Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2021

Note 5. Loans and Allowance for Loan Losses

The following table presents loans held for investment, including Paycheck Protection Program ("PPP") loans, as of the dates stated.


	December 31,
(Dollars in thousands)	2021			2020
Commercial and industrial	$	320,827		$	123,675
Paycheck Protection Program		30,742			292,068
Real estate – construction, commercial		146,523			54,702
Real estate – construction, residential		58,857			18,040
Real estate – mortgage, commercial		701,503			273,499
Real estate – mortgage, residential		493,982			213,404
Real estate – mortgage, farmland		6,173			3,615
Consumer loans		49,877			41,962
Gross loans		1,808,484			1,020,965
Less: deferred loan fees, net of costs		(906	)		(4,271	)
Total	$	1,807,578		$	1,016,694

In 2020, the Company participated in the PPP under the CARES Act (“PPP 1”). Through the PPP 1, the federal government partnered with banks, including the Bank, to provide over $650 billion to small businesses to support payrolls and other operating expenses. PPP 1 loans have a two year term if originated prior to June 5, 2020, or a five-year term if originated on or subsequent to June 5, 2020, and earn an annual interest rate of 1%. Banks originating PPP 1 loans earned a processing fee of 1%, 3%, or 5% of the loan amount, depending on the size of the loan. The Company originated approximately $363.4 million in PPP 1 loans in 2020, and as of December 31, 2021, $18.0 million of PPP 1 loans were outstanding, including those acquired in the Bay Banks Merger.

In 2021 the Company participated in the PPP pursuant to the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, passed into law on December 27, 2020 (“PPP 2”). The PPP 2 was for loan applications received by May 31, 2021. The Company funded over 20,000 PPP 2 loans for approximately $730 million. PPP 2 loans have a contractual term of five years and earn an annual interest rate of 1%. Banks originating PPP 2 loans earned processing fees that were tiered depending on the size of the loan. Specifically, processing fees for loans of not more than $50,000 equaled 50% of the loan balance or $2,500, whichever was less; processing fees for loans more than $50,000 and not more than $350,000 equaled 5% of the loan balance, and processing fees for loans above $350,000 equaled 3% of the loan balance. Of the PPP 2 loans originated in 2021, approximately 19,500 with principal balances of $712.6 million were sold on June 28, 2021. Gross proceeds from the sale were $705.9 million and the Company recorded a pre-tax gain in noninterest income of $24.3 million on the sale after giving effect to $30.9 million of unamortized fees, net of deferred costs, and the sale discount. As of December 31, 2021, the Company held PPP 2 loans with aggregate principal balances and unamortized fees, net of deferred costs, of $12.7 million and $348 thousand, respectively.

The Company believes that the majority of PPP 1 and PPP 2 loans will be forgiven, in accordance with the terms of the program, and will be paid in full pursuant to the U.S. government guarantee.

The Company is accounting for the PPP processing fees in accordance with ASC 310-20, Receivables Nonrefundable Fees and Other Costs, which requires fees, net of costs, to be deferred and amortized as a component of loan yield over the expected life of the loans, which the Company believes is one to three years for PPP 2 loans, depending on the individual loan balance. Of the $11.5 million of processing fees received in 2020 for PPP 1 loans, $4.8 million were recognized as a component of interest income for the year ended December 31, 2021. No unamortized PPP 1 fees remain as of December 31, 2021. PPP 2 processing fees, net of costs, totaled $43.4 million in 2021, of which $12.5 million were recognized as interest income for the year ended December 31, 2021, and $30.9 million were recognized as part of the gain on sale in the second quarter of 2021.

From the onset of the global COVID-19 pandemic, the Company proactively addressed the needs of its commercial and individual borrowers by modifying loans allowing for the short-term deferral of principal payments or of principal and interest payments. In response to the COVID-19 pandemic, during 2020, the Company approved over 550 loan deferrals for a total of $110.6 million. In addition, Bay Banks approved nearly 400 loan deferrals for approximately $160.0 million. Most of these loans are now past the deferment period and are back on normal

payment schedules, and as of December 31, 2021, 15 loans were in deferment for a total of approximately $5.2 million. These loans were not designated as TDRs.

