Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.

The following tables present the activity in the allowance for credit losses by portfolio segment for years ended December 31, 2022 and 2021, and the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2020:


December 31, 2022	Commercial Real Estate			Commercial			Residential Real Estate			Consumer			Total
(In Thousands of Dollars)
Allowance for credit losses
Beginning balance	$	15,879		$	4,949		$	4,870		$	3,688		$	29,386
Provision for credit losses		(742	)		1,204			(493	)		281			250
Loans charged off		(300	)		(2,042	)		(92	)		(870	)		(3,304	)
Recoveries		3			75			89			479			646
Total ending allowance balance	$	14,840		$	4,186		$	4,374		$	3,578		$	26,978


December 31, 2021	Commercial Real Estate			Commercial			Residential Real Estate			Consumer			Total
Allowance for credit losses
Beginning balance	$	10,746		$	5,018		$	3,687		$	2,693		$	22,144
Impact of CECL adoption		(2,137	)		259			193			3,845			2,160
Provision for credit losses		6,226			(349	)		1,121			(2,349	)		4,649
PCD ACL on loans acquired		1,081			210			4			0			1,295
Loans charged off		(70	)		(388	)		(297	)		(912	)		(1,667	)
Recoveries		33			199			162			411			805
Total ending allowance balance	$	15,879		$	4,949		$	4,870		$	3,688		$	29,386


December 31, 2020	Commercial Real Estate			Commercial			Residential Real Estate			Consumer			Total
Allowance for loan losses
Beginning balance	$	6,127		$	2,443		$	3,032		$	2,885		$	14,487
Provision for loan losses		4,710			2,976			742			672			9,100
Loans charged off		(122	)		(412	)		(172	)		(1,347	)		(2,053	)
Recoveries		31			11			85			483			610
Total ending allowance balance	$	10,746		$	5,018		$	3,687		$	2,693		$	22,144

The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of December 31, 2022 and 2021:


	2022				2021
	Nonaccrual		Loans Past Due 90 Days or More Still Accruing		Nonaccrual		Loans Past Due 90 Days or More Still Accruing
(In Thousands of Dollars)
Commercial real estate
Owner occupied	$	993	$	0	$	433	$	0
Non-owner occupied		3,031		0		2,511		0
Farmland		2,183		0		274		0
Other		33				60
Commercial
Commercial and industrial		3,840		50		7,190		54
Agricultural		299		0		40		0
Residential real estate
1-4 family residential		2,703		310		3,363		459
Home equity lines of credit		735		58		917		36
Consumer
Indirect		313		62		455		123
Direct		179		12		227		53
Other		2		0		0		0
Total loans	$	14,311	$	492	$	15,470	$	725

The following tables present the aging of the recorded investment in past due loans as of December 31, 2022 and 2021 by class of loans.


December 31, 2022	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Nonaccrual		Total Past Due		Loans Not Past Due		Total
(In Thousands of Dollars)
Commercial real estate
Owner occupied	$	159	$	0	$	993	$	1,152	$	329,305	$	330,457
Non-owner occupied		0		0		3,031		3,031		560,013		563,044
Farmland		0		0		2,183		2,183		186,399		188,582
Other		0		0		33		33		133,288		133,321
Commercial
Commercial and industrial		1,034		185		3,890		5,109		289,297		294,406
Agricultural		104		20		299		423		58,166		58,589
Residential real estate
1-4 family residential		4,247		1,775		3,013		9,035		466,313		475,348
Home equity lines of credit		115		92		793		1,000		131,209		132,209
Consumer
Indirect		1,267		298		375		1,940		202,683		204,623
Direct		234		70		191		495		15,962		16,457
Other		0		5		2		7		7,707		7,714
Total loans	$	7,160	$	2,445	$	14,803	$	24,408	$	2,380,342	$	2,404,750


