LOANS

Total net loans at September 30, 2013 and December 31, 2012 are summarized as follows:


	September 30, 2013			December 31, 2012
Commercial, industrial, and agricultural	$	258,889		$	257,091
Commercial mortgages		305,840			261,791
Residential real estate		400,649			347,904
Consumer		62,187			58,668
Credit cards		4,800			4,800
Overdrafts		510			971
Less: unearned discount		(3,904	)		(3,401	)
allowance for loan losses		(17,221	)		(14,060	)

Loans, net	$	1,011,750		$	913,764

At September 30, 2013 and December 31, 2012, net unamortized loan costs of $322 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. 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 26% and 28% of the Corporation’s total loan portfolio at September 30, 2013 and December 31, 2012, respectively. Commercial mortgage loans comprised 30% and 28% of the Corporation’s total loan portfolio at September 30, 2013 and December 31, 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 40% and 37% of the Corporation’s total loan portfolio at September 30, 2013 and December 31, 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. 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 September 30, 2013 and December 31, 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 three months ended September 30, 2013 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2013	$	5,338		$	5,896		$	2,508		$	1,555		$	55		$	148		$	15,500
Charge-offs		(169	)		(4	)		(57	)		(269	)		(19	)		(72	)		(590	)
Recoveries		0			1,424			1			21			3			16			1,465
Provision (benefit) for loan losses		384			(275	)		189			454			18			76			846

Allowance for loan losses, September 30, 2013	$	5,553		$	7,041		$	2,641		$	1,761		$	57		$	168		$	17,221

Transactions in the allowance for loan losses for the nine months ended September 30, 2013 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2013	$	4,940		$	4,697		$	2,466		$	1,699		$	83		$	175		$	14,060
Charge-offs		(253	)		(1,534	)		(398	)		(946	)		(48	)		(163	)		(3,342	)
Recoveries		7			1,427			5			95			13			65			1,612
Provision (benefit) for loan losses		859			2,451			568			913			9			91			4,891

Allowance for loan losses, September 30, 2013	$	5,553		$	7,041		$	2,641		$	1,761		$	57		$	168		$	17,221

Transactions in the allowance for loan losses for the three months ended September 30, 2012 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2012	$	5,115		$	4,553		$	2,225		$	1,568		$	81		$	148		$	13,690
Charge-offs		(751	)		(165	)		(7	)		(252	)		(22	)		(80	)		(1,277	)
Recoveries		6			0			1			18			1			22			48
Provision (benefit) for loan losses		103			504			113			372			19			77			1,188

Allowance for loan losses, September 30, 2012	$	4,473		$	4,892		$	2,332		$	1,706		$	79		$	167		$	13,649

Transactions in the allowance for loan losses for the nine months ended September 30, 2012 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2012	$	4,511		$	4,470		$	1,991		$	1,404		$	71		$	168		$	12,615
Charge-offs		(1,398	)		(401	)		(231	)		(890	)		(55	)		(197	)		(3,172	)
Recoveries		14			0			1			67			8			78			168
Provision for loan losses		1,346			823			571			1,125			55			118			4,038

Allowance for loan losses, September 30, 2012	$	4,473		$	4,892		$	2,332		$	1,706		$	79		$	167		$	13,649

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 September 30, 2013 and December 31, 2012. The recorded investment in loans excludes accrued interest due to its insignificance.

September 30, 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	$	573	$	932	$	0	$	0	$	0	$	0	$	1,505
Collectively evaluated for impairment		4,980		4,209		2,641		1,761		57		168		13,816
Modified in a troubled debt restructuring		0		1,900		0		0		0		0		1,900

Total ending allowance balance	$	5,553	$	7,041	$	2,641	$	1,761	$	57	$	168	$	17,221


Loans:
Loans individually evaluated for impairment	$	1,774	$	4,252	$	64	$	0	$	0	$	0	$	6,090
Loans collectively evaluated for impairment		255,813		289,635		400,585		58,283		4,800		510		1,009,626
Loans modified in a troubled debt restructuring		1,302		11,953		0		0		0		0		13,255

Total ending loans balance	$	258.889	$	305,840	$	400,649	$	58,283	$	4,800	$	510	$	1,028,971

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:
Loans individually evaluated for impairment	$	2,623	$	10,683	$	593	$	0	$	0	$	0	$	13,899
Loans collectively evaluated for impairment		253,048		240,907		347,311		55,267		4,800		971		902,304
Loans 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	$	55,267	$	4,800	$	971	$	927,824

The following tables present information related to loans individually evaluated for impairment by portfolio segment as of September 30, 2013 and December 31, 2012 and for the three and nine months ended September 30, 2013 and 2012:

September 30, 2013


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,836	$	1,085	$	573
Commercial mortgage		12,017		9,985		2,832
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,604		1,991		0
Commercial mortgage		6,246		6,220		0
Residential real estate		149		64		0

