UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-30665

CNB Financial Services, Inc.

(Exact name of registrant as specified in its charter)

West Virginia		55—0773918
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

101 S. Washington Street, Berkeley Springs, WV		25411
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, (304) 258 — 1520

Securities to be registered under Section 12(b) of the Act:

None

Securities to be registered under Section 12(g) of the Act:

(Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o    No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes o   No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a Smaller Reporting Company)		Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asking price of such common equity, as of the last business day at the registrant’s most recently completed second fiscal quarter (June 30, 2009) was approximately $12.9 million. This amount was based on the last closing sale price of a share of common stock of $47.40 as of the same date.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 443,648 shares of common stock, par value $1 per share, as of February 25, 2010.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the following documents have been incorporated by reference into this form 10-K as indicated:

Documents		10-K Parts
1. CNB Financial Services, Inc. 2010 Proxy Statement		Part III

 

 

CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY
TABLE OF CONTENTS

		PAGE
PART I
Item 1. Business			4
Item 1A. Risk Factors			9
Item 2. Properties			11
Item 3. Legal Proceedings			11
Item 4. (Removed and Reserved)			11
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			12
Item 6. Selected Financial Data			14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			35
Item 8. Financial Statements and Supplementary Data			37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			73
Item 9A(T). Controls and Procedures			73
Item 9B. Other Information			73
PART III
Item 10. Directors and Executive Officers of the Registrant			74
Item 11. Executive Compensation			75
Item 12. Security Ownership of Certain Beneficial Owners and Management			75
Item 13. Certain Relationships and Related Stockholder Matters			75
Item 14. Principal Accountant’s Fees and Services			75
PART IV
Item 15. Exhibits and Financial Statement Schedules			76
SIGNATURES			77

FORWARD LOOKING STATEMENTS

     In our Annual Report and Form 10-K, we include forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products and similar matters. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plans,” “intends,” or similar words or expressions. You should read statements that contain these words carefully because they discuss our future expectations or state other “forward-looking” information. We believe that it is important to communicate our future expectations to our shareholders. However, there may be events in the future that we are not able to predict accurately or control, including those factors set forth under “Risk Factors” contained herein. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we must inform you that a variety of factors could cause CNB Financial Services, Inc.’s actual results and experiences to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. Our ability to predict the results of the effect of future plans and strategies is inherently uncertain. Some of the risks and uncertainties that may affect the operations, performance, development and results of CNB Financial Services, Inc.’s business include:

•		Changes in market interest rates;
•		Local and national economic trends and conditions;
•		Competition for products and services among community, regional and national financial institutions;
•		New services and product offerings by competitors;
•		Changes in customer preferences;
•		Changes in technology;
•		Legislative and regulatory changes;
•		General economic conditions may become unfavorable resulting in reduced credit quality or demand for loans;
•		Delinquency rates on loans;
•		Additional assessments may be imposed by the FDIC;
•		Additional expense to the provision for loan losses may be greater than anticipated;
•		Loan activity may continue to be soft in the commercial real estate portfolio with very little generation of new loans;
•		Real estate activity for 2010 in the Eastern Panhandle of West Virginia may not improve;
•		Changes in accounting principles, policies or guidelines; and
•		Current economic environment.

     You should consider these factors in evaluating any forward-looking statements and not place undue reliance on such statements. We are not obligated to publicly update any forward looking statements we may make in this Form 10-K or our Annual Report to reflect the impact of subsequent events.

Part I

Item 1. DESCRIPTION OF BUSINESS

ORGANIZATIONAL HISTORY AND SUBSIDIARIES

     CNB Financial Services, Inc. (the “Company”) was organized under the laws of West Virginia on March 20, 2000, at the direction of the Board of Directors of CNB Bank, Inc. (the “Bank”) for the purpose of becoming a financial services holding company. The Company and its subsidiary are collectively referred to herein as “CNB.”

     A special meeting of the Bank’s shareholders was held on August 4, 2000, and the shareholders approved the Agreement and Plan of Merger between the Bank and the Company, whereby the Bank became a wholly-owned subsidiary of the Company and the shareholders of the Bank became shareholders of the Company. The merger became effective on August 31, 2000. Each Bank shareholder received two shares of the Company stock for each share of the Bank’s common stock. On August 31, 2000, the Company consummated its merger with the Bank and subsidiary, in a tax-free exchange of stock. Shareholders of the Bank received two shares of CNB Financial Services, Inc. common stock for each of the 229,024 shares of the Bank’s common stock. The merger was accounted for as a pooling of interests.

     CNB became a 50% member of a limited liability company, Morgan County Title Insurance Agency, LLC in February 2001, for the purpose of selling title insurance. As of January 2003, CNB’s percentage of ownership in Morgan County Title Insurance Agency, LLC decreased to 33%. On August 31, 2009, Morgan County Title Insurance Agency, LLC was dissolved and the final distribution was made during the fourth quarter 2009.

     The Bank was organized on June 20, 1934 and has operated as a national banking association continuously until October 16, 2006, at which time the Bank obtained a West Virginia state charter and began operating as a state banking association.

EMPLOYEES

     As of December 31, 2009 and 2008, CNB employed 91 and 95 full-time equivalent employees, respectively.

BUSINESS OF CNB FINANCIAL SERVICES, INC. AND CNB BANK, INC.

     The Company’s primary function is to direct, plan and coordinate the business activities of the Bank and its subsidiary.

     CNB Bank, Inc. is a full-service commercial bank conducting general banking and trust activities through six full-service offices and six automated teller machines located in Morgan and Berkeley Counties, West Virginia and Washington County, Maryland.

     CNB Bank, Inc. accepts time, demand and savings deposits including NOW accounts, regular savings accounts, money market accounts, fixed-rate certificates of deposit and club accounts. In addition, the Bank provides safe deposit box rentals, wire transfer services and 24-hour ATM services through a regional network known as STAR. STAR is a participant in the nationwide Cirrus network.

     The Bank offers a full spectrum of lending services to its customers, including commercial loans and lines of credit, residential real estate loans, consumer installment loans and other personal loans. Commercial loans are generally secured by various collateral, including commercial real estate, accounts receivable and business machinery and equipment. Residential real estate loans consist primarily of mortgages on the borrower’s personal residence, and are typically secured by a first lien on the subject property. Consumer and personal loans are generally secured, often by first liens on automobiles, consumer goods or depository accounts. A special effort is made to keep loan products as flexible as possible within the guidelines of prudent banking practices in terms of interest rate risk and credit risk. Bank lending personnel adhere to established lending limits and authorities based on each individual’s lending expertise and experience.

     The Bank’s trust department acts as trustee under trusts and wills, as executor of wills and administrator of estates, as guardian for estates of minors and incompetents and serves in various corporate trust capacities.

     The Eastern Panhandle of West Virginia has been hit hard by the national and global downturn. Recent estimates suggest the region lost jobs at a rate of -3.6%, compared to the state rate of -3.0% and the U.S. rate of -3.9% from the second quarter of 2009 to the same quarter in 2009. The unemployment rate in the Eastern Panhandle skyrocketed from 4.5% in the second quarter of 2009 to 8.7% during the same period of 2009. The state of West Virginia and the nation also recorded similar spikes at 8.5% and 9.1%, respectively.

     Population growth in the Eastern Panhandle has outpaced the surrounding metropolitan areas, the state and the nation. The Eastern Panhandle population increased from 146,179 residents in 2003 to 169,984 in 2008 which translates into an annual

growth rate of 3.1%. The Eastern Panhandle also added new jobs at a rate of 1.6% per year during the 2003-2008 period, outpacing West Virginia at .9% per year and the United States at 1.1% per year.

     With the bursting of the housing bubble, housing activity has decreased dramatically. Residential construction starts have declined 70.4% in 2009 from 2008. Nonbuilding construction starts have also shown a declining trend in recent years. In 2007, nonbuilding construction starts in the Eastern Panhandle were $206.6 million. Since then, however, nonbuilding have plummeted 55.5% in 2008 and another 80.0% in 2009.

     Similarly to the plummeting of residential construction starts, the bursting of the housing bubble is also reflected in the price of houses. From the second quarter of 2008 to the same quarter of 2009, house prices declined by 4.0% nationally while house prices held up better in West Virginia only falling by 1.5% during the same period. The Eastern Panhandle along with the many surrounding metropolitan areas have suffered much more severely than the national trend posting major declines in house prices during the past two years.

     The outlook for the Eastern Panhandle calls for employment to grow from 2010 through 2013 at a rate of 1.4% per year, as the national and world economies accelerate out of a particularly severe downturn. Construction jobs stabilize during the next two years and then begin to grow slowly during 2012-2013. Rebounding job growth drives per capita personal income higher with growth expected to average 1.3% per year. Population growth in the Eastern Panhandle is expected to average 2.1% per year during the next five years while the unemployment rate is forecast to surge to 8.5% in 2010 and then gradually descend to 6.5% by 2013.

COMPETITION

     CNB Bank, Inc. faces a high degree of competition for all its services from local banks. Within its market area of Morgan and Berkeley Counties in West Virginia and Washington County in Maryland, numerous competing commercial banks exist.