December 31, 2021	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Nonaccrual		Total Past Due		Loans Not Past Due		Total
Commercial real estate
Owner occupied	$	70	$	591	$	433	$	1,094	$	338,880	$	339,974
Non-owner occupied		394		311		2,511		3,216		529,490		532,706
Farmland		0		0		274		274		177,143		177,417
Other		56		0		60		116		137,878		137,994
Commercial
Commercial and industrial		256		100		7,244		7,600		304,932		312,532
Agricultural		100		28		40		168		54,706		54,874
Residential real estate
1-4 family residential		4,452		1,077		3,822		9,351		443,441		452,792
Home equity lines of credit		80		12		953		1,045		126,405		127,450
Consumer
Indirect		795		275		578		1,648		163,112		164,760
Direct		203		91		280		574		20,614		21,188
Other		0		0		0		0		9,395		9,395
Total loans:	$	6,406	$	2,485	$	16,195	$	25,086	$	2,305,996	$	2,331,082

Total troubled debt restructurings were $5.6 million and $3.9 million at December 31, 2022 and 2021 respectively. The Company allocated $110 thousand and $109 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2022 and 2021, respectively. There were no commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings at December 31, 2022 and 2021.

During the years ending December 31, 2022, 2021 and 2020, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one, or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; an extension of an interest only period; a deferral of principal and or interest payments; a capitalization of interest and/or escrow or a legal concession.

Troubled debt restructuring modifications involved a reduction of the notes stated interest rate in the range of 0.25% to 4.075%. There were also extensions of the maturity dates on these and other troubled debt restructurings in the range of 22 days to 361 months.

The following tables present loans by class modified as troubled debt restructurings that occurred during the years ending December 31, 2022, 2021 and 2020:

The troubled debt restructurings described above increased the allowance for credit losses by $64 thousand and resulted in charge offs of $66 thousand during the year ended December 31, 2022.

The troubled debt restructurings described above increased the allowance for loan losses by $127 thousand and resulted in charge offs of $129 thousand during the year ended December 31, 2021.

The troubled debt restructurings described above increased the allowance for loan losses by $65 thousand and resulted in charge offs of $65 thousand during the year ended December 31, 2020.

Throughout 2021 and 2020 the Company offered three-month deferrals upon request by borrowers. For those borrowers in industries that were greatly impacted by COVID-19, additional deferrals were considered and granted beyond the initial three month period throughout 2021. The range of the deferred months for subsequent requests were three to twelve months. The decline in deferred loans and balances is due to borrowers not requesting additional deferments and most continued to pay under the original terms of their loan. As of March 31, 2022 and throughout 2022 there were no longer borrowers on deferment due to COVID-19 related issues.

Farmers is also a preferred SBA lender and dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under Paycheck Protection Program (PPP) under CARES Act, so they could obtain SBA approval and receive funding as quickly as possible. During the period of the PPP program, the Company facilitated PPP assistance to 2,134 business customers totaling $256.4 million. The Company, on behalf of its customers, began processing borrower applications for PPP forgiveness at the beginning of September 2020. Once forgiveness of the PPP loan was communicated and payment was received from the SBA, the Company recorded the cash received from the SBA, paid-off the loans based on the amount of forgiveness provided and accelerated the amount of net deferred loan fees/costs recognized for the portion of the PPP loans that were forgiven. As of December 31, 2022, the Company has received life to date payments from the SBA for forgiveness of these loans totaling $256.4 million, or approximately 99.9% of the loans originated in 2020. The remaining balance of the loans originated in 2020 of $11 thousand is being amortized over the remaining life of the loans. The Company processed $107.9 million in new loans for PPP funding during 2021. The Company has received payments from the SBA for forgiveness of loans totaling $107.7 million, or approximately 99.8% of the PPP loans originated in 2021. Of the remaining $230 thousand in loans originated in 2021, $188 thousand is being amortized over the remaining life of loans and $42 thousand is pending approval for forgiveness.

