- Quarterly Report (10-Q)

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 September 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 (Do not check if a smaller reporting company)		Smaller Reporting Company þ

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

YES o NO þ

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 November 12, 2010.

CNB FINANCIAL SERVICES, INC.

TABLE OF CONTENTS


	PAGE
PART 1: FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

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

Consolidated Statements of Cash Flows for the Nine Months Ended September 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 Nine Months ended September 30, 2010		20

Item 3. Quantitative and Qualitative Disclosures about Market Risk		30

Item 4. Controls and Procedures		32

PART II: OTHER INFORMATION

Item 1. Legal Proceedings		33

Item 1a. Risk Factors		33

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds		33

Item 5. Other Information		33

Item 6. Exhibits and Reports on Form 8-K		33

SIGNATURES		34
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 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


	September 30,			December 31,
	2010			2009
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	3,596,105		$	5,068,118
Federal funds sold		3,800,000			—
Certificates of deposit investments		—			1,989,017
Securities available for sale (at approximate market value)		71,750,052			72,272,665
Federal Home Loan Bank stock, at cost		2,321,300			2,321,300
Loans and lease receivable, net		186,892,465			194,707,226
Accrued interest receivable		1,331,841			1,334,704
Foreclosed real estate (held for sale), net		942,983			386,500
Premises and equipment, net		5,417,889			5,554,927
Deferred income taxes		1,580,206			1,753,665
Cash surrender value of life insurance		1,690,400			1,601,720
Intangible assets		78,991			162,628
Other assets		1,889,484			2,345,418


TOTAL ASSETS	$	281,291,716		$	289,497,888


LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand	$	39,820,448		$	43,381,922
Interest-bearing demand		36,443,847			35,564,826
Savings		26,000,838			24,925,247
Time, $100,000 and over		73,027,938			72,982,196
Other time		73,223,391			75,437,663

	$	248,516,462		$	252,291,854
Accrued interest payable		1,021,793			1,170,417
FHLB borrowings		—			6,400,000
Accrued expenses and other liabilities		4,160,801			4,005,322


TOTAL LIABILITIES	$	253,699,056		$	263,867,593


SHAREHOLDERS’ EQUITY
Common stock, $1 par value; 5,000,000 shares authorized; 458,048 shares issued at September 30, 2010 and December 31, 2009 and 441,348 and 443,648 outstanding at September 30, 2010 and December 31, 2009, respectively	$	458,048		$	458,048
Capital surplus		4,163,592			4,163,592
Retained earnings		23,556,318			22,476,562
Accumulated other comprehensive income (loss)		352,600			(642,839	)

	$	28,530,558		$	26,455,363
Less treasury stock, at cost, 16,700 shares at September 30, 2010 and 14,400 shares at December 31, 2009		(937,898	)		(825,068	)


TOTAL SHAREHOLDERS’ EQUITY	$	27,592,660		$	25,630,295


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	281,291,716		$	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						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
INTEREST INCOME
Interest and fees on loans	$	2,997,963		$	3,227,137		$	9,028,174		$	9,701,834
Interest and dividends on securities
U.S. Government agencies and corporations		35,364			48,362			130,732			189,552
Corporate bonds		68,251			86,655			189,587			283,586
Mortgage backed securities		305,741			327,452			920,968			1,038,813
State and political subdivisions		300,455			202,095			938,318			539,114
Interest on certificates of deposit		—			5,517			2,052			14,142
Interest on FHLB deposits		3			4			60			33
Interest on federal funds sold		653			2,750			2,142			3,288

	$	3,708,430		$	3,899,972		$	11,212,033		$	11,770,362

INTEREST EXPENSE
Interest on interest bearing demand, savings and time deposits	$	1,167,236		$	1,280,828		$	3,598,414		$	3,808,924
Interest on federal funds purchased		21			—			21			—
Interest on FHLB borrowings		2,287			73,161			28,805			234,052

	$	1,169,544		$	1,353,989		$	3,627,240		$	4,042,976


NET INTEREST INCOME	$	2,538,886		$	2,545,983		$	7,584,793		$	7,727,386

PROVISION FOR LOAN LOSSES		460,000			400,000			1,370,000			1,165,000


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	$	2,078,886		$	2,145,983		$	6,214,793		$	6,562,386


NONINTEREST INCOME
Service charges on deposit accounts	$	290,139		$	344,025		$	867,826		$	970,759
Other service charges, commissions and fees		205,176			206,890			638,854			593,998
Other operating income		22,029			17,575			73,837			115,915
Income from title company		—			—			—			5,061
Net gain on sales of loans		3,812			12,628			18,455			32,952
Net gain on sales and calls of securities		120,495			568			173,918			32,591
Net gain (loss) on sale of other real estate owned		(4,461	)		(38,308	)		10,100			(86,744	)
Provision for losses on other real estate owned		(3,900	)		(35,000	)		(51,900	)		(110,800	)
Net (loss) on disposal of premises, equipment and software		—			—			(166	)		—
Net gain (loss) on sale of repossessed assets		975			—			(3,450	)		—

	$	634,265		$	508,378		$	1,727,474		$	1,553,732

NONINTEREST EXPENSES
Salaries	$	738,208		$	690,747		$	2,205,913		$	2,029,127
Employee benefits		288,389			264,747			876,856			842,383
Occupancy of premises		187,733			126,526			484,466			362,466
Furniture and equipment expense		130,118			163,529			443,842			482,674
Other operating expenses		871,179			600,606			2,442,317			1,976,062

