5. Loans

Total net loans at December 31, 2013 and 2012 are summarized as follows:


	2013			2012

Commercial, industrial, and agricultural	$	291,704		$	257,091
Commercial mortgages		467,292			261,791
Residential real estate		471,298			347,904
Consumer		63,491			58,668
Credit cards		5,065			4,800
Overdrafts		409			971
Less: unearned discount		(3,896	)		(3,401	)
allowance for loan losses		(16,234	)		(14,060	)

Loans, net	$	1,279,129		$	913,764

At December 31, 2013 and 2012 net unamortized loan costs of $911 and $232, 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 23% and 28% of the Corporation’s total loan portfolio at December 31, 2013 and 2012, respectively. Commercial mortgage loans comprised 37% and 29% of the Corporation’s total loan portfolio at December 31, 2013 and 2012, 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 37% and 38% of the Corporation’s total loan portfolio at December 31, 2013 and 2012, respectively. 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 December 31, 2013 and 2012. 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.

Transactions in the allowance for loan losses for the year ended December 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		(958	)		(1,931	)		(467	)		(1,919	)		(97	)		(258	)		(5,630	)
Recoveries		7			1,430			5			114			16			94			1,666
Provision for loan losses		2,290			1,273			876			1,439			64			196			6,138

Allowance for loan losses, December 31, 2013	$	6,279		$	5,469		$	2,880		$	1,333		$	66		$	207		$	16,234

Transactions in the allowance for loan losses for the year ended December 31, 2012 were as follows:


	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2012	$	4,511		$	4,470		$	1,991		$	1,404		$	71		$	168		$	12,615
Charge-offs		(2,871	)		(401	)		(304	)		(1,279	)		(78	)		(257	)		(5,190	)
Recoveries		45			0			1			91			18			99			254
Provision for loan losses		3,255			628			778			1,483			72			165			6,381

Allowance for loan losses, December 31, 2012	$	4,940		$	4,697		$	2,466		$	1,699		$	83		$	175		$	14,060

Transactions in the allowance for loan losses for the year ended December 31, 2011 were as follows:


	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2011	$	3,517		$	3,511		$	1,916		$	1,561		$	96		$	219		$	10,820
Charge-offs		(1,796	)		(175	)		(217	)		(907	)		(39	)		(222	)		(3,356	)
Recoveries		9			0			13			88			10			94			214
Provision for loan losses		2,781			1,134			279			662			4			77			4,937

Allowance for loan losses, December 31, 2011	$	4,511		$	4,470		$	1,991		$	1,404		$	71		$	168		$	12,615

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 December 31, 2013 and 2012. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.


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		0		1,455		0		0		0		0		1,455

Total ending allowance balance	$	6,279	$	5,469	$	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		285,518		452,945		471,298		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		1,263		10,873		0		0		0		0		12,136

Total ending loans balance	$	291,704	$	467,292	$	471,298	$	63,491	$	5,065	$	409	$	1,299,259


December 31, 2012	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	$	541	$	131	$	81	$	0	$	0	$	0	$	753
Collectively evaluated for impairment		4,399		3,467		2,385		1,699		83		175		12,208
Modified in a troubled debt restructuring		0		1,099		0		0		0		0		1,099

Total ending allowance balance	$	4,940	$	4,697	$	2,466	$	1,699	$	83	$	175	$	14,060

Loans:
Individually evaluated for impairment	$	2,623	$	10,683	$	593	$	0	$	0	$	0	$	13,899
Collectively evaluated for impairment		253,048		240,907		347,311		58,668		4,800		971		905,705
Modified in a troubled debt restructuring		1,420		10,201		0		0		0		0		11,621

Total ending loans balance	$	257,091	$	261,791	$	347,904	$	58,668	$	4,800	$	971	$	931,225

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012, and 2011:


December 31, 2013	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,402	$	4,152	$	372
Commercial mortgage		6,173		5,970		1,510
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


December 31, 2012	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	2,542	$	1,792	$	541
Commercial mortgage		5,870		5,329		1,230
Residential real estate		416		381		81
With no related allowance recorded:
Commercial, industrial, and agricultural		2,804		2,251		0
Commercial mortgage		17,285		15,555		0
Residential real estate		308		212		0

Total	$	29,225	$	25,520	$	1,852

The unpaid principal balance of impaired loans includes the Corporation’s recorded investment in the loan and amounts that have been charged off.


