LOANS

Total net loans at March 31, 2015 and December 31, 2014 are summarized as follows:


	March 31, 2015			December 31, 2014
Commercial, industrial, and agricultural	$	436,305		$	428,458
Commercial mortgages		345,561			352,752
Residential real estate		504,569			502,317
Consumer		67,461			69,648
Credit cards		5,004			5,233
Overdrafts		1,075			1,188
Less: unearned discount		(3,849	)		(4,307	)
allowance for loan losses		(17,682	)		(17,373	)

Loans, net	$	1,338,444		$	1,337,916

At March 31, 2015 and December 31, 2014, net unamortized loan costs of $219 and $483, 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 32% and 32% of the Corporation’s total loan portfolio at March 31, 2015 and December 31, 2014, respectively. Commercial mortgage loans comprised 26% of the Corporation’s total loan portfolio at March 31, 2015 and December 31, 2014. 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 37% of the Corporation’s total loan portfolio at March 31, 2015 and December 31, 2014, 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 originated for sale into the secondary market 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, 2015 and December 31, 2014. 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 three months ended March 31, 2015 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2015	$	7,114		$	5,310		$	2,479		$	2,205		$	71		$	194		$	17,373
Charge-offs		(74	)		0			(66	)		(523	)		(42	)		(57	)		(762	)
Recoveries		15			50			1			29			3			30			128
Provision (benefit) for loan losses		168			(64	)		372			418			42			7			943

Allowance for loan losses, March 31, 2015	$	7,223		$	5,296		$	2,786		$	2,129		$	74		$	174		$	17,682

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	$	8,212	$	3,536		$	2,450		$	1,763		$	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		66		218			108			586			21			20			1,019

Allowance for loan losses, March 31, 2014	$	8,278	$	3,704		$	2,455		$	1,972		$	68		$	197		$	16,674

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, 2015 and December 31, 2014. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

March 31, 2015


	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	$	205	$	407	$	193	$	0	$	0	$	0	$	805
Collectively evaluated for impairment		6,240		2,471		2,593		2,129		74		174		13,681
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		778		2,418		0		0		0		0		3,196

Total ending allowance balance	$	7,223	$	5,296	$	2,786	$	2,129	$	74	$	174	$	17,682

Loans:
Individually evaluated for impairment	$	3,434	$	490	$	657	$	0	$	0	$	0	$	4,581
Collectively evaluated for impairment		428,991		329,829		503,912		67,461		5,004		1,075		1,336,272
Acquired with deteriorated credit quality		0		713		0		0		0		0		713
Modified in a troubled debt restructuring		3,880		14,529		0		0		0		0		18,409

Total ending loans balance	$	436,305	$	345,561	$	504,569	$	67,461	$	5,004	$	1,075	$	1,359,975

December 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	$	254	$	294	$	197	$	0	$	0	$	0	$	745
Collectively evaluated for impairment		6,703		2,503		2,282		2,205		71		194		13,958
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		157		2,513		0		0		0		0		2,670

Total ending allowance balance	$	7,114	$	5,310	$	2,479	$	2,205	$	71	$	194	$	17,373

Loans:
Individually evaluated for impairment	$	3,394	$	494	$	657	$	0	$	0	$	0	$	4,545
Collectively evaluated for impairment		421,144		336,801		501,660		69,648		5,233		1,188		1,335,674
Acquired with deteriorated credit quality		0		719		0		0		0		0		719
Modified in a troubled debt restructuring		3,920		14,738		0		0		0		0		18,658

Total ending loans balance	$	428,458	$	352,752	$	502,317	$	69,648	$	5,233	$	1,188	$	1,359,596

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, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014:

March 31, 2015


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	6,225	$	6,225	$	983
Commercial mortgage		10,762		10,269		2,825
Residential real estate		400		400		193
With no related allowance recorded:
Commercial, industrial, and agricultural		2,644		1,693		0
Commercial mortgage		4,757		4,750		0
Residential real estate		319		257		0

Total	$	25,107	$	23,594	$	4,001

December 31, 2014


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,737	$	5,737	$	411
Commercial mortgage		10,651		10,212		2,807
Residential real estate		400		400		197
With no related allowance recorded:
Commercial, industrial, and agricultural		2,530		1,577		0
Commercial mortgage		5,020		5,020		0
Residential real estate		319		257		0

