CNB FINANCIAL SERVICES INC - FORM 10-Q

Attached files

file	filename
EX-32.1 - EX-32.1 - CNB FINANCIAL SERVICES INC	l40441exv32w1.htm
EX-32.2 - EX-32.2 - CNB FINANCIAL SERVICES INC	l40441exv32w2.htm
EX-31.2 - EX-31.2 - CNB FINANCIAL SERVICES INC	l40441exv31w2.htm
EX-31.1 - EX-31.1 - CNB FINANCIAL SERVICES INC	l40441exv31w1.htm

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q


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

For the quarterly period ended June 30, 2010


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

For the transition period from to

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)

Issuer’s telephone number, (304) 258 - 1520

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 such shorter period 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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)


Large Accelerated Filer o	Accelerated Filer o	Non-Accelerated Filer o	Smaller Reporting Company þ
		(Do not check if a smaller reporting company)

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

YES þ NO o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 441,348 shares of common stock, par value $1 per share, as of August 5, 2010.

CNB FINANCIAL SERVICES, INC.

TABLE OF CONTENTS


	PAGE
PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Condition as of June 30, 2010 (Unaudited) and December 31, 2009		3

Consolidated Statements of Income for the Three and Six Months ended June 30, 2010 and 2009 (Unaudited)		4

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2010 and 2009 (Unaudited)		5

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (Unaudited)		6

Notes to Consolidated Financial Statements (Unaudited)		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months ended June 30, 2010		19

Item 3. Quantitative and Qualitative Disclosures about Market Risk		28

Item 4. Controls and Procedures		29

PART II: OTHER INFORMATION

Item 1. Legal Proceedings		30

Item 1a. Risk Factors		30

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds		30

Item 6. Exhibits and Reports on Form 8-K		30

SIGNATURES		31
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements that involve risk and uncertainty. All statements other than statements of historical fact included in this Form 10-Q including statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In order to comply with the terms of the safe harbor, CNB notes that a variety of factors could cause CNB’s actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements. These factors could include the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) changes in the interest rate environment may reduce margins; (3) general economic conditions may become more unfavorable than expected resulting in reduced credit quality or demand for loans; (4) legislative or regulatory changes could increase expenses (including changes as a result of rule 5 regulations adopted under the Dodd-Frank Wall Street Reform and Consumer Protection Act); (5) competitors may have greater financial resources and develop products that enable them to compete more successfully than CNB; (6) additional assessments may be imposed by the FDIC; (7) additional expense to the provision for loan losses may be greater than anticipated; (8) loan activity may continue to be soft in the commercial real estate portfolio with very little generation of new loans; and (9) real estate activity for 2010 in the Eastern Panhandle of West Virginia may not improve. Additionally, consideration should be given to the cautionary language contained elsewhere in this Form 10-Q and in the section on “Risk Factors,” Item 1A in the company’s Annual Report to Shareholders on Form 10-K for the fiscal year ended December 31, 2009.

CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)


	June 30,			December 31,
	2010			2009
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	4,177,941		$	5,068,118
Certificates of deposit investments		—			1,989,017
Securities available for sale (at approximate market value)		74,135,935			72,272,665
Federal Home Loan Bank stock, at cost		2,321,300			2,321,300
Loans and lease receivable, net		189,826,915			194,707,226
Accrued interest receivable		1,304,823			1,334,704
Foreclosed real estate (held for sale), net		414,383			386,500
Premises and equipment, net		5,441,616			5,554,927
Deferred income taxes		1,731,527			1,753,665
Cash surrender value of life insurance		1,690,400			1,601,720
Intangible assets		106,870			162,628
Other assets		1,669,606			2,345,418


TOTAL ASSETS	$	282,821,316		$	289,497,888


LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand	$	41,295,035		$	43,381,922
Interest-bearing demand		35,361,458			35,564,826
Savings		26,528,999			24,925,247
Time, $100,000 and over		70,268,504			72,982,196
Other time		74,710,485			75,437,663

	$	248,164,481		$	252,291,854
Accrued interest payable		1,080,622			1,170,417
FHLB borrowings		2,925,000			6,400,000
Accrued expenses and other liabilities		3,947,594			4,005,322


TOTAL LIABILITIES	$	256,117,697		$	263,867,593


SHAREHOLDERS’ EQUITY
Common stock, $1 par value; 5,000,000 shares authorized; 458,048 shares issued at June 30, 2010 and December 31, 2009 and 441,348 and 443,648 outstanding at June 30, 2010 and December 31, 2009, respectively	$	458,048		$	458,048
Capital surplus		4,163,592			4,163,592
Retained earnings		23,092,161			22,476,562
Accumulated other comprehensive income (loss)		(72,284	)		(642,839	)

	$	27,641,517		$	26,455,363
Less treasury stock, at cost, 16,700 shares at June 30, 2010 and 14,400 shares at December 31, 2009		(937,898	)		(825,068	)


TOTAL SHAREHOLDERS’ EQUITY	$	26,703,619		$	25,630,295


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	282,821,316		$	289,497,888

The Notes to Consolidated Financial Statements are an integral part of these statements.

CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three months ended					Six months ended
	June 30,					June 30,
	2010		2009			2010			2009
INTEREST INCOME
Interest and fees on loans	$	2,998,412	$	3,206,011		$	6,030,211		$	6,474,697
Interest and dividends on securities U.S. Government agencies and corporations		39,711		60,392			95,368			141,190
Corporate bonds		59,400		97,711			121,336			196,931
Mortgage backed securities		306,971		343,628			615,227			711,361
State and political subdivisions		329,486		179,366			637,863			337,019
Interest on certificates of deposit		597		6,059			2,052			8,625
Interest on FHLB deposits		3		6			57			29
Interest on federal funds sold		394		538			1,489			538

	$	3,734,974	$	3,893,711		$	7,503,603		$	7,870,390

INTEREST EXPENSE
Interest on interest bearing demand, savings and time deposits	$	1,193,655	$	1,268,891		$	2,431,178		$	2,528,096
Interest on FHLB borrowings		2,935		74,058			26,518			160,891

	$	1,196,590	$	1,342,949		$	2,457,696		$	2,688,987


NET INTEREST INCOME	$	2,538,384	$	2,550,762		$	5,045,907		$	5,181,403

PROVISION FOR LOAN LOSSES		455,000		375,000			910,000			765,000


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	$	2,083,384	$	2,175,762		$	4,135,907		$	4,416,403


NONINTEREST INCOME
Service charges on deposit accounts	$	296,989	$	336,159		$	577,687		$	626,734
Other service charges, commissions and fees		226,461		204,630			433,678			387,108
Other operating income		27,808		20,772			51,808			98,340
Income from title company		—		3,267			—			5,061
Net gain on sales of loans		9,949		19,542			14,643			20,324
Net gain (loss) on sales and calls of securities		5,213		(1,672	)		53,423			32,023
Net gain on sale of other real estate owned		3,072		29,137			14,561			27,364
Provision for losses on other real estate owned		—		(60,800	)		(48,000	)		(75,800	)
Net (loss) on disposal of premises, equpment and software		—		—			(166	)		—
Net gain (loss) on sale of repossessed assets		2,725		—			(4,425	)		—

	$	572,217	$	551,035		$	1,093,209		$	1,121,154

NONINTEREST EXPENSES
Salaries	$	725,968	$	648,579		$	1,467,705		$	1,338,380
Employee benefits		299,222		282,312			588,467			577,636
Occupancy of premises		146,558		125,570			296,733			235,940
Furniture and equipment expense		156,593		159,078			313,724			319,145
Other operating expenses		842,223		796,838			1,571,138			1,451,256

	$	2,170,564	$	2,012,377		$	4,237,767		$	3,922,357


INCOME BEFORE INCOME TAXES	$	485,037	$	714,420		$	991,349		$	1,615,200

PROVISION FOR INCOME TAXES		62,217		201,294			141,836			470,341


NET INCOME	$	422,820	$	513,126		$	849,513		$	1,144,859


BASIC EARNINGS PER SHARE	$	0.96	$	1.15		$	1.92		$	2.56

The Notes to Consolidated Financial Statements are an integral part of these statements.

CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


											Accumulated
											Other			Total
	Common		Treasury			Capital		Retained			Comprehensive			Shareholders’
	Stock		Stock			Surplus		Earnings			Income (Loss)			Equity
BALANCE, JANUARY 1, 2009	$	458,048	$	(570,512	)	$	4,163,592	$	21,015,652		$	(1,848,990	)	$	23,217,790

Comprehensive income:
Net income for six months ended June 30, 2009		—		—			—		1,144,859			—			1,144,859
Change in unrealized gains (losses) on securities available for sale (net of tax of $204,163)		—		—			—		—			333,108			333,108

Total Comprehensive Income															1,477,967

Acquisition of treasury stock, at cost, 3,303 shares		—		(153,616	)		—					—			(153,616	)

Cash dividends ($.53 per share)									(236,300	)					(236,300	)


BALANCE, JUNE 30, 2009	$	458,048	$	(724,128	)	$	4,163,592	$	21,924,211		$	(1,515,882	)	$	24,305,841


BALANCE, JANUARY 1, 2010	$	458,048	$	(825,068	)	$	4,163,592	$	22,476,562		$	(642,839	)	$	25,630,295
Comprehensive income:
Net income for six months ended June 30, 2010		—		—			—		849,513			—			849,513
Change in unrealized gains (losses) on securities available for sale (net of tax of $349,695)		—		—			—		—			570,555			570,555

Total Comprehensive Income															1,420,068

Acquisition of treasury stock, at cost, 2,300 shares		—		(112,830	)		—		—			—			(112,830	)

Cash dividends ($.53 per share)									(233,914	)					(233,914	)


BALANCE, JUNE 30, 2010	$	458,048	$	(937,898	)	$	4,163,592	$	23,092,161		$	(72,284	)	$	26,703,619

The Notes to Consolidated Financial Statements are an integral part of these statements.

CNB FINANCIAL SERVICES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Six months ended
	June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	849,513		$	1,144,859
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on premises, equipment and software		236,811			254,340
Provision for loan losses		910,000			765,000
Provision for losses on other real estate owned		48,000			—
Deferred income taxes		(327,557	)		(140,387	)
Net (gain) on sale of securities		(53,423	)		(32,023	)
Net (gain) loss on sale of real estate owned		(14,183	)		48,436
Decrease in deferred gain on sale of real estate owned		378			—
Loss on disposal of premises, equipment and software		166			—
Net (gain) on loans sold		(14,643	)		(20,324	)
Loans originated for sale		(1,330,300	)		(4,029,800	)
Proceeds from loans sold		1,344,943			4,050,124
Decrease in accrued interest receivable		29,881			47,848
(Increase) decrease in other assets		692,161			(2,079,124	)
Increase (decrease) in accrued interest payable		(89,795	)		15,384
(Increase) in cash surrender value on life insurance in excess of premiums paid		(33,472	)		(87,999	)
Proceeds from life insurance death benefits		—			194,184
(Decrease) in accrued expenses and other liabilities		(58,106	)		(117,891	)
Amortization of deferred loan (fees) cost		47,300			95,235
Amortization (accretion) of premium and discount on securities		72,940			212
Amortization (accretion) of premium and discount on certificates of deposit		—			(364	)

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	2,310,614		$	107,710


CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans, not originated for sale	$	3,258,011		$	729,498
Proceeds from sales of securities		4,813,393			1,319,395
Proceeds from maturities, repayments and calls of securities		9,147,517			10,455,130
Proceeds from maturities of certificates of deposit		1,989,000			250,000
Purchases of securities		(14,919,961	)		(7,355,276	)
Purchases of certificates of deposit		—			(4,659,620	)
Purchases of premises, equipment and software		(87,726	)		(100,131	)
Proceeds from sale of real estate owned		610,892			402,906
Costs to acquire foreclosed real estate		(7,592	)		(18,137	)
Net (increase) in federal funds sold		—			(1,050,000	)
Premiums paid on life insurance		(55,208	)		(55,208	)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	$	4,748,326		$	(81,443	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits	$	(686,503	)	$	3,776,074
Net increase (decrease) in time deposits		(3,440,870	)		14,081,363
Net (decrease) in FHLB borrowings		(3,475,000	)		(15,445,000	)
Purchase of treasury stock		(112,830	)		(153,616	)
Cash dividends paid		(233,914	)		(236,300	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	$	(7,949,117	)	$	2,022,521


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(890,177	)	$	2,048,788
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		5,068,118			4,770,724

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,177,941		$	6,819,512


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest	$	2,547,491		$	2,673,603
Income taxes	$	260,582		$	389,400
Net transfer to foreclosed real estate, held for sale from loans receivable	$	665,000		$	578,332
Unrealized gain (loss) on investment securities available for sale (net of tax)	$	570,555		$	333,108

The Notes to Consolidated Financial Statements are an integral part of these statements.

CNB FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation and Contingencies

In the opinion of CNB Financial Services, Inc. (“CNB” or the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of CNB’s financial condition as of June 30, 2010 and the results of operations for the three and six months ended June 30, 2010 and 2009, changes in shareholders’ equity and cash flows for the six months ended June 30, 2010 and 2009.

The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes included in CNB’s Annual Report for the year ended December 31, 2009.

In the ordinary course of business, the Company 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.

Earnings per share have been computed based on the following weighted average shares outstanding:


	6/30/2010		6/30/2009
Quarter ending		441,581		446,696

Year to date ending		442,600		447,124

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2. Securities

The amortized cost and estimated market value of debt securities at June 30, 2010 and December 31, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities are summarized as follows:


	June 30, 2010								Weighted Average
			Gross		Gross		Estimated		Tax
	Amortized		Unrealized		Unrealized		Fair		Equivalent
	Cost		Gains		Losses		Value		Yield
Available for sale:
U.S. Government agencies and corporations
Within one year	$	730,000	$	2,049	$	—	$	732,049		4.00	%
After 5 but within 10 years		5,496,067		30,941		—		5,527,008		2.59

	$	6,226,067	$	32,990	$	—	$	6,259,057		2.76	%

Corporate Bonds
Within one year	$	491,939	$	4,770	$	—	$	496,709		3.23	%
After 1 but within 5 years		1,474,743		117,224		—		1,591,967		5.87
After 5 but within 10 years		2,506,502		134,888		3,465		2,637,925		5.48

	$	4,473,184	$	256,882	$	3,465	$	4,726,601		5.36	%

States and political subdivisions
Within one year	$	2,262,475	$	8,885	$	—	$	2,271,360		2.26	%
After 1 but within 5 years		9,865,300		337,173		3,772		10,198,701		3.02
After 5 but within 10 years		22,546,116		429,351		88,304		22,887,163		4.18

	$	34,673,891	$	775,409	$	92,076	$	35,357,224		3.72	%


Mortgage backed securities:
Government issued or guaranteed	$	12,110,850	$	914,826	$	—	$	13,025,676		5.16	%


Collateralized mortgage obligations:
Government issued or guaranteed	$	13,371,885	$	392,206	$	159	$	13,763,932		3.88	%
Privately issued		1,150,607		—		147,162		1,003,445		7.60

	$	14,522,492	$	392,206	$	147,321	$	14,767,377		4.17	%


Total securities available for sale	$	72,006,484	$	2,372,313	$	242,862	$	74,135,935		4.07	%


Restricted:
Federal Home Loan Bank stock	$	2,321,300	$	—	$	—	$	2,321,300		—	%

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2. Securities (continued)


									Weighted
	December 31, 2009								Average
			Gross		Gross		Estimated		Tax
	Amortized		Unrealized		Unrealized		Fair		Equivalent
	Cost		Gains		Losses		Value		Yield
Available for sale:
U.S. Government agencies and corporations
Within one year	$	864,592	$	18,441	$	—	$	883,033		3.68	%
After 1 but within 5 years		2,006,039		1,077		17,468		1,989,648		1.60
After 5 but within 10 years		5,742,908		29,965		22,737		5,750,136		3.27

