LOANS

Total net loans at March 31, 2014 and December 31, 2013 are summarized as follows:


	March 31, 2014			December 31, 2013
Commercial, industrial, and agricultural	$	361,140		$	357,715
Commercial mortgages		409,760			413,465
Residential real estate		459,667			459,114
Consumer		62,007			63,491
Credit cards		4,879			5,065
Overdrafts		421			409
Less: unearned discount		(3,778	)		(3,896	)
allowance for loan losses		(16,674	)		(16,234	)

Loans, net	$	1,277,422		$	1,279,129

At March 31, 2014 and December 31, 2013, net unamortized loan costs of $870 and $911, respectively, have been included in the carrying value of loans.

The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within Central and Western Pennsylvania and Central Ohio. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer. The Corporation maintains lending policies to control the quality of the loan portfolio. These policies delegate the authority to extend loans under specific guidelines and underwriting standards. These policies are prepared by the Corporation’s management and reviewed and ratified annually by the Corporation’s Board of Directors.

All relevant documentation, such as the loan application, financial statements and tax returns, required under the lending policies is summarized and provided to management and/or the Corporation’s Board of Directors in connection with the loan approval process. Such documentation is subsequently electronically archived in the Corporation’s document management system. Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether to extend credit to a customer, including loan-to-value ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees.

Commercial, industrial, and agricultural loans comprised 28% and 28% of the Corporation’s total loan portfolio at March 31, 2014 and December 31, 2013, respectively. Commercial mortgage loans comprised 32% and 32% of the Corporation’s total loan portfolio at March 31, 2014 and December 31, 2013, respectively. Management assigns a risk rating to all commercial loans in excess of $250,000. The loan-to-value policy guidelines for commercial, industrial, and agricultural loans are generally a maximum of 80% of the value of business equipment, a maximum of 75% of the value of accounts receivable, and a maximum of 60% of the value of business inventory. The loan-to-value policy guideline for commercial mortgage loans is generally a maximum of 85% of the appraised value of the real estate.

Residential real estate loans comprised 36% of the Corporation’s total loan portfolio at both March 31, 2014 and December 31, 2013. The loan-to-value policy guidelines for residential real estate loans vary depending on the collateral position and the specific type of loan. Higher loan-to-value terms may be approved with the appropriate private mortgage insurance coverage. The Corporation also originates and prices loans for sale into the secondary market through Freddie Mac. Loans so originated are classified as loans held for sale and are excluded from residential real estate loans reported above. The rationale for these sales is to mitigate interest rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing the loan. The Corporation also offers a variety of unsecured and secured consumer loan and credit card products which represent less than 10% of the total loan portfolio at both March 31, 2014 and December 31, 2013. Terms and collateral requirements vary depending on the size and nature of the loan.

CNB has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented.

During the first quarter of 2014, management reviewed its loan portfolio segments resulting in the reclassification of approximately $66 million into Commercial, Industrial and Agricultural, $54 million out of Commercial Mortgages and $12 million out of Residential Real Estate. Accordingly, the December 31, 2013 loan portfolio segment balances were reclassified to conform to the March 31, 2014 presentation. The effect of this reclassification was not considered material to the overall allowance for loan losses, did not change the total loan balances, and is not considered material to the consolidated financial statements taken as a whole.

Transactions in the allowance for loan losses for the three months ended March 31, 2014 were as follows:


	Commercial,					Residential
	Industrial, and		Commercial			Real						Credit
	Agricultural		Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2014	$	6,394	$	5,354		$	2,880		$	1,333		$	66		$	207		$	16,234
Charge-offs		0		(50	)		(122	)		(399	)		(21	)		(58	)		(650	)
Recoveries		0		0			19			22			2			28			71
Provision (benefit) for loan losses		734		(570	)		(202	)		1,016			21			20			1,019

Allowance for loan losses, March 31, 2014	$	7,128	$	4,734		$	2,575		$	1,972		$	68		$	197		$	16,674

Transactions in the allowance for loan losses for the three months ended March 31, 2013 were as follows:


	Commercial, Industrial, and Agricultural		Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2013	$	4,940	$	4,697		$	2,466		$	1,699		$	83		$	175		$	14,060
Charge-offs		0		(607	)		(172	)		(331	)		(12	)		(47	)		(1,169	)
Recoveries		0		1			1			41			2			31			76
Provision (benefit) for loan losses		331		208			100			298			4			(11	)		930

