due from banks $ 13,979 $ 14,952
Interest-bearing deposits with banks 46,747 45,766
Federal funds sold
Total cash and cash equivalents 61,686 60,946
Investment securities available-for-sale 96,076 107,358
Loans receivable 584,613 593,744
Allowance for loan losses (6,727 ) (6,735 )
Net loans 577,886 587,009
Bank premises and equipment, net 19,290 20,735
Other real estate owned 1,361
Accrued interest receivable 2,555 2,112
Deferred taxes, net 4,623 1,673
Bank owned life insurance 4,549 4,685
Right-of-use assets - operating leases 3,725 4,062
Other assets 4,707 4,706
Total assets $ 775,358 $ 794,647
LIABILITIES
Deposits
Noninterest bearing $ 249,924 $ 251,257
Interest-bearing 442,783 456,256
Total deposits 692,707 707,513
Borrowed funds 16,496 16,496
Lease liabilities - operating leases 3,725 4,062
Accrued interest payable
Accrued expenses and other liabilities 4,685 2,673
Total liabilities 718,139 731,016
Commitments and Contingent Liabilities (Notes 19 and 20)
SHAREHOLDERS’ EQUITY
Common stock - $2.00 par value; 50,000,000 shares authorized;
23,848,491 and 23,922,086 shares issued and outstanding at
December 31, 2022 and 2021, respectively 47,697 47,844
Additional paid-in capital 14,546 14,570
Retained earnings 8,917 2,031
Accumulated other comprehensive loss (13,941 ) (814 )
Total shareholders’ equity 57,219 63,631
Total liabilities and shareholders’ equity $ 775,358 $ 794,647
The accompanying notes are an integral part of these financial statements.
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(in thousands except share and per share data)
INTEREST AND DIVIDEND INCOME
Loans including fees $ 27,739 $ 28,323
Federal funds sold -
Interest-earning deposits with banks 1,514
Investments 1,983 1,377
Dividends on equity securities (restricted)
Total interest and dividend income 31,390 29,912
INTEREST EXPENSE
Deposits 1,875 2,248
Borrowed funds 1,230
Total interest expense 3,105 2,701
NET INTEREST INCOME 28,285 27,211
PROVISION FOR LOAN LOSSES
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 27,660 26,839
NONINTEREST INCOME
Service charges and fees 3,969 3,724
Card processing and interchange income 3,769 3,871
Insurance and investment fees 1,029
Net gain on sales of available-for-sale securities -
Other noninterest income 1,034
Total noninterest income 9,240 9,980
NONINTEREST EXPENSES
Salaries and employee benefits 13,365 12,662
Occupancy and equipment expenses 4,135 5,785
Data processing and telecommunications 2,369 2,444
Other operating expenses 6,650 6,976
Total noninterest expenses 26,519 27,867
INCOME BEFORE INCOME TAXES 10,381 8,952
INCOME TAX EXPENSE 2,299 1,942
NET INCOME $ 8,082 $ 7,010
Income Per Share
Basic and Diluted $ 0.34 $ 0.29
Average Weighted Shares of Common Stock
Basic and Diluted 23,898,185 23,922,086
The accompanying notes are an integral part of these financial statements.
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(Dollars in thousands)
NET INCOME $ 8,082 $ 7,010
Other comprehensive loss:
Investment securities activity:
Unrealized losses arising during the year (16,617 ) (1,647 )
Reclassification adjustment for net gains included in net income - (322 )
Other comprehensive losses on investment securities (16,617 ) (1,969 )
Related tax benefit 3,490
TOTAL OTHER COMPREHENSIVE LOSS (13,127 ) (1,556 )
TOTAL COMPREHENSIVE (LOSS) INCOME $ (5,045 ) $ 5,454
The accompanying notes are an integral part of these financial statements.
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(in thousands including share data)
Shares of Common Stock Common Stock Additional Paid-in- Capital Retained
Earnings
(Deficit)
Accumulated Other
Comprehensive Income (Loss)
Total Shareholders’ Equity
Balance, December 31, 2020 23,922 $ 47,844 $ 14,570 $ (4,979 ) $ 742 $ 58,177
Net income - - - 7,010 - 7,010
Other comprehensive loss, net of tax - - - - (1,556 ) (1,556 )
Balance, December 31, 2021 23,922 $ 47,844 $ 14,570 $ 2,031 $ (814 ) $ 63,631
Net income - $ - $ - $ 8,082 $ - $ 8,082
Other comprehensive loss, net of tax - - - - (13,127 ) (13,127 )
Cash dividend declared ($0.05 per share) - - - (1,196 ) - (1,196 )
Repurchase of common stock (74 ) (147 ) (24 ) - - (171 )
Balance, December 31, 2022 23,848 $ 47,697 $ 14,546 $ 8,917 $ (13,941 ) $ 57,219
The accompanying notes are an integral part of these financial statements.
NEW PEOPLES BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(Dollars are in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,082 $ 7,010
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,741 2,097
Provision for loan losses
Loss (income) on bank owned life insurance (32 )
Gain on sale of securities available-for-sale - (322 )
Gain on sale of mortgage loans (29 ) (104 )
Loss on sale or disposal of premises and equipment 1,098
Gain on sale of foreclosed real estate and repossessed assets (70 ) (126 )
Loans originated for sale (1,577 ) (5,814 )
Proceeds from sales of loans originated for sale 1,606 6,307
Adjustment of carrying value of foreclosed real estate and repossessed assets
Net amortization/accretion of bond premiums/discounts
Deferred tax expense 1,866
Net change in:
Interest receivable (443 )
Other assets
Accrued interest payable (164 )
Accrued expenses and other liabilities 2,068 (19 )
Net Cash Provided by Operating Activities 13,831 13,800
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans 9,209 (18,987 )
Purchase of securities available-for-sale (19,790 ) (85,082 )
Proceeds from sale of investment securities available-for-sale - 7,686
Proceeds from repayments and maturities of securities available-for-sale 13,980 16,315
Net (purchase) sale of equity securities (restricted) (27 )
Payments for the purchase of premises and equipment (548 ) (4,094 )
Proceeds from sale of premises and equipment - 1,203
Proceeds from insurance claims on other real estate owned or premises
Proceeds from sales of other real estate owned 2,645
Net Cash Provided by (Used in) Investing Activities 3,082 (79,705 )
CASH FLOWS FROM FINANCING ACTIVIES
Net change in short term borrowings - (5,000 )
Net change in noninterest bearing deposits (1,333 ) 27,532
Net change in interest bearing deposits (13,473 ) 11,969
Dividends paid (1,196 ) -
Repurchase of common stock (171 ) -
Net Cash (Used in) Provided by Financing Activities (16,173 ) 34,501
Net increase (decrease) in cash and cash equivalents (31,404 )
Cash and Cash Equivalents, Beginning of the Year 60,946 92,350
Cash and Cash Equivalents, End of the Year $ 61,686 $ 60,946
Supplemental Disclosure of Cash Paid During the Year for:
Interest $ 2,851 $ 2,865
Taxes -
Supplemental Disclosure of Non-Cash Transactions:
Right-of-use assets obtained in exchange for new operating lease liabilities -
Loan made to finance sale of premises and equipment -
Other real estate acquired in settlement of foreclosed loans -
Loans made to finance sale of foreclosed real estate
Transfer of premises and equipment to other real estate -
Change in unrealized losses on securities available for sale (16,617 ) (1,969 )
The accompanying notes are an integral part of these financial statements.
NEW PEOPLES BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1	NATURE OF OPERATIONS
Nature of Operations - New Peoples Bankshares, Inc. (New Peoples) is a financial holding company whose principal activity is the ownership and management of a community bank, New Peoples Bank, Inc. (the Bank). New Peoples and the Bank are each organized and incorporated under the laws of the Commonwealth of Virginia. As a state-chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwest Virginia, southern West Virginia, northeastern Tennessee and western North Carolina. These services include commercial and consumer loans along with traditional deposit products such as checking and savings accounts.