	$	2,215,627		$	1,846,155		$	6,453,394		$	5,692,712


INCOME BEFORE INCOME TAXES	$	497,524		$	808,206		$	1,488,873		$	2,423,406

PROVISION FOR INCOME TAXES		33,367			193,886			175,203			664,227


NET INCOME	$	464,157		$	614,320		$	1,313,670		$	1,759,179


BASIC EARNINGS PER SHARE	$	1.05		$	1.38		$	2.97		$	3.94

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 nine months ended September 30, 2009		—		—			—		1,759,179			—			1,759,179
Change in unrealized gains (losses) on securities available for sale (net of tax of $714,213)		—		—			—		—			1,165,296			1,165,296

Total Comprehensive Income															2,924,475

Acquisition of treasury stock, at cost, 3,703 shares		—		(172,296	)		—					—			(172,296	)

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


BALANCE, SEPTEMBER 30, 2009	$	458,048	$	(742,808	)	$	4,163,592	$	22,538,531		$	(683,694	)	$	25,733,669


BALANCE, JANUARY 1, 2010	$	458,048	$	(825,068	)	$	4,163,592	$	22,476,562		$	(642,839	)	$	25,630,295

Comprehensive income:
Net income for nine months ended September 30, 2010		—		—			—		1,313,670			—			1,313,670
Change in unrealized gains (losses) on securities available for sale (net of tax of $610,107)		—		—			—		—			995,439			995,439

Total Comprehensive Income															2,309,109

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

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


BALANCE, SEPTEMBER 30, 2010	$	458,048	$	(937,898	)	$	4,163,592	$	23,556,318		$	352,600		$	27,592,660

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)


	Nine months ended
	September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,313,670		$	1,759,179
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization on premises, equipment and software		339,645			380,255
Provision for loan losses		1,370,000			1,165,000
Provision for losses on other real estate owned		51,900			—
Deferred income taxes		(436,649	)		(327,645	)
Net (gain) on sale of securities		(173,918	)		(32,591	)
Net (gain) loss on sale of real estate owned		(9,153	)		86,744
Decrease in deferred gain on sale of real estate owned		947			—
Loss on disposal of premises, equipment and software		166			—
Net (gain) on loans sold		(18,455	)		(32,952	)
Loans originated for sale		(1,756,300	)		(7,141,400	)
Proceeds from loans sold		1,774,755			7,174,177
(Increase) decrease in accrued interest receivable		2,863			(42,359	)
(Increase) decrease in other assets		485,772			(40,007	)
Increase (decrease) in accrued interest payable		(148,624	)		1,433
(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
Increase (decrease) in accrued expenses and other liabilities		154,532			(250,434	)
Amortization of deferred loan (fees) cost		79,155			136,126
Amortization (accretion) of premium and discount on securities		101,458			11,005
Amortization (accretion) of premium and discount on certificates of deposit		—			(380	)

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	3,098,292		$	2,952,336


CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans, not originated for sale	$	5,032,606		$	3,818,107
Proceeds from sales of securities		8,227,219			2,327,895
Proceeds from maturities, repayments and calls of securities		16,430,106			13,060,660
Proceeds from maturities of certificates of deposit		1,989,000			1,238,000
Purchases of securities		(22,453,670	)		(16,660,699	)
Purchases of certificates of deposit		—			(4,908,620	)
Purchases of premises, equipment and software		(151,992	)		(151,165	)
Proceeds from sale of real estate owned		745,862			588,695
Costs to acquire foreclosed real estate		(12,092	)		(20,423	)
Net (increase) in federal funds sold		(3,800,000	)		(9,950,000	)
Premiums paid on life insurance		(55,208	)		(55,208	)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	$	5,951,831		$	(10,712,758	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand and savings deposits	$	(1,606,862	)	$	5,804,867
Net increase (decrease) in time deposits		(2,168,530	)		16,830,638
Net (decrease) in FHLB borrowings		(6,400,000	)		(15,445,000	)
Purchase of treasury stock		(112,830	)		(172,296	)
Cash dividends paid		(233,914	)		(236,300	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	$	(10,522,136	)	$	6,781,909


NET (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(1,472,013	)	$	(978,513	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		5,068,118			4,770,724

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	3,596,105		$	3,792,211


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period:
Interest	$	3,775,864		$	4,041,543
Income taxes	$	555,982		$	840,900
Net transfer to foreclosed real estate, held for sale from loans receivable	$	1,333,000		$	686,045
Unrealized gain on investment securities available for sale (net of tax)	$	995,439		$	1,165,296

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 September 30, 2010 and the results of operations for the three and nine months ended September 30, 2010 and 2009, changes in shareholders’ equity and cash flows for the nine months ended September 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:


	9/30/2010		9/30/2009
Quarter ending		441,348		445,774

Year to date ending		442,178		446,669

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

Note 2. Securities

The amortized cost and estimated market value of debt securities at September 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:


									Weighted
	September 30, 2010								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	$	999,400	$	2,257				1,001,657		3.81	%
After 1 but wihin 5 years		1,000,000		4,977		—		1,004,977		2.00
After 5 but within 10 years		1,998,290		20,795		1		2,019,084		2.29