Allowance for loan losses, March 31, 2013	$	5,271	$	4,299		$	2,395		$	1,707		$	77		$	148		$	13,897

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on the Corporation’s impairment method as of March 31, 2014 and December 31, 2013. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

March 31, 2014


	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	847	$	0	$	0	$	0	$	0	$	0	$	847
Collectively evaluated for impairment		6,168		3,467		2,575		1,972		68		197		14,447
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		113		1,267		0		0		0		0		1,380

Total ending allowance balance	$	7,128	$	4,734	$	2,575	$	1,972	$	68	$	197	$	16,674


Loans:
Individually evaluated for impairment	$	5,122	$	588	$	0	$	0	$	0	$	0	$	5,710
Collectively evaluated for impairment		354,273		396,777		459,667		62,007		4,879		421		1,278,024
Acquired with deteriorated credit quality		0		2,195		0		0		0		0		2,195
Modified in a troubled debt restructuring		1,745		10,200		0		0		0		0		11,945

Total ending loans balance	$	361,140	$	409,760	$	459,667	$	62,007	$	4,879	$	421	$	1,297,874

December 31, 2013


	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	372	$	55	$	0	$	0	$	0	$	0	$	427
Collectively evaluated for impairment		5,907		3,959		2,880		1,333		66		207		14,352
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		115		1,340		0		0		0		0		1,455

Total ending allowance balance	$	6,394	$	5,354	$	2,880	$	1,333	$	66	$	207	$	16,234


Loans:
Individually evaluated for impairment	$	4,923	$	1,249	$	0	$	0	$	0	$	0	$	6,172
Collectively evaluated for impairment		351,002		399,645		459,114		63,491		5,065		409		1,278,726
Acquired with deteriorated credit quality		0		2,225		0		0		0		0		2,225
Modified in a troubled debt restructuring		1,790		10,346		0		0		0		0		12,136

Total ending loans balance	$	357,715	$	413,465	$	459,114	$	63,491	$	5,065	$	409	$	1,299,259

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013:

March 31, 2014


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,891	$	4,641	$	960
Commercial mortgage		5,459		5,195		1,267
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		3,046		2,226		0
Commercial mortgage		5,593		5,593		0
Residential real estate		0		0		0

Total	$	19,989	$	17,655	$	2,227

December 31, 2013


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,929	$	4,679	$	487
Commercial mortgage		5,646		5,443		1,395
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,055		2,034		0
Commercial mortgage		6,178		6,152		0
Residential real estate		0		0		0

Total	$	19,808	$	18,308	$	1,882


	Three Months Ended March 31, 2014
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	4,660	$	1	$	1
Commercial mortgage		5,319		0		0
Residential real estate		0		8		8
With no related allowance recorded:
Commercial, industrial, and agricultural		2,130		0		0
Commercial mortgage		6,970		0		0
Residential real estate		0		0		0

Total	$	19,079	$	9	$	9


	Three Months Ended March 31, 2013
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,630	$	0	$	0
Commercial mortgage		5,107		3		3
Residential real estate		252		1		1
With no related allowance recorded:
Commercial, industrial, and agricultural		2,238		0		0
Commercial mortgage		14,922		0		0
Residential real estate		145		0		0

Total	$	24,294	$	4	$	4

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing interest by class of loans as of March 31, 2014 and December 31, 2013:


	March 31, 2014				December 31, 2013
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	3,883	$	27	$	1,006	$	0
Commercial mortgages		4,067		0		7,236		0
Residential real estate		2,756		375		2,389		150
Consumer		938		15		942		170
Credit cards		0		39		0		24

Total	$	11,644	$	456	$	11,573	$	344

Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013 by class of loans.