	$	8,613,539	$	49,483	$	40,205	$	8,622,817		2.92	%

Corporate Bonds
Within one year	$	252,711	$	—	$	7,614	$	245,097		6.76	%
After 1 but within 5 years		1,490,853		47,318		7,029		1,531,142		4.84
After 5 but within 10 years		2,997,344		57,064		19,138		3,035,270		5.60

	$	4,740,908	$	104,382	$	33,781	$	4,811,509		5.42	%

States and political subdivisions
Within one year	$	2,898,507	$	19,824	$	—	$	2,918,331		1.92	%
After 1 but within 5 years		9,567,178		314,547		357		9,881,368		2.98
After 5 but within 10 years		19,656,673		216,197		139,565		19,733,305		4.20

	$	32,122,358	$	550,568	$	139,922	$	32,533,004		3.63	%


Mortgage backed securities:
Government issued or guaranteed	$	12,775,369	$	640,601	$	—	$	13,415,970		5.35	%


Collateralized mortgage obligations:
Government issued or guaranteed	$	11,489,702	$	346,900	$	21,947	$	11,814,655		4.12	%
Privately issued		1,321,605		—		246,895		1,074,710		7.17

	$	12,811,307	$	346,900	$	268,842	$	12,889,365		4.43	%


Total securities available for sale	$	71,063,481	$	1,691,934	$	482,750	$	72,272,665		4.12	%


Restricted:
Federal Home Loan Bank stock	$	2,321,300	$	—	$	—	$	2,321,300		—	%


Certificates of deposit	$	1,989,000	$	209	$	192	$	1,989,017		0.33	%

The fair value of securities pledged to secure public deposits and for other purposes as required or permitted by law totaled $20,890,565 at June 30, 2010 and $24,761,434 at December 31, 2009.

Proceeds from sales of securities available for sale (excluding maturities and calls) during the six months ended June 30, 2010 and 2009 were $4,813,393 and $1,319,395, respectively. Gross gains (losses) of $53,796 and $(4,543) during the six months ended June 30, 2010 on respective sales of securities and $33,695 and $(0) for the six months ended June 30, 2009 were realized on the respective sales. Gross gains (losses) of $4,273 and ($103) and $23 and ($1,695) during the six months ended June 30, 2010 and 2009, respectively were realized on called securities.

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2. Securities (continued)

The following tables show our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2010 and December 31, 2009.

Securities are summarized as follows:


	June 30, 2010
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Corporate bonds	$	497,891	$	3,465	$	—	$	—	$	497,891	$	3,465

State and political subdivisions		5,837,971		84,022		738,521		8,054		6,576,492		92,076

Collateralized mortgage obligations:
Government issued or guaranteed		—		—		334,987		159		334,987		159
Privately issued		—		—		1,003,445		147,162		1,003,445		147,162


Total temporarily impaired securities	$	6,335,862	$	87,487	$	2,076,953	$	155,375	$	8,412,815	$	242,862


	December 31, 2009
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Corporate bonds	$	990,185	$	19,138	$	723,796	$	14,643	$	1,713,981	$	33,781

U.S. Government agencies and corporations		3,207,366		40,205		—		—		3,207,366		40,205

State and political subdivisions		8,689,560		124,471		929,785		15,451		9,619,345		139,922

Collateralized mortgage obligations:
Government issued or guaranteed		1,995,305		19,204		370,595		2,742		2,365,900		21,946
Privately issued		—		—		1,074,651		246,896		1,074,651		246,896

Certificates of deposit		499,808		192		—		—		499,808		192


Total temporarily impaired securities	$	15,382,224	$	203,210	$	3,098,827	$	279,732	$	18,481,051	$	482,942

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2. Securities (continued)

At June 30, 2010, there were 23 available for sale securities that have unrealized losses with aggregate depreciation of 2.8% from their amortized cost basis. The unrealized losses relate principally to privately issue collateralized mortgage obligations. In analyzing these collateralized mortgage obligations, management considers the collateral composition, prepayment history and the overall credit worthiness of the investment. Some of the unrealized losses relate to corporate bonds and municipal obligations and it is more likely than not that management will not be required to sell the securities before the market value has recovered. At June 30, 2010, management analyzed the investment portfolio and determined no other-than-temporary losses were needed at the present time.

Note 3. Loans and Leases Receivable

Major classifications of loans at June 30, 2010 and December 31, 2009, were as follows:


	June 30,			December 31,
	2010			2009
Loans:
Real estate	$	126,114,799		$	129,509,117
Commercial real estate		43,750,794			43,972,033
Consumer		15,654,034			16,683,611
Commercial		7,696,620			7,276,430
Overdrafts		126,249			203,337

	$	193,342,496		$	197,644,528

Leases		517,973			585,393

	$	193,860,469		$	198,229,921
Net deferred loan fees, costs, premiums and discounts		398,866			380,025
Allowance for loan losses		(4,432,420	)		(3,902,720	)

	$	189,826,915		$	194,707,226

An analysis of the allowance for possible loan losses is as follows:


	June 30,						December 31,
	2010			2009			2009
Balance, Beginning	$	3,902,720		$	2,751,386		$	2,751,386
Provision charged to operations		910,000			765,000			1,852,726
Recoveries		132,761			129,179			116,135
Loans charged off		(513,061	)		(528,357	)		(817,527	)

Balance, Ending	$	4,432,420		$	3,117,208		$	3,902,720

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3. Loans and Leases Receivable (continued)

The following is a summary of information pertaining to impaired loans:


	June 30,				December 31,
	2010		2009		2009
Impaired loans without a valuation allowance	$	—	$	—	$	—
Impaired loans with a valuation allowance (1)		821,943		1,375,400		935,785

Total impaired loans	$	821,943	$	1,375,400	$	935,785

Valuation allowance related to impaired loans	$	182,138	$	440,285	$	235,073


(1)		Some of these loans have government agency guarantees reducing the bank’s exposure by $18,884 for June 30, 2010, $44,842 at June 30, 2009 and $31,379 for December 31, 2009


	June 30,				December 31,
	2010		2009		2009
Average investment in impaired loans	$	1,098,672	$	1,301,234	$	1,081,427

Interest income recognized on impaired loans	$	23,041	$	29,458	$	56,662

Interest income recognized on a cash basis on impaired loans	$	23,041	$	29,458	$	56,662

Loans are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When interest accruals are discontinued, interest credited to income is reversed. Nonaccrual loans are restored to accrual status when all delinquent principal and interest becomes current or the loan is considered secured and in the process of collection. Certain loans that are determined to be sufficiently collateralized may continue to accrue interest after reaching 90 days past due. A summary of nonperforming assets is as follows:


	June 30,				December 31,
	2010		2009		2009
Foreclosed real estate (other real estate owned)	$	414,383	$	398,427	$	386,500
Impaired loans, not on nonaccrual		704,011		778,483		826,658
Nonaccrual loans, impaired (1)		117,932		596,917		109,127
Nonaccrual loans, not impaired		2,060,756		682,727		1,456,367
Loans past due 90 days or more still accruing interest		—		—		—

Total non-performing assets	$	3,297,082	$	2,456,554	$	2,778,652


(1)		Some of these loans have government agency guarantees reducing the bank’s exposure by $18,884 at June 30, 2010, $44,842 at June 30, 2009 and $31,379 at December 31, 2009.

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 4. Time Deposits

At June 30, 2010, the scheduled maturities of time deposits are as follows:


	Time Deposits		All Time
	$100,000 and Over		Deposits
Within 3 months	$	4,371,905	$	10,352,558
3 months thru 6 months		16,173,770		29,031,065
6 months thru 12 months		25,424,719		45,116,580
Over 12 months		24,298,110		60,478,786

	$	70,268,504	$	144,978,989

Note 5. Federal Home Loan Bank Borrowings


	June 30,				December 31,
	2010		2009		2009
Federal Home Loan Bank advances	$	2,925,000	$	10,000,000	$	6,400,000

CNB Bank, Inc. is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh and, as such, can take advantage of the FHLB program for overnight and term advances at published daily rates. At June 30, 2010, the Bank has long term advances with FHLB. Under the terms of a blanket collateral agreement, advances from the FHLB are collateralized by qualifying mortgages and US government agencies and mortgage-backed securities. In addition, all of the Bank’s stock in the FHLB is pledged as collateral for such debt. Term advances available under this agreement are limited by available and qualifying collateral and the amount of FHLB stock held by the borrower.