NOTE 2	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation - The consolidated financial statements include New Peoples, the Bank, NPB Insurance Services, Inc., and NPB Web Services, Inc. (Hereinafter, collectively referred to as the Company, we, us, or our). All significant intercompany balances and transactions have been eliminated. In accordance with Accounting Standards Codification (ASC) 942, Financial Services - Depository and Lending, NPB Capital Trust I and 2 are not included in the consolidated financial statements.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles of the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses and the determination of the deferred tax asset and related valuation allowance are based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.
Cash and Cash Equivalents - Cash and cash equivalents as used in the cash flow statements include cash and due from banks, interest-bearing deposits with banks, federal funds sold and investment securities maturing within three months.
Investment Securities - Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized historical cost. Securities not intended to be held to maturity are classified as available-for-sale and carried at fair value. Securities available-for-sale are intended to be used as part of the Company’s asset and liability management strategy and may be sold in response to changes in interest rates, prepayment risk or other similar factors.
The amortization of premiums and accretion of discounts are recognized in interest income using the effective interest method over the period to maturity for discounts and the earlier of call date or maturity for premiums. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Realized gains (losses) on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive loss. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive loss, net of tax, whereas realized gains and losses flow through the statements of income.
Loans held for sale - Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance through earnings. Mortgage loans held for sale are generally sold with servicing released. Gains and losses on sales of mortgages are based on the difference between the selling price and the carrying value of the related loan sold.
Loans - Loans are carried on the balance sheet at unpaid principal balance, net of any unearned interest and the allowance for loan losses. Interest income on loans is computed using the effective interest method, except where serious doubt exists as to the collectability of the loan, in which case accrual of the income is discontinued.
It is the Company’s policy to stop accruing interest on a loan, and classify that loan as non-accrual under the following circumstances: (a) whenever we are advised by the borrower that scheduled payment or interest payments cannot be met, (b) when our best judgment indicates that payment in full of principal and interest can no longer be expected, or (c) when any such loan or obligation becomes delinquent for 90 days unless it is both well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, except in the case of a nonaccrual loan that is well secured and in the process of collection, in which case, the interest accrued but not collected is not reversed. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual status. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, six consecutive timely payments are made, and prospects for future contractual payments are reasonably assured.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Significant Group Concentrations of Credit Risk - The Company identifies a concentration as any obligation, direct or indirect, of the same or affiliated interests which represent 25% or more of the Company’s capital structure, or $14.3 million as of December 31, 2022. Most of the Company’s activities are with customers located within southwest Virginia, southern West Virginia, northeastern Tennessee region and western North Carolina. Certain concentrations may pose credit risk. The Company does not have any significant concentrations to any one industry or customer.
Allowance for Loan Losses - The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The loan portfolio is analyzed periodically and loans are assigned a risk rating. Allowances for impaired loans are generally determined based on collateral values or the present value of expected cash flows. A general allowance is made for all other loans not considered impaired as deemed appropriate by management. In determining the adequacy of the allowance, management considers the following factors: the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, the estimated value of any underlying collateral, prevailing environmental factors and economic conditions, and other inherent risks. While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in collateral values and changes in estimates of cash flows on impaired loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Loans are charged against the allowance for loan losses when management believes that collectability of all or part of the principal is unlikely. Past due status is determined based on contractual terms.
In regard to our consumer and consumer real estate loan portfolio, the Company uses the guidance found in the Uniform Retail Credit Classification and Account Management Policy which affects our estimate of the allowance for loan losses. Under this approach, a consumer or consumer real estate loan must initially have a credit risk grade of Pass or better. Subsequently, if the loan becomes contractually 90 days past due or the borrower files for bankruptcy protection, the loan is downgraded to Substandard and placed in nonaccrual status. If the loan is unsecured, upon being deemed Substandard, the entire loan amount is charged off. For non-1-4 family residential loans that are 90 days past due or greater, or in bankruptcy, the collateral value less estimated liquidation costs is compared to the loan balance to calculate any potential deficiency. If the collateral is sufficient then no charge-off is necessary. If a deficiency exists, then upon the loan becoming contractually 120 days past due, the deficiency is charged-off against the allowance for loan loss. In the case of 1-4 family residential or home equity loans, upon the loan becoming 120 days past due, a current value is obtained and after application of an estimated liquidation discount, a comparison is made to the loan balance to calculate any deficiency. Subsequently, any noted deficiency is then charged-off against the allowance for loan loss when the loan becomes contractually 180 days past due. If the customer has filed bankruptcy, then within 60 days of the bankruptcy notice, any calculated deficiency is charged-off against the allowance for loan loss. Collection efforts continue by means of repossessions or foreclosures, and upon bank ownership, liquidation ensues.
Bank Premises and Equipment - Land, buildings and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:
Schedule of estimated useful lives
Type
Estimated useful life
Buildings
years
Paving and landscaping
years
Computer equipment and software
to 5 years
Vehicles
years
Furniture and other equipment
to 10 years
Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Repairs and maintenance costs are recorded as a component of noninterest expense as incurred.
Other Real Estate Owned - Other real estate owned represents properties acquired through foreclosure or deeds taken in lieu of foreclosure and former branch sites that have been closed and for which there are no intentions to re-open or otherwise use the location. At the time of acquisition, these properties are recorded at fair value less estimated costs to sell. Expenses incurred in connection with operating these properties and subsequent write-downs, if any, are charged to operations. Subsequent to foreclosure, management periodically considers the adequacy of the reserve for losses on the property. Gains and losses on the sales of these properties are credited or charged to income in the year of the sale.
Bank Owned Life Insurance (BOLI) - The Bank purchased life insurance policies on certain, now-former, key officers and employees. Changes in the cash surrender value are recorded in noninterest income.
Leases - A right-of-use asset and related lease liability is recognized for operating leases the Bank has entered into for certain office facilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management. If it is determined that it is reasonably certain that the Bank will exercise renewal options, the additional term is included in the calculation of the lease liability. As most of our leases do not provide an implicit rate, we use the fully collateralized Federal Home Loan Bank borrowing rate, commensurate with the lease terms at the lease commencement date, in determining the present value of the lease payments.
Income Taxes - Deferred tax assets or liabilities are computed based upon the difference between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The Company provides a valuation allowance on its net deferred tax assets where it is more likely than not such assets will not be realized. As of December 31, 2022 and 2021, the Company had no valuation allowance on its net deferred tax assets.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. See Note 10, Income Taxes, for additional information. The Company records any penalties and interest attributed to uncertain tax positions as a component of income tax expenses.
Income Per Share - Basic income per share computations are based on the weighted average number of shares outstanding during each period. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued.
Financial Instruments - Off-balance-sheet instruments - In the ordinary course of business, the Company has entered into commitments to extend credit. Such financial instruments are recorded in the financial statements when they are funded.
Financial Instruments - Fair Value - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully discussed in Note 22. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risks, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect these estimates.
Comprehensive (Loss) Income - GAAP require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive (loss) income. The change in unrealized gains and losses on available-for-sale securities is the Company’s only component of other comprehensive loss.
Revenue from Contracts with Customers - The Company generally satisfies its performance obligations fully on its contracts with customers as services are rendered; and the transaction prices are typically fixed, charged either on a periodic basis or based on activity.
Advertising Cost - Advertising costs are expensed in the period incurred. Those costs, which are included in Advertising, sponsorships and donations in Note 24 totaled $162,000 and $252,000, for the years ended December 31, 2022 and 2021, respectively.
Reclassification - Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and shareholders’ equity previously reported were not affected by these reclassifications.
Subsequent Events - The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. See Note 25 Subsequent Events for additional information.
NOTE 3	INCOME PER SHARE
Basic income per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. For the years ended December 31, 2022 and 2021, there were no dilutive potential common shares. Basic and diluted net income per common share calculations follows:
Schedule of basic and diluted net loss per common share calculations
(Amounts in thousands, except For the year ended
share and per share data) December 31,
Net income $ 8,082 $ 7,010
Weighted average shares outstanding 23,898,185 23,922,086
Weighted average dilutive shares outstanding 23,898,185 23,992,086
Basic and diluted income per share $ 0.34 $ 0.29
NOTE 4	DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS
The Bank had federal funds sold and interest-bearing cash on deposit with the Federal Reserve Bank of Richmond (the Federal Reserve Bank) and other commercial banks amounting to $47.7 million and $46.0 million as of December 31, 2022 and 2021, respectively. Deposit amounts at other commercial banks may, at times, exceed federally insured limits.