March 31, 2014


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	941	$	973	$	3,717	$	5,631	$	355,509	$	361,140
Commercial mortgages		5,978		404		4,067		10,449		399,311		409,760
Residential real estate		3,982		269		3,131		7,382		452,285		459,667
Consumer		143		46		953		1,142		60,865		62,007
Credit cards		0		55		39		94		4,785		4,879
Overdrafts		0		0		0		0		421		421

Total	$	11,044	$	1,747	$	11,907	$	24,698	$	1,273,176	$	1,297,874

December 31, 2013


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	211	$	542	$	855	$	1,608	$	356,107	$	357,715
Commercial mortgages		1,258		713		7,236		9,207		404,258		413,465
Residential real estate		4,216		114		2,539		6,869		452,245		459,114
Consumer		334		1,049		1,112		2,495		60,996		63,491
Credit cards		0		29		24		53		5,012		5,065
Overdrafts		0		0		0		0		409		409

Total	$	6,019	$	2,447	$	11,766	$	20,232	$	1,279,027	$	1,299,259

Troubled Debt Restructurings

The terms of certain loans have been modified as troubled debt restructurings. The modification of the terms of such loans included either or both of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The following table presents the number of loans, loan balances, and specific reserves for loans that have been restructured in a troubled debt restructuring as of March 31, 2014 and December 31, 2013.


	March 31, 2014						December 31, 2013
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		5	$	1,745	$	113		5	$	1,790	$	115
Commercial mortgages		7		10,200		1,267		7		10,346		1,340
Residential real estate		0		0		0		0		0		0
Consumer		0		0		0		0		0		0
Credit cards		0		0		0		0		0		0

Total		12	$	11,945	$	1,380		12	$	12,136	$	1,455

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2014. The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2013.


	Three Months Ended March 31, 2013
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		0	$	0	$	0
Commercial mortgages		1		346		403
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		1	$	346	$	403

The troubled debt restructuring described above did not increase the allowance for loan losses during the three months ended March 31, 2013.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4 to 15 years. Modifications involving an extension of the maturity date were for periods ranging from 4 to 18 years.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Except as discussed below, all loans modified in troubled debt restructurings are performing in accordance with their modified terms as of March 31, 2014 and December 31, 2013 and no principal balances were forgiven in connection with the loan restructurings.

During the three months ended March 31, 2013, the Corporation recorded a partial chargeoff of $595 for one commercial mortgage loan with a balance of $1,660 that had defaulted under its restructured terms in 2012 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $135 on this loan during the three months ended March 31, 2013.

During the year ended December 31, 2013, a commercial mortgage loan with a balance of $1,086 defaulted under its restructured terms in 2013 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $615 on this loan during the year ended December 31, 2013.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. This evaluation is performed using the Corporation’s internal underwriting policies. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring.

Generally, non-performing troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Credit Quality Indicators

The Corporation classifies commercial, industrial, and agricultural loans and commercial mortgage 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. Loans with outstanding balances greater than $1 million are analyzed at least semiannually and loans with outstanding balances of less than $1 million are analyzed at least annually.

The Corporation 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 Corporation’s credit position at some future date.

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 Corporation 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 rated as special mention, substandard, or doubtful are considered to be pass rated loans. All loans included in the following tables have been assigned a risk rating within 12 months of the balance sheet date.

March 31, 2014


			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	338,861	$	2,129	$	19,799	$	351	$	361,140
Commercial mortgages		354,206		5,016		50,035		503		409,760

Total	$	693,067	$	7,145	$	69,834	$	854	$	770,900

December 31, 2013


			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	332,507	$	5,509	$	19,318	$	381	$	357,715
Commercial mortgages		351,421		16,623		44,936		485		413,465

Total	$	683,928	$	22,132	$	64,254	$	866	$	771,180

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate, consumer, and credit card loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential, consumer, and credit card loans based on payment activity as of March 31, 2014 and December 31, 2013:


	March 31, 2014						December 31, 2013
	Residential				Credit		Residential				Credit
	Real Estate		Consumer		Cards		Real Estate		Consumer		Cards
Performing	$	456,536	$	61,054	$	4,840	$	456,575	$	62,379	$	5,041
Non-performing		3,131		953		39		2,539		1,112		24

Total	$	459,667	$	62,007	$	4,879	$	459,114	$	63,491	$	5,065

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”), a subsidiary that offers small balance unsecured and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics than are typical in the Bank’s consumer loan portfolio, are considered to be subprime loans.

Holiday’s loan portfolio is summarized as follows at March 31, 2014 and December 31, 2013:


	March 31,			December 31,
	2014			2013
Consumer	$	24,051		$	24,891
Residential real estate		1,488			1,552
Less: unearned discount		(3,778	)		(3,896	)

Total	$	21,761		$	22,547