NEW PEOPLES BANKSHARES INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

Caution Regarding Forward-Looking Statements




We make forward looking statements in this quarterly report on Form 10-Q that
are subject to risks and uncertainties. These forward looking statements include
statements regarding expectations, intentions, projections and beliefs
concerning our profitability, liquidity, and allowance for 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. The forward-looking
information is based on various factors and was derived using numerous
assumptions. Important factors that may cause actual results to differ from
projections include:

º the success or failure of our efforts to implement our business plan;

º any required increase in our regulatory capital ratios;

º meet other regulatory requirements that may arise from the examinations,

     changes in the law and other similar factors;
   º deterioration of asset quality;
   º changes in the level of our nonperforming assets and charge-offs;
   º fluctuations of real estate values in our markets;
   º our ability to attract and retain talent;

º demographic changes in our markets which have a negative impact

economy;

º the uncertain outcome of current or future legislation or regulation or

the policies of state and federal regulators;

º good management of interest rate risk;

º good liquidity management;

º changes in general economic and business conditions in our market area and

United States in general;

º the credit risks inherent in granting loans such as changes in

ability to repay and our management of those risks;

º competition with other banks and financial institutions, and companies

outside the banking sector, including online lenders and those

businesses that have significantly greater access to capital and other

Resources;

º demand, development and acceptance of new products and services we have

offered or may offer;

º the effects of and changes in trade, monetary and fiscal policies and

laws, including interest rate policies Federal Reserveinflation,

interest rate, market and currency fluctuations;

º the occurrence of major natural disasters, including severe weather events

conditions, floods, health issues (including ongoing novel

coronavirus (COVID-19) outbreak and associated efforts to limit

     spread of the disease), and other catastrophic events;
   º technology utilized by us;
   º our ability to successfully manage cyber security;
   º our reliance on third-party vendors and correspondent banks;
   º changes in generally accepted accounting principles;

º changes in government regulations, tax rates and other similar matters; and,

º 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.



Critical Accounting Policies



For discussion of our significant accounting policies, see our Annual Report on
Form 10-K for the year ended December 31, 2021 (the 2021 10-K). Certain critical
accounting policies affect the more significant judgments and estimates used in
the preparation of our financial statements. Our most critical accounting
policies relate to the allowance for loan losses and the related provision for
loan losses and the calculation of our deferred tax asset and related valuation
allowance.


The allowance represents an amount that, in the Company's judgment, will be
adequate to absorb probable and estimable losses inherent in the loan portfolio.
The judgment in determining the level of the allowance is based on evaluations
of the collectability of loans while taking into consideration such factors as
trends in delinquencies and charge-offs for relevant periods of time, changes in
the nature and volume of the loan portfolio, current economic conditions that
may affect a borrower's ability to repay and the value of collateral, overall
portfolio quality and review of specific potential losses. This evaluation is
inherently subjective because it requires estimates that are susceptible to
significant revision as more information becomes available.



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. In the past, the Company provided a valuation
allowance on its net deferred tax assets where it was deemed more likely than
not such assets would not be realized. At March 31, 2022 and December 31, 2021,
the Company had no valuation allowance on its net deferred tax assets.

                                       23




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.



For more information on the deferred tax asset and the valuation allowance, we refer you to the section “Deferred tax asset and income taxes” below.



Overview and Highlights


The Company generated net income for the three months ended March 31, 2022 of
$1.9 million, or basic and diluted net income per share of $0.08, as compared to
the three months ended March 31, 2021 when the Company had net income of $1.6
million, or $0.07 basic and diluted net income per share. The primary drivers
for the increase were increases in net interest income of $208 thousand, a
reduction in the provision for loan losses of $86 thousand, and an increase in
total noninterest income of $241 thousand.