Effective March 26, 2020, the Board of Governors of the Federal Reserve System set reserve requirements to zero. Therefore, the Bank is no longer required to maintain minimum reserve balances with the Federal Reserve Bank.
The Bank has a total of $30.0 million in unsecured fed funds lines of credit facilities from three correspondent banks that were available at December 31, 2022 and 2021, respectively. Of these total commitments, all were available at December 31, 2022 and 2021. As a condition for $5.0 million of one of the unsecured fed funds line of credit, the Bank maintains a minimum deposit balance of $250,000 with this correspondent bank. As of December 31, 2022 and 2021, the Bank was in compliance with this requirement.
NOTE 5	INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities (all available-for-sale) as of December 31, 2022 and December 31, 2021 are as follows:
Schedule of securities amortized cost and estimated fair value
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(Dollars are in thousands) Cost Gains Losses Value
December 31,
U.S. Treasuries $ 12,642 $ - $ 957 $ 11,685
U.S. Government Agencies 10,129 9,399
Taxable municipals 23,022 - 6,207 16,815
Corporate bonds 3,512 - 3,136
Mortgage backed securities 64,419 - 9,378 55,041
Total Securities available for sale $ 113,724 $ 4 $ 17,652 $ 96,076
December 31, 2021
U.S. Treasuries $ 7,791 $ 2 $ 122 $ 7,671
U.S. Government Agencies 9,098 9,089
Taxable municipals 23,075 22,980
Corporate bonds 2,014 2,019
Mortgage backed securities 66,410 65,599
Total Securities available for sale $ 108,388 $ 404 $ 1,434 $ 107,358
The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2022 and December 31, 2021.
Schedule of fair value and gross unrealized losses on investment securities
Less than 12 Months Months or More Total
(Dollars are in thousands)
Fair Value Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
December 31, 2022
U.S. Treasuries $ 4,761 $ 145 $ 6,922 $ 812 $ 11,683 $ 957
U.S. Government Agencies 5,925 3,295 9,220
Taxable municipals 3,689 1,113 13,127 5,094 16,816 6,207
Corporate bonds 2,375 3,136
Mortgage backed securities 11,338 43,612 8,517 54,950 9,378
Total $ 28,088 $ 2,603 $ 67,717 $ 15,049 $ 95,805 $ 17,652
December 31, 2021
U.S. Treasuries $ 6,200 $ 122 $ - $ - $ 6,200 $ 122
U.S. Government Agencies 3,434 4,411
Taxable municipals 13,040 13,427
Corporate bonds 1,482 - - 1,482
Mortgage backed securities 52,180 6,282 58,462
Total $ 73,879 $ 1,145 $ 10,103 $ 289 $ 83,982 $ 1,434
As of December 31, 2022, the available-for-sale portfolio included 221 investments for which the fair market value was less than amortized cost. As of December 31, 2021, the available-for-sale portfolio included 113 investments for which the fair market value was less than amortized cost. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s analysis, the Company concluded that no securities had other-than-temporary impairment at December 31, 2022 or December 31, 2021.
Investment securities with a carrying value of $27.3 million and $12.1 million as of December 31, 2022 and 2021, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
There were no securities sold during the year ended December 31, 2022. During the year ended December 31, 2021, $7.7 million of securities were sold, realizing $322,000 in gains.
The amortized cost and fair value of investment securities as of December 31, 2022, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Also, actual maturities may differ from scheduled maturities on amortizing securities, such as mortgage-backed securities and collateralized mortgage obligations, because the underlying collateral on these types of securities may be repaid prior to the scheduled maturity date.
Schedule of amortized cost and fair value of investment securities contractual maturity
Weighted
(Dollars are in thousands) Amortized
Fair
Average
Securities Available for Sale Cost
Value
Yield
Due in one year or less $ 1,482 $ 1,475
4.51%
Due after one year through five years 16,696 15,674 2.12%
Due after five years through ten years
15,315
13,409
2.11%
Due after ten years
80,231
65,518
1.86%
Total $ 113,724 $ 96,076
1.97%
The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank of Atlanta (FHLB), is required to hold stock in each. The Bank also owns stock in CBB Financial Corp., which is a correspondent of the Bank. These equity securities, which are included in other assets on the consolidated balance sheet, are restricted from trading and are recorded at a cost of $2.1 million and $2.0 million as of December 31, 2022 and 2021, respectively. The stock has no quoted market value and no ready market exists.
NOTE 6	LOANS
Loans receivable outstanding as of December 31, 2022 and 2021, are summarized as follows:
Summary of loans receivable outstanding
December 31,
(Dollars are in thousands)
Real estate secured:
Commercial $ 197,069 $ 206,162
Construction and land development 42,470 32,325
Residential 1-4 family 227,232 224,530
Multifamily 29,710 33,048
Farmland 17,744 18,735
Total real estate loans 514,225 514,800
Commercial 46,697 54,325
Agriculture 3,756 4,021
Consumer installment loans 19,309 18,756
All other loans 1,842
Total loans $ 584,613 $ 593,744
Included in commercial loans as of December 31, 2022 and 2021, were approximately $273,000 and $6.4 million of PPP loans that are guaranteed by the SBA.
Also included in total loans above are deferred loan fees of $1.6 million and $1.8 million, as of December 31, 2022 and 2021, respectively, which include net deferred PPP loan fees. Total deferred loan costs were $1.9 million and $2.0 million, as of December 31, 2022 and 2021, respectively. Income or expense from net deferred fees and costs is recognized as income or expense over the lives of the respective loans as a yield adjustment. If loans repay prior to scheduled maturities any unamortized fee or cost is recognized at that time.
As a result of PPP originations, net deferred fees totaling $3.2 million were received. The Company recognized approximately $211,000 and $2.0 million, respectively, during the years ended December 31, 2022 and 2021.
Loans receivable on nonaccrual status as of December 31, 2022 and 2021 are summarized as follows:
Summary of loans receivable on nonaccrual status
(Dollars are in thousands)
Real estate secured:
Commercial $ - $ 415
Construction and land development
Residential 1-4 family 2,597 2,314
Multi-family
Farmland
Total real estate loans 3,377 2,925
Commercial -
Consumer installment and other loans
Total loans receivable on nonaccrual status $ 3,413 $ 2,941
Total interest income not recognized on nonaccrual loans for 2022 and 2021 was approximately $10,000 and $223,000, respectively.
The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2022 and December 31, 2021:
Summary of impaired loans
As of December 31, 2022
(Dollars are in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Recorded
Investment
Unpaid Principal Balance
Related
Allowance
With no related allowance recorded:
Real estate secured:
Commercial $ 124 $ 6 $ 90 $ 131 $ -
Construction and land development 491 -
Residential 1-4 family 1,585 1,617 1,972 -
Multifamily - - - - -
Farmland 417 -
Commercial 31 -
Agriculture - - - - -
Consumer installment loans
- - -
All other loans - - - - -
With an allowance recorded:
Real estate secured:
Commercial 338
Construction and land development - - - -
Residential 1-4 family 48
Multifamily - - - -
Farmland - - - -
Commercial - - -
Agriculture - - - - -
Consumer installment loans - - - - -
All other loans - - - - -
Total $ 3,154 $ 105 $ 2,749 $ 3,428 $ 86
As of December 31, 2021
(Dollars are in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Recorded
Investment
Unpaid Principal Balance
Related
Allowance
With no related allowance recorded:
Real estate secured:
Commercial $ 245 $ - $ 99 $ 140 $ -
Construction and land development 298 -
Residential 1-4 family 1,720 1,508 1,791 -
Multifamily - - - - -
Farmland 490 -
Commercial - - - - -
Agriculture - - - - -
Consumer installment loans - -
All other loans - - - - -
With an allowance recorded:
Real estate secured:
Commercial 372
Construction and land development - - - - -
Residential 1-4 family 372
Multifamily - - - - -
Farmland 209
Commercial 35
Agriculture - - - - -
Consumer installment loans - - - - -
All other loans - - - - -
Total $ 3,909 $ 70 $ 2,833 $ 3,709 $ 166
An age analysis of past due loans receivable is below. As of December 31, 2022 and 2021, there were no loans over 90 days past due that were accruing.
