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, which is administered by the Small Business Administration, 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 approximately $71.3 million were forgiven or paid back by the borrower by December 31, 2020. As of March 31, 2021, $261.0 million of PPP 1 loans were outstanding, including those acquired in the Bay Banks Merger.

In the first quarter 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 March 31, 2021, the Company had funded over 3,800 PPP 2 loans for approximately $348.0 million. PPP 2 loans have a contractual term of five years and earn an annual interest rate of 1%. Banks originating PPP 2 loans earn processing fees that are tiered depending on the size of the loan. Specifically, processing fees for loans of not more than $50,000 equal 50% of the loan balance or $2,500, whichever is less; processing fees for loans more than $50,000 and not more than $350,000 equal 5% of the loan balance, and processing fees for loans above $350,000 equal 3% of the loan balance. As of March 31, 2021, no PPP 2 loans had been forgiven.

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 1.5 years for PPP 1 loans and one to three years for PPP 2 loans, depending on the loan balance. Of the $11.5 million of processing fees received in 2020 for PPP 1 loans, approximately $1.3 million of unamortized fees remain as of March 31, 2021, with $2.2 million recognized as a component of interest income in the first quarter of 2021. Of the $11.2 million of net processing fees received in the first quarter of 2021 for PPP 2 loans, approximately $10.1 million of unamortized fees remain as of March 31, 2021, with $1.1 million recognized as interest income in three months ended March 31, 2021.

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, banks have the option to temporarily suspend certain requirements of GAAP related to TDRs for a limited period of time 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 are not designated as TDRs, as of March 31, 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, 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 March 31, 2021, 30 loans were in deferment for a total of approximately $31.0 million.

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $567.0 million and $213.3 million were pledged as of March 31, 2021 and December 31, 2020, respectively. Additionally, PPP loans in the amount of $509.7 million and $281.6 million were pledged as collateral for PPPLF advances as of March 31, 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 Company’s consolidated balance sheets as of the dates stated.

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

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

	March 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	$	1,166	$	128	$	—	$	1,432	$	2,726	$	10,213	$	273,896		$	286,835
Paycheck Protection Program		—		—		—		—		—		—		608,692			608,692
Real estate – construction, commercial		310		—		—		—		310		31,049		124,272			155,631
Real estate – construction, residential		1,185		—		—		262		1,447		—		47,891			49,338
Real estate – mortgage, commercial		3,287		685		—		2,032		6,004		47,520		595,950			649,474
Real estate – mortgage, residential		6,027		800		7		965		7,799		7,379		481,123			496,301
Real estate – mortgage, farmland		—		—		—		—		—		—		5,245			5,245
Consumer		752		145		—		655		1,552		1,731		61,927			65,210
Less: Deferred loan fees, net of costs		—		—		—		—		—		—		(12,184	)		(12,184	)
Total Loans	$	12,727	$	1,758	$	7	$	5,346	$	19,838	$	97,892	$	2,186,812		$	2,304,542

	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.

	March 31, 2021
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current Loans		Total Loans
Commercial and industrial	$	—	$	187	$	10,026	$	10,213
Real estate – construction, commercial		8		10		31,032		31,050
Real estate – mortgage, commercial		722		29		46,768		47,519
Real estate – mortgage, residential		739		978		5,662		7,379
Consumer		—		4		1,727		1,731
Total PCI Loans	$	1,469	$	1,208	$	95,215	$	97,892

	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

The 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 established as losses are estimated to have occurred 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 allowance consists of specific and general components. The specific component relates to loans that are identified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or the net realizable value, 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 impaired 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 Financial Accounting Standards Board. 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 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 March 31, 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.

