Loans and Allowance for Loan Losses | Note 4. Loans and Allowance for Loan Losses (Restated) This note has been restated to reflect the changes described in the Explanatory Note and Note 23 to the Consolidated Financial Statements included in this Form 10-K/A. The following table presents loans held for investment, including Paycheck Protection Program ("PPP") loans, as of the dates stated. December 31, (Dollars in thousands) 2022 2021 Commercial and industrial $ 590,049 $ 320,827 Paycheck Protection Program 11,967 30,742 Real estate – construction, commercial 183,301 146,523 Real estate – construction, residential 76,599 58,857 Real estate – mortgage, commercial 864,989 701,503 Real estate – mortgage, residential 631,772 493,982 Real estate – mortgage, farmland 6,599 6,173 Consumer 47,423 49,877 Gross loans 2,412,699 1,808,484 Less: deferred loan fees, net of costs ( 1,640 ) ( 906 ) Total $ 2,411,059 $ 1,807,578 The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $ 436.0 million and $ 478.3 million were pledged as of December 31, 2022 and 2021, respectively. Additionally, PPP loans were pledged as collateral for Paycheck Protection Program Liquidity Facility ("PPPLF") advances in the amount of $ 51 thousand and $ 17.9 million as of December 31, 2022 and 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 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) 2022 2021 PCI loans Outstanding principal balance $ 64,911 $ 97,418 Recorded investment 58,748 84,029 Purchased performing loans Outstanding principal balance 513,461 706,147 Recorded investment 511,752 703,333 Total acquired loans Outstanding principal balance 578,372 803,565 Recorded investment 570,500 787,362 The following table presents the changes in the accretable yield for PCI loans for the periods stated. December 31, (Dollars in thousands) 2022 2021 Balance, beginning of period $ 16,849 $ 123 Additions — 10,030 Accretion ( 9,410 ) ( 5,381 ) Reclassification of nonaccretable difference due to improvement in expected cash flows 3,804 1,400 Other changes, net ( 71 ) 10,677 Balance, end of period $ 11,172 $ 16,849 The following tables present the aging of the recorded investment of loans held for investment as of the dates stated. December 31, 2022 (Restated) (Dollars in thousands) 30-59 60-89 Greater than Nonaccrual Total Past PCI Loans Current Total Commercial and industrial $ 488 $ 279 $ — $ 68,039 $ 68,806 $ 1,481 $ 519,762 $ 590,049 Paycheck Protection Program — — — — — — 11,967 11,967 Real estate – construction, commercial 1,137 19 — 714 1,870 — 181,431 183,301 Real estate – construction, residential 1,416 1,204 — — 2,620 7 73,972 76,599 Real estate – mortgage, commercial 6,198 297 6,234 1,658 14,387 51,223 799,379 864,989 Real estate – mortgage, residential 4,544 231 1,998 5,143 11,916 5,678 614,178 631,772 Real estate – mortgage, farmland — 75 — — 75 — 6,524 6,599 Consumer 880 200 28 495 1,603 359 45,461 47,423 Less: deferred loan fees, net of costs — — — — — — ( 1,640 ) ( 1,640 ) Total Loans $ 14,663 $ 2,305 $ 8,260 $ 76,049 $ 101,277 $ 58,748 $ 2,251,034 $ 2,411,059 December 31, 2021 (Dollars in thousands) 30-59 60-89 Greater than Nonaccrual Total Past Nonaccrual PCI Loans Current Total 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. December 31, 2022 (Dollars in thousands) 30-89 Greater than Current Total Commercial and industrial $ — $ — $ 1,481 $ 1,481 Real estate – construction, commercial — — 7 7 Real estate – mortgage, commercial — — 51,223 51,223 Real estate – mortgage, residential 354 — 5,324 5,678 Consumer — — 359 359 Total PCI Loans $ 354 $ — $ 58,394 $ 58,748 December 31, 2021 (Dollars in thousands) 30-89 Greater than Current Total 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 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, 2022 (Restated) (Dollars in thousands) Individually Collectively Total Loan Balances Related Allowance for Loan Losses PCI loans: Commercial and industrial $ — $ 1,481 $ 1,481 $ — Real estate – construction, commercial — 7 7 — Real estate – mortgage, commercial — 51,223 51,223 3 Real estate – mortgage, residential — 5,678 5,678 — Consumer — 359 359 — Total PCI loans — 58,748 58,748 3 Originated and purchased performing loans: Commercial and industrial 67,654 520,914 588,568 23,073 Real estate – construction, commercial 521 182,773 183,294 1,637 Real estate – construction, residential — 76,599 76,599 628 Real estate – mortgage, commercial 4,634 809,132 813,766 2,353 Real estate – mortgage, residential 834 625,260 626,094 1,760 Real estate – mortgage, farmland — 6,599 6,599 4 Consumer — 47,064 47,064 1,282 Total originated and purchased performing loans 73,643 2,268,341 2,341,984 30,737 Gross loans 73,643 2,327,089 2,400,732 30,740 Less: deferred loan fees, net of costs — ( 1,640 ) ( 1,640 ) — Total $ 73,643 $ 2,325,449 $ 2,399,092 $ 30,740 December 31, 2021 (Dollars in thousands) Individually Collectively 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 $ 12.0 million and $ 30.7 million as of December 31, 2022 and 2021, respectively. PPP loans are fully guaranteed by the U.S. government; therefore, the Company recorded no allowance for loan losses for these loans. 