	$	3,997,690	$	28,029	$	1	$	4,025,718		2.60	%


Corporate Bonds
Within one year	$	495,110	$	4,158	$	—	$	499,268		3.18	%
After 1 but within 5 years		2,775,820		222,793		—		2,998,613		5.03
After 5 but within 10 years		2,015,126		160,610				2,175,736		5.49

	$	5,286,056	$	387,561	$	—	$	5,673,617		5.03	%


States and political subdivisions
Within one year	$	1,510,350	$	8,499	$	—	$	1,518,849		2.61	%
After 1 but within 5 years		6,589,670		276,723		1,038		6,865,355		3.04
After 5 but within 10 years		22,371,714		1,094,925				23,466,639		4.19

	$	30,471,734	$	1,380,147	$	1,038	$	31,850,843		3.86	%


Mortgage backed securities:
Government issued or guaranteed	$	11,867,046	$	787,680	$	15,215	$	12,639,511		5.05	%


Collateralized mortgage obligations:
Government issued or guaranteed	$	16,247,150	$	395,204	$	15,666	$	16,626,688		3.44	%
Privately issued		1,065,628		—		131,953		933,675		8.41

	$	17,312,778	$	395,204	$	147,619	$	17,560,363		3.74	%


Total securities available for sale	$	68,935,304	$	2,978,621	$	163,873	$	71,750,052		4.05	%


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 $21,384,433 at September 30, 2010 and $24,761,434 at December 31, 2009.

Proceeds from sales of securities available for sale (excluding maturities and calls) during the nine months ended September 30, 2010 and 2009 were $8,227,219 and $2,327,895, respectively. Gross gains (losses) of $161,694 and $(4,543) during the nine months ended September 30, 2010 on respective sales of securities and $34,987 and $(0) for the nine months ended September 30, 2009 were realized on the respective sales. Gross gains (losses) of $16,870 and ($103) and $23 and ($2,419) during the nine months ended September 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 September 30, 2010 and December 31, 2009.

Securities are summarized as follows:


	September 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
U.S. Government agencies and corporations	$	499,375	$	1	$	—	$	—	$	499,375	$	1

State and political subdivisions		—		—		103,530		1,038		103,530		1,038

Mortgage backed securities:
Government issued or guarenteed		507,658		15,215		—		—		507,658		15,215

Collateralized mortgage obligations:
Government issued or guaranteed		1,912,687		15,666		—		—		1,912,687		15,666
Privately issued		—		—		933,675		131,953		933,675		131,953


Total temporarily impaired securities	$	2,919,720	$	30,882	$	1,037,205	$	132,991	$	3,956,925	$	163,873


	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 September 30, 2010, there were 8 available for sale securities that have unrealized losses with aggregate depreciation of 4.0% 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 September 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 September 30, 2010 and December 31, 2009, were as follows:


	September 30,			December 31,
	2010			2009
Loans:
Real estate	$	124,585,916		$	129,509,117
Commercial real estate		43,523,511			43,972,033
Consumer		15,158,985			16,683,611
Commercial		7,091,463			7,276,430
Overdrafts		65,494			203,337

	$	190,425,369		$	197,644,528

Leases		525,987			585,393

	$	190,951,356		$	198,229,921
Net deferred loan fees, costs, premiums and discounts		409,055			380,025
Allowance for loan losses		(4,467,946	)		(3,902,720	)

	$	186,892,465		$	194,707,226

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


	September 30,						December 31,
	2010			2009			2009
Balance, Beginning	$	3,902,720		$	2,751,386		$	2,751,386
Provision charged to operations		1,370,000			1,165,000			1,852,726
Recoveries		168,387			54,341			116,135
Loans charged off		(973,161	)		(602,125	)		(817,527	)

Balance, Ending	$	4,467,946		$	3,368,602		$	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:


	September 30,				December 31,
	2010		2009		2009
Impaired loans without a valuation allowance	$	—	$	—	$	—
Impaired loans with a valuation allowance (1)		5,556,693		1,236,885		935,785

Total impaired loans	$	5,556,693	$	1,236,885	$	935,785

Valuation allowance related to impaired loans	$	756,730	$	275,430	$	235,073


(1)		Some of these loans have government agency guarantees reducing the bank’s exposure by $0 for September 30, 2010, $38,435 at September 30, 2009 and $31,379 for December 31, 2009


	September 30,				December 31,
	2010		2009		2009
Average investment in impaired loans	$	3,396,789	$	1,231,977	$	1,081,427

Interest income recognized on impaired loans	$	172,451	$	49,571	$	56,662

Interest income recognized on a cash basis on impaired loans	$	172,451	$	49,571	$	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:


	September 30,				December 31,
	2010		2009		2009
Foreclosed real estate (other real estate owned)	$	942,983	$	284,329	$	386,500
Impaired loans, not on nonaccrual		5,556,693		654,404		826,658
Nonaccrual loans, impaired (1)		—		582,481		109,127
Nonaccrual loans, not impaired		1,180,830		258,019		1,456,367
Loans past due 90 days or more still accruing interest		—		—		—

Total non-performing assets	$	7,680,506	$	1,779,233	$	2,778,652


(1)		Some of these loans have government agency guarantees reducing the bank’s exposure by $0 at September 30, 2010, $38,435 at September 30, 2009 and $31,379 at December 31, 2009.