     Nonbank competition has also increased in recent years locally by the establishment of finance and mortgage companies and the expansion of insurance operations and credit unions, as well as from mutual funds located throughout the country.

     West Virginia banks are allowed unlimited branch banking throughout the State. The Interstate Banking and Branch Efficiency Act of 1994 also authorizes interstate branching by acquisition and consolidation nationwide. These and similar provisions impacting both the banking and thrift industries may serve to intensify future competition within the Bank’s market.

AVAILABLE INFORMATION

     Our Internet address is www.cnbwv.com. The Securities and Exchange Commission (“SEC”) maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, and our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, any document filed by the company with the SEC can be read and copied at the SEC’s public reference facilities at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Copies of documents can also be obtained free of charge by any shareholder by writing to Rebecca S. Stotler, Senior VP/CFO, CNB Financial Services, Inc., 101 S. Washington Street, Berkeley Springs, WV 25411.

SUPERVISION AND REGULATION

     The following is a summary of certain statutes and regulations affecting the Company and its subsidiaries and is qualified in its entirety by reference to such statutes and regulations:

          Bank Holding Company Regulation. The Company is a bank holding company under the Bank Holding Company Act of 1956 (“BHCA”), which restricts the activities of the Company and any acquisition by the Company of voting stock or assets of any bank, savings association or other company. The Company is subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board. The Company’s subsidiary bank is subject to restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the Company or its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the Company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the Company and other subsidiaries. The Bank is prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board. The

Company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the Company or its subsidiaries.

          On July 30, 2002, the Senate and the House of Representatives of the United State (Congress) enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. The New York Stock Exchange proposed corporate governance rules that were enacted by the Securities and Exchange Commission. The changes are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors.

          Effective August 29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, the Bank’s chief executive officer and chief financial officer are each required to certify that CNB’s Quarterly and Annual Reports do not contain any untrue statement of a material fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining, and regularly evaluating the effectiveness of CNB’s internal controls; they have made certain disclosures to CNB’s auditors and the audit committee of the Board of Directors about CNB’s internal controls; and they have included information in CNB’s Quarterly and Annual Reports about their evaluation and whether there have been significant changes in CNB’s internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. As of October 5, 2009, the audit requirements related to internal controls contained in Section 404 of Sarbanes-Oxley have been delayed until 2010.

          The BHCA also permits the Company to purchase or redeem its own securities. However, Regulation Y provides that prior notice must be given to the Federal Reserve Board if the gross consideration for such purchase or consideration, when aggregated with the net consideration paid by the Company for all such purchases or redemptions during the preceding 12 months, is equal to 10 percent or more of the Company’s consolidated net worth. Prior notice is not required if (i) both before and immediately after the redemption, the bank holding company is well-capitalized; (ii) the financial holding company is well-managed and (iii) the bank holding company is not the subject of any unresolved supervisory issues.

          The Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999) permits bank holding companies to become financial holding companies. This allows them to affiliate with securities firms and insurance companies and to engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

          The Financial Services Modernization Act defines “financial in nature” to include: securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating.

          On October 14, 2008, under authority granted by the Emergency Economic Stabilization Act of 2008 (the “EESA”), the United States Department of the Treasury adopted the Troubled Asset Relief Program (“TARP”) and the Capital Purchase Program (the “CPP”) whereby the Treasury will purchase up to $250 billion of preferred stock and warrants to be issued by United States banks, savings associations and their holding companies. CNB has analyzed the TARP program and has elected not to participate in this program at this time.

          Bank Subsidiary Regulation. The Bank converted from a national bank to a state bank in 2006 and is regulated by the West Virginia Division of Banking and the Federal Deposit Insurance Corporation. The Bank is also subject to supervision, examination and regulation by the Federal Reserve System, and as such is subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder.

          The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law. Accordingly, the Bank is also subject to regulation by the FDIC. The FDIC may terminate a bank’s deposit insurance upon finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank’s regulatory agency.

          Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. The base assessment rate was increased by seven basis points (7 cents for every $100 of deposits) for the first quarter of 2009. Effective April 1,

2009, initial base assessment rates were changed to range from 12 basis points to 45 basis points across all risk categories with possible adjustments to these rates based on certain debt-related components. These increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounted to 5 basis points on each institution’s assets minus tier one (core) capital as of June 30, 2009, subject to a maximum equal to 10 basis points times the institution’s assessment base. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was approximately $130,000. The FDIC may impose additional emergency special assessments if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC will negatively impact our earnings.

          On November 12, 2009, the FDIC adopted a final rule requiring that all institutions prepay their assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. This pre-payment was due on December 30, 2009. However, the FDIC may exempt certain institutions from the prepayment requirement if the FDIC determines that the prepayment would adversely affect the safety and soundness of the institution. We were not granted an exemption to this prepayment requirement.

          The Bank is a member of the Federal Home Loan Bank of Pittsburgh. The FHLB provided credit to its member in the form of advances. As a member of the FHLB of Pittsburgh, the bank must maintain an investment in the capital stock of that FHLB in an amount equal to the greater of 1% of the aggregate outstanding principal amount of its respective residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year or 5% of its advances from the FHLB.

Capital Requirements

          As a bank holding company, the Company is subject to Federal Reserve Board risk-based capital guidelines. The guidelines establish a systematic framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures into account and minimizes disincentives to holding liquid, low-risk assets. Under the guidelines, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance-sheet commitments into four weighted categories, with higher levels of capital being required for categories perceived as representing greater risk. The Bank is subject to substantially similar capital requirements adopted by its applicable regulatory agencies. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a regulatory framework which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution’s capital category. Among other things, FDICIA authorized regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Company is well capitalized as detailed in Note 20: Regulatory Matters in the Notes to Consolidated Financial Statements.

Federal and State Laws

          The Bank is subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of a bank to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent a bank lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas.

Monetary Policy and Economic Conditions

          The business of financial institutions is affected not only by general economic conditions, but also by the policies of various governmental regulatory agencies, including the Federal Reserve Board. The Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions primarily through open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in the reserve requirements against depository institutions’ deposits. These policies and regulations significantly affect the overall growth and distribution of loans, investments and deposits, and the interest rates charged on loans, as well as the interest rates paid on deposits and accounts.

          The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to have significant effects in the future. In view of the changing conditions in the economy and the money markets and the activities of monetary and fiscal authorities, the Company cannot definitely predict future changes in interest rates, credit availability or deposit levels.

Effect of Environmental Regulation

          The Bank’s primary exposure to environmental risk is through its lending activities. In cases when management believes environmental risk potentially exists, the Bank mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

          With regard to residential real estate lending, management reviews those loans with inherent environmental risk on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit.

          The Company anticipates no material effect on anticipated capital expenditures, earnings or competitive position as a result of compliance with federal, state or local environmental protection laws or regulations.

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (U.S. Patriot Act)

          The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the “Patriot Act”) was adopted in response to the September 11, 2001 terrorist attacks. The Patriot Act provides law enforcement with greater powers to investigate terrorism and prevent future terrorist acts. Among the broad-reaching provisions contained in the Patriot Act are several designed to deter terrorists’ ability to launder money in the United States and provide law enforcement with additional powers to investigate how terrorists and terrorist organizations are financed. The Patriot Act creates additional requirements for banks, which were already subject to similar regulations. The Patriot Act authorizes the Secretary of the Treasury to require financial institutions to take certain “special measures” when the Secretary suspects that certain transactions or accounts are related to money laundering. These special measures may be ordered when the Secretary suspects that a jurisdiction outside of the United States, a financial institution operating outside of the United States, a class of transactions involving a jurisdiction outside of the United States or certain types of accounts are of “primary money laundering concern.” The special measures include the following: (a) require financial institutions to keep records and report on the transactions or accounts at issue; (b) require financial institutions to obtain and retain information related to the beneficial ownership of any account opened or maintained by foreign persons; (c) require financial institutions to identify each customer who is permitted to use a payable-through or correspondent account and obtain certain information from each customer permitted to use the account; and (d) prohibit or impose conditions on the opening or maintaining of correspondent or payable-through accounts.

          We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or laws could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. New legislation proposed by Congress may give bankruptcy courts the power to reduce the increasing number of home foreclosures by giving bankruptcy judges the authority to restructure mortgages and reduce a borrower’s payments. Property owners would be allowed to keep their property while working out their debts. Other similar bills placing additional temporary moratoriums on foreclosure sales or otherwise modifying foreclosure procedures to the benefit of borrowers and the detriment of lenders may be enacted by either Congress or the States of West Virginia, Pennsylvania or Maryland in the future. These laws may further restrict our collection efforts on one-to-four single-family mortgage loans. Additional legislation proposed or under consideration in Congress would give current debit and credit card holders the chance to opt out of an overdraft protection program and limit overdraft fees, which could result in additional operational costs and a reduction in our non-interest income.