Net interest income increased $208 thousand due to a $270 thousand decrease in
interest expense, which more than offset a $62 thousand decrease in interest
income. Although year-over-year there was a $36.3 million increase in the volume
of earning assets, due largely to growth in the investment and loan portfolios
of $60.7 million and $9.3 million, respectively, interest income attributed to
the increased volume of earning assets increased only $43 thousand. There are a
couple of primary reasons for the results. One, the net increase was negatively
impacted comparative to the prior year due to a $312 thousand decrease in loan
fee income resulting from the forgiveness in PPP loans in 2021 which was not
replicated in 2022. We anticipate loan interest income to be less in the second
and third quarters of 2022 as compared to the same periods in 2021 for the same
reasons related to the PPP loan fee income cessation. Secondly, interest income
was negatively impacted by the repricing of earning assets at lower interest
rates which caused a year-over-year, rate related, decline of $105 thousand.
Interest expense decreased driven by the continued low interest rate environment
throughout 2021 and into the first quarter of 2022, as our overall cost of funds
fell 16 basis points year-over-year to 0.30% for the first quarter of 2022.
Also, the mix of deposits continues to shift away from time deposits to lower,
and noninterest, rate bearing deposits. Furthermore, Federal Home Loan Bank
advances were paid off resulting in a decrease in interest expense of $96,000.
In March and May 2022, the Federal Open Market Committee raised the target
federal funds rate 25 and 50 basis points, respectively, in what is largely
considered to be a series of rate increases during 2022. Due to our interest
rate sensitivity position, we anticipate interest income to increase as interest
rates increase in the near future; however, future year-over-year comparisons
may not reflect the increase due to the impact of the PPP loan forgiveness
in
2021.



The year-over-year reduction in the provision for loan losses of $86 thousand is
due to a combination of factors, including the improving characteristics of the
loan portfolio, as exhibited by the decline in nonperforming loans, combined
with continued improving employment metrics. Annualized net charge-offs to
average loans remain at low levels and were 0.05% for the quarter ended March
31, 2022. Nonaccrual loans to total loans and nonperforming assets to total
assets declined to 0.44% and 0.42%, respectively at March 31, 2022.



Total non-interest income increased $240,000 during the first quarter of 2022
compared to the first quarter of 2021 due to increases in service charges and
fees and card processing fees of $175 thousand and $52 thousand, respectively.
The service charges and fees increase relates to increased volume in overdraft
charges related to customer activity beginning to return to pre-pandemic levels
as businesses reopened and as customers spend savings from stimulus payments
accumulated during the pandemic. Card processing fee revenue is also volume
related for reasons similar to those impacting service charge income. In
addition, year-over-year, fees generated through financial and merchant services
increased $12 thousand and $11 thousand, respectively, due to increased volume
from both new and existing customers using these services. We continue efforts
to increase noninterest income revenue through product enhancements and customer
development.


Total non-interest expense increased $90 thousand, as salaries and benefits
expense increased $196 thousand due to the impact of increasing our minimum base
hourly wage in the fourth quarter of 2021, targeted salary adjustments to retain
and attract employees, combined with normal annual wage adjustments and added
accrued costs for performance incentive plans to be awarded in the first quarter
of 2023, if 2022 goals are met. Occupancy expense decreased $170 thousand due
largely to the reduction in the number of buildings through sales or transfers
to other real estate owned. Additionally, net depreciation costs for furniture,
equipment and computer equipment decreased $89 thousand as assets reached the
end of their estimated economic useful lives, along with the decommissioning of
a number of interactive teller machines during the fourth quarter of 2021. Other
operating expenses increased $83 thousand year-over-year, primarily due to costs
related to the holding and disposal of other real estate owned, which increased
from $33 thousand to $130 thousand in 2021 to 2022. ATM network expenses
increased $25 thousand to $367 thousand, due to increased activity combined with
general cost increases. Miscellaneous losses increased $69 thousand to $50
thousand in 2022, as compared to net recoveries of $19 thousand in 2021. These
increased expenses were partially offset by decreases in data processing and
telecommunications costs, and FDIC insurance which decreased $19 thousand and
$21 thousand, respectively. Data processing and telecommunication costs
decreased due to the reduction in the number of branch sites and renegotiated
contracts, while FDIC insurance decreased due to the improved risk factors
considered in the premium assessment. Efforts continue to decrease non-interest
expenses of the Company and improve efficiency.