	Year Ended December 31, 2013
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded:
Commercial, industrial, and agricultural	$	1,989	$	7	$	7
Commercial mortgage		6,572		3		3
Residential real estate		101		7		7
With no related allowance recorded:
Commercial, industrial, and agricultural		2,124		0		0
Commercial mortgage		11,885		0		0
Residential real estate		86		0		0

Total	$	22,757	$	17	$	17


	Year Ended December 31, 2012
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded:
Commercial, industrial, and agricultural	$	3,083	$	4	$	4
Commercial mortgage		5,504		3		3
Residential real estate		334		13		13
With no related allowance recorded:
Commercial, industrial, and agricultural		3,217		0		0
Commercial mortgage		12,723		0		0
Residential real estate		103		0		0

Total	$	24,964	$	20	$	20


	Year Ended December 31, 2011
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded:
Commercial, industrial, and agricultural	$	3,711	$	3	$	3
Commercial mortgage		6,412		19		19
Residential real estate		179		4		4
With no related allowance recorded:
Commercial, industrial, and agricultural		2,050		0		0
Commercial mortgage		6,040		0		0
Residential real estate		0		0		0

Total	$	18,392	$	26	$	26

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of December 31, 2012 and 2011:


	December 31, 2013				December 31, 2012
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	1,006	$	0	$	3,073	$	0
Commercial mortgages		7,236		0		8,570		109
Residential real estate		2,389		150		2,792		18
Consumer		942		170		10		217
Credit cards		0		24		0		13

Total	$	11,573	$	344	$	14,445	$	357

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.

The following table presents the aging of the recorded investment in past due loans as of December 31, 2013 and 2012 by class of loans.


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	$	290,096	$	291,704
Commercial mortgages		1,258		713		7,236		9,207		458,085		467,292
Residential real estate		4,216		114		2,539		6,869		464,429		471,298
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


December 31, 2012	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	$	724	$	157	$	2,968	$	3,849	$	253,242	$	257,091
Commercial mortgages		1,162		3,197		8,679		13,038		248,753		261,791
Residential real estate		1,390		641		2,700		4,731		343,173		347,904
Consumer		724		203		227		1,154		57,514		58,668
Credit cards		39		9		13		61		4,739		4,800
Overdrafts		0		0		0		0		971		971

Total	$	4,039	$	4,207	$	14,587	$	22,833	$	908,392	$	931,225

Troubled Debt Restructurings

During the years ended December 31, 2013 and 2012, the terms of certain loans were 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 December 31, 2013 and December 31, 2012.


	December 31, 2013						December 31, 2012
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		2	$	1,263	$	0		2	$	1,420	$	0
Commercial mortgages		10		10,873		1,455		8		10,201		1,099
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	$	12,136	$	1,455		10	$	11,621	$	1,099

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2013 and 2012:


	Year Ended December 31, 2013
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		0	$	0	$	0
Commercial mortgages		3		3,747		3,681
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		3	$	3,747	$	3,681


	Year Ended December 31, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		2	$	1,455	$	1,455
Commercial mortgages		5		2,717		2,717
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		7	$	4,172	$	4,172

The troubled debt restructurings described above increased the allowance for loan losses by $514 and $101 during the years ended December 31, 2013 and 2012, respectively.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4-15 years. Modifications involving an extension of the maturity date were for periods ranging from 4-18 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 December 31, 2013 and 2012 and no principal balances were forgiven in connection with the loan restructurings.

During the year ended December 31, 2013, the Corporation recorded a partial charge-off of $974 for a 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 $262 on this loan 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 during the year ended December 31, 2013. In addition, an impaired commercial mortgage loan that was placed on non-accrual status in 2013 and having a balance of $3,269 was modified in a troubled debt restructuring. The Corporation recorded an additional provision for loan losses of $514 for this loan during the year ended December 31, 2013.

During the year ended December 31, 2012, one commercial mortgage loan with a balance of $1,660 defaulted under its restructured terms and was placed on nonaccrual status, resulting in an increase in the allowance for loan losses of $503. No loans that were modified in a troubled debt restructuring were charged off during the year ended December 31, 2012.

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.


December 31, 2013	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	266,868	$	5,377	$	19,318	$	141	$	291,704
Commercial mortgages		404,876		16,755		44,936		725		467,292

Total	$	671,744	$	22,132	$	64,254	$	866	$	758,996


December 31, 2012	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	234,835	$	6,641	$	15,459	$	156	$	257,091
Commercial mortgages		225,294		12,294		23,501		702		261,791

Total	$	460,129	$	18,935	$	38,960	$	858	$	518,882

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 December 31, 2013 and December 31, 2012:


	December 31, 2013						December 31, 2012
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	468,759	$	62,379	$	5,041	$	345,094	$	58,441	$	4,787
Non-performing		2,539		1,112		24		2,810		227		13

Total	$	471,298	$	63,491	$	5,065	$	347,904	$	58,668	$	4,800

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, included in consumer and residential loans above, is summarized as follows at December 31, 2013 and 2012:


	2013			2012
Consumer	$	24,891		$	21,535
Residential real estate		1,552			954
Less: unearned discount		(3,896	)		(3,401	)

Total	$	22,547		$	19,088