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

Note 4. Time Deposits

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


	Time Deposits		All Time
	$100,000 and Over		Deposits
Within 3 months	$	17,106,070	$	30,675,356
3 months thru 6 months		23,125,076		37,280,831
6 months thru 12 months		4,875,723		13,932,645
Over 12 months		27,921,069		64,362,497

	$	73,027,938	$	146,251,329

Note 5. Federal Home Loan Bank Borrowings


	September 30,				December 31,
	2010		2009		2009
Federal Home Loan Bank advances	$	—	$	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 September 30, 2010, the Bank has no 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						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Service cost	$	65,133		$	59,100		$	195,398		$	177,299
Interest cost		86,446			79,062			259,337			237,185
Expected return on plan assets		(86,656	)		(81,877	)		(259,967	)		(245,631	)
Amortization of prior service costs		3,086			3,086			9,258			9,258
Recognized net actuarial loss		21,530			18,321			64,592			54,964

Net periodic plan cost	$	89,539		$	77,692		$	268,618		$	233,075

Employer contributions paid during the periods ended September 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 June 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 nine months ended September 30, 2010 and 2009 was $10,120 and $20,107, 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 nine months ended September 30, 2010 and 2009 was $38,531 and $39,938, 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 September 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 September 30, 2010 and December 31, 2009:

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


	September 30, 2010
			(In Thousands)
			In Active Markets		Significant Other		Significant
			for Identical		Observable Inputs		Unobservable Inputs
Description	Total		Assets (Level 1)		(Level 2)		(Level 3)
Assets:
U.S. government agencies and corporations	$	4,026	$	—	$	4,026	$	—
Corporate bonds		5,673		—		5,673		—
State and municipal securities		31,851		—		31,851		—
Residential mortgage-backed securities		12,640		—		12,640		—
Collateralized mortgage obligations		17,560		—		17,560		—

	December 31, 2009
			(In Thousands)
			In Active Markets		Significant Other		Significant
			for Identical		Observable Inputs		Unobservable Inputs
Description	Total		Assets (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 September 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 impaired loans 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 September 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 $3,900 fair value adjustments during the quarter ended September 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


	September 30, 2010
					(In Thousands)
			Quoted Prices In
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs		Recognized Gains
Description	Total		(Level 1)		(Level 2)		(Level 3)		(Losses)
Assets:
Impaired loans, net of government agency guarantees and reserve for losses	$	4,800	$	—	$	4,800	$	—	$	—
Other real estate owned	$	943	$	—	$	943	$	—	$	(42	)


	December 31, 2009
	(In Thousands)
			Quoted Prices In
			Active Markets for		Significant Other		Significant
			Identical Assets		Observable Inputs		Unobservable Inputs		Recognized 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 September 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.


	September 30, 2010				December 31, 2009
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash, due from banks and federal funds sold	$	7,396,105	$	7,396,105	$	5,068,118	$	5,068,118
Securities available for sale		71,750,052		71,750,052		72,272,665		72,272,665
Loans		186,892,465		183,298,249		194,707,226		191,450,941
Accrued interest receivable		1,331,841		1,331,841		1,334,704		1,334,704
Financial Liabilities:
Demand deposits	$	102,265,133	$	102,265,133	$	103,871,995	$	103,871,995
Time deposits		146,251,329		149,763,574		148,419,859		157,634,463
Accrued interest payable		1,021,793		1,021,793		1,170,417		1,170,417
FHLB borrowings		—		—		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) 2009-15 — Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. The ASU amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. The ASU is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. CNB has adopted ASU 2009-15 with no material impact on the consolidated financial statements.

Accounting Standards Update (ASU) 2010-4 — Accounting for Various Topics — Technical Corrections to SEC Paragraphs. The ASU makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements — subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. CNB has adopted ASU 2010-4 with no material impact on the consolidated financial statements.

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 CNB’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 CNB’s interim and annual periods

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

Note 10. Recently Issued Accounting Standards (continued)

beginning on or after December 15, 2010. The adoption of this update and its impact on CNB’s consolidated financial statements is currently being assessed.

SEC Release No. 33-9142 — Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers. This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010.

SEC Release No. 33-9144 — Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management’s Discussion and Analysis. This interpretive release is intended to improve discussion of liquidity and capital resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations in order to facilitate understanding by investors of the liquidity and funding risks facing the registrant. This release was issued in conjunction with a proposed rule, “Short-Term Borrowings Disclosures,” that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. Release No. 33-9144 was effective on September 28, 2010.

Note 11. Subsequent Events

The Company has evaluated events and transactions subsequent to September 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 September 30, 2010, that requires recognition or disclosure in the consolidated financial statements. On November 5, 2010, the Company began mailing its definitive Proxy Statement to shareholders of record as of October 15, 2010, soliciting proxies for a Special Meeting of Shareholders on December 9, 2010. The purpose of the Special Meeting is to vote upon a proposal to engage in a corporate reorganization that will allow all those Company shareholders who hold, in the aggregate, less than 150 shares of CNB Common Stock, to exchange those shares for newly created Class A Common Stock shares. Those Company shareholders who hold in the aggregate 150 or more of CNB’s Common Stock shares will continue to hold their existing Common Stock without change. This reorganization is known as a “going private” transaction and will result, if approved, in the Company having less than 300 shareholders owning the Company’s existing Common Stock and less than 500 shareholders owning the newly created Class A Common Stock.


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 nine months ended September 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.

