In 2020, the Company participated in the 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 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 September 30, 2021, $32.6 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 Act, passed into law on December 27, 2020 (“PPP 2”). The PPP 2 was for 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 September 30, 2021, the Company held PPP 2 loans with aggregate principal balances and unamortized fees, net of deferred costs, of $14.7 million and $676 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 1.5 years for PPP 1 loans and 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, approximately $0 of unamortized fees remain as of September 30, 2021, with $228 thousand and $4.8 million recognized as a component of interest income for the three and nine months ended September 30, 2021, respectively. PPP 2 processing fees, net of costs, totaled $40.8 million through the first nine months of 2021, of which $484 thousand and $12.1 million were recognized as interest income for the three and nine months ended September 30, 2021, respectively, and $30.9 million was 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 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 on which the national emergency 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 September 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, 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 September 30, 2021, 16 loans were in deferment for a total of approximately $4.7 million.

The Company has pledged certain commercial and residential mortgages as collateral for borrowings with the FHLB. Loans totaling $517.6 million and $213.3 million were pledged as of September 30, 2021 and December 31, 2020, respectively. Additionally, PPP loans were pledged as collateral for PPPLF advances in the amount of $33.9 million and $281.6 million as of September 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.

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


	September 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	$	—	$	6,270	$	6,940	$	8,947	$	293,171		$	309,058
Paycheck Protection Program		—		—		—		—		—		—		47,325			47,325
Real estate – construction, commercial		2,696		21		65		88		2,870		14,015		122,401			139,286
Real estate – construction, residential		—		—		451		254		705		—		50,393			51,098
Real estate – mortgage, commercial		2,006		15		24		3,191		5,236		52,371		622,702			680,309
Real estate – mortgage, residential		989		1,601		1,726		2,605		6,921		7,671		484,769			499,361
Real estate – mortgage, farmland		—		—		—		—		—		—		6,317			6,317
Consumer		702		236		112		369		1,419		1,040		65,328			67,787
Less: Deferred loan fees, net of costs		—		—		—		—		—		—		(1,440	)		(1,440	)
Total Loans	$	6,731	$	2,205	$	2,378	$	12,777	$	24,091	$	84,044	$	1,690,966		$	1,799,101


	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.


	September 30, 2021
(Dollars in thousands)	30-89 Days Past Due		Greater than 90 Days Past Due & Accruing		Current Loans		Total Loans
Commercial and industrial	$	—	$	—	$	8,947	$	8,947
Real estate – construction, commercial		21		65		13,929		14,015
Real estate – mortgage, commercial		148		24		52,199		52,371
Real estate – mortgage, residential		552		1,726		5,393		7,671
Consumer		5		—		1,035		1,040
Total PCI Loans	$	726	$	1,815	$	81,503	$	84,044


	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 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, which generally include loans risk rated substandard or worse with balances of $500 thousand or more and all loans classified as TDRs. 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 those loans not classified as impaired and those loans classified as impaired 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, which 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 September 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.


	September 30, 2021
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment			Total
Originated and purchased performing loans:
Commercial and industrial	$	4,697	$	295,414		$	300,111
Real estate – construction, commercial		531		124,740			125,271
Real estate – construction, residential		—		51,098			51,098
Real estate – mortgage, commercial		1,333		626,605			627,938
Real estate – mortgage, residential		1,672		490,018			491,690
Real estate – mortgage, farmland		—		6,317			6,317
Consumer		—		66,747			66,747
Total originated and purchased performing loans		8,233		1,660,939			1,669,172
PCI loans:
Commercial and industrial		—		8,947			8,947
Real estate – construction, commercial		—		14,015			14,015
Real estate – mortgage, commercial		—		52,371			52,371
Real estate – mortgage, residential		—		7,671			7,671
Consumer		—		1,040			1,040
Total PCI loans		—		84,044			84,044
Gross loans		8,233		1,744,983			1,753,216
Less: Deferred loan fees, net of costs		—		(763	)		(763	)
Total	$	8,233	$	1,744,220		$	1,752,453


	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 $47.3 million and $292.1 million as of September 30, 2021 and December 2020, respectively.