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $478.3 million and $213.3 million were pledged as of December 31, 2021 and 2020, respectively. Additionally, PPP loans were pledged as collateral for PPPLF advances in the amount of $17.9 million and $281.6 million as of December 31, 2021 and 2020, respectively.

As a result of the Bay Banks Merger and the 2019 acquisition of Virginia Community Bankshares, Inc., the acquired loan portfolios were initially measured at fair value as of the respective acquisition dates and subsequently accounted for as either purchased performing loans or PCI loans. The following table presents the outstanding principal balance and related recorded investment of these acquired loans included in the consolidated balance sheets as of the dates stated.


	December 31,
(Dollars in thousands)	2021		2020
PCI loans
Outstanding principal balance	$	97,418	$	1,278
Carrying amount		84,029		1,085
Purchased performing loans
Outstanding principal balance		706,147		97,301
Carrying amount		703,333		96,317
Total acquired loans
Outstanding principal balance		803,565		98,579
Carrying amount		787,362		97,402

The following table presents the changes in the accretable yield for PCI loans for the periods stated.


(Dollars in thousands)	2021			2020
Balance, beginning of period	$	123		$	188
Additions		10,030			—
Accretion		(5,381	)		(56	)
Other changes, net		12,077			(9	)
Balance, end of period	$	16,849		$	123

The following tables present the aging of the recorded investment of loans held for investment as of the dates stated.


	December 31, 2021
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total Past Due & Nonaccrual		PCI		Current			Total Loans
Commercial and industrial	$	2,338	$	—	$	30	$	6,066	$	8,434	$	8,903	$	303,490		$	320,827
Paycheck Protection Program		—		—		—		—		—		—		30,742			30,742
Real estate – construction, commercial		271		—		—		88		359		14,754		131,410			146,523
Real estate – construction, residential		651		98		279		413		1,441		—		57,416			58,857
Real estate – mortgage, commercial		53		—		—		3,024		3,077		51,872		646,554			701,503
Real estate – mortgage, residential		13,950		1,587		359		5,190		21,086		7,621		465,275			493,982
Real estate – mortgage, farmland		—		—		—		—		—		—		6,173			6,173
Consumer		902		583		249		396		2,130		879		46,868			49,877
Less: deferred fees, net of costs		—		—		—		—		—		—		(906	)		(906	)
Total	$	18,165	$	2,268	$	917	$	15,177	$	36,527	$	84,029	$	1,687,022		$	1,807,578


	December 31, 2020
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Nonaccrual		Total Past Due & Nonaccrual		PCI		Current			Total Loans
Commercial and industrial	$	1,117	$	—	$	—	$	1,310	$	2,427	$	—	$	121,248		$	123,675
Paycheck Protection Program		—		—		—		—		—		—		292,068			292,068
Real estate – construction, commercial		—		—		—		—		—		35		54,667			54,702
Real estate – construction, residential		262		—		—		—		262		—		17,778			18,040
Real estate – mortgage, commercial		771		211		—		3,643		4,625		808		268,066			273,499
Real estate – mortgage, residential		1,062		—		46		881		1,989		242		211,173			213,404
Real estate – mortgage, farmland		—		—		—		—		—		—		3,615			3,615
Consumer		935		334		—		714		1,983		—		39,979			41,962
Less: deferred loan fees, net of costs		—		—		—		—		—		—		(4,271	)		(4,271	)
Total	$	4,147	$	545	$	46	$	6,548	$	11,286	$	1,085	$	1,004,323		$	1,016,694

The following tables present the aging of the recorded investment of PCI loans as of the dates stated.