Note 6. Pension Plan

CNB Bank, Inc. has an obligation under a defined benefit plan covering all eligible employees. See Note 11 “Pension Plan” to our consolidated financial statements in our most recently filed Annual Report on Form 10-K for further information.

The components of net periodic plan cost charged to operations are as follows:


	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Service cost	$	65,133		$	59,099		$	130,266		$	118,199
Interest cost		86,446			79,061			172,891			158,123
Expected return on plan assets		(86,656	)		(81,877	)		(173,311	)		(163,754	)
Amortization of prior service costs		3,086			3,086			6,172			6,172
Recognized net actuarial loss		21,530			18,322			43,061			36,643

Net periodic plan cost	$	89,539		$	77,691		$	179,079		$	155,383

Employer contributions paid during the periods ended June 30, 2010 and 2009 were $304,000 and $477,092, respectively.

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7. Supplemental Retirement Plan

On January 2, 2004, the Bank entered into a nonqualified supplemental retirement benefit agreement with the President which when fully vested would pay the President or his beneficiary an amount of $30,000 per year for 10 years beginning September 11, 2011, if he retires on or after May 29, 2011. Termination of employment prior to that date other than by reasons of death or disability will result in a reduced benefit. The expense for the six months ended June 30, 2010 and 2009 was $5,980 and $19,713, respectively.

Note 8. Health Insurance Plan

Effective January 1, 2005, the Bank changed its health insurance program to a high deductible plan and concurrently established health reimbursement accounts for each employee in the plan. The Bank has committed to fund $750 for each participant in 2010 and 2009. The expense incurred for the health reimbursement accounts for the six months ended June 30, 2010 and 2009 was $25,819 and $26,719, respectively.

Note 9. Fair Value Measurements

The FASB ASC Topic 820, “Financial Instruments,” requires the disclosure of the estimated fair value of certain financial instruments. CNB’s available for sale investment portfolio is subject to disclosure for interim reporting. Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are most transparent or reliable.

• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following describes the valuation techniques used by CNB to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale and certificates of deposit investments

Securities available for sale and certificates of deposit investments are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. At June 30, 2010 and December 31, 2009, all of CNB’s securities and certificates of deposit investments are considered to be Level 2 investments.

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9. Fair Value Measurements (continued)

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009:

Valuation of our Financial Instruments by Fair Value Hierarchy Levels — Recurring Basis


	June 30, 2010
	(In Thousands)
					Significant
			In Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. government agencies and corporations	$	6,259	$	—	$	6,259	$	—
Corporate bonds		4,727		—		4,727		—
State and municipal securities		35,357		—		35,357		—
Residential mortgage-backed securities		13,026		—		13,026		—
Collateralized mortgage obligations		14,767		—		14,767		—


	December 31, 2009
	(In Thousands)
					Significant
			In Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. government agencies and corporations	$	8,623	$	—	$	8,623	$	—
Corporate bonds		4,812		—		4,812		—
State and municipal securities		32,533		—		32,533		—
Residential mortgage-backed securities		13,416		—		13,416		—
Collateralized mortgage obligtions		12,889		—		12,889		—
Certificates of deposit investments		1,989		—		1,989		—

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with accounting principles generally accepted in the United States (“GAAP”). Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by CNB to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans held for sale

These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Loans held for sale are required to be measured at lower of cost or fair value. Under ASC Topic 820, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2010, CNB did not have any loans held for sale.

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9. Fair Value Measurements (continued)

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Certain assets such as other real estate owned are measured at the lower of cost or fair value less the estimated cost to sell. Management believes that the fair value component in its valuation follows the provisions of ASC Topic 820. CNB had no fair value measurement adjustments to impaired loans during the quarter ended June 30, 2010.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. CNB had $0 of fair value adjustments during the quarter ended June 30, 2010 and $130,800 of fair value adjustments during the year ended December 31, 2009 resulting from the inability to sell a property at its appraised value. We believe that the fair value component in its valuation follows the provisions of ASC Topic 820.

The following table summarized CNB’s financial and nonfinancial assets that were measured at fair value on a nonrecurring basis during the period.

Valuation of our Financial Instruments by Fair Value Hierarchy Levels – Non-recurring Basis


	June 30, 2010
	(In Thousands)
			Quoted Prices		Significant
			In Active		Other		Significant
			Markets for		Observable		Unobservable		Recognized
			Identical Assets		Inputs		Inputs		Gains
Description	Total		(Level 1)		(Level 2)		(Level 3)		(Losses)
Assets:
Impaired loans, net of government agency guarantees and reserve for losses	$	621	$	—	$	621	$	—	$	—
Other real estate owned	$	414	$	—	$	414	$	—	$	(33	)


	December 31, 2009
	(In Thousands)
			Quoted Prices		Significant
			In Active		Other		Significant
			Markets for		Observable		Unobservable		Recognized
			Identical Assets		Inputs		Inputs		Gains
Description	Total		(Level 1)		(Level 2)		(Level 3)		(Losses)
Assets:
Impaired loans, net of government agency
guarantees and reserve for losses	$	669	$	—	$	669	$	—	$	—
Other real estate owned	$	387	$	—	$	387	$	—	$	(149	)

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9. Fair Value Measurements (continued)

The fair value is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial assets. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the assets.

The estimated fair values of the Company’s financial instruments at June 30, 2010 and December 31, 2009 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.


	June 30, 2010				December 31, 2009
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash, due from banks and federal funds sold	$	4,177,941	$	4,177,941	$	5,068,118	$	5,068,118
Securities available for sale		74,135,935		74,135,935		72,272,665		72,272,665
Loans		189,826,915		185,989,079		194,707,226		191,450,941
Accrued interest receivable		1,304,823		1,304,823		1,334,704		1,334,704
Financial Liabilities:
Demand deposits	$	103,185,492	$	103,185,492	$	103,871,995	$	103,871,995
Time deposits		144,978,989		148,809,009		148,419,859		157,634,463
Accrued interest payable		1,080,622		1,080,622		1,170,417		1,170,417
FHLB borrowings		2,925,000		2,925,000		6,400,000		6,400,000
Off-Balance Sheet
Financial Instruments:
Letters of credit	$	—	$	250	$	—	$	—

Note 10. Recently Issued Accounting Standards

ASC Topic 860 — Transfers and Servicing (Statement No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140) (ASC 860). This accounting guidance was originally issued in June 2009 and is now included in ASC 860. The guidance removes the concept of a qualifying special purpose entity and changes the requirements for derecognizing financial assets. Many types of transferred financial assets that would have been derecognized previously are no longer eligible for derecognition. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009, and early adoption is prohibited. The guidance applies prospectively to transfers of financial assets occurring on or after the effective date. The guidance will impact structuring of securitizations and other transfers of financial assets in order to meet the amended sale treatment criteria.

ASC Topic 810 — Consolidation (Statement No. 167, Amendments to FASB Interpretation No. 46R) (ASC 810) This accounting guidance was originally issued in June 2009 and is now included in ASC 810. The guidance amends the consolidation guidance applicable for variable interest entities (VIE). The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009, and early adoption is prohibited. The adoption of this guidance did not have a material impact on CNB’s consolidated financial statements.

CNB FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10. Recently Issued Accounting Standards (continued)

Accounting Standards Update (ASU) 2010-6 — Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The ASU amends Subtopic 820-10 with new disclosure requirements and clarification of existing disclosure requirements. New disclosures required include the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. The ASU provides additional guidance related to the level of disaggregation in determining classes of assets and liabilities and disclosures about inputs and valuation techniques. The amendments are effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the reconciliation for level 3 activity on a gross basis which will be effective for fiscal years beginning after December 15, 2010.

Accounting Standards Update (ASU) 2010-9— Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-9 amends Topic 855 to exclude SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated. In addition, it modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. The amendments are generally effective immediately, but with respect to the requirement that conduit obligors evaluate subsequent events through the date the financial statements are issued, the effective date is for interim or annual reporting periods ending after June 15, 2010. CNB has adopted ASU 2010-9 with no material impact on the consolidated financial statements.