                                       24





Total assets increased $18.9 million, or 2.4%, to $813.5 million at March 31,
2022 from $794.6 million at December 31, 2021, funded largely by increased
deposits as the low interest rate environment continues to provide liquidity.
Total loans increased $1.4 million, or 0.23%, to $595.1 million at March 31,
2022 from $593.7 million at December 31, 2021. Loan growth has resulted from to
increases in construction and land development loans, commercial loans secured
by real estate and multi-family loans, which grew $6.5 million, $1.2 million and
$1.4 million, respectively. Growth in these components of the portfolio offset a
reduction in commercial loans of $6.7 million. The decrease in commercial loans
was largely the result of the repayment and forgiveness of PPP loans which
declined $3.6 million during the first three months of 2022. Our loan production
operation in Boone, North Carolina, continues to generate positive results, as
well as our Tri Cities area branches in Bristol, Virginia and Kingsport,
Tennessee. Total deposits increased $23.5 million, or 3.3%, to $731.0 million at
March 31, 2022 from $707.5 million at December 31, 2021, driven by liquidity
resulting from the continuing low interest rate environment and seasonal growth
from income tax refunds.



At March 31, 2022, shareholders' equity totaled $58.9 million, a decrease of
$4.7 million, or 7.4%, from December 31, 2021. The primary cause for the net
decrease was the change in the net unrealized loss on investment securities
available for sale, which increased $5.4 million, or 668.8%, during the first
quarter of 2022, due to the impact of the change in interest rates. Excluding
the impact of the unrealized loss, equity increased $725 thousand, due to net
income of $1.9 million less the cash dividend payment of $1.2 million, which was
the first cash dividend paid by the Company.



Highlights as of and for the three-month period ended March 31, 2022 include:

The net profit for the first quarter of 2022 was $1.9 millioncompared to $1.6

million for the first quarter of 2021;

Net interest margin was 3.53% for the quarter, down 6 basis points

compared to 3.59% for the quarter ended March 31, 2021;

The allowance for loan losses has been $100,000 for the quarter, a reduction of

$86,000 compared to the first quarter of 2021;

Increase in payroll and benefits expenses $196,000i.e. 6.4%, to

$3.3 million for the first quarter of 2022 compared to the same quarter in

2021;

Total assets increased $18.9 million for $813.5 millionin the first three

month of 2022; while

Deposit balances increased $23.5 million;

Loan balances have increased $1.4 million; and

Non-performing assets, which include non-accrual loans and other real estate

possessed, totaled $3.4 million to March 31, 2022a drop $867,000or

   20.2%, during the quarter.



Comparison of three months ended March 31, 2022 for March 31, 2021




The Company's primary source of income is net interest income, which increased
by $208 thousand, or 3.2%, to $6.6 million for the first quarter of 2022
compared to $6.4 million for the first quarter of 2021. While we had increases
in average loan balances and investment securities, those were impacted by the
effect of decreases in interest rates and a decrease of $292 thousand in
nonrecurring PPP loan fees in 2022, causing interest income to decrease by $62
thousand. However, total interest expense decreased $270 thousand, which more
than mitigated the decrease in interest income. The decrease in interest expense
was driven primarily by a $253 thousand decrease in interest on deposits, a
result of growth in noninterest bearing deposits and a 16 basis-point decrease
in the cost of funds to 30 bps. Overall, the net interest margin decreased
6 bps
to 3.53%.



                                       25


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





                                            Net Interest Margin Analysis
                             Average Balances, Income and Expense, and Yields and Rates

                                               (Dollars in thousands)
                                            Three Months Ended March 31,
                                                          2022                                 2021
                                               Average   Income/   Yields/       Average       Income/      Yields/
                                               Balance   Expense    Rates        Balance       Expense       Rates
ASSETS
  Loans (1) (2) (3)                          $ 596,060 $   6,674     4.54%  

$586,733 $6,921 4.79%

  Federal funds sold                               218         -     0.15%              227          -          0.07%

Interest-bearing deposits with other banks 53,809 21 0.16%

87,535 19 0.09%

  Taxable investment securities                110,435       462     1.67%  

49,687,279 2.25%

  Total earning assets                         760,522     7,157     3.82%  

724,182 7,219 4.04%

  Less: Allowance for loans losses             (6,848)                              (7,303)
  Non-earning assets                            49,332                               59,938
      Total Assets                           $ 803,006                      $       776,817