Total	$	24,657	$	23,203	$	3,415


	Three Months Ended March 31, 2015
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,981	$	35	$	35
Commercial mortgage		10,241		0		0
Residential real estate		400		2		2
With no related allowance recorded:
Commercial, industrial, and agricultural		1,636		10		10
Commercial mortgage		4,886		0		0
Residential real estate		257		2		2

Total	$	23,401	$	49	$	49


	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

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, 2015 and December 31, 2014:


	March 31, 2015				December 31, 2014
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	715	$	0	$	796	$	0
Commercial mortgages		4,447		0		4,323		0
Residential real estate		3,152		57		3,026		213
Consumer		844		0		1,045		0
Credit cards		0		0		0		0

Total	$	9,158	$	57	$	9,190	$	213

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, 2015 and December 31, 2014 by class of loans.

March 31, 2015


					Greater Than
	30-59 Days		60-89 Days		90 Days		Total Past		Loans Not
	Past Due		Past Due		Past Due		Due		Past Due		Total
Commercial, industrial, and agricultural	$	2,550	$	69	$	223	$	2,842	$	433,463	$	436,305
Commercial mortgages		2,395		1,144		4,447		7,986		337,575		345,561
Residential real estate		2,385		614		3,209		6,208		498,361		504,569
Consumer		146		49		844		1,039		66,422		67,461
Credit cards		0		0		0		0		5,004		5,004
Overdrafts		0		0		0		0		1,075		1,075

Total	$	7,476	$	1,876	$	8,723	$	18,075	$	1,341,900	$	1,359,975

December 31, 2014


					Greater Than
	30-59 Days		60-89 Days		90 Days		Total Past		Loans Not
	Past Due		Past Due		Past Due		Due		Past Due		Total
Commercial, industrial, and agricultural	$	888	$	588	$	294	$	1,770	$	426,688	$	428,458
Commercial mortgages		20		1,351		4,323		5,694		347,058		352,752
Residential real estate		2,719		1,191		3,239		7,149		495,168		502,317
Consumer		265		122		1,045		1,432		68,216		69,648
Credit cards		0		83		0		83		5,150		5,233
Overdrafts		0		0		0		0		1,188		1,188

Total	$	5,083	$	2,144	$	8,901	$	16,128	$	1,343,468	$	1,359,596

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, 2015 and December 31, 2014.


	March 31, 2015						December 31, 2014
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		6	$	3,880	$	778		6	$	3,920	$	157
Commercial mortgages		9		14,529		2,418		9		14,738		2,513
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		15	$	18,409	$	3,196		15	$	18,658	$	2,670

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2015 or March 31, 2014.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of March 31, 2015 and December 31, 2014 and no principal balances were forgiven in connection with the loan restructurings.

In order to determine whether a borrower is experiencing financial difficulty, the Corporation performs an evaluation using the its internal underwriting policies of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. 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, 2015


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	414,492	$	4,818	$	16,641	$	354	$	436,305
Commercial mortgages		323,722		0		21,403		436		345,561

Total	$	738,214	$	4,818	$	38,044	$	790	$	781,866

December 31, 2014


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	402,923	$	6,703	$	18,525	$	307	$	428,458
Commercial mortgages		328,614		0		23,699		439		352,752

Total	$	731,537	$	6,703	$	42,224	$	746	$	781,210

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, 2015 and December 31, 2014:


	March 31, 2015						December 31, 2014
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	501,360	$	66,617	$	5,004	$	499,078	$	68,603	$	5,233
Non-performing		3,209		844		0		3,239		1,045		0

Total	$	504,569	$	67,461	$	5,004	$	502,317	$	69,648	$	5,233

The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”) are considered to be subprime loans. Holiday is 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.

Holiday’s loan portfolio is summarized as follows at March 31, 2015 and December 31, 2014:


	March 31,			December 31,
	2015			2014
Consumer	$	25,700		$	27,916
Residential real estate		1,219			1,270
Less: unearned discount		(3,849	)		(4,307	)

Total	$	23,070		$	24,879