Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2022

Note 4 – 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.


(Dollars in thousands)	June 30, 2022			December 31, 2021
Commercial and industrial	$	496,962		$	320,827
Paycheck Protection Program		15,654			30,742
Real estate – construction, commercial		122,455			146,523
Real estate – construction, residential		70,860			58,857
Real estate – mortgage, commercial		791,465			701,503
Real estate – mortgage, residential		522,219			493,982
Real estate – mortgage, farmland		6,880			6,173
Consumer		39,092			49,877
Gross loans		2,065,587			1,808,484
Less: deferred loan fees, net of costs		(1,550	)		(906	)
Total	$	2,064,037		$	1,807,578

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $404.5 million and $478.3 million were pledged as of June 30, 2022 and December 31, 2021, respectively. Additionally, PPP loans were pledged as collateral for the FRB's Paycheck Protection Program Liquidity Facility ("PPPLF") advances in the amount of $60 thousand and $17.9 million as of June 30, 2022 and December 31, 2021, 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 purchased credit-impaired ("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.


(Dollars in thousands)	June 30, 2022		December 31, 2021
PCI loans
Outstanding principal balance	$	75,897	$	97,418
Recorded investment		66,021		84,029
Purchased performing loans
Outstanding principal balance		607,497		706,147
Recorded investment		605,152		703,333
Total acquired loans
Outstanding principal balance		683,394		803,565
Recorded investment		671,173		787,362

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


	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands)	2022			2021			2022			2021
Balance, beginning of period	$	13,337		$	9,439		$	16,849		$	123
Additions		—			—			—			10,030
Accretion		(1,750	)		(1,625	)		(5,262	)		(2,465	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		2,515			2			2,515			106
Other changes, net		(1,157	)		14			(1,157	)		36
Balance, end of period	$	12,945		$	7,830		$	12,945		$	7,830

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


	June 30, 2022
(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 Loans		Current Loans			Total Loans
Commercial and industrial	$	652	$	11	$	—	$	3,993	$	4,656	$	3,516	$	488,790		$	496,962
Paycheck Protection Program		—		—		—		—		—		—		15,654			15,654
Real estate – construction, commercial		1,794		521		—		352		2,667		1,191		118,597			122,455
Real estate – construction, residential		—		183		—		329		512		—		70,348			70,860
Real estate – mortgage, commercial		1,397		—		—		952		2,349		55,042		734,074			791,465
Real estate – mortgage, residential		602		2,428		—		5,599		8,629		5,903		507,687			522,219
Real estate – mortgage, farmland		625		—		—		—		625		—		6,255			6,880
Consumer		768		76		308		648		1,800		369		36,923			39,092
Less: deferred loan fees, net of costs		—		—		—		—		—		—		(1,550	)		(1,550	)
Total Loans	$	5,838	$	3,219	$	308	$	11,873	$	21,238	$	66,021	$	1,976,778		$	2,064,037


	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 Loans		Current Loans			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 loan fees, net of costs		—		—		—		—		—		—		(906	)		(906	)
Total Loans	$	18,165	$	2,268	$	917	$	15,177	$	36,527	$	84,029	$	1,687,022		$	1,807,578

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


	June 30, 2022
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current Loans		Total Loans
Commercial and industrial	$	—	$	—	$	3,516	$	3,516
Real estate – construction, commercial		—		—		1,191		1,191
Real estate – mortgage, commercial		—		—		55,042		55,042
Real estate – mortgage, residential		24		—		5,879		5,903
Consumer		—		—		369		369
Total PCI Loans	$	24	$	—	$	65,997	$	66,021


	December 31, 2021
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current Loans		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

The following tables present a summary of the loan portfolio individually and collectively evaluated for impairment as of the dates stated.


	June 30, 2022
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total Loan Balances			Related Allowance for Loan Losses
PCI loans:
Commercial and industrial	$	—	$	3,516		$	3,516		$	—
Real estate – construction, commercial		—		1,191			1,191			—
Real estate – mortgage, commercial		—		55,042			55,042			—
Real estate – mortgage, residential		—		5,903			5,903			11
Consumer		—		369			369			—
Total PCI loans		—		66,021			66,021			11
Originated and purchased performing loans:
Commercial and industrial		7,858		485,588			493,446			10,435
Real estate – construction, commercial		527		121,928			122,455			284
Real estate – construction, residential		—		69,669			69,669			117
Real estate – mortgage, commercial		9,013		727,410			736,423			2,903
Real estate – mortgage, residential		1,500		514,816			516,316			2,345
Real estate – mortgage, farmland		—		6,880			6,880			25
Consumer		—		38,723			38,723			1,122
Total originated and purchased performing loans		18,898		1,965,014			1,983,912			17,231
Gross loans		18,898		2,031,035			2,049,933			17,242
Less: deferred loan fees, net of costs		—		(1,550	)		(1,550	)		—
Total	$	18,898	$	2,029,485		$	2,048,383		$	17,242


	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			7,133
Real estate – construction, commercial		527		131,242			131,769			953
Real estate – construction, residential		—		58,857			58,857			395
Real estate – mortgage, commercial		3,194		646,437			649,631			1,403
Real estate – mortgage, residential		1,400		484,961			486,361			1,184
Real estate – mortgage, farmland		—		6,173			6,173			23
Consumer		—		48,998			48,998			913
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

The tables above exclude PPP loans of $15.7 million and $30.7 million as of June 30, 2022 and December 31, 2021, respectively. PPP loans are fully guaranteed by the U.S. government; therefore, the Company recorded no allowance for loan losses ("ALL") for these loans as of June 30, 2022 and December 31, 2021. In future periods, the Company may be required to establish an ALL for these loans, which would result in a provision for loan losses charged to earnings.

