Credit Quality Indicators

3 Months Ended

Mar. 31, 2021

Credit Quality Indicators:

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, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $750 thousand, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for the loans in their respective portfolios on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of March 31, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

(In Thousands of Dollars)	Pass		Special Mention		Sub standard		Total
March 31, 2021
Originated loans:
Commercial real estate
Owner occupied	$	203,634	$	5,077	$	1,347	$	210,058
Non-owner occupied		294,564		11,177		7,201		312,942
Farmland		153,501		2,462		358		156,321
Other		73,234		0		156		73,390
Commercial
Commercial and industrial		376,736		2,323		8,379		387,438
Agricultural		41,675		313		222		42,210
Total originated loans	$	1,143,344	$	21,352	$	17,663	$	1,182,359
Acquired loans:
Commercial real estate
Owner occupied	$	43,007	$	81	$	864	$	43,952
Non-owner occupied		41,672		3,576		3,277		48,525
Farmland		23,505		100		1,041		24,646
Other		12,578		0		0		12,578
Commercial
Commercial and industrial		13,804		0		1,219		15,023
Agricultural		3,732		19		47		3,798
Total acquired loans	$	138,298	$	3,776	$	6,448	$	148,522
Total loans	$	1,281,642	$	25,128	$	24,111	$	1,330,881

(In Thousands of Dollars)	Pass		Special Mention		Sub standard		Total
December 31, 2020
Originated loans:
Commercial real estate
Owner occupied	$	208,289	$	5,121	$	1,385	$	214,795
Non-owner occupied		290,773		11,240		7,203		309,216
Farmland		153,225		2,464		364		156,053
Other		77,432		387		167		77,986
Commercial
Commercial and industrial		372,083		1,522		8,740		382,345
Agricultural		44,527		320		213		45,060
Total originated loans	$	1,146,329	$	21,054	$	18,072	$	1,185,455
Acquired loans:
Commercial real estate
Owner occupied	$	44,031	$	87	$	981	$	45,099
Non-owner occupied		50,053		49		2,752		52,854
Farmland		24,637		100		1,342		26,079
Other		12,868		0		0		12,868
Commercial
Commercial and industrial		16,246		0		2,412		18,658
Agricultural		4,481		303		65		4,849
Total acquired loans	$	152,316	$	539	$	7,552	$	160,407
Total loans	$	1,298,645	$	21,593	$	25,624	$	1,345,862

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential, consumer indirect and direct loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. In the 1-4 family residential real estate portfolio at March 31, 2021, other real estate owned and foreclosure properties were $30 thousand and $491 thousand, respectively. At December 31, 2020, other real estate owned and foreclosure properties were $0 and $699 thousand, respectively.

The following tables present the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of March 31, 2021 and December 31, 2020. Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.

	Residential Real Estate				Consumer
(In Thousands of Dollars)	1-4 Family Residential		Home Equity Lines of Credit		Indirect		Direct		Other
March 31, 2021
Originated loans:
Performing	$	317,374	$	90,447	$	162,873	$	21,196	$	9,256
Nonperforming		916		590		554		232		3
Total originated loans	$	318,290	$	91,037	$	163,427	$	21,428	$	9,259
Acquired loans:
Performing	$	76,828	$	16,295	$	0	$	4,619	$	118
Nonperforming		4,999		179		0		44		0
Total acquired loans		81,827		16,474		0		4,663		118
Total loans	$	400,117	$	107,511	$	163,427	$	26,091	$	9,377

	Residential Real Estate				Consumer
(In Thousands of Dollars)	1-4 Family Residential		Home Equity Lines of Credit		Indirect		Direct		Other
December 31, 2020
Originated loans:
Performing	$	322,771	$	92,376	$	169,576	$	23,193	$	9,862
Nonperforming		1,089		603		712		268		6
Total originated loans	$	323,860	$	92,979	$	170,288	$	23,461	$	9,868
Acquired loans:
Performing	$	83,520	$	17,198	$	0	$	5,064	$	97
Nonperforming		5,597		186		0		64		0
Total acquired loans		89,117		17,384		0		5,128		97
Total loans	$	412,977	$	110,363	$	170,288	$	28,589	$	9,965

The following table presents total loans by risk categories and year of origination.