          Further, our regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by financial institutions and holding companies in the performance of their supervisory and enforcement duties. In this regard, banking regulators are considering additional regulations governing compensation, which may adversely affect our ability to attract and retain employees. On June 17, 2009, the Obama Administration published a comprehensive regulatory reform plan that is intended to modernize and protect the integrity of the United States financial system. The President’s plan contains several elements that would have a direct effect on us. The reform plan proposes the creation of a new federal agency, the Consumer Financial Protection Agency, which would be dedicated to protecting consumers in the financial products and services market. The creation of this agency could result in new regulatory requirements and raise the cost of regulatory compliance. In addition, legislation stemming from the reform plan could require changes in regulatory capital requirements, and compensation practices. If implemented, the foregoing regulatory reforms may have a material impact on our operations. However, because the legislation needed to implement the President’s reform plan has not been introduced, and because the final legislation may differ significantly from the legislation proposed by the Administration, we cannot determine the specific impact of regulatory reform at this time.

Item 1A. RISK FACTORS

     This report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed elsewhere in this report.

The banking business is very competitive.

     The banking business is generally a highly competitive business. Our total assets have grown over the past four years from approximately $259.0 million at December 31, 2005, to $289.5 million at December 31, 2009. Our business plan calls for minimal growth over the next three years. Our ability to continue to grow depends, in part, upon our ability to successfully attract deposits and identify favorable loan and investment opportunities. In the event that we do not continue to grow, our results of operations could be adversely impacted.

     Our ability to grow successfully will depend on whether we can continue to fund this growth while maintaining cost controls and asset quality, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to control costs and maintain asset quality, such growth could adversely impact our earnings and financial condition.

     As of June 30, 2009, based on an FDIC analysis done as of June 30 each year, there were fourteen other banks in CNB’s market area. The total Morgan County commercial bank deposits, which include a total of five banking offices, as of June 30, 2009, were in excess of $242.6 million. The total Berkeley County commercial bank deposits, which include a total of thirty one banking offices, as of June 30, 2009, were in excess of $1.0 billion. The total Hancock, Maryland commercial bank deposits, which include three banking offices, as of June 30, 2009, were in excess of $90.1 million. At this same date CNB had a 71.7% share of the Morgan County commercial bank deposits, a 3.4% share of the Berkeley County commercial bank deposits and a 40.8% share of the Hancock, Maryland commercial bank deposits. CNB represents Morgan County’s only locally owned bank, as the other existing commercial banks have their parent-Bank headquarters in Charleston, West Virginia (City National) and Charlotte, North Carolina (BB&T).

     For most of the services which CNB provides, there is also competition from financial institutions other than commercial banks in attracting deposits and in making loans with local offices and those that do business over the internet. We compete for loans principally through the interest rates and loan fees we charge and the efficiency and quality of services we provide. Increasing levels of competition in our banking and financial services businesses may reduce our market share or cause the prices we charge for our services to fall. Our results may differ in future periods depending upon the nature or level of competition. In addition, some traditional banking services or competing services are offered by insurance companies, investment counseling firms and other business firms and individuals. Many of CNB’s competitors have significantly greater financial and marketing resources than we have.

     The existence of larger financial institutions in Morgan and Berkeley Counties, West Virginia and Washington County, Maryland, some of which are owned by larger regional or national companies, influence the competition in CNB’s market area. The principal competitive factors in the market for deposits and loans are interest rates, either paid on deposits or charged on loans. West Virginia law allows statewide branch banking which provides increased opportunities for CNB, but it also increases the potential competition for our service area. In addition, in 1994, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act. Under this Act, absent contrary action by a state’s legislature, interstate branch banking was allowed to occur after June 1, 1997. States are permitted to elect to participate to a variety of degrees in interstate banking or states may elect to “opt out.” In 1996, the West Virginia Legislature elected to “opt in.” Accordingly, out-of-state banks may form de novo banks or may acquire existing branches of West Virginia banks on a reciprocal basis.

 In the future, CNB’s lending limit could create a competitive disadvantage.

     In the future, CNB may not be able to attract larger volume customers because the size of loans that CNB can offer to potential customers is less than the size of the loans that many of CNB’s larger competitors can offer. Accordingly, CNB may lose customers seeking large loans to mortgage companies, larger commercial banks and other financial institutions. We anticipate that our lending limit will continue to increase proportionately with CNB’s growth in earnings; however, CNB may not be able to successfully attract or maintain larger customers.

CNB engages in commercial and consumer lending activities which are riskier than residential real estate lending.

     CNB makes loans that involve a greater degree of risk than loans involving residential real estate lending. Commercial business loans may involve greater risks than other types of lending because they are often made based on varying forms of collateral, and repayment of these loans often depends on the success of the commercial venture. Consumer loans may involve greater risk because adverse changes in borrowers’ incomes and employment after funding of the loans may impact their abilities to repay the loans.

     CNB’s loan portfolio at December 31, 2009, consists of the following:

Type of Loan		Percentage of Portfolio
Residential Real Estate Loans			66	%
Commercial Loans, principally real estate secured			26	%
Consumer Loans			8	%

CNB has limited control over its profitability because CNB cannot control the various factors that can cause fluctuations in interest rates.

     Aside from credit risk, the most significant risk resulting from CNB’s normal course of business, extending loans and accepting deposits, is interest rate risk. If market interest rate fluctuations cause CNB’s cost of funds to increase faster than the yield of its interest-earning assets, then its net interest income will be reduced. CNB’s results of operations depend to a large extent on the level of net interest income, which is the difference between income from interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond CNB’s control, including general economic conditions and the policies of various governmental and regulatory authorities. In establishing interest rates on deposit accounts, CNB considers various factors, including rates offered by competing institutions in their local market. In doing so, CNB tries to offer interest rates which fall in the mid range of the local competing financial institutions.

     To effectively monitor the interest rate risk discussed above, CNB uses a computer model to project the change in net interest income under various changes in interest rates. To provide guidance to management, CNB’s board of directors, through its Asset/Liability/Investment Committee, has established a policy related thereto which includes interest rate risk parameters within which to operate. As of December 31, 2009, CNB’s interest rate risk is within the parameters.

CNB’s success depends on CNB’s management team.

     The departure of one or more of CNB’s officers or other key personnel could adversely affect CNB’s operations and financial position. The Company’s management makes most decisions that involve CNB’s operations. The key personnel have all been with CNB since 2001. They include Thomas F. Rokisky, Patricia C. Muldoon and Rebecca S. Stotler.

An economic slowdown in our market area could hurt CNB’s business.

     Because we focus our business in the Eastern Panhandle of West Virginia and the western part of Maryland, an economic slowdown in these areas could hurt our business. An economic slowdown could have the following consequences:

	•		Loan delinquencies may increase;
	•		Problem assets and foreclosures may increase;
	•		Demand for the products and services of CNB may decline; and
	•		Collateral (including real estate) for loans made by CNB may decline in value, in turn reducing customers’ borrowing power and making existing loans less secure.

     The slowdown in both the local and national markets has caused an increase in delinquencies and loan foreclosures. Management anticipates this trend to continue into 2010.

The global financial crisis may have an adverse affect on our Bank, business and results of operations.

     Significant declines in the housing market in recent months, falling home prices, increased foreclosures and unemployment as well as problems affecting the automobile industry and business in general may adversely affect the Bank’s loan demand as customers may be reluctant to borrow in this economic environment. Additionally, the economic downturn may result in some of the Bank’s borrowers being unable to make loan repayments and may result in foreclosures and the Bank recording writedowns which would adversely affect the Bank’s results of operations.

     The Bank’s investments are exposed to various risks, such as interest rate, market, currency and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the financial statements.

     In addition, recent economic uncertainty and market events have led to unprecedented volatility in currency, commodity, credit and equity markets culminating in failures of some banking and financial services firms and Government intervention to solidify others. These recent events underscore the level of investment risk associated with the current economic environment, and accordingly the level of risk in the Bank’s investments.

CNB is highly regulated.

     The operations of CNB are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on them. Policies adopted or required by these governmental authorities can affect CNB’s business operations and the availability, growth and distribution of CNB’s investments, borrowings and deposits.

CNB may incur increased charge-offs and additional loan loss provision due to negative credit in the future.

     In the future, CNB could experience negative credit quality trends that could lead to a deterioration of asset quality. Such deterioration could require CNB to incur loan charge-offs in the future and incur additional loan loss provision, both of which would have the effect of decreasing earnings.

Marketability of Common Stock.

      There is no active market for our outstanding shares, and it is unlikely that an established market for our shares will develop in the near future. We presently do not intend to seek listing of the shares on any securities exchange, or quotation on the Nasdaq interdealer quotation system. It is not known whether significant trading activity will take place for several years, if at all. Accordingly, a shareholder may not be able to sell their shares immediately upon offering them for sale.

Item 2. PROPERTIES

CNB Financial Services, Inc.

     CNB’s headquarters are located at the main office of CNB Bank, Inc. located at 101 South Washington Street, Berkeley Springs, West Virginia.

CNB Bank, Inc.