Accounting Standards Update (ASU) 2010-18 — Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset (Topic 310). ASU 2010-18 was issued in April 2010. This guidance is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending after July 15, 2010. As a result of the amendments in this Update, modification of loans within the pool does not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a trouble debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. However, loans within the scope of Subtopic 310-30 that are accounted for individually will continue to be subject to the troubled debt restructuring accounting provisions. The provisions of this Update will be applied prospectively with early application permitted. Upon initial adoption of the guidance in this Update, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. The election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. CNB does not have any pools of loans accounted for as a single asset as defined in Subtopic 310-30, and therefore, the adoption of this Update will not have a significant effect on CNB’s financial statements.

Accounting Standards Update (ASU) 2010-20 — Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310). ASU 2010-20 was issued in July 2010. This guidance will significantly expand the disclosures that the Company must make about the credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide financial statement users with additional information about the nature of credit risks inherent in the Company’s financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses. The disclosures as of the end of the reporting period are effective for the Company’s interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s interim and annual periods beginning on or after December 15, 2010. The adoption of this Update requires enhanced disclosures and is not expected to have a significant effect on CNB’s financial statements.

Note 11. Subsequent Events

The Company has evaluated events and transactions subsequent to June 30, 2010 through the date these consolidated financial statements were included in this Form 10-Q and filed with the SEC. Based on the definitions and requirements of Generally Accepted Accounting Principles, we have identified an event that has occurred subsequent to June 30, 2010, that requires recognition or disclosure in the consolidated financial statements. On July 6, 2010, CNB filed Schedule 13E-3 and Schedule 14A with the Securities and Exchange Commission detailing their request to become a privately held company.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

CNB Financial Services, Inc. (“CNB” or the “Company”) was organized under the laws of West Virginia in March 2000 at the direction of the Board of Directors of CNB Bank, Inc. formerly Citizens National Bank, (the “Bank”) for the purpose of becoming a financial services holding company. The Company’s primary function is to direct, plan and coordinate the business activities for the Bank and its subsidiary. We refer to the Company and its subsidiary as “CNB”.

On August 31, 2000, the Bank, via merger, became a wholly-owned subsidiary of the Company and the shareholders of the Bank became shareholders of the Company. Each Bank shareholder received two shares of the Company stock for each share of the Bank’s common stock. The merger was accounted for as a pooling of interests.

The Bank was organized on June 20, 1934, and has operated in Berkeley Springs in Morgan County, West Virginia, 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.

The Bank 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.

The following discussion and analysis presents the significant changes in financial condition and results of operations of CNB for the three and six months ended June 30, 2010 and 2009. This discussion may include forward-looking statements based upon management’s expectations. Actual results may differ. We have rounded amounts and percentages used in this discussion and have based all average balances on daily averages.

CRITICAL ACCOUNTING POLICIES

CNB has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation and presentation of CNB’s consolidated financial statements. The significant accounting policies of CNB are described in “Item 1, Critical Accounting Policies” and Note 1: Summary of Significant Accounting Policies of the Consolidated Financial Statements on Form 10-K as of December 31, 2009, and along with the disclosures presented in other financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Certain accounting policies involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, which management considers to be critical accounting policies. The judgments, assumptions and estimates used by management are based on historical experience, knowledge of the accounts and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgment and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

CNB views the determination of the allowance for loan losses as a critical accounting policy that requires the most significant judgments, assumptions and estimates used in the preparation of its consolidated financial statements. For a more detailed discussion on the allowance for loan losses, see Nonperforming Loans and Allowance For Loan Losses in the 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 in the Form 10-K for December 31, 2009.

EARNINGS SUMMARY

Net income for the three months ended June 30, 2010 was $423,000 or $0.96 per share compared to $513,000 or $1.15 per share for the same period in 2009. Annualized return on average assets and average equity were .6% and 6.5% respectively, for the three months ended June 30, 2010, compared with 0.7% and 8.6%, respectively, for the three months ended June 30, 2009.

Net income for the six months ended June 30, 2010 was $850,000 or $1.92 per share compared to $1.1 million or $2.56 per share for the same period in 2009. Annualized return on average assets and average equity were .6% and 6.6% respectively, for the six months ended June 30, 2010, compared with 0.8% and 9.7%, respectively, for the six months ended June 30, 2009.

Earnings projections for the remainder of 2010 are expected to be impacted by the continued slowing in the Bank’s loan demand and poor economic conditions. The Bank is anticipating an additional expense of approximately $990,000 to the provision for loan losses for the remainder of 2010 due to the continued foreclosure activity, increased number of impaired loans and loans with weaknesses. Another significant factor affecting the 2010 net income are increased expenses related to the FDIC insurance regular assessment. The Federal Reserve amended Regulation E to require 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. The passage of the interchange act by Congress in July 2010 will have an impact on the bank’s ATM and debit card interchange fee income in 2010.

NET INTEREST INCOME

Net interest income represents the primary component of CNB’s earnings. It is the difference between interest and fee income related to earning assets and interest expense incurred to carry interest-bearing liabilities. Changes in the volume and mix of interest earning assets and interest bearing liabilities, as well as changing interest rates, impact net interest income. To manage these changes, their impact on net interest income and the risk associated with them, CNB 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 for the three months ended June 30, 2010 decreased by $12,000 or .5% over the same period in 2009. Interest income for the three months ended June 30, 2010 decreased by $159,000 or 4.1% compared to the same period in 2009, while interest expense decreased by $146,000 or 10.9% during the three months ended June 30, 2010, as compared to the same period in the prior year.

Net interest income for the six months ended June 30, 2010 decreased by $135,000 or 2.6% over the same period in 2009. Interest income for the six months ended June 30, 2010 decreased by $367,000 or 4.7% compared to the same period in 2009, while interest expense decreased by $231,000 or 8.6% during the six months ended June 30, 2010, as compared to the same period in the prior year.

During the second quarter of 2010, the average balance of interest bearing liabilities, net of the average balance of borrowings, increased at a faster pace than the average balance of interest earning assets increased, while the interest expense paid on the liabilities net of borrowings decreased at a slower pace than the interest earned on the assets resulting in a decrease in net interest income for the three month period ending June 30, 2010. The 34 basis point decrease in rates earned on average interest earning assets offset by a 28 basis point decrease in rates paid on average interest bearing liabilities contributed to the 6 basis point decrease in the net interest margin while the ratio of net interest income to average interest earning assets also decreased by 7 basis points.

For the three and six month periods ending June 30, 2010 compared to the same periods in 2009, CNB experienced an increase in the average balance of interest earning assets of $6.1 and 7.2 million, respectively along with a shift in the composition of the interest earning assets. The increase in the average balance of interest earning assets is a result of higher balances in the lower yielding federal funds sold and investment securities with a strong emphasis in tax exempt securities offset by a decrease in the average balance on loans. The reason for the decrease in the average balance on loans was due to the continued slow housing market and the overall lower loan demand. Along with the shift to lower yielding interest earning assets was the decrease in the yields of all earning assets. These factors impacted the 34 and 39 basis point decreases in the average interest earned on these assets for the three and six month periods ending June 30, 2010.

For the three and six month period ending June 30, 2010 compared to the same period in 2009, CNB experienced an increase in the average balance of interest bearing liabilities. Although, each interest bearing deposit category has shown

growth in aggregate of $10.4 million and $13.4 million, respectively during the three and six month periods ending June 30, 2010 compared to the same periods in 2009 except for money market accounts, the decrease in the average balance of borrowings of $9.7 million and $11.7 million, respectively overshadowed the increases in the deposits. The full impact of the increase in average interest bearing deposit accounts was reduced by the decreased average balance of borrowings the bank held during this same period. During the aforementioned time frames, the Bank has also experienced lower rates paid on these interest bearing liabilities. These factors impacted the 28 and 23 basis point decrease in the average interest paid on these liabilities for the three and six month periods ending June 30, 2010.

See Table 1 and Table 2 — Distribution of Assets, Liabilities, and Shareholders’ Equity; Interest Rates and Interest Differential.

