Loans and Allowance for Loan Losses | Note 5 – Loans and Allowance for Loan Losses The following table presents loans held for investment as of the dates stated. (Dollars in thousands) June 30, 2021 December 31, 2020 Commercial and industrial $ 304,178 $ 123,675 Paycheck Protection Program 130,489 292,068 Real estate – construction, commercial 143,215 54,702 Real estate – construction, residential 47,894 18,040 Real estate – mortgage, commercial 672,592 273,499 Real estate – mortgage, residential 490,753 213,404 Real estate – mortgage, farmland 6,537 3,615 Consumer 65,220 46,684 Gross loans 1,860,878 1,025,687 Less: Deferred loan fees, net of costs (1,008 ) (4,271 ) Total $ 1,859,870 $ 1,021,416 In 2020, the Company participated in the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (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 five-year In the first and second quarters of 2021, the Company participated in the PPP pursuant to the Economic Aid Act, passed into law on December 27, 2020 (“PPP 2”), and through June 30, 2021, the Company had funded over 20,000 PPP 2 loans for approximately $728.0 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 June 30, 2021, the Company held approximately 600 PPP 2 loans with aggregate principal balances and unamortized fees, net of deferred costs, of $15.7 million and $367 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 From the onset of the global COVID-19 pandemic, the Company has 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. Pursuant to the CARES Act and the Economic Aid Act, banks have the option to temporarily suspend certain requirements of GAAP related to TDRs to the earlier of January 1, 2022 or the date that is 60 days after the date o n which the n ational e mergenc y terminates if certain conditions are met. All loan modifications made by the Company were made on a good faith basis to borrowers who met the requirements for modifications under the CARES Act. As a result of regulatory and accounting guidance regarding such modifications, the loans were not designated as TDRs as of June 30 , 2021 and December 31, 2020 . 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, B ay B anks 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 June 30 , 2021, 16 loans we re in deferment for a total of approximately $ 5.2 million. The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $598.4 million and $213.3 million were pledged as of June 30, 2021 and December 31, 2020, respectively. Additionally, PPP loans were pledged as collateral for PPPLF advances in the amount of $97.4 million and $281.6 million as of June 30, 2021 and December 31, 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. (Dollars in thousands) June 30, 2021 December 31, 2020 PCI loans Outstanding principal balance $ 108,220 $ 1,278 Recorded investment 94,163 1,085 Purchased performing loans Outstanding principal balance 877,755 97,301 Recorded investment 874,825 96,317 Total acquired loans Outstanding principal balance 985,975 98,579 Recorded investment 968,988 97,402 The following table presents the changes in the accretable yield for PCI loans for the periods stated. For the three months ended For the six months ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Balance, beginning of period $ 9,439 $ 169 $ 123 $ 185 Additions — — 10,030 — Accretion (1,625 ) (16 ) (2,465 ) (32 ) Reclassification of nonaccretable difference due to improvement in expected cash flows 2 — 106 — Other changes, net 14 — 36 — Balance, end of period $ 7,830 $ 153 $ 7,830 $ 153 The following tables present the aging of the recorded investment of loans held for investment as of the dates stated. June 30, 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 $ 338 $ 332 $ — $ 6,180 $ 6,850 $ 9,235 $ 288,093 $ 304,178 Paycheck Protection Program — — — — — — 130,489 130,489 Real estate – construction, commercial 16,593 7 9 89 16,698 22,722 103,795 143,215 Real estate – construction, residential — — 451 255 706 — 47,188 47,894 Real estate – mortgage, commercial 2,007 — 28 3,220 5,255 52,945 614,392 672,592 Real estate – mortgage, residential 924 2,182 1,308 1,588 6,002 7,905 476,846 490,753 Real estate – mortgage, farmland — — — — — — 6,537 6,537 Consumer 668 226 97 594 1,585 1,356 62,279 65,220 Less: Deferred loan fees, net of costs — — — — — — (1,008 ) (1,008 ) Total Loans $ 20,530 $ 2,747 $ 1,893 $ 11,926 $ 37,096 $ 94,163 $ 1,728,611 $ 1,859,870 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 Loans Current Loans 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 — 44,701 46,684 Less: Deferred loan fees, net of costs — — — — (4,271 ) (4,271 ) Total Loans $ 4,147 $ 545 $ 46 $ 6,548 $ 11,286 $ 1,085 $ 1,009,045 $ 1,021,416 The following tables present the aging of the recorded investment of PCI loans as of the dates stated. June 30, 2021 (Dollars in thousands) 30-89 Days Past Due Greater than 90 Days Past Due & Accruing Current Loans Total Loans Commercial and industrial $ — $ — $ 9,235 $ 9,235 Real estate – construction, commercial 13,904 9 8,809 22,722 Real estate – mortgage, commercial 133 28 52,784 52,945 Real