Credit Quality Indicators

3 Months Ended

Mar. 31, 2022

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 $1 million, 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, 2022 and December 31, 2021, 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, 2022
Commercial real estate
Owner occupied	$	338,256	$	4,430	$	4,096	$	346,782
Non-owner occupied		506,509		14,708		18,418		539,635
Farmland		170,456		2,145		670		173,271
Other		112,473		499		375		113,347
Commercial
Commercial and industrial		289,651		1,308		7,590		298,549
Agricultural		50,936		507		86		51,529
Total loans	$	1,468,281	$	23,597	$	31,235	$	1,523,113

(In Thousands of Dollars)	Pass		Special Mention		Sub standard		Total
December 31, 2021
Commercial real estate
Owner occupied	$	330,754	$	5,006	$	4,214	$	339,974
Non-owner occupied		495,170		19,366		18,170		532,706
Farmland		174,580		2,160		677		177,417
Other		137,063		784		147		137,994
Commercial
Commercial and industrial		301,879		1,190		9,463		312,532
Agricultural		54,394		397		83		54,874
Total loans	$	1,493,840	$	28,903	$	32,754	$	1,555,497

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, 2022, other real estate owned and foreclosure properties were $0 and $216 thousand, respectively. At December 31, 2021, other real estate owned and foreclosure properties were $0 and $93 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, 2022 and December 31, 2021. 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, 2022
Performing	$	451,151	$	127,315	$	172,843	$	18,719	$	6,580
Nonperforming		3,611		928		508		203		0
Total loans	$	454,762	$	128,243	$	173,351	$	18,922	$	6,580

	Residential Real Estate				Consumer
(In Thousands of Dollars)	1-4 Family Residential		Home Equity Lines of Credit		Indirect		Direct		Other
December 31, 2021
Performing	$	448,970	$	126,497	$	164,182	$	20,908	$	9,395
Nonperforming		3,822		953		578		280		6
Total loans	$	452,792	$	127,450	$	164,760	$	21,188	$	9,401

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, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
Commercial real estate
Risk Rating
Pass	$	34,484	$	170,585	$	141,201	$	163,632	$	114,598	$	314,075	$	18,663	$	957,238
Special mention		0		788		0		6,924		2,020		9,387		518		19,637
Substandard		40		0		661		2,648		492		18,441		607		22,889
Total commercial real estate loans	$	34,524	$	171,373	$	141,862	$	173,204	$	117,110	$	341,903	$	19,788	$	999,764

Commercial
Risk Rating
Pass	$	28,559	$	80,860	$	46,807	$	25,005	$	20,084	$	24,321	$	64,015	$	289,651
Special mention		0		533		103		122		31		2		517		1,308
Substandard		399		1,984		1,676		265		257		1,890		1,119		7,590
Total commercial loans	$	28,958	$	83,377	$	48,586	$	25,392	$	20,372	$	26,213	$	65,651	$	298,549

Agricultural
Risk Rating
Pass	$	9,435	$	42,324	$	49,368	$	27,039	$	27,002	$	51,111	$	15,113	$	221,392
Special mention		0		0		227		31		0		2,045		349		2,652
Substandard		0		365		17		58		11		275		30		756
Total agricultural loans	$	9,435	$	42,689	$	49,612	$	27,128	$	27,013	$	53,431	$	15,492	$	224,800

Residential real estate
Risk Rating
Pass	$	19,699	$	102,254	$	86,118	$	36,861	$	29,617	$	167,930	$	3,706	$	446,185
Special mention		0		0		73		127		80		139		0		419
Substandard		0		46		100		89		30		7,893		0		8,158
Total residential real estate loans	$	19,699	$	102,300	$	86,291	$	37,077	$	29,727	$	175,962	$	3,706	$	454,762

Home equity lines of credit
Risk Rating
Pass	$	0	$	0	$	149	$	0	$	19	$	1,744	$	124,320	$	126,232
Special mention		0		0		0		0		0		0		48		48
Substandard		0		13		12		51		143		1,626		118		1,963
Total home equity lines of credit	$	0	$	13	$	161	$	51	$	162	$	3,370	$	124,486	$	128,243

Consumer
Risk Rating
Pass	$	24,827	$	58,540	$	42,425	$	30,910	$	18,087	$	17,561	$	5,408	$	197,758
Substandard		0		120		261		253		102		359		0		1,095
Total consumer loans	$	24,827	$	58,660	$	42,686	$	31,163	$	18,189	$	17,920	$	5,408	$	198,853

Purchased Loans

As a result of the Cortland Merger, the Company acquired $478.2 million in loans, excluding $4.0 million of loans held for sale.

Under ASU Topic 326, when loans are purchased with evidence of more than significant deterioration of credit, they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. During 2021, the Company acquired PCD loans with a fair value of $34.3 million, credit discount of $1.3 million and a noncredit discount of $1.1 million. The outstanding balance at March 31, 2022 and related allowance on these loans is as follows:

	Loan Balance		ACL Balance
Commercial real estate
Owner Occupied	$	2,531	$	82
Non-owner Occupied		20,017		890
Other		780		36
		23,328		1,008
Commercial
Commercial and industrial		1,775		106
Residential real estate
1-4 family residential		500		4

Total	$	25,603	$	1,118