LIABILITIES AND EQUITY

  Interest-bearing demand deposits           $  67,217 $      16     0.10%  

$52,999 $14 0.11%

  Savings and money market deposits            194,195        38     0.08%          164,260         37          0.09%
  Time deposits                                196,283       376     0.78%          232,938        632          1.10%
  Short-term borrowings                              -         -        -%            5,000         17          1.34%
  Trust preferred securities                    16,496       106     2.58%           16,496        106          2.58%

Total interest-bearing liabilities 474,191,536 0.46%

471,693,806 0.69%

  Non-interest-bearing deposits                258,157         -        -%          237,454                       - %

Total deposit liabilities and cost of

  funds                                        732,348       536     0.30%  

709,147,806 0.46%

  Other liabilities                              7,575                                9,031
      Total Liabilities                        739,923                              718,178
  Shareholders' Equity                          63,083                               58,639

Total liabilities and shareholders

      Equity                                 $ 803,006                      $       776,817
  Net Interest Income                                  $   6,621                             $   6,413
  Net Interest Margin                                                3.53%                                 3.59%
  Net Interest Spread                                                3.36%                                 3.35%
(1) Nonaccrual loans and loans held for sale have been included in average loan balances.
(2) Tax exempt income is not significant and has been treated as fully taxable.
(3) Includes loans held for sale
Net interest income is affected by changes in both average interest rates and
average volumes (balances) of interest-earning assets and interest-bearing
liabilities. The following table sets forth the amounts of the total changes in
interest income and interest expense which can be attributed to rates and volume
for the period indicated:

                                       26





                            Volume and Rate Analysis
                              Increase (decrease)




                                                  Three Months Ended March 31,
                                                        2022 versus 2021
                                                                         Change in
                                              Volume                     Interest
(Dollars in thousands)                        Effect    Rate Effect   Income/ Expense
Interest Income:
  Loans                                    $    (160) $        (87) $           (247)
  Federal funds sold                                -             -                 -
  Interest bearing deposits in other banks        (9)            11                 2
  Taxable investment securities                   212          (29)               183
  Total Earning Assets                             43         (105)              (62)

Interest Expense:
  Interest-bearing demand deposits                  4           (2)                 2
  Savings and money market deposits                 7           (6)                 1
  Time deposits                                  (90)         (166)             (256)
  Short-term borrowings                          (17)             -              (17)
  Trust preferred securities                        -             -                 -
  Total Interest-bearing Liabilities             (96)         (174)             (270)
  Change in Net Interest Income            $      139 $          69 $             208





Based on our current assessment of the loan portfolio, a lower provision of $100
thousand was made in the first quarter of 2022, after considering the continued
improvement in loan quality, exhibited by reductions in past due and nonaccrual
loans and classified assets. For a discussion of the factors affecting the
allowance for loan losses, including provision expense, refer to Note 7,
Allowance for Loan Losses, in Item 1 of this Form 10-Q.



Noninterest income for the first quarter of 2022 was $2.4 million, an increase
of $240 thousand, or 11.3%, when compared to the same period in 2021. As
discussed previously, increased revenues from service charges and card servicing
fees, which increased $175 thousand and $52 thousand, respectively, were the
primary drivers of this improvement. Revenue from financial services activities
increased $12 thousand, or 5.3%, while merchant services income increased $11
thousand or 37.6%, as we continue to develop, or expand existing, customer
relationships in these service sectors.



Total non-interest expense increased $90 thousand, year-over-year for the three
month period ending March 31, 2022. As previously discussed, increases to
salaries and benefits expenses of $196 thousand were largely offset by reduced
occupancy expenses which decreased $170 thousand.



The efficiency ratio, a non-GAAP measure which is defined as non-interest expense divided by the sum of net interest income and non-interest income, improved to 71, 6% for the first quarter of 2022, compared to 74.3% for the first quarter of 2022, as we continue to implement changes to increase revenue and further control operating expenses.

On April 29, 2022, the Bank notified its principal regulators that it will be
closing branch offices in Big Stone Gap and Chilhowie, Virginia, on August 12,
2022. Accounts serviced at these offices will be transferred to nearby branches,
and employees will be reassigned to other positions or offices, as available.
Interactive teller machines at these locations will remain in service for the
foreseeable future. This restructuring of the branch network should improve the
efficiency of service to the customers of these communities.