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 and leases 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. They 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.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


December 31, 2022	Pass		Special Mention		Sub standard		Total
(In Thousands of Dollars)
Commercial real estate
Owner occupied	$	324,979	$	1,193	$	4,285	$	330,457
Non-owner occupied		527,267		25,541		10,236		563,044
Farmland		186,057		0		2,525		188,582
Other		133,218		0		103		133,321
Commercial
Commercial and industrial		282,412		777		11,217		294,406
Agricultural		58,002		250		337		58,589
Total loans	$	1,511,935	$	27,761	$	28,703	$	1,568,399


December 31, 2021	Pass		Special Mention		Sub standard		Total

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 and indirect loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

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


	Term Loans Amortized Cost Basis by Origination Year

As of December 31	2022		2021		2020		2019		2018		Prior		Revolving Loans		Total
Commercial real estate
Risk Rating
Pass	$	188,240	$	174,841	$	120,883	$	138,342	$	89,769	$	256,103	$	17,286	$	985,464
Special mention		0		711		1,861		5,286		624		18,252		0		26,734
Substandard		0		18		256		1,968		267		10,952		1,163		14,624
Total commercial real estate loans	$	188,240	$	175,570	$	123,000	$	145,596	$	90,660	$	285,307	$	18,449	$	1,026,822

Commercial
Risk Rating
Pass	$	100,368	$	45,872	$	34,110	$	16,854	$	13,574	$	14,664	$	56,970	$	282,412
Special mention		0		197		0		0		0		0		580		777
Substandard		3,642		1,331		356		152		110		1,761		3,865		11,217
Total commercial loans	$	104,010	$	47,400	$	34,466	$	17,006	$	13,684	$	16,425	$	61,415	$	294,406

Agricultural
Risk Rating
Pass	$	51,096	$	36,376	$	44,133	$	23,661	$	24,003	$	45,490	$	19,300	$	244,059
Special mention		0		0		0		0		0		0		250		250
Substandard		0		379		235		72		0		2,146		30		2,862
Total agricultural loans	$	51,096	$	36,755	$	44,368	$	23,733	$	24,003	$	47,636	$	19,580	$	247,171

Residential real estate
Risk Rating
Pass	$	83,951	$	112,463	$	76,095	$	31,404	$	22,918	$	135,757	$	3,956	$	466,544
Special mention		0		0		70		118		76		93		0		357
Substandard		0		136		249		121		9		7,932		0		8,447
Total residential real estate loans	$	83,951	$	112,599	$	76,414	$	31,643	$	23,003	$	143,782	$	3,956	$	475,348

Home equity lines of credit
Risk Rating
Pass	$	0	$	10	$	0	$	0	$	16	$	1,394	$	128,622	$	130,042
Special mention		0		0		0		0		0		0		49		49
Substandard		0		13		137		20		0		1,848		100		2,118
Total home equity lines of credit	$	0	$	23	$	137	$	20	$	16	$	3,242	$	128,771	$	132,209

Consumer
Risk Rating
Pass	$	98,530	$	46,945	$	32,284	$	20,849	$	10,918	$	10,942	$	7,302	$	227,770
Special mention		0		0		0		0		0		0		0		0
Substandard		102		113		267		230		109		202		1		1,024
Total consumer loans	$	98,632	$	47,058	$	32,551	$	21,079	$	11,027	$	11,144	$	7,303	$	228,794

The Company follows ASU 2016-13 to calculate the allowance for credit losses 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 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 and the 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 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.

According to accounting standard an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows insufficient collateral coverage based on a current assessment of the value of the collateral.

In addition, ASC Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the Company must first establish a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At December 31, 2022, the Company had $603 million in unfunded commitments and set aside $1.4 million in anticipated credit losses. This reserve is recorded in other liabilities as opposed to the ACL.

The determination of ACL is complex and the Company makes decisions on the effects of factors that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgements as to the facts and circumstances related to particular situations or credits. There may be significant changes in the ACL in future periods determined by prevailing factors at that point in time along with future forecasts.

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 ASC Topic 326, when loans are purchased with evidence of more than significant deterioration of credit, they are accounted for as 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. On November 1, 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 December 31, 2022 and related allowance on these loans is as follows (in thousands):