Summary of age analysis of past due loans receivable
As of December 31, 2022
(Dollars are in thousands)
Loans
30-59
Days
Past
Due
Loans
60-89
Days
Past
Due
Loans
or
More
Days
Past
Due
Total
Past
Due
Loans
Current
Loans
Total
Loans
Real estate secured:
Commercial $ 268 $ - $ - $ 268 $ 196,801 $ 197,069
Construction and land
development
- - 42,381 42,470
Residential 1-4 family 3,521 4,405 222,827 227,232
Multifamily - - 29,481 29,710
Farmland - - 17,459 17,744
Total real estate loans 4,392 5,276 508,949 514,225
Commercial - - 46,641 46,697
Agriculture - - - - 3,756 3,756
Consumer installment
loans
107 19,202 19,309
All other loans - -
Total loans $ 4,580 $ 560 $ 358 $ 5,498 $ 579,115 $ 584,613
As of December 31, 2021
(Dollars are in thousands)
Loans
30-59
Days
Past
Due
Loans
60-89
Days
Past
Due
Loans
or
More
Days
Past
Due
Total
Past
Due
Loans
Current
Loans
Total
Loans
Real estate secured:
Commercial $ - $ - $ - $ - $ 206,162 $ 206,162
Construction and land
development
- 32,311 32,325
Residential 1-4 family 2,473 3,199 221,331 224,530
Multifamily - - 32,937 33,048
Farmland - - - - 18,735 18,735
Total real estate loans 2,480 3,324 511,476 514,800
Commercial - - 54,320 54,325
Agriculture - - - - 4,021 4,021
Consumer installment
loans
- 18,695 18,756
All other loans - - - - 1,842 1,842
Total loans $ 2,541 $ 245 $ 604 $ 3,390 $ 590,354 $ 593,744
The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:
Pass - Loans in this category are considered to have a low likelihood of loss based on analysis of relevant information about the ability of the borrowers to service their debt and other factors.
Special Mention - Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.
Substandard - A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. There were no loans classified as doubtful at either December 31, 2022 or 2021.
Based on the most recent analysis performed, the risk category of loans receivable was as follows:
Summary of risk category of loans receivable
As of December 31, 2022
(Dollars are in thousands)
Pass
Special
Mention
Substandard
Doubtful
Total
Real estate secured:
Commercial $ 195,376 $ 1,425 $ 268 $ - $ 197,069
Construction and land development 41,882 - 42,470
Residential 1-4 family 224,228 2,598 - 227,232
Multifamily 29,503 - - 29,710
Farmland 16,848 - 17,744
Total real estate loans 507,837 3,010 3,378 - 514,225
Commercial 46,471 - - 46,697
Agriculture 3,756 - - - 3,756
Consumer installment loans 19,272 - 19,309
All other loans - - -
Total $ 577,962 $ 3,238 $ 3,413 $ - $ 584,613
As of December 31, 2021
(Dollars are in thousands)
Pass
Special
Mention
Substandard
Doubtful
Total
Real estate secured:
Commercial $ 198,022 $ 7,725 $ 415 $ - $ 206,162
Construction and land development 31,366 - 32,325
Residential 1-4 family 221,342 2,273 - 224,530
Multifamily 32,499 - 33,048
Farmland 18,137 - 18,735
Total real estate loans 501,366 10,550 2,884 - 514,800
Commercial 53,162 1,154 - 54,325
Agriculture 4,021 - - - 4,021
Consumer installment loans 18,746 - 18,756
All other loans 1,842 - - - 1,842
Total $ 579,137 $ 11,706 $ 2,901 $ - $ 593,744
NOTE 7	ALLOWANCE FOR LOAN LOSSES
The following tables present activity in the allowance for loan losses for the years ended December 31, 2022 and 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Additionally, the allocation of the allowance by recorded portfolio segment and impairment method is presented as of December 31, 2022 and 2021.
Schedule of allocation of portion of allowance
Real estate secured
(Dollars are in thousands)
Commercial
Construction and Land Development
Residential 1-4 family
Multifamily
Farmland
Commercial
Agriculture
Consumer and All Other
Unallocated
Total
Year ended December 31, 2022
Beginning balance $ 2,134 $ $ 2,237 $ $ $ 1,099 $ $ $ $ 6,735
Charge-offs
(5)
(149)
(64)
(111)
(1)
(45)
(1)
(559)
-
(935)
Recoveries
-
Provision
(9)
(704)
(97)
Ending balance $ 2,364 $ $ 2,364 $ $ $ $ $ $ $ 6,727
Allowance for loan losses at December 31, 2022
Individually evluated for impairment $ $ - $ $ - $ - $ - $ - $ - $ - $
Collectively evaluated for impairment
2,301
2,341
6,641
$ 2,364 $ $ 2,364 $ $ $ $ $ $ $ 6,727
Loans at December 31,
Individually evluated for impairment $ $ $ 1,649 $ - $ $ $ - $ - $ - $ 2,749
Collectively evaluated for impairment
196,711
41,999
225,583
29,710
17,496
46,965
3,756
19,644
-
581,864
$ 197,069 $ 42,470 $ 227,232 $ 29,710 $ 17,744 $ 46,988 $ 3,756 $ 19,644 $ - $ 584,613
Real estate secured
(Dollars are in thousands)
Commercial
Construction and Land Development
Residential 1-4 family
Multifamily
Farmland
Commercial
Agriculture
Consumer and All Other
Unallocated
Total
Year ended December 31, 2021
Beginning balance $ 2,281 $ $ 1,951 $ $ $ 2,275 $ $ $ - $ 7,191
Charge-offs
(915)
-
(48)
-
-
(92)
-
(78)
-
(1,133)
Recoveries
-
-
Provision
(50)
(1,221)
(13)
(22)
Ending balance $ 2,134 $ $ 2,237 $ $ $ 1,099 $ $ $ $ 6,735
Allowance for loan losses at December 31, 2021
Individually evluated for impairment $ $ - $ $ - $ $ $ - $ - $ - $
Collectively evaluated for impairment
2,040
2,184
1,097
6,569
$ 2,134 $ $ 2,237 $ $ $ 1,099 $ $ $ $ 6,735
Loans at December 31,
Individually evluated for impairment $ $ $ 1,848 $ - $ $ $ - $ $ - $ 2,833
Collectively evaluated for impairment
205,748
32,301
222,682
33,048
18,218
54,297
4,021
20,596
-
590,911
$ 206,162 $ 32,325 $ 224,530 $ 33,048 $ 18,735 $ 54,325 $ 4,021 $ 20,598 $ - $ 593,744
In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision. Due to the underlying SBA guarantee provided for PPP loans, these accounts were not included in the portfolio segment or impairment calculations. Additionally, due to uncertainties presented by the lingering impact of the pandemic and the resulting economic uncertainty, internal and external qualitative factors were revised accordingly. In 2022 and 2021, external qualitative factors were adjusted to consider the impact of inflation.
NOTE 8	TROUBLED DEBT RESTRUCTURINGS
As of December 31, 2022, loans classified as troubled debt restructurings (TDRs) totaled $2.0 million compared to $2.5 million as of December 31, 2021. The following table presents information related to loans modified as troubled debt restructurings during the years ended December 31, 2022 and 2021.
Schedule of loans modified as troubled debt restructurings
December 31, 2022 December 31, 2021
(Dollars are in thousands)
# of
Loans
Pre-Mod.
Recorded Investment
Post-Mod.
Recorded
Investment
# of
Loans
Pre-Mod.
Recorded Investment
Post-Mod.