RECENT LEGISLATION IMPACTING THE FINANCIAL SERVICES INDUSTRY

On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. Generally, the Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:

	•		Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, which will have rulemaking authority for a wide range of consumer protection laws that would apply to all banks and have broad powers to supervise and enforce consumer protection laws;

	•		Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries;

	•		After a three-year phase-in period which begins January 1, 2013, removes trust preferred securities as a permitted component of a holding company’s tier 1 capital;

	•		Requires the Office of the Comptroller of the Currency to seek to make its capital requirements for national banks countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction;

	•		Requires financial holding companies to be well-capitalized and well-managed as of July 21, 2011. Bank holding companies and banks must also be both well-capitalized and well-managed in order to acquire banks located outside their domiciled state;

	•		Provides for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases in the minimum reserve ratio for the deposit insurance fund from 1.15% to 1.35% and changes in the basis for determining FDIC premiums from deposits to assets;

	•		Requires large, publicly traded bank holding companies with assets of $10 billion or more to establish a risk committee responsible for the oversight of enterprise risk management;

	•		Provides for new disclosure and other requirements relating to executive compensation and corporate governance. These disclosures and requirements apply to all public companies, not just financial institutions;

	•		Permanently increases the $250 thousand limit for federal deposit insurance and increases the cash limit of Securities Investor Protection Corporation protection from $100 thousand to $250 thousand and provides unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions;

	•		Repeals the federal prohibitions on the payment of interest on demand deposits;

	•		Amends the Electronic Fund Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer; and

	•		Increases the authority of the Federal Reserve to examine the Bank and its non-bank subsidiaries.

Uncertainty remains as to the ultimate impact of the Act, which could have a material adverse impact either on the financial services industry as a whole, or on our business, result of operations and financial condition. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Company and the Bank could require the Company and the Bank to seek other sources of capital in the future.

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 September 30, 2010 was $464,000 or $1.05 per share compared to $614,000 or $1.38 per share for the same period in 2009. Annualized return on average assets and average equity were .6% and 7.0% respectively, for the three months ended September 30, 2010, compared with .9% and 10.1% , respectively, for the three months ended September 30, 2009.

Net income for the nine months ended September 30, 2010 was $1.3 million or $2.97 per share compared to $1.8 million or $3.94 per share for the same period in 2009. Annualized return on average assets and average equity were .6% and 6.7% respectively, for the nine months ended September 30, 2010, compared with 0.8% and 9.9% , respectively, for the nine months ended September 30, 2009.

Earnings projections for the remainder of 2010 and into the first half of 2011 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 $450,000 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 net income through 2012 is the 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 for 2010 and in the future. 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 and in the future.

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 September 30, 2010 decreased by $7,000 or .3% over the same period in 2009. Interest income for the three months ended September 30, 2010 decreased by $191,000 or 4.9% compared to the same period in 2009, while interest expense decreased by $184,000 or 13.6% during the three months ended September 30, 2010, as compared to the same period in the prior year.

Net interest income for the nine months ended September 30, 2010 decreased by $143,000 or 1.9% over the same period in 2009. Interest income for the nine months ended September 30, 2010 decreased by $558,000 or 4.7% compared to the same period in 2009, while interest expense decreased by $415,000 or 10.3% during the nine months ended September 30, 2010, as compared to the same period in the prior year.

During the third quarter of 2010, the average balance of interest bearing liabilities, net of the average balance of borrowings, increased while the average balance of interest earning assets decreased. Due to the increase in the average balance of interest bearing liabilities, net of borrowings, 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 slight decrease in net interest income for the three month period ending September 30, 2010. The 29 basis point decrease in rates paid on average interest bearing liabilities offset by the 22 basis point decrease in rates earned on average interest earning assets contributed to the 7 basis point increase in the net interest margin along with the 4 basis point increase in the ratio of net interest income to average interest earning assets.

During the nine months ended September 30, 2010 compared to the same period in 2009, average net interest earning assets increased $4.0 million or 1.5% whereas average net interest bearing liabilities decreased $710,000 or .3% resulting in a decrease in net interest income and a decreased net interest margin. The 33 basis point decrease in rates earned on average interest earning assets offset by a 26 basis point decrease in interest paid on average interest bearing liabilities contributed to the decrease in the net interest margin of 7 basis points while the ratio of net interest income to average interest earning assets decreased 11 basis points.

Although the third quarter of 2010 compared to the same period in 2009 experienced decreases of $2.2 million in the average balance of interest earning assets and $5.6 million in the average balance of interest bearing liabilities, the nine month period ending September 30, 2010 compared to the same period in 2009, reflected an increase of $4.0 million in the average balance of interest earning assets and a small decrease of $710,000 in the average balance of interest bearing liabilities. The

decrease in the average balance of interest earning assets is fueled by the continued decrease in the average balance of loans offset by higher balances in investment securities. 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. The decrease in the yield earned on the interest earning assets is reflective of the shift to lower yielding assets and the decrease in some rates earned on these assets. These factors impacted the 22 and 33 basis point decreases in the average interest earned on these assets for the three and nine month periods ending September 30, 2010.