	December 31, 2021
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current		Total Loans
Commercial and industrial	$	—	$	—	$	8,903	$	8,903
Real estate – construction, commercial		—		—		14,754		14,754
Real estate – mortgage, commercial		—		—		51,872		51,872
Real estate – mortgage, residential		147		—		7,474		7,621
Consumer		—		4		875		879
Total PCI loans	$	147	$	4	$	83,878	$	84,029


	December 31, 2020
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current		Total Loans
Real estate – construction, commercial	$	—	$	—	$	35	$	35
Real estate – mortgage, commercial		224		—		584		808
Real estate – mortgage, residential		35		—		207		242
Total PCI loans	$	259	$	—	$	826	$	1,085

The following tables present the allowance for loan losses and the amount of loans evaluated for impairment, individually and collectively, by loan type as of the dates stated.


	December 31, 2021
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total Loan Balances			Related Allowance for Loan Losses
PCI loans:
Commercial and industrial	$	—	$	8,903		$	8,903		$	—
Real estate – construction, commercial		—		14,754			14,754			—
Real estate – mortgage, commercial		—		51,872			51,872			—
Real estate – mortgage, residential		—		7,621			7,621			117
Consumer		—		879			879			—
Total PCI loans		—		84,029			84,029			117
Originated and purchased performing loans:
Commercial and industrial		4,612		307,312			311,924			2,859
Real estate – construction, commercial		527		131,242			131,769			895
Real estate – construction, residential		—		58,857			58,857			21
Real estate – mortgage, commercial		3,194		646,437			649,631			4,294
Real estate – mortgage, residential		1,400		484,961			486,361			1,376
Real estate – mortgage, farmland		—		6,173			6,173			18
Consumer		—		48,998			48,998			2,541
Total originated and purchased performing loans		9,733		1,683,980			1,693,713			12,004
Gross loans		9,733		1,768,009			1,777,742			12,121
Less: deferred loan fees, net of costs		—		(570	)		(570	)		—
Total	$	9,733	$	1,767,439		$	1,777,172		$	12,121


	December 31, 2020
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total Loan Balances			Related Allowance for Loan Losses
PCI loans:
Real estate – construction, commercial	$	—	$	35		$	35		$	—
Real estate – mortgage, commercial		—		808			808			—
Real estate – mortgage, residential		—		242			242			—
Total PCI loans		—		1,085			1,085			—
Originated and purchased performing loans:
Commercial and industrial		234		123,441			123,675			3,762
Real estate – construction, commercial		—		54,667			54,667			960
Real estate – construction, residential		—		18,040			18,040			150
Real estate – mortgage, commercial		1,645		271,046			272,691			4,215
Real estate – mortgage, residential		452		212,710			213,162			1,481
Real estate – mortgage, farmland		—		3,615			3,615			18
Consumer		—		41,962			41,962			3,241
Total originated and purchased performing loans		2,331		725,481			727,812			13,827
Gross loans		2,331		726,566			728,897			13,827
Less: deferred loan fees, net of costs		—		(736	)		(736	)		—
Total	$	2,331	$	725,830		$	728,161		$	13,827

The tables above exclude PPP loans of $30.7 million and $292.1 million as of December 31, 2021 and 2020, respectively. PPP loans are fully guaranteed by the U.S. government; therefore, the Company recorded no allowance for loan losses for these loans as of December 31, 2021 and 2020.

The following tables present information related to impaired loans by loan type as of and for the periods presented.


	December 31, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Real estate – construction, commercial	$	527	$	527	$	—	$	535	$	37
With an allowance recorded:
Commercial and industrial		4,612		4,612		836		4,369		260
Real estate – mortgage, commercial		3,194		3,849		1		3,636		70
Real estate – mortgage, residential		1,400		1,400		42		700		23
Total	$	9,733	$	10,388	$	879	$	9,240	$	390


	December 31, 2020
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Real estate – mortgage, residential	$	1,645	$	2,030	$	—	$	2,091	$	4
Real estate – mortgage, commercial		452		571		—		538		2
With an allowance recorded:
Commercial and industrial		234		234		144		362		—
Total	$	2,331	$	2,835	$	144	$	2,991	$	6

Impaired loans also include TDRs. There were eight TDRs totaling $1.0 million as of December 31, 2021 compared to two TDRs totaling $142 thousand as of December 31, 2020.