Recorded
Investment
Real estate secured:
Commercial - $ - $ - - $ - $ -
Construction and land
Development	
- - - - - -
Residential 1-4 family - - -
Multifamily - - - - - -
Farmland - - - - - -
Total real estate loans - - -
Commercial - - - - - -
Agriculture - - - - - -
Consumer installment loans - - - - - -
All other loans - - - - - -
Total - $ - $ - $ 35 $ 35
There were no loans modified that resulted in a troubled debt restructuring during the year ended December 31, 2022. During the year ended December 31, 2021, one loan was modified for which the modification was considered to be a troubled debt restructuring.
For the year ended December 31, 2022 there were no TDRs that subsequently defaulted within twelve months of the loan modification. For the year ended December 31, 2021, there were two TDRs with a modified balance of $56,000 that subsequently defaulted within twelve months of the loan modification. Generally, a TDR is considered to be in default once it becomes 90 days or more past due following a modification.
When determining the level of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further write down the carrying value of these loans.
NOTE 9	BANK PREMISES AND EQUIPMENT
Depreciation expense for 2022 and 2021 was $1.7 million and $2.1 million, respectively. Bank premises and equipment as of December 31, 2022 and 2021 are summarized as follows:
Schedule of bank premises and equipment
(Dollars are in thousands)
Land $ 7,371 $ 7,424
Buildings and improvements 15,972 16,252
Furniture and equipment 13,965 14,139
37,308 37,815
Less accumulated depreciation (18,018 ) (17,080 )
Bank Premises and Equipment $ 19,290 $ 20,735
As presented in Note 14 Other Real Estate Owned, the bank sold three former branch locations during 2022. These properties with a combined carrying value of $2.0 million, were transferred to other real estate owned during 2021, resulting in an increase to OREO of $950,000, and disposal and valuation costs of approximately $1.1 million. Equipment with a combined net book value of $188,000 was written off in 2021.
During the year ended December 31, 2021, the Bank sold four other former branch locations, with net book values of approximately $1.1 million, resulting in approximately $173 thousand of net gains on sales.
During 2021, we opened one new branch office, in Bristol, Virginia, resulting in a net increase of $1.7 million in premises and equipment.
As presented in Note 17 Leasing Activities, during 2021, the Bank repurchased the branch office located in Lebanon, Virginia, which had previously been sold and leased back.
NOTE 10	INCOME TAXES
The Company files a consolidated federal income tax return. The following summarizes the provision for income taxes and the related deferred tax components for the years ended December 31, 2022 and 2021.
Income tax expense is summarized as follows for the years ended December 31, 2022 and 2021:
Schedule of pre-tax book income
(Dollars are in thousands)
Current income tax expense (benefit)
Federal $ 1,759 $ (172 )
State - -
Total current income tax expense (benefit) 1,759 (172 )
Deferred income tax expense
Federal 2,067
State
Total deferred income tax expense 2,114
Income tax expense $ 2,299 $ 1,942
The following table summarizes the differences between the actual income tax expense and the amounts computed using the federal statutory tax rate of 21% for years ended December 31, 2022 and 2021, respectively:
Schedule of reconciliation of income tax expense
(Dollars are in thousands)
Income tax expense (benefit) at the applicable federal rate $ 2,180 $ 1,879
Permanent differences resulting from:
Nondeductible expenses
Tax exempt interest income (3 ) (4 )
Bank owned life insurance (7 )
Other adjustments
Income tax expense $ 2,299 $ 1,942
The net deferred tax assets and liabilities resulting from temporary differences as of December 31, 2022 and 2021, are summarized as follows:
Schedule of net deferred tax assets and liabilities
(Dollars are in thousands)
Deferred tax assets
Allowance for loan losses $ 1,498 $ 1,500
Deferred compensation
Nonaccrual loan interest
Unrealized loss on securities available for sale 3,706
Other real estate owned
Amortization of core deposits -
Amortization of goodwill -
Capitalized interest and repair expense
Net operating loss carryforward -
Other
Total assets, gross 5,954 3,256
Deferred tax liabilities
Accelerated depreciation 1,105
Prepaid expenses
Deferred loan costs
Total liabilities, gross 1,331 1,583
Net deferred tax asset $ 4,623 $ 1,673
In accordance with applicable accounting guidance, the Company determined that it was not required to establish a valuation allowance for deferred tax assets as it is more likely than not that the deferred tax asset will be realized through future taxable income, future reversals of existing taxable temporary differences and tax strategies. The Company’s net deferred tax asset is recorded in the consolidated financial statements separately.
As of December 31, 2022 and 2021, the Company had no unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to increase significantly over the next twelve months. The company recognizes interest and penalties as a component of income tax expense.
The Company and Bank are subject to U. S. federal income tax, a capital-based franchise tax in the Commonwealth of Virginia; and income and excise taxes in West Virginia, Tennessee and North Carolina, respectively, based on earnings realized from business activities within each state. Years prior to 2019 are no longer subject to examination by taxing authorities.
NOTE 11	TIME DEPOSITS
The aggregate amount of time deposits that meet or exceed the Federal Deposit Insurance Corporation (FDIC) Insurance limit of $250,000 was $26.8 million and $28.6 million as of December 31, 2022 and 2021, respectively. We had no brokered time deposits at either December 31, 2022 or 2021. As of December 31, 2022, the scheduled maturities of time deposits are as follows (dollars are in thousands):
Schedule of maturities
$ 123,270
20,683
29,987
8,185
6,108
After five years
-
Total $ 188,233
NOTE 12	RELATED PARTY TRANSACTIONS
Officers, directors (and companies controlled by them), principal shareholders, and associates were customers of and had loan transactions with the Bank in the normal course of business. The following table summarizes these transactions, which were made on substantially the same terms as those prevailing for other customers and did not involve any abnormal risk.
Schedule of related party
For the year ended December 31,
(Dollars in thousands)
Beginning balance $ 3,419 $ 4,187
New loans and advances on lines 2,636 2,620
Payments and other reductions (4,496 ) (3,388 )
Ending balance $ 1,559 $ 3,419
Total related party deposits held at the Bank were $29.0 million and $24.8 million as of December 31, 2022 and 2021, respectively.
NPB Insurance Services, Inc. holds a 39% membership interest in Lonesome Pine Title Agency, LLC, which provides title insurance. Another member of the agency is a related party to the Company.
In August 2021, the Bank sold a parcel of land, adjacent to the Grundy, Virginia office to a director for $150 thousand, which approximated the fair value of the property. A gain of approximately $17,000 was recorded from this transaction.
NOTE 13	RETIREMENT PLANS
The Company has established a qualified defined contribution plan that covers all full-time employees. The Company matches employee contributions up to a maximum of 3% of their salary. The Company contributed approximately $235,000 and $246,000 to the defined contribution plan during the years ended December 31, 2022 and 2021, respectively.
The Bank maintains a salary continuation plan for key executives which was established in 2002 and is funded by single premium life insurance policies. Expenses related to the plan were approximately $27,000 and $29,000 for the years ended December 31, 2022 and 2021, respectively.
NOTE 14	OTHER REAL ESTATE OWNED
The following table summarizes the activity in other real estate owned for the years ended December 31, 2022 and 2021:
Schedule of other real estate owned
(Dollars are in thousands)
Balance, beginning of year $ 1,361 $ 3,334
Additions -
Transfers from premises and equipment -
Proceeds from sales (207 ) (2,645 )
Proceeds from insurance claims - (54 )
Loans made to finance sales (711 ) (400 )
Adjustment of carrying value (197 ) (466 )
Gains (losses) from sales
Balance, end of year $ 261 $ 1,361
During 2022, three former branch offices that were transferred from premises to other real estate owned during 2021, were sold, resulting in valuation adjustments of $137,000 and net losses totaling $5,000, respectively.
NOTE 15	BANK OWNED LIFE INSURANCE
As of December 31, 2022 and 2021, the Bank had an aggregate total cash surrender value of $4.5 million and $4.7 million, respectively, on life insurance policies covering former key officers.
The Company recorded a net write-down of approximately $136,000 during the year ended December 31, 2022. The Company recognized income of approximately $32,000 during the year ended December 31, 2021.