estate – mortgage, residential 1,068 1,308 5,529 7,905 Consumer 20 — 1,336 1,356 Total PCI Loans $ 15,125 $ 1,345 $ 77,693 $ 94,163 December 31, 2020 (Dollars in thousands) 30-89 Days Past Due Greater than 90 Days Past Due & Accruing Current Loans 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 T he Company prepares a quarterly analysis of the ALL, with the objective of quantifying portfolio risk into a dollar amount of inherent losses. The ALL is increased through a provision for loan losses charged against income and decreased by loans charged-off (net of recoveries, if any). Management’s periodic evaluation of the adequacy of the ALL is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used. The ALL consists of specific and general components. The specific component relates to loans that are identified as impaired and meet certain other criteria, such as size . For loans that are classified as impaired, an allowance is established when the discounted cash flows or the net realizable value of underlying collateral , which is equal to the estimated fair value less estimated costs to sell, of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and those loans classified that are not individually evaluated for impairment and is based on historical loss experience adjusted for other internal or external influences on credit quality that are not fully reflected in the historical data. The Company follows applicable guidance issued by the FASB. This guidance requires that losses be accrued when they are probable of occurring and can be estimated. It also requires that impaired loans, within its scope, be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the underlying collateral if the loan is collateral dependent. PPP loans are fully guaranteed by the U.S. government; therefore, the Company recorded no ALL for these loans as of June 30, 2021 and December 31, 2020. 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 a summary of the loan portfolio individually and collectively evaluated for impairment as of the dates stated. June 30, 2021 (Dollars in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Originated and purchased performing loans: Commercial and industrial $ 4,810 $ 290,133 $ 294,943 Real estate – construction, commercial 536 119,958 120,494 Real estate – construction, residential — 47,894 47,894 Real estate – mortgage, commercial 1,378 618,269 619,647 Real estate – mortgage, residential 976 481,871 482,847 Real estate – mortgage, farmland — 6,537 6,537 Consumer — 63,864 63,864 Total originated and purchased performing loans 7,700 1,628,526 1,636,226 PCI loans: Commercial and industrial — 9,235 9,235 Real estate – construction, commercial — 22,721 22,721 Real estate – mortgage, commercial — 52,945 52,945 Real estate – mortgage, residential — 7,906 7,906 Consumer — 1,356 1,356 Total PCI loans — 94,163 94,163 Gross loans 7,700 1,722,689 1,730,389 Less: Deferred loan fees, net of costs — (722 ) (722 ) Total $ 7,700 $ 1,721,967 $ 1,729,667 December 31, 2020 (Dollars in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Originated and purchased performing loans: Commercial and industrial $ 234 $ 123,441 $ 123,675 Real estate – construction, commercial — 54,667 54,667 Real estate – construction, residential — 18,040 18,040 Real estate – mortgage, commercial 1,645 271,046 272,691 Real estate – mortgage, residential 452 212,710 213,162 Real estate – mortgage, farmland — 3,615 3,615 Consumer — 46,684 46,684 Total originated and purchased performing loans 2,331 730,203 732,534 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 Gross loans 2,331 731,288 733,619 Less: Deferred loan fees, net of costs — (736 ) (736 ) Total $ 2,331 $ 730,552 $ 732,883 The tables above exclude gross PPP loans of $130.5 million and $292.1 million as of June 30, 2021 and December 2020, respectively. The following tables present information related to impaired loans by loan type as of the dates presented. June 30, 2021 December 31, 2020 (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 $ 4,735 $ 4,735 $ — $ 234 $ 234 $ 144 Real estate – construction, commercial 535 535 — — — — Real estate – mortgage, commercial 182 182 — 1,645 2,030 — Real estate – mortgage, residential 919 919 — 452 571 — With an allowance recorded: Real estate – mortgage, commercial 1,188 1,188 387 — — — Real estate – mortgage, residential 57 57 57 — — — $ 7,616 $ 7,616 $ 444 $ 2,331 $ 2,835 $ 144 For the three months ended June 30, 2021 June 30, 2020 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no specific allowance recorded: Commercial and industrial $ 4,324 $ 49 $ — $ — Real estate – construction, commercial 537 8 — — Real estate – mortgage, commercial 185 3 — — Real estate – mortgage, residential 920 7 581 — With an allowance recorded: Commercial and industrial — — 265 — Real estate – mortgage, commercial 1,207 17 — — Real estate – mortgage, residential 57 — 376 — $ 7,230 $ 84 $ 1,222 $ — For the six months ended June 30, 2021 June 30, 2020 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no specific allowance recorded: Commercial and industrial $ 4,409 $ 99 $ — $ — Real estate – construction, commercial 539 16 — — Real estate – mortgage, commercial 210 7 — — Real estate – mortgage, residential 890 13 581 — With an allowance recorded: Commercial and industrial — — 265 1 Real estate – mortgage, commercial 1,211 34 — — Real estate – mortgage, residential 116 — 376 2 $ 7,375 $ 169 $ 1,222 $ 3 Impaired loans also include certain loans that have been modified in 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 non-performing 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 three TDRs in the amount of $192 thousand as of June 30, 2021, two of which were classified as a TDR due to a change in interest rate and payment terms and one of which was classified as a TDR due to a change in payment terms. The Company had two TDRs in the amount of $142 thousand as of December 31, 2020, one of which was classified as a TDR due to a change in interest rate and payment terms and the other loan was classified as a TDR due to a change in payment terms. The following table presents an analysis of the change in the ALL by loan type as of and for the periods stated. For the three months ended For the six months ended (Dollars in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 ALL, beginning of period $ 13,402 $ 4,897 $ 13,827 $ 4,572 Charge-offs Commercial and industrial $ (857 ) $ — $ (1,216 ) $ — Real estate – mortgage (1 ) — (13 ) — Consumer (133 ) (255 ) (396 ) (574 ) Total charge-offs (991 ) (255 ) (1,625 ) (574 ) Recoveries Commercial and industrial 394 — 450 1 Real estate – mortgage 87 — 103 — Consumer 115 64 252 132 Total recoveries 596 64 805 133 Net charge-offs (395 ) (191 ) (820 ) (441 ) Provision for loan losses — 3,500 — 4,075 ALL, end of period $ 13,007 $ 8,206 $ 13,007 $ 8,206 The following tables summarize the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment for the periods stated For the three months ended June 30, 2021 (Dollars in thousands) Commercial and Industrial Real Estate – Construction Commercial Real Estate – Construction Residential Real Estate – Mortgage, Commercial Real Estate – Mortgage, Residential Real Estate – Mortgage, Farmland Consumer Total ALL, beginning of period $ 3,459 $ 960 $ 150 4,215 $ 1,485 $ 18 $ 3,115 $ 13,402 Charge-offs (857 ) — — — (1 ) — (133 ) (991 ) Recoveries 394 — — 79 8 — 115 596 Provision for loan losses 502 (208 ) (72 ) 1,953 (734 ) 5 (1,446 ) — ALL, end of period $ 3,498 $ 752 $ 78 $ 6,247 $ 758 $ 23 $ 1,651 $ 13,007 Individually evaluated for impairment $ — $ — $ — $ 387 $ 57 $ — $ — $ 444 Collectively evaluated for impairment $ 3,498 $ 752 $ 78 $ 5,860 $ 701 $ 23 $ 1,651 $ 12,563 For the six months ended June 30, 2021 (Dollars in thousands) Commercial and Industrial Real Estate – Construction Commercial Real Estate – Construction Residential Real Estate – Mortgage Commercial Real Estate – Mortgage Residential Real Estate – Mortgage, Farmland Consumer Total ALL, beginning of period $ 3,762 $ 960 $ 150 4,215 $ 1,481 $ 18 $ 3,241 $ 13,827 Charge-offs (1,216 ) — — — (13 ) — (396 ) (1,625 ) Recoveries 450 — — 79 24 — 252 805 Provision for loan losses 502 (208 ) (72 ) 1,953 (734 ) 5 (1,446 ) — ALL, end of period $ 3,498 $ 752 $ 78 $ 6,247 $ 758 $ 23 $ 1,651 $ 13,007 Individually evaluated for impairment $ — $ — $ — $ 387 $ 57 $ — $ — $ 444 Collectively evaluated for impairment $ 3,498 $ 752 $ 78 $ 5,860 $ 701 $ 23 $ 1,651 $ 12,563 The Company categorizes loans into risk categories based on relevant information about the 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 (loan grade). 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 following tables present the Company’s loan portfolio by internal loan grade as of the dates stated. June 30, 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 Total Commercial and industrial $ 5,324 $ 3,578 $ 133,649 $ 131,944 $ 13,441 $ 5,787 $ 10,455 $ 304,178 Paycheck Protection Program 130,489 — — — — — — 130,489 Real estate – construction, commercial — 538 36,043 76,956 8,625 18,988 2,065 143,215 Real estate – construction, residential 108 33 19,401 21,681 6,416 — 255 47,894 Real estate – mortgage, commercial — 3,766 325,958 235,860 41,193 56,990 8,825 672,592 Real estate – mortgage residential 1,663 9,393 313,336 142,353 14,530 4,158 5,320 490,753 Real estate – mortgage, farmland 384 — 1,172 4,981 — — — 6,537 Consumer 354 44 18,655 43,373 1,685 496 613 65,220 Gross loans $ 138,322 $ 17,352 $ 848,214 $ 657,148 $ 85,890 $ 86,419 $ 27,533 $ 1,860,878 Less: Deferred loan fees, net of costs (1,008 ) Total $ 1,859,870 December 31, 2020 (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 Total 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 26,324 5,916 218 577 54,702 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 2,968 7,598 273,499 Real estate – mortgage residential — 3,583 101,078 100,601 5,750 158 2,234 213,404 Real estate – mortgage, farmland 444 — 1,175 1,996 — — — 3,615 Consumer 324 36 17,062 28,033 521 1 707 46,684 Gross loans $ 293,680 $ 10,240 $ 293,903 $ 366,106 $ 41,695 $ 3,349 $ 16,714 $ 1,025,687 Less: Deferred loan fees, net of costs (4,271 ) Total $ 1,021,416 |