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


	June 30, 2022						December 31, 2021
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific allowance recorded:
Commercial and industrial	$	4,290	$	8,061	$	—	$	—	$	—	$	—
Real estate – construction, commercial		527		521		—		527		527		—
Real estate – mortgage, commercial		5,973		6,229		—		—		—		—
Real estate – mortgage, residential		1,442		1,439		—		—		—		—
With an allowance recorded:
Commercial and industrial	$	3,568	$	5,875	$	360	$	4,612	$	4,612	$	836
Real estate – mortgage, commercial		3,040		3,039		1		3,194		3,849		1
Real estate – mortgage, residential		58		58		14		1,400		1,400		42
Total	$	18,898	$	25,222	$	375	$	9,733	$	10,388	$	879


	For the three months ended
	June 30, 2022				June 30, 2021
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	6,203	$	12	$	4,324	$	49
Real estate – construction, commercial		521		8		537		8
Real estate – mortgage, commercial		6,254		100		185		3
Real estate – mortgage, residential		1,441		3		920		7
With an allowance recorded:
Commercial and industrial	$	6,619	$	33	$	—	$	—
Real estate – mortgage, commercial		3,570		2		1,207		17
Real estate – mortgage, residential		58		5		57		—
Total	$	24,666	$	163	$	7,230	$	84


	For the six months ended
	June 30, 2022				June 30, 2021
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	5,754	$	74	$	4,409	$	99
Real estate – construction, commercial		523		8		539		16
Real estate – mortgage, commercial		9,067		148		210		7
Real estate – mortgage, residential		1,392		17		890		13
With an allowance recorded:
Commercial and industrial	$	4,955	$	33	$	—	$	—
Real estate – mortgage, commercial		1,829		2		1,211		34
Real estate – mortgage, residential		59		5		116		—
Total	$	23,579	$	287	$	7,375	$	169

Impaired loans also include certain loans that have been modified in troubled debt restructurings ("TDRs") where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs

are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. The Company had 10 TDRs totaling $1.5 million as of June 30, 2022 and eight TDRs totaling $688 thousand as of December 31, 2021.

Three residential mortgage loans with a total recorded investment of $449 thousand were in the process of foreclosure as of June 30, 2022.

The following table presents an analysis of the change in the ALL by loan type as of the dates and for the periods stated.


	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands)	2022			2021			2022			2021
ALL, beginning of period	$	12,013		$	13,402		$	12,121		$	13,827
Charge-offs
Commercial and industrial		(1,383	)		(857	)		(3,746	)		(1,216	)
Real estate – construction		—			—			(123	)		—
Real estate – mortgage		(1,079	)		(1	)		(1,093	)		(13	)
Consumer		(329	)		(133	)		(605	)		(396	)
Total charge-offs		(2,791	)		(991	)		(5,567	)		(1,625	)
Recoveries
Commercial and industrial		2			394			37			450
Real estate – construction		4			—			16			—
Real estate – mortgage		387			87			391			103
Consumer		133			115			250			252
Total recoveries		526			596			694			805
Net charge-offs		(2,265	)		(395	)		(4,873	)		(820	)
Provision for loan losses		7,494			—			9,994			—
ALL, end of period	$	17,242		$	13,007		$	17,242		$	13,007

The following tables present the Company’s loan portfolio by internal loan grade as of the dates stated.


	June 30, 2022
(Dollars in thousands)	Grade 1 Prime		Grade 2 Desirable		Grade 3 Good		Grade 4 Acceptable		Grade 5 Pass/Watch		Grade 6 Special Mention		Grade 7 Substandard			Grade 8 Doubtful		Total
PCI loans:
Commercial and industrial	$	—	$	—	$	991	$	1,512	$	1	$	627	$	—		$	385	$	3,516
Real estate – construction, commerecial		—		—		—		23		—		—		1,168			—		1,191
Real estate – mortgage, commercial		—		—		—		18,636		20,015		14,040		2,351			—		55,042
Real estate – mortgage residential		—		—		—		1,002		1,444		1,675		1,782			—		5,903
Consumer loans		—		—		—		—		—		361		8			—		369
Total PCI loans		—		—		991		21,173		21,460		16,703		5,309			385		66,021
Originated and purchased performing loans:
Commercial and industrial		9,281		909		185,605		274,411		10,675		2,748		5,966			3,851		493,446
Paycheck Protection Program		15,654				—		—		—		—		—			—		15,654
Real estate – construction, commercial		—		378		17,900		93,728		8,174		65		2,210			—		122,455
Real estate – construction, residential		—		—		9,915		58,743		1,849		—		(1,031	)		193		69,669
Real estate – mortgage, commercial		—		2,242		258,116		417,539		43,162		5,081		6,318			3,965		736,423
Real estate – mortgage residential		—		7,417		243,445		245,797		10,630		25		9,002			—		516,316
Real estate – mortgage, farmland		625		—		664		5,462		129		—		—			—		6,880
Consumer loans		287		—		16,067		20,126		1,463		1		779			—		38,723
Total originated and purchased performing loans:		25,847		10,946		731,712		1,115,806		76,082		7,920		23,244			8,009		1,999,566
Gross loans	$	25,847	$	10,946	$	732,703	$	1,136,979	$	97,542	$	24,623	$	28,553		$	8,394	$	2,065,587
Less: deferred loan fees, net of costs																			(1,550	)
Total																		$	2,064,037


	December 31, 2021
(Dollars in thousands)	Grade 1 Prime		Grade 2 Desirable		Grade 3 Good		Grade 4 Acceptable		Grade 5 Pass/Watch		Grade 6 Special Mention		Grade 7 Substandard		Grade 8 Doubtful		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