Income tax expense for the first quarter of 2022 totaled $530 thousand, an
increase of $108 thousand, or 25.6% from the $422 thousand recorded during the
same period in 2021. The year-over-year increase approximates the increase
of
pre-tax earnings.



Balance Sheet



Total assets increased $18.9 million, or 2.4%, to $813.5 million at March 31,
2022 from $794.6 million at December 31, 2021. This growth was primarily driven
by the $23.5 million increase in deposits, which has increased interest-bearing
deposits in other banks and has helped fund loan growth which increased $16.0
million and $1.4 million, respectively.

                                       27





Total investments decreased $538 thousand, or 0.5%, to $106.8 million at March
31, 2022 due primarily to an increase of $6.9 million in net unrealized losses
and $4.2 million of repayments and maturities, which were largely offset by
purchases of $10.7 million. It is expected that purchases will continue as we
deploy excess liquidity, and use the investment portfolio to manage the balance
sheet and increase the return on earning assets.



There were $100 thousand of loans held for sale at March 31, 2022 versus $0 at
December 31, 2021. These loans are originated for sale into the secondary market
on a best efforts basis.



Loans receivable increased $1.4 million, or 0.2%, due mainly to increases in
construction and land development loans, commercial loans secured by real estate
and multi-family loans, which grew $6.5 million, $1.2 million and $1.4 million,
respectively. Growth in these components of the portfolio offset a reduction in
commercial loans of $6.7 million. The decrease in commercial loans was largely
the result of the repayment and forgiveness of PPP loans which declined $3.6
million during the first three months of 2022. At March 31, 2022, PPP loans
totaled $2.8 million.



Total deposits increased $23.5 million, or 3.3%, to $731.0 million at March 31,
2022 from $707.5 million at December 31, 2021, due to increases in
noninterest-bearing demand deposits of $18.0 million, or 7.2%, and
interest-bearing deposits of $5.5 million, or 1.2%. The increase in deposits was
driven mainly by increases in interest-bearing NOW and demand deposits and other
interest-bearing transaction accounts which increased $5.5 million and $5.6
million, respectively, offset by a decrease in time deposits of $5.7 million.
The increase in deposits is something experienced across the industry, due to
the continuing low interest rate environment, combined with the lingering impact
of various stimulus and liquidity measures implemented by the government during
the peak of the pandemic. While it is likely that recent and expected increases
to the federal funds rate will, at some point, impact liquidity, we continue to
maintain core deposits through attractive consumer and commercial deposit
products and strong ties with our customer base and communities.



Preferred Securities Trust of $16.5 million to March 31, 2022 remained unchanged from December 31, 2021.




Total equity at March 31, 2022 was $58.9 million, a decrease of $4.7 million, or
7.4%, compared to $63.6 million at December 31, 2021. As discussed previously
and in the Capital Resources section the primary driver of the decline was the
$5.4 million net increase in the other accumulated comprehensive loss, related
to the unrealized loss on available for sale investment securities, along with a
cash dividend payment. The increase in other accumulated comprehensive loss is
related to the recent increase in interest rates and is not related to any
deterioration in the credit quality of any investment securities held.



Asset Quality



Non-performing assets decreased $867 thousand, or 20.2%, during the first three
months of 2022, driven by a decrease in nonaccruing loan balances of $301
thousand, a decrease in other real estate owned (OREO) of $566 thousand. As a
result, the ratio of nonperforming assets to total assets decreased to 0.42% at
March 31, 2022 compared to 0.54% at December 31, 2021.



Non-performing assets include outstanding loans, OREOs, and loans past due more than 90 days that are still earning interest. Our policy is to place loans on non-accumulation once they reach 90 days past due. The composition of unaccrued loans is primarily that secured by residential mortgages and commercial real estate.




OREO is primarily made up of commercial properties, farmland and land of which
$475 thousand consists of former branch office sites that were transferred to
OREO in 2021. Those two remaining branch sites at March 31, 2022, were sold in
May 2022, bringing our OREO balance down to $321 thousand. We continue extensive
and aggressive measures to work through problem credits and liquidate foreclosed
properties in an effort to reduce nonperforming assets. 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 loss as we expedite the resolution of these problem
assets.