     The principal executive office and main banking office is located at 101 South Washington Street, Berkeley Springs, West Virginia. In addition, the bank has owned and operated a full service branch bank located at 1610 Valley Road, Berkeley Springs, West Virginia since 1991. In October 1998, the bank opened a full service branch located at 2646 Hedgesville Road, Martinsburg, West Virginia. In March 2002, the bank opened a full service branch located at 14994 Apple Harvest Drive, Martinsburg, West Virginia. In April 2005, the bank opened an additional full service branch located at 1231 T.J. Jackson Drive, Falling Waters, West Virginia. On June 11, 2004, CNB purchased certain assets and liabilities associated with the Hancock Branch of Fidelity Bank, a subsidiary bank of Mercantile Bankshares Corporation (formerly Home Federal). CNB assumed responsibility for all the deposit services including checking, savings and certificate of deposits. CNB also acquired loans, equipment and leasehold improvements and assumed the lease for the real estate located at 333 East Main Street, Hancock, Maryland. Each of the bank’s locations provides ATM services, in addition to traditional lobby and drive-in services. The main office and branches are owned free and clear of any indebtedness. The bank owns all of the facilities described above with the exception of the Hancock, Maryland branch on which the bank owns improvements situated on leased land. Management believes that the facilities are of sound construction, in good operating condition, are appropriately insured and are adequately equipped for carrying on the business of the Company. The net book value of the bank’s premises and equipment as of December 31, 2009, is $5.6 million.

Item 3. LEGAL PROCEEDINGS

     In the ordinary course of business, the Bank and its subsidiary are involved in various legal proceedings.

     In the opinion of the management of CNB, there are no proceedings pending to which CNB is a party or to which its property is subject, which, if determined adversely to CNB, would be material in relation to CNB’s financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of CNB. In addition, no material proceedings are pending or are known to be threatened or contemplated against CNB by government authorities.

Item 4. (REMOVED AND RESERVED)

Part II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     The stock of CNB Financial Services, Inc., and prior to the formation of CNB, the Bank, is not listed on an exchange and is not heavily traded. The trades that have occurred are those that, to management’s knowledge, have been individually arranged. The prices listed below are based upon information available to management through discussions with shareholders, and to management’s knowledge, represent the amount at which its stock was traded during the periods indicated. Prices reflect amounts paid by purchasers of the stock and, therefore, may include commissions or fees. The amounts of such commissions or fees, if any, are not known to management. No attempt was made by management to ascertain the prices for every sale made during these periods.

     Based on information that management is aware of, the majority of shares sold during 2009 and 2008 were at a price that ranged from $45 to $80 per share. Book value per share increased from $51.69 at December 31, 2008, to $57.77 at December 31, 2009.

     On August 23, 2007, the Board of Directors approved a stock repurchase program to repurchase issued shares of common stock of CNB Financial Services, Inc. Management is authorized to repurchase up to 45,804 shares or 10% of the outstanding shares of CNB Financial Services, Inc. common stock at the prevailing fair market value. The stock repurchase program will terminate upon the repurchase of 45,804 shares. Through this program as of December 31, 2009, shareholders’ equity has been reduced by $825,068 through the repurchase of 14,400 shares of CNB Financial Services, Inc. common stock of which 1,800 shares was purchased in the fourth quarter. Below is a listing of the shares repurchased during the fourth quarter of 2009.

		Total Number								Total Number of Shares Purchased				Maximum Number of Shares
		of Shares				Average Price				as Part of Publicly Announced				that may yet be purchased under
Period		Purchased				Paid per Share				Plans or Programs				the Plans or Programs
Beginning balance September 30, 2009											12,600				33,205
October 1, 2009 October 31, 2009			600			$	46.60				600				32,605
November 1, 2009 November 30, 2009			1,200			$	45.25				1,200				31,405
December 1, 2009 December 31, 2009			—			$	—				—				31,405
Total			1,800								14,400

     Dividends which have been declared by the Board of Directors semiannually, decreased from $1.90 per share in 2008 to $1.55 per share in 2009, an 18.4% decrease. The ability of CNB to pay dividends is subject to certain limitations imposed by various banking regulations. See Note 20: Regulatory Matters in the Notes to Consolidated Financial Statements for a more detailed discussion on the limitations. As of February 25, 2010, the number of record holders excluding individual participants in securities positions listings was 663.

The prices listed below represent the high and low market prices for stock trades reported during each quarter.

										Per Share
		High				Low				Dividend
2009
First quarter		$	66.00			$	47.00
Second quarter		$	60.00			$	44.50			$	0.53
Third quarter		$	46.70			$	46.70
Fourth quarter		$	46.60			$	45.25			$	1.02
2008
First quarter		$	80.00			$	65.00
Second quarter		$	67.00			$	65.50			$	0.53
Third quarter		$	63.50			$	63.50
Fourth quarter		$	63.85			$	49.40			$	1.37

     CNB’s stock is not traded on an established exchange and there are no known market makers, therefore there is no established public trading market for CNB’s stock. The prices listed above are based upon information available to management through discussions with shareholders, and to management’s knowledge, represent the amount at which its stock was traded during the periods indicated. Prices reflect amounts paid by purchasers of the stock and, therefore, may include commissions or fees. The amounts of such commissions or fees, if any, are not known to management. No attempt was made by management to ascertain the prices for every sale made during these periods.

Item 6. SELECTED FINANCIAL DATA

TABLE 1. FIVE YEAR SELECTED CONSOLIDATED FINANCIAL DATA

		2009				2008				2007				2006				2005
						In thousands except for per share data
At Year-End
Total assets		$	289,498			$	282,257			$	290,415			$	276,069			$	258,953
Securities available for sale			72,273				62,605				66,017				50,873				55,194
Loans and lease, net of unearned income			194,707				200,752				202,669				204,319				180,207
Deposits			252,292				227,895				226,645				233,083				219,288
Shareholders’ equity			25,630				23,218				22,821				20,322				19,008
Significant Ratios
Return on average assets			0.75	%			0.96	%			0.90	%			0.92	%			1.00	%
Return on average shareholders’ equity			8.88				11.66				11.88				12.46				12.91
Average shareholders’ equity to average assets			8.49				8.21				7.55				7.35				7.76
Net interest margin			3.71				3.92				3.53				3.77				4.12
Summary of Operations
Interest income		$	15,642			$	16,995			$	17,201			$	15,989			$	13,420
Interest expense			5,412				6,307				7,725				6,269				3,850
Net interest income			10,230				10,688				9,476				9,720				9,570
Provision for loan losses			1,853				940				169				275				352
Net interest income after provision for loan losses			8,377				9,748				9,307				9,445				9,218
Non-interest income			2,172				2,241				2,400				1,968				2,007
Non-interest expense			7,834				7,967				8,012				7,760				7,541
Income before income taxes and discontinued operations			2,715				4,022				3,695				3,653				3,684
Discontinued operations			—				—				—				124				—
Income tax expense			565				1,307				1,191				1,308				1,238
Net income			2,150				2,715				2,504				2,469				2,446
Per Share Data
Net income		$	4.82			$	6.01			$	5.48			$	5.39			$	5.34
Cash dividends			1.55				1.90				1.69				1.54				1.44
Net book value			57.77				51.69				50.16				44.37				41.50

TABLE 2. SELECTED QUARTERLY FINANCIAL DATA

		2009
		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
		In thousands
Interest income		$	3,977			$	3,894			$	3,900			$	3,871
Interest expense			1,346				1,343				1,354				1,369
Net interest income			2,631				2,551				2,546				2,502
Provision for loan losses			390				375				400				688
Noninterest income			570				551				543				508
Noninterest expense			1,910				2,013				1,881				2,030
Income before income taxes			901				714				808				292
Provision for income taxes			269				201				194				(99	)
Net income		$	632			$	513			$	614			$	391
Basic earnings per share		$	1.41			$	1.15			$	1.38			$	0.88

		2008
		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
		In thousands
Interest income		$	4,351			$	4,178			$	4,218			$	4,248
Interest expense			1,793				1,572				1,531				1,411
Net interest income			2,558				2,606				2,687				2,837
Provision for loan losses			105				120				160				556
Noninterest income			581				589				589				482
Noninterest expense			1,869				1,926				1,991				2,180
Income before income taxes			1,165				1,149				1,125				583
Provision for income taxes			386				379				372				170
Net income		$	779			$	770			$	753			$	413
Basic earnings per share		$	1.71			$	1.70			$	1.67			$	0.93

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis presents the significant changes in financial condition and results of operations of CNB, for the full fiscal years ended December 31, 2009 and 2008. This discussion and analysis should be read in conjunction with the audited, consolidated financial statements and accompanying notes. This discussion includes forward-looking statements based upon management’s expectations; actual results may differ. Amounts and percentages used in this discussion have been rounded. All average balances are based on monthly averages.

CRITICAL ACCOUNTING POLICIES

     CNB’s financial position and results of operations are impacted by management’s application of accounting policies involving judgments made to arrive at the carrying value of certain assets. Management’s greatest challenge in implementing its policies is the need to make estimates about the effect of matters that are inherently less than certain. For a detailed discussion of CNB’s significant accounting policies, see Note 1: Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. A material estimate that is susceptible to significant change is the determination of the allowance for loan losses. Both the estimates of the amount of the allowance for loan losses and the placement of loans on non-accrual status affect the carrying amount of the loan portfolio and accrued interest receivable.