Total	$	22,852	$	19,345	$	3,405

December 31, 2012


	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


	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,267	$	3	$	3	$	1,439	$	4	$	4
Commercial mortgage		8,337		0		0		7,657		3		3
Residential real estate		0		1		1		191		4		4
With no related allowance recorded:
Commercial, industrial, and agricultural		2,055		0		0		2,121		0		0
Commercial mortgage		10,602		0		0		10,888		0		0
Residential real estate		69		0		0		138		0		0

Total	$	22,330	$	4	$	4	$	22,434	$	11	$	11


	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	4,140	$	0	$	0	$	3,406	$	3	$	3
Commercial mortgage		6,180		3		3		5,549		3		3
Residential real estate		476		3		3		322		11		11
With no related allowance recorded:
Commercial, industrial, and agricultural		3,506		0		0		3,459		0		0
Commercial mortgage		11,971		0		0		12,016		0		0
Residential real estate		151		0		0		75		0		0

Total	$	26,424	$	6	$	6	$	24,827	$	17	$	17

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 September 30, 2013 and December 31, 2012:


	September 30, 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	$	2,566	$	0	$	3,073	$	0
Commercial mortgages		8,946		0		8,570		109
Residential real estate		1,993		58		2,792		18
Consumer		683		11		10		217
Credit cards		0		54		0		13

Total	$	14,188	$	123	$	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.

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 September 30, 2013 and December 31, 2012 by class of loans.

September 30, 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	$	126	$	523	$	2,478	$	3,127	$	255,762	$	258,889
Commercial mortgages		1,173		0		5,784		6,957		298,883		305,840
Residential real estate		860		949		1,954		3,763		396,886		400,649
Consumer		569		266		694		1,529		56,754		58,283
Credit cards		24		23		54		101		4,699		4,800
Overdrafts		0		0		0		0		510		510

Total	$	2,752	$	1,761	$	10,964	$	15,477	$	1,013,494	$	1,028,971

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		54,113		55,267
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	$	904,991	$	927,824

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 September 30, 2013 and December 31, 2012.


	September 30, 2013						December 31, 2012
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		2	$	1,302	$	0		2	$	1,420	$	0
Commercial mortgages		10		11,953		1,900		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	$	13,255	$	1,900		10	$	11,621	$	1,099

The following tables present loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2013 and 2012. There was one loan modified as a troubled debt restructuring during the three months ended September 30, 2013, and no loans modified as troubled debt restructurings during the three months ended September 30, 2012.


	Nine Months Ended September 30, 2013
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		0	$	0	$	0
Commercial mortgages		2		3,615		3,549
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		2	$	3,615	$	3,549


	Nine Months Ended September 30, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		1	$	310	$	310
Commercial mortgages		4		2,556		2,556
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		5	$	2,866	$	2,866

The troubled debt restructurings described above increased the allowance for loan losses by $562 and $0 during the three months ended September 30, 2013 and 2012 and $562 and $0 during the nine months ended September 30, 2013 and 2012.

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 September 30, 2013 and December 31, 2012 and no principal balances were forgiven in connection with the loan restructurings. In the first quarter of 2013, the Corporation recorded a partial chargeoff of $595 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 $127 and $262 on this loan during the three and nine months ended September 30, 2013, and $503 during both the three and nine months ended September 30, 2012. In the second quarter of 2013, a commercial mortgage loan with a balance of $1,086 defaulted under its restructured terms and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $0 and $588 during the three and nine months ended September 30, 2013. In the third quarter of 2013, an impaired commercial mortgage loan that was placed on non-accrual status in the second quarter of 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 $562 for this loan during the three months ended September 30, 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.

September 30, 2013


			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	230,412	$	6,997	$	21,349	$	131	$	258,889
Commercial mortgages		263,115		9,956		30,040		2,729		305,840

Total	$	493,527	$	16,953	$	51,389	$	2,860	$	564,729

December 31, 2012


			Special
	Pass		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 September 30, 2013 and December 31, 2012:


	September 30, 2013						December 31, 2012
	Residential				Credit		Residential				Credit
	Real Estate		Consumer		Cards		Real Estate		Consumer		Cards
Performing	$	398,598	$	57,589	$	4,746	$	345,094	$	55,040	$	4,787
Non-performing		2,051		694		54		2,810		227		13

Total	$	400,649	$	58,283	$	4,800	$	347,904	$	55,267	$	4,800

The Corporation considers all overdraft loans to be performing loans given their short-term duration.

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 September 30, 2013 and December 31, 2012:


	September 30,			December 31,
	2013			2012
Consumer	$	23,909		$	21,535
Residential real estate		1,397			954
Less: unearned discount		(3,904	)		(3,401	)

Total	$	21,402		$	19,088