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 presented. December 31, 2022 (Restated) December 31, 2021 (Dollars in thousands) Recorded Unpaid Related Recorded Unpaid Related With no specific allowance recorded: Commercial and industrial $ 1,268 $ 1,289 $ — $ — $ — $ — Real estate – construction, commercial 521 521 — 527 527 — Real estate – mortgage, commercial 4,508 4,504 — — — — Real estate – mortgage, residential 834 834 — — — — With an allowance recorded: Commercial and industrial $ 66,386 $ 66,386 $ 11,605 $ 4,612 $ 4,612 $ 836 Real estate – mortgage, commercial 126 126 1 3,194 3,849 1 Real estate – mortgage, residential — — — 1,400 1,400 42 Total $ 73,643 $ 73,660 $ 11,606 $ 9,733 $ 10,388 $ 879 The increase in impaired loans was primarily attributable to a portfolio specialty finance loans (classified as commercial and industrial loans), totaling $ 68.7 million as of December 31, 2022, and risk graded as substandard as of the same date. These loans were deemed impaired per Company policy and individually evaluated for impairment. These impairment analyses resulted in an increase of $ 11.4 million in the allowance for loan losses as of December 31, 2022, which is included in the table above. Impaired loans also include TDRs. As of December 31, 2022, there were 12 TDRs totaling $ 38.3 million as compared to eight TDRs totaling $ 688 thousand as of December 31, 2021. Included in the $ 38.3 million of TDRs as of December 31, 2022 was one $ 37.3 million specialty finance loan (classified as a commercial and industrial loan) that was modified via an extension of terms and placed on nonaccrual status in the fourth quarter of 2022. The following table presents an analysis of the change in the allowance for loans losses by loan type as of the dates and for the periods stated. December 31, 2022 2021 2020 (Dollars in thousands) (Restated) Allowance for loan losses, beginning of period $ 12,121 $ 13,827 $ 4,572 Charge-offs Commercial and industrial ( 4,779 ) ( 1,098 ) ( 6 ) Real estate – construction ( 162 ) ( 195 ) — Real estate – mortgage ( 1,824 ) ( 125 ) ( 505 ) Consumer ( 1,686 ) ( 1,123 ) ( 994 ) Total charge-offs ( 8,451 ) ( 2,541 ) ( 1,505 ) Recoveries Commercial and industrial 442 196 41 Real estate – construction 40 — — Real estate – mortgage 409 98 8 Consumer 492 424 261 Total recoveries 1,383 718 310 Net charge-offs ( 7,068 ) ( 1,823 ) ( 1,195 ) Provision for loan losses 25,687 117 10,450 Allowance for loan losses, end of period $ 30,740 $ 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 uses the following definitions for loan risk ratings and periodically evaluates the appropriateness of these ratings across its loan portfolio: 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 uncollectible 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 as of December 31, 2022 and December 31, 2021. 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, 2022 (Restated) (Dollars in thousands) Grade Grade Grade Grade Grade Grade Grade Grade Total PCI loans: Commercial and industrial $ — $ — $ — $ 1,369 $ — $ 112 $ — $ — $ 1,481 Real estate – construction, commercial — — — 7 — — — — 7 Real estate – mortgage, commercial — — — 22,778 26,059 1,700 686 — 51,223 Real estate – mortgage residential — — — 1,453 1,985 — 2,240 — 5,678 Consumer — — — — 353 — 6 — 359 Total PCI loans — — — 25,607 28,397 1,812 2,932 — 58,748 Originated and purchased performing loans: Commercial and industrial 318 885 192,393 291,204 31,902 2,834 69,032 — 588,568 Paycheck Protection Program 11,967 — — — — — — — 11,967 Real estate – construction, commercial — 361 14,223 156,027 8,504 3,365 814 — 183,294 Real estate – construction, residential — — 3,110 72,327 1,162 — — — 76,599 Real estate – mortgage, commercial — 2,330 187,648 561,554 54,352 2,048 5,834 — 813,766 Real estate – mortgage residential — 7,311 233,697 365,511 11,858 — 7,717 — 626,094 Real estate – mortgage, farmland 549 — 1,315 4,609 126 — — — 6,599 Consumer 197 — 21,330 24,731 256 — 550 — 47,064 Total originated and purchased performing loans: 13,031 10,887 653,716 1,475,963 108,160 8,247 83,947 — 2,353,951 Gross loans $ 13,031 $ 10,887 $ 653,716 $ 1,501,570 $ 136,557 $ 10,059 $ 86,879 $ — $ 2,412,699 Less: deferred loan fees, net of costs ( 1,640 ) Total $ 2,411,059 December 31, 2021 (Dollars in thousands) Grade Grade Grade Grade Grade Grade Grade Grade 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 — — — — 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 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 |