The net interest margin is impacted by the change in the spread between yields on earning assets and rates paid on interest bearing liabilities.

TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL


	JUNE 30, 2010								JUNE 30, 2009
	QTR								QTR
	AVERAGE			QTR		YIELD/			AVERAGE			QTR		YIELD/
	BALANCE			INTEREST		RATE(4)			BALANCE			INTEREST		RATE(4)
						(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold	$	317		$	—		0.19	%	$	1,165		$	1		0.18	%
Certificates of deposit		773			1		0.52			2,704			6		0.89
Securities:
Taxable		45,834			486		4.24			41,790			519		4.97
Tax-exempt (1)		30,152			249		5.00			18,789			162		5.23
Loans (net of unearned interest) (2)(5)(6)		194,789			2,952		6.06			201,321			3,143		6.24

Total interest earning assets (1)	$	271,865		$	3,688		5.43	%	$	265,769		$	3,831		5.77	%


Nonearning assets:
Cash and due from banks	$	4,054							$	5,806
Bank premises and equipment, net		5,451								5,757
Other assets		6,898								7,115
Allowance for loan losses		(4,287	)							(2,979	)

Total assets	$	283,981							$	281,468


Interest bearing liabilities:
Savings deposits	$	26,507		$	7		0.11	%	$	24,759		$	6		0.10	%
Time deposits		147,198			1,157		3.14			138,999			1,233		3.55
NOW accounts		24,338			26		0.43			21,936			25		0.46
Money market accounts		10,640			4		0.15			12,634			5		0.16
Borrowings		1,643			3		0.73			11,293			74		2.62

Total interest bearing liabilities	$	210,326		$	1,197		2.28	%	$	209,621		$	1,343		2.56	%


Noninterest bearing liabilities:
Demand deposits	$	42,608							$	42,660
Other liabilities		4,867								5,358
Shareholders’ equity		26,180								23,829

Total liabilities and shareholders’ equity	$	283,981							$	281,468



Net interest income (1)				$	2,491							$	2,488


Net interest spread (3)							3.15	%							3.21	%


Net interest income to average interest earning assets (1)							3.67	%							3.74	%


(1)		Yields are expressed on a tax equivalent basis using a 34% tax rate.

(2)		For the purpose of these computations, nonaccruing loans are included in the amounts of average loans outstanding.

(3)		Net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4)		Yields/Rates are expressed on an annualized basis.

(5)		Interest income on loans excludes fees of $46,854 in 2010 and $62,662 in 2009.

(6)		Interest income on loans includes fees of $16,810 in 2010 and $23,321 in 2009 from student loans and lease receivables.

TABLE 2. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL


	JUNE 30, 2010								JUNE 30, 2009
	YTD								YTD
	AVERAGE			YTD		YIELD/			AVERAGE			YTD		YIELD/
	BALANCE			INTEREST		RATE(4)			BALANCE			INTEREST		RATE(4)
						(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold	$	642		$	2		0.16	%	$	586		$	1		0.18	%
Certificates of deposit		1,321			2		0.30			1,747			9		1.03
Securities:
Taxable		45,969			986		4.29			43,362			1,069		4.93
Tax-exempt (1)		29,444			484		4.98			18,079			317		5.31
Loans (net of unearned interest) (2)(5)(6)		195,701			5,948		6.08			202,147			6,361		6.29

Total interest earning assets (1)	$	273,077		$	7,422		5.44	%	$	265,921		$	7,757		5.83	%

Nonearning assets:
Cash and due from banks	$	4,253							$	5,881
Bank premises and equipment, net		5,487								5,783
Other assets		7,257								6,672
Allowance for loan losses		(4,164	)							(2,948	)

Total assets	$	285,910							$	281,309

Interest bearing liabilities:
Savings deposits	$	25,998		$	13		0.10	%	$	24,442		$	16		0.13	%
Time deposits		148,089			2,359		3.19			136,239			2,448		3.59
NOW accounts		23,523			51		0.43			21,494			50		0.47
Money market accounts		10,914			8		0.15			12,926			14		0.22
Borrowings		3,790			27		1.42			15,465			161		2.08

Total interest bearing liabilities	$	212,314		$	2,458		2.32	%	$	210,566		$	2,689		2.55	%


Noninterest bearing liabilities:
Demand deposits	$	42,860							$	41,756
Other liabilities		4,915								5,465
Shareholders’ equity		25,821								23,522

Total liabilities and shareholders’ equity	$	285,910							$	281,309



Net interest income (1)				$	4,964							$	5,068


Net interest spread (3)							3.12	%							3.28	%


Net interest income to average interest earning assets (1)							3.64	%							3.81	%


(1)		Yields are expressed on a tax equivalent basis using a 34% tax rate.

(2)		For the purpose of these computations, nonaccruing loans are included in the amounts of average loans outstanding.

(3)		Net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4)		Yields/Rates are expressed on an annualized basis.

(5)		Interest income on loans excludes fees of $82,309 in 2010 and $113,503 in 2009.

(6)		Interest income on loans includes fees of $33,409 in 2010 and $48,037 in 2009 from student loans and lease receivables.

PROVISION FOR LOAN LOSSES

The amount charged to 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 of management of the probable losses which have been incurred as of a balance sheet date.

The provision for loan losses is a charge to earnings which is made to maintain the allowance for loan losses at a sufficient level. The provision for loan losses for the three months ended June 30, 2010 and June 30, 2009 amounted to $455,000 and $375,000, respectively. The provision for loan losses for the six months ended June 30, 2010 and June 30, 2009 amounted to $910,000 and $765,000, respectively. Nonperforming assets have increased from the same period in 2009 and foreclosure activity remains constant while past due loans have increased from 2.7% of total loans as of June 30, 2009 to 3.7% of total loans as of June 30, 2010. Management believes the allowance for loan losses is adequate and is not aware of any information relating to the loan portfolio which it expects will materially impact future operating results, liquidity or capital resources. In addition, federal regulators may require an adjustment to the reserves as a result of their examination of the Bank. See “Nonperforming Assets and Allowance for Loan Losses” for further discussion.

NONINTEREST INCOME

Noninterest income for the three months ended June 30, 2010 increased $21,000 or 3.8% to $572,000 from $551,000. Noninterest income for the six months ended June 30, 2010 decreased $28,000 or 2.5% to $1.1 million. The increase in noninterest income for the three months ended June 30, 2010 is partially a result of an increase in debit card fee income, ATM fee income, trust income and lockbox income offset by a decrease in overdraft account fees. 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. The increase in debit card and ATM fee income is a direct result of an increase in the interchange rates for the bank’s ATM/debit card network provider along with increased usage by our customers. Trust fee income increased $4,000 due to a 5.1% increase in the balance of trust assets during this time frame. In the fourth quarter of 2009, the bank began offering a lockbox service to our commercial customers which generated $7,000 in the second quarter of 2010 and $12,000 for the six months ended June 30, 2010. These aforementioned factors also affected noninterest income in the same manner for the six months ended June 30, 2010.

Other factors impacting noninterest income for the three and six months ending June 30, 2010 is the fact that during the second quarter 2010 no additional provision for losses on other real estate owned was assessed. This compares to a provision of $60,800 in the second quarter 2009. For the six months ended June 30, 2010, the provision totaled $48,000 which compared to $75,800 for the same period in 2009. Larger gains were recorded in the second quarter 2010 as compared to the same time frame in 2009 on the sale of investment securities which impacted the increase in noninterest income. Also, a decrease in 2010 in the gain on sale of other real estate owned along with smaller gains recorded on loans sold due to a smaller volume of loans were sold during the first half of 2010 compared to the same period in 2009. During the first half of 2009, the bank recorded income from the title company. The title company was dissolved on August 31, 2009. Additionally, one of the Bank’s Board of Directors passed away 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 was recorded in assets as cash surrender value. The difference of $58,858 was reflected in other operating income.

NONINTEREST EXPENSES

Noninterest expenses for the three months ended June 30, 2010, increased $158,000 or 7.9% and for the six months ended June 30, 2010, increased $315,000 or 8.0%. The most significant factor leading to the increase in noninterest expenses for the three and six month periods ending June 30, 2010 is the increased FDIC assessment. The three year prepayment of the FDIC assessment was payable on December 31, 2009 and totaled $1.5 million. The monthly assessment expense for the first half of 2010 was $254,000 compared to $208,000 in the first half of 2009.

