Credit Quality Indicators

6 Months Ended

Jun. 30, 2021

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 June 30, 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
June 30, 2021
Originated loans:
Commercial real estate
Owner occupied	$	207,222	$	6,131	$	1,293	$	214,646
Non-owner occupied		296,976		11,114		7,182		315,272
Farmland		147,653		2,441		358		150,452
Other		73,493		0		148		73,641
Commercial
Commercial and industrial		323,897		2,374		7,748		334,019
Agricultural		45,378		306		233		45,917
Total originated loans	$	1,094,619	$	22,366	$	16,962	$	1,133,947
Acquired loans:
Commercial real estate
Owner occupied	$	41,819	$	76	$	988	$	42,883
Non-owner occupied		39,248		3,548		3,279		46,075
Farmland		21,765		100		1,036		22,901
Other		10,324		787		0		11,111
Commercial
Commercial and industrial		12,731		0		988		13,719
Agricultural		3,794		269		18		4,081
Total acquired loans	$	129,681	$	4,780	$	6,309	$	140,770
Total loans	$	1,224,300	$	27,146	$	23,271	$	1,274,717

(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 June 30, 2021, other real estate owned and foreclosure properties were $30 thousand and $430 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 June 30, 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
June 30, 2021
Originated loans:
Performing	$	307,496	$	91,209	$	161,807	$	20,079	$	9,161
Nonperforming		1,037		642		488		215		9
Total originated loans	$	308,533	$	91,851	$	162,295	$	20,294	$	9,170
Acquired loans:
Performing	$	69,967	$	15,140	$	0	$	3,816	$	84
Nonperforming		3,785		172		0		41		0
Total acquired loans		73,752		15,312		0		3,857		84
Total loans	$	382,285	$	107,163	$	162,295	$	24,151	$	9,254

	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 June 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans		Total
Commercial real estate
Risk Rating
Pass	$	44,016	$	109,865	$	131,303	$	111,490	$	67,731	$	189,115	$	15,562	$	669,082
Special mention		787		0		9,137		1,578		2,915		6,335		904		21,656
Substandard		0		342		2,282		507		91		9,545		123		12,890
Total commercial real estate loans	$	44,803	$	110,207	$	142,722	$	113,575	$	70,737	$	204,995	$	16,589	$	703,628

Commercial
Risk Rating
Pass	$	103,444	$	82,622	$	29,494	$	33,455	$	13,567	$	20,619	$	53,427	$	336,628
Special mention		230		310		0		784		0		24		1,026		2,374
Substandard		127		1,917		354		281		843		821		4,393		8,736
Total commercial loans	$	103,801	$	84,849	$	29,848	$	34,520	$	14,410	$	21,464	$	58,846	$	347,738

Agricultural
Risk Rating
Pass	$	17,761	$	50,821	$	32,365	$	36,391	$	21,178	$	42,242	$	17,832	$	218,590
Special mention		0		243		35		0		2,089		381		368		3,116
Substandard		358		23		233		0		0		1,001		30		1,645
Total agricultural loans	$	18,119	$	51,087	$	32,633	$	36,391	$	23,267	$	43,624	$	18,230	$	223,351

Residential real estate
Risk Rating
Pass	$	29,256	$	83,969	$	42,170	$	33,095	$	41,742	$	137,954	$	2,772	$	370,958
Special mention		0		0		0		0		0		0		0		0
Substandard		52		0		71		85		946		10,173		0		11,327
Total residential real estate loans	$	29,308	$	83,969	$	42,241	$	33,180	$	42,688	$	148,127	$	2,772	$	382,285

Home equity lines of credit
Risk Rating
Pass	$	0	$	0	$	0	$	0	$	101	$	1,206	$	104,045	$	105,352
Special mention		0		0		0		0		0		0		48		48
Substandard		0		0		0		75		79		1,435		174		1,763
Total home equity lines of credit	$	0	$	0	$	0	$	75	$	180	$	2,641	$	104,267	$	107,163

Consumer
Risk Rating
Pass	$	28,778	$	55,190	$	43,937	$	27,474	$	13,468	$	19,367	$	6,040	$	194,254
Special mention		0		0		0		0		0		0		0		0
Substandard		0		80		243		289		223		611		0		1,446
Total consumer loans	$	28,778	$	55,270	$	44,180	$	27,763	$	13,691	$	19,978	$	6,040	$	195,700

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 supportable 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.