The following table presents an analysis of the change in the allowance for loans losses by loan type as of and for the periods stated.


	December 31,
(Dollars in thousands)	2021			2020
Allowance for loan losses, beginning of period	$	13,827		$	4,572
Charge-offs:
Commercial and industrial	$	(1,098	)	$	(6	)
Real estate – construction		(195	)		—
Real estate – mortgage		(125	)		(505	)
Consumer loans		(1,123	)		(994	)
Total charge-offs		(2,541	)		(1,505	)
Recoveries:
Commercial and industrial		196			41
Real estate – mortgage		98			8
Consumer loans		424			261
Total recoveries		718			310
Net charge-offs		(1,823	)		(1,195	)
Provision for loan losses		117			10,450
Allowance for loan losses, end of period	$	12,121		$	13,827

The Company categorizes loans into risk categories based on relevant information about the expected ability of borrowers to service their debt, such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Risk Grade 1 – Strong: This grade is reserved for loans to the strongest of borrowers. These loans are to individuals or corporations that are well known to the Bank and are always secured with an almost guaranteed source of repayment such as a lien on a bank deposit account. Character, credit history, and ability of individuals or company principals are excellent and unquestioned. Source of income and industry of borrower appears stable. High liquidity, minimum risk, good ratios, and low handling cost are present.

Risk Grade 2 – Minimal: This grade is reserved for loans to borrowers who are deemed exceptionally strong. These loans are within guidelines and where the borrowers have documented significant overall financial strength. These loans have excellent sources of repayment, significant balance sheet liquidity, no significant identifiable risk of collection, and conform in all respects to policy, guidelines, underwriting standards, and federal and state regulations (no exceptions of any kind).

Risk Grade 3 – Acceptable: This grade is reserved for loans to borrowers who are deemed strong. These loans have adequate sources of repayment, with little identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with policy, guidelines, underwriting standards, and federal and state regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt.

Risk Grade 4 – Satisfactory: This grade is given to satisfactory loans containing more risk than Risk Grade 3 loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to the Bank's underwriting requirements, with limited exceptions to policy, product, or underwriting guidelines. All exceptions noted have documented mitigating factors that offset any additional risk associated with the exceptions noted, (2) documented historical cash flow that meets or exceeds required minimum guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Risk Grade 5 – Watch: This grade is for satisfactory loans containing acceptable but elevated risk. These loans are characterized by borrowers who have a marginal cash flow, marginal profitability, or have experienced an unprofitable year and declining financial condition. The borrower's management may be deemed to be satisfactory, the collateral securing the loan may create a loan-to-value ratio in excess of 90%, the debt service coverage ratio and global debt service coverage are unstable but mostly positive, and/or guarantor support, if any, is inadequate. Loans classified as Watch warrant additional monitoring by management.

Risk Grade 6 – Special Mention: This grade is for loans that have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention credits typically exhibit underwriting guideline tolerances and/or exceptions with no mitigating factors, or emerging weaknesses that may or may not be cured as time passes.

Risk Grade 7 – 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. Loans consistently not meeting the repayment schedule should be downgraded further to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) high debt to worth ratios, (2) declining or negative earnings trends, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable repayment sources, (6) lack of well-defined secondary repayment source, and (7) unfavorable competitive comparisons. Such

loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins, and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.

Risk Grade 8 – 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. However, these loans are not yet rated as loss because certain events may occur which would salvage the Bank's position, which can include, but not limited to (1) an injection of capital, (2) alternative financing, and (3) liquidation of assets or the pledging of additional collateral. Doubtful is a temporary grade where a loss is expected, but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off against the allowance for loan losses.

Risk Grade 9 – Loss: Loans classified loss are considered uncollectable and of such little value that their continuance as assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer charging off the worthless loan, even though partial recovery may be effected in the future. Probable loss portions of doubtful loans are charged off promptly against the allowance for loan losses.