(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total
March 31, 2021
Originated and purchased performing loans:
Commercial and industrial	$	3,169	$	273,453		$	276,622
Real estate – construction, commercial		540		124,041			124,581
Real estate – construction, residential		—		49,338			49,338
Real estate – mortgage, commercial		1,391		600,564			601,955
Real estate – mortgage, residential		592		488,330			488,922
Real estate – mortgage, farmland		—		5,245			5,245
Consumer		—		63,479			63,479
Total originated and purchased performing loans		5,692		1,604,450			1,610,142
PCI loans:
Commercial and industrial		—		10,213			10,213
Real estate – construction, commercial		—		31,050			31,050
Real estate – mortgage, commercial		—		47,519			47,519
Real estate – mortgage, residential		—		7,379			7,379
Consumer		—		1,731			1,731
Total PCI loans		—		97,892			97,892
Gross loans		5,692		1,702,342			1,708,034
Less: Deferred loan fees, net of costs		—		(1,118	)		(1,118	)
Total	$	5,692	$	1,701,224		$	1,706,916

(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total
December 31, 2020
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 $608.7 million and $292.1 million as of March 31, 2021 and December 2020, respectively. The Company carries no ALL on PPP loans as these loans are fully guaranteed by the U.S. government.

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

	March 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	$	540	$	539	$	—	$	542	$	8
Real estate – mortgage, commercial		1,391		1,460		—		1,384		14
Real estate – mortgage, residential		592		591		—		583		6
Commercial and industrial		3,169		3,162		—		3,250		35
	$	5,692	$	5,752	$	—	$	5,217	$	63

	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, commercial	$	1,645	$	2,030	$	—	$	2,091	$	4
Real estate – mortgage, residential		452		571		—		538		2
With an allowance recorded:
Commercial and industrial		234		234		144		362		—
	$	2,331	$	2,835	$	144	$	2,991	$	6

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 $293 thousand as of March 31, 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.

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 March 31, 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		(359	)		—		—		—		(12	)		—		(263	)		(634	)
Recoveries		56			—		—		—		16			—		137			209
Provision for loan losses		—			—		—		—		—			—		—			—
ALL, end of period	$	3,459		$	960	$	150	$	4,215	$	1,485		$	18	$	3,115		$	13,402
Individually evaluated for impairment	$	—		$	—	$	—	$	—	$	—		$	—	$	—		$	—
Collectively evaluated for impairment	$	3,459		$	960	$	150	$	4,215	$	1,485		$	18	$	3,115		$	13,402

	For the three months ended March 31, 2020
(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	$	841	$	220	$	60		1,604	$	510	$	9	$	1,328		$	4,572
Charge-offs		—		—		—		—		—		—		(319	)		(319	)
Recoveries		1		—		—		—		—		—		68			69
Provision for loan losses		86		27		11		62		16		—		373			575
ALL, end of period	$	928	$	247	$	71	$	1,666	$	526	$	9	$	1,450		$	4,897
Individually evaluated for impairment	$	144	$	—	$	—	$	—	$	—	$	—	$	—		$	144
Collectively evaluated for impairment	$	784	$	247	$	71	$	1,666	$	526	$	9	$	1,450		$	4,753

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.

	March 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		Total
Commercial and industrial	$	1,218	$	552	$	125,985	$	128,054	$	13,434	$	7,300	$	10,292	$	286,835
Paycheck Protection Program		608,692		—		—		—		—		—		—		608,692
Real estate – construction, commercial		—		650		36,028		78,234		9,045		29,605		2,069		155,631
Real estate – construction, residential		147		74		21,005		20,622		7,228		—		262		49,338
Real estate – mortgage, commercial		—		2,645		316,340		228,523		47,630		45,092		9,244		649,474
Real estate – mortgage residential		536		9,561		329,777		131,986		15,773		2,870		5,798		496,301
Real estate – mortgage, farmland		410		—		1,220		3,615		—		—		—		5,245
Consumer		398		23		18,806		42,638		2,191		497		657		65,210
Gross loans	$	611,401	$	13,505	$	849,161	$	633,672	$	95,301	$	85,364	$	28,322	$	2,316,726
Less: Deferred loan fees, net of costs																(12,184	)
Total															$	2,304,542

	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