LOANS

Total net loans at September 30, 2016 and December 31, 2015 are summarized as follows:


	September 30, 2016			December 31, 2015
Commercial, industrial, and agricultural	$	569,267		$	475,364
Commercial mortgages		507,340			448,179
Residential real estate		644,545			574,225
Consumer		77,405			78,345
Credit cards		5,842			5,201
Overdrafts		73			1,040
Less: unearned discount		(3,614	)		(4,556	)
allowance for loan losses		(15,703	)		(16,737	)

Loans, net	$	1,785,155		$	1,561,061

At September 30, 2016 and December 31, 2015, net unamortized loan fees of $(824) and $(636), respectively, have been included in the carrying value of loans.

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 30% of the Corporation’s total loan portfolio at September 30, 2016 and December 31, 2015. Commercial mortgage loans comprised 28% of the Corporation’s total loan portfolio at September 30, 2016 and December 31, 2015. Management assigns a risk rating to all commercial loans at loan origination. 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 September 30, 2016 and December 31, 2015. 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 September 30, 2016 and December 31, 2015. 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, 2016 were as follows:


	Commercial,					Residential
	Industrial, and			Commercial		Real						Credit
	Agricultural			Mortgages		Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2016	$	5,218		$	6,207	$	2,299		$	2,066		$	50		$	148		$	15,988
Charge-offs		(86	)		0		(95	)		(709	)		(17	)		(86	)		(993	)
Recoveries		37			2		10			20			3			14			86
Provision (benefit) for loan losses		(24	)		27		(65	)		545			36			103			622

Allowance for loan losses, September 30, 2016	$	5,145		$	6,236	$	2,149		$	1,922		$	72		$	179		$	15,703

Transactions in the allowance for loan losses for the nine months ended September 30, 2016 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2016	$	6,035		$	5,605		$	2,475		$	2,371		$	90		$	161		$	16,737
Charge-offs		(519	)		(20	)		(244	)		(2,397	)		(54	)		(167	)		(3,401	)
Recoveries		84			7			72			94			18			54			329
Provision (benefit) for loan losses		(455	)		644			(154	)		1,854			18			131			2,038

Allowance for loan losses, September 30, 2016	$	5,145		$	6,236		$	2,149		$	1,922		$	72		$	179		$	15,703

Transactions in the allowance for loan losses for the three months ended September 30, 2015 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2015	$	6,598		$	5,928		$	2,612		$	2,118		$	98		$	150		$	17,504
Charge-offs		(80	)		0			(191	)		(448	)		(17	)		(54	)		(790	)
Recoveries		12			1			4			21			3			18			59
Provision (benefit) for loan losses		89			(384	)		115			585			14			44			463

Allowance for loan losses, September 30, 2015	$	6,619		$	5,545		$	2,540		$	2,276		$	98		$	158		$	17,236

Transactions in the allowance for loan losses for the nine months ended September 30, 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		(219	)		0		(347	)		(1,448	)		(103	)		(159	)		(2,276	)
Recoveries		39			51		5			76			8			68			247
Provision (benefit) for loan losses		(315	)		184		403			1,443			122			55			1,892

Allowance for loan losses, September 30, 2015	$	6,619		$	5,545	$	2,540		$	2,276		$	98		$	158		$	17,236

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, 2016 and December 31, 2015. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

September 30, 2016


	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	$	193	$	0	$	0	$	0	$	0	$	0	$	193
Collectively evaluated for impairment		4,824		3,811		2,149		1,922		72		179		12,957
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		128		2,425		0		0		0		0		2,553

Total ending allowance balance	$	5,145	$	6,236	$	2,149	$	1,922	$	72	$	179	$	15,703

Loans:
Individually evaluated for impairment	$	820	$	0	$	0	$	0	$	0	$	0	$	820
Collectively evaluated for impairment		565,737		497,318		644,545		77,405		5,842		73		1,790,920
Acquired with deteriorated credit quality		0		660		0		0		0		0		660
Modified in a troubled debt restructuring		2,710		9,362		0		0		0		0		12,072

Total ending loans balance	$	569,267	$	507,340	$	644,545	$	77,405	$	5,842	$	73	$	1,804,472

December 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	$	239	$	0	$	39	$	0	$	0	$	0	$	278
Collectively evaluated for impairment		4,909		3,580		2,436		2,371		90		161		13,547
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		887		2,025		0		0		0		0		2,912

Total ending allowance balance	$	6,035	$	5,605	$	2,475	$	2,371	$	90	$	161	$	16,737


Loans:
Individually evaluated for impairment	$	1,196	$	393	$	248	$	0	$	0	$	0	$	1,837
Collectively evaluated for impairment		469,128		437,200		573,977		78,345		5,201		1,040		1,564,891
Acquired with deteriorated credit quality		0		685		0		0		0		0		685
Modified in a troubled debt restructuring		5,040		9,901		0		0		0		0		14,941

Total ending loans balance	$	475,364	$	448,179	$	574,225	$	78,345	$	5,201	$	1,040	$	1,582,354

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015:

September 30, 2016


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,689	$	1,689	$	321
Commercial mortgage		10,148		9,362		2,425
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,763		1,841		0
Commercial mortgage		0		0		0
Residential real estate		0		0		0

Total	$	14,600	$	12,892	$	2,746

December 31, 2015


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	3,448	$	3,448	$	1,126
Commercial mortgage		5,985		5,343		2,025
Residential real estate		351		248		39
With no related allowance recorded:
Commercial, industrial, and agricultural		3,716		2,788		0
Commercial mortgage		5,001		4,951		0
Residential real estate		0		0		0

Total	$	18,501	$	16,778	$	3,190


	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016
	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	$	2,340	$	34	$	34	$	2,859	$	36	$	36
Commercial mortgage		7,253		57		57		6,331		61		61
Residential real estate		0		0		0		83		6		6
With no related allowance recorded:
Commercial, industrial, and agricultural		2,148		24		24		2,420		26		26
Commercial mortgage		2,214		17		17		3,467		20		20
Residential real estate		0		0		0		0		0		0

Total	$	13,955	$	132	$	132	$	15,160	$	149	$	149


	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
	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	$	6,463	$	0	$	0	$	6,129	$	42	$	42
Commercial mortgage		7,474		0		0		8,069		0		0
Residential real estate		400		5		5		400		18		18
With no related allowance recorded:
Commercial, industrial, and agricultural		1,549		0		0		1,496		10		10
Commercial mortgage		4,656		0		0		4,822		0		0
Residential real estate		0		0		0		129		6		6

Total	$	20,542	$	5	$	5	$	21,045	$	76	$	76

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, 2016 and December 31, 2015:


	September 30, 2016				December 31, 2015
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	2,830	$	0	$	3,560	$	3
Commercial mortgages		5,592		0		3,651		0
Residential real estate		5,733		27		3,671		87
Consumer		1,170		15		1,277		15
Credit cards		0		28		0		0

Total	$	15,325	$	70	$	12,159	$	105

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, 2016 and December 31, 2015 by class of loans.

September 30, 2016


					Greater Than
	30-59 Days		60-89 Days		90 Days		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial, industrial, and agricultural	$	1,641	$	269	$	1,910	$	3,820	$	565,447	$	569,267
Commercial mortgages		2		727		2,043		2,772		504,568		507,340
Residential real estate		1,680		354		2,451		4,485		640,060		644,545
Consumer		286		150		1,185		1,621		75,784		77,405
Credit cards		24		39		28		91		5,751		5,842
Overdrafts		0		0		0		0		73		73

Total	$	3,633	$	1,539	$	7,617	$	12,789	$	1,791,683	$	1,804,472

December 31, 2015


	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	$	131	$	622	$	698	$	1,451	$	473,913	$	475,364
Commercial mortgages		7		343		3,651		4,001		444,178		448,179
Residential real estate		2,834		378		3,001		6,213		568,012		574,225
Consumer		216		179		1,292		1,687		76,658		78,345
Credit cards		0		0		0		0		5,201		5,201
Overdrafts		0		0		0		0		1,040		1,040

Total	$	3,188	$	1,522	$	8,642	$	13,352	$	1,569,002	$	1,582,354

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, 2016 and December 31, 2015.


	September 30, 2016						December 31, 2015
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		7	$	2,710	$	128		8	$	5,040	$	887
Commercial mortgages		8		9,362		2,425		8		9,901		2,025
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	$	12,072	$	2,553		16	$	14,941	$	2,912

The following table present loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2016. There was one loan modified as a troubled debt restructuring during the three and nine months ended September 30, 2016.


	Nine Months Ended September 30, 2016
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		1	$	109	$	109
Commercial mortgages		0		0		0
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		1	$	109	$	109

There were no loans modified as troubled debt restructurings during the three or nine months ended September 30, 2015.

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 September 30, 2016 and December 31, 2015 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 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.

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, 2016


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	530,168	$	21,155	$	17,936	$	8	$	569,267
Commercial mortgages		484,374		2,641		20,325		0		507,340

Total	$	1,014,542	$	23,796	$	38,261	$	8	$	1,076,607

December 31, 2015


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	447,449	$	4,749	$	22,943	$	223	$	475,364
Commercial mortgages		426,870		1,735		19,148		426		448,179

Total	$	874,319	$	6,484	$	42,091	$	649	$	923,543

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, 2016 and December 31, 2015:


	September 30, 2016						December 31, 2015
	Residential				Credit		Residential				Credit
	Real Estate		Consumer		Cards		Real Estate		Consumer		Cards
Performing	$	638,785	$	76,220	$	5,814	$	570,467	$	77,053	$	5,201
Non-performing		5,760		1,185		28		3,758		1,292		0

Total	$	644,545	$	77,405	$	5,842	$	574,225	$	78,345	$	5,201

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 September 30, 2016 and December 31, 2015:


	September 30,			December 31,
	2016			2015
Consumer	$	25,268		$	30,001
Residential real estate		1,166			1,263
Less: unearned discount		(3,614	)		(4,556	)

Total	$	22,820		$	26,708