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


	September 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	$	4,697	$	4,697	$	—	$	234	$	234	$	144
Real estate – construction, commercial		531		531		—		—		—		—
Real estate – mortgage, commercial		1,333		1,432		—		1,645		2,030		—
Real estate – mortgage, residential		1,672		1,672		—		452		571		—
With an allowance recorded:
Real estate – mortgage, commercial		—		—		—		—		—		—
Real estate – mortgage, residential		—		—		—		—		—		—
	$	8,233	$	8,332	$	—	$	2,331	$	2,835	$	144


	For the three months ended
	September 30, 2021				September 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	$	4,710	$	53	$	—	$	—
Real estate – construction, commercial		532		8		—		—
Real estate – mortgage, commercial		1,378		21		—		—
Real estate – mortgage, residential		1,421		5		696		28
With an allowance recorded:
Commercial and industrial		—		—		375		—
Real estate – mortgage, commercial		—		—		337		1
Real estate – mortgage, residential		—		—		—		—
	$	8,041	$	87	$	1,408	$	29

	For the nine months ended
	September 30, 2021				September 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	$	4,390	$	149	$	—	$	—
Real estate – construction, commercial		537		24		—		—
Real estate – mortgage, commercial		1,402		62		—		—
Real estate – mortgage, residential		1,078		11		696		28
With an allowance recorded:
Commercial and industrial		—		—		375		1
Real estate – mortgage, commercial		—		—		337		7
Real estate – mortgage, residential		—		—		—		—
	$	7,407	$	246	$	1,408	$	36

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 four TDRs totaling $235 thousand as of September 30, 2021, two of which were classified as TDRs due to a change in interest rate and payment terms and two of which were classified as TDRs due to a change in payment terms. The Company had two TDRs totaling $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 September 30,						For the nine months ended September 30,
(Dollars in thousands)	2021			2020			2021			2020
ALL, beginning of period	$	13,007		$	8,206		$	13,827		$	4,572
Charge-offs
Commercial and industrial		(18	)		—			(968	)		—
Real estate – mortgage		(133	)		—			(146	)		—
Consumer		(361	)		(213	)		(757	)		(787	)
Total charge-offs		(512	)		(213	)		(1,871	)		(787	)
Recoveries
Commercial and industrial		26			33			210			34
Real estate – mortgage		5			—			108			—
Consumer		88			97			340			229
Total recoveries		119			130			658			263
Net charge-offs		(393	)		(83	)		(1,213	)		(524	)
Provision for loan losses		—			4,000			—			8,075
ALL, end of period	$	12,614		$	12,123		$	12,614		$	12,123

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.


	September 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	$	591	$	3,521	$	142,771	$	135,275	$	14,247	$	4,505	$	8,148	$	309,058
Paycheck Protection Program		47,325		—		—		—		—		—		—		47,325
Real estate – construction, commercial		—		516		32,633		86,430		6,845		10,849		2,013		139,286
Real estate – construction, residential		7		—		16,715		29,246		4,875		—		255		51,098
Real estate – mortgage, commercial		4,358		2,447		317,296		244,322		34,810		60,845		16,231		680,309
Real estate – mortgage residential		1,286		9,068		291,246		173,404		13,621		4,422		6,314		499,361
Real estate – mortgage, farmland		366		—		1,122		4,829		—		—		—		6,317
Consumer		339		8		17,768		47,346		1,279		489		558		67,787
Gross loans	$	54,272	$	15,560	$	819,551	$	720,852	$	75,677	$	81,110	$	33,519	$	1,800,541
Less: Deferred loan fees, net of costs																(1,440	)
Total															$	1,799,101


	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