Salaries increased by $77,000 for the three months ending June 30, 2010 and $129,000 for the six months ending June 30, 2010 due to normal merit increases and a decrease in the deferred loan costs offset by a decrease of four in the number of full time equivalent employees employed. These deferred costs are based on loan volumes and during the first six months of 2010 the loan demand remained soft. Consumers are concentrated on decreasing their current debt instead of taking on more debt. Employee benefits increased during these same time periods primarily due to an increase in the pension plan expense and the post retirement expense. These expenses were offset by decreases in the 401k expense and the supplemental non qualified retirement benefit plan expense. The 401k expense is down due to the expected decrease in employer contributions for 2010 compared to 2009.

The increase of $21,000 in other occupancy expense for the three months and $61,000 for the six months ended June 30, 2010 are mainly due to painting and minor building repairs at the bank’s facilities and the cost of snow removal at all six bank locations in the Eastern Panhandle of West Virginia and in Hancock, Maryland during the first quarter of 2010.

The increase of $45,000 in other operating expenses for the three months and $120,000 for the six months ended June 30, 2010, are due to increases in the Bank’s FDIC assessment fee, data processing expenses, debit card expense, legal fees offset by decreases in marketing expense, stationery, supplies and printing and ATM expense. The three year prepayment of the FDIC assessment was payable on December 31, 2009 and totaled $1.5 million. The monthly assessment expense for the first six months of 2010 was $254,000 compared to $208,000 for the first half of 2009. Data processing expense increased due to the expenses related to the monthly outsourcing charges of the Bank’s data processing system. The increase in the bank’s debit card expense is related to the cost of the fraud monitoring monthly fee being assessed by the bank’s software vendor to this account. For the first nine months of 2009, this monthly fee was being assessed to ATM expense causing this account in the first half of 2010 to show a decrease over the first half of 2009. The increase in legal fees relates to the bank’s ongoing process of reclassification of the common stock. Beginning in 2009, the bank scaled back its newspaper advertising along with basically all of its marketing expenditures and the trend has continued into the first half of 2010. The bank continues to be in a cost cutting mode and continues to reduce non essential expenses to a minimum.

INCOME TAXES

The bank’s provision for income taxes decreased $139,000 or 69.1% to $62,000 for the three months ended June 30, 2010 and decreased $329,000 or 69.8% to $142,000 for the six months ended June 30,2 010. The effective tax rates for the second quarter of 2010 and 2009 were 12.8% and 28.2%, respectively. The effective tax rates for the six months ended June 30, 2010 and 2009, were 14.3% and 29.1%, respectively. The effective tax rates for the quarter and six months ending June 30, 2010 are lower due in part to a significant increase in tax exempt interest income 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.

FINANCIAL CONDITION

The bank’s total assets as of June 30, 2010 decreased $6.7 million or 2.3% to $282.8 million from December 31, 2009 due primarily to a $4.9 million decrease in loans, a $890,000 decrease in cash and due from banks, a $2.0 million decrease in certificates of deposit investments and a $676,000 decrease in other assets offset by a $1.9 million increase in investment securities The Bank’s total liabilities decreased $7.7 million or 2.9% to $256.1 million from December 31, 2009 due to a $3.5 million decrease in borrowings and a $4.1 million decrease in deposits. Shareholders’ equity increased $1.1 million to $26.7 million at June 30, 2010, due to net income of $850,000 and a $571,000 increase in accumulated other comprehensive income offset by stock repurchases of $113,000 and cash dividends paid of $234,000. The $571,000 increase in accumulated other comprehensive income is a direct result of the increase in market value of available for sale securities. The components of accumulated other comprehensive income at June 30, 2010 and 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 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 unless the securities are actually sold.

During the third quarter 2007, the Bank instituted a stock repurchase program to repurchase issued shares of common stock of CNB Financial Services, Inc. Through this program as of June 30, 2010, the Bank has repurchased 16,700 shares of CNB Financial Services, Inc. common stock reducing shareholders’ equity by $937,898.

LOAN PORTFOLIO

At June 30, 2010, total loans decreased $4.9 million or 2.5% to $189.8 million from $194.7 million at December 31, 2009. All loan categories showed decreases during the first six months of 2010. In general, several reasons have caused this continued decline in the loan demand. The overall economy and the financial uncertainty surrounding it along with unemployment have increased while housing prices have declined. Customers continue to concentrate on paying off their debt instead of borrowing additional funds. During this unstable economy, the bank continues to tighten its credit standards and is performing more rigorous underwriting standards. 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 have caused a deficiency in the officer calls made to these prospective clients during the first half of 2010.

During the first half of 2010, real estate loans outstanding decreased by $3.4 million. Beyond the factors already explained, another factor impacting the decrease was CNB originated and sold $1.3 million of loans to secondary market investors. CNB began selling all fixed rate mortgage loans to secondary market investors in January 2007. An additional factor impacting the decrease in real estate loans were the foreclosures of six loans during the first six months of 2010.

NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES

Nonperforming assets consist of nonaccrual loans, loans which are past due 90 days or more and still accruing interest, impaired loans and foreclosed real estate. The following table summarized the Bank’s nonperforming assets as of the periods shown:


	June 30,						December 31,
	2010			2009			2009
Impaired loans, not on nonaccrual		704,011			778,483			826,658
Nonaccrual loans, impaired (1)		117,932			596,917			109,127
Nonaccrual loans, not impaired		2,060,756			682,727			1,456,367
Loans past due 90 days or more still accruing interest		—			—			—

Total non-performing loans	$	2,882,699		$	2,058,127		$	2,392,152


Foreclosed real estate (other real estate owned)	$	414,383		$	398,427		$	386,500


Total nonperforming assets	$	3,297,082		$	2,456,554		$	2,778,652


Nonperforming loans/Total loans		1.52	%		1.04	%		1.23	%
Nonperforming assets/Total assets		1.17	%		0.86	%		0.96	%
Allowance for loan losses/Total loans		2.33	%		1.57	%		2.00	%


(1)		Some of these loans have government agency guarantees reducing the bank’s exposure by $18,884 at June 30, 2010, $44,842 at June 30, 2009 and $31,379 at December 31, 2009.

As of June 30, 2010, there are nine loans considered to be impaired with a balance of $803,000 (net of government agency guarantees) and a specific allowance of $166,000. As of June 30, 2010, management is aware of forty seven borrowers who have exhibited weaknesses. Their loans have aggregate uninsured balances of $11.5 million. A specific allowance of $1.4 million related to these loans has been established as part of the allowance for loan losses. The Bank continues to experience additional foreclosures in its mortgage loan portfolio. Although the Bank’s mortgage loan portfolio is well secured, if the Bank needs to go to foreclosure on a property, the value of the property may possibly be less than the current appraised value considering the current real estate market. In turn, the Bank may begin to see future write downs on foreclosed properties.

The allowance for loan losses is the best estimate by management of the probable losses which have been incurred as of a balance sheet date. Management makes this determination quarterly by its analysis of overall loan quality, changes in the mix and size of the loan portfolio, previous loss experience, general economic conditions, information about specific borrowers and other factors. The Bank’s methodology for determining the allowance for loan losses established both an allocated and an unallocated component. The allocated portion of the allowance represents the results of analyses of individual loans that the Bank monitors for potential credit problems and pools of loans within the portfolio. Management bases the allocated portion of the allowance for loans principally on current loan risk ratings, historical loan loss rates adjusted to reflect current conditions, as well as analyses of other factors that may have affected the collectibility of loans in the portfolio. The Bank analyzes all commercial loans it is monitoring as potential credit problems to determine whether those loans are impaired, with impairment measured by reference to the borrowers’ collateral values and cash flows.