	Term Loans Amortized Cost Basis by Origination Year

As of March 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Commercial real estate
Risk Rating
Pass	$	18,911	$	113,455	$	135,474	$	117,019	$	73,247	$	195,638	$	14,944	$	668,688
Special mention		0		0		9,166		1,594		2,736		6,416		0		19,912
Substandard		0		356		2,281		511		93		9,483		121		12,845
Total commercial real estate loans	$	18,911	$	113,811	$	146,921	$	119,124	$	76,076	$	211,537	$	15,065	$	701,445

Commercial
Risk Rating
Pass	$	86,561	$	142,031	$	34,218	$	36,782	$	15,206	$	24,738	$	51,004	$	390,540
Special mention		260		317				866		1		49		830		2,323
Substandard		144		2,380		374		299		911		1,102		4,388		9,598
Total commercial loans	$	86,965	$	144,728	$	34,592	$	37,947	$	16,118	$	25,889	$	56,222	$	402,461

Agricultural
Risk Rating
Pass	$	8,999	$	53,165	$	35,876	$	39,025	$	24,108	$	46,520	$	14,721	$	222,414
Special mention		0		247		36		0		2,105		387		118		2,893
Substandard		360		78		227		0		0		1,003		0		1,668
Total agricultural loans	$	9,359	$	53,490	$	36,139	$	39,025	$	26,213	$	47,910	$	14,839	$	226,975

Residential real estate
Risk Rating
Pass	$	13,348	$	84,993	$	46,301	$	35,298	$	51,990	$	152,073	$	2,887	$	386,890
Special mention		0		0		0		0		0		738		0		738
Substandard		0		0		43		86		1,053		11,307		0		12,489
Total residential real estate loans	$	13,348	$	84,993	$	46,344	$	35,384	$	53,043	$	164,118	$	2,887	$	400,117

Home equity lines of credit
Risk Rating
Pass	$	0	$	0	$	0	$	0	$	103	$	1,529	$	104,043	$	105,675
Special mention		0		0		0		0		0		0		48		48
Substandard		0		0		0		76		82		1,453		177		1,788
Total home equity lines of credit	$	0	$	0	$	0	$	76	$	185	$	2,982	$	104,268	$	107,511

Consumer
Risk Rating
Pass	$	11,584	$	59,645	$	49,183	$	31,910	$	16,010	$	22,837	$	5,823	$	196,992
Special mention		0		0		0		0		0		0		0		0
Substandard		0		230		296		356		268		753		0		1,903
Total consumer loans	$	11,584	$	59,875	$	49,479	$	32,266	$	16,278	$	23,590	$	5,823	$	198,895

Allowance for Credit Losses

The Company adopted ASU 2016-13 to calculate the Allowance for credit losses (“ACL”) which requires projecting credit losses over the lifetime of the credits. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans. Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of any underlying collateral.

The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s loan portfolio segments. These segments are disaggregated into the loan pools for monitoring. A model of risk characteristics, such as loss history and delinquency experience, trends in past due and non-performing loans, as well as existing economic conditions and forecasts used to determine credit loss assumptions.

The Company uses two methodologies to analyze loan pools. The cohort method (“cohort”) and the probability of default/loss given default (“PD/LGD”).

Cohort relies on the creation of cohorts to capture loans that qualify for a particular segment, as of a point in time. Those loans are then tracked over their remaining lives to determine their loss experience. The Company aggregates financial assets on the basis of similar risk characteristics when evaluating loans on a collective basis. Those characteristics include, but aren’t limited to, internal or external credit score, risk ratings, financial asset, loan type, collateral type, size, effective interest rate, term, or geographical location. The Company uses cohort primarily for consumer loan portfolios.

The probability of default (“PD”) portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, becomes a troubled debt restructuring or is partially or wholly charged-off. Typically a one-year time period is used to asses PD. PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. Loss given default (“LGD”) is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.