NOTE 16	DIVIDEND LIMITATIONS ON SUBSIDIARY BANK
A principal source of funds for the Company is dividends paid by the Bank. The Federal Reserve Act restricts the amount of dividends the Bank may pay. Approval by the Board of Governors of the Federal Reserve System is required if the dividends declared by a state member bank, in any year, exceed the sum of (1) net income of the current year and (2) income net of dividends for the preceding two years.
Virginia law restricts the amount of dividends a Virginia corporation may pay. Generally, a Virginia corporation may not authorize and make distributions if, after giving effect to the distribution, it would be unable to meet its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if it were dissolved at that time, to satisfy the preferential rights of shareholders whose rights are superior to the rights of those receiving the distribution. In addition, the payment of distributions to shareholders is subject to any prior rights of outstanding preferred stock.
NOTE 17	LEASING ACTIVITIES
As of December 31, 2022, the Bank leases four branch offices and sublets a lot adjacent to another branch office. The lease agreements have maturity dates ranging from May 2032 to December 2041. It is assumed that there are currently no circumstances in which the leases would be terminated prior to expiration. The weighted average remaining life of the lease terms as of December 31, 2022, was 9.60 years.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded to the lease term for each transaction. This methodology is expected to be used for any other subsequent lease agreements. The weighted average discount rate for the leases as of December 31, 2022 was 3.28%.
The Company’s operating lease costs for the years ended December 31, 2022 and 2021, as a result of the transactions discussed above, was $456,000 and $528,000, respectively.
During 2021, the Bank repurchased its branch office located in Lebanon, Virginia, for $1.3 million. This branch had previously been sold and leased back in September 2019. As a result of the repurchase, the lease with a remaining term of 12.9 years was cancelled.
The Company’s other operating leases were evaluated and determined to be immaterial to the financial statements. As of December 31, 2022, future minimum rental commitments under the non-cancellable operating leases discussed above are as follows (dollars are in thousands):
Schedule of future minimum rental commitments under the non-cancellable operating leases
$
Thereafter
2,226
Total lease payments
4,527
Less imputed interest
Total $ 3,725
NOTE 18	BORROWED FUNDS
The following table presents the breakdown of borrowed funds as of December 31, 2022 and 2021 (dollars in thousands):
Schedule of breakdown of borrowed funds
FHLB Revolving Advances
(a)
Federal Funds Lines
(b)
FHLB Term Loans Short-Term
(c)
FHLB Term Loans Long-Term
(d)
NPB Capital Trust I
(e)
NPB Capital Trust 2
(e)
Total
Balance December 31, 2022 $ - $ -
$ -
$ -
$ 11,341
$ 5,155 $ 16,496
Highest balance at any month-end
-
-
60,000
-
11,341
5,155
Average weighted balance
-
19,507
-
11,341
5,155
36,866
Average interest rate:
Paid during the year
1.68%
-%
2.48%
-%
4.63%
3.79%
3.31%
At year-end
-%
-%
-%
-%
6.68%
5.85%
6.42%
Balance December 31, 2021 $ - $ -
$ -
$ -
$ 11,341
$ 5,155
$ 16,496
Highest balance at any month-end
-
1,020
5,000
-
11,341
5,155
Average weighted balance
-
2,466
-
11,341
5,155
18,970
Average interest rate:
Paid during the year
- %
2.51%
1.36%
-%
2.81%
1.97%
2.39%
At year-end
-%
-%
-%
-%
2.72%
1.89%
2.46%
(a) - The Bank has the ability to borrow up to an additional $113.7 million from the FHLB under a line of credit which is secured by a blanket lien on residential real estate loans. With additional collateral, the Bank’s total credit availability would be $200.1 million. The Bank had no overnight borrowings subject to daily rate changes from the FHLB at December 31, 2022 or 2021.
We have used our line of credit with FHLB to issue letters of credit totaling $7.0 million to the Treasury Board of Virginia for collateral on public funds deposited in the Bank. No draws on the letters of credit have been issued. The letters of credit are considered draws on our FHLB line of credit.
(b) - Federal funds lines consist of $30.0 million in unsecured federal funds line of credit facilities with correspondent banks as of December 31, 2022 and 2021, respectively exclusive of any outstanding balance. The Company did not borrow from the lines other than to test the ability to access the lines.
(c) - As of December 31, 2022, there are no short term FHLB advances outstanding.
(d) - As of December 31, 2022 and 2021, there were no long term FHLB advances.
(e) - TPS I - On July 7, 2004, the Company completed the issuance of $11.3 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust I (TPS I). The rate is determined quarterly and floats based on the 3-month LIBOR plus 260 basis points.
TPS 2 - On September 27, 2006, the Company completed the issuance of $5.2 million in floating rate trust preferred securities offered by its wholly owned subsidiary, NPB Capital Trust 2 (TPS 2). The rate is determined quarterly and floats based on the 3-month LIBOR plus 177 basis points.
Under the terms of the subordinated debt transactions, the securities have 30-year maturities and are redeemable, in whole or in part, without penalty, at the option of the Company after five years from the issuance date, and on a quarterly basis thereafter.
Following are maturities of borrowed funds as of December 31, 2022 (dollars in thousands):
Schedule of maturities of borrowed funds
$ -
-
-
-
-
and thereafter
16,496
$
16,496
NOTE 19	FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.
Financial instruments whose contract amount represents credit risk as of December 31, 2022 and 2021 were as follows:
Schedule of financial instruments with credit risk
(Dollars in thousands)
Commitments to extend credit $ 84,149 $ 69,015
Standby letters of credit 3,731 3,684
Commitments to extend credit are agreements to lend to a customer at either a fixed or variable interest rate as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit.
NOTE 20	LEGAL CONTINGENCIES
In the course of operations, we may become a party to legal proceedings in the normal course of business. At December 31, 2022, we do not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or any of its subsidiaries to which the property of the Company or any of its subsidiaries is subject, in the opinion of management, may materially impact the financial condition or liquidity of the Company.
NOTE 21	CAPITAL
Capital Requirements and Ratios
The Company meets eligibility criteria of a small bank holding company in accordance with the Board of Governors of the Federal Reserve System’s Small Bank Holding Company Policy Statement issued in February 2015, and is no longer obligated to report consolidated regulatory capital.
The Bank is subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets, and Common Equity Tier 1 capital to risk-weighted assets. As of December 31, 2022, the Bank meets all capital adequacy requirements to which it is subject.
The Bank’s actual capital amounts and ratios are presented in the following table as of December 31, 2022 and 2021, respectively.
Schedule of capital requirements
Actual Minimum Capital Requirement Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars are in thousands) Amount Ratio Amount Ratio
Amount Ratio
December 31, 2022:
Total Capital to Risk Weighted Assets $ 93,028 16.50% $45,106 8.0% $ 56,382 10.0%
Tier 1 Capital to Risk Weighted Assets
86,301 15.31% 33,829 6.0%
45,106 8.0%
Tier 1 Capital to Average Assets
86,301 10.40% 33,206 4.0%
41,508 5.0%
Common Equity Tier 1 Capital
to Risk Weighted Assets
86,301 15.31% 25,372 4.5%
36,648 6.5%
December 31, 2021:
Total Capital to Risk Weighted Assets $ 85,890 16.23% $ 42,332 8.0% $ 52,915 10.0%
Tier 1 Capital to Risk Weighted Assets
79,274 14.98% 31,749 6.0%
42,332 8.0%
Tier 1 Capital to Average Assets
79,274 9.86% 32,145 4.0%
40,181 5.0%
Common Equity Tier 1 Capital
to Risk Weighted Assets
79,274 14.98% 23,812 4.5%
34,395 6.5%
Accordingly, as of December 31, 2022 and 2021, the Bank was well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since such dates that management believes have changed the Bank’s category.
The Bank is also subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The final rules require the Bank to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 capital to risk-weighted assets ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (effectively resulting in a minimum Common Equity Tier 1 capital to risk-weighted assets ratio of 7%), (ii) a ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets. The Bank’s capital conservation buffer was 8.50% at December 31, 2022. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a Common Equity Tier 1 capital to risk-weighted assets ratio above the minimum but below the conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. As of both December 31, 2022 and 2021, the Common Equity Tier 1 Capital to Risk-weighted Assets ratio, the Tier 1 Capital to Risk-weighted Assets ratio, the Total Capital to Risk-weighted Assets ratio, and the Tier 1 Capital to Average Assets ratio of the Bank, all exceeded the minimum requirements.