     The allowance for loan losses is a subjective judgment that management must make regarding the loan portfolio, and is established and maintained at levels that management believes are adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Where there is a question as to the impairment of a specific loan, management obtains valuations of the property or collateral securing the loan, and current financial information of the borrower, including financial statements, when available. Since the calculation of appropriate loan loss allowances relies on management’s estimates and judgments relating to inherently uncertain events, actual results may differ from these estimates. For a more detailed discussion on the allowance for loan losses, see Nonperforming Loans and Allowance For Loan Losses in this Management’s Discussion and Analysis and Allowance for Loan Losses in Note 1: Summary of Significant Accounting Policies and Note 4: Loans and Leases Receivable in the Notes to Consolidated Financial Statements.

EARNINGS SUMMARY

     CNB had net income totaling $2.1 million or $4.82 per share, $2.7 million or $6.01 per share and $2.5 million or $5.48 per share for fiscal years 2009, 2008 and 2007, respectively. Annualized return on average assets and average equity were .8% and 8.9%, respectively, for 2009 compared to 1.0% and 11.7% for 2008 and .9% and 11.9% for 2007.

     Net income for the year 2010 is expected to be impacted by the continued slowing in the bank’s loan demand along with the possibility of additional writedowns on existing and potential foreclosed properties and loans. The Bank is anticipating an expense of approximately $1.4 million to the provision for loan losses during 2010 due to continued increase in past due loans, loans with weaknesses, impaired loans and foreclosed properties. Another factor affecting the 2010 net income is the increased expense of FDIC insurance which is expected to exceed $491,000 compared to $382,000 in 2009. The Federal Reserve amended Regulation E to required financial institutions to obtain a specific opt-in consent from customers in order for the institution to be able to pay into overdraft and charge an overdraft fee whenever a customer’s ATM transactions and one-time debit card transactions, such as point-of-sale transactions, cause an account to go into overdraft. This amendment will have an impact on the bank’s overdraft fee income in 2010.

NET INTEREST INCOME

     Net interest income represents the primary component of the bank’s earnings. It is the difference between interest and fee income related to earning assets and interest expense incurred to carry interest-bearing liabilities. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as by changing interest rates. In order to manage these changes, their impact on net interest income and the risk associated with them, the bank utilizes an ongoing asset/liability management program. This program includes analysis of the difference between rate sensitive assets and rate sensitive liabilities, earnings sensitivity to rate changes, and source and use of funds. A discussion of net interest income and the factors impacting it is presented below.

     Net interest income in 2009 decreased by $458,000 or 4.3% over 2008. Interest income in 2009 decreased by $1.4 million or 8.0% compared to 2008, while interest expense decreased by $896,000 or 14.2% during 2009 as compared to 2008. Interest income decreased during 2009 compared to 2008 as a result of a decrease in the average balance of loans and taxable securities offset by an increase in the average balances of tax exempt investment securities, certificates of deposit and federal funds sold. Average rates earned on interest earning assets also decreased during 2009 compared to 2008. Interest expense decreased during 2009 compared to 2008 as a result of a decrease in the average balance of borrowings offset by an increase in the average balance of savings, NOW accounts and time deposit accounts. A decrease in the average rates paid on all interest bearing liability accounts also contributed to the decrease in interest expense for 2009.

     Net interest income in 2008 increased by $1.2 million or 12.8% over 2007. Interest income in 2008 decreased by $206,000 or 1.2% compared to 2007, while interest expense decreased by $1.4 million or 18.4% during 2008 as compared to 2007. Interest income decreased during 2008 compared to 2007 as a result of a decrease in the average balance of loans and federal funds sold offset by an increase in the average balances of investment securities. Average rates earned on interest earning assets also decreased during 2008 compared to 2007. Interest expense decreased during 2008 compared to 2007 as a result of a decrease in the average balance of savings, NOW accounts and money market accounts offset by an increase in the average balance of time deposit accounts and borrowings. A decrease in the average rates paid on all interest bearing liability accounts also contributed to the decrease in interest expense for 2008.

     During 2009, the bank used funds generated from deposit growth to fund the purchase of investment securities and decrease borrowings. During 2008, the bank used funds generated from FHLB borrowings and time deposit account growth to fund the purchase of investment securities and loan commitments.

     The net interest margin is impacted by the change in the spread between yields on earning assets and rates paid on interest bearing liabilities. Net interest margin decreased from 2008 to 2009. See Table 3 — Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential.

TABLE 3. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL

`		DECEMBER 31, 2009												DECEMBER 31, 2008												DECEMBER 31, 2007
		YTD				YTD				YIELD/				YTD				YTD				YIELD/				YTD				YTD				YIELD/
		AVERAGE												AVERAGE												AVERAGE
		BALANCE				INTEREST				RATE				BALANCE				INTEREST				RATE				BALANCE				INTEREST				RATE
		In thousands
Interest earning assets:
Federal funds sold		$	2,428			$	7				0.16	%		$	—			$	—				—	%		$	701			$	37				4.97	%
Certificates of deposit			2,578				18				0.70				—				—				—				—				—				—
Securities:
Taxable			43,666				2,084				4.77				49,888				2,514				5.04				45,820				2,192				4.78
Tax-exempt (1)			20,788				687				5.01				14,776				510				5.23				11,100				386				5.27
Loans (net of unearned interest) (2) (4) (5)			200,177				12,618				6.30				202,803				13,757				6.78				204,045				14,356				7.04
Total interest earning assets (1)		$	269,637			$	15,414				5.72	%		$	267,467			$	16,781				6.27	%		$	261,666			$	16,971				6.49	%
Nonearning assets:
Cash and due from banks		$	6,470											$	6,590											$	7,573
Bank premises and equipment, net			5,712												5,970												6,249
Other assets			6,694												5,704												5,688
Allowance for loan losses			(3,181	)											(2,292	)											(2,171	)
Total assets		$	285,332											$	283,439											$	279,005
Interest bearing liabilities:
Savings deposits		$	24,750			$	29				0.12	%		$	23,540			$	69				0.29	%		$	25,335			$	119				0.47	%
Time deposits			140,905				4,945				3.51				125,689				5,148				4.10				122,639				5,632				4.59
NOW accounts			22,399				108				0.48				22,348				202				0.90				31,534				772				2.45
Money market accounts			12,726				24				0.19				12,801				120				0.94				13,252				287				2.17
Borrowings			12,669				306				2.42				30,538				768				2.51				18,173				915				5.03
Total interest bearing liabilities		$	213,449			$	5,412				2.54	%		$	214,916			$	6,307				2.93	%		$	210,933			$	7,725				3.66	%
Noninterest bearing liabilities:
Demand deposits		$	42,102											$	41,209											$	42,575
Other liabilities			5,568												4,039												4,424
Shareholders’ equity			24,213												23,275												21,073
Total liabilities and shareholders’ equity		$	285,332											$	283,439											$	279,005
Net interest income (1)						$	10,002											$	10,474											$	9,246
Net interest spread (3)											3.18	%											3.34	%											2.83	%
Net interest income to average interest earning assets (1)											3.71	%											3.92	%											3.53	%

     Table 4 sets forth a summary of the changes in interest earned and interest expense detailing the amounts attributable to (i) changes in volume (change in average volume times the prior year’s average rate), and (ii) changes in rate (change in the average rate times the prior year’s average volume). The changes in rate/volume (change in the average volume times the change in the average rate), had been allocated to the changes in volume and changes in rate in proportion to the relationship of the absolute dollar amounts of the change in each. During 2009, net interest income decreased $922,000 due to changes in volume and increased $450,000 due to changes in interest rates. Also, net interest income was affected by a $13,000 increase in loan fees. In 2008, net interest income increased $841,000 due to changes in volume and increased $387,000 due to changes in interest rates. Also, net interest income was affected by a $15,000 decrease in loan fees.

TABLE 4. VOLUME AND RATE ANALYSIS OF CHANGES IN INTEREST INCOME

(Taxable equivalent basis)		2009 over 2008												2008 over 2007
		Change due to								Total				Change due to								Total
		Volume				Rate				Change				Volume				Rate				Change
		In thousands
Interest earned on:
Federal funds sold		$	7			$	—			$	7			$	(23	)		$	(14	)		$	(37	)
Certificates of deposit			18				—				18				—				—				—
Taxable securities			(300	)			(130	)			(430	)			201				121				322
Tax-exempt securities			198				(21	)			177				128				(4	)			124
Loans			(176	)			(963	)			(1,139	)			(80	)			(519	)			(599	)
Total interest earned		$	(253	)		$	(1,114	)		$	(1,367	)		$	226			$	(416	)		$	(190	)
Interest expense on:
Savings deposits		$	3			$	(43	)		$	(40	)		$	(8	)		$	(42	)		$	(50	)
Time deposits			1,101				(1,304	)			(203	)			141				(625	)			(484	)
NOW accounts			—				(94	)			(94	)			(179	)			(391	)			(570	)
Money market accounts			(1	)			(95	)			(96	)			(8	)			(159	)			(167	)
Other borrowing			(434	)			(28	)			(462	)			(561	)			414				(147	)
Total interest expense		$	669			$	(1,564	)		$	(895	)		$	(615	)		$	(803	)		$	(1,418	)
Net interest income		$	(922	)		$	450			$	(472	)		$	841			$	387			$	1,228

     Another method of analyzing the change in net interest income is to examine the changes between interest rate spread and the net interest margin on earning assets. The interest rate spread as shown in Table 5 is the difference between the average rate earned on earning assets and the average rate paid on interest bearing liabilities. The net interest margin takes into account the benefit derived from assets funded by interest free sources such as non-interest bearing demand deposits and capital.