Loans rated substandard or below totaled $2.6 million at March 31, 2022, a
decrease of $261 thousand from $2.9 million at December 31, 2021. Total past due
loans decreased to $2.7 million at March 31, 2022 from $3.4 million at December
31, 2021. Please refer to Note 6 Loans in Section 1 of this Form 10-Q for
additional details related to loan ratings and past due loans.

                                       28




Our allowance for loan losses at March 31, 2022 was $6.8 million, or 1.14% of
total loans as compared to $6.7 million, or 1.13%, of total loans at December
31, 2021. Impaired loans totaled $2.8 million with an estimated related specific
allowance of $199 thousand for potential losses at March 31, 2022 as compared to
$2.8 million of impaired loans with an estimated related allowance of $166
thousand at the end of 2021. A provision of $100 thousand was recorded for the
first quarter of 2022 compared to $186 thousand for the first three months of
2021. In the first three months of 2022, net charge-offs were $76 thousand, or
0.05% of average loans, annualized, as compared to $84 thousand, or 0.06%, of
average loans for the same period of 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. We continue to adjust the
allowance for loan loss model to best reflect the risks in the portfolio and the
changes made in our internal policies and procedures; however, future provisions
may be deemed necessary. Due to uncertainties related to the ongoing pandemic
and the resulting economic uncertainty, internal and external qualitative
factors that were revised early in the pandemic remain largely in place. These
revisions included reviewing our internal scoring related to loan modifications
and extensions, and external factors, specifically, unemployment and other
economic factors.



We have commenced the process of preparing to implement the Current Expected
Credit Loss (CECL) model to replace our legacy loan loss model. We are on
schedule to be testing and running concurrent quarterly calculations of both the
legacy and CECL models by the end of the second quarter 2022.





           Selected Credit Ratios
                                                      March 31,            December 31,
(Dollars in thousands)                                     2022                    2021
Allowance for loan losses                           $     6,759          $        6,735
Total loans                                             595,132                 593,744
Allowance for loan losses to total loans                   1.14 %                  1.13 %
Nonaccrual loans                                    $     2,640          $ 

2,941

Nonaccrual loans to total loans                            0.44 %          

0.50%


Ratio of allowance for loan losses to
nonaccrual loans                                           2.56 X                  2.29 X

Charge-offs net of recoveries                       $        76          $          828
Average loans                                       $   596,046          $      586,963
Net charge-offs to average loans                           0.05 %          
       0.14 %







Deferred tax assets and income taxes

Due to timing differences between book and tax treatment of several income and
expense items, a net deferred tax asset, excluding the deferred tax asset on the
unrealized loss on securities available for sale, of $2.6 million and $1.7
million existed at March 31, 2022 and December 31, 2021, respectively. Our
income tax expense was computed at the corporate income tax rate of 21% of
taxable income. We have no significant nontaxable income or nondeductible
expenses.



Capital Resources


Total shareholders' equity at March 31, 2022 was $58.9 million compared to $63.6
million at December 31, 2021, a decrease of $4.7 million, or 7.4%. As previously
discussed, this decline was driven by the $5.4 million net increase in the
accumulated comprehensive loss related to the unrealized loss on investment
securities available- for-sale. Excluding the impact of the unrealized loss,
equity increased $725 thousand, due to net income of $1.9 million less the cash
dividend payment of $1.2 million.



The Company meets the eligibility criteria to be classified as a small bank
holding company in accordance with the Federal Reserve's Small Bank Holding
Company Policy Statement issued in February 2015 and is therefore not obligated
to report consolidated regulatory capital. The Bank continues to be subject to
various capital requirements administered by banking agencies.



                                       29


The Bank’s capital ratios as well as the minimum regulatory thresholds to be considered well capitalized are presented in note 4 of item 1 of this Form 10-Q.

To March 31, 2022, the Bank remains well capitalized in the regulatory framework for prompt corrective action. The ratios mentioned above for the Bank are in line with the Federal Reserve rules to align with Basel III Capital
terms.