NOTE 22	FAIR VALUES
The Company established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by this hierarchy are:
Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are valued using other financial instruments, the parameters of which can be directly observed.
Level 3: Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy are as follows:
Investment Securities Available for Sale - Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $96.1 million and $107.4 million as of December 31, 2022 and 2021, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.
Loans - The Company does not record loans at fair value on a recurring basis. Real estate serves as collateral on a substantial majority of the Company’s loans. When a loan is considered impaired, a specific reserve may be established. Loans, which are deemed to be impaired and require a reserve, are primarily valued on a non-recurring basis at the fair value of the underlying real estate collateral. Where there is no observable market price, such fair values are obtained using independent appraisals, which management evaluates to determine whether or not the fair value of the collateral is further impaired below the appraised value and adjusts for estimated costs of disposition. The Company records impaired loans as nonrecurring Level 3 assets. The aggregate amount of impaired loans carried at fair value was $213,000 and $714,000 as of December 31, 2022 and 2021, respectively.
Other Real Estate Owned - Other real estate owned is adjusted to fair value upon transfer of the loans, or former bank premises, to other real estate owned. These assets are carried at the lower of their carrying value or fair value. Fair value is based upon observable market prices, when available, reduced by estimated disposition costs, which the Company considers to be nonrecurring Level 2 inputs. When observable market prices are not available, management determines the fair value of the foreclosed asset using independent third-party appraisals, evaluated to determine whether or not the property is further impaired below the appraised value, and adjusts for estimated costs of disposition. The Company records foreclosed assets as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were approximately $261,000 and $1.4 million as of December 31, 2022 and 2021, respectively.
Assets and liabilities measured at fair value are as follows as of December 31, 2022 (for purpose of this table the impaired loans are shown net of the related allowance):
Schedule of summary of assets and liabilities measured at fair value
(Dollars are in thousands)
Quoted market price in active markets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available for sale investments
U.S. Treasuries $ - $ 11,685 $
U.S. Government Agencies - 9,399 -
Taxable municipals - 16,815 -
Corporate bonds - 3,136 -
Mortgage backed securities - 55,041 -
(On a non-recurring basis)
Other real estate owned
- -
Impaired loans:
Real estate secured:
Commercial - -
Construction and land development - - -
Residential 1-4 family - -
Multifamily - - -
Farmland - - -
Commercial - - -
Agriculture - - -
Consumer installment loans - - -
All other loans - - -
Total $ - $ 96,076 $ 474
Assets and liabilities measured at fair value are as follows as of December 31, 2021 (for purpose of this table the impaired loans are shown net of the related allowance):
(Dollars are in thousands)
Quoted market price in active markets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
(On a recurring basis)
Available for sale investments
U.S. Treasuries $ - $ 7,671 $ -
U.S. Government Agencies - 9,089 -
Taxable municipals - 22,980 -
Corporate bonds - 2,019 -
Mortgage backed securities - 65,599 -
(On a non-recurring basis)
Other real estate owned
- - 1,361
Impaired loans:
Real estate secured:
Commercial - -
Construction and land development - - -
Residential 1-4 family - -
Multifamily - - -
Farmland - -
Commercial - -
Agriculture - - -
Consumer installment loans - - -
All other loans - - -
Total $ - $ 107,358 $ 2,075
For Level 3 assets measured at fair value on a recurring or non-recurring basis as of December 31, 2022 and 2021, the significant unobservable inputs used in the fair value measurements were as follows:
Schedule of significant unobservable inputs In level 3 assets
(Dollars in thousands)
Fair Value at December 31,
Fair Value at
December 31,
Valuation Technique
Significant Unobservable Inputs
General Range of Significant Unobservable Input Values
Impaired Loans $ $
Appraised Value
Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell
- 18%
Other Real Estate Owned $ $ 1,361
Appraised Value/Comparable Sales/Other Estimates from Independent Sources
Discounts to reflect current market conditions and estimated costs to sell
- 18%
Fair Value of Financial Instruments
The carrying amount and fair value of the Company’s financial instruments that are not required to be measured or reported at fair value on a recurring basis are as follows:
Schedule of estimated fair value of financial instruments
Fair Value Measurements
(Dollars are in thousands)
Carrying
Amount
Fair
Value
Quoted market price in active markets
(Level 1)
Significant other observable inputs
(Level 2)
Significant unobservable inputs
(Level 3)
December 31, 2022
Financial instruments - assets
Net loans $ 577,886 $ 552,675 $ - $ 552,462 $ 213
Financial instruments - liabilities
Time deposits 188,233 187,179 - 187,179 -
Borrowed funds 16,496 14,825 - 14,825 -
December 31, 2021
Financial instruments - assets
Net loans $ 587,009 $ 580,024 $ - $ 579,310 $ 714
Financial instruments - liabilities
Time deposits 196,285 198,353 - 198,353 -
Borrowed funds 16,496 15,649 - 15,649 -
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions can significantly affect the estimates.
Estimated fair values have been determined by the Company using historical data, as generally provided in the Company’s regulatory reports, and an estimation methodology suitable for each category of financial instruments. The Company’s fair value estimates, methods and assumptions are set forth below for the Company’s other financial instruments.
The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities and accrued interest approximates fair value and is excluded from the table above.
The methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price may differ.
NOTE 23	REVENUE FROM CONTRACTS WITH CUSTOMERS
All of our revenue from contracts with customers as defined in ASC 606 is recognized within noninterest income. The following table presents Noninterest Income by revenue stream for the years ended December 31, 2022 and 2021.
Schedule of revenue from contracts with customers
(Dollars are in thousands)
Service charges and fees $ 3,969 $ 3,724
Card processing and interchange income 3,769 3,871
Insurance and investment fees 1,029
Gains on sales of available-for-sale securities (1) -
Other noninterest income 1,034
Total noninterest income $ 9,240 $ 9,980
(1) - Not within the scope of ASU 2014-9
Certain revenues are earned from contracts with customers. These revenues are recognized when the promised services are rendered to the customer and reflects the entitled consideration received in exchange for those services.
Service charges and fees - revenue is recognized on deposit services based on published fees for the services provided. These fees may be collected on a transaction basis, at the time the service is rendered or periodically based on the period over which the service is provided. Transaction based fees include services such as stop payment requests, paper statement rendering and ITM usage fees. Periodic fees include such charges as monthly account maintenance fees. Overdraft fees are realized at the time the overdraft occurs.
Card processing and interchange fees - Card-related interchange revenue is primarily comprised of debit and credit card income. Debit and credit card income is earned when customers’ debit or credit cards are processed through a card payment network. Card-related interchange income is recognized at the time the customer transactions settle.
Insurance and investment fees - Insurance and investment fee income consists of commissions received on annuity and investment product sales through a third-party service provider. Performance is generally satisfied at the time an annuity policy is issued, or at the execution of an investment transaction.
NOTE 24	NONINTEREST EXPENSES
Other operating expenses, included as part of noninterest expenses, consisted of the following for the years ended December 31, 2022 and 2021:
Schedule of noninterest expenses
(Dollars are in thousands)
Advertising, sponsorships and donations $ 162 $ 252
ATM network expense 1,471 1,473
Legal and professional fees 1,120
Consulting fees
Loan related expenses
Printing and supplies
FDIC insurance premiums
Other real estate owned expenses, net
Other operating expenses 2,656 2,556
Total $ 6,650 $ 6,976
NOTE 25	SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and has identified the following as a non-recognized subsequent event.
On February 27, 2023, the board of directors declared a dividend of $0.06 per share payable on March 31, 2023 to shareholders of record as of March 15, 2023.
On February 27, 2023, the board of directors authorized the continuation of the Company’s repurchase of up to 500,000 shares of its common stock through March 31, 2024. This is a continuation of the repurchase program originally announced April 28, 2022, which was set to expire March 31, 2023. To the date of this announced continuation, 82,352 shares have been repurchased at an average price of $2.32 per share, leaving 417,648 shares available for repurchase. Repurchases made through this program will be made through open market purchases or in privately negotiated transactions.