TABLE 5. INTEREST RATE SPREAD AND NET INTEREST MARGIN ON EARNING ASSETS

(Taxable equivalent basis)		2009								2008								2007
		Average								Average								Average
		Balance				Rate				Balance				Rate				Balance				Rate
		In thousands
Earning assets		$	269,637				5.72	%		$	267,467				6.27	%		$	261,666				6.49	%
Interest bearing liabilities		$	213,449				2.54	%		$	214,916				2.93	%		$	210,933				3.66	%
Interest rate spread							3.18	%							3.34	%							2.83	%
Interest free sources used to fund earning assets(1)			56,188				0.53	%			52,551				0.58	%			50,733				0.70	%
Total sources of funds		$	269,637							$	267,467							$	261,666
Net interest margin							3.71	%							3.92	%							3.53	%

     The following discussion analyzes changes in the bank’s spreads and margins in terms of basis points. A basis point is a unit of measure for interest rates equal to .01%. One hundred basis points equals 1%.

     Interest rate spread decreased 16 basis points in 2009 and the net interest margin decreased 21 basis points. The interest rate spread was negatively impacted by a 55 basis point decrease in earning asset yields offset by a 39 basis point decrease in interest bearing liability costs. Interest rate spread increased 51 basis points in 2008 and the net interest margin increased 39 basis points. The interest rate spread was positively impacted by a 73 basis point decrease in interest bearing liability costs offset by a 22 basis point decrease in earning asset yields.

     After dropping 400 basis points during 2008, the prime rate was unchanged for 2009. In 2009, loan yields decreased 48 basis points compared to a decrease of 26 basis points in 2008. Although the prime rate was unchanged during 2009, the effect of the 400 basis point changes during 2008 had a full year impact on yields during 2009. During the first quarter 2008 alone, the prime rate dropped 200 basis points. During the remainder of 2008, the pace of the declines in the prime rate slowed. Although, the prime rate moved by 400 basis points in 2008, the loan yields only decreased 26 basis points as compared to an increase of 26 basis points in 2007. The impact of the decrease of the prime rate was lessened due to the fact that 40.8% of the bank’s commercial real estate and real estate portfolio are fixed rates which the fluctuations in the prime rate do not affect. Interest rates on deposit accounts and other liabilities are tied to the shorter term rates such as the prime and federal funds rate. In 2009, liability costs decreased by 39 basis points primarily due to a decrease in the cost of funds on all deposit accounts offset by a slowing in the decrease in the cost of borrowing funds from FHLB. In 2008, liability costs decreased by 73 basis points primarily due to a decrease in the cost of funds on all deposit accounts along with a larger decrease in the cost of borrowing funds from FHLB.

PROVISION FOR LOAN LOSSES

     The amount charged to the provision for loan losses is based on Management’s evaluation of the loan portfolio. Management determines the adequacy of the allowance for loan losses based on past loan loss experience, current economic conditions and composition of the loan portfolio. The allowance for loan losses is the best estimate by Management of the probable losses which have been incurred as of the balance sheet date. See Nonperforming Assets and Allowance for Loan Losses for a comprehensive analysis.

NONINTEREST INCOME

     Noninterest income decreased $70,000 or 3.1% during 2009 over 2008. The decrease in 2009 was partially a result of decreases in overdraft account fees and trust fee income. The decrease in fees related to overdrafts is a result of the Bank’s customer base being much more aware of the status of their deposit accounts and proactive in keeping these accounts in a satisfactory condition. Trust fees decreased, although, the level of trust assets being managed during 2009 increased $4.4 million from the December 31, 2008 level of $32.7 million, the average assets under management decreased to $34.6 million, a decrease of $3.3 million or 8.8% from the average of $38.0 million in 2008. This decrease in average trust assets is due to market value decline. The decrease in trust fees over the decrease in trust assets in 2009 is due to additional assets being added to several large advisory accounts which have lower marginal rates.

     In January 2007, the bank began selling all fixed rate residential mortgage loans to secondary market investors. During 2009, 2008 and 2007, CNB originated and sold $7.8 million, $4.3 million and $5.4 million, respectively of loans to secondary market investors. Although, the volume of loans sold increased from 2008 to 2009, the yield spread premium the bank earned on these sold loans continued to shrink due to the competitiveness in the marketplace which resulted in a decrease in the gain on sales of loans of $16,000. Comparing 2008 to 2007, both the volume of loans sold decreased from $5.4 million to $4.3 million along with the yield spread premium earned on these loans resulting in a decrease of $35,000 in gain on sales of loans.

     Other factors contributing to the decrease in noninterest income for 2009 was smaller gains recorded on the sales and calls of investment securities, an increase in the losses recorded on the sales or writedowns of other real estate owned and repossessed assets. The reason for the smaller gains on the sales and calls of investment securities was due to in 2008 the bank recognizing $64,000 gains on called securities which compares to the loss of $3,000 in 2009. The bank was able to sell $3.8 million in investment securities in 2009 compared to $2.8 million in 2008.

     The bank recorded a loss of $149,000 on the sale of other real estate owned or the writedown of other real estate owned. These writedowns were necessary due to the inability of the bank to sell these properties in the current housing market. Losses of $12,000 were recorded in 2009 on the sale or the writedown of repossessed assets.

     Offsetting these decreases were increases in debit card fee income, miscellaneous income and smaller losses on the disposal of equipment and software along with a fee increase effective November 1, 2009. The increase in debit card fee income for 2009 and 2008 have a direct correlation to the increased deposit base of the bank and the increased usage of debit cards by our customer base.

     Miscellaneous income increased due to the death of one of the bank’s Board of Directors in February 2009 and the bank was the named beneficiary of a life insurance policy on the director. The bank received $194,184 in a death benefit, $135,326 of which has been recorded in assets as cash surrender value. The difference of $58,858 is reflected in other operating income.

     During the fourth quarter 2008, the bank disposed of equipment and software due to the bank’s outsourcing conversion in December 2008. The bank recorded a loss of $49,000 on the disposal of this equipment and software. During the fourth quarter 2009, the bank disposed of equipment due to the outsourcing of the bank’s statement rendering process. The bank recorded a loss of $7,600 on the disposal of this equipment.

     The slight increase in the income from the title company is due to the final distribution in the fourth quarter 2009 of $1,169. On August 31, 2009, Morgan County Title Insurance Agency, LLC was dissolved which CNB had a 33% ownership in the limited liability company.

     Noninterest income decreased $159,000 or 6.6% during 2008 over 2007. The decrease in 2008 was a result of decreases in trust fees, gain on sale of stock, gain on sales of loans and income from the title company offset by increases in debit card fees and gain on sales and calls of securities.

     The decrease in trust fees is due to the fact that assets under management have decreased from $42.6 million at December 31, 2007 to $32.7 million at December 31, 2008. This 23.2% decrease is primarily due to market value decline. Although trust fees declined during 2008, there was a reallocation of trust assets during 2008 into accounts earning higher management fees which helped to offset the 23.2% decrease due to the market value decline causing trust fee income to only decrease by 4.6%.

     The decrease in the gain on sale of stock in 2008 was due to the bank’s $59,000 realized gain in the second quarter of 2007 on 1,644 shares of stock the bank received in 2000 from the demutualization of an insurance company. The bank was unaware of these shares, but immediately upon knowledge of the existence of the stock, the bank took possession of the stock and sold it.

     The decrease in the income from the title company in 2008 is a direct result of the slowing in the loan demand in our market area and the overall decline in the economic conditions.

     Other factors contributing to the decrease in non interest income for 2008 was the loss of $86,000 on other-than- temporary impairment of securities. At December 31, 2008, management analyzed the portfolio noting two collateralized mortgage obligations to be performing very poorly and the loans within the portfolio have increased delinquencies and foreclosures. Therefore, management recorded an other than temporarily impaired loss on these two collateralized mortgage obligations of $86,468, a 9.8% reduction in the book value. The bank also recorded a loss of $69,000 on the sale of other real estate owned or the writedown of other real estate owned. This writedown was necessary due to the continued decline in the economic conditions in the bank’s local housing market and the inability of the bank to sell these properties in a timely fashion.