There were no loans classified as doubtful or loss at December 31, 2021 and December 31, 2020.

The following tables present the Company's loan portfolio (PCI and originated and purchased performing) by internal loan grades as of the dates stated. PPP loans are risk graded strong because they are fully guaranteed by the U.S. government.


	December 31, 2021
(Dollars in thousands)	Grade 1 Strong		Grade 2 Minimal		Grade 3 Acceptable		Grade 4 Satisfactory		Grade 5 Watch		Grade 6 Special Mention		Grade 7 Substandard		Total
PCI loans:
Commercial and industrial	$	—	$	—	$	—	$	1,567	$	2,818	$	2,748	$	1,770	$	8,903
Real estate – construction, commercial		—		—		—		2,423		—		11,010		1,321		14,754
Real estate – mortgage, commercial		—		—		—		2,642		3,892		33,487		11,851		51,872
Real estate – mortgage residential		—		—		—		142		1,657		2,709		3,113		7,621
Consumer loans		—		—		—		—		388		481		10		879
Total PCI loans		—		—		—		6,774		8,755		50,435		18,065		84,029
Originated and purchased performing loans:
Commercial and industrial		291		560		156,519		133,738		11,256		3,180		6,380		311,924
Paycheck Protection Program		30,742		—		—		—		—		—		—		30,742
Real estate – construction, commercial		—		412		28,973		91,900		7,995		1,846		643		131,769
Real estate – construction, residential		—		—		14,610		40,418		3,416		—		413		58,857
Real estate – mortgage, commercial		—		2,382		307,067		283,165		34,750		17,133		5,134		649,631
Real estate – mortgage residential		990		9,218		276,992		180,980		11,107		974		6,100		486,361
Real estate – mortgage, farmland		340		—		1,067		4,766		—		—		—		6,173
Consumer loans		262		3		16,920		30,691		542		—		580		48,998
Total originated and purchased performing loans:		32,625		12,575		802,148		765,658		69,066		23,133		19,250		1,724,455
Gross loans	$	32,625	$	12,575	$	802,148	$	772,432	$	77,821	$	73,568	$	37,315	$	1,808,484
Less: deferred loan fees, net of costs																(906	)
Total															$	1,807,578


	December 31, 2020
(Dollars in thousands)	Grade 1 Strong		Grade 2 Minimal		Grade 3 Acceptable		Grade 4 Satisfactory		Grade 5 Watch		Grade 6 Special Mention		Grade 7 Substandard		Total
PCI loans:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Real estate – construction, commercial		—		—		—		35		—		—		—		35
Real estate – mortgage, commercial		—		—		—		—		—		93		715		808
Real estate – mortgage residential		—		—		40		46		121		35		—		242
Total PCI loans		—		—		40		81		121		128		715		1,085
Originated and purchased performing loans:
Commercial and industrial		844		484		23,828		85,928		7,251		4		5,336		123,675
Paycheck Protection Program		292,068		—		—		—		—		—		—		292,068
Real estate – construction, commercial		—		2,143		19,524		26,289		5,916		218		577		54,667
Real estate – construction, residential		—		—		3,073		8,247		6,458		—		262		18,040
Real estate – mortgage, commercial		—		3,994		128,163		114,977		15,799		2,875		6,883		272,691
Real estate – mortgage residential		—		3,583		101,038		100,555		5,629		123		2,234		213,162
Real estate – mortgage, farmland		444		—		1,175		1,996		—		—		—		3,615
Consumer loans		324		36		17,062		23,311		521		1		707		41,962
Total originated and purchased performing loans:		293,680		10,240		293,863		361,303		41,574		3,221		15,999		1,019,880
Gross loans	$	293,680	$	10,240	$	293,903	$	361,384	$	41,695	$	3,349	$	16,714	$	1,020,965
Less: deferred loan fees, net of costs																(4,271	)
Total															$	1,016,694