Note 5 – Loans

The Company originates commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central, south central and south eastern  Pennsylvania, southern New York, Wilmington, Dover and Georgetown, Delaware and Burlington County, New Jersey. Although the Company had a diversified loan portfolio at June 30, 2026 and December 31, 2025, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for credit losses - loans as of June 30, 2026 and December 31, 2025 (in thousands):

Allowance for Credit Losses - Loans

The following table presents the components of the allowance for credit losses as of June 30, 2026 and December 31, 2025 (in thousands):

The following table presents the activity in the allowance for credit losses for the three and six months ended June 30, 2026 and 2025 (in thousands):

The following tables present the activity in the allowance for credit losses – loans, by portfolio segment, for the three and six months ended June 30, 2026 and 2025 (in thousands):

The provision for the three and six months ended June 30, 2026 was driven by changes in economic forecasts and the annual update of the loss driver analysis. This update includes revising prepayment and curtailment speeds as well as the historical loss factor. In addition, loss rates are updated to include the most recent completed year of 2025. The provision for 2026 was also impacted by the Iran conflict as we adjusted qualitative factors due to the impact this conflict is having on gas and diesel prices, as well as fertilizer prices as the spring growing season starts.

The following table presents the allowance for credit losses – loans and amortized cost basis of loans as of June 30, 2026 and December 31, 2025 (in thousands):

Non-performing Loans

Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days. Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans, or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the non-performing loan receivables, as well as those on non-accrual status as of June 30, 2026 and December 31, 2025, respectively. The balances are presented by class of loan receivable (in thousands):

As of June 30, 2026, there were $26.2 million of non-accrual loans that did not have a related allowance for credit losses. The estimated fair values of the collateral securing these loans exceeded their carrying amount, or the loans were previously charged down to the realizable collateral values. Accordingly, no specific valuation allowance was considered to be necessary.

The following table presents, by class of loans receivable, the amortized cost basis of collateral-dependent loans and type of collateral as of June 30, 2026 and December 31, 2025 (in thousands):

Credit Quality Information

For commercial real estate loans, agricultural real estate loans, construction loans, other commercial loans, other agricultural loans, and state and political subdivision loans, management uses a ten grade internal risk rating system to monitor and assess credit quality. The first six grades under the revised system are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

 

 

 

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. Commercial, agricultural and state and political relationships over $750,000 in all Bank regions other than the Delaware region are reviewed annually to ensure the appropriateness of the loan grade. In the Delaware region all loan relationships greater than $1,000,000 are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to: 1) review a minimum of 50% of the dollar volume of the commercial loan portfolio on an annual basis, 2) a large sample of relationships in aggregate over $1,000,000, 3) selected loan relationships over $750,000 which are over 30 days past due, or classified Special Mention, Substandard, Doubtful, or Loss, and 4) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades, by origination year, as of June 30, 2026 and December 31, 2025 (in thousands):