     Gain on sales and calls of securities contributed $120,000 to non interest income during 2008 which compared to a loss of $2,700 for the same period in 2007. The level of trust assets being managed decreased from $42.6 million at December 31, 2007 to $32.7 million at December 31, 2008, a 23.2% decrease and the fees earned on these assets decreased by $11,000 or 4.6%. The average level of trust assets being managed decreased by $4.0 million or 9.6%.

NONINTEREST EXPENSES

     Noninterest expenses decreased $133,000 or 1.7% during 2009 over the prior comparable period. Salaries decreased by $169,000 due to a concerted effort, beginning in the first quarter of 2009 and continuing throughout the year, on the part of bank management to control expenses by eliminating extra hours worked and to utilize employee’s time more efficiently. Also contributing to the decrease was the employment of four less full time equivalent employees from the same time period last year. These decreases were offset by lower merit increases.

     The decrease in employee benefits expense is due primarily to a decrease in the post retirement expense due to a change in assumptions along with decreases in most all other employee benefit accounts due to a reduction in employee hours or the controlling of expenses by management.

     Occupancy expense decreased $12,000 from 2008 to 2009 as a result of the negotiation of several vendor contracts to decrease the cost of their services offset by increased cost of real property taxes and bank operating supplies. During 2009, the bank installed new fluorescent light fixtures at all six bank locations which the cost of the new light bulbs was charged to bank operating supplies.

     Furniture and equipment expense showed a decrease for 2009 compared to 2008 of $203,000. This decrease is due to a decrease in furniture and equipment maintenance expense, equipment expense and depreciation expense for computer hardware and furniture and equipment. The decreased maintenance expense is due to the number and amount of maintenance contracts declined due to the outsourcing of the Bank’s technology in December 2008. These expenses have shifted to data processing fees and are included in other operating expenses on the statement of income.

     Equipment expense decreased due to in the fourth quarter 2008 approximately $51,000 in expenses were recorded which related to the outsourcing conversion of the bank’s computer system. Depreciation expense decreased due to equipment becoming fully depreciated during this time period along with the computer hardware which was written off in 2008 as it was no longer in service after the outsourcing of the Bank’s technology in December 2008.

     The increase in other operating expenses of $381,000 was due to increases in data processing expense, FDIC assessment fees, 75^th anniversary expenses and other loan expense. These increases were offset by decreases to marketing expense, stationery, supplies and printing, debit card expense, audit and accounting expense and employee training expense. Data processing expense increased due to the expenses related to the monthly outsourcing charges of the bank’s data processing system began in the second quarter of 2009. The FDIC assessment fee increased due to the increase in the quarterly assessment rate along with the 5 basis point special one time assessment for every $100 of deposits the bank holds. The one time special assessment of $130,188 was paid on September 30, 2009. The bank celebrated its 75^th anniversary on June 19, 2009. The celebrations began in April 2009 at each of the bank’s branch locations and finished with a large picnic celebration in the local state park for customers and local businesses. Other loan expense increased due to the costs associated with acquiring and maintaining the foreclosed properties the bank owns.

     During 2009, the bank was in a cost cutting mode and attempted to reduce all non essential expenses to a minimum. This cost cutting mode is reflective in the decreased marketing expense and employee training expense. Stationery, supplies and printing decreased due to in late 2008, the bank began the purchase of paper supplies for the 75^th anniversary celebration of the bank during 2009.

Noninterest expenses decreased $46,000 or .6% during 2008 over the prior comparable period. Salaries decreased by $45,000 due to the employment of two less full time equivalent employees from the same time period last year and lower merit increases for employees. In 2007, the bank paid bonuses totaling $36,000 in May based in part on the bank’s 2006 performance and also accrued $30,000 for bonuses to be paid in 2008 to the top four executive officers. In 2008, $36,000 was accrued for bonuses for the top four executive officers to be paid in 2009. The increase in employee benefits expense is due primarily to an increase in the post retirement expense. This expense increased by $98,000 due to a change in the assumptions. Offsetting this increase were decreases to group insurance expense and vested health contribution expense, pension expense and payroll taxes. In 2008, bank employees were offered two different group health insurance plans to choose from, a lower deductible plan which the employee would pay 10% of the premium cost and a higher deductible plan which the bank would pay 100% of the premium cost. With the lower deductible plan which 62% of the participating employees chose, the bank’s portion of the premium would be approximately the same as the premium paid in 2007. With the higher deductible plan which 38% of the participating employees chose, the yearly savings to the bank would be approximately $15,000. Along with this change in deductibles and premium charges, the number of employees enrolled in the plan has also declined. Due to the number of employees in the group insurance plan declining, this has also impacted the vested health contribution expense. The decrease in payroll taxes is a result of the employment of two less full time equivalent employees from the same time period last year.

     Occupancy expense decreased $17,000 from 2007 to 2008 because of some minor building repairs, renovations and painting at the main office and additional painting at one of the bank’s branch facilities done in 2007 which were not required in 2008. These decreases were offset by an increase in property taxes. Furniture and equipment expense showed a decrease for 2008 as compared to 2007. This decrease is a result of the reduction in the depreciation expense due to some computer hardware becoming fully depreciated during this time period. Equipment expense increased due to approximately $51,000 in expenses incurred in the fourth quarter related to the outsourcing conversion of the bank’s computer system. Equipment expense, prior to the fourth quarter, had shown a decrease as compared to the same period in 2007 due to upgrades made to LCD displays at a few of the bank’s ATM machines and numerous repairs to other bank equipment performed during 2007.

     The decrease in other operating expenses was due to decreases in marketing expense, data processing expense, professional service fees, courier services and franchise tax expense. Marketing expense decreased due to the concentrated effort of the bank to lower costs through funneling advertising monies to be used in more effective modes of advertising along with a decrease in public relations and promotional expenses. The decrease in data processing expense is due in part to the fact that proof of deposit encoding supplies were not needed after June 2007 because the bank began image processing through check image exchange. Professional fees decreased in 2008 because the expense for documentation of the bank’s internal controls in connection with the Sarbanes-Oxley Act of 2002 was completed in 2007. The expenses for testing the internal controls have shifted to audit fees expense which increased in 2008 from 2007. Courier services were ended in late 2007 when the bank began image processing through check image exchange. Franchise tax expense decreased due to the West Virginia franchise tax rate decrease for 2008.

     These decreases in 2008 were offset by increases to stationary, supplies and printing, telephone, ATM expense, debit card expense, director’s fees, FDIC assessment expense, legal fees and other miscellaneous operating expenses. The increase in stationary, supplies and printing is due to the fourth quarter 2008 the bank began the purchase of paper supplies to begin the 75^th anniversary celebration of the bank during 2009. ATM and debit card expenses increased due to the monthly fees for ATM and debit card fees continue to increase due to increased costs and volume of usage. Committee meeting fees for the Board of Directors increased in April 2008. The FDIC assessment fee increased because the bank’s one time assessment credit was completely exhausted in the second quarter of 2008 causing the assessment to increase from $27,000 in 2007 to $84,000 in 2008. Legal fees increased due to the increased number of foreclosures and bankruptcies that the bank experienced in 2008 along with the increased number of civil actions the bank initiated in 2008. The increase in other miscellaneous operating expenses was caused by the expense of $14,261 associated with the reimbursement of five commercial customers who participated in the bank’s money market mutual fund sweep product. This product was offered in 2005 due to demand from commercial depositors to earn interest on their business checking accounts. On September 17, 2008, the bank was notified by The Reserve, the company managing these money market mutual funds, that the net asset value of these funds would be 97%. The bank has committed to cover up to 3% should the final liquidation result in a 97% payment.

     The Company performs an annual test of impairment of acquired customer lists. The annual test for impairment resulted in no loss for the years ended December 31, 2009, 2008 or 2007.

INCOME TAXES

     Provision for income tax totaled $565,000 in 2009, $1.3 million in 2008 and $1.2 million in 2007. The effective tax rate was 20.8% in 2009 compared to 32.5% and 32.2% in 2008 and 2007, respectively. The 2009 reduction in the effective tax rate is due in part to a significant increase in tax exempt interest income, tax exempt life insurance proceeds and an adjustment to deferred tax liability related to the bank changing its estimate of the likelihood of the taxability for the cash surrender value life insurance related to the deferred compensation plan. The bank’s income tax expense differs from the amount computed at statutory rates primarily due to the tax-exempt earnings from certain investment securities and loans, and non-deductible expenses, such as life insurance premiums. See Note 14: Income Taxes in the Notes to Consolidated Financial Statements for a comprehensive analysis of income tax expense.

FINANCIAL CONDITION

     Table 6 examines CNB Bank, Inc.’s financial condition in terms of its sources and uses of funds. Average funding sources and uses increased $2.2 million or .8% in 2009 compared with an increase of $5.8 million or 2.2% in 2008.