The unallocated portion of the allowance for loan losses represents the results of analyses that measure probable losses inherent in the portfolio that are not adequately captured in the allocated allowance analyses. These analyses include consideration of unidentified losses inherent in the portfolio resulting from changing underwriting criteria, changes in the types and mix of loans originated, industry concentrations and evaluations, allowance levels relative to selected overall credit criteria and other economic indicators used to estimate probable incurred losses. During the second quarter, the Bank considered the general economic conditions in its market area and the significant slowdown in the residential housing market. At June 30, 2010, the Bank had outstanding loans for the development of residential property including loans for spec homes and subdivisions totaling $14.0 million with an additional undisbursed commitment of $1.6 million. At June 30, 2010 and December 31, 2009, the allowance for loan losses totaled $4.4 million and $3.9 million, respectively. The allowance for loan losses as a percentage of loans was 2.3% as of June 30, 2010 and 2.0% as of December 31, 2009.

An analysis of the allowance for loan losses is summarized below:


	June 30,					December 31,
	2010					2009
			Percent of					Percent of
			Loans in Each					Loans in Each
			Category to					Category to
	Amount		Total Loans			Amount		Total Loans
Commercial, financial and agriculture	$	1,766		27	%	$	1,428		26	%
Real estate — residential mortgage		1,773		65			1,613		66
Installment and other		549		8			483		8
Impaired loans		182		—			235		—
Unallocated		162		N/A			144		N/A

Total	$	4,432		100	%	$	3,903		100	%

DEPOSITS

The Bank’s deposits decreased $4.1 million during the six months ended June 30, 2010. This decrease was reflected in all deposit categories except savings accounts. The increase in savings account balances is from customers wanting immediate liquidity of their funds, when needed. During the past six months, the volume of new account activity has slowed significantly as compared to the same time frame last year. The decrease in demand accounts is completely attributable to the decrease in balances held by one large commercial customer. Although, certificates of deposit accounts over $100,000 decreased $2.7 million, these accounts actually showed growth of $2.8 million during the first six months of 2010 due to the fact that during this time frame, the bank experienced the maturity of $5.5 million in certificate of deposit funds from the State of WV Treasurer’s office. These certificates of deposit carried interest rates of .18 and .351%.

Factors affecting the shift between certificates of deposit and certificates of deposit over $100,000 are the increase in IRA rollovers by customers from their qualified retirement plans and the continued growth of our Washington County, Maryland branch from the proactive approach of management in establishing new customer relationships to the continued trust of existing customers as deposits are made to certificates of deposit accounts. The Bank’s 36-month Ultimate Certificates of Deposit continues to be the certificate of choice for customers. The Bank’s 36-month Ultimate Certificate of Deposit allows the customer to withdraw all or a portion of the certificate of deposit on the first or second year anniversary date without penalty and deposits may be made to this CD at any time.

CAPITAL RESOURCES

Shareholders’ equity increased $1.1 million or 4.2% during the first six months of 2010 due to $850,000 in net income and a $571,000 increase in accumulated other comprehensive income offset by stock repurchases of $113,000 and cash dividends paid of $234,000.

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. Under each measure, the Bank was substantially in excess of the minimum regulatory requirements, and, by definition was “well capitalized” at June 30, 2010. The following table summarizes, as of June 30, 2010, the Bank’s capital ratios.


	Components		Actual			Required
	of Capital		Ratio			Ratio
Tier 1 Capital	$	26,318		9.3	%		4.0	%
Total Risk Based Capital	$	28,484		16.7	%		8.0	%

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by banking entities include interest rate risk, bond market price risk, real estate market risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only bond market price risk, interest rate risk and real estate market risk are significant to the Bank.

The objective of the Bank’s liquidity management program is to ensure the continuous availability of funds to meet the withdrawal demands of depositors and the credit needs of borrowers. The basis of the Bank’s liquidity comes from the stability of its core deposits. Liquidity is also available through the available for sale securities portfolio and short-term funds such as federal funds sold which totaled $74.1 million, or 26.2% of total assets at June 30, 2010. In addition, liquidity may be generated through loan repayments, FHLB borrowings and over $6.5 million of available borrowing arrangements with correspondent banks. At June 30, 2010, management considered the Bank’s ability to satisfy its anticipated liquidity needs over the next twelve months. Management believes that the Bank is well positioned and has ample liquidity to satisfy these needs. The Bank generated $2.3 million of cash from operations in the first six months of 2010, which compares to $108,000 during the same time period in 2009. Additional cash of $4.7 million was provided by net investing activities through June 30, 2010, which compares to $81,000 used in net investing activities for the first six months of 2009. Net cash used in financing activities totaled $7.9 million during the first six months of 2010, which compares to $2.0 million provided by financing activities during the same time period in 2009. Details on both the sources and uses of cash are presented in the Consolidated Statements of Cash Flows contained in the financial statements.

The objective of the Bank’s interest rate sensitivity management program, also known as asset/liability management, is to maximize net interest income while minimizing the risk of adverse effects from changing interest rates. This is done by controlling the mix and maturities of interest sensitive assets and liabilities. The Bank has established an asset/liability committee for this purpose. Daily management of the Bank’s sensitivity of earnings to changes in interest rates within the Bank’s policy guidelines are monitored by using a combination of off-balance sheet and on-balance sheet financial instruments. The Bank’s Chief Executive Officer, Senior Lending Officer, Chief Financial Officer and the Chief Operations Officer monitor day to day deposit flows, lending requirements and the competitive environment. Rate changes occur within policy guidelines if necessary to minimize adverse effects. Also, the Bank’s policy is intended to ensure the Bank measures a range of rate scenarios and patterns of rate movements that are reasonably possible. The Bank measures the impact that 200 basis point changes in rates would have on earnings over the next twelve months.

In analyzing interest rate sensitivity for policy measurement, the Bank compares its forecasted earnings in both a “high rate” and “low rate” scenario to a base-line scenario. The Bank’s base-line scenario is its estimated most likely path for future short-term interest rates over the next 12 months. The “high rate” and “low rate” scenarios assumes 100 through 300 basis point increases or decreases in the prime rate from the beginning point of the base-line scenario over the most current 12-month period. The Bank’s policy limit for the maximum negative impact on earnings resulting from “high rate” or “low rate” scenarios is 10 percent. The policy measurement period is 12 months in length, beginning with the first month of the forecast.

The Bank’s base-line scenario holds the prime rate constant at 3.25 percent through June 2011. Based on the July 2010 outlook, if interest rates increased or decreased by 200 basis points, the model indicates that net interest income during the policy measurement period would be affected by less than 10 percent, in both an increasing and decreasing interest rate scenario.

CONTRACTUAL OBLIGATIONS

There were no other material changes outside the normal course of business to the quantitative and qualitative disclosures about contractual obligations previously reported on Form 10-K for the year ended December 31, 2009. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” in the Form 10-K for December 31, 2009 for a detailed discussion.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s chief executive officer and chief financial officer, based on their evaluation as of the end of the reporting period of this quarterly report of the Company’s disclosure controls and procedures (as defined in Rule 13 (a) — 14 (c) of the Securities Exchange Act of 1934), have concluded that the Company’s disclosure controls and procedures are adequate and effective for purposes of Rule 13 (a) — 14 (c) and timely, alerting them to material information relating to the Company required to be included in the Company’s filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

There have been no changes in the Company’s internal controls over financial reporting in the fiscal quarter ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

There are no material legal proceedings to which CNB or its subsidiary is a party, or to which any of their property is subject. However, CNB is involved in various legal proceedings occurring in the ordinary course of business.

Item 1a. Risk Factors

There have been no material changes to CNB’s risk factors since these factors were previously disclosed in CNB’s annual report on Form 10-K for the period ended December 31, 2009.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds


	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 March 31, 2010						15,244		30,561

April 1, 2010 April 30, 2010		1,366	$	50.23		1,366		29,195

May 1, 2010 May 31, 2010		90	$	50.50		90		29,105

June 1, 2010 June 30, 2010		—	$	—		—		29,105


Total		1,456				16,700

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.

Item 4. Removed and Reserved.

Item 6. Exhibits


31.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		CNB Financial Services, Inc. (Registrant)

Date August 5, 2010		/s/ Thomas F. Rokisky, President/CEO

Date August 5, 2010		/s/ Rebecca S. Stotler, Senior Vice President/CFO

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