Although CNB experienced a decrease in the average balance of interest bearing liabilities for the three and nine month period ending September 30, 2010 compared to the same period in 2009, each interest bearing deposit category, except money market accounts, has shown growth in aggregate of $3.2 million and $10.0 million, respectively during the three and nine month periods ending September 30, 2010 compared to the same periods in 2009. The decrease in the average balance of borrowings of $8.7 million and $10.7 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 29 and 26 basis point decrease in the average interest paid on these liabilities for the three and nine month periods ending September 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


	SEPTEMBER 30, 2010								SEPTEMBER 30, 2009
	QTR AVERAGE								QTR AVERAGE
	BALANCE			QTR INTEREST		YIELD/ RATE (4)			BALANCE			QTR INTEREST		YIELD/ RATE (4)
						(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold	$	930		$	—		0.19	%	$	5,645		$	3		0.16	%
Certificates of deposit		—			—		—			3,599			6		0.67
Securities:
Taxable		48,958			493		4.03			40,921			496		4.85
Tax-exempt (1)		25,699			217		5.12			21,032			168		4.84
Loans (net of unearned interest) (2)(5)(6)		192,539			2,952		6.13			199,166			3,168		6.36

Total interest earning assets (1)	$	268,126		$	3,662		5.46	%	$	270,363		$	3,841		5.68	%


Nonearning assets:
Cash and due from banks	$	4,304							$	6,085
Bank premises and equipment, net		5,431								5,681
Other assets		7,061								6,496
Allowance for loan losses		(4,541	)							(3,235	)

Total assets	$	280,381							$	285,390


Interest bearing liabilities:
Savings deposits	$	26,595		$	7		0.11	%	$	25,110		$	6		0.10	%
Time deposits		145,383			1,134		3.12			143,461			1,245		3.47
NOW accounts		23,061			22		0.38			21,893			25		0.46
Money market accounts		11,444			4		0.14			12,833			5		0.16
Borrowings		1,287			2		0.62			10,023			73		2.91

Total interest bearing liabilities	$	207,770		$	1,169		2.25	%	$	213,320		$	1,354		2.54	%


Noninterest bearing liabilities:
Demand deposits	$	40,962							$	41,993
Other liabilities		5,062								5,752
Shareholders’ equity		26,587								24,325

Total liabilities and shareholders’ equity	$	280,381							$	285,390



Net interest income (1)				$	2,493							$	2,487


Net interest spread (3)							3.21	%							3.14	%


Net interest income to average interest earning assets (1)							3.72	%							3.68	%


(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 $45,876 in 2010 and $59,168 in 2009.

(6)		Interest income on loans includes fees of $17,307 in 2010 and $19,666 in 2009 from student loans and lease receivables.

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


	SEPTEMBER 30, 2010								SEPTEMBER 30, 2009
	YTD AVERAGE								YTD AVERAGE
	BALANCE			YTD INTEREST		YIELD/ RATE (4)			BALANCE			YTD INTEREST		YIELD/ RATE (4)
						(IN THOUSANDS OF DOLLARS)
Interest earning assets:
Federal funds sold	$	739		$	1		0.17	%	$	2,291		$	3		0.17	%
Certificates of deposit		876			2		0.30			2,371			14		0.79
Securities:
Taxable		46,975			1,479		4.20			42,539			1,566		4.91
Tax-exempt (1)		28,182			702		5.03			19,074			485		5.14
Loans (net of unearned interest) (2)(5)(6)		194,636			8,900		6.10			201,142			9,529		6.32

Total interest earning assets (1)	$	271,408		$	11,084		5.45	%	$	267,417		$	11,597		5.78	%


Nonearning assets:
Cash and due from banks	$	4,270							$	5,950
Bank premises and equipment, net		5,468								5,749
Other assets		7,192								6,613
Allowance for loan losses		(4,291	)							(3,044	)

Total assets	$	284,047							$	282,685


Interest bearing liabilities:
Savings deposits	$	26,200		$	19		0.10	%	$	24,667		$	23		0.12	%
Time deposits		147,177			3,493		3.16			138,672			3,693		3.55
NOW accounts		23,367			73		0.42			21,629			74		0.46
Money market accounts		11,092			13		0.16			12,894			19		0.20
Borrowings		2,947			29		1.31			13,631			234		2.29

Total interest bearing liabilities	$	210,783		$	3,627		2.29	%	$	211,493		$	4,043		2.55	%


Noninterest bearing liabilities:
Demand deposits	$	42,220							$	41,837
Other liabilities		4,965								5,563
Shareholders’ equity		26,079								23,792

Total liabilities and shareholders’ equity	$	284,047							$	282,685


Net interest income (1)				$	7,457							$	7,554


Net interest spread (3)							3.16	%							3.23	%


Net interest income to average interest earning assets (1)							3.66	%							3.77	%


(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 $128,185 in 2010 and $172,671 in 2009.