Book value per common share was $2.46 at March 31, 2022, and $2.66 at December
31, 2021. Excluding the impact of the accumulated other comprehensive loss, book
value per share was $2.72 and $2.69 at March 31, 2022 and December 31, 2021,
respectively. Other key performance indicators are as follows:





                                      Three months ended March 31,
                                          2022                2021
Return on average assets1                         0.97%        0.83%
Return on average equity1                        12.35%       10.96%
Average equity to average assets                  7.86%        7.55%





1 - Annualized


Under current economic conditions, we believe it is prudent to continue to
retain capital sufficient to support planned asset growth while being able to
absorb potential losses that may occur if asset quality deteriorates, and based
upon projections, we believe our current capital levels will be sufficient.



During the first quarter of 2022, the Company paid its first cash dividend of
$0.05 to shareholders. Earnings will continue to be retained to provide capital
to support the planned growth and operations of the Company and to continue to
pay any future dividends to shareholders.



On April 28, 2022 the board of directors of the Company authorized the
repurchase of up to 500,000 shares of the Company's outstanding common stock
through March 31, 2023. The actual means and timing of any purchases, number of
shares and prices or range of prices will be determined by the Company in its
discretion and will depend on a number of factors, including the market price of
the Company's common stock, general market and economic conditions, and
applicable legal and regulatory requirements. There is no assurance that the
Company will purchase any shares under this program



Liquidity


We closely monitor our liquidity and our liquid assets in the form of cash, due
from banks, federal funds sold, and unpledged available for sale investments.
Collectively, those balances were $184.7 million at March 31, 2022, an increase
of $25.4 million from $159.3 million at December 31, 2021. A surplus of
short-term assets is maintained at levels management deems adequate to meet
potential liquidity needs during 2022.



At March 31, 2022, all of our investment securities were classified as
available-for-sale. These investments provide a source of liquidity in the
amount of $95.8 million, which is net of the $11.1 million of securities pledged
as collateral. Investment securities available for sale serve as a source of
liquidity while yielding a higher return versus other short-term investment
options, such as federal funds sold and overnight deposits with the Federal
Reserve Bank.



Our loan to deposit ratio was 81.4% at March 31, 2022 and 83.9% at December 31,
2021. We anticipate this ratio to remain at or below 90% for the foreseeable
future.



Available third-party sources of liquidity at March 31, 2022 include the
following: a line of credit with the FHLB, access to brokered certificates of
deposit markets and the discount window at the Federal Reserve Bank. We also
have the ability to borrow $30.0 million in unsecured federal funds through
credit facilities extended by correspondent banks.



The Bank's line of credit with the FHLB is $198.6 million, with unused
availability at March 31, 2022 of $186.6 million. No FHLB advances were
outstanding at March 31, 2022, but the credit line also secures letters of
credit totaling $12.0 million. The available line and the outstanding letters of
credit are secured by a blanket lien on our residential real estate loans which
amounted to $132.0 million at March 31, 2022.



                                       30


The Bank also has access to the traded deposit market and the certificates of deposit registration service (CDARS). To March 31, 2022we did not hold any brokerage deposits and $4.4 million in CDARS reciprocal term deposits.

Additional cash is available through the Federal Reserve Bank discount window for day-to-day financing needs. We may collateralize this line with securities and loans at our discretion; however, we do not plan to use this source of funding 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, etc.,
some of which are beyond our control.



The bank holding company has approximately $748 thousand in cash on deposit at
the Bank at March 31, 2022. The holding company receives periodic dividend
payments from the Bank which are used to pay operating expenses, trust preferred
interest payments, and fund dividend payments to shareholders. The Company makes
quarterly interest payments on the trust preferred securities.



As discussed in the Capital Resources section, on April 28, 2022, the board of
directors of the Company authorized the repurchase of up to 500,000 shares of
the Company's outstanding common stock through March 31, 2023. Payments for any
repurchases will be distributed from available funds, or from dividends payments
from the Bank.


Off-balance sheet items and contractual obligations

There have been no material changes during the quarter ended March 31, 2022 to
the off-balance sheet items and the contractual obligations disclosed in our
2021 Form 10-K.

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