TABLE 6. SOURCES AND USES OF FUNDS

		2009												2008												2007
		Average				Increase (Decrease)								Average				Increase (Decrease)								Average
		Balance				Amount				%				Balance				Amount				%				Balance
														In thousands
Funding uses:
Federal funds sold		$	2,428			$	2,428				100.0	%		$	—			$	(701	)			(100.0	)%		$	701
Certificates of deposit			2,578				2,578				100.0				—				—				—				—
Securities available for sale			64,454				(210	)			(0.3	)			64,664				7,744				13.6				56,920
Loans			200,177				(2,626	)			(1.3	)			202,803				(1,242	)			(0.6	)			204,045
Total uses		$	269,637			$	2,170				0.8	%		$	267,467			$	5,801				2.2	%		$	261,666
Funding sources:
Interest-bearing demand deposits		$	35,125			$	(24	)			(0.1	)%		$	35,149			$	(9,637	)			(21.5	)%		$	44,786
Savings deposits			24,750				1,210				5.1				23,540				(1,795	)			(7.1	)			25,335
Time deposits			140,905				15,216				12.1				125,689				3,050				2.5				122,639
Short-term borrowings			12,669				(17,869	)			(58.5	)			30,538				12,365				68.0				18,173
Noninterest bearing funds, net(1)			56,188				3,637				6.9				52,551				1,818				3.6				50,733
Total sources		$	269,637			$	2,170				0.8	%		$	267,467			$	5,801				2.2	%		$	261,666

     Total assets increased $7.2 million or 2.6% to $289.5 million from December 31, 2008, to December 31, 2009, due primarily to a $9.7 million increase in investment securities, a $2.0 million increase in certificates of deposit investments, a $1.7 million increase in other assets offset by a $6.0 million decrease in loans.

     Total liabilities increased $4.8 million or 1.9% to $263.9 million from December 31, 2008, to December 31, 2009, due primarily to an increase in deposits of $24.4 million offset by a decrease in FHLB borrowings of $19.0 million and a decrease in accrued expenses and other liabilities of $568,000. Shareholders’ equity increased $2.4 million to $25.6 million at December 31, 2009, primarily due to net income of $2.1 million, a $1.2 million increase in accumulated other comprehensive income offset by cash dividends of $689,000 and stock repurchases of $255,000.

     The components of accumulated other comprehensive income at December 31, 2009, were unrealized gains and losses on available for sale securities, net of deferred income taxes and unrecognized pension costs, net of deferred income taxes. The

increase in accumulated other comprehensive income was due to the decrease in unrecognized pension costs and an increase in the unrealized market value appreciation of the available for sale investment security portfolio. The unrealized gains and losses are primarily a function of available market interest rates relative to the yield being generated on the available for sale portfolio. No earnings impact results, however, unless the securities are actually sold. In 2006, CNB implemented guidance now codified as ASC Topic 715, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” in which the unfunded liability resulting from the projected benefit obligation exceeding the fair value of the plan assets is recorded as a liability and any unrecognized pension costs are recorded net of tax in accumulated other comprehensive income. See Note 11: Pension Plan in the Notes to Consolidated Financial Statements for further details.

LOAN PORTFOLIO

     At December 31, 2009, total loans decreased $6.0 million or 3.0% to $194.7 million from $200.8 million at December 31, 2008. Although each category of loans except commercial real estate loans and consumer loans experienced decreases, the loan mix was unchanged from December 31, 2008. Commercial real estate loans have shown an increase of $3.4 million which is in part attributable to several large loans to builders for presold entry level homes. The buyers of these homes have been pre-approved by area banks and qualify for the $8,000 government tax credit. Another factor was the consolidation of debt from other banks to CNB by a large land developer of $1.5 million and a commercial business customer consolidating debt of $925,000. Consumer loans have shown a slight increase of $18,000. Beginning in January 2007, the bank began selling all fixed rate residential mortgage loans to secondary market investors. During 2009, CNB originated and sold $7.8 million of loans to secondary market investors. The bank continues to experience a slowdown in the residential loan demand due to the slowdown in the housing market along with tightened secondary market and private mortgage company guidelines. Although the bank’s lending officers continue to be proactive in their marketing effort in the bank’s lending area, the uncertainty of the current financial position of prospective bank customers caused a lag in officer calls during a portion of 2009. The bank’s lending area has seen a shift in the market price on real property from price appreciation in 2006 to a declining market in 2008 and 2009. The bank’s management believes the slowdown in the housing market and the lower loan demand will continue through the first half of 2010. The loan to deposit ratio was 77.2% at December 31, 2009 and 88.1% at December 31, 2008. The ratio of net charge-offs to average loans outstanding was .4% in 2009 and .2% in 2008.

     Table 7 sets forth the amount of loans outstanding (net of unearned income) as of the dates shown:

TABLE 7. LOANS AND LEASES OUTSTANDING

		December 31,
		2009				2008				2007				2006				2005
										In thousands
Real estate		$	129,509			$	137,770			$	143,012			$	143,767			$	125,723
Commercial real estate			43,972				40,614				37,588				36,967				29,492
Consumer			16,684				16,666				15,544				15,934				16,802
Commercial			7,277				7,931				8,179				9,172				9,314
Overdrafts			203				92				104				163				356
		$	197,645			$	203,073			$	204,427			$	206,003			$	181,687
Leases			585				105				113				124				145
		$	198,230			$	203,178			$	204,540			$	206,127			$	181,832
Net deferred loan fees, premiums and discounts			380				325				273				324				397
Allowance for loan losses			(3,903	)			(2,751	)			(2,144	)			(2,132	)			(2,022	)
		$	194,707			$	200,752			$	202,669			$	204,319			$	180,207

     The commercial real estate loan portfolio showed an increase in outstanding loans of $3.4 million from $40.6 million at December 31, 2008 to $44.0 million at December 31, 2009. The commercial real estate loan portfolio is approximately 22% of the total loan portfolio at December 31, 2009 and 20% of the total loan portfolio at December 31, 2008. The bank’s activity in the Berkeley County market continues to expand with the three branch locations located in that area. The bank’s loan activity also increased in the Maryland market after acquiring the Hancock, Maryland branch in June 2004. In addition, the bank’s loan growth has benefited from several large commercial real estate loans closing in 2009. Management believes additional growth in the real estate and commercial real estate area are possible in 2010 through the extension of the $8,000 government tax credit for qualified home buyers and the recent passage of a local school bond by taxpayers along with $31 million in government stimulus funds being made available to fund public and private projects, management’s projections for commercial real estate activity for 2010 are positive for the Eastern Panhandle of West Virginia.

     Real estate mortgage loans comprised mainly of one to four family residences continued to be the bank’s dominant loan category. Mortgage lending comprises approximately 66% of the total loan portfolio at December 31, 2009, and 68% of the total loan portfolio at December 31, 2008, totaling $129.5 million at December 31, 2009, and $137.8 million at December 31, 2008. With real estate values down, very few home owners were able to refinance their current mortgage to increase their mortgage. The local economy saw very few home sales in 2009. Customers were mainly refinancing their homes into fixed rate loans. CNB originated $8.6 million in fixed rate loans during 2009 of which $1.3 million was a runoff of existing loans in our portfolio which the customer refinanced into a fixed rate loan. Another factor in the decrease in the real estate portfolio is the fact that approximately $1.7 million in mortgage loans became foreclosed properties of the bank.

     Although the net decrease in real estate mortgage loans totaled $8.3 million, actual real estate mortgage loan originations were higher as the bank sold all fixed rate mortgage loans originated in 2009 to secondary market investors. During 2009, CNB sold $7.8 million of fixed rate loans to secondary market investors. The bank’s increased presence in Berkeley County, West Virginia, and Washington County, Maryland continues to generate additional activity in the real estate mortgage loan arena.

     The consumer loan portfolio showed a slight increase of $18,000. 2009 was a very slow year for automobile lending whether it was direct or indirect lending. The bank’s primary consumer loan market area is Morgan and Berkeley Counties, West Virginia and Washington County, Maryland which are all considered to be conservative spending areas.

     Table 8 summarizes the approximate contractual maturity and sensitivity of certain loan types to changes in interest rates as of December 31, 2009:

TABLE 8. CONTRACTUAL MATURITY AND SENSITIVITY

		December 31, 2009
		One year				One through				Over
		or less				Five years				Five years				Total
						In thousands
Commercial, financial and agricultural:
Floating rate		$	28,383			$	14,910			$	—			$	43,293
Fixed rate			1,989				4,040				1,927				7,956
Total		$	30,372			$	18,950			$	1,927			$	51,249
Real estate — mortgage:
Floating rate		$	11,046			$	60,946			$	402			$	72,394
Fixed rate			923				4,728				49,845				55,496
Total		$	11,969			$	65,674			$	50,247			$	127,890
Real estate — construction:
Floating rate		$	1,547			$	—			$	—			$	1,547
Fixed rate			72				—				—				72
Total		$	1,619			$	—			$	—			$	1,619
Consumer:
Floating rate		$	206			$	115			$	—			$	321
Fixed rate			1,050				9,992				5,524				16,566
Total		$	1,256			$	10,107			$	5,524			$	16,887
Lease financing:
Floating rate		$	—			$	—			$	—			$	—
Fixed rate			—				488				97				585
Total		$	—			$	488			$	97			$	585