On February 27, 2023 the board of directors approved and adopted the New Peoples Bankshares, Inc. Long-Term Cash Incentive Plan (the Plan). The Plan, which became effective on February 27, 2023, provides for cash incentive awards to Plan participants based on the Company’s quarterly earnings per share of common stock over the period specified in the Plan. Certain members of management or highly compensated employees of the Company or the Bank are eligible to participate in the Plan. On February 28, 2023, the executive committee of the board of directors awarded a combined 500,000 notional shares to five members of management. Individual awards are settled solely in cash, determined by multiplying quarterly earnings per share by the number of notional shares covered by a Plan award. The Plan does not grant participants equity in the Company and does not create any shareholders rights.
NOTE 26	RECENT ACCOUNTING DEVELOPMENTS
The following is a summary of recent authoritative announcements:
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration. The Company adopted ASU 2016-13 as of January 1, 2023 in accordance with the required implementation date and recorded the impact of adoption to retained earnings, net of deferred income taxes, as required by the standard. The adjustment recorded at adoption, was not significant to the overall allowance for credit losses or shareholders’ equity as compared to December 31, 2022 and consisted of adjustments to the allowance for credit losses on loans, as well as an adjustment to the Company’s reserve for unfunded loan commitments. Subsequent to adoption, the Company will record adjustments to its allowance(s) for credit losses and reserves for unfunded commitments through the provision for credit losses in the consolidated statements of income.
The Company is utilizing a third-party model to tabulate its estimate of current expected credit losses, using a loan-level probability of default / loss given default cash flow method with an exposure at default model methodology. In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics which included call report classification and risk rating. The Company primarily utilizes the cohort and the probability of default/loss given default methodologies for its reasonable and supportable forecasting of current expected credit losses. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company may consider the following qualitative adjustment factors: changes to: lending policies and procedures, national and local economic conditions, the experience and ability of management and staff; the volume and severity of past due, rated and nonaccrual assets, loan review system, collateral value, concentrations of credit, and legal or regulatory requirements and competition. The Company’s CECL implementation process was overseen by the Audit and Risk Committee of the board of directors, and managed by credit, finance and risk management personnel, to include an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience. During 2022, the Company calculated its current expected credit losses model in parallel to its incurred loss model in order to further refine the methodology and model. In addition, the Company engaged a third-party to perform a comprehensive model validation.
Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments - Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.The Company has adopted an alternative reference rate for loans based on LIBOR and is assessing alternatives for financial instruments referencing LIBOR that do not allow for the substitution of an alternative reference rate. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference rate.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.
In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”. ASU 2022-06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022-06 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments that have not already been transitioned to an alternative reference rate.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 27	PARENT CORPORATION ONLY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2022 AND 2021
(Dollars in Thousands)
Schedule of parent corporation only condensed balance sheets
ASSETS
Due from banks $ 521 $ 187
Investment in subsidiaries 72,360 78,460
Other assets 1,150 1,645
Total assets $ 74,031 $ 80,292
LIABILITIES
Accrued interest payable $ 277 $ 104
Accrued expenses and other liabilities
Trust preferred securities 16,496 16,496
Total liabilities 16,812 16,661
SHAREHOLDERS’ EQUITY
Common stock - $2.00 par value, 50,000,000 shares authorized;
23,848,491 and 23,922,086 shares issued and outstanding at December 31, 2022 and 2021, respectively
47,697 47,844
Additional paid capital 14,546 14,570
Retained earnings 8,917 2,031
Accumulated other comprehensive loss (13,941 ) (814 )
Total shareholders’ equity 57,219 63,631
Total liabilities and shareholders’ equity $ 74,031 $ 80,292
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(Dollars in thousands)
Schedule of parent corporation only condensed statements of income
Income
Miscellaneous income $ 22 $ 13
Dividends from subsidiaries 1,749
Undistributed income of subsidiaries 7,027 7,026
Total income 8,798 7,469
Expenses
Trust preferred securities interest expense
Professional fees
Other operating expenses
Total expenses
Income before income taxes 7,896 6,892
Income tax benefit (186 ) (118 )
Net income $ 8,082 $ 7,010
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
(Dollars in thousands)
Schedule of parent corporation only condensed statements of cash flows
Cash flows from operating activities
Net income $ 8,082 $ 7,010
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Equity in undistributed earnings of subsidiaries (7,027 ) (7,026 )
Net decrease in other assets
Net increase in other liabilities (36 )
Net cash provided by (used in) operating activities 1,701 (28 )
Cash flows from financing activities:
Repurchase of common stock (171 ) -
Cash dividends paid (1,196 ) -
Net cash used in financing activities (1,367 ) -
Net increase (decrease) in cash and cash equivalents (28 )
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year $ 521 $ 187

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of New Peoples Bankshares, Inc. New Peoples’ internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting practices.
All internal control systems, no matter how well designed, have inherent limitations. Because of these inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation, and may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of New Peoples’ internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control - Integrated Framework” issued in 2013. Based on this assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2022.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that material information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of December 31, 2022.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information contained under the captions “Election of Directors,” “Incumbent Directors,” “Executive Officers Who Are Not Directors,” “Corporate Governance” and “Delinquent Section 16(a) Reports” in the 2023 Proxy Statement that is required to be disclosed in this Item 10 is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information contained under the captions “Director Compensation” and “Executive Compensation and Related Party Transactions” in the 2023 Proxy Statement that is required to be disclosed in this Item 11 is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained under the captions “Security Ownership of Management” and “Security Ownership of Certain Beneficial Owners” in the 2023 Proxy Statement that is required to be disclosed in this Item 12 is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information contained under the caption “Executive Compensation and Related Party Transactions” and “Corporate Governance” in the 2023 Proxy Statement that is required to be disclosed in this Item 13 is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information contained under the caption “Audit Information” in the 2023 Proxy Statement that is required to be disclosed in this Item 14 is incorporated herein by reference.
The Independent Registered Public Accounting Firm for the financial statements as of December 31, 2022 and the year then ended was Yount, Hyde & Barbour, P.C., (U.S. PCAOB Auditor Firm I.D.: 613, located in Roanoke, Virginia.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibit and Financial Statement Schedules
(a)(1)	The response to this portion of Item 15 is included in Item 8 above.
(a)(2)	The response to this portion of Item 15 is included in Item 8 above.
(a)(3)	The following exhibits are filed as part of this Form 10-K:
Exhibit
Number
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 Registrant (incorporated by reference to Exhibit 3.2 to Form 8-K filed 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2019).
10.1*
Employment Agreement dated December 1, 2016 between New Peoples Bankshares, Inc., New Peoples Bank, Inc., and C. Todd Asbury (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 2, 2016
10.2* Employment Agreement dated December 1, 2016 between New Peoples Bankshares, Inc., New Peoples Bank, Inc., and C. Todd Asbury (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 2, 2016).
10.3* Employment Agreement dated May 14, 2019 between New Peoples Bank, Inc., and James W. Kiser.
10.4* Form of Award Agreement for New Peoples Bankshares, Inc. Long-Term Cash Incentive Plan (incorporated by reference to Exhibit 10.2 to Form 8-K filed March 2, 2023).
Code of Ethics (incorporated by reference to Exhibit 14 to Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
Subsidiaries of the Registrant.
Powers of Attorney (contained on signature page).
31.1
Certification by Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification by Chief Financial Officer pursuant to Rule 13a-14(a).
Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
The following materials for the Company’s 10-K Report for the year ended December 31, 2020, formatted in XBRL are being furnished, not filed. XBRL Taxonomy Extension Calculation Linkbase Document, XBRL Taxonomy Extension Definitions Linkbase Document, Taxonomy Extension Label Linkbase Document, XBRL Taxonomy Extension Label Linkbase Document.
Cover Page Interactive Data File (embedded within the Inline XBRL document in Exhibit 101).
____________________________________
* Denotes management contract.
(b) See Item 15(a)(3) above.
(c) See Items 15(a)(1) and (2) above.