(6)		Interest income on loans includes fees of $50,716 in 2010 and $67,704 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 September 30, 2010 and September 30, 2009 amounted to $460,000 and $400,000, respectively. The provision for loan losses for the nine months ended September 30, 2010 and September 30, 2009 amounted to $1.4 million and $1.2 million, respectively. Nonperforming assets have increased from .6% of total assets as of September 30, 2009 to 2.8% of total assets as of September 30, 2010 and foreclosure activity remains constant while past due loans have increased from 3.5% of total loans as of September 30, 2009 to 6.5% of total loans as of September 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 September 30, 2010 increased $126,000 or 24.8% to $634,000 from $508,000. Noninterest income for the nine months ended September 30, 2010 increased $174,000 or 11.2% to $1.7 million. The increase in noninterest income for the three months ended September 30, 2010 is mainly a result of larger gains recorded in the third quarter 2010 as compared to the same time frame in 2009 on sales and calls of securities. During the third quarter 2010 an additional provision of $3,900 for losses on other real estate owned was assessed. This compares to a provision of $35,000 in the third quarter 2009. Smaller losses were recognized on sales of other real estate owned during the third quarter of 2010 compared to the same time frame in 2009. These increases were offset by decreases in overdraft account fees. The decrease in fees related to overdrafts is a result of the amendment to Regulation E which was effective during the third quarter of 2010. This amendment deals with the specific opt-in consent from customers in order for the bank 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. Without this opt-in consent, overdrafts caused by debit card transactions will not occur which in turn has caused overdraft fees to decline. Another reason overdraft fees have declined is the bank’s customer base remaining much more aware of the status of their deposit accounts and proactive in keeping these accounts in a satisfactory condition.

The increase in noninterest income for the nine months ended September 30, 2010 is related to the aforementioned factors along with increases in the following areas, debit card fee income, ATM fee income, trust income and lockbox income. 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. While the balance of trust assets declined during the time frame by $3.0 million or 8.4%, the average balance of trust assets increased $1.7 million or 5.1% causing trust fee income to increase $6,000 during the nine months ending September 30, 2010. In the fourth quarter of 2009, the bank began offering a lockbox service to our commercial customers which has generated $14,000 in the first nine months of 2010.

Offsetting these gains were decreases caused by income from the title company which dissolved on August 31, 2009 and the death benefit received from the death of one of the Bank’s Board of Directors in February 2009.

NONINTEREST EXPENSES

Noninterest expenses for the three months ended September 30, 2010, increased $369,000 or 20.0% and for the nine months ended September 30, 2010, increased $761,000 or 13.4%. The most significant factor leading to the increase in noninterest expenses for the three and nine month periods ending September 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 assessment expense for the first nine months of 2010 was $416,000 compared to $292,000 during the first nine months of 2009.

Salaries increased by $47,000 for the three months ending September 30, 2010 and $177,000 for the nine months ending September 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 nine 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. During the nine months ended September 30, 2010, 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 $61,000 in other occupancy expense for the three months and $122,000 for the nine months ended September 30, 2010 are mainly due to painting, minor building repairs at the bank’s facilities and during the first quarter of 2010, the cost of snow removal at all six bank locations in the Eastern Panhandle of West Virginia and in Hancock, Maryland.

The decrease of $33,000 in furniture and equipment expense for the three months and $39,000 for the nine months ended September 30, 2010 are primarily due to decreased depreciation expense due to some furniture, equipment and computer hardware becoming fully depreciated during this time period.

The increase of $271,000 in other operating expenses for the three months and $466,000 for the nine months ended September 30, 2010, are due to increases in the Bank’s FDIC assessment fee, data processing expenses, legal fees and debit card losses offset by decreases in marketing expense, stationery, supplies and printing and 75 ^th anniversary expenses. The three year prepayment of the FDIC assessment was payable on December 31, 2009 and totaled $1.5 million. The assessment expense for the first nine months of 2010 was $416,000 compared to $292,000 for the first nine months 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 legal fees relates to the bank’s ongoing process of reclassification of the common stock. The increase in debit card losses, which primarily happened in the third quarter 2010, relates to a sudden increase in unauthorized fraudulent charges. Beginning in 2009, the bank scaled back its newspaper advertising along with basically all of its marketing expenditures and the trend has continued in 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 $161,000 or 82.8% to $33,000 for the three months ended September 30, 2010 and decreased $489,000 or 73.6% to $175,000 for the nine months ended September 30,2 010. The effective tax rates for the third quarter of 2010 and 2009 were 6.7% and 24.0%, respectively. The effective tax rates for the nine months ended September 30, 2010 and 2009, were 11.8% and 27.4%, respectively. The effective tax rates for the quarter and nine months ending September 30, 2010 are lower due in part to a continued increase in tax exempt interest income and a reduction in tax liability related to the bank’s life insurance compounded by CNB’s significantly lower pre-tax net income. 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 September 30, 2010 decreased $8.2 million or 2.8% to $281.3 million from December 31, 2009 due primarily to a $7.8 million decrease in loans, a $1.5 million decrease in cash and due from banks, a $2.0 million decrease in certificates of deposit investments, a $523,000 decrease in investments and a $456,000 decrease in other assets offset by a $3.8 million increase in federal funds sold and a $556,000 increase in foreclosed real estate. The Bank’s total liabilities decreased $10.2 million or 3.9% to $253.7 million from December 31, 2009 due to a $6.4 million decrease in borrowings and a $3.8 million decrease in deposits. Shareholders’ equity increased $2.0 million to $27.6 million at September 30, 2010, due to net income of $1.3 million and a $995,000 increase in accumulated other comprehensive income offset by stock repurchases of $113,000 and cash dividends paid of $234,000. The $995,000 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 September 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 September 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 September 30, 2010, total loans decreased $7.8 million or 4.0% to $186.9 million from $194.7 million at December 31, 2009. All loan categories showed decreases during the first nine 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 has caused a reduction in the officer calls made to prospective clients during the first nine months of 2010.

During the first nine months of 2010, real estate loans outstanding decreased by $4.9 million. Beyond the factors already explained, another factor impacting the decrease was CNB originated and sold $1.8 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 ten loans during the first nine 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:


	September 30,						December 31,
	2010			2009			2009
Impaired loans, not on nonaccrual		5,556,693			654,404			826,658
Nonaccrual loans, impaired (1)		—			582,481			109,127
Nonaccrual loans, not impaired		1,180,830			258,019			1,456,367
Loans past due 90 days or more still accruing interest		—			—			—

Total non-performing loans	$	6,737,523		$	1,494,904		$	2,392,152


Foreclosed real estate (other real estate owned)	$	942,983		$	284,329		$	386,500


Total nonperforming assets	$	7,680,506		$	1,779,233		$	2,778,652


Nonperforming loans/Total loans		3.61	%		0.77	%		1.23	%
Nonperforming assets/Total assets		2.73	%		0.61	%		0.96	%
Allowance for loan losses/Total loans		2.39	%		1.73	%		2.00	%


(1)		Some of these loans have government agency guarantees reducing the bank’s exposure by $0 at September 30, 2010, $38,435 at September 30, 2009 and $31,379 at December 31, 2009.

As of September 30, 2010, there are thirteen loans considered to be impaired with a balance of $5.6 million (net of government agency guarantees) and a specific allowance of $125,000. As of September 30, 2010, management is aware of forty borrowers who have exhibited weaknesses. Their loans have aggregate uninsured balances of $9.5 million. A specific allowance of $798,000 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 third quarter, the Bank considered the general economic conditions in its market area and the significant slowdown in the residential housing market. At September 30, 2010, the Bank had outstanding loans for the development of residential property including loans for spec homes and subdivisions totaling $13.6 million with an additional undisbursed commitment of $1.6 million. At September 30, 2010 and December 31, 2009, the allowance for loan losses totaled $4.5 million and $3.9 million, respectively. The allowance for loan losses as a percentage of loans was 2.4% as of September 30, 2010 and 2.0% as of December 31, 2009.

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


	September 30,					December 31,
	2010					2009
			Percent of					Percent of
			Loans in Each					Loans in Each
			Category to					Category to
In thousands	Amount		Total Loans			Amount		Total Loans
Commercial, financial and agriculture	$	1,743		24	%	$	1,428		26	%
Real estate — residential mortgage		1,295		65			1,613		66
Installment and other		287		8			483		8
Impaired loans		757		3			235		—
Unallocated		386		N/A			144		N/A

Total	$	4,468		100	%	$	3,903		100	%

DEPOSITS

The Bank’s deposits decreased $3.8 million during the nine months ended September 30, 2010. This decrease was reflected in non-interest bearing demand deposits and certificates of deposit accounts. The decrease in non-interest bearing demand accounts is completely attributable to the decrease in balances held by one large commercial customer. This decrease was stabilized by the continued volume of new account activity the bank has experienced. The shift from certificates of deposit accounts to interest bearing demand and savings accounts is due to the increased number of IRA and certificate of deposit withdrawals by customers needing immediate accessibility to their cash. Another factor in the decrease of certificates of deposit accounts is a shift to certificates of deposit over $100,000. The increase in interest bearing demand account balances and savings account balances is from customers wanting immediate liquidity of their funds, when needed. Although certificates of deposit accounts over $100,000 only increased $46,000, these accounts actually showed growth of $5.5 million during the first nine 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 $2.0 million or 7.7% during the first nine months of 2010 due to $1.3 million in net income and a $995,000 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 September 30, 2010. The following table summarizes, as of September 30, 2010, the Bank’s capital ratios.


	Components		Actual			Required
	of Capital		Ratio			Ratio
Tier 1 Capital	$	26,831		9.6	%		4.0	%
Total Risk Based Capital	$	28,967		17.2	%		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 $75.6 million, or 26.9% of total assets at September 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 September 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 $3.1 million of cash from operations in the first nine months of 2010, which compares to $3.0 million during the same time period in 2009. Additional cash of $6.0 million was provided by net investing activities through September 30, 2010, which compares to $10.7 million used in net investing activities for the first nine months of 2009. Net cash used in financing activities totaled $10.5 million during the first nine months of 2010, which compares to $6.8 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 September 2011. Based on the October 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 September 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
June 30, 2010						16,700		29,105

July 1, 2010
July 31, 2010		—	$	—		—		29,105

August 1, 2010
August 31, 2010		—	$	—		—		29,105

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


Total		—				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 5.		Other Information

		On November 5, 2010, the Company began mailing its definitive Proxy Statement to shareholders of record as of October 15, 2010, soliciting proxies for a Special Meeting of Shareholders on December 9, 2010. The purpose of the Special Meeting is to vote upon a proposal to engage in a corporate reorganization that will allow all those Company shareholders who hold, in the aggregate, less than 150 shares of CNB Common Stock, to exchange those shares for newly created Class A Common Stock shares. Those Company shareholders who hold in the aggregate 150 or more of CNB’s Common Stock shares will continue to hold their existing Common Stock without change. This reorganization is known as a “going private” transaction and will result, if approved, in the Company having less than 300 shareholders owning the Company’s existing Common Stock and less than 500 shareholders owning the newly created Class A Common Stock.

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 November 12, 2010	/s/ Thomas F. Rokisky, President/CEO


Date November 12, 2010	/s/ Rebecca S